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Smart Summary

Tribunal Opinion Summary — Bharti Airtel Services Ltd (Appeal vs. CIT(A))

Factual and Procedural Background

This appeal arises from Bharti Airtel Services Ltd (the assessee) challenging the order of the Commissioner of Income Tax (Appeals) No. 44, New Delhi dated 10 August 2016 for assessment year 2011-12. The assessee is engaged in selling hardware for internet and satellite business and in providing training services. For the year under consideration the assessee reported international transactions, including manpower recruitment/related services provided to associated enterprises (AEs).

The Transfer Pricing Officer (TPO) examined the assessee's balance sheet and invoices and found that payments by an associated enterprise were not made within the 15-day period specified in the service agreement. The TPO treated receivables outstanding beyond the contractual 15 days as a separate international transaction (extended credit) and imputed notional interest, adopting an interest rate of 11.69% (SBI rate + 300 basis points), computing an adjustment of Rs. 4,46,726/-. The assessee sought a working capital adjustment to rebut the notional interest, which the TPO rejected for lack of reliable data.

An order under section 92CA(3) was passed on 15/01/2015 and an assessment under section 143(3) read with section 144C was passed on 08/04/2015. The CIT(A) held that the overdue receivable beyond 15 days constituted an international transaction but directed that benchmarking should use LIBOR + 300 basis points (since the receivable was in US dollars) instead of SBI + 300 bps. The assessee appealed to the Tribunal, which delivered its order on 06/10/2020.

Legal Issues Presented

  1. Whether the Assessing Officer / Transfer Pricing Officer and Commissioner (Appeals) erred in making a transfer pricing adjustment by imputing notional interest on outstanding receivables from Associated Enterprises and treating those receivables as an international transaction.
  2. Whether outstanding receivables from AEs (beyond the agreed 15 days) constitute an "international transaction" under the transfer pricing provisions.
  3. Whether recharacterizing account receivables as an unsecured loan is permissible under section 92B(1) (including clause (c) reference) and whether a commercial distinction exists between a loan and an account receivable.
  4. Whether the rejection of the assessee's working capital adjustment by the authorities was correct given the data relied upon by the assessee.
  5. Whether charging or not charging interest on overdue receivables is purely a commercial/business policy matter which tax authorities cannot second-guess for transfer pricing purposes.
  6. Whether internal comparable uncontrolled price (CUP) evidence in the form of contracts with third parties (which do not stipulate separate interest for delayed payments) could be relied upon to benchmark the notional interest.
  7. Whether directing the AO/TPO to benchmark notional interest at LIBOR + 300 basis points (and specifically adding 300 bps) was arbitrary or lacked basis.

Arguments of the Parties

Assessee's Arguments (Authorised Representative)

  • The TPO incorrectly imputed interest on outstanding receivables by treating overdue receivables as an international transaction; this was not warranted.
  • The assessee contended that its overall profitability (including a higher working capital adjusted margin) compensated for outstanding receivables and therefore no separate notional interest adjustment was appropriate; it sought working capital adjustment.
  • The assessee relied on several judicial decisions (Bechtel India Pvt Ltd; Principal Commissioner of Income Tax vs Kusum Healthcare Pvt Ltd; AVL India Pvt Ltd; Motherson Sumi Infotech & Design Ltd; Blackrock Services India Pvt Ltd v ITO) to support the proposition that an imputed interest adjustment is not appropriate where working capital adjustments have already been made or on commercial grounds.
  • The assessee argued that internal CUPs (contracts with third parties not stipulating separate interest for delayed payments) should be accepted for benchmarking instead of imputing interest.

Departmental Arguments (Revenue / Learned CIT(A) as Respondent)

  • The departmental representative supported the TPO and CIT(A) orders and contended that the precedents cited by the assessee did not apply on the facts because in those cases working capital adjustments had been made or the sales price had factored in overdue receivables.
  • It was argued that if the sales price included the cost of extended credit, there would have been no need to specify the 15-day payment term in the agreement; the presence of the 15-day clause indicates that overdue amounts were not part of the service consideration.
  • The departmental representative submitted that even if the assessee were bearing interest costs, those would have been charged to the AE in the invoicing/terms; here, interest had not been charged and working capital adjustment was neither shown nor accepted.
  • The departmental view was that the facts were materially different from the decisions relied upon by the assessee and therefore those authorities were not applicable.

Table of Precedents Cited

Precedent Rule or Principle Cited For Application by the Court
Bechtel India Pvt Ltd (TS 591 SC 2017) Relied upon by the assessee for the proposition that where working capital adjustments have been made/considered, an imputed interest adjustment may be inappropriate. The Tribunal found the facts distinguishable — in Bechtel a working capital adjustment had been granted; in the present case no such adjustment was made or accepted, so reliance on Bechtel was rejected.
Principal Commissioner of Income Tax v. Kusum Healthcare Pvt Ltd [2017 TII 28 (Delhi HC)] Relied upon to show that where a working capital adjustment for comparables has been undertaken and not disputed, differential working capital impact is factored into pricing and an interest adjustment may be inappropriate. The Tribunal noted Kusum involved working capital adjustments that had been accepted for comparables; in the present case no working capital adjustment was offered or accepted, so Kusum was distinguished and not followed.
AVL India Pvt Ltd Listed by the assessee as relevant authority (specific principle as relied upon was not detailed in the opinion). The Tribunal observed the decisions relied upon were on different facts; reliance on AVL (as cited) was treated as distinguishable and not persuasive on the present facts.
Motherson Sumi Infotech & Design Ltd v. DCIT (91 Taxmann.com 443) Relied upon for the proposition that non-charging of interest on overdue receivables may be due to bona fide commercial/business reasons, and therefore an imputed interest adjustment may not be justified. The Tribunal noted in Motherson the non-charge of interest was due to commercial reasons and no interest was charged to unrelated parties either; in the present case no such commercial/business reasons were shown, so Motherson was distinguished and not applied.
Blackrock Services India Pvt Ltd v. ITO (107 Taxmann.com 93) Listed by the assessee as an authority (specific principle as relied upon was not detailed in the opinion). The Tribunal treated reliance on this decision as distinguishable on facts and rejected its applicability to the present matter.

Court's Reasoning and Analysis

The Tribunal carefully reviewed the service agreement and the orders of the lower authorities. The agreement expressly required the recipient to pay service invoices within 15 days of receipt. The agreement also stated that the service costs constituted the full consideration for the services provided, which the Tribunal interpreted to mean that payment beyond 15 days was not included in the agreed consideration.

Because overdue payments beyond the contractual 15-day period were not part of the contracted service consideration, the Tribunal agreed with the lower authorities that the extended period of credit constituted a separate international transaction — effectively, the grant of funds/credit by the assessee to the associated enterprise. As such, compensation in the form of interest was appropriate.

The Tribunal addressed the working capital adjustment argument. The assessee had attempted to demonstrate that its overall profitability (after working capital adjustment) obviated the need for an interest imputation. However, the TPO and CIT(A) had rejected the working capital adjustment for lack of reliable data, and the Tribunal noted that the assessee did not supply reliable working capital adjustment data before the Tribunal either. Because working capital adjustments were neither made by the assessee nor accepted by the authorities, the Tribunal concluded that the arm's-length price as determined did not factor in any working capital impact that would compensate for overdue receivables.

With respect to the rate to be applied, the CIT(A) had applied LIBOR + 300 basis points (since the receivable was denominated in US dollars) rather than the SBI-based rate used by the TPO. The Tribunal found no infirmity in the CIT(A)'s adjustment in directing LIBOR + 300 bps.

The Tribunal considered the judicial decisions cited by the assessee and found them distinguishable on factual matrices: several relied authorities involved situations where working capital adjustments were accepted or where non-charging of interest was explained by commercial reasons (including non-charging to unrelated parties). Because those facts were not present here (no accepted working capital adjustment; no demonstrated commercial reason for non-charging interest), the Tribunal rejected reliance on those decisions and affirmed the approach of the lower authorities.

Holding and Implications

Final Holding: The Tribunal confirmed the order of the Commissioner of Income Tax (Appeals) and dismissed all grounds of appeal raised by the assessee. The appeal by Bharti Airtel Services Ltd was dismissed. (Order pronounced on 06/10/2020.)

Implications:

  • The direct effect is that the CIT(A)'s determination that receivables outstanding beyond the contracted 15-day period constituted a separable international transaction (requiring compensation by way of interest) stands affirmed.
  • The CIT(A)'s direction to benchmark interest at LIBOR + 300 basis points (for a US dollar receivable) is upheld.
  • No broader legal change or new precedent is articulated by the Tribunal beyond the application of existing principles to the facts; the Tribunal expressly distinguished the authorities relied upon by the assessee on factual grounds.

Order dated: 06/10/2020. Bench: (BHAVNESH SAINI) JUDICIAL MEMBER and (PRASHANT MAHARISHI) ACCOUNTANT MEMBER. The Tribunal confirmed the CIT(A) order dated 10/08/2016 for assessment year 2011-12.

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    M/s. Bharti Airtel Services Ltd., Gurgaon v. DCIT, New Delhi

    PER PRASHANT MAHARISHI, A. M.

    1. This appeal is filed by Bharti Airtel services Ltd (the appellant/assessee) against the order of the learned Commissioner Of Income Tax (Appeals) 44, New Delhi dated 10 August 2016 for assessment year 2011 12.

    2. The assessee has raised the following grounds of appeal:-

    1. That the learned Commissioner of Income tax (Appeals) [CIT (A)] has erred both on facts and in law in partly allowing the addition/adjustment made by the Assessing Officer (AO)/Transfer Pricing Officer (TPO) of Rs. 446,726/- to the arms length price of the international transactions on account of notional interest on outstanding balance of receivables from Associated Enterprises (AE).

    2. That the learned CIT(A) and the learned AO/TPO has erred in not appreciating that outstanding balance of receivables from the AE is not an international transaction as it does not impact the profits, incomes, losses or assets of the appellant.

    3. That the learned CIT(A) further erred in law in concluding that characterizing of outstanding account receivables as loan is permitted under section 92B. 3.1 That the learned CIT(A) erred in law in treating the account receivables at par with unsecured loan by making reference to clause (c) of section 92B(1). 3.2 That the learned CIT(A) and the learned AO/TPO erred on facts and in law in recharacterizing the account receivables as unsecured loan advanced to AEs without appreciating the commercial distinction between a transaction of loan and account receivable. Page | 2

    4. Without prejudice, that the learned C1T(A) and the learned AO/TPO erred on facts and in law in rejecting the working capital adjustment profitability results submitted by the Applicant on the amount of account receivables.

    5. Without prejudice, that the learned CIT(A) and the learned AO/TPO erred on facts and in law in confirming the transfer pricing adjustment by not appreciating the fact that charging or non-charging of interest on outstanding account receivables is a matter of the commercial and business policy of an enterprise and that tax authorities have no power to step into the shoes of businessman and judge business strategies.

    6. Without prejudice, that the learned CIT(A) and the learned AO/TPO erred on facts and in law in not accepting the internal CUP in the form of contracts between the Airtel Group and third parties for staffing services (which do not stipulate a separate interest charge for delayed payments) for benchmarking the alleged international transaction on account of outstanding receivables.

    7. That the Ld. CIT(A) acted arbitrarily and erred on facts and in law in directing the AO to benchmark notional interest on account receivables at the rate of LIBOR plus

    300 basis points without giving any basis of adding 300 bps to the LIBOR rate.

    3. The brief facts of the case show that Assessee Company is engaged in the business of selling of hardware for Internet and satellite business and also in the field of providing training. During the year the assessee has reported three international transactions. The transaction of manpower recruitment related services and manpower related services provided to its associated enterprise was benchmarked adopting cost plus method and stated that transactions are at arms-length. With respect to the employee -related transactions no specified method was adopted. However that is not the dispute between the TPO and the assessee.

    4. The learned transfer pricing officer examined the balance sheet which revealed that the receivables have not been received within the stipulated time (15 days) as provided in the service agreement with the associated enterprise. Invoice wise details were called for and delay beyond the dates specified in the agreement were considered as an outstanding overdue from associated enterprise. Therefore the learned assessing officer proceeded to compute the interest on the outstanding holding that outstanding beyond a specified period of 15 days in the agreement results into a separate international transaction which requires to be benchmarked and assessee needs to be compensated for that and therefore he adopted interest rate at the rate of 11.69% adopting SBI rate + 300 BPS and computed the interest of 4,46,726/-. Before him, assessee argued that working capital adjustment margin of the taxpayer is higher than the working capital adjusted margin of the comparables and thereby demonstrating that the overall profitability of the taxpayer adequately compensates for outstanding receivable. The learned TPO did not accept this argument of the assessee stating that even otherwise working capital adjustment submitted by the taxpayer are not acceptable in absence of any reliable data. Accordingly order u/s 92CA (3) was passed on 15/1/2015. Page | 3 Consequently assessment order u/s 143 (3) read with Section 144C of the income tax act was passed on eighth of April 2015 determining total loss of the assessee at 79,604,067/ again the returned income of the assessee of loss of 8,00,50,793 as per return filed on 29/11/2011.

    5. Assessee aggrieved with the order of the learned assessing officer preferred an appeal before the learned CIT A wherein the outstanding overdue receivable from associated enterprise Leon 15 days agreed was held to be a international transaction. However the learned CIT A agreed that for benchmarking such loan only LIBOR should be applied as the outstanding receivable is in US dollars. He directed the TPO/AO to apply LIBOR Rate + 300 base points on outstanding loan instead of SBI base rate +300 base points applied by the learned TPO.

    6. Thus assessee aggrieved with the order of the learned CIT A has preferred this appeal raising seven different grounds of appeal. The learned authorised representative submitted the business and facts of the case and dealt with the transfer pricing addition/adjustment proposed by the learned TPO confirmed by the learned CIT A to the extent of relief granted. He submitted that the learned transfer pricing officer has imputed the interest on account of outstanding receivable considering the same to be an international transaction which is not correct. He relied upon the decision of a. Bechtel India Pvt Ltd TS 591 SC 2017 TP b. Principal Commissioner Of Income Tax Versus Kusum Healthcare Private Limited [ 2017 TII 28 HC Del c. AVL India Pvt Ltd d. Motherson sumi Infotech & Design Limited V DCIt 91 Taxmann.com 443 e. Blackroacjk Services India P Ltd V ITO 107 taxmann.com 93

    7. The learned departmental representative, who also happens to be the ld CIT A vehemently supported the order of the learned learned CIT A. He submitted that all the decisions cited by the learned authorised representative does not apply to the facts of the case as there is no working capital adjustment granted or it is not shown that these sale price included the outstanding beyond a specified period. He submitted that had the sales price included the outstanding receivable beyond specified period for payment, there was no need to mention 15 days in the agreement. He also submitted that assessee is charging Cost Plus margin, had the interest cost been on assessee, then it would have been chargeable to AE even if outstanding is received within agreed period. He submitted that therefore it is irrelevant here wither the assessee pays interest or is a debt free company. He submitted that the facts of the case are quite different then the decision cited by the learned that AR.

    8. We have carefully considered the rival contention and perused the orders of the lower authorities. In the present case the service agreement clearly says that the amount of payment Page | 4 is to be made by the associated enterprises to the assessee within 15 days. Such payment was not made within that period but beyond that. The learned assessing officer held that the amount of outstanding bills beyond a specified period of 15 days is a separate international transaction giving certain benefit of extended credit to the associated enterprise. Such is the finding of the learned CIT A also. We have carefully gone through the service agreement produced before us at page number 335 of the paper book. According to that, clause 3 shows services charge and payments as well as the method of providing invoices in making payment. It provides that the company shall raise invoices on the recipient on the first day of every subsequent month for the services fee, and the recipient shall pay the services for within 15 days of receipt of the invoice by the company. It further provides that the service costs shall constitute full consideration for the company for the providing of services to the recipient. This agreement clause clearly shows that if the payment is beyond 15 days, it does not include the cost of service for withholding the payment beyond 15 days by the associated enterprises. This shows that in the service cost, the cost of outstanding which remains overdue is not factored. Hence, We do not find any infirmity in the order of the ld CIT A. The working capital adjustment was denied to the assessee in absence of any reliable data provided by the assessee. Even before us same is not provided. Therefore it is apparent that in the present case working capital adjustment was not factored into by determining the arms-length price of the international transaction of provision of the services. Therefore, outstanding debtors beyond an agreed period is a separate international transaction of providing funds to its associated enterprise for which the assessee must have been compensated in the form of interest at LIBOR + 300 BPS as held by CIT (A) .

    9. Coming to the various decisions relied upon by the learned authorised representative we find that they are on different facts. The decision of the honourable Delhi High Court in ITA number 765/2016 dated 24 appeal 2017 in case of Kusum healthcare private limited (supra), para number eight clearly shows that assessee has undertaken working capital adjustment for the comparable companies selected in its transfer pricing report which has not been disputed by the learned transfer pricing officer and therefore the differential impact of working capital of the assessee vis--vis is comparable had already been factored in pricing profitability and therefore the honourable High Court held that adjustment proposed by the learned TPO deleted by the ITAT is proper. In the present case there is no working capital adjustment made by the assessee as well as granted by the learned TPO. The facts in the present case are distinguishable. Further same are the facts in case of Bechtel India where working capital adjustment was already granted. In case of 91 taxmann.com 443 Motherson Sumi Infotech and design Limited non charging of interest was due to business and commercial reasons and Page | 5 no interest was also charged against outstanding beyond a specified period from non-related parties. No such commercial or business reasons were shown before us. The facts of the other decisions cited before us are also distinguishable. Therefore, reliance on them is rejected.

    10. In the result order of the learned CIT A confirmed and all the grounds of appeal are dismissed.

    11. In the result appeal of the assessee is dismissed. Order pronounced in the open court on 06/10/2020. -Sd/- -Sd/- (BHAVNESH SAINI) (PRASHANT MAHARISHI) JUDICIAL MEMBER ACCOUNTANT MEMBER Dated: 06/10/2020 A K Keot Copy forwarded to

    1. Applicant

    2. Respondent

    3. CIT

    4. CIT (A)

    5. DR:ITAT ASSISTANT REGISTRAR ITAT, New Delhi

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    Comments

    M/s. Bharti Airtel Services Ltd., Gurgaon v. DCIT, New Delhi
    (Oct 6, 2020)