2015 (3) TMI 1025 - AT - Income Tax

Transfer pricing adjustment - assessee has challenged the addition on account of transfer pricing adjustment in respect of sale made to the associated enterprise by applying comparable uncontrolled price method instead of transactional net margin method - Held that - Under a particular description, invoices raised to associated enterprise and non-associated enterprise were similar. Exact difference in invoices have not been brought forth before us. Thus in the case of the assessee, there was availability of the internal comparable uncontrolled price, wherein on similar nature of transaction and similar description of product as given in the invoices, the assessee has been charging prices from the associated enterprise as well as from the third party. Even though there may be some differences of size, carat, weight and other aspects, however the same has not been clearly demarcated or demonstrated by the assessee either before the Transfer Pricing Officer or before the Commissioner of Income-tax (Appeals). In such a situation the presumption can be drawn, that even with the third party customers, similar nature of products have been sold on negotiation and, therefore, the prices of the two transactions can be compared. In a way, we uphold the contention of the learned Commissioner of Income-tax (Appeals) that there was internal comparable uncontrolled price available in the case of the assessee for determining the transfer price. Once a direct method of internal comparable uncontrolled price is available then there is no need to resort to transactional net margin method.- Decided against revenue. Transfer pricing adjustment on account of transactions of sale of diamond with the associated enterprise - CIT(A) deleted the addition - Held that - Out of the three transactions, which has been adversely viewed by the Transfer Pricing Officer, two transactions pertained to sale made by the assessee to one M/s. Simona NV. Now it has been brought on the record before the Commissioner of Income-tax (Appeals), which has also been a subject matter of remand before the Transfer Pricing Officer that the said transactions have been cancelled, as the said party has returned back/diverted the diamonds sold to them to the assessee s associated enterprise. This is evident from the letter dated October 14, 2010, written by Simona NV. Thus as from the above letter and relevant finding of the Commissioner of Income-tax (Appeals), it is quite conclusive that, the said party has not purchased the diamonds sent on these two invoices and ultimately, it has been sold to associated enterprise only. Thus, such a transaction cannot be considered for benchmarking and determining the arm s length price. Once the particular transaction, which is the subject matter of comparison for transfer pricing adjustment, has not even undertaken or has been cancelled, then such a transaction has to be excluded for the purpose of benchmarking the transfer price. Thus with regard to the non inclusion of such a transaction and also the consequent deletion of adjustment of ₹ 1,28,19,493 on account of such transaction is both factually and legally correct and has rightly been deleted by the Commissioner of Income-tax (Appeals). - Decided against revenue. Adjustment on account of transactions with one of the third party - sale made to the associated enterprise by applying comparable uncontrolled price method instead of transactional net margin method - Held that - In this particular transaction, the assessee has sold a total quantity of 2773.20 to its associated enterprise with an average rate of 328.89 dollars, whereas to the third party, the assessee has merely sold quantity of 8.50 carats with the rate of 370 dollars. Thus there is a huge difference in volume of sale and it is quite a normal phenomena that if the purchases and sales are made in huge quantity then there is always a chance of negotiation of preferable price by the purchaser and there is difference in the price as compared to the one where very small quantity of sale or purchase takes place. Such difference of volume, definitely has a bearing on the negotiation of the prices and, therefore, adjustment on this factor has to be made. This itself is a material difference. We, also agree with the contention of the assessee that marketing expenses in the case of the associated enterprise are comparatively less as there is quite probability of the transaction being finalised. There is also an element of bad debt risk involved in the case of a third party which is much less probable in the case of the related party. If all these differences, which in our opinion are quite material differences are taken into account and adjustment is made then difference of rate, which here in this case is approximately 11 per cent., can be made. Thus, looking to these factors of material difference including huge difference in volume, adjustment of a differential rate of 41.11 in terms of dollars in the transaction of sale price between associated enterprise and third party can be made under the comparable uncontrolled price, which is also permissible under rule 10B. Accordingly, we hold that such a price difference in the aforesaid transaction has to be ignored and adjustment has to be made for comparing the negotiated price charged from the associated enterprise as well as from the third party and if such an adjustment is carried out then there is no requirement for making any kind of upward adjustment in this case. Therefore, the decision of the Commissioner of Income-tax (Appeals) in confirming the adjustment of ₹ 51,32,512 to the arm s length price is reversed and the said addition is deleted. - Decided in favour of assessee. Transfer pricing adjustment on account of notional interest on delayed collection of payment on sale invoices from associated enterprises in comparison to non-associated enterprises - CIT(A) deleted the addition - Held that - The average days of delay in payment as worked out by the Transfer Pricing Officer is also inappropriate as number of sale transactions with associated enterprise is far more than the non-associated enterprise and will result in improper working of average days. On these facts of the case, we do not find any reason for making any kind of upward adjustment on account of differences in period for realisation of payments in respect of sales made to associated enterprise as well as non-associated enterprises. Such a notional interest cannot be charged for the purpose of making adjustment in the arm s length price. Thus the order of the Commissioner of Income-tax (Appeals) deleting the adjustment of Rs, 4,65,23,007 on this score is upheld - Decided in favour of assessee.

Summary

Issues Involved:
1. Transfer pricing adjustment on account of sale transactions with associated enterprises.
2. Deletion of transfer pricing adjustment on account of transactions of sale of diamonds with associated enterprises.
3. Transfer pricing adjustment on account of notional interest to be charged on delayed payment on sales/invoices receivables from associated enterprises.

Issue-wise Detailed Analysis:

1. Transfer Pricing Adjustment on Account of Sale Transactions with Associated Enterprises:
The main issue revolves around the transfer pricing adjustment of Rs. 51,32,512 made by the Transfer Pricing Officer (TPO) using the Comparable Uncontrolled Price (CUP) method instead of the Transactional Net Margin Method (TNMM). The assessee argued that the CUP method was inappropriate due to various differences such as period and price fluctuation, volume of sales, bad debt risk, marketing expenses, and geographical differences. The TPO rejected these arguments, stating that the prices negotiated in international transactions should reflect the prevailing market prices and made adjustments based on differences in prices charged to associated enterprises (AEs) and non-associated enterprises (NAEs). The Commissioner of Income-tax (Appeals) (CIT(A)) upheld the applicability of the CUP method but accepted additional evidence which led to the deletion of adjustments amounting to Rs. 1,28,19,493 for certain transactions. The Tribunal upheld the CIT(A)'s decision to use the CUP method, noting that the nature of the transactions and the description of goods sold to AEs and NAEs were similar. However, for the transaction involving Rs. 51,32,512, the Tribunal reversed the CIT(A)'s decision, considering factors like volume differences, credit risk, and marketing expenses, and deleted the adjustment.

2. Deletion of Transfer Pricing Adjustment on Account of Transactions of Sale of Diamonds with Associated Enterprises:
The TPO made an adjustment of Rs. 1,79,52,005 based on three categories of diamonds where the prices charged to AEs were lower than those charged to NAEs. The CIT(A) deleted the adjustment of Rs. 1,28,19,493 related to transactions with Simona NV, as the sale was not completed and the goods were returned to the assessee's AE. The Tribunal upheld the CIT(A)'s decision, agreeing that the transaction with Simona NV could not be considered for benchmarking since it was not completed.

3. Transfer Pricing Adjustment on Account of Notional Interest to be Charged on Delayed Payment on Sales/Invoices Receivables from Associated Enterprises:
The TPO made an upward adjustment of Rs. 4,65,23,007 due to the delayed realization of payments from AEs compared to NAEs. The CIT(A) deleted this adjustment, accepting the assessee's argument that delayed payments were common in the diamond industry and no interest was charged on delayed payments from NAEs either. The Tribunal upheld the CIT(A)'s decision, noting that the average credit period for AEs was not significantly different from that for NAEs and that no interest was charged on delayed payments from NAEs.

Conclusion:
The Tribunal allowed the assessee's appeal and dismissed the Department's appeal, concluding that the CUP method was appropriate for certain transactions but adjustments should consider material differences like volume, credit risk, and marketing expenses. The Tribunal also upheld the deletion of adjustments related to incomplete transactions and notional interest on delayed payments.