2018 (5) TMI 1895 - AT - Income Tax

TP Adjustment - upward adjustment made u/s 92CA in respect of transaction of sales of finish goods - international transaction - HELD THAT - MICRO INK LIMITED VERSUS ADDITIONAL COMMISSIONER OF INCOME TAX VAPI RANGE, VAPI 2015 (12) TMI 143 - ITAT AHMEDABAD the comparison has to be based on real transactions of similar nature, if at all such transactions have taken place. When no such transactions have taken place, as is the case before us, there is obviously no occasion of any comparison. The stand taken by the learned Departmental Representative, therefore, is not only quite detached from commercial reality but also wholly untenable in law. In any case, what can be examined on the touchstone of arm's length principles is the commercial transaction itself, as a result of which the debit balance has come into existence, and the terms and conditions, including terms of payment, on which the said commercial transaction has been entered into. Aztec decision 2007 (7) TMI 50 - ITAT BANGALORE is of no assistance to the case of the revenue. The international transaction is exports of goods which has been benchmarked on TNMM basis and which is duly accepted by the TPO. In assessee's own case for the earlier years, we uphold the grievance of the assessee and direct the Assessing Officer to delete the impugned ALP adjustment - we uphold the plea of the assessee and delete the impugned ALP adjustment

Summary

Issues Involved:
1. Upward adjustment under section 92CA for sales of finished goods.
2. Interest charge due to delay in realization of sales invoices beyond the credit period.
3. Application of the Transactional Net Margin Method (TNMM) as the Most Appropriate Method (MAM).

Issue-wise Detailed Analysis:

1. Upward Adjustment under Section 92CA for Sales of Finished Goods:
The appellant challenged the correctness of the addition of ?37,67,667/- towards the upward adjustment made under section 92CA concerning the transaction of sales of finished goods. The Assessing Officer (AO) noted delays in the realization of sale invoices to associated enterprises (AEs), beyond the normal credit period of 120 days. Consequently, an ALP adjustment of ?49,35,629/- was initially made, which the CIT(A) later reduced to ?37,67,667/-. The appellant contended that this adjustment was unjustified, relying on precedent cases such as Micro Ink Ltd. vs. Addl. CIT, where similar adjustments were deleted on the grounds that the cost of funds blocked in the credit period was inbuilt in the sale price.

2. Interest Charge Due to Delay in Realization of Sales Invoices Beyond the Credit Period:
The CIT(A) upheld the AO's view that interest should be charged due to delays in the realization of sales invoices beyond the credit period. The appellant argued that the interest cost was already accounted for under the TNMM, which was accepted as the Most Appropriate Method (MAM) by the AO/TPO. The tribunal noted that in similar cases, such as Micro Ink Ltd., it was observed that the delay in realization of debts does not constitute a stand-alone international transaction but is a result of the commercial transaction. Therefore, separate adjustments for delayed realization of debtors, when the arm's length price of exports is benchmarked on the TNMM, are not warranted.

3. Application of the Transactional Net Margin Method (TNMM) as the Most Appropriate Method (MAM):
The appellant applied the TNMM as the MAM for determining the arm's length price, which was accepted by the AO/TPO. The appellant argued that once the TNMM is accepted, no separate adjustment for notional interest on delayed payment is required. The tribunal referred to the decision of the Hon'ble Delhi High Court in the case of Sony Ericsson Mobile Corpn. (P.) Ltd. v. CIT, which emphasized that when comparables are accepted as a bundled transaction, it would be improper to treat AMP expenses or excess credit period as separate international transactions. The tribunal concluded that making an adjustment for interest on excess credit allowed on sales to AEs would vitiate the picture, as the financial impact of the excess credit period is already factored into the TNMM analysis.

Conclusion:
The tribunal found that the issue of upward adjustment for delayed realization of sales invoices was covered in favor of the assessee by a series of orders, including the case of Micro Ink Ltd. vs. Addl. CIT. The tribunal upheld the plea of the assessee and deleted the impugned ALP adjustment of ?37,67,667/-. The appeal was allowed, and the judgment was pronounced in the open court on May 16, 2018.