2018 (10) TMI 1863 - AT - Income Tax

TP Adjustment - Selection of MAM - TPO rejecting Transactional Net Margin Method and instead applying Cost Plus Method CPM as the most appropriate method - disregarding requirements of Rule 10B and 10C of the Income-tax Rules, 1962 the Rules - HELD THAT - As relying on PINO BISAZZA GLASS PVT LTD 2015 (10) TMI 2793 - ITAT AHMEDABAD we allow the appeal preferred by the assessee by remitting the matter to the file of the Ld. Assessing Officer for de novo assessment where the assessee will raise their contentions on merit on ascertainment of Arms Length Price under the Transactional Net Margin Method as the assessee may deem fit. The Ld. Assessing Officer is further directed to decide the issue afresh in the light of the directions given by the Co-ordinate Bench as mentioned hereinabove. Upward adjustment on account of ALP interest that was required to be charged by the assessee company from the associated enterprise in view of delay in realization of sale invoices beyond the credit period extended by the assessee company - HELD THAT - Issue decided in own case 2013 (8) TMI 332 - ITAT AHMEDABAD The credit period for finished goods cannot be compared with credit period for unfinished goods and raw materials, and in any case, when products are not the same, there cannot be any question of prices being the same. Unless the prices of the product and the product are the same, and yet extra credit period is allowed, there cannot be any occasion for making ALP adjustment on the basis of the excess credit period. None of the authorities below have even disputed that the ingredients, raw materials and semi-finished goods sold to Micro USA are not sold to any other concern. The very foundation of impugned addition in arm's length price on account of excess credit period is thus devoid of any legally sustainable merits or factual basis. When all these factors were pointed out to the learned Departmental Representative, he did not have much to say except to place his bland but dutiful reliance on the orders of the authorities below. However, for the reasons set out above and in the absence of any comparative price and credit period figures on comparable product to support the case of the revenue, we uphold the grievance of the assessee and direct the Assessing Officer to delete this ALP adjustment. The assessee gets the relief accordingly. interest is includible in operating income and the operating income itself has been accepted as reasonable under the TNMM, there cannot be an occasion to make adjustment for notional interest on delayed realization of debtors. One can understand separate adjustment for excess credit period when the arm's length price for exports has been benchmarked on the CUP basis but not in a case when the arm's length price of the exports has been benchmarked on the basis of TNMM. The very conceptual foundation, for separate adjustment for delayed realization of debtors and on the facts of this case, is thus devoid of legally sustainable merits. We delete the ALP adjustment as made by the TPO towards the notional interest on receivables outstanding against sales made to AEs by the assessee. - Decided in favour of assessee.

Summary

Issues Involved:
1. Determination of the most appropriate method for ascertaining the Arms Length Price (ALP) for international transactions.
2. Upward adjustment due to delayed realization of sale invoices from Associated Enterprises (AEs).

Issue-wise Detailed Analysis:

1. Determination of the Most Appropriate Method for ALP:

The primary issue revolves around the selection of the most appropriate method for determining the ALP for the assessee's international transactions. The assessee, engaged in the manufacturing of glass mosaic, argued that the Transactional Net Margin Method (TNMM) was the most appropriate method. Conversely, the authorities preferred the Cost Plus Method (CPM).

The Tribunal referred to its previous decision in the assessee’s own case for AY 2009-10, where it was held that TNMM is often easier to apply than CPM due to the availability of data in the public domain about net profits. The Tribunal emphasized that TNMM is less sensitive to minor differences in products and is more reliable when necessary inputs are available publicly. The Tribunal concluded that the authorities below erred in not applying TNMM for ascertaining the ALP. Consequently, the matter was remitted to the Assessing Officer (AO)/Transfer Pricing Officer (TPO) for fresh determination of ALP using TNMM, allowing the assessee to present further arguments on merits.

2. Upward Adjustment Due to Delayed Realization of Sale Invoices:

For AY 2012-13, the issue was the upward adjustment due to delayed realization of sale invoices from AEs. The assessee contended that no notional interest should be charged as it did not charge interest for delays from third parties. The authorities, however, treated the outstanding receivables as loans to AEs and computed an upward adjustment based on the benchmark interest rates.

The Tribunal relied on the decision in the case of Bisazza India (P.) Ltd. vs. Deputy Commissioner of Income-tax, where it was held that once TNMM is accepted, no further adjustment for notional interest is required. The Tribunal noted that the delay in realization of debts was part of the business cycle and was already factored into the TNMM analysis. Hence, it concluded that separate adjustments for delayed realization of debts were not warranted when the arm's length price was benchmarked using TNMM. The Tribunal deleted the ALP adjustment of ?15,74,438/- made by the TPO towards notional interest on receivables from AEs.

Conclusion:

The appeals for AYs 2010-11 and 2011-12 were allowed for statistical purposes, directing the AO to recompute the ALP using TNMM. For AY 2012-13, the Tribunal deleted the upward adjustment for notional interest on delayed receivables, aligning with the TNMM application. The combined result of all three appeals was allowed for statistical purposes, with directions for fresh assessments in light of the Tribunal's observations.