2016 (4) TMI 400 - AT - Income Tax

Transfer pricing adjustment - impact of amendment in section 92B, by the virtue of Finance Act 2012 - Held that - No ALP adjustments can be made, on the facts of this case, in respect of delay in realization of sale proceeds. The amendment in Section 92B, at least to the extent it dealt with the question of issuance of corporate guarantees, is effective from 1st April 2012. The assessment year before us being an assessment year prior to that date, the amended provisions of Section 92 B have no application in the matter. - Decided in favour of assessee

Issues Involved:
1. Withdrawal of Cross-Objection by the Assessee.
2. Transfer Pricing Adjustment on Interest for Outstanding Receivables from Associated Enterprises (AE).
3. Deletion of Mark-up on Account of Risk Premium by the Dispute Resolution Panel (DRP).

Issue-wise Detailed Analysis:

1. Withdrawal of Cross-Objection by the Assessee:
The learned counsel for the assessee stated that he does not wish to pursue the cross-objection filed by the assessee, and the same may be treated as withdrawn. The departmental representative did not oppose this prayer, resulting in the cross-objection being dismissed as withdrawn.

2. Transfer Pricing Adjustment on Interest for Outstanding Receivables from AE:
The assessee challenged the correctness of the order dated 16th December 2013, passed by the CIT(A) regarding the assessment under section 143(3) of the Income Tax Act, 1961, for the assessment year 2009-10. The grievances raised by the assessee included:
- The AO and DRP erred in holding outstanding receivables from AE as an international transaction.
- The delay in receipts from debtors was incorrectly characterized as an extension of credit and termed as a loan, leading to the application of interest.
- The adjustment for notional interest on outstanding receivables was made despite the appellant not charging any interest to third parties on delayed receivables.
- The working capital adjustments neutralized the impact of embedded interest in the receivables, making further adjustments unnecessary.
- Interest was charged on the total outstanding receivables without considering the outstanding payables to the AE.
- Interest was charged for the full year without considering that the average number of days invoices were outstanding was only 228 days.
- The addition was made for the entire credit period rather than the excess credit period.
- A high rate of SBI PLR was applied instead of the LIBOR rate, which should be used since the transactions were in foreign currency.

The assessee argued that the delay in realization of export proceeds is not an international transaction and cannot be benchmarked on a standalone basis. The sale transactions were benchmarked using the TNMM, and once found at arm’s length, no further adjustment should be made for delayed realization of export proceeds. The assessee also contended that the amendment made in 2012 could not be applied retrospectively.

The DRP upheld the adjustment in principle but directed the AO to restrict the interest on receivables to the SBI PLR, effectively deleting the 3% mark-up.

3. Deletion of Mark-up on Account of Risk Premium by the DRP:
The Assessing Officer (AO) was aggrieved by the deletion of the 3% mark-up on the SBI PLR by the DRP. The AO argued that the mark-up was essential to insulate the assessee from various risks like entity risk, country risk, and exchange risk.

Tribunal's Observations and Decision:
The Tribunal observed that even if the Explanation to Section 92B is retrospective and covers the delay in realization of debts, no separate adjustment for delay in realization of debts can be made when the sale is benchmarked on the TNMM basis. The interest income is an integral part of the PBIT, and once the profitability as per PBIT is found to be comparable, there cannot be a separate adjustment for interest income on delayed realization.

The Tribunal referred to the decision in Micro Ink Ltd Vs ACIT, where it was held that making an adjustment for interest on excess credit allowed on sales to AEs will vitiate the picture since the financial impact of the excess credit period allowed is already factored into the TNMM analysis.

The Tribunal also noted that the amendment to Section 92B by the Finance Act 2012, though stated to be retrospective, cannot be applied retrospectively if it introduces new principles upon which liabilities might arise. The Tribunal relied on the Delhi High Court's decision in DIT vs New Skies Satellite BV, which held that transformative substantive amendments are incapable of being given retrospective effect.

In conclusion, the Tribunal upheld the grievance of the assessee, directing the AO to delete the impugned arm’s length price adjustment. Consequently, the appeal of the assessee was allowed, and the appeal of the revenue was dismissed as infructuous.

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