2023 (7) TMI 648 - AT - Income Tax

TP Adjustment - aggregation to distribution segment with that of assembly segment - HELD THAT - For assembly, the assessee has set up a full scale assembly facility, including, deployment in the plant machinery, land, building and other tangible assets. Whereas in the case of import of finished products, products are sold to third party customers without making any value-addition and the assessee primarily engages in activities of storage and distribution. In our considered opinion, the submission of the assessee is justified that the AO has wrongly aggregated the assembly segment with distribution segment. We direct that such aggregation is not permissible in the facts and circumstances of the case as discussed above. We direct accordingly. Treatment of outstanding receivables from AE as unsecured loans and imputing an interest thereon - HELD THAT - As in assessee s own case for Assessment Year 2014-15 2022 (5) TMI 1567 - ITAT DELHI on the same issue ITAT has deleted the similar adjustments as assessee in not charging interest from both the AE and Non AE debtors and the delay in realization of the export proceeds - Thus relying on M/s. Indo American Jewellery Ltd. 2013 (1) TMI 804 - BOMBAY HIGH COURT as neither interest has been charged nor paid, we hereby allow the appeal of the assessee on this ground.

Summary

Issues Involved:

1. Aggregation of Distribution Segment with Assembly/Manufacturing Segment.
2. Treatment of Outstanding Receivables from AE as Unsecured Loans and Imputing Interest Thereon.

Summary:

1. Aggregation of Distribution Segment with Assembly/Manufacturing Segment:

The first issue raised by the assessee pertained to the aggregation of the distribution segment with the assembly/manufacturing segment by the Transfer Pricing Officer (TPO). The assessee argued that the TPO erred in aggregating the results of the distribution segment with the assembly/manufacturing segment, which was inconsistent with the previous year's approach where adjustments were only made in the assembly/manufacturing segment. The TPO's show cause notice did not mention such aggregation, and the TPO considered only the manufacturing segments for adjustments. The assessee highlighted that the Functions, Assets, and Risks (FAR) of the two segments were distinct, with the assembly segment involving significant value addition and tangible assets, while the distribution segment primarily involved storage and distribution without value addition. The Tribunal found the assessee's submissions justified and directed that such aggregation was not permissible in the facts and circumstances of the case.

2. Treatment of Outstanding Receivables from AE as Unsecured Loans and Imputing Interest Thereon:

The second issue involved the treatment of outstanding receivables from associated enterprises (AE) as unsecured loans and the imputation of interest thereon. The TPO considered the delay in payment from AE as unsecured loans and proposed to charge interest based on LIBOR plus 400 basis points. The Dispute Resolution Panel (DRP) reduced the adjustment by netting off payables from receivables. The assessee argued that it did not charge interest from its major third-party customers, depicting an arm's length situation, and cited the Tribunal's decision in its own case for AY 2014-15, where a similar adjustment was deleted. The Tribunal, following the precedent set in the assessee's own case and other judicial pronouncements, allowed the appeal on this ground, noting that the decision of the Hon'ble Delhi High Court in the case of Kusum Healthcare was still binding.

Conclusion:

In conclusion, the appeal filed by the assessee was partly allowed, with the Tribunal directing that the aggregation of the distribution segment with the assembly/manufacturing segment was not permissible and allowing the appeal regarding the treatment of outstanding receivables from AE as unsecured loans and imputing interest thereon. The order was pronounced in the open court on 12.07.2023.