2016 (1) TMI 410 - AT - Income Tax

Transfer pricing adjustment - whether the transaction of receivable is outside the purview of international transactions as argued by assessee - as per assessee the notional interest should be calculated on the net amount i.e after adjusting the amount due and paid to the AE by the assessee company - Held that - The assessee company reported international transactions in its TP report. On a reference by the AO, the learned TPO accepted that the price charged by the assessee company on these transactions are at arm s length. However, the TPO made adjustments on account of notional interest for the excess period allowed by the assessee- company to its AE for realization of its dues. The TPO applied 14% of interest on the outstanding amount of Rs. The learned DRP also had also concurred with the finding of learned TPO. There is no dispute that the transaction in question falls within the ambit of international transactions u/s 92B of the IT Act. However, this transaction is not an independent transaction. It is an integral part of transaction of sale made to the AE and therefore, it has to be considered alongwith the main transaction. The similar issue had come up for consideration before the Co-ordinate Bench of Mumbai in the case of M/s Goldstar Jewellery Ltd 2015 (2) TMI 58 - ITAT MUMBAI wherein held both the TPO and the DRP has taken into consideration the lending rates, however, this is not a transaction of loan or advance to the AE but it is only an excess period allowed for realization of sales proceeds from the AE. Therefore, the arm s length interest in any case would be the average cost of the total fund available to the assessee and not the rate at which a loan is available. Accordingly, we direct the AO/TPO to re-do the exercise of determination of the ALP in terms of above observation . Respectfully following the above decision, we hold that there can be no separate international transaction of interest in the international transaction of sale. Early or late realization of sale proceeds is only incidental to transaction of sale, but not a separate transaction in nature. Since we hold that the impugned transaction of interest on delayed realization of sale proceeds is not international transaction, it is not necessary to adjudicate upon the additional grounds raised by the assessee company. - Decided in favour of assessee partly allowed for statistical purposes.

Issues Involved:
1. Definition and scope of "International Transactions" under Section 92B(1) of the Income-tax Act, 1961.
2. Jurisdiction of the Transfer Pricing Officer (TPO) regarding new transactions not referred by the Assessing Officer (AO).
3. Treatment of delayed payments by Associated Enterprises (AEs) as independent transactions.
4. Determination and applicability of Arm's Length Price (ALP) for interest on delayed payments.
5. Comparability analysis for interest on delayed payments.
6. Levy of penalty under Section 271 for alleged concealment of income.

Issue-Wise Analysis:

1. Definition and Scope of "International Transactions":
The assessee contended that the delay in the collection of amounts due from its AE should not be treated as a loan and brought within the purview of the definition of 'International Transaction' under Section 92B(1) of the Act. The assessee argued that the collection of amounts against sales/services rendered is part of the sales transaction itself and cannot be considered an independent transaction.

2. Jurisdiction of the TPO:
The assessee objected to the TPO's adjustment on the grounds that the reference made by the AO was limited to the ALP in respect of international transactions of provision of services. The assessee argued that the TPO could not exercise jurisdiction on any new transaction not referred to him, especially before the insertion of Section 92CA(2A) w.e.f. 1.6.2011.

3. Treatment of Delayed Payments as Independent Transactions:
The assessee argued that neither accounting principles nor trade practices consider delayed payments by a customer as an independent transaction. The assessee emphasized that the collection of dues is part of the sale transaction, and viewing such dues as an independent transaction is incorrect and unknown to trade and law.

4. Determination and Applicability of ALP for Interest on Delayed Payments:
The TPO made an adjustment of Rs. 2,66,55,491/- on account of delay in realization of dues from its AE, applying a 14% interest rate. The assessee contended that the notional interest should be calculated on the net amount after adjusting the amount due and paid to the AE. The assessee also argued that since the main transaction of sales to the AE is at arm's length, no further adjustment is required.

5. Comparability Analysis for Interest on Delayed Payments:
The assessee argued that the TPO should have considered similar transactions in comparable companies. The assessee highlighted that in comparable companies, no interest is levied on delayed payments, and discounts are often given to induce payment. The TPO's approach of comparing delayed payments with lending transactions for determining the interest rate was contested.

6. Levy of Penalty under Section 271:
The assessee contended that neither the capital expenditure of Rs. 6,00,000/- debited under "Other Expenses" nor the adjustments made under Section 92CA constituted intentional concealment of income or a deliberate act to conceal any particulars, thus not warranting the levy of penalty under Section 271.

Judgment:
The Tribunal held that the transaction of interest on delayed realization of sale proceeds is not an independent international transaction but an integral part of the sale transaction to the AE. The Tribunal referenced the decision in M/s Goldstar Jewellery Ltd. Vs JCIT, stating that the credit period allowed to the AE is closely linked to the sale transaction and should be considered together for determining the ALP. The Tribunal directed the AO/TPO to re-do the exercise of determining the ALP in line with this observation. Consequently, the appeal was partly allowed for statistical purposes.

Conclusion:
The Tribunal concluded that the impugned transaction of interest on delayed realization of sale proceeds is not an independent international transaction. The appeal was partly allowed for statistical purposes, and the AO/TPO was directed to re-evaluate the ALP considering the sale transaction and credit period together. The issue of penalty under Section 271 was not adjudicated as the primary transaction was not considered an international transaction.

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