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TMI Blog2010 (10) TMI 902X X X X Extracts X X X X X X X X Extracts X X X X ..... impugned assessment year 2004-05 reflected a loss of Rs. 1,31,53,534. In the course of assessment proceedings, the matter was referred to the TPO who has determined an additional income of Rs. 56,60,486 u/s.92C as Arm's Length Price ('ALP' for short) adjustment. As a result of the above, the loss determined in the case of the assessee company came down to Rs. 74,93,048. 3. The assessee company M/s. Logix Micro Systems Ltd., ('Logix India' for short) is having an Associate Enterprise ('AE' for short) in USA as 100% subsidiary known as Logix America Inc.USA (Logix USA for short). Logix USA in turn holds 76% of the shares in another US company by name M/s. Homestar LLC (USA) ('Homestar- USA' for short). Because of the above shareholding, pattern Homestar-USA stands in the position of AE to the assessee-Logix India. 4. The assessee, Logix India has entered into a product development services agreement and a professional services agreement, both separately, with its AE-Homestar USA. As the transactions of the assessee company had been with its AE at USA, the Assessing Officer made a reference u/s.92CA to the TPO to decide the matter of ALP. The TPO found that the international transac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income attributable to the receivables outstanding as on the last day of the previous year. But regarding the rate of interest to be applied, the Commissioner of Income-tax(A) did not approve the PLR of the State Bank of India. First of all he held that the said PLR rate cannot be taken as CUP method. Secondly he held that the billing is done by the assessee in USD and debts are borne in the accounts of Homestar USA in USD and, therefore, the rate of interest should be comparable to the rate of interest that would have been suffered by Homestar USA if funds were borrowed in USA. Accordingly, the Commissioner of Income-tax(A) directed the Assessing Officer to calculate the interest by adopting the LIBOR/US-FED rate as the bench-mark and to determine the actual rate after providing for appropriate adjustments relating to the nature of loan, term of loan, credit standing of Homestar USA, security for loan etc. He also directed that the Assessing Officer to allow a reasonable period as the collection period of the receivables and to compute the interest only for the period over-flowing the reasonable time limit. With these directions the first appeal was disposed of. 8. The assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... olation of the law on this issue and the principles enunciated by various courts more particularly on the issue of reference, sanction of approval, recording of reasons and lack of satisfaction; (xi)The Assessing Officer erred in believing that the suggestions made by the TPO is binding and compels him to make the adjustment; (xii)The authorities below failed to identify the International Taxation which requires Arm's Length Price adjustment, thus the order suffers from basic infirmity and hence liable to be vacated; (xiii)The authorities below have failed to identify a comparable in terms of Rule 10B(3); (xiv)The Commissioner of Income-tax(A) erred in ignoring the fact that before making an adjustment neither a comparable transaction entered into has been identified nor the enterprise which has entered into such a transaction has been identified. Unless these two are identified as explained in Rule 10B(2) no further proceedings are possible. In this case, in view of non-identification, the entire order requires to be vacated; (xv)The Commissioner of Income-tax(A) erred in overlooking the fact that there was no method prescribed under the Act or the Rules, having regard to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee with its AE in USA. Therefore, there is no basis in arguing that the receivables are strange to the international transactions and, therefore, those receivables would not come under the purview of the jurisdiction of the TPO. The outstanding receivables is the financial result of the international transactions concluded by the assessee company with AE in USA and, therefore, the income effect arising, if any, to that outstanding receivables is very much a relevant aspect of ALP. Therefore, as a legal proposition we hold that the TPO is having the jurisdiction to examine the issue of outstanding receivables and non-charging of interest thereon. 14. Another legal argument advanced by the learned Chartered Accountant is that the Assessing Officer and the TPO should have considered the outstanding balance of receivables as a separate transaction different from the international transactions. This contention also fails in view of our discussion made in paragraph above. 15. Next we will examine the merit of the addition suggested by the TPO and made by the assessing authority. It is a fact that huge amount of receivables were outstanding at the end of the relevant previous year. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... th the learned Chartered Accountant that what is to be assessed as income is the income earned by an assessee and not the income that could have been earned by the assessee. Thus there is a real difference between the actual and the probable. But that general rule of taxation is not as such directly applicable to the present case as the TPO was really examining the financial impact of an international transaction. What is made in an analysis of ALP is the evaluation of the said financial impact. On one side the pricing adopted by the assessee for all its international transactions with its AE is comparable and the ALP test is satisfied. To that extent in the present case, the TPO has accepted the position reported by the assessee company. But in spite of the fact that on one aspect of the transaction, the assessee has complied with the ALP parameters, on another side the assessee has parked huge amount of funds for long period with its AE in USA. Only for the reason that the pricing of international transactions has been accepted for ALP test, it is not possible to hold that the TPO should not go into this question of parking of funds with its AE in USA. If the funds are repatriate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it is more appropriate to consider the potential loss suffered by the assessee in India by not bringing the receivables within the normal period. In fact, the said potential loss of the assessee in India is the ALP factor which contributes to the additional income attributable to the assessee. Therefore, instead of the US rate, the TPO is justified in adopting the Indian rate. 23. While adopting the Indian rate, it is not proper to rely on PLR of the State Bank of India. This is because if the funds were brought in time and those funds were properly deployed, the assessee company may earn an income at the maximum rate applicable to deposits and not at the rate applicable to loans. Therefore, we vacate the direction of the TPO to adopt the PLR rate of 10.25%. Instead we find it appropriate to adopt a reasonable rate that would be available to the assessee on short-term deposits. 24. We have held that the period chargeable to interest has to be recomputed and a reasonable deposit rate has to be applied for calculating the interest. Taking into consideration all aspects of the case like interest-free period and piece-meal remittance of the receivables, we fix the ALP interest rate ..... X X X X Extracts X X X X X X X X Extracts X X X X
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