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TMI Blog2016 (2) TMI 699X X X X Extracts X X X X X X X X Extracts X X X X ..... nditure attributable to interest free advances given to its AE. It is also a fact on record that before DRP, the assessee has not challenged the disallowance of the aforesaid interest expenditure. This fact clearly proves that the assessee had accepted the disallowance of interest expenditure of 94,44,829/- and that being the clear factual position, in our view, the assessee cannot raise this issue. Accordingly, we decline to entertain this ground raised by the assessee. Eligible deduction u/s 10AA - whether AO ought to have reduced not the gross interest income but the net interest income for qualifying the profits of the business for determining the eligible deduction u/ 10AA - Held that:- The assessee has fairly admitted that this issue was not raised before the DRP. Therefore, when the assessee has not raised any objection on this issue before the DRP, in our view, the assessee cannot raise such issue before us at this stage as the assessee has accepted the decision of the AO in the draft assessment proceedings, wherein he excluded the interest income while computing the deduction u/s 10AA of the Act. The final assessment order passed by the AO is only to give effect to the dir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... embers of Dispute Resolution Panel [DRP] ought to have directed the Assessing Officer [AO] to delete the notional adjustment of interest on delayed payment from Associated Enterprise of ₹ 18,89,938/- in its entirety". 6. Facts relating to this issue are, assessee an Indian Company is engaged in the business of manufacture and sale of studded jewellery. For this purpose assessee has set up a Unit in SEEPZ, Andheri (E), Mumbai. To briefly describe business profile of the assessee, it is a part of Dynamics Jewellery Group which has it business in India as well as abroad but are catering to the market in USA. Jewel America INC is a premium marketer, manufacturer and distributor of fine jewellery, serving all major retailers in USA. Looking at the market demand Jewel America INC procures jewellery from Dynamics Jewellery Group companies in India including the assessee. Thus, Jewel America operates as a Distributor on wholesale basis for the jewellery manufactured by its group companies in India. During the relevant previous year the assessee has entered into international transaction relating to export of jewellery to both Associated Enterprises (AEs) and non AEs. In the return f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee to submit the invoice wise detailed working of export receipts and interest chargeable for such delay. After examining the data furnished by the assessee it was noticed by the TPO that while in case of AE there is a delay of even more than one year in realisation of the export receivables on certain instances in case of non-AE such delay do not exceed 180 days which is normal credit period given to AE. Accordingly, TPO tabulated the transactions with AE where delay in receipt is more than 180 days. For justifying the delay in receiving the export receivables the assessee submitted as under: "10.2 The normal credit period granted for sales to AE is 180 days. Up to September 2008, majority of relations with normal credit period. ln respect of sales made from October 2008, the realisation is not within the normal credit period. The assessee submitted that no interest is charged for this delay due to: i. Slow down in world economy, more particularly US market to which the assessee company caters to. This factor on standalone basis resulted into delay in realisation of debt in the hands of the assessee company. ii. Rejections by the end customer of the AE resulting in rectif ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was of the view that as the extended credit facilities to AE is like a short term loan without any security, the assessee is bearing foreign exchange fluctuation risk and on that account assessee deserves to get some profit and also for the risk he is bearing on account of fact that AE is not in financially good position indicating a poor credit worthiness. For these reasons, he added further amount of 3% per annum to the average interest rate on secured loans obtained by the assessee during the previous year. Thus, the TPO adopting interest rate of 12.30% per annum on the delayed realisation of debts from the AE worked out the notional interest at ₹ 18,89,938/- which was treated as adjustment to the ALP. On the basis of the order passed by the TPO, the AO framed draft assessment incorporating adjustment suggested by the TPO. Being aggrieved by the said adjustment made to the ALP, the assessee filed objections before the DRP. The DRP while upholding the charging of interest @ 9.30%, however, deleted the additional 3% interest charged by the TPO on account of foreign exchange fluctuation risk. In terms with the direction of DRP, AO has passed the impugned assessment order. 8 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... companies requiring no further adjustment. 9. The ld. DR, on the other hand, submitted that the assessee has computed margin of its international transactions by adopting TNMM, therefore, he must have considered the net margin by taking into consideration all aspects, hence, it is for the assessee to prove with documentary evidence that while negotiating the price credit facilities was also factored in. Referring to Rule 10D(k) and (l), the ld.DR submitted that the assessee has not furnished any documentation for price negotiation to show that the adjustment to be made in working capital on account of credit facility is already subsumed in the price. Hence, retrofitting of such adjustment to the price charged is not permissible. However, the ld.DR agreed that interest can be charged at LIBOR rate. He also relied upon the decision of ITAT, Pune Bench in the case of IGATE Computer System Ltd V/s Adl.CIT in ITA no.2504/PN/2012 (AY-2005-06) dated 27.5.2015. 10. We have considered the submissions of the parties and perused the materials on record as well as the decisions cited at the Bar. There is no dispute to the fact the margin shown by the assessee for international transactions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ther higher margin charged to A.E. takes care of the extended credit period for realisation of export sale proceeds. In the present case, undisputedly, the margin of A.E. transaction is relatively higher than the margin of comparables brought on record both by assessee and the TPO. That being the case, it is all the more necessary to examine assessee's claim that cost involved due to delay in realisation of export receivables from A.E. was factored in while fixing the price of international transaction with A.E. However, in our view, assessee has to establish such claim through proper documentary evidence which, as it appears, have not been examined by Transfer Pricing Officer or DRP, nor they are before us. 12. The next issue which arises is whether allowing extended credit period to A.E. should be considered as an independent international transaction for benchmarking or should be aggregated with other international transactions with A.E. for determining ALP. It is evident from material on record as well as order of the Transfer Pricing Officer, assessee has benchmarked the price charged for international transactions with A.Es applying TNMM by aggregating all transacts viz., bo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s per Rule 10A(d) if a number of transactions are closely linked or continuous in nature and arising from a continuous transactions of supply of amenity or services the transactions is treated as closely linked transactions for the purpose of transfer pricing and, therefore, the aggregate and clubbing of closely linked transaction are permitted under said rule. This concept of aggregation of the transaction which is closely linked is also supported by OECD transfer pricing guidelines. In order to examine whether the number of transactions are closely linked or continuous so as to aggregate for the purpose of evaluation what is to be considered is that one transaction is follow-on of the earlier transaction and then the subsequent transaction is carried out and dependent wholly or substantially on the earlier transaction. In other words, if two transactions are so closely linked that determination of price of one transaction is dependent on the other transaction then for the purpose of determining the ALP, the closely linked transaction should be aggregated and clubbed together. When the transaction are influenced by each other and particularly in determining the price and profit in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Assessing Officer/TPO to re-do the exercise of determination of ALP in terms of above observation." 13. Similar view has also been expressed by the Tribunal, Mumbai Bench, in case of Tecnimount ICB House (supra). In fact, in case of Kusum Healthcare Pvt. Ltd. (supra), the Tribunal, Delhi Bench, held that if ALP of the main sale transaction computed under TNMM is accepted, no separate adjustment on account of outstanding receivables can be made. However, it needs to be mentioned, in case of Kusum Healthcare (supra), assessee demonstrated that impact of extended credit period on working capital was factored in the pricing / profitability. The decision of IGate Computer Softwares Ltd. v/s Addl. CIT is factually distinguishable as in that case assessee itself has considered the extended credit facility as a separate international transaction. Thus, taking into consideration, the principle laid down as above we are of the view that transaction relating to extended credit period provided to A.E. is required to be aggregated with oth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... therefore, there is no case for disallowing the interest expenditure. However, the ld. Counsel admitted that the assessee before the AO has disallowed interest expenditure to avoid prolonged litigation and also no grounds were raised before the TRP on the issue. 17. The ld. DR submitted before us, the assessee having itself disallowed the interest expenditure relating to interest free advances at the assessment stage and having not raised any ground before the DRP, now the assessee cannot raise this issue before the Tribunal. 18. Having considered the submissions of the parties and perused the material on records, we find that the assessee during the course of assessment proceedings on its own offered the disallowance of interest expenditure attributable to interest free advances given to its AE. It is also a fact on record that before DRP, the assessee has not challenged the disallowance of the aforesaid interest expenditure. This fact clearly proves that the assessee had accepted the disallowance of interest expenditure of ₹ 94,44,829/- and that being the clear factual position, in our view, the assessee cannot raise this issue. Accordingly, we decline to entertain this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xcluded from the business income while computing the deduction u/s 10AA. Alternatively, it was submitted, if at all interest income has to be excluded from the business profit then the interest paid by the assessee should be netted off against the interest income and the net interest income should be reduced. 23. The ld. DR, on the other hand, raising preliminary objection submitted, assessee has not raised any ground on this issue before the DRP, therefore, no such ground can be raised at this stage as it does not emanate from the order of DRP. He submitted if at all, assessee could have raised the issue by way of additional ground. 25. We have considered the rival contentions and perused the material on record. The ld. Counsel for the assessee has fairly admitted that this issue was not raised before the DRP. Therefore, when the assessee has not raised any objection on this issue before the DRP, in our view, the assessee cannot raise such issue before us at this stage as the assessee has accepted the decision of the AO in the draft assessment proceedings, wherein he excluded the interest income while computing the deduction u/s 10AA of the Act. The final assessment order passed ..... X X X X Extracts X X X X X X X X Extracts X X X X
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