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TMI Blog2016 (4) TMI 400X X X X Extracts X X X X X X X X Extracts X X X X ..... partmental representative does not oppose this prayer. The cross-objection is accordingly dismissed as withdrawn. That leaves us with the cross appeals. 2. These cross appeals call into question correctness of the order dated 16th December, 2013 passed by the learned CIT(A) in the matter of assessment under section 143(3) of the Income Tax Act,1961, for the assessment year 2009- 10. Grievances raised by the parties are as follows: Grievances raised by the assessee: Ground 1: Transfer Pricing Adjustment of ₹ 4,47,04,460/- on account of charging interest on outstanding receivables from associated enterprises ('AE') (i) On the facts and in the circumstances of the case, and in law, the learned AO erred and the Hon'ble DRP further erred in holding outstanding receivables from AE to be an international transaction. (ii) On the facts and in the circumstances of the case, and in law, the learned AO has erred and the Hon'ble DRP further erred in characterizing delay in receipts from debtors in ordinary course of sale as extension of credit and termed it as loan and thereby applying an interest. (iii) On the facts and in the circumstances of the case, and in law, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the case, the Hon'ble DRP-II, Mumbai failed to appreciate that the mark-up of 3% while determining the ALP was essential as it insulated the assessee from various types of risks like entity risk, country risk and exchange risk. 3. As the issues so raised in the cross appeals are interconnected, we will take up all these grounds of appeal together. 4. The relevant material facts are like this. The assessee is engaged in the business of manufacturing, import and export of cut and polished diamonds. During the relevant previous year, the assessee had international transactions with an associated enterprises by the name of Doshi Impex Limited, Hong Kong. The sale transactions to this AE were benchmarked on the basis of TNMM. That, however, is not the point of dispute before us. During the course of the proceedings before the Transfer Pricing Officer, it was noticed that as on the balance sheet date, this AE of the assessee owed ₹ 35.76 to assessee whereas assessee's entire exports is ₹ 94 crores. The receivables thus amounted to almost 40% of the entire exports. The TPO further noted that the assessee had paid interest of ₹ 27,07,989 which could have been avo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er to the hearing dated October 16, 2013 which we had with your Honours. During the course of the hearing your goodself had requested for additional information on without prejudice basis with respect to Ground 7- Interest on receivables. The additional details/information are submitted below: 1. Your Honours had asked for the calculation of interest on unpaid receivable. In this respect, we would like to state that the since we have carried out working capital adjustments of comparable companies which take into account and neutralize the impact of embedded interest in die receivables and payables. Hence separate adjustment for interest on receivables is not required as otherwise it results into double adjustment. 2. Further, we would like to state that the interest chargeable on outstanding receivable does not fit within the meaning of international transactions, as the transfer pricing adjustment can be made u/s 92 in respect of an "international transaction". A continuing debit balance is not an "international transaction" per se but is a "result" of the international transaction. Even the residuary clause in the definition of 'international tra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AE. This calculation worked to 96 days (228 days minus 132 days). 9. The assessee also contends that the Id. TPO used SBI PLR plus 3% as the interest rate while calculating the adjustment. In this respect, we would like to mention state that since the outstanding is a result of international transactions, hence SBI PLR can not be taken as the interest rate, and instead interest on receivable should be calculated by adopting the London Inter-bank offered rate (LIBOR), 10. Without prejudice to all our contention, if we take SBI PLR plus 3% and interest for the period over-flowing the reasonable time limit, then the adjustment would reduce to ₹ 14,579,778. 6. While DRP did uphold the adjustment in principle, the interest rate, on the basis of which ALP adjustment was made, was taken as the PLR of the State Bank of India. In effect thus, the mark up on the PLR was deleted. In its brief order, the DRP held as follows: We have carefully considered the submissions made by the assessee and the reasons given by the Assessing Officer/ Transfer Pricing Officer in the order. We agree with the contentions of the Assessing Officer/ Transfer Pricing Officer that interest is leviable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... espect of delayed realization of export proceeds from the AEs. 9. Learned Departmental Representative contends that the Finance Act 2012, with retrospective effect from 1st April 2012, has clarified that the expression 'international transaction' would also include capital financing, including receivables, or any other kind of debt, arising during the course of business. He then submits that in view of this clarification, it is clear that overdue receivables would constitute an international transaction as per the provisions of Section 92B of the Act. He also refers to the order dated 27th May 2015 passed a coordinate bench of this Tribunal, in the case of i-Gate Computer Systems Ltd Vs ACIT and vice versa (ITA No. 2504/PN/2012), wherein it is, inter alia, stated that "the Hon'ble Bombay High Court, in assessee's own case relating to the assessment year 2002-03 in Income Tax Appeal No. 1148/2012, vide judgment dated 28.2.2013, has held that in view of the amendment by the Finance Act 2012 with retrospective effect from 1st April 2002, the said transaction of charging of interest from the AEs is covered under the amended provision of Section 92B(1) of the Act". On the strength of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le with that of the similarly placed comparables, it is wholly fallacious to come to the conclusion that since PLI is found to be comparable, separate adjustment in not required in respect of the interest on late realization of debts. 10. In his brief rejoinder, learned counsel reiterated his submissions and emphasized the contention that when time taken in realization of debts from AEs is considered vis-à-vis the time taken in realization with non AEs, there is no delay at all. 11. We have heard the rival submissions, perused the material on record and duly considered facts of the case in the light of the applicable legal position. 12. In our considered view, even if we proceed on the basis that Explanation to Section 92B is indeed retrospective in effect and it does cover delay in realization of debts, as long as sale is benchmarked on TNMM basis, as in this situation before us, there cannot be any occasion to make a separate adjustment for delay in realization of debts. The reason is that the interest income is an integral part of the PBIT inasmuch as interest income, in cases other than finance companies, is required to be included in the 'other income' and thus affec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... explained by Hon'ble Delhi High Court as follows: "An example given below would make it clear: Particulars Case 1 Case 2 Sales 1000 1,000 Purchase Price 600 500 Gross Margin 400 (40%) 500 Marketing Sale promotion 50 150 Overhead expense 300 300 Net profit 50 (5%) 50 (5%) The above illustrations draw a distinction between two distributors having different marketing functions. In case 2, a distributor having significant marketing functions incurs substantial expenditure on AMP, three times more than in case 1, but the purchase price being lower, the Indian AE gets adequately compensated and, therefore, no transfer pricing adjustment is required. In case we treat the AMP expenses in case 2 as ₹ 501-, i.e. identical as case 1 and AMP of ₹ 100 as a separate transaction, the position in case 2 would be: Particulars Case 2 Sales 1,000 Purchase Price 500 Gross Margin 500 (50%) Overhead expenses 300 Marketing expenses 50 Net profit 150 (15%) It is obvious that this would not be the correct way and method to compute the arm's length price. The purchase price adjustments/set off would be mandated to arrive at the arm's lengt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ong but it is not even the case of the TPO that excessive credit period was allowed to these AEs vis-à-vis the credit period allowed to independent enterprises, nor any ALP adjustment has been recommended in connection with the same. This fact, if anything, shows that the credit period allowed to the AEs is comparable with credit period of non AEs in respect of similar goods. To compare credit period in respect of finished goods with the credit period in respect of semi-finished goods, is, therefore, somewhat fallacious in approach and untenable in law. In our considered view, merely because there is a delay in realization of debts cannot be reason enough to make an addition as long as such a delay is peculiar to the transactions with AEs. The adjustment before us is an adjustment to arrive at an arm's length price and unless there is something, more than sweeping generalizations as implicit in the arguments before us, to at least indicate that such a delay in realization of debts in similar transactions is absent in arm's length transactions, these adjustments cannot be made even when sales are benchmarked on CUP basis. The delay in realization of debts, resulting i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not only quite detached from commercial reality but also wholly untenable in law. In any case, what can be examined on the touchstone of arm's length principles is the commercial transaction itself, as a result of which the debit balance has come into existence, and the terms and conditions, including terms of payment, on which the said commercial transaction has been entered into. In this view of the matter, learned Departmental Representative's reliance on Aztec decision (supra) is of no assistance to the case of the revenue. The international transaction is exports of goods which been benchmarked on TNMM basis and which is duly accepted by the TPO. In view of these discussions, and respectfully following the decision of the coordinate bench in assessee's own case for the earlier years, we uphold the grievance of the assessee and direct the Assessing Officer to delete the impugned ALP adjustment of ₹ 2,10,95,346. 14. As regards learned Departmental Representative's contention that Sony Ericsson Mobile Corporation decision (supra) will not apply in the case before us in the context of interest on delayed realization of debts for the simple reason that while AM ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... respect of delay in realization of sale proceeds. Such being our conclusions, we also see no need to address ourselves to the specific factual arguments advanced by the learned counsel. In effect thus, we uphold the grievance of the assessee, and direct the Assessing Officer to delete the impugned arm's length price adjustment. 18. As we have upheld the grievance of the assessee, and thus deleted the impugned ALP adjustment, grievance raised by the Assessing Officer, which was in respect of the interest rate on the basis of which ALP adjustment was required to be made, is rendered academic and it does not call for any adjudication at this stage. 19. There is, however, one more aspect of the matter for which the impugned ALP adjustment must be deleted. 20. In order to explain this line of reasoning, a few material factual developments and the legal analysis will have to be taken note of. We have noted that everything hinges on application of Explanation to Section 92B, vide Finance Act 2012, though with retrospective effect from 1st April 2002. This Explanation provides as follows: Explanation*: - For the removal of doubts, it is hereby clarified that - (*inserted by the Fina ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... omer related intangible assets, such as, customer lists, customer contracts, customer relationship, open purchase orders; (g) contract related intangible assets, such as, favourable supplier, contracts, licence agreements, franchise agreements, non -compete agreements; (h) human capital related intangible assets, such as, trained and organised work force, employment agreements, union contracts; (i) location related intangible assets, such as, leasehold interest, mineral exploitation rights, easements, air rights, water rights; (j) goodwill related intangible assets, such as, institutional goodwill, professional practice goodwill, personal goodwill of professional, celebrity goodwill, general business going concern value; (k) methods, programmes, systems, procedures, campaigns, surveys, studies, forecasts, estimates, customer lists, or technical data; (l) any other similar item that derives its value from its intellectual content rather than its physical attributes.'. 21. Shortly before the 2012 amendments were brought, a coordinate bench of this Tribunal, in the case of Nimbus Communications Ltd Vs ACIT [(2011) 139 TTJ 214 (Bom)] and speaking through one of us, had ob ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9;, i.e. any other transaction having a bearing on the profits, incomes, losses or assets of such enterprises, does not apply to a continuing debit balance, on the given facts of the case, for the elementary reason that there is nothing on record to show that as a result of not realizing the debts from associated enterprises, there has been any impact on profits, incomes, losses or assets of the assessee. In view of these discussions, in our considered view, a continuing debit balance per se, in the account of the associated enterprises, does not amount to an international transaction under section 92 B in respect of which ALP adjustments can be made. The factum of payment has to be considered vis-a-vis terms of payment set out in the transaction arrangement, and not in isolation with the commercial terms on which transaction in respect of which payment is, according to the revenue authorities, delayed. 22. We have noted the learned Departmental Representative's contention that the above decision is no longer good in law since a coordinate bench of this Tribunal, in the case of i-Gate Computer Systems Ltd Vs ACIT and vice versa (ITA No. 2504/PN/2012 has, inter alia, stated that " ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s judgment does not involve an adjudication on a legal issue as it is a result of consensus of the parties. When both the parties before Their Lordships agreed, and so 'stated' before Their Lordships, to let the matter be restored to the file of the Tribunal, there could not have been, and there was no, adjudication on any legal issue. 27. It is for this reason that the said decision of the Pune bench of the Tribunal, relied upon by the learned Departmental Representative, is per incurium and does not bind the coordinate benches. 28. The question then is as to what is the impact of amendment in section 92B, by the virtue of Finance Act 2012, on the definition of 'international transaction' so far as the interest on delayed realization of debt is concerned. 29. The amendment so made by the Finance Act 2012, stated to be with retrospective effect 1st April 2002, inserts an Explanation to Section 92 B which, inter alia, that "For the removal of doubts, it is hereby clarified that (c) capital financing, including any type of long -term or short -term borrowing, lending or guarantee, purchase or sale of marketable securities or any type of advance, payments or deferred payment or rec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e judicial forums, as to what went so wrong that the interpretation was so off the mark vis-à-vis fundamental principles of taxation or the sound policy considerations. However, amendment so made are generally prospective, and there is a sound conceptual foundation, as has been highlighted in the binding judicial precedents that we will deal with in a short while, for that approach. There is no dearth of examples on this aspect of the matter. Take for example, the amendment to Section 263 by the Finance Act, 1961. In many judicial precedents, [such as in the case of CIT Vs Sunbeam Auto Limited (332 ITR 167) wherein it was held that "Learned counsel for the assessee is right in his submission that one has to keep in mind the distinction between "lack of inquiry" and "inadequate inquiry". If there was any inquiry, even inadequate that would not by itself give occasion to the CIT to pass orders under s. 263 of the Act, merely because he has different opinion in the matter. It is only in cases of "lack of inquiry" that such a course of action would be open"], it was reiterated that it was only the lack, not the adequacy, of inquiry which could confe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rise. Such amendments though framed as clarificatory, are in fact transformative substantive amendments, and incapable of being given retrospective effect. …………………. 37. An important question, which arises in this context, is whether a "clarificatory" amendment remains true to its nature when it purports to annul, or has the undeniable effect of annulling, an interpretation given by the courts to the term sought to be clarified. In other words, does the rule against clarificatory amendments laying down new principles of law extend to situations where law had been judicially interpreted and the legislature seeks to overcome it by declaring that the law in question was never meant to have the import given to it by the Court? The general position of the courts in this regard is where the purpose of a special interpretive statute is to correct a judicial interpretation of a prior law, which the legislature considers inaccurate, the effect is prospective. Any other result would make the legislature a court of last resort. United States v. Gilmore 8 Wall [(75 US) 330, 19L Ed 396 (1869)] Peony Park v. O'Malley [223 F2d 668 (8th Cir 1955)]. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his stock reply is that the amendment only clarifies the law, it does not expand the law. 38. Well, if the 2012 amendment does not add anything or expand the scope of international transaction defined under section 92B, assuming that it indeed does not- as learned Departmental Representative contends, this provision has already been judicially interpreted, and the matter rests there unless it is reversed by a higher judicial forum. However, if the 2012 amendment does increase the scope of international transaction under section 92B, as is our considered view, there is no way it could be implemented for the period prior to this law coming on the statute i.e. 28th May 2012. The law is well settled. It does not expect anyone to perform an impossibility. Reiterating this settled legal position, Hon'ble Supreme Court has, in the case of Krishnaswamy S Pd Vs Union of India [(2006) 281 ITR 305 (SC)], observed as follows: The other relevant maxim is, lex non cogit ad impossibilia-the law does not compel a man to do what he cannot possibly perform. The law itself and its administration is understood to disclaim as it does in its general aphorisms, all intention of compelling impossibilit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Kumar Agarwal Vs ACIT [(2014) 249 ITD 363 (Agra)], insertion of second proviso to Section 40(a)(ia), though specifically stated to be with effect from 1st April 2013, was read to be effective from 1st April 2005. The reasoning adopted by the bench, speaking through one of us, was as follows: 8. With the benefit of this guidance from Hon'ble Delhi High Court, in view of legislative amendments made from time to time, which throw light on what was actually sought to be achieved by this legal provision, and in the light of the above analysis of the scheme of the law, we are of the considered view that section 40(a)(ia) cannot be seen as intended to be a penal provision to punish the lapses of non deduction of tax at source from payments for expenditure- particularly when the recipients have taken into account income embedded in these payments, paid due taxes thereon and filed income tax returns in accordance with the law. As a corollary to this proposition, in our considered view, declining deduction in respect of expenditure relating to the payments of this nature cannot be treated as an "intended consequence" of Section 40(a)(ia). If it is not an intended consequence i.e. if it is a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... existed prior to insertion of second proviso thereto, went much beyond the obvious intentions of the lawmakers and created undue hardships even in cases in which the assessee's tax withholding lapses did not result in any loss to the exchequer. Now that the legislature has been compassionate enough to cure these shortcomings of provision, and thus obviate the unintended hardships, such an amendment in law, in view of the well settled legal position to the effect that a curative amendment to avoid unintended consequences is to be treated as retrospective in nature even though it may not state so specifically, the insertion of second proviso must be given retrospective effect from the point of time when the related legal provision was introduced. In view of these discussions, as also for the detailed reasons set out earlier, we cannot subscribe to the view that it could have been an "intended consequence" to punish the assessee's for non deduction of tax at source by declining the deduction in respect of related payments, even when the corresponding income is duly brought to tax. That will be going much beyond the obvious intention of the section. Accordingly, we hold that the insert ..... X X X X Extracts X X X X X X X X Extracts X X X X
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