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TMI Blog2017 (11) TMI 634X X X X Extracts X X X X X X X X Extracts X X X X ..... the same international transaction. We, therefore, set aside the impugned order on this score and hold that the international transactions of trade receivables and trade payables with all the three AEs should be aggregated and processed as a single transaction of interest on receivables/payables. If the position is viewed in such a manner, there remains no amount of interest receivable from the AE liable to be added to the assessee’s total income as a transfer pricing adjustment. Disallowance u/s 14A - Held that:- An admitted position that the assessee did not earn any exempt income during the year and, still, the disallowance has been made u/s 14A. The Hon'ble Delhi High Court in Cheminvest Ltd. vs. CIT (2015 (9) TMI 238 - DELHI HIGH COURT), has held that if there is no exempt income, there can be no question of making any disallowance u/s 14A of the Act. In view of the binding precedents mandating for not making any disallowance u/s 14A of the Act in the absence of any exempt income, which are squarely applicable to the facts of the instant case, we overturn the view taken by the ld. CIT(A) and order for the deletion of disallowance sustained u/s 14A of the Act. Internati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wever, it was noticed from the examination of the assessee s balance sheet that there were certain receivables from the Associated Enterprises (AEs) on account of invoices raised by the assessee, which were not received within a reasonable period. Considering Explanation 1(c) to section 92B inserted by the Finance Act, 2002 w.r.e.f. 01.04.2002, the TPO held that: any other debt arising during the course of business is also an international transaction. After considering the assessee s objections and arguments, it was opined that the assessee provided benefit to its AEs by way of advancing interest free loans in the garb of delayed receipt of receivables. Making a prudent estimate of 30 days for payment of receivables, the TPO held that any delay beyond such period was required to suffer transfer pricing adjustment. He applied Comparable Uncontrolled Price (CUP) method for determining the ALP of the international transaction of Interest on receivables . Considering the Prime lending rate of RBI to which 500 basis points were added, the TPO treated interest rate of 17.22% as benchmark. That is how, he computed transfer pricing adjustment of ₹ 56,53,235/- on account of delaye ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cumstances as mentioned in this clause of the Explanation , also become international transactions, requiring determination of their ALP. If payment of interest is excessive or there is no or low receipt of interest, then such interest expense/income need to be brought to its ALP. The expression debt arising during the course of business in common parlance encompasses, inter alia, any trading debt arising from the sale or purchase of goods or services rendered in the course of carrying on the business. Once any debt arising during the course of business has been ordained by the legislature as an international transaction, it is, but, natural that if there is any delay in the realization of such debts arising during the course of business, the same is liable to be visited with the transfer pricing adjustment on account of interest income short charged or uncharged. Under such circumstances, the contention taken by the assessee before the authorities below that interest on receivables is not an international transaction, turns out to be bereft of any force. 6. The Hon ble Bombay High Court in the case of CIT vs. Patni Computer Systems Ltd., (2013) 215 Taxmann 108 (Bom.) d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... saction shall be determined by any of the following methods, being the most appropriate method, having regard to the nature of transaction or class of transaction or class of associated persons or functions performed by such persons or such other relevant factors as the Board may prescribe, namely .. 11. It can be seen from the prescription of sub-section (1) to section 92C of the Act that the ALP is required to be determined having regard, inter alia , to nature of transaction or class of transaction. The term transaction has been defined in Rule 10A(d) of the Income-tax Rules, 1962 to include a number of closely linked transactions . When we consider the language of section 92C(1) in juxtaposition to rule 10A(d), it becomes apparent that the international transactions of the same nature or the same class are to be aggregated for the purpose of determining their ALP as a single transaction. Such closely linked transactions cannot be benchmarked independent of each other. The Hon'ble Delhi High Court in Sony Ericsson Mobile Communications India Pvt Ltd. vs. CIT (2015) 374 ITR 118 (Del) has also held that bunching of interconnected and continuous trans ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ₹ 4,32,737 from this party. The ld. CIT(A) has allowed set off of interest on payables of AVL List Graz with interest on receivables of AVL List Graz, thereby, computing addition of net interest on receivables at ₹ 5,08,487/-. Such addition was computed notwithstanding the fact that the assessee had certain trade payables to the other AEs, namely, AVL Fahrzeugdiagnose GmbH and AVL Zollner Marine GmbH as well, on which again no interest was paid. Interest on such payables at the rate of 17.22% which, if paid, would have been ₹ 14,65,217 and ₹ 30,554. The assessee, admittedly, did not either charge any interest on receivables or pay any interest on payables from/to all the three AEs. Allowing set off of interest on payables with interest on receivables to AVL List Graz has brought on fore the proposition that the assessee should have charged net interest on receivables from this party at ₹ 5,08,487/-. This position in totality is an oversight of the fact that the assessee, in addition to AVL List Graz had also certain amounts payable in the same manner to the other two AEs. Even going by the ld. CIT(A) s version, there would have been no transfer pricin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le jurisdictional High Court in CIT vs. Holcim India P. Ltd. (2014) 90CCH 081-Del-HC . In view of these binding precedents mandating for not making any disallowance u/s 14A of the Act in the absence of any exempt income, which are squarely applicable to the facts of the instant case, we overturn the view taken by the ld. CIT(A) and order for the deletion of disallowance sustained u/s 14A of the Act. 17. In the result, the appeal is partly allowed. Assessment Year 2010-11 18. The first issue pressed in the instant appeal is transfer pricing adjustment on account of interest on receivables from the AE. 19. The factual matrix of the case is that the assessee continued to be engaged in assembling of diesel smoke meters, petrol exhaust gas analysers, computerized state of the art pollution monitoring systems for diesel and petrol vehicles and other engine diagnostic equipments. The assessee filed return declaring 8 international transactions in Form No.3CEB. The Assessing Officer made reference to the TPO for determining the ALP of the international transactions. The TPO treated the declared international transactions at ALP. However, on examination of the balance shee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rred or services provided in a comparable uncontrolled transaction, or a number of such transactions, is identified ; ( ii) such price is adjusted to account for differences, if any, between the international transaction and the comparable uncontrolled transactions or between the enterprises entering into such transactions, which could materially affect the price in the open market ; ( iii) the adjusted price arrived at under sub-clause (ii) is taken to be an arm s length price in respect of the property transferred or services provided in the international transaction ; 23. Sub-clause (i) of rule 10B(1)(a) requires identification of the price charged or paid in a comparable uncontrolled transaction. Such price is adjusted under sub-clause (ii) on account of difference between the international transaction and comparable uncontrolled transaction. The adjusted price becomes ALP under sub-clause (iii) in respect of the services provided by the assessee in the international transaction. Ergo, it is evident from the mandate of Rule 10B(1)(a) above that the ALP under this method can be determined only by making a comparison of the international transaction with simil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... It is not the case of the Revenue that the assessee s case falls in any of the above two exceptions. As such, we cannot permit to recharacterize the international transaction of interest on trade receivables with interest on bonds with a fixed maturity period . As such, the application of interest rate of 14.88 %, being the interest rate on bonds with a maturity period of 5 years or more, as a benchmark is disapproved and overturned. 26. Sub-clause (i) of rule 10B(1)(a) further provides for making a comparison with the price charged or paid in a comparable uncontrolled transaction . Thus it is discernible that what is to be compared under this method is the price charged or paid from a comparable uncontrolled transaction. The word 'comparable' may encompass internal comparable as well as external comparable. Where a potential comparable is available in the shape of an uncontrolled transaction of the same assessee, it is likely to have higher degree of comparability vis-a-vis the comparables identified amongst the uncontrolled transactions of third parties. The underlying object behind the computation of the ALP of an international transaction is to find out the pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he international transaction of interest on receivables should also be taken as nil. In fact, this was the submission made before the ld. CIT(A) as well, which starts from page 23 and goes on up to page 44 of the paper book. As against this, the ld. CIT(A) has recorded in para 6.3 of the impugned order that: the appellant has not brought on record any such uncontrolled transaction so as to show that no interest has been charged by it for similar delays nor any exact comparability has been established. It is, thus, evident that ld. CIT(A) did not take into consideration the cases cited by the assessee of internally comparable uncontrolled transactions in which no interest was charged. Once, there are internal comparable transactions, the same need to be considered and preferred for benchmarking the international transaction. 29. However, we find from the assessee s Profit Loss Account, whose copy is placed on page 142 of the paper book, that there is an item of Other income with the value of ₹ 22,33,35,416/-. Break up of this amount is available in Schedule 9, which is available on page 148 of the paper book. The last item of this Schedule is Interest. In addition t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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