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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 ..... of the arm's length price (ALP) of these international transactions to the Transfer Pricing Officer (TPO). No adverse inference was drawn in respect of the international transactions reported by the assessee. However, 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 Pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... een expressly recognized as an international transaction. That being so, the payment/non-payment of interest or receipt/non-receipt of interest on the loans accepted or allowed in the circumstances 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 inte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ith in section 92C. Relevant part of sub-section (1) of section 92C reads as under :- '(1) The arm's length price in relation to an international transaction 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 Eric ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n of net interest on receivables at Rs. 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 Rs. 14,65,217 and Rs. 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 Rs. 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 pricing addition if the assessee had received the amount from one AE and paid to other AE, which would have been only an internal arrangement between the AEs. Since the balances with these three AEs are, ad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me, 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 sheet, it was revealed that there were certain trade receivables representing payment for invoices raised, but, not received within the stipulated time. For this year, the Assessing Officer himself allowed credit period of 180 days, u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... olled 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 similar uncontrolled transaction(s). 24. To be more specific, sub-clause (i) of rule 10B(1)(a) provides that the price charged or paid for property transferred etc. is to be compared with the price charged or paid for a comparable uncontrolled transaction. The essen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 profit which an enterprise would have earned if the transaction had been with some third party instead of related party. If data is available showing price charged or paid by the enterprise itself from a third party, it is advisable to have recourse to an internally compara ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Rs. 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 to interest from bank, the assessee also declared to have earned interest from 'Others' to the tune of Rs. 37,95,288/-. This shows that the assessee did earn interest from 'Others.' It is not clearly borne out as to whether such interest was received on account of trade receivables from unr ..... X X X X Extracts X X X X X X X X Extracts X X X X
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