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TMI Blog2018 (12) TMI 1556X X X X Extracts X X X X X X X X Extracts X X X X ..... idering the amount receivable from AE for more than 90 days as a separate international transaction. The Appellant submits that the outstanding receivables are a result of the main international transaction of sale of software/services and hence are closely linked to the main international transaction of sales. 1.3. On the facts and circumstances of the case and in law, the learned CIT (A) has erred in confirming the action of the learned AO / TPO in not appreciating the fact that even after the delayed receivables, the working capital adjusted operating margins of the Appellant are higher than that of the comparable companies and hence no separate adjustment is warranted. 1.4. Without prejudice to the above, on the facts and circumstances of the case and in law, the learned CIT (A) has erred in confirming the action of the learned AO / TPO in rejecting Internal Comparable Uncontrolled Price ('CUP') method as the most appropriate method. The Appellant submits that it has not charged any interest on the outstanding receivables from Non AEs beyond the credit period and hence Internal CUP should be applied as the most appropriate method. 1.5. Without prejudice t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee, by a decision of Ahmedabad Bench of this Tribunal in the case of Micro Inks Limited Vs. ACIT, [2016] 157 ITD 132 (Ahmedabad - Trib.), wherein, after taking into account Hon'ble jurisdictional High Court's judgment in the case of Nirma Industries Ltd. Vs.. DCIT, [2006] 283 ITR 402 and the Hon'ble Delhi High Court's judgement in the case of Sony Ericsson Mobile Corpn. (P.) Ltd. v. CIT, [2015] 374 ITR 118, the Coordinate bench has, inter alia, observed as under:- "5. We find that this issue is covered, in favour of the assessee, by a decision of the coordinate bench in assessee's own case for the assessment year 2002-03 [reported as Micro Inks Ltd. v. Asstt. CIT [2013] 144 ITD 610/36 taxmann.com 50 (Ahd.), While deleting similar addition, the coordinate bench had observed as follows: "20. The only other ALP adjustment in appeal before us is with respect to, what the authorities below have treated as, excess credit period allowed to Micro USA. This adjustment must be deleted for the short reason that it was part of the arrangement that specified credit period was allowed and thus the cost of funds blocked in the credit period was inbuilt in the sale price. There is no disp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... acturer would be lower as the supplier does not have to factor the lead time for the sale of finished goods by the manufacturer" and that "the supplier is entitled to receipt of payment immediately on delivery irrespective of whether the finished goods is sold in the market, get spoiled in manufacturing or is damaged". He further submits that "it is by now acknowledged that granting of excess credit period is a service rendered to the AE and needs to be benchmarked". A reference is then made to Special Bench decision in the case of Aztec Software & Technology Services (P.) Ltd. v. Asstt. CIT [2007] 107 ITD 141/162 Taxman 119 (SB) (Bang.), in support of the proposition that merely by finding fault in the work done by the TPO, the adjustments cannot be deleted and that unless the ALP submitted by the taxpayer is specifically accepted, the appellate authorities, on the basis of material available on record have to determine ALP themselves. 7. We find that, as evident from audit report on form 3CEB (pages 39 to 52 of the paper-book), the arm's length price of exports to the AEs, including Micro USA, has been determined on the basis of the Transactional Net Margin Method (TNMM). ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... djustments/set off would be mandated to arrive at the arm's length price, if the AMP expenses are segregated as an independent international transaction....." 9. By the same logic, even making an adjustment for interest on excess credit allowed on sales to AEs will vitiate the picture, inasmuch as what has already been factored in the TNMM analysis, by taking operating profit figure which incorporate financial impact of the excess credit period allowed, will be adjusted again separately as well. Of course, in the example used by Hon'ble Delhi High Court, the AMP expenses are deductibles in computation of operating profit but that does not make any material difference because the interest levy for late realization of debtors, being inextricably connected with the sales, is also part of operating income. In the case of Nirma Industries Ltd. v. Dy. CIT [2006] 283 ITR 402/155 Taxman 330 (Guj.), Hon'ble High Court has dealing with the nature of interest on debtors, held it to be integral to business income. The same is the principle for the transfer pricing cases to that extent interest is to be taken as integral to sale proceeds, and, as such, includible in operating inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sequent years when the actual liability of making the payment of royalty has occurred. Hence it is prayed that the appropriate deduction be granted to the Appellant in the subsequent year when taxes have been deducted." 11. So far as this disallowance is concerned, the relevant material facts are like this. The assessee procures anti-virus (soured from Kasperkey, Russia) and anti-spam software (soured from Commtouh Software Ltd, Israel) and bundles these softwares with assessee's own Unified Threat Management Software which is ultimately sold to the end customers as a bundled product. The royalty in respect of anti-virus and antispam software, referred to above, is paid only when the end customer, i.e. the ultimate user of the bundled software, activates the license key. However, the assessee recognizes the revenue from the sale of its software and at the point of time when the bundled software is sold to the distributor, and the assessee also makes a provision for the royalty that it may have to pay upon activation of key in respect of the outsourced component which is part of the bundled product. In other words, while the assessee makes the provision in respect of the possible ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under the treaty is the point of time when the royalty income is paid to the resident of the other Contracting State. Incidentally, while dealing with an identically worded Article 13(1) of the Indo-Italian Tax Treaty, a Co-ordinate Bench of this Tribunal in the case of Saira Asia Interiors (P.) Ltd. Vs. ITO, [2017]164 ITD 687 (Ahmedabad- Trib.), has, inter alia, observed as follows:- "8. As for the point of time of crediting the amount payable to non-resident, i.e. "at the time of credit of such income to the account of payee", the royalty so paid by the assessee was not taxable in the hands of the resident, for the simple reason that, in terms of article 13 of Indo Italian DTAA- which is reproduced above for the ready reference, taxability of royalty is dependent on the payment by the resident of a contracting state and receipt of the same by the resident of the other contracting state. Unless, therefore, the actual payment takes place, the taxability under article 13 of Indo Italian DTAA does not arise. In other words, the mere fact that an Indian resident credits the amount of royalty payable to an Italian resident does not trigger taxability under article 13 of the Indo Ita ..... X X X X Extracts X X X X X X X X Extracts X X X X
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