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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 ..... key has taken place. This approach is legally correct because activation of the end product is the trigger to royalty accruing to the vendors and as such to the income in the hands, if taxable, being brought to tax in India. The approach of the assessee thus cannot be faulted with. In view of the above discussions and bearing in mind entirety of the case, we see merits in the plea of the assessee. The impugned disallowance of under section 40(a)(i), as rightly contended by the learned Counsel, is devoid of legally sustainable merits and must be, therefore, deleted. Accordingly, we direct the Assessing Officer to delete the impugned disallowance made under section 40(a)(i) - decided in favour of assessee. - ITA No. 1565/Ahd/2017 - - - Dated:- 16-11-2018 - Mr P Bhatt, President And Pramod Kumar, Vice President For The Appellant : Dhinal Shah, For The Respondent : Vinod Talwani ORDER 1. By way of this appeal, the assessee-appellant has challenged correctness of the order dated 12th April 2017 passed by the CIT(A)-8, Ahmedabad in the matter of assessment under section 143(3) of the Income-tax Act, 1961, for the assessment year 2012-13. 2. In the first gro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng the relevant previous year, the assessee had entered into international transactions in respect of sale of its product to its Associated Enterprise (AE) abroad. These transactions were benchmarked using Transactional Net Margin Method (TNMM). In the course of proceedings before the Transfer Pricing Officer (TPO), while the TPO accepted the benchmarking of these sale transactions, he noted that in some of the cases the realization of bills was beyond 90 days. The TPO was of the view that realization of billing dues beyond 90 days constitutes an international transaction and accordingly made an adjustment of ₹ 2,04,090/- in respect of delay in realization of sale invoices. 4. Aggrieved, the assessee carried the matter in appeal before the learned CIT(A) but without any success. Learned CIT(A) was of the view that if the funds are repatriated to India, the assessee would have been in a position to earn better profit from appropriate investment of those repatriated funds and this potential loss is definitely a factor to be considered while evaluating the financial impact of the international taxation concluded by the assessee . Learned CIT(A) further relied upon the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ame, there cannot be any question of prices being the same. Unless the prices of the product and the product are the same, and yet extra credit period is allowed, there cannot be any occasion for making ALP adjustment on the basis of the excess credit period. None of the authorities below have even disputed that the ingredients, raw materials and semi-finished goods sold to Micro USA are not sold to any other concern. The very foundation of impugned addition in arm's length price on account of excess credit period is thus devoid of any legally sustainable merits or factual basis. When all these factors were pointed out to the learned Departmental Representative, he did not have much to say except to place his bland but dutiful reliance on the orders of the authorities below. However, for the reasons set out above and in the absence of any comparative price and credit period figures on comparable product to support the case of the revenue, we uphold the grievance of the assessee and direct the Assessing Officer to delete this ALP adjustment. The assessee gets the relief accordingly. 6. Learned counsel for the assessee submits that the issue being squarely covered, in favo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ere the Assessing Officer/TPO accepts the comparables adopted by the assessed, with or without making adjustments, as a bundled transaction, it would be illogical and improper to treat AMP expenses as a separate international transaction, for the simple reason that if the functions performed by the tested parties and the comparables match, with or without adjustments, AMP expenses are duly accounted for. It would be incongruous to accept the comparables and determine or accept the transfer price and still segregate AMP expenses as an international transaction, 8. By way of an example, this aspect of the matter was then 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 expen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cases to that extent interest is to be taken as integral to sale proceeds, and, as such, includible in operating income. When such an interest is includible in operating income and the operating income itself has been accepted as reasonable under the TNMM, there cannot be an occasion to make adjustment for notional interest on delayed realization of debtors. One can understand separate adjustment for excess credit period when the arm's length price for exports has been benchmarked on the CUP basis but not in a case when the arm's length price of the exports has been benchmarked on the basis of TNMM. The very conceptual foundation, for separate adjustment for delayed realization of debtors and on the facts of this case, is thus devoid of legally sustainable merits. 7. In any case, as pointed out by the learned Counsel, the undisputed position is that the assessee had allowed credit period beyond 90 days in the case of Non- Associated Enterprises, i.e. independent enterprises as well. Once this fact is not disputed, the transactions with the non-AE constitute valid Internal CUP inputs and ALP adjustment on account of realisation of bills beyond 90 days from the Associa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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 liability for the anti-virus and anti-spam software which are bundled along with this product at the time of sale of product to the distributor, the actual liability to pay for this product crystallizes at a much later time when the product is eventually activated by the end customers and that is also the point of time when tax withholding obligations are discharged. On these facts, the Assessing Officer was of the view that the provision for the liability in respect of royalty payable for the bundled product is not admissible as a deduction because the assessee has failed to deduct the tax at source. The plea of the assessee is that the liability to pay tax arises only at the point of time when the end product activated by the end customer was rejected. The Assessing Officer was of the view that the provision for royalty is not a provision per se but an expense payable which had occurred but was not actually paid as on the year end date. The Assessing Officer accordingly held that the assessee is liable to deduct tax at source unde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rds, 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 Italian DTAA. Such is also the view taken by a series of decisions by the coordinate benches, including the decision in the case National Organic Chemical Industries Ltd. v. Dy. CIT [2006] 5 SOT 317 (Mum.), with which we are in respectful agreement. When the royalty so credited by the assessee is not taxable at the time of credit of such amount to the account of payee, in the light of law laid down by Hon'ble Supreme Court in the case of GE Information Technology Centre (P.) Ltd. (supra), it does not give rise to any tax withholding obligations under section 195 (1) either. 15. The liability to deduct tax at source arises only when the income embedded in the relevant payment is exigible to tax. Clearly, the sale of bundles software to the distributor is not a point of time when the royalty in respect of the bundled product becomes payable. That point of time is when the end product is activated. In these circumstances, the Assessing Officer s approach of treating the entire provision as income exigible to tax in ..... X X X X Extracts X X X X X X X X Extracts X X X X
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