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TMI Blog2019 (3) TMI 325X X X X Extracts X X X X X X X X Extracts X X X X ..... t, 1961. Deleting the addition of Rs. 1,63,68,461/- made by the A.O. on account of interest not charged from AE on outstanding receivables. Not appreciating the fact that the second proviso to Section 92C(2) is not applicable in the instance case, as the A.O. has applied CUP method of determining ARM'S LENGTH PRICE." 3. The assessee is a company engaged in the business of manufacturing and exporting of hand knotted carpets. Since the assessee has reported international transactions entered into with its Associated Enterprises (AE), therefore, the Assessing Officer referred the issue of determination of Arm's Length Price in respect of international transactions to the TPO. The assessee is exporting the carpets to M/s Jaipur Rugs Inc, USA which is Associated Enterprise of the assessee as well as to the other unrelated parties. The international transactions reported by the assessee are reproduced by the TPO in para 3 as under: "3. INTERNATIONAL TRANSACTIONS: The international transactions entered into bythe assesse with its associated enterprise during the year are as following: Description of transaction Method Value (in Rs.) 1. Sale of Carpet to M/s jaipu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thod applied by the assessee for bench-marking of international transaction and held that the price of international transaction is within the tolerance range of + 5% of ARM'S LENGTH PRICE and consequently directed the Assessing Officer to delete the addition made on account of T.P. adjustment. As regards the addition made on account of notional interest, the ld. CIT(A) applied LIBOR as against the PLR applied by the TPO and then worked out the ALP on account of interest at Rs. 25,61,118/-. However, the said amount was found to be set off against the foreign exchange differences as the exchange rate of dollar was increased as against INR at the time of realization or at the end of the year in comparison to the rate at the time of transaction. Therefore, even after considering the balance amount on account of arm's length price of the interest to be added, the ld. CIT(A) found that the price of international transaction is still within the tolerance range of +5% from the arm's length price. Hence, the ld. CIT(A) has deleted the additions made by the Assessing Officer on account of transfer pricing adjustment. 5. Before us, the ld. CIT-DR has submitted that the assessee has applied ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the AE is always less than in comparison to the price charged from the non-related parties who are buying the goods as per their choice. The ld AR has further submitted that since the sale of carpets is made on regular basis and a large volume, therefore, it is not possible to compare each and every carpet price with arm's length price under CUP. Accordingly the assessee has taken average price of carpets sold to the non-AE under CUP and then benchmarked its international transactions by taking the average price of sale made to the AE. Though, the sale made to the AE is forming major part of the total sales, however, due to the large volume of quantity and number of transactions it is not possible to compare each transaction with corresponding comparables uncontrolled price. Hence, the assessee has worked out the average of comparable uncontrolled price being the sale price of unrelated party and the sale price of the AE as per the Rules 10A and 10B of the Income Tax Rules, 1962 (in short the Rules). The ld AR has further pointed out that the Rules 10A and 10B of the Rules permits the aggregation of the transactions if the transactions are closely related even under CUP and con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nal transactions being sale of carpets to the AE of Rs. 29,29,83,743/-. The carpets sold to the AE varies in quality, size and design. As per the details reproduced by the TPO, there are around 300 different varieties of products sold to the AE. Though, the quantity of products sold to the AE is very large in comparison to the non-AE. The assessee adopted CUP method as most appropriate method for bench-marking of the international transaction. The assessee has computed the arm's length price by taking the average price of all the carpets sold to the non-AE and then compared the average price of all the carpets sold to the AE. We find that the variation in the rates of different carpets varies many times and it goes to even up to 8 times, therefore, the vast variation of the rates of different variety of the carpets, designs and pattern makes it difficult to compare the average price computed as per the arithmetic mean of all the transaction with the carpets sold to the non-AE. Therefore, we find that the average method adopted by the assessee in working out the arm's length price under CUP does not give the correct results of arm's length price. Even the average price adopted by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee has adopted a simple method of working out arithmetic means instead of considering the rate and quantity of each transaction. Therefore, we find that a weighted average of price rate of the transactions with the AE as well as the non-AE will mitigate the scope of any variation or difference in the working out of the sale price of the international transactions as well as the uncontrolled/unrelated price being arm's length price. We find that the TPO has also not taken a correct view while picking only those transactions with the AE which are found to be sold at less rate than the comparables uncontrolled price. In this exercise, the TPO has left out the transactions with AE at the price which is more than the comparables uncontrolled price, therefore, such an approach of the TPO is also not permissible/ warranted while computing the arm's length price in respect of the one product and with one AE. Therefore in course of sales of a variety of the goods of the same product, the arm's length price and comparison of the international transaction has to be taken on the total transactions instead of cherry picking of the transactions. Accordingly, we find that neither the assessee ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Tribunal in the case of ACIT Vs. Millipore (India) Ltd. (2017) 80 taxmann.com 12 has considered an identical issue in para 13 as under: "13. The assessee-company had placed no material before us or before the CIT(A) controverting above finding of the AO and the reasoning of the AO cannot be found fault with. Therefore, ground No.4 of cross objections is dismissed. Ground No.2 of Cross objection challenges the confirmation of ALP adjustment in respect of amount due from AEs. The TPO made adjustment on account of notional interest for nonrealization of its dues. There is no dispute that the transaction in question is not an independent transaction. It is an integral part of transaction of sale made to AE and therefore, it has to be considered along with main transaction. It is only w.e.f. assessment year 2012- 13 amendment to section 92A was brought in the statute book. Since amendment is not applicable to the assessment year under consideration, law laid down by several co-ordinate benches like Goldstar Jewellery Ltd. v. Jt. CIT [2015] 53 taxmann.com 353/68 SOT 259 (URO) (Mum.) is applicable and in the case of Avnet India (P.) Ltd. v. Dy. CIT [2016] 65 taxmann.com 187 (Bang. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... saction and then the subsequent transaction is carried out and dependent wholly or substantially on the earlier transaction. In other words, if two transactions are so closely liked that determination of price of one transaction is dependent on the other transaction then for the purpose of determining the ALP, the closely linked transaction should be aggregated and clubbed together. When the transaction are influenced by each other and particularly in determining the price and profit involved in the transaction then those transactions can safely be regarded as closely lined transactions. In the case in hand, the credit period extended to the AE is a direct result of sale transaction. Therefore, no question of credit period allowed to the AE for realization of sale proceeds without having sale to AE. The credit period extended to the AE cannot be treated as a transaction stand alone without considering the main transaction of sale. The sale price of the product or service determined between the parties is always influenced by the credit period allowed by the seller. Therefore, the transaction of sale to the AE and credit period allowed in realization of sale proceeds are closely lin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t necessary to adjudicate upon the additional grounds raised by the assessee company. Hence, the appeal is treated as partly allowed for statistical purposes. Respectfully following this decision, we hold that no ALP adjustment is permissible on this issue. This cross objection is allowed." Thus, it is clear that the Coordinate Bench of the Bangalore Tribunal has followed the decision in the case of Goldstar Jewellery Ltd. Vs Jt.CIT (2015) 53 taxmann.com 353 as well as the another decision of Coordinate Bench. One of us the Judicial Member is the party of the said decision in the case of ACIT Vs. ACIT Vs Millipore (India) Ltd. (supra) as well as Goldstar Jewellery Ltd. Vs Jt.CIT (supra). Therefore, the Tribunal has held that the transaction of sale to the AE and credit period allowed in realization of sale proceeds are closely linked as they are interlinked and the terms and conditions of sale as well as price are determined based on the totality of the transaction and not on individual and separate transaction. Therefore, for the purpose of determining the arm's length price the transaction of allowing the credit to the AE for realization of sale proceeds has to be clubbed or a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uestions of law as proposed do not give rise to any substantial question of law. Thus, not entertained." Thus the Hon'ble High Court has considered that extension of credit beyond the normal period of 60 days is in substance a granting of loan to the AE so as to enjoy the funds which the AE would otherwise has to be repay within the period of 60 days and upheld the arm's length interest at LIBOR rate as against the PLR applied by the TPO. In the case in hand, the ld. CIT(A) has rightly applied the LIBOR for the purpose of bench-marking the credit allowed to the AE for realization of sale proceeds. However, the ld. CIT(A) has also considered the exchange rate gain against the said arm's length interest which in our view, is not proper as the exchange gain or loss would be part of the sale proceeds and therefore would consequently increase or decrease the sale price at the time of computing the arm's length price and bench-marking of international transaction. Hence the for ex-gain or loss has to be taken as part of the sale price in both the cases of international transaction as well as comparable uncontrolled price. In other words, the exchange gain or loss would be part of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... interest for allowing the credit to the AE is covered by our finding in the appeal for A.Y. 2008-09 and accordingly, the matter is set aside to the TPO/A.O.. Similarly the issue raised by the revenue is also common to the issue of transfer pricing adjustment made by the TPO was deleted by the ld. CIT(A). Being the common issue involved in these cross appeals for the A.Y. 2009-10 as it was in the A.Y. 2008-09, the same are set aside to the record of the TPO/A.O. on same terms and directions. 10. In the appeal for the A.Y. 2010-11, the assessee has raised following grounds: "1. In the facts and circumstances of the case and in law, the ld. CIT(A) has erred in confirming the action of ld. A.O./ld.TPO in making an addition of Rs. 76,82,931/- on account of alleged notional interest on outstanding receivables in respect of transactions with AE. The action of the ld. CIT(A) is illegal, unjustified, arbitrary and against the facts of the case. Relief may please be granted by deleting the said addition of Rs. 76,82,931/-." 11. The only issue raised by the assessee in this appeal is regarding the addition sustained by the ld. CIT(A) on account of transfer pricing adjustment in respect of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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