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TMI Blog2018 (8) TMI 1834X X X X Extracts X X X X X X X X Extracts X X X X ..... and addition made by way of upward adjustment be deleted. 3. The Honorable CIT (A) failed to appreciate the fact that the appellant has applied Transitional Net Margin Method (TNMM) as Most Appropriate Method (MAM) which takes care of all such cost like involvement of working capital and interest cost for the recovery of sales proceeds from debtors. Once the AO/TPO have accepted the Transitional Net margin Method (TNMM) as Most Appropriate Method (MAM), no separate adjustment for notional interest on delayed payment is required to be adjusted. Reliance is placed on decision of jurisdictional Ahmedabad IT AT in case of Microink Ltd. v. ACIT ITA No 2873/AHD/2010. 4. The learned CIT (A) erred in law and on facts by not appreciating the fact that sales transactions is international transaction, but receipt of payment from debtor is not international transactions with AE. 5. Reliance is Placed on (i) Kusum Healthcare (P.) Ltd. v. ACIT ITA No. 6814 (Delhi) of 2014.' (ii) D'CIT v. Indo American Jewellery Ltd. ITA No. 5872/Mum/2009 A.Y. 2005-2006. 6. The learned CIT (A) failed to appreciate the fact that the appellant have made sales transactions with its subsidiaries ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the AEs so that international transaction of outstanding receivable was at Arm's Length: 2. It has been observed from the perusal of the invoices raised by the assessee company on various AEs that there was excess delay beyond the credit period extended to the AEs in realization of sales invoices. By parking such amount at the disposal of the AEs for extra period, the assessee company has deprived itself of the funds available in its hands. In the independent third party scenario, no third party will extend such funds to any un-related entity without expecting commensurate re-numeration/compensation for the same. Consequently, the non-charging of any commensurate remuneration from the associate enterprise in respect of such grant of funds by the assessee company is not at arm's length. In order to determine the arms length remuneration corresponding to this transaction, it is proposed to consider the amount outstanding from the AEs as parking of funds in the nature of loan with the AEs by the assessee company. For determination of ALP of such funds in the nature of loan extended to the AEs, it is proposed to benchmark the rate at which interest should have been charge ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing 'receivables have been considered the US Dollar denominated loan. The base rate is accordingly taken as 12 Months US Dollar LIBOR The above filters have been relaxed wherever required so as to have sufficient number of comparables. The adjustment for the annual fee and upfront fee is made to the comparable instances to arrive at all in cost. The entire process and the comparable instances identified from the above process are enclosed vide Annexure-A to this show cause in a CD. Since the Indian outstanding receivables are considered as foreign currency loan, the assessee company has taken foreign exchange risk which is not factored in the above loan analysis. Looking at the fact that there had been severe fluctuations in the foreign exchange and the foreign exchange risk has been substantial, a 100 basis point increase on account of country and foreign exchange risk is found to be normal and udded to the above margin. The ALP interest rate for the outstanding receivables pertaining to various AEs has been determined as under: S No Name of the AE Base Rate Average Comparable Rate Forex Risk ALP Interest Rate 1 BISAZZA AUSTRALIA PTY. LTD, Australia 12 Month ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fic finding of the HAT, that there is complete uniformity in the act of the assessee in not charging interest from both the associated enterprises and non associated enterprises debtors for delay in realization of the export proceeds. In these circumstances the decision of the Tribunal to delete the notional interest was upheld." We enclose herewith the copy of judicial pronouncement as per Annexure-A The assessee has no practice to charge any interest on outstanding balance with AE 's or non AE's, domestic or export sales in part since the inception of the business. 2. Most Appropriate Method For ALP The assessee has applied TNMM as Most Appropriate Method. TNMM takes into consideration the net margin level of entity as PIL. The net margin takes care about all such cost like notional interest on receivables. Therefore we submit that once the TNMM is accepted no such adjustment is required. 3. Notional Interest Without prejudice to the above fact and legal status even if notional interest is to be charged we have following objections:- A. Forex Risk As per show cause notice you intent to charge 100 basis point on account of forex risk. It may be noted that all ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessing officer has computed the arm's length interest rate in the case of the assessee as under:- S No Name of the AE Base Rate Average Comparable Rate Forex Risk ALP Interest Rate 1 BISAZZA AUSTRALIA PTY. LTD, Australia 11 Month Libor-93.57 320 100 513.57 2 BISAZZA CHIN A LTD., China 12 Month Libor-93.57 110 100 303.57 3 BISAZZA MEXICO, S de RLde CV, Mexico 12 Month Libor-93.57 425 100 618.57 4 BISAZZA NORTH AMERICA, INC., USA 1 2 Month Libor-93.57 168.75 100 362.32 5 BISAZZA PHILIPPINES INC., Philippines 12 Month Libor-93.57 463.43 100 667.00 6 BISAZZA S.P.A. (Unipersonale), Italy 12 Month Libor-93.57 252.5 100 446.07 7 BTI Sari, Tunisia 12 Month Libor-93.57 394 100 587.57 8 BISAZZA HONG KONG 4-TD, Hong Kong 12 Month Libor-93.57 260 100 453.57 9 B IS AZZA JAPAN SHOWROOM, Japan 12 Month Libor-93.57 262.5 100 456.07 10 BISAZZA BRASIL COMERCIO DE MOSA1COS 12 Month Libor-93.57 425 100 618.57 Consequently, the TPO has made an upward adjustment of Rs. 98,47,085/- to the total income of the assessee in view of the delay in realization of sale invoices from t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the case of the assessee itself, we have noticed that identical issue has been adjudicated by the Co-ordinate Bench vide which the similar addition on account of ALP adjustment was deleted. The relevant part of the findings of the Co-ordinate Bench is reproduced as under:- '4. We have heard the rival submissions, perused the material on record and duly considered facts of the case in the light of the applicable legal position. 5. As Learned Counsel for the assessee rightly points out, the issue in appeal is covered, in favour of the assessee, by a series of orders passed by the co-ordinate benches, including in the case of Micro Ink Ltd. v. Addl. CIT [(2016) 157 ITD 132 (Ahd.)] wherein the co-ordinate bench has, inter alia, observed as follows: "4. The relevant material facts, as necessary for our adjudication, are like this. The assessee before us is a leading ink manufacturer in India. The assessee has a wholly owned subsidiary in Austria, by the name of Micro Inks GmbH which, in turn, owns Micro Ink Co USA. This step down subsidiary (Micro USA, in short) manufactures printing ink by using the base material supplied by the assessee. The inks meant for US markets thus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ged on the excess credit period of 56 (i.e. 186-130) days. An amount of Rs. 2,10,95,346, computed on this basis, was proposed to be added to the income of the assessee as an arm's length price adjustment. The assessee did raise a grievance, against this ALP adjustment, before the DRP but without any success. The Assessing Officer, therefore, proceeded to make the addition of Rs. 2,10,95,346, aggrieved by which the assessee is in appeal before us. 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 co-ordinate 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 dispute that simila ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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). By way of a note a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ments/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 income. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re benchmarked on CUP basis. The delay in realization of debts, resulting in a continuing debit balance, is not a stand-alone international transaction per se, but is a result of the international transaction as it only reflects that the related payment has not been made by the debtor. As for the learned Departmental Representative's stand 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" would probably be valid in the perfect market conditions which are more of a myth than reality. The only other merit of this approach is its simplicity, or, to put it more appropriately, naivety. The real life trade and commerce is seldom so simple. It is not at all necessary that a payment is to be made as soon as goods or services are delivered. A call is to be taken by the vendor, in consultation with its client and based on the business exigencies, as to what should be the terms on which payments for the supplies is to be made. It is a harsh commercial reality that immediate payments are more of exceptions rather than rule, and more so in a complex case i ..... X X X X Extracts X X X X X X X X Extracts X X X X
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