9911796707
TMI Blog2018 (8) TMI 1834X X X X Extracts X X X X X X X X Extracts X X X X ..... view of the matter DR s reliance on Aztec decision [ 2007 (7) TMI 50 - ITAT BANGALORE] is of no assistance to the case of the revenue. The international transaction is exports of goods which has been benchmarked on TNMM basis and which is duly accepted by the TPO. In view of these discussions, and respectfully following the decision of the coordinate bench in assessee s own case for the earlier years [ 2018 (5) TMI 1895 - ITAT AHMEDABAD] , we uphold the grievance of the assessee and direct the AO to delete the impugned ALP adjustment. - Decided in favour of assessee. X X X X Extracts X X X X X X X X Extracts X X X X ..... referred to transfer pricing officer u/s. 92CA(1) of the act for the computation of arm's length price in relation to international transactions entered into by the assessee with associated enterprise. The assessee has entered into following international transactions with its associated enterprise as per the details given in form 3CEB. Nature of Transactions Value of Intl. Transactions (in Rs) Purchase of Raw material 286,39,138 Purchase of Consumable stores & spares & Plant & Machineries 190,88,901 Sale of Consumable stores & spares 27,612 Sale of finished goods 43,94,05,046 Buy back of Shares 13,77,60,000 Information Technology Maintenance (SAP) 101,66,894 Promotional and advertisement literature 43,69,555 Reimbursement of expenses 23,58,367 After verification of the details filed by the assessee the TPO observed that there is delay in realization of the sale invoices from the sale made to the associated enterprises by the assessee. Therefore, the TPO has considered the unrealized sale from the associated enterprise in the nature of loan extended to the associated enterprise. The TPO has applied cup method for determining the rate at which interes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te: Since the transaction pertains to FY: 12-13, all the deals taken place in FY: 12-13 were taken into account (b) Borrowers Region: Comparable loan instances have been chosen on the basis of Geographical location of each of the AE as follows: S No Name of the AE Borrower Region considered 1 BISAZZA AUSTRALIA PTY, LTD. Australia Australia 2 BISAZZA CHINA LTD., China China 3 BISAZZA MEXICO. S de RL de CV. Mexico Mexico 4 BISAZZA NORTH AMERICA. INC.. USA USA 5 BISAZZA PHILIPPINES INC., Philippines Philipines 6 BISAZZA S.P.A. (Unipersonale), Italy Western Europe 7 BTI Sari, Tunisia Africa 8 BISAZZA HONG KONG LTD. Hong Kong Hong Kong 9 BISAZZA JAPAN SHO WROOM. Japan Japan (c) Deal Status: Only Completed and Active deals have been taken into consideration (d) Tenor: In order to have sufficient number of comparables the filter is relaxed and loam with all tenors have been taken into consideration (e) Tranche Type/Tranche Purpose: Only loan extended for Working Capital/Corp Purposes has been considered (f) Guaranteed/Secured Loan: Since the funds extended to the AEs are unsecured, the guaranteed and secured loans have been rejec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ome by applying above interest rates for the delayed realization so that the international transaction of outstanding receivables against sales made to the AEs is at ALP., You are also requested to furnish the working of such interest amount computed after applying above interest rates (including the excess realization period for opening receivable as on 01/04/12)." The assessee replied to the show cause notice as under:- '4.4 Against the above showcause issued by this office, the assessee company vide its submission dated 08/09/16 replied as under: The above referred assessee is in receipt of your show cause notice and have noted the content. In reply to the same as per the instruction of assessee, we place on record the objections as under:- Objections 1. Interest on outstanding balance As regards to charging of interest on outstanding balance we submit that notional interest on outstanding balance is not an international transaction. A brief note on the same is given us under:- "When there are outstanding debtor balances in books of the assessee, relating to sale transactions, the issue is whether same can be regarded as international transaction betwe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... charged till the last date of assessment year 2013-14 i.e 31st March, 2013 only. The interest from 1st April, 2013 till the date of receipt of payment may be charged in the next assessment year i.e A. Y 2014-15. We enclose herewith a sheet explaining the calculation of interest on opening balance. The amount of interest comes to ₹ 50,03,041 (Annexure-C) We enclose herewith a sheet explaining the calculation of interest on the transactions during the year. The amount of interest comes to ₹ 47,92,771 (Annexure-D) 4. Working Capital Adjustment Without prejudiced to our objection for alleged adjustment even if the interest adjustment is required to be made the assessee must be given working capital adjustment while determining ALP.' The assessing officer has not accepted the explanation provided by the assessee and stated that assessee company has wrongly submitted that the outstanding receivable is not an international transaction. He has stated that the Finance Act, 2001-02 has inserted explanation to section 92B with retrospective effect from 1st April, 2002. The assessing officer has further stated that from the plain reading of the sub-clause C of clause 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e itself for the assessment year 2012-13 vide ITA 3543/Ahd/2016 on identical issue has deleted the addition made on ALP adjustment, therefore, he has contended that case of the assessee is covered by the above decision of ITAT. On other hand, ld. departmental representative has placed reliance on the order of ld. CIT (A) and submitted a written submission from the TPO mostly reiterated the details as mentioned in the order of TPO. 6. We have heard the rival contentions and perused the material on record carefully. In this case, a reference u/s. 92CA(1) of the act for the computation of arm's length price in relation to international transaction entered into by the assessee with associated enterprise was made to the TPO. The TPO has worked out a upward adjustment of ₹ 98,47,085/- on account of ALP interest that was required to be charged by the assessee company from the associated enterprise in view of delay in realization of sale invoices beyond the credit period extended by the assessee company. The assessee has explained that it has applied TNMM method which takes into account all the income and expenditure of the entity and takes the net margin as profit level indicat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... would have been possible only upon charge of a cost", the TPO required the assessee to show cause as to why ALP adjustment in respect of excess credit period of 56 days not be made, by computing time value of money @ 6.38% on LIBOR plus basis. In response to this show-cause notice, it was, inter alia, explained by the assessee that what is exported to Micro USA is semi-finished material which is required to be further processed and converted into saleable product. In effect thus, export to Micro USA cannot be compared with export of finished products as was done to the independent enterprises. The assessee had also pointed out that "average credit period of third parties is 120 days whereas credit period granted to Micro USA is 135 days" though "actual highest average debtor days to third parties is 161 days whereas for Micro USA it is 186 days". It was also explained that considering the time taken in shipping the semi finished goods to Micro US, its processing in US, maintenance of inventory at US and credit realization time in US, the total cycle was about 210 days, but even if bare minimum period to complete a sale cycle is taken into account, it cannot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 favour of the assessee and on admittedly similar set of facts, there ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssing 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 expense 300 300 Net profit 50 (5%) 50 (5%) The above illustrations draw a distinction between two distributors having different marketing functions. In case 2, a distributor having significant marketing functions incurs substantial expenditure on AMP, three times more than in case 1, but the purchas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of this case, is thus devoid of legally sustainable merits. 10. The other aspect of the matter is that a separate adjustment for delayed realization of debtors can, even in a fit case, can only be made only to the extent the credit period allowed to the associated enterprises is more than the credit period allowed to independent enterprise in respect of the same or materially similar transactions. In the present case, it is an undisputed position that semi-finished goods, as sold to Micro USA, is not sold to any other independent enterprises. The assessee did have trading transactions in respect of the finished goods with trading subsidiaries in China and Hong Kong but it is not even the case of the TPO that excessive credit period was allowed to these AEs vis-à-vis the credit period allowed to independent enterprises, nor any ALP adjustment has been recommended in connection with the same. This fact, if anything, shows that the credit period allowed to the AEs is comparable with credit period of non-AEs in respect of similar goods. To compare credit period in respect of finished goods with the credit period in respect of semi-finished goods, is, therefore, somewhat fallac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d it is, therefore, not the delay simplictor in payment but delay in payment vis-à-vis similar situations with non-AEs (i.e. independent enterprises) which is of crucial consideration. Such a comparison cannot be based on the hypothesis as to what would have, in the wisdom of the TPO, happened if assessee was to have similar transactions with non-AEs. The comparison has to be based on real transactions of similar nature, if at all such transactions have taken place. When no such transactions have taken place, as is the case before us, there is obviously no occasion of any comparison. The stand taken by the learned Departmental Representative, therefore, is not only quite detached from commercial reality but also wholly untenable in law. In any case, what can be examined on the touchstone of arm's length principles is the commercial transaction itself, as a result of which the debit balance has come into existence, and the terms and conditions, including terms of payment, on which the said commercial transaction has been entered into. In this view of the matter, learned Departmental Representative's reliance on Aztec decision (supra) is of no assistance to the case of ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
