Income Tax Appellate Tribunal - Ahmedabad
Bisazza India Pvt. Limited,, Mehsana vs The Dy. Cit, Circle-1(1)(2),, ... on 8 August, 2018
IN THE INCOME TAX APPELLATE TRIBUNAL
AHMEDABAD "D" BENCH
Before: Shri Rajpal Yadav, Judicial Member
And Shri Amarjit Singh, Accountant Member
ITA No. 2350/Ahd/2017
Assessment Year 2013-14
Bisazza India Pvt. Ltd. The DCIT,
372/2, B/h, GAIL Office, Circle-1(1)(2),
GIDC, Kadi-382715, North Vs Ah medabad
Gujarat, Dist: Mehsana (Respondent)
PAN: AAACB6284G
(Appellant)
Reve nue by: Shri V.K. Si ngh, Sr. D.R.
Assessee by: Shri S.N. So parkar, A. R.
Date of hearing : 10-07-2018
Date of pronounce ment : 08-08-2018
आदेश /ORDER
PER : AMARJIT SINGH, ACCOUNTANT MEMBER:-
This assessee's appeal for A.Y. 2013-14, arises from order of the CIT(A)- 1, Ahmedabad dated 24-08-2017, in proceedings under section 143(3) r.w.s. 144C(3) of the Income Tax Act, 1961; in short "the Act".
2. The assessee has raised following grounds of appeal:-
"1. The Honorable CIT(A) erred both in law and on facts in confirming an addition of Rs 79,13,290/- towards upward adjustment made under section 92CA in respect of transaction of sales of finish goods. It be so held now and addition of Rs 79,13,290/- be deleted.
2. The Honorable CIT(A) erred in law and facts in holding that interest was required to be charged by the assessee company from the AES in view of delay in realization of sales invoices beyond the credit period. It be so held now 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 I.T.A No. 2350/Ahd/2017 A.Y. 2013-14 Page No 2 Bisazza India Pvt. Ltd. vs. DCIT 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/S ACIT ITANo. 6814 (Delhi) of 2014.'
(ii) D'CIT V/S 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 at North Africa, Europe and Italy. The transit period of delivery of goods to each AE destination and sales to non AEs within India is quiet different therefore a common benchmarking of invoice date and transit period is not justified
7. The learned CIT(A) erred in considering notional rate of interest at average comparable rate instead of LIBOR rate.
8. The order passed by the Hon. CIT(A) is bad in law."
3. The fact in brief of the case is that return of income declaring income of Rs. 9,12,53,760/- was filed on 18th Nov, 2013. Subsequently, the case was selected under scrutiny by issuing of notice u/s. 143(2) of the act on 4th Sep, 2014. The assessee is engaged in the business of manufacturing and trading of glass mosaic during the year under consideration. The case of the assessee was 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 & 190,88,901 Machineries 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 I.T.A No. 2350/Ahd/2017 A.Y. 2013-14 Page No 3 Bisazza India Pvt. Ltd. vs. DCIT 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 interest should have been charged from the associated enterprise on the outstanding unrealized sale amount. The TPO has issued show cause notice to the aasessee as under:-
"4.3 Accordingly, the assessee company was issued the following showcause vide this office notice dated 18/08/16 for charging the interest on the receivables outstanding beyond the credit period extended by the assessee company 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 charged from the AEs. Since the invoices have denomination in United States Dollar, the receivables pertaining to such invoices are proposed to be treated as US Dollar denominated loan extended to 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 apply external CUP and benchmark the rate at which interest should have been charged from the AEs separately using 'loan connector' database.
3. In order to develop a CUP for the purpose of benchmarking the above interest rate, loan data on deals entered into by various financial institutions during the period 1/4/2012 to 31/3/2013 with borrowing corporations has been examined. Following filters were applied to arrive at comparable instances:
a) Deal Active Date: 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:I.T.A No. 2350/Ahd/2017 A.Y. 2013-14 Page No 4
Bisazza India Pvt. Ltd. vs. DCIT 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 rejected.
g) Industry Selection: Considering the structure of Finance and Government sector, the loans issued to borrowers in the such Sector were rejected.
h) Credit Rating: The credit rating of the AEs was not available. The top rated loan instances i.e. with credit rating A,AA, AAA were not considered.
i) Base Rate and Currency: Since the invoices are denominated in US Dollar, the outstanding '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 upfrontfee 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 showcause 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 lo 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 Forex Risk ALP Interest Comparable Rate Rate 1 BISAZZA 12 Month 320 100 513.57 AUSTRALIA PTY. Libor-93.57 I.T.A No. 2350/Ahd/2017 A.Y. 2013-14 Page No 5 Bisazza India Pvt. Ltd. vs. DCIT LTD, Australia 2 BISAZZA CHINA 12 Month *' 110 100 303.57 LTD.. China Libor-93.57 3 BISAZZA MEXICO. 12 Month 425 100 618.57 S de RL de CV, Libor-93.57 Mexico 4 BISAZZA NORTH 12 Month • 168.75 100 362.32 AMERICA, INC., Libor-93.57 USA . 5 BISAZZA 12 Month 463.43 100 667.00 PHILIPPINES INC.. Libor-93.57 Philippines 6 BISAZZA S.P.A. 12 Month 252.5 100 446.07 (Unipersonale), Italy Libor-93.57 7 BTlSarl, Tunisia 12 Month 394 100 587.57 Libor-93.57 8 BISAZZA HONG 12 Month 260 100 453.57 KONG LTD. Hong Libor-93.57 Kong 9 BISAZZA JAPAN 12 Month 262.5 100 456.07 SHOWROOM, Japan Libor-93.57 Accordingly, you are hereby given a showcause why the upward adjustment should not made to the total income 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 excesss 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 between two parties requiring benchmarking of interest. In indo American jewellery Ltd. case the Tribunal held the view that interest income is associated only with the I.T.A No. 2350/Ahd/2017 A.Y. 2013-14 Page No 6 Bisazza India Pvt. Ltd. vs. DCIT transaction of lending and borrowing of money and not in case of sale of goods, and therefore addition in respect of notional interest was not justified. On farther appeal by revenue, the High Court held that in the present case, there was specific 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 the sales made to AE's only and therefore there is no forex risk involved in it. On the contrary it is a proven fact that the value of dollar have always increased as compared to INR. Further even for recovery of outstanding balance the assessee has no risk as assessee has not claimed any written off debt as bad debt. Therefore while determining ALP interest rate, the addition on account of forex risk should be eliminated.
ALP Interest rate In this connection we submit that even if the interest is to be charged the same should be charged at LIBOR rate only. In support of the same assessee rely on following judicial pronouncement. (Annexure-B) B. Calculation of No of days As regards to calculation of number of days, we state that the notional interest should be charged till the last date of assessment year 2013-14 i.e 31st March,2013 only. The interest from 1sl 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 Rs 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 Rs 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 of the explanation to section 92B of I.T.A No. 2350/Ahd/2017 A.Y. 2013-14 Page No 7 Bisazza India Pvt. Ltd. vs. DCIT the act it can be seen that the international transactions include within ambit any receivables or any other debit arising during the course of business. He observed that receivables outstanding against the excess credit period allowed are of the nature of loan extended to associated enterprises by the assessee company. Therefore after considering the submission of the assessee, the assessing officer has computed the arm's length interest rate in the case of the asssesee as under:-
S No Name of the AE Base Rate Average Forex Risk ALP Interest Comparable Rate Rate 1 BISAZZA AUSTRALIA 1 1 Month 320 100 513.57 PTY. LTD, Australia Libor-93.57 2 BISAZZA CHIN A LTD., 12 Month Libor- 110 100 303.57 China 93.57 3 BISAZZA MEXICO, S de 12 Month Libor- 425 100 618.57 RLdeCV, Mexico 93.57 4 BISAZZA NORTH 1 2 Month 168.75 100 362.32 AMERICA, INC., USA Libor-93.57 5 BISAZZA PHILIPPINES 12 Month Libor- 463.43 100 667.00 INC., Philippines 93.57 6 BISAZZA S.P.A. 12 Month Libor- 252.5 100 446.07 (Unipersonale), Italy 93.57 7 BTI Sari, Tunisia 12 Month Libor- 394 100 587.57 93.57 8 BISAZZA HONG KONG 4- 12 Month 260 100 453.57 TD, Hong Kong Libor-93.57 9 B IS AZZA JAPAN 12 Month Libor- 262.5 100 456.07 SHOWROOM, Japan 93.57 10 BISAZZA BRASIL 12 Month Libor- 425 100 618.57 COMERCIO DE 93.57 MOSA1COS 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 the associated enterprises as explained above.I.T.A No. 2350/Ahd/2017 A.Y. 2013-14 Page No 8
Bisazza India Pvt. Ltd. vs. DCIT
4. Aggrieved assessee filed appeal before the ld. CIT(A). The ld. CIT(A) has partly allowed the appeal of the assessee by reducing the 100% basis on account of foreign exchange risk after taking in to consideration the adjustment on account of foreign exchange gain of Rs. 2,43,17,471/- shown by the assessee. The ld. CIT(A) has sustained the upward adjustment made by the TPO in arm's length price to the extent of Rs. 79,13,290/-.
5. During the course of appellate proceedings before us, the ld. counsel has submitted that ld. CIT(A) has erred in sustaining the upward adjustment to the extent of Rs. 79,13,290/-. He has further submitted that the Co-ordinate Bench of the ITAT in the case of the assessee 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 asssessee 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 Rs. 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 indicated. It was further submitted that TNMM takes care of the interest income if any forgone by the assesse on account of late payment received from the associated enterprise. It was also contended that once the TNMM method and its results are accepted, no I.T.A No. 2350/Ahd/2017 A.Y. 2013-14 Page No 9 Bisazza India Pvt. Ltd. vs. DCIT further adjustment on account of notional interest from associated enterprise is required. After perusal of the above submission and judicial pronouncement of the Co-ordinate Bench of ITAT 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. vs. 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 are mixed, and given finishing touches, by Micro USA. The assessee company also has trading subsidiaries in China and Hong Kong. During the relevant previous year, the assessee sold goods worth Rs 215.51 crore to Micro USA. The Transfer Pricing Officer, in the course of proceedings before the TPO, it was noted that the assessee has sold goods worth Rs 215.51 crore to Micro USA and allowed it an average credit period of 186 days as against average credit period of 130 days allowed to independent enterprises, i.e. non-AEs. It was also noted that out of total exports made by the assessee, 45% exports was to Micro USA. On these facts, and the TPO being of the view that "in a third party situation, such an allowance of use of money 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 be less than 170 days. It was thus pointed out that the average credit period to Micro USA, which was 135 days, was reasonable. On the basis of these arguments, it was submitted that no ALP adjustment is warranted in respect of, what was termed as, 'excess credit period' allowed to the Micro Ink USA. None of these submissions were accepted by the TPO. He was of the view that, taking 130 days as permissible interest free credit period, interest @6.38% I.T.A No. 2350/Ahd/2017 A.Y. 2013-14 Page No 10 Bisazza India Pvt. Ltd. vs. DCIT should have been charged 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 similar products are not sold to any other concern, at same price or even any other price, and interest is levied on the similar credit period allowed to those independent parties but not to Micro USA. The question of excess credit period arises only when there is a standard credit period for the product sold at the same price and the credit period allowed to the associated enterprises is more than the credit period allowed to independent enterprises. That is not the case here. The credit period for finished goods cannot be compared with credit period for unfinished goods and raw materials, and in any case, when products are not the same, 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 favour of the assessee and on admittedly similar set of facts, there is no occasion to reconsider the matter. We are urged to follow the said decision and delete the impugned adjustment. On the other hand, while learned Departmental Representative does not dispute that this issue is squarely covered by the aforesaid decision, he submits that the aforesaid decision is "severely flawed" as no matter what is the goods sold, "a credit period is a credit period". It is also submitted that "the credit period for sale of raw material to an independent manufacturer 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 I.T.A No. 2350/Ahd/2017 A.Y. 2013-14 Page No 11 Bisazza India Pvt. Ltd. vs. DCIT 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 at page 51, it is specifically stated that "further, the said amount of Rs 2428.26 millions has also been determined/ computed by the assessee having regard to the arm's length price on application of Transactional Net Margin Method (TNMM), on aggregation of transactions, as prescribed under section 92C of the Income-tax Act, 1961". In this backdrop, we can usefully refer to the decision of Hon'ble Delhi High Court, in the case of Sony Ericsson Mobile Corpn. (P.) Ltd. v. CIT [2015] 374 ITR 118/231 Taxman 113/55 taxmann.com 240 (Delhi), wherein Their Lordships had, inter alia, observed as follows:
"Where 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 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 I.T.A No. 2350/Ahd/2017 A.Y. 2013-14 Page No 12 Bisazza India Pvt. Ltd. vs. DCIT purchase price being lower, the Indian AE gets adequately compensated and, therefore, no transfer pricing adjustment is required. In case we treat the AMP expenses in case 2 as Rs.501-, i.e. identical as case 1 and AMP of Rs. 100 as a separate transaction, the position in case 2 would be:
Particulars Case 2
Sales 1,000
Purchase Price 500
Gross Margin 500
(50%)
Overhead expenses 300
Marketing expenses 50
Net profit 150 (15%)
It is obvious that this would not be the correct way and method to compute the arm's length price. The purchase price adjustments/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. 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.
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 I.T.A No. 2350/Ahd/2017 A.Y. 2013-14 Page No 13 Bisazza India Pvt. Ltd. vs. DCIT 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 fallacious in approach and untenable in law. In our considered view, merely because there is a delay in realization of debts cannot be reason enough to make an addition as long as such a delay is peculiar to the transactions with AEs. The adjustment before us is an adjustment to arrive at an arm's length price and unless there is something, more than sweeping generalizations as implicit in the arguments before us, to at least indicate that such a delay in realization of debts in similar transactions is absent in arm's length transactions, these adjustments cannot be made even when sales are 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 in which the assessee is sole vendor and the very existence of the buyer is to process the semi-finished goods and sell it to the end buyers. Many factors, such normal business practices and the commercial exigencies, influence the fact of payment in respect of a commercial transaction. Whether a payment is made immediately by the AE or is made after six months cannot, therefore, be seen in isolation with what is the position is with respect to similar payments due from non-AEs. The whole exercise of ALP adjustments is to neutralize the impact of inter se relationships between the AEs and 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 I.T.A No. 2350/Ahd/2017 A.Y. 2013-14 Page No 14 Bisazza India Pvt. Ltd. vs. DCIT 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, we uphold the grievance of the assessee and direct the Assessing Officer to delete the impugned ALP adjustment of Rs.2,10,95,346."
6. We see no reasons to take any other view of the matter than the view so taken by the co-ordinate bench. Respectfully following the same, we uphold the plea of the assessee and delete the impugned ALP adjustment of Rs.37,67,667/-. That was the only issue agitated before us.
7. In the result, appeal is allowed in the terms indicated above."
Respectfully following the above cited decision of the Co-ordinate Bench on identical issue and facts in the case of the assessee, we are not inclined with the decision of the Ld. CIT(A). Accordingly, the appeal of the assessee is allowed.
7. In the result, the appeal of the assessee is allowed.
Order pronounced in the open court on 08-08-2018
Sd/- Sd/-
(RAJPAL YADAV) (AMARJIT SINGH)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Ahmedabad : Dated 08/08/2018
आदेश क त ल प अ े षत / Copy of Order Forwarded to:-
1. Assessee
2. Revenue
3. Concerned CIT
4. CIT (A)
5. DR, ITAT, Ahmedabad
6. Guard file.
By order/आदेश से,
उप/सहायक पंजीकार
आयकर अपील य अ धकरण,
अहमदाबाद