Tribunal allows appeal, rejects ALP adjustment & bars retrospective application of tax law

The Tribunal allowed the appeal, deleted the ALP adjustment of Rs. 46,127 for deemed interest on delayed sale proceeds, and held that the retrospective application of the Explanation to Section 92B was impermissible for the assessment year. The decision emphasized adherence to judicial precedents and the principle that amendments expanding section scope cannot have retrospective effect.

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Issues Involved:
1. Addition of Rs. 46,127 as deemed interest on delayed sale proceeds.
2. Retrospective application of Explanation to Section 92B of the Income Tax Act, 1961.

Issue-wise Detailed Analysis:

1. Addition of Rs. 46,127 as Deemed Interest on Delayed Sale Proceeds:
The assessee, engaged in manufacturing and trading diamond-studded jewelry, contested the addition of Rs. 46,127 made by the Assessing Officer (AO) as deemed interest on delayed sale proceeds. The AO computed this interest based on delays of 16, 7, and 7 days beyond the benchmark of 180 days for three export bills, applying an interest rate of 18.816%. The CIT(A) upheld the AO's decision, prompting the assessee to appeal further.

The Tribunal found that the issue was covered in favor of the assessee by a previous order in the case of Rusabh Diamonds Vs ACIT, where it was held that no separate adjustment for delay in realization of debts is required if the sale is benchmarked on the Transactional Net Margin Method (TNMM). The interest income is considered an integral part of the Profit Before Interest and Taxes (PBIT), and once the profitability as per PBIT is found comparable, no separate adjustment for interest income on delayed realization is warranted.

The Tribunal also referred to the Delhi High Court's decision in Sony Ericsson Mobile Corporation Pvt Ltd Vs ACIT, which highlighted that treating AMP expenses as a separate international transaction would be illogical if the comparables adopted by the assessee are accepted as a bundled transaction. Similarly, making an adjustment for interest on excess credit allowed on sales to AEs would vitiate the picture as it would result in double adjustments.

The Tribunal concluded that no ALP adjustments could be made for delayed realization of sale proceeds, as the interest on delayed realization of debtors is part of operating income, and the operating income itself has been accepted as reasonable under TNMM. Therefore, the Tribunal directed the AO to delete the impugned ALP adjustment of Rs. 46,127.

2. Retrospective Application of Explanation to Section 92B:
The Tribunal examined whether the Explanation to Section 92B, inserted by the Finance Act 2012 with retrospective effect from 1st April 2002, could be applied to the assessment year in question. The Explanation clarified that "international transaction" includes capital financing, deferred payment, or receivable arising during the course of business.

The Tribunal noted that judicial precedents prior to the amendment held that a continuing debit balance does not constitute an international transaction per se. The Tribunal referred to the Delhi High Court's decision in DIT vs New Skies Satellite BV, which stated that a clarificatory amendment that expands the scope of a section introduces new principles and cannot be given retrospective effect.

The Tribunal concluded that the Explanation to Section 92B, though stated to be clarificatory, is transformative and substantive, and thus cannot be applied retrospectively. The amendment could only be treated as effective from 1st April 2012 onwards. Consequently, the impugned ALP adjustment for the assessment year prior to this date was deleted.

Conclusion:
The Tribunal allowed the appeal, deleted the impugned ALP adjustment of Rs. 46,127, and held that the retrospective application of Explanation to Section 92B was not permissible for the assessment year in question. The judgment emphasized the importance of adhering to judicial precedents and the principle that amendments expanding the scope of a section cannot be applied retrospectively.

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