2019 (7) TMI 1899 - AT - Income Tax

Tribunal directs RPM for ALP in reagents sale, sets aside arm's length interest issue for fresh examination.

The Tribunal allowed the assessee's appeal partially by directing the application of the Resale Price Method (RPM) for determining the Arm's Length Price ... TP Adjustment - selection of MAM - RPM OR TNMM - determination of Arm’s Length Price (ALP) in respect of an international transaction of sale of reagents by the Assessee to its Associated Enterprise (AE) - HELD THAT:- As decided in own case [2019 (6) TMI 601 - ITAT MUMBAI] RPM was the MAM and directed the TPO to determine ALP applying RPM as the MAM. Assessee sells re agents (chemicals) after purchase from AE but to use re agents the customer has to possess analysers, which is given free of cost by the Assessee. Therefore, the Assessee is not merely indulging in simple trading in reagents. Perusal of the order of the Tribunal for AY 2010-11 would show that the same reasons were given by the TPO in AY 2010-11 for coming to the conclusion that the Assessee is not a reseller simpliciter and therefore RPM cannot be the MAM. The findings recorded by the Tribunal of its order for AY 2010-11 would show that manufacturing activity had not commenced in that year and this fact remains the same for AY 2011-12 also. The finding in the same paragraph by the Tribunal is that the Assessee purchases and sells re agents and chemicals without any value addition. The tribunal has also recorded a finding that analyzer, spares and consumables, though were imported, however, they were not sold but were provided in the laboratories/diagnostics units of the third party customers for testing and research activity. In the light of similarity of facts in AY 2011-12 & 2010-11, we are of the view that the decision rendered by the Tribunal in AY 2010-11 would equally apply to AY 2011-12 also. Following the aforesaid decision of the tribunal we hold that RPM is the MAM for determining ALP. Computing arm's length interest in respect of receivable outstanding from the AEs beyond six months as on 31.03.2011 - normal credit period was only 60-90 days whereas the Assessee had allowed credit period of more than 700 to 800 days - whether allowing a greater period of payment to the AE would be an international transaction and income from such arrangement should also be determined having regard to Arm’s Length Price as laid down in Sec.92? - HELD THAT:- In the present case, admittedly the receivables relate to transactions in FY 2007-08 & 2008-09.TPO has not spelt out as to what is the nature of the receivables and whether it had any relation with any international transaction of those years and what is the position with regard to the ALP of those transactions, whether working capital adjustment were made while determining ALP of connected international transaction, what is the effect of payables by the Assessee to the very same AE and on what account these payables were due to the Assessee, whether in the circumstance where there is receivables as well as payables from the very same AE, can you say that there is any real benefit of longer credit period allowed to the AE in respect of receivables from AE. Without an analysis of all these facts, it is not possible to come to a conclusion that allowing longer credit period to the AE was an international transaction and income from such transaction has to be determined having regard to ALP. The issue requires to be set aside to the TPO for examination afresh of the question whether allowing longer credit period was in the nature of an international transaction in the facts and circumstances of the case. TPO will decide the issue afresh after affording opportunity of being heard to the Assessee. Rate of interest to be adopted - as assuming that there was an international transaction, we are of the view that the CIT(A) has rightly applied LIBOR rate + 3% as the appropriate rate of interest, taking note of the judicial pronouncements on the issue including in the case of CIT v. Cotton Naturals (I) Private Limited[2015 (3) TMI 1031 - DELHI HIGH COURT] wherein it was held that Arm’s length interest rate needs to be the market-determined rate applicable to the currency in which the loan has to be repaid. Therefore there is no merit in the appeal by the revenue. Issues Involved:1. Determination of Arm's Length Price (ALP) for the sale of reagents to Associated Enterprises (AE).2. Computation of arm's length interest on receivables outstanding from AE beyond six months.Detailed Analysis:1. Determination of Arm's Length Price (ALP) for the Sale of Reagents to Associated Enterprises (AE):The primary issue was whether the Transaction Net Margin Method (TNMM) or the Resale Price Method (RPM) was the most appropriate method (MAM) for determining the ALP for the sale of reagents by the assessee to its AE. The assessee, a wholly owned Indian subsidiary of a UK-based company, imported reagents and diagnostic equipment from its AE and sold them to third parties in India. The Transfer Pricing Officer (TPO) and the Dispute Resolution Panel (DRP) had previously rejected RPM in favor of TNMM, citing the assessee's involvement in manufacturing and research activities.However, the Tribunal noted that in the previous assessment year (AY 2010-11), it had ruled that RPM was the MAM because the assessee was merely reselling the reagents without any value addition. The Tribunal examined the nature of the transactions and found that the assessee was not engaged in manufacturing during the relevant assessment year (AY 2011-12) and was only reselling the reagents. The Tribunal cited multiple precedents where RPM was deemed the most appropriate method for similar transactions involving resale without value addition.The Tribunal concluded that RPM should be applied to determine the ALP for the sale of reagents, and directed the Assessing Officer (AO) and TPO to compute the ALP accordingly, following the precedent set in the previous assessment year.2. Computation of Arm's Length Interest on Receivables Outstanding from AE Beyond Six Months:The second issue was whether the receivables outstanding from the AE beyond six months constituted an international transaction requiring an arm's length interest adjustment. The TPO had added a notional interest income based on the assessee's borrowing rate from HDFC Bank plus a markup, resulting in an addition to the assessee's income.The Tribunal referred to the Delhi High Court's ruling in the case of Prl.CIT Vs. Kusum Health Care Pvt. Ltd., which clarified that not all receivables from AEs automatically qualify as international transactions. The Court emphasized the need for a detailed analysis to determine if the extended credit period was intended to benefit the AE and whether it impacted the working capital and profitability of the assessee.The Tribunal noted that the receivables in question related to services rendered in previous financial years and were not directly linked to any international transaction reported for the relevant assessment year. The Tribunal also highlighted the need to consider the overall financial relationship between the assessee and the AE, including any payables and the nature of the transactions.Given the lack of detailed analysis by the TPO, the Tribunal set aside the issue for fresh examination. The TPO was directed to reassess whether the extended credit period constituted an international transaction and to consider the appropriate rate of interest, if applicable, based on the LIBOR rate plus a suitable markup.Conclusion:The Tribunal allowed the assessee's appeal in part by directing the application of RPM for determining the ALP for the sale of reagents and set aside the issue of arm's length interest on receivables for fresh examination. The revenue's appeal was dismissed, affirming the Tribunal's findings and directions.