TaxTMI 
TaxTMI 
2016 (5) TMI 279
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....the case and in law, the CIT(A) erred on facts in arriving a decision that the appellant itself has offered interest at the rate of 11.96% which has to be taken as basis while working out the amount of adjustment; 1.3 On the facts and in the circumstances of the case and in law, the CIT(A) erred by ignoring the case law in the case of CIT v. Indo American Jewellery Ltd., (Bombay High Court) 44 taxmann.com 310 wherein Hon'ble High Court has held that no interest can be imputed on outstanding balances having comparable aging from AE if no interest is charged by the taxpayer from outstanding balances of Non-AE; 1.4 On the facts and in the circumstances of the case and in law, the CIT(A) erred by ignoring the case law in the case of CIT v. U. K. Bose- (Delhi High Court) 29 taxmann.com 219 wherein Hon'ble High Court has held that right to receive interest and liability to pay interest arose in respect of the same period and out of the same event i.e. non payment of sale proceeds in time, it afforded sufficient nexus between two to justify applicability of principles of netting; 1.5 The Appellant submits that while giving directions to the AO to follow directions of Hon'....
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....exports made to the AE is benchmarked on the basis of the transactional net margin method (TNMM) and the TPO has accepted the same. However, an adjustment of Rs. 1,72,69,053 is made in respect of delayed realization of debts. The assessee's argument that no such interest is charged from the non AEs was noted and brushed aside. It was also noted that in many cases the assessee has received advance payments from the AEs as well. He also noted that 'the business prudence or necessity of extending credit to the AE is not relevant for computing arm's length price in unrelated (sic- related) party transactions". It was also noted that lending or borrowing is not the man business of the company and that the assessee has extended the credit facility to the AE. The TPO, thus, proposed an arm's length price adjustment for delay in realization of trade debts, by adopting 14.21% interest for the period of delay. Aggrieved, assessee carried the matter in appeal but without any success. The assessee is not satisfied and is in further appeal before us. 4. We have heard the rival contentions, perused the material on record and duly considered the facts of the case in the light of the applicable l....
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....rospective in effect and it does cover delay in realization of debts, as long as sale is benchmarked on TNMM basis, as in this situation before us, there cannot be any occasion to make a separate adjustment for delay in realization of debts. The reason is that the interest income is an integral part of the PBIT inasmuch as interest income, in cases other than finance companies, is required to be included in the 'other income' and thus affects the profit before interest and taxes. While profit before interest and taxes does not take into account 'interest expenditure', it does take into account 'interest income' because the interest income is part of the 'other income', under pre amended as well as post amended schedule VI to the Companies Act, which is duly taken into account into computation of PBIT. In a way PBIT is a misnomer, as while PBIT does not take into account interest expenditure, it does take into account interest incomeappearing in the other income. Once the profitability, as per PBIT, is found to be comparable, there cannot be a separate adjustment for interest income on delayed realization which is an integral part of the PBIT figure. 13. It is in this background ....
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....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 in....
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....Es. 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 standalone 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 t....
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....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. 14. As regards learned Departmental Representative's contention that Sony Ericsson Mobile Corporation decision (supra) will not apply in the case before us in the context of interest on delayed realization of debts for the simple reason that while AMP expenses, as in that case, are taken into account in the computation of the PLI, interest on delayed realization of debts is not taken into account in computation of the PLI, we can only say that it proceeds on the fallacious assumption that interest income is not taken into account in computation of profit before interest and taxes. The profit before tax and interest (PBIT) so computed takes into account interest income because, on the given facts, it is in the nature of 'other income' which is duly included in the PBIT figure. It is only interest expenditure which is not taken into account in the PBIT computation. There is no warrant for the proposition that interest expenditure taken into account is net of interest income on account of delay in realiz....
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....eleted. 20. In order to explain this line of reasoning, a few material factual developments and the legal analysis will have to be taken note of. We have noted that everything hinges on application of Explanation to Section 92B, vide Finance Act 2012, though with retrospective effect from 1st April 2002. This Explanation provides as follows: Explanation*: - For the removal of doubts, it is hereby clarified that - (*inserted by the Finance Act 2012, though with retrospective effect from 1st April 2002) (i) the expression "international transaction" shall include - (a) the purchase, sale, transfer, lease or use of tangible property including building, transportation vehicle, machinery, equipment, tools, plant, furniture, commodity or any other article, product or thing; (b) the purchase, sale, transfer, lease or use of intangible property, including the transfer of ownership or the provision of use of rights regarding land use, copyrights, patents, trademarks, licences, franchises, customer list, marketing channel, brand, commercial secret, know -how, industrial property right, exterior design or practical and new design or any other business or commercial rights of si....
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....mmes, systems, procedures, campaigns, surveys, studies, forecasts, estimates, customer lists, or technical data; (l) any other similar item that derives its value from its intellectual content rather than its physical attributes.'. 21. Shortly before the 2012 amendments were brought, a coordinate bench of this Tribunal, in the case of Nimbus Communications Ltd Vs ACIT [(2011) 139 TTJ 214 (Bom)] and speaking through one of us, had observed as follows: 4. It is only elementary, in terms of the provisions of Section 92, any income arising from an international transaction has to be computed having regard to the arm's length price (ALP), and that this exercise includes the allowance for any expense or interest arising from an international transaction as well. That is the only provisions under which ALP adjustments can be made. In other words, therefore, arm's length price adjustments can only be made in respect of an 'international transactions'. The expression 'international transaction', on the other hand, is defined under section 92 B as a transaction between two or more associated enterprises, either or both of them are non-residents, "in the natur....
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....ent, and not in isolation with the commercial terms on which transaction in respect of which payment is, according to the revenue authorities, delayed. 22. We have noted the learned Departmental Representative's contention that the above decision is no longer good in law since a coordinate bench of this Tribunal, in the case of i-Gate Computer Systems Ltd Vs ACIT and vice versa (ITA No. 2504/PN/2012 has, inter alia, stated that "the Hon'ble Bombay High Court, in assessee's own case relating to the assessment year 2002-03 in Income Tax Appeal No. 1148/2012, vide judgment dated 28.2.2013, has held that in view of the amendment by the Finance Act 2012 with retrospective effect from 1st April 2002, the said transaction of charging of interest from the AEs is covered under the amended provision of Section 92B(1) of the Act". 23. However, when we perused Hon'ble Bombay High Court's judgment referred to in this coordinate bench's order, we found the factual position to be slightly, but very materially, different. 24. The relevant question before Their Lordships, in the said case and as set out at page 2 of this judgment, was "(c) whether, on the facts and circumstances of the cas....
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....debt is concerned. 29. The amendment so made by the Finance Act 2012, stated to be with retrospective effect 1st April 2002, inserts an Explanation to Section 92 B which, inter alia, that "For the removal of doubts, it is hereby clarified that (c) capital financing, including any type of long -term or short -term borrowing, lending or guarantee, purchase or sale of marketable securities or any type of advance, payments or deferred payment or receivable or any other debt arising during the course of business". In plain words, this amendment inter alia implies that capital financing of any type, including by way of "deferred payment or receivable or any other debt arising during the course of business" will constitute an international transaction under section 92B. Going by this definition "any debts arising during the course of business" will constitute an international transaction. A trade debt is, accordingly, covered by this definition. However, since the assessment year that we are dealing with is prior to the assessment year 2012-13, the next important question is whether this amendment could be held to be applicable in the assessment year before us as well. Undoubtedly, the....
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....tinction between "lack of inquiry" and "inadequate inquiry". If there was any inquiry, even inadequate that would not by itself give occasion to the CIT to pass orders under s. 263 of the Act, merely because he has different opinion in the matter. It is only in cases of "lack of inquiry" that such a course of action would be open"], it was reiterated that it was only the lack, not the adequacy, of inquiry which could confer jurisdiction under section 263 on the Commissioner. By inserting Explanation 2 to Section 263(1), which inter alia provided that powers under section 263 could also be invoked in the cases where "the order is passed without making inquiries or verification which should have been made", all ratio of all these decisions was nullified. That, however, is done with prospective effect, i.e. with effect from 1st June 2015. As a matter of fact, it is a laudable policy of the present tax administration to stay away from making the retrospective amendments, and thus contribute to greater certainty and congenial business climate. Nothing evidences it better than this subtle, but easily discernible, paradigm shift in the underlying approach to the amendments made in Section....
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....courts in this regard is where the purpose of a special interpretive statute is to correct a judicial interpretation of a prior law, which the legislature considers inaccurate, the effect is prospective. Any other result would make the legislature a court of last resort. United States v. Gilmore 8 Wall [(75 US) 330, 19L Ed 396 (1869)] Peony Park v. O'Malley [223 F2d 668 (8th Cir 1955)]. It does not mean that the legislature does not have the power to override judicial decisions which in its opinion it deems as incorrect, however to respect the separation of legal powers and to avoid making a legislature a court of last resort, the amendments can be made prospective only [Ref County of Sacramento v State (134 Cal App 3d 428) and In re Marriage of Davies (105 I II App 3d 66)] (Emphasis, by underlining, supplied by us) 34. Quite clearly, in view of the law so laid down by Their Lordships also, just because a provision is stated to be clarificatory, it does not become entitled to be treated as 'clarificatory' by the judicial forums as well. The view taken by Hon'ble Delhi High Court support this line of reasoning. Even without the benefit of guidance of Their Lordships, the views ....
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....conduct their affairs. In that sense, all anti abuse legislations seek a certain degree of compliance with the norms set out therein. It is, therefore, only elementary that amendments in the anti-abuse legislations can only be prospective. It does not make sense that someone tells you today as to how you should have behaved yesterday, and then goes on to levy a tax because you did not behave in that manner yesterday. 37. When this is put to the learned Departmental Representative that as to how the transfer pricing legislation can be expected to have a retrospective amendment, which is almost like telling people how they should have benchmarked their international transactions in past and thus expecting them to do the impossible, his stock reply is that the amendment only clarifies the law, it does not expand the law. 38. Well, if the 2012 amendment does not add anything or expand the scope of international transaction defined under section 92B, assuming that it indeed does not- as learned Departmental Representative contends, this provision has already been judicially interpreted, and the matter rests there unless it is reversed by a higher judicial forum. However, if the 20....
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....ystem. We are bound by the law laid down by Hon'ble Courts above, and all that we are expected to do, and we do, is to decide the issues before us in accordance with the provisions of the statute, in accordance with the law laid down by Hon'ble Courts above and in the light of binding judicial precedents. When a binding judicial precedent requires us to deviate from the specific words of the provisions of the statute in a particular manner, we have to do so. There is no escape from this call of duty. Of course, whatever we do is, and shall always remain, subject to the approval by Hon'ble Courts above. 41. There are a number of decisions in which our so tinkering with the specific words in the statute have been upheld, as long as this has been so done in accordance with the judicial principles and guidance in the judge made law. In the case of Rajeev Kumar Agarwal Vs ACIT [(2014) 249 ITD 363 (Agra)], insertion of second proviso to Section 40(a)(ia), though specifically stated to be with effect from 1st April 2013, was read to be effective from 1st April 2005. The reasoning adopted by the bench, speaking through one of us, was as follows: 8. With the benefit of this guidance f....
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....nderstanding, it could not be an "intended consequence" to disallow the expenditure, due to non deduction of tax at source, even in a situation in which corresponding income is brought to tax in the hands of the recipient. The scheme of Section 40(a)(ia), as we see it, is aimed at ensuring that an expenditure should not be allowed as deduction in the hands of an assessee in a situation in which income embedded in such expenditure has remained untaxed due to tax withholding lapses by the assessee. It is not, in our considered view, a penalty for tax withholding lapse but it is a sort of compensatory deduction restriction for an income going untaxed due to tax withholding lapse. The penalty for tax withholding lapse per se is separately provided for in Section 271 C, and, section 40(a)(ia) does not add to the same. The provisions of Section 40(a)(ia), as they existed prior to insertion of second proviso thereto, went much beyond the obvious intentions of the lawmakers and created undue hardships even in cases in which the assessee's tax withholding lapses did not result in any loss to the exchequer. Now that the legislature has been compassionate enough to cure these shortcomings of ....