TaxTMI 
TaxTMI 
2018 (8) TMI 1834
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....ales 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 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. ACIT ITA No. 6814 (Delhi) of 2014.' (ii) D'CIT v. Indo American Jewellery Ltd. ITA No. 5872/Mum/2009 A.Y. 2005-2006. 6. The learned ....
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....cause 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 com....
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....or 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 upfront fee 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 show cause 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 ud....
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....o parties requiring benchmarking of interest. In indo American jewellery Ltd. case the Tribunal held the view that interest income is associated only with the 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....
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....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 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 assessee as under:- S No Name of the AE Base Rate Average Comparable Rate Forex Risk ALP Interest Rate 1 BISAZZA AUSTRALIA PTY. LTD, Australia 11 Month Libor-93.57 320 100 513.57 2 BISAZZA CHIN A LTD., China 12 Month Libor-93.57 110 100 303.57 3 BISAZZA MEXICO, S de RLde CV, Mexico 12 Month Libor-93.57 425 100 618.57 4 BISAZZA NORTH AMERICA, INC., USA 1 2 Month Libor-93.57 168.75 100 362.32 5 BISAZZA PHILIPPINES INC., Philippines 12 Month Libor-93.57 463.43 100 667.00 6 BISAZZ....
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.... 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 assessee 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 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 p....
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....n 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% 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 asses....
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....unsel 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 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 Servic....
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....having significant marketing functions incurs substantial expenditure on AMP, three times more than in case 1, but the 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 a....
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....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....