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Income Tax Appellate Tribunal, “D” BENCH, AHMEDABAD
आदेश/O R D E R
PER SHRI MANISH BORAD, A.M:
The captioned appeal filed at the instance of assessee pertaining to Assessment Year 2012-13 is directed against the order of Ld. Commissioner of Income Tax (Appeals)-8 (in short ‘Ld.CIT(A)’], Ahmedabad dated 07.03.2017 which is arising out of the order u/s 143(3)r.w.s 144 of the Act, 1961 dated 26.02.2016 framed by DCIT, Ahmedabad.
Brief facts stated as culled out from the records are that the assessee is a limited company engaged in the manufacturing and trading of Air-Cooler and other consumer
Symphony Ltd. For AY 2012-13 2 durables. Income of Rs.52,89,18,140/- declared in the E-return of income filed on 28.09.2012 which was subsequently revised on 28.03.2013 declaring income at Rs.52,89,93,637/-. Case selected for scrutiny through CASS followed by serving of notices u/s 143(3) & 142(1) of the Act. Since the assessee entered into the international transactions, the case was referred to the Transfer Pricing Officer (TPO) on 09.12.2014 for determination of Arm’s Length Price (ALP) in relation to the international transactions. The Ld. TPO vide its order dated 31.12.2005 made an Upward Adjustment of Rs.17,77,393/- and the same was added to the income of the assessee as per the provisions of section 92CA of the Act. Apart from this addition the AO examined the records and after considering the submissions made by the assessee made disallowance u/s 14A of the Act at Rs.4,23,953/-, addition u/s 68 of the Act at Rs.5,60,000/-, addition u/s 145A of the Act for untilized balance of tax at Rs.21,05,125/-. Income assessed at Rs.53,37,84,610/- and Book Profit u/s 115JB of the Act assessed at Rs.53,77,58,612/-.
Aggrieved assesseepreferred appeal before Ld. CIT(A) but partly succeeded. Now the assessee in appeal before the Tribunal raising following grounds of appeal.:- “The part of impugned order is contrary to the evidence and material on record, contrary to the principles of law and binding judgments of the Court, contrary to the relevant provisions of the Act and deserves to be quashed and set aside.
Symphony Ltd. For AY 2012-13 3 2. The learned CIT(A) has erred in confirming the addition of Rs.80,000/- out of total addition of Rs.5,60,000/- made by learned AO u/s.68 of the Act. Such confirmation addition of Rs.80,000/- by learned CIT(A) being contrary to the facts and without going into the merits of the case and therefore such addition being contrary to the facts and relevant provisions of the Act deserves to be quashed and set aside. It may be so held now.
3. The Learned CIT(A). has erred in confirming the Upward Adjustment of Rs.17,73,393/- made by the ''Ld.AO''. Transfer Pricing Officer-2 as per his order u/s 92CA(3). Such addition being contrary to the facts and untenable under law, is required to be deleted in toto. It may be so done now.
4. The appellant craves leave to add to, alter, amend, modify and/ or vary any or all of the grounds of aforesaid at the time of hearing.”
Learned counsel for the assessee argued at length referring to the following return submissions in support of the issues raised in both the grounds of appeal
.:- ““Your appellant respectfully submits that following 2 grounds are for adjudication;
1. Addition of Rs.80,000/- out of Rs.5,60,000/- confirmed by learned CIT(A) as small trade deposit taken from small dealers u/s.68 where the submission is already made in Paper book Page 2 & 3 with the details of deposits with name and complete address alongwith mode of acceptance by cheques with details, (on page number 93 to 95 of paper book).
2. Upward Adjustment of Rs.17,77,393/- made by learned TPO 2 confirmed by learned A.O. 4(1) being the credit period extended to AE IMPCO (Mexico) beyond 90 days and charging interest on outstanding receivables considered by TPO as beyond arm's length credit period so that the said international transaction is at ALP. (i) The appellant during proceedings u/s.92CA(2), made following arguments for Upward Adjustment of Rs.17,77,393/-: (a) At page 6, last para of learned TPO order (paper book page 85), it is stated that adjustment of notional interest on overdue payments from AE cannot be considered as international transaction. (b) At para 8 of page 9 of TPO order (paper book page 87), it is the policy of company not to charge any interest on the delay of credit period or delay in realization of sale proceeds.
Symphony Ltd. For AY 2012-13 4 (c) At para 7 on page 8 of TPO order (paper book page 86) it was stated that the appellant company has factored it while quoting sale price to AE IMPCO. (d) At para 9 on page 9 of TPO order (paper book page 87), it was cited by appellant that the Hon'ble Mumbai High Court in the case of Indo American Jewellery Ltd (2014) in taxmann 310 upheld, the findings of tribunal holding that interest income associated only with the lending or borrowing of money and not the case of sale. It is further respectfully submitted that when the revenue is recognized only on the basis of mercantile method of accounting then the notional interest for extended credit period is not justifiable and to consider as income. Please note that it is not a loan or borrowing. The receivable happened is only resultant of the main international export sale and there is a complete uniformity in the act of the Symphony in not charging interest from the AE. Therefore, the outstanding amount from the AE on account of continuing debit balance for the goods supplied is a normal course of business and is not an international transaction. (ii) At page 3, last para (paper book page 107) observation of learned CIT(A): "After detailed verification the TPO concluded that by non-realisation of the sale proceeds from AE beyond the Arm's Length period of 90 days, the assessee company had deprived itself of the funds available in its hand and non-charging of any commensurate remuneration from the associate enterprise in respect of such grant of Rs.17,77,393/- on outstanding receivable by considering that it is beyond the arm's length credit period in the said international transaction. The TPO also observed that there was significant difference between the credit terms extended to the AE and the non-AE customers. For the purpose of benchmarking, the credit terms extended to the Non-AE customer was adopted as an internal CUP and suitable adjustment was carried out to account for difference in transit time. Accordingly, the ALP credit period in the case of AE customer (Impco, Mexico) was computed at 90 days in place of 180 days allowed such AE customer." (iii) At page 4, sub para 2 of para 5.1 (paper book page 108), Appellant argument: "You will also appreciate that sale price of brand to AE is higher as compared to Non AE. The sale price of any product or service determined between the parties is always influenced by the credit period allowed by the seller. Please note that the rates to AE IMPCO includes insurance, shipping charges, etc but without considering any expenses relating to foreign exchange fluctuation. Therefore the transaction of sale to the AE and credit period allowed in realization of sale proceeds are closely linked as they are inter linked and conditions of sale as well as the price are determined based on the totality of the transaction with an overall scenario of market." (iv) At para 5.2 on page 5 of the order (paper book page 109), the learned CIT(A) concluded: "...... In the case of the appellant, huge amount of receivables were outstanding at the end of the relevant previous year. If the funds are Symphony Ltd. For AY 2012-13 5 repatriated to India, the assessee would have been in a position to earn better profit from appropriate investment of those repatriated funds. This potential loss is definitely a factor to be considered while evaluating the financial impact of the international taxation concluded by the assessee with its AE." (v) At para c on page 6 of the order (paper book page 110), the learned CIT(A) stated: "By allowing excess credit period to the AR customer, the assessee company had deprived itself of the working capital and rather has funded the working capital requirement of such AE customer. Accordingly, the excess credit period to the AE was not at Arm's length." (vi) The appellant respectfully submits that the facts of the case is squarely covered by the facts of the decision of Hon'ble - D Bench, vide dated 16.11.2018 in the case of Sophos Technologies Private Limited vs. DCIT Circle 4{1)(1), Ahmedabad. Facts:- (1) Page 2 - para 3 of above citation. (Similar to learned TPO). (2) Page 2 - para 4 of said citation. (Similar to learned TPO). (3) Page 6 - para 7 & 8 of said citation. (Similar to learned TPO). The appellant shall be grateful if the above synopsis with written submissions submitted on 06.03.2019 is considered while disposing of the appeal for the year under consideration.”
Per contra, the Ld. Departmental Representative with regard to the ground no.1 relating to addition of Rs.80,000/- u/s 68 of the Act supported the finding of the both the lower authorities. As regards ground no. 2 relating to Upward Adjustment of Rs.17,73,393/-, he submitted that the providing more credit limit to the Associate’s Enterprise (in short ÁE’) vis- à-vis non-AE calls for the calculation of Arm’s Length Price. In support he relied upon the decision of Hon’ble ITAT Chennai Bench in the case of Professional Access Software Development (P.) Ltd. Vs. DCIT (2017) 79 taxmann.com 25 (Chennai Tri.).
We have heard rival contentions and perused the record placed before us and carefully gone through judgments referred and relied by the both the parties.
Symphony Ltd. For AY 2012-13 6
7. As regards ground no. 1 by way of which the assessee has challenged the addition of Rs.80,000/- sustained by the Ld. Representative of the CIT(A) regarding to small trade deposit taken from small dealers, we find that the loan amount of Rs.80,000/- constitutes deposits of Rs.10,000/- each from 5 parties and Rs.5,000/- each from 6 parties. The payments were received through cheques and were part of the trade deposits. Looking to the turn-over of the assessee which stood at Rs.225.9. crores and the profit before the tax at Rs.57.87 crores, we do not find any reason to doubt the genuineness of the small trade deposits receivedin normal course of business and thus direct the Assessing Officer to delete the same. In the result ground no. 2 of the assesseeappeal stands allowed and additions u/s 68 of the Act at Rs.8,000/- is deleted.
8. Apropos to ground no. 3 through which the assessee has challenged the addition for Upward Adjustment of Rs.17,77,393/- for the notional interest calculated on the extended credit period provided to the Associate Enterprise (IMPCO) (Mexico).The Learned counsel for the assessee submitted that the lower authorities erred in charging interest on outstanding receivable considering them as International transactions. Learned counsel for the assessee also submitted that the Ld. TPO has also observed that there was significant different between the credit terms extended to the AE and the non-AE customer. However for the purpose for bench marking, the credit term extended to the non-AE customer was adopted
Symphony Ltd. For AY 2012-13 7 as internal CUP and suitable adjustment was carried out to account for difference in transit time. Therefore, the ALP credit in the case of AE customer (IMPCO) (Mexico) was computed at 90 days in place of 180 days allowed to AE customer. We observethat the sale price charged by the assessee for the products exported to AE is higher vis-à-vis the sale price charged to the non-AE. It is ageneral business practice that if profit margin is kept higher in the sale price credit period is also higher and vice versa if the profit margin is kept lower the credit period is less.Therefore, we find force in the contention of the learned counsel for the assessee that the extended credit period provided to the AE has been adjusted with the higher sale price charged on the product sold to the AE. As regards to issue that whether the action of the AO/TPO in computing the notional interest on extended credit period given to AE and considering it as a separate International transactions, co- ordinate bench Ahmedabad in the case of Sophos Technologies Pvt. Ltd. Vs. DCIT in decided similar issue in favour of the assesseeobserving as follows.:-
“5. We have heard the rival contentions, perused the material on record and duly considered facts of the case in the light of the applicable legal position.
6. As learned Counsel rightly points out, this issue is now covered, in favour of the assessee, by a decision of Ahmedabad Bench of this Tribunal in the case of Micro Inks Limited Vs. ACIT, [2016] 157 ITD 132 (Ahmedabad - Trib.), wherein, after taking into account Hon’ble jurisdictional High Court’s judgment in the case of Nirma Industries Ltd. Vs.. DCIT, [2006] 283 ITR 402 and the Hon’ble Delhi High Court’s judgement in the case of Sony Ericsson Mobile Corpn. (P.) Ltd. v. CIT, [2015] 374 ITR 118, the Coordinate bench has, inter alia, observed as under:-
Symphony Ltd. For AY 2012-13 8 “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 coordinate bench had observed as follows: "
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 Symphony Ltd. For AY 2012-13 9 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 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,"
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
Symphony Ltd. For AY 2012-13 10 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 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 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 Symphony Ltd. For AY 2012-13 11 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.”
In any case, as pointed out by the learned Counsel, the undisputed position is that the assessee had allowed credit period beyond 90 days in the case of Non-Associated Enterprises, i.e. independent enterprises as well. Once this fact is not disputed, the transactions with the non-AE constitute valid Internal CUP inputs and ALP adjustment on account ofrealisation of bills beyond 90 days from the Associated Enterprise cannot be justified.
8. In view of above discussions, and respectfully following the binding judicial precedents as referred to above, we uphold the plea of the assessee and direct the Assessing Officer to delete the impugned ALP adjustment of Rs.2,04,090/-.”
In the given facts and circumstances of the case and respectfully following the decisions of the co-ordinate bench Ahmedabad referred above, we are of the view that since that the extended credit period provided by the assessee has been adjusted by the higher sale price charged to the AE and such transactions of providing extended credit period for more than 90 days or above cannot be considered as a separate International transaction, do not call for and any Upward Adjustment. We accordingly direct the AO to delete the additions for Upward Adjustment of Rs.17,73,393/- made u/s 92CA(3) of the Act and allow. Ground no. 3 raised by the assessee.
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