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Income Tax Appellate Tribunal, “D” BENCH, AHMEDABAD
Before: SHRI WASEEM AHMED&
PER Ms. MADHUMITA ROY - JM:
These three appeals have been filed by the assessee before us against the separate orders dated 16.10.2015 passed u/s.154 of the Income Tax Act, 1961 (hereinafter referred to as "the Act"), dated 29.10.2015 and 14.12.2016 both passed under section 143(3) read with section 144C of the Act, by the Dy.Commissioner of Income-tax, Circle-3(1)(1), Ahmedabad, [Ld.Dy.CIT in short] for the Assessment Years (AYs) 2010-11, 2011-12 & 2012-13 respectively.
- 2 - IT(TP)A Nos.3533/Ahd/2015, 3631/Ahd/2015& IT(TP)A No.414/Ahd/2017 Gemstone Glass Pvt.Ltd. vs. DCIT Asst.Years – 2010-11, 2011-12 & 2012-13 Since the issues are inter-connected and of the same assessee, these appeals 2. were heard analogously and are being disposed of by this consolidated order for the sake of convenience.
ITA No.3533/Ahd/2015 for AY 2010-11
The appeal has been preferred on 14 grounds and only ground No.7 narrated as follows is being pressed at the time of hearing by the Ld.AR.
“7. The learned Ld. Assessing Officer/TPO erred in law and on facts in rejecting Transactional Net Margin Method and instead applying Cost Plus Method [“CPM”] as the most appropriate method and thereby disregarding requirements of Rule 10B and 10C of the Income-tax Rules, 1962 [“the Rules”].
The moot point involved in this matter is as to which is the most appropriate method for determining the Arms Length Price (ALP) and the exports made by the assessee to its Associated Enterprises (AEs).
The assessee is engaged in the business of manufacturing of glass mosaic. The company has its manufacturing unit at Kadi in Gujarat. It is a subsidiary company of Trend Group SpA, Italy. It has five AEs in Italy, Malaysia, Hong Kong & USA. During the year under consideration, the assessee-company has entered into international transactions with its associated enterprises. According to the assessee, the ALP of the International transactions representing sale of manufactured products to the associated enterprises (AE) is determined by applying Transactional Net Margin Method (TNMM) on aggregated international transactions to be the most appropriate method on the facts and circumstances of the case. On the contrary, the authorities below are of the opinion that Cost Plus Method (CPM) is the most appropriate method for ascertaining the ALP.
- 3 - IT(TP)A Nos.3533/Ahd/2015, 3631/Ahd/2015& IT(TP)A No.414/Ahd/2017 Gemstone Glass Pvt.Ltd. vs. DCIT Asst.Years – 2010-11, 2011-12 & 2012-13 6. At the very outset of the proceeding, the Ld. Representative for the assessee before us submitted that the issue is covered by the order passed by the Co-ordinate Bench of this Ld. Tribunal in assessee’s own case for AY 2009-10.
6.1. The Ld. DR for the Revenue though on the other hand, relies upon the orders passed by the authorities below could not confront the submissions made by the Ld. AR.
We have heard the Ld. Representatives appearing for the respective parties. We have perused the relevant materials available on record. We have been handed over with the copy of the order dated 05.07.2017 passed in ITA Nos.1090/Ahd/2014 & 1035/Ahd/2014 for AY 2009-10 (cross-appeals) in the case of the Pino Bisazza Private Limited (the erstwhile name of the assessee-company) vs. ACIT. The relevant portion dealing the similar issue is as follows:-
“4. We find that an identical dispute arose in A.Y. 2008-09 which travelled up to the Tribunal and the Tribunal vide order dated 30th October, 2015 in ITA No. 2857/Ahd/2012, after considering the contentious issues held as under:-
As for the cost plus method being applied to the facts of this case, we have noted that the DRP has conceded that appropriate data for the application of cost plus method is not available and yet they have approved adopted of the CPM because, according to the DRP, appropriate data is not available for the TNMM either. It is difficult to understand the logic of this approach. CPM is not a residuary method in the sense that if every other method of ascertaining the arm’s length price fails, CPM can be applied on the basis of imperfect data. If at all there is a residuary method, or what is termed as the method of last resort, it is transactional net margin method. TNMM has almost become the ‘default’ method for taxpayers in recent years.The key advantage of the TNMM is that there is often available data in the public domain about the net profits that comparable independent businesses earn from their trading activities in comparable markets with other third parties. As such, the TNMM often proves easier to apply than, say, the Cost Plus or RPM methods, and TNMM is less sensitive to minor differences in the products being sold. It is also important that the data for application of CPM, as collected by the TPO, was not in public domain and this
- 4 - IT(TP)A Nos.3533/Ahd/2015, 3631/Ahd/2015& IT(TP)A No.414/Ahd/2017 Gemstone Glass Pvt.Ltd. vs. DCIT Asst.Years – 2010-11, 2011-12 & 2012-13 has been done by collecting information under section 133(6). Such a data could not have been available to the assessee. All shortcomings being equal in the application of the methods of determining the ALP, as at best is the case of the authorities below, the method to be preferred is the method for which necessary inputs are available in the public domain. As for the TNMM data not being available, as there is difference between the product that the assessee is manufacturing vis-a-vis the products being manufactured by the comparables adopted, it is only broad similarity in the product and economic similarity in the conditions which is need. While on this issue, it may be relevant to refer to following observations in the UN’s Transfer Pricing Manual:
TNMM is usually applied with respect to broad comparable functions rather than particular controlled transactions. Returns to these functions are typically measured by a PLI in the form of a net margin that arguably will be affected by factors unrelated to arm’s length pricing. Consequently, one might expect the TNMM to be a relatively disfavoured method. Nevertheless TNMM is typically applied when two related parties engage in a continuing series of transactions and one of the parties controls intangible assets for which an arm’s length return is not easily determined. Since TNMM is applied to the party performing routine manufacturing, distribution or other functions that do not involve control over such intangible assets, it allows the appropriate return to the party controlling unique or difficult‐to‐ value intangible assets to be determined indirectly.
TNMM may also be appropriate for use in certain situations in which data limitations on uncontrolled transactions make it more reliable than traditional methods. TNMM may be more attractive if the data on gross margins are less reliable due to accounting differences (i.e. differences in the treatment of certain costs as cost of goods sold or operating expenses) between the tested party and the comparable companies for which no adjustments can be made as it is impossible to identify the specific costs for which adjustments are needed. In such a case, it may be more appropriate to use TNMM to analyse net margins, a more consistent measured profit level indicator than gross margins in case of accounting differences.
In view of the above discussions, as also bearing in mind entirety of the case, we are of the considered view that the authorities below indeed erred in not applying the TNMM for ascertaining the arm’s length price of assessee’s transactions with the associated enterprises. We direct the AO/TPO to compute the ALP on the basis of the transactional net margin method. With these directions, we remit the matter to the file to the assessment stage for fresh determination of arm’s length price. As the matter is being remitted to the
- 5 - IT(TP)A Nos.3533/Ahd/2015, 3631/Ahd/2015& IT(TP)A No.414/Ahd/2017 Gemstone Glass Pvt.Ltd. vs. DCIT Asst.Years – 2010-11, 2011-12 & 2012-13 assessment stage, it will be open to the assessee to take such other plea, on merits, on ascertainment of ALP under the TNMM as the assessee may deem fit and the same will have to be disposed of by way of a speaking order, in accordance with the law and after giving a fair and reasonable opportunity of hearing to the assessee. All those issues regarding application of TNMM method, as on now, are academic and wholly hypothetical. With these directions, the matter is remitted to the file of the Assessing Officer.
We see no reasons to take any other view of the matter than the view so taken by us in the case of Gemstone (supra). Respectfully following this decision, we hold that the authorities below indeed erred in not applying the TNMM for ascertaining the arm’s length price of assessee’s transactions with the associated enterprises. We direct the AO/TPO to compute the ALP on the basis of the transactional net margin method. With these directions, we remit the matter to the file to the assessment stage for fresh determination of arm’s length price. As the matter is being remitted to the assessment stage, it will be open to the assessee to take such other plea, on merits, on ascertainment of ALP under the TNMM as the assessee may deem fit and the same will have to be disposed of by way of a speaking order, in accordance with the law and after giving a fair and reasonable opportunity of hearing to the assessee. All those issues regarding computation part, as on now, are quite academic and wholly hypothetical. With these directions, the matter is remitted to the file of the Assessing Officer. 5. Representatives of both sides fairly conceded that the facts in issue for the appeal under consideration are similar to the facts in issue considered by the Co-ordinate Bench (supra). 6. In our considered opinion and on finding parity on the facts of the case in hand with the facts of A.Y. 2008-09, we do not find any reason why the order of the Co-ordinate Bench should not be followed. 7. Respectfully following the decision of the Co-ordinate Bench, we direct accordingly. 8. All the issues are remitted to the assessment stage, it will be open to the assessee to take such other plea, on merits, on ascertainment of ALP under the TNMM as the assessee may deem fit. The A.O. is directed to decide the issue afresh in the light of the directions given by the Co-ordinate Bench in ITA No. 2857/Ahd/2012 (supra).
We find that the identical issue as of the assessee has been dealt with and finalized by the Co-ordinate Bench. Respectfully following the said order, we allow the appeal preferred by the assessee by remitting the matter to the file of the Ld. Assessing Officer for de novo assessment where the assessee will raise their contentions on merit on
- 6 - IT(TP)A Nos.3533/Ahd/2015, 3631/Ahd/2015& IT(TP)A No.414/Ahd/2017 Gemstone Glass Pvt.Ltd. vs. DCIT Asst.Years – 2010-11, 2011-12 & 2012-13 ascertainment of Arms Length Price under the Transactional Net Margin Method as the assessee may deem fit. The Ld. Assessing Officer is further directed to decide the issue afresh in the light of the directions given by the Co-ordinate Bench as mentioned hereinabove.
In the result, appeal of the assessee in ITA No.3533/Ahd/2015 for AY 2010-11 is allowed for statistical purposes.
ITA No.3631/Ahd/2015 for AY 2011-12
The ground of challenge is identical to that of the ground raised in ITA No.3533/Ahd/2015 for AY 2010-11. This appeal has been preferred by the assessee against the order u/s.143(3) r.w.s.144C of the Act dated 29.10.2015 passed by the DCIT Circle-3(1)(1) Ahmedabad for the AY 2011-12 pursuant to the directions dated 22.09.2015 passed by the Disputes Resolution Panel-II (DRP), Mumbai under section 144C(5) of the Act.
Both the parties consented to the issue being identical with that of ITA No.3533/Ahd/2015. In that view of the matter, the observation and mandates given in ITA No.3533/Ahd/2015 for AY 2010-11 above shall apply mutatis mutandis to the instant appeal. Therefore, this appeal preferred by the assessee is also disposed of in favour of assessee with the same direction upon the Ld. Assessing Officer as narrated in ITA No.3533/Ahd/2015 for AY 2010-11. As a result, the appeal of the Assessee in ITA No.3631/Ahd/2015 for AY 2011-12 is allowed for statistical purposes.
- 7 - IT(TP)A Nos.3533/Ahd/2015, 3631/Ahd/2015& IT(TP)A No.414/Ahd/2017 Gemstone Glass Pvt.Ltd. vs. DCIT Asst.Years – 2010-11, 2011-12 & 2012-13
ITA No.414/Ahd/2017 for AY 2012-13
In this particular case, it is evident from the records particularly from the invoices raised by the assessee-company on various Associated Enterprises (AEs) that there were excess delay beyond the credit facility extended to those AEs in realization of sale invoices. By parking such amount at the disposal of the AEs for extra period, the assessee- company had deprived its own funds available in its hand. According to the Revenue, in the independent third party scenario, no third party will extend such funds to any unrelated 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 was not at arm’s length and thus the amount outstanding from the AEs were considered as parking of funds in the nature of loan with the AEs by the assessee-company. In that view of the matter, for determining of ALP of such funds in the nature of loan with the AEs, the benchmark rate at which interest should have been charged from the AEs was determined by Revenue. Since the invoices were denomination in United States Dollar and Euro, the receivables pertaining to such invoices were treated as US Dollar and EURO denominated loan extended to the AEs by the assessee-company. For determination of ALP of such funds in the nature of loan extended to the AEs, the external CUP was applied and benchmark rate at which interest should have been charged from the AEs separately was computed using ‘loan connector’ database. The assessee was also issued a show-cause notice on 15.12.2015 proposing to charge suitable interest and was directed to explain as to why upward adjustment on account of interest should not be made to the total income by applying above interest rates so that the international transaction of outstanding receivables against sales made to the AEs is at ALP. In response to the said show-cause notice, the assessee inter alia contended that no notional interest can be charged where the assessee has not charged any interest for transactions with third parties. The assessee further
- 8 - IT(TP)A Nos.3533/Ahd/2015, 3631/Ahd/2015& IT(TP)A No.414/Ahd/2017 Gemstone Glass Pvt.Ltd. vs. DCIT Asst.Years – 2010-11, 2011-12 & 2012-13 submitted that a short delay in receiving the amount whether from the AE or from the third parties is in the normal course of business and is inevitable. Further that, the assessee has not charged any interest from any third party for delay in receipt of outstanding dues from them. The assessee thus prayed before the authorities below that under the arm’s length principle, no notional interest is to be charged by the assessee from its AEs where it has not charged any interest on transactions with third parties. More so, neither the assessee nor the AEs charge any interest on outstanding receivable from its end customers. However, the argument made by the assessee was not accepted by the authorities below and upward adjustment of Rs.15,74,438/- has been proposed so that the international transaction of receivables outstanding against sales made to AE is at ALP as per the working enclosed thereto. Accordingly, total upward adjustment of Rs.15,74,438/- was required to be made to the total income so that international transactions undertaken by the company are at arm’s length and the same was revised. The said order was confirmed by the assessment order dated 14.12.2016 passed under section 143(3) r.w.s.144C of the Act passed by the DCIT, Circle-3(1)(1), Ahmedabad which is impugned before us.
At the time of hearing of the instant appeal, the Ld. Representative of the assessee relied upon the judgment of Ahmedabad Tribunal in the case of Bisazza India (P.) Ltd. vs. Deputy Commissioner of Income-tax, Circle-1(1)(2), Ahmedabad reported in [2018] 97 taxmann.com 432 (Ahmedabad-Trib.) in support of his contention/refuting the upward adjustment of Rs.15,74,438/- made by the TPO and confirmed by the authorities below. The relevant portion of the said order is as follows:-
“6. We have heard the rival contentions and perused the material on record carefully. In this case, a reference u/s. 92CA(1) of the act for the computation of arm's length price in relation to international transaction entered into by the assessee with associated enterprise was made to the TPO. The TPO has worked out a upward adjustment of Rs. 98,47,085/- on account of ALP interest that was required to be charged by the assessee company from the associated enterprise in view of delay in realization of sale invoices beyond the credit period extended by the assessee company. The assessee has explained that it has applied TNMM method which takes into
- 9 - IT(TP)A Nos.3533/Ahd/2015, 3631/Ahd/2015& IT(TP)A No.414/Ahd/2017 Gemstone Glass Pvt.Ltd. vs. DCIT Asst.Years – 2010-11, 2011-12 & 2012-13 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.
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 passed by the co-ordinate benches, including in the case of Micro Ink Ltd. v. Addl. CIT [(2016) 157 ITD 132 (Ahd.)] wherein the co- ordinate bench has, inter alia, observed as follows:
"4. The relevant material facts, as necessary for our adjudication, are like this. The assessee before us is a leading ink manufacturer in India. The assessee has a wholly owned subsidiary in Austria, by the name of Micro Inks GmbH which, in turn, owns Micro Ink Co USA. This step down subsidiary (Micro USA, in short) manufactures printing ink by using the base material supplied by the assessee. The inks meant for US markets thus are mixed, and given finishing touches, by Micro USA. The assessee company also has trading subsidiaries in China and Hong Kong. During the relevant previous year, the assessee sold goods worth Rs. 215.51 crore to Micro USA. The Transfer Pricing Officer, in the course of proceedings before the TPO, it was noted that the assessee has sold goods worth Rs. 215.51 crore to Micro USA and allowed it an average credit period of 186 days as against average credit period of 130 days allowed to independent enterprises, i.e. non-AEs. It was also noted that out of total exports made by the assessee, 45% exports was to Micro USA. On these facts, and the TPO being of the view that "in a third party situation, such an allowance of use of money would have been possible only upon charge of a cost", the TPO required the assessee to show cause as to why ALP adjustment in respect of excess credit period of 56 days not be made, by computing time value of money @ 6.38% on LIBOR plus basis. In response to this show-cause notice, it was, inter alia, explained by the assessee that what is exported to Micro USA is semi-finished material which is required to be further processed and converted into saleable product. In effect thus, export to Micro USA cannot be compared with export of finished products as was done to the independent enterprises. The assessee had also pointed out that "average credit period of third parties is 120 days whereas credit period granted to Micro USA is 135 days" though "actual highest average debtor days to third parties is 161 days whereas for Micro USA it is 186 days". It was also explained that considering the time taken in shipping the semi finished goods to Micro US,
- 10 - IT(TP)A Nos.3533/Ahd/2015, 3631/Ahd/2015& IT(TP)A No.414/Ahd/2017 Gemstone Glass Pvt.Ltd. vs. DCIT Asst.Years – 2010-11, 2011-12 & 2012-13 its processing in US, maintenance of inventory at US and credit realization 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 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 co-ordinate bench had observed as follows:
"20. 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."
- 11 - IT(TP)A Nos.3533/Ahd/2015, 3631/Ahd/2015& IT(TP)A No.414/Ahd/2017 Gemstone Glass Pvt.Ltd. vs. DCIT Asst.Years – 2010-11, 2011-12 & 2012-13
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 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.
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," 8. By way of an example, this aspect of the matter was then explained by Hon'ble Delhi High Court as follows:
- 12 - IT(TP)A Nos.3533/Ahd/2015, 3631/Ahd/2015& IT(TP)A No.414/Ahd/2017 Gemstone Glass Pvt.Ltd. vs. DCIT Asst.Years – 2010-11, 2011-12 & 2012-13 "An example given below would make it clear:
Particulars Case I Case 2 Sales 1000 1,000 Purchase Price 600 500 Gross Marin 400(40%) 500 Marketing Sale 50 150 promotion Overhead expense 300 300 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 Marin 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
- 13 - IT(TP)A Nos.3533/Ahd/2015, 3631/Ahd/2015& IT(TP)A No.414/Ahd/2017 Gemstone Glass Pvt.Ltd. vs. DCIT Asst.Years – 2010-11, 2011-12 & 2012-13 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 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 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. 10. The other aspect of the matter is that a separate adjustment for delayed realization of debtors can, even in a fit case, can only be made only to the extent the credit period allowed to the associated enterprises is more than the credit period allowed to independent enterprise in respect of the same or materially similar transactions. In the present case, it is an undisputed position that semi-finished goods, as sold to Micro USA, is not sold to any other independent enterprises. The assessee did have trading transactions in respect of the finished goods with trading subsidiaries in China and Hong Kong but it is not even the case of the TPO that excessive credit period was allowed to these AEs vis-à-vis the credit period allowed to independent enterprises, nor any ALP adjustment has been recommended in connection with the same. This fact, if anything, shows that the credit period allowed to the AEs is comparable with credit period of non-AEs in respect of 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
- 14 - IT(TP)A Nos.3533/Ahd/2015, 3631/Ahd/2015& IT(TP)A No.414/Ahd/2017 Gemstone Glass Pvt.Ltd. vs. DCIT Asst.Years – 2010-11, 2011-12 & 2012-13 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 to be made as soon as goods or services are delivered. A call is to be taken by the vendor, in consultation with its client and based on the business exigencies, as to what should be the terms on which payments for the supplies is to be made. It is a harsh commercial reality that immediate payments are more of exceptions rather than rule, and more so in a complex case in which the assessee is sole vendor and the very existence of the buyer is to process the semi-finished goods and sell it to the end buyers. Many factors, such normal business practices and the commercial exigencies, influence the fact of payment in respect of a commercial transaction. Whether a payment is made immediately by the AE or is made after six months cannot, therefore, be seen in isolation with what is the position is with respect to similar payments due from non-AEs. The whole exercise of ALP adjustments is to neutralize the impact of inter se relationships between the AEs and it is, therefore, not the delay simplictor in payment but delay in payment vis-à-vis similar situations with non-AEs (i.e. independent enterprises) which is of crucial consideration. Such a comparison cannot be based on the hypothesis as to what would have, in the wisdom of the TPO, happened if assessee was to have similar transactions with non-AEs. The comparison has to be based on real transactions of similar nature, if at all such transactions have taken place. When no such transactions have taken place, as is the case before us, there is obviously no occasion of any comparison. The stand taken by the learned Departmental Representative, therefore, is not only quite detached from commercial reality but also wholly untenable in law. In any case, what can be examined on the touchstone of arm's length principles is the commercial transaction itself, as a result of which the debit balance has come into existence, and the terms and conditions, including terms of payment, on which the said commercial transaction has been entered into. In this view of the matter, learned Departmental Representative's reliance on Aztec decision (supra) is of no assistance to the case of the revenue. The international transaction is exports of goods which has been benchmarked on TNMM basis and which is duly accepted by the TPO. In view of these discussions, and respectfully following the decision of the coordinate bench 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."
We see no reasons to take any other view of the matter than the view so taken by the co- ordinate bench. Respectfully following the same, we uphold the plea of the assessee and delete the impugned ALP adjustment of Rs. 37,67,667/-. That was the only issue agitated before us.
In the result, appeal is allowed in the terms indicated above.'
- 15 - IT(TP)A Nos.3533/Ahd/2015, 3631/Ahd/2015& IT(TP)A No.414/Ahd/2017 Gemstone Glass Pvt.Ltd. vs. DCIT Asst.Years – 2010-11, 2011-12 & 2012-13
Respectfully following the above cited decision of the Co-ordinate Bench on identical issue and facts in the case of the assessee, we are not inclined with the decision of the Ld. CIT (A). Accordingly, the appeal of the assessee is allowed.”
We find the identical issue has been dealt with and finalized by the Co-ordinate Bench. Respectfully following the aforesaid decision, we delete the ALP adjustment of Rs.15,74,438/- as made by the TPO towards the notional interest on receivables outstanding against sales made to AEs by the assessee.
In the result, ITA No.414/Ahd/2017 for AY 2012-13 is allowed for statistical purposes.
In the combined result, all the three appeals of the Assessee are allowed for statistical purposes. This Order pronounced in Open Court on 23/ 10 /2018
Sd/- Sd/- ( WASEEM AHMED ) ( Ms. MADHUMITA ROY ) ACCOUNTANT MEMBER JUDICIAL MEMBER Ahmedabad; Dated 23/ 10 /2018 ट�.सी.नायर, व.�न.स./T.C. NAIR, Sr. PS आदेश क� ��त�ल�प अ�े�षत/Copy of the Order forwarded to : 1. अपीलाथ� / The Appellant 2. ��यथ� / The Respondent. 3. संबं�धत आयकर आयु�त / Concerned CIT 4. आयकर आयु�त(अपील) / The CIT(A)-concerned �वभागीय ��त�न�ध, आयकर अपील�य अ�धकरण, अहमदाबाद / DR, ITAT, Ahmedabad 5. 6. गाड� फाईल / Guard file. आदेशानुसार/ BY ORDER, स�या�पत ��त //True Copy// उप/सहायक पंजीकार (Dy./Asstt.Registrar) आयकर अपील�य अ�धकरण, अहमदाबाद / ITAT, Ahmedabad