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Income Tax Appellate Tribunal, DELHI BENCHES: I-2: NEW DELHI
Before: SHRI R.S. SYAL & SHRI K. NARASIMHA CHARY
Assessee By : Shri Manoneet Dalal, Advocate Department By : Shri Sanjay Yadav, Sr. DR Date of Hearing : 02.11.2017 Date of Pronouncement : 07 .11.2017 ORDER PER R.S. SYAL, VP:
These two appeals by the assessee relate to the A.Ys. 2009-10 and 2010-11. Some common issues are involved in these appeals. We are,
And 4275/Del/2016 therefore, proceeding to dispose them off by this consolidated order for the sake of convenience.
Assessment Year 2009-10 2. The first assail is to the confirmation of addition on account of transfer pricing adjustment towards interest on receivables.
Succinctly, the facts of the case are that the assessee is engaged in manufacturing, trading, marketing and also providing after-sales service for vehicles pollution monitoring equipments, instruction and test systems for engines/vehicles etc. The assessee reported ten international transactions in Form No.3CEB. The Assessing Officer (AO) referred the matter of determination of the arm’s length price (ALP) of these international transactions to the Transfer Pricing Officer (TPO). No adverse inference was drawn in respect of the international transactions reported by the assessee. However, it was noticed from the examination of the assessee’s balance sheet that there were certain receivables from the Associated Enterprises (AEs) on account of invoices raised by the assessee, which were not received within a reasonable period.
And 4275/Del/2016 Considering Explanation 1(c) to section 92B inserted by the Finance Act, 2002 w.r.e.f. 01.04.2002, the TPO held that: ‘any other debt arising during the course of business’ is also an international transaction. After considering the assessee’s objections and arguments, it was opined that the assessee provided benefit to its AEs by way of advancing interest free loans in the garb of delayed receipt of receivables. Making a prudent estimate of 30 days for payment of receivables, the TPO held that any delay beyond such period was required to suffer transfer pricing adjustment. He applied Comparable Uncontrolled Price (CUP) method for determining the ALP of the international transaction of `Interest on receivables’. Considering the Prime lending rate of RBI to which 500 basis points were added, the TPO treated interest rate of 17.22% as benchmark. That is how, he computed transfer pricing adjustment of Rs.56,53,235/- on account of delayed receipt of amounts due from the AEs. The assessee challenged the addition before the ld. CIT(A) by contending that credit period allowed to the AEs was 180 days and further the benefit of netting of interest on receivables and payables was required to be given. The ld. CIT(A) concurred with the submissions put 3
And 4275/Del/2016 forth on behalf of the assessee and held that the credit period of 180 days should be allowed for computing the amount on which interest should be calculated. As regards the netting of interest payable with interest receivable, he held that the benefit of netting should be allowed for transactions with the same party. This resulted into reduction of addition to Rs.5,08,487/-. The assessee is aggrieved against the sustenance of such addition.
We have heard the rival submissions and perused the relevant material on record. The first question is whether `interest on receivables’ is an international transaction? At this stage, it would be apposite to note that the Finance Act, 2012 has inserted Explanation to section 92B with retrospective effect from 1.4.2002. Clause (i) of this Explanation, which is otherwise also for removal of doubts, gives meaning to the expression ‘international transaction’ in an inclusive manner. Sub-clause (c) of clause (i) of this Explanation, which is relevant for our purpose, provides as under:-
` Explanation.—For the removal of doubts, it is hereby clarified that—
And 4275/Del/2016 (i) the expression "international transaction" shall include— (a) ………… (b) ……….. (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;….’
On going through the relevant part of the Explanation inserted with retrospective effect from 1.4.2002, thereby also covering the assessment year under consideration, there remains no doubt that apart from any long-term or short-term lending or borrowing etc. or any type of advance payments or deferred payments, ‘any other debt arising during the course of business’ has also been expressly recognized as an international transaction. That being so, the payment/non-payment of interest or receipt/non-receipt of interest on the loans accepted or allowed in the circumstances as mentioned in this clause of the Explanation, also become international transactions, requiring determination of their ALP. If payment of interest is excessive or there is no or low receipt of interest, then such interest expense/income need to be brought to its ALP. The expression ‘debt arising during the course of 5
And 4275/Del/2016 business’ in common parlance encompasses, inter alia, any trading debt arising from the sale or purchase of goods or services rendered in the course of carrying on the business. Once any debt arising during the course of business has been ordained by the legislature as an international transaction, it is, but, natural that if there is any delay in the realization of such debts arising during the course of business, the same is liable to be visited with the transfer pricing adjustment on account of interest income short charged or uncharged. Under such circumstances, the contention taken by the assessee before the authorities below that interest on receivables is not an international transaction, turns out to be bereft of any force.
The Hon’ble Bombay High Court in the case of CIT vs. Patni Computer Systems Ltd., (2013) 215 Taxmann 108 (Bom.) dealt, inter alia, with the following question of law:-
“(c) Whether on the facts and circumstances of the case and in law, the Tribunal did not err in holding that the loss suffered by the assessee by allowing excess period of credit to the associated enterprises without charging an interest during such And 4275/Del/2016 credit period would not amount to international transaction whereas section 92B(1) of the Income-tax Act, 1961 refers to any other transaction having a bearing on the profits, income, losses or assets of such enterprises?”
While answering the above question, the Hon’ble High Court noticed that an amendment to section 92B has been carried out by the Finance Act, 2012 with retrospective effect from 1.4.2002. Setting aside the view taken by the Tribunal, the Hon’ble High Court restored this issue to the file of the Tribunal for fresh decision in the light of the legislative amendment.
The foregoing discussion makes it vivid that non-charging or under- charging of interest on the excess period of credit allowed to the AE for the realization of invoices amounts to an international transaction and the ALP of such an international transaction is required to be determined. Similar view has been taken by the Delhi tribunal in Ameriprise India Pvt. Ltd. vs. ACIT (2015) 44 CCH 0504 DelTrib and Techbooks International Pvt. Ltd. VS. DCIT (2015) 44 CCH 0295 DelTrib. We, therefore, hold that interest on receivables is an And 4275/Del/2016 international transaction. In fact, the ld. AR was fair enough not to assail that interest on receivables is an international transaction.
On merits, the ld. AR contended that the ld. CIT(A) was not right in allowing netting of interest payable with interest receivable only for the same party. It was submitted that aggregate of the amounts receivable and payable from all the AEs should have been considered for the purpose of computing the amount of transfer pricing addition, if any, and not on transaction by transaction basis.
Section 92(1) of the Income-tax Act, 1961 (hereinafter also called `the Act’) provides that any income arising from an international transaction shall be computed having regard to the arm’s length price. Computation of the ALP has been dealt with in section 92C. Relevant part of sub-section (1) of section 92C reads as under :-
`(1) The arm's length price in relation to an international transaction shall be determined by any of the following methods, being the most appropriate method, having regard to the nature of transaction or class of transaction or class of associated persons or functions performed by such persons or such other relevant factors as the Board may prescribe, namely …..’
And 4275/Del/2016 11. It can be seen from the prescription of sub-section (1) to section 92C of the Act that the ALP is required to be determined having regard, inter alia, to ‘nature of transaction or class of transaction.’ The term ‘transaction’ has been defined in Rule 10A(d) of the Income-tax Rules, 1962 to include a number of ‘closely linked transactions.’ When we consider the language of section 92C(1) in juxtaposition to rule 10A(d), it becomes apparent that the international transactions of the same nature or the same class are to be aggregated for the purpose of determining their ALP as a single transaction. Such `closely linked transactions’ cannot be benchmarked independent of each other. The Hon'ble Delhi High Court in Sony Ericsson Mobile Communications India Pvt Ltd. vs. CIT (2015) 374 ITR 118 (Del) has also held that bunching of interconnected and continuous transactions is permissible provided such transactions can be evaluated and adequately compared on aggregate basis. This proposition can be understood with the help of a simple illustration. If an assessee makes several transactions of sale of a particular product during a year to its two or three AEs, such several transactions of sale constitute one international transaction for the 9
And 4275/Del/2016 purpose of determining the ALP. One cannot contemplate benchmarking each and every sale transaction separately. Such sale transactions have to be necessarily aggregated for determining their ALP, being, closely linked transactions, which are of the same class and nature.
Adverting to the facts of the instant case, we find that the ld. CIT(A) has extracted the position on page 9 of his order, as under:-
Name of the AE Interest on Interest on Net receivables payables Interest AVL List Graz 9,41,224 4,32,737 5,08,487 AVL Fahrzeugdiagnose 1,465,217 GmbH AVL Zollner Marine GmbH 30,534 Net Adjustment 19,28,488 5,08,487
It is manifest that he allowed the benefit of netting of interest payable of Rs. 4,32,737 with interest receivable of Rs.9,41,224 from the same party only, viz. AVL List Graz and did not extend such benefit in respect of interest of Rs.14,65,217 payable to AVL Fahrzeugdiagnose GmbH and Rs.30,534 to AVL Zollner Marine GmbH. His point of view is that the benefit of netting of interest payable should be confined only to AVL List Graz and should not be extended to AVL Fahrzeugdiagnose 10
And 4275/Del/2016 GmbH and AVL Zollner Marine GmbH, being other AEs in which there are only payables and no receivables. In our considered opinion, this proposition canvassed by the ld. first appellate authority cannot be countenanced. It is obvious that the assessee had certain amounts receivable from and payable to AVL List Graz, on which no interest was either charged or paid. If the benchmark rate of interest of 17.22% as considered by the TPO had been applied, the assessee would have received interest of Rs.9,41,224 and paid interest of Rs.4,32,737 from this party. The ld. CIT(A) has allowed set off of interest on payables of AVL List Graz with interest on receivables of AVL List Graz, thereby, computing addition of net interest on receivables at Rs.5,08,487/-. Such addition was computed notwithstanding the fact that the assessee had certain trade payables to the other AEs, namely, AVL Fahrzeugdiagnose GmbH and AVL Zollner Marine GmbH as well, on which again no interest was paid. Interest on such payables at the rate of 17.22% which, if paid, would have been Rs. 14,65,217 and Rs.30,554. The assessee, admittedly, did not either charge any interest on receivables or pay any interest on payables from/to all the three AEs. Allowing set off of 11
And 4275/Del/2016 interest on payables with interest on receivables to AVL List Graz has brought on fore the proposition that the assessee should have charged net interest on receivables from this party at Rs.5,08,487/-. This position in totality is an oversight of the fact that the assessee, in addition to AVL List Graz had also certain amounts payable in the same manner to the other two AEs. Even going by the ld. CIT(A)’s version, there would have been no transfer pricing addition if the assessee had received the amount from one AE and paid to other AE, which would have been only an internal arrangement between the AEs. Since the balances with these three AEs are, admittedly, on account of trading transactions, which belong to the same ‘class of transaction’, we fail to comprehend as to why transactions with AVL Fahrzeugdiagnose GmbH and AVL Zollner Marine GmbH should not be aggregated with transactions with AVL List Graz. When the ld. CIT(A) was satisfied that interest on payables to AVL List Graz called for set off against interest on receivables from the same party for the purpose of determining the amount of transfer pricing adjustment, which position has also been accepted by the Department, then he ought to have considered similar transactions with AVL 12
And 4275/Del/2016 Fahrzeugdiagnose GmbH and AVL Zollner Marine GmbH as also part of the same international transaction. We, therefore, set aside the impugned order on this score and hold that the international transactions of trade receivables and trade payables with all the three AEs should be aggregated and processed as a single transaction of interest on receivables/payables. If the position is viewed in such a manner, there remains no amount of interest receivable from the AE liable to be added to the assessee’s total income as a transfer pricing adjustment. This issue is, therefore, decided in the assessee’s favour.
The only other issue which survives in the present appeal is against the confirmation of disallowance u/s 14A of the Act amounting to Rs.52,449/-.
Briefly stated, the facts of this ground are that the assessee did not offer any disallowance u/s 14A of the Act. The Assessing Officer applied the provisions of Rule 8D and computed disallowance u/s 14A to the tune of Rs.52,449/-, being half percent of the average value of investments. The ld. CIT(A) echoed the addition.
And 4275/Del/2016 16. Having heard the rival submissions and perused the relevant material on record, it is observed as an admitted position that the assessee did not earn any exempt income during the year and, still, the disallowance has been made u/s 14A. The Hon'ble Delhi High Court in Cheminvest Ltd. vs. CIT (2015) 378 ITR 33 (Del), has held that if there is no exempt income, there can be no question of making any disallowance u/s 14A of the Act. Similar view has been taken by the Hon'ble jurisdictional High Court in CIT vs. Holcim India P. Ltd. (2014) 90CCH 081-Del-HC. In view of these binding precedents mandating for not making any disallowance u/s 14A of the Act in the absence of any exempt income, which are squarely applicable to the facts of the instant case, we overturn the view taken by the ld. CIT(A) and order for the deletion of disallowance sustained u/s 14A of the Act.
In the result, the appeal is partly allowed.
Assessment Year 2010-11
The first issue pressed in the instant appeal is transfer pricing adjustment on account of interest on receivables from the AE.
And 4275/Del/2016 19. The factual matrix of the case is that the assessee continued to be engaged in assembling of diesel smoke meters, petrol exhaust gas analysers, computerized state of the art pollution monitoring systems for diesel and petrol vehicles and other engine diagnostic equipments. The assessee filed return declaring 8 international transactions in Form No.3CEB. The Assessing Officer made reference to the TPO for determining the ALP of the international transactions. The TPO treated the declared international transactions at ALP. However, on examination of the balance sheet, it was revealed that there were certain trade receivables representing payment for invoices raised, but, not received within the stipulated time. For this year, the Assessing Officer himself allowed credit period of 180 days, unlike 30 days allowed by him for the preceding year. The amount of international transaction of interest on receivables was worked out by allowing benefit of netting of interest receivable with interest payable. Interest rate of 14.88% was applied as a benchmark. Such rate was determined by considering the interest rate on BB Grade Corporate Bonds with duration of five years or more. That is how, the transfer pricing adjustment of Rs.6,96,516/- 15
And 4275/Del/2016 was proposed, which came to be made in the final assessment order. The ld. CIT(A) did not allow any relief. The assessee is aggrieved against the sustenance of this addition.
We have heard both the sides and perused the relevant material on record. While dealing with the appeal of the assessee for the immediately preceding year, we have held above that interest on receivables is an international transaction; and netting of interest payable with interest receivables should be allowed on aggregate basis. Admittedly, there is no issue of setting off of interest receivable with interest payable for this year as the TPO has himself allowed the same and, further, the benefit of 180 days has also been allowed.
What remains is the determination of the ALP of the international transaction of `Interest on receivables’ from its AE. This has two ingredients, viz., the amount on which interest should be charged and the arm’s length rate at which the interest should be charged. In so far as the first aspect is concerned, we find that the TPO has taken correct credit period and accordingly computed the base amount in excess of the And 4275/Del/2016 stipulated days, which position has not been disputed by the ld. AR as well. Thus, there is no dispute on the amount due on which interest is receivable.
Now we turn to the second aspect of arm’s length rate of interest. The TPO applied CUP as the most appropriate method for determining the ALP of the transaction of interest on receivables. Mechanism for determining the ALP under this method has been set out in rule 10B(1)(a) as under : -
“(a) comparable uncontrolled price method, by which,— (i) the price charged or paid for property transferred or services provided in a comparable uncontrolled transaction, or a number of such transactions, is identified ; (ii) such price is adjusted to account for differences, if any, between the international transaction and the comparable uncontrolled transactions or between the enterprises entering into such transactions, which could materially affect the price in the open market ; (iii) the adjusted price arrived at under sub-clause (ii) is taken to be an arm’s length price in respect of the property transferred or services provided in the international transaction ;”
Sub-clause (i) of rule 10B(1)(a) requires identification of the price charged or paid in a comparable uncontrolled transaction. Such price is 17
And 4275/Del/2016 adjusted under sub-clause (ii) on account of difference between the international transaction and comparable uncontrolled transaction. The adjusted price becomes ALP under sub-clause (iii) in respect of the services provided by the assessee in the international transaction. Ergo, it is evident from the mandate of Rule 10B(1)(a) above that the ALP under this method can be determined only by making a comparison of the international transaction with similar uncontrolled transaction(s).
To be more specific, sub-clause (i) of rule 10B(1)(a) provides that the price charged or paid for property transferred etc. is to be compared with the price charged or paid for a comparable uncontrolled transaction. The essence of the CUP method, or for that purpose all the methods, is that the uncontrolled transaction must be comparable with the international transaction. No transfer pricing analysis can be done by considering a non comparable transaction. The international transaction under consideration is `interest on trade receivables’. It can be compared only with interest on trade receivables in uncontrolled transactions.
And 4275/Del/2016 25. The TPO wrote a letter dated 26.11.2013 to the assessee calculating the amount due beyond the stipulated period and the number of days for which such delay was caused. A copy of such letter is available on pages 170 and 171 of the paper book. It can be seen from this letter that the maximum delay is of 94 days with the lowest delay of 8 days. As against that, the TPO has considered arm’s length rate of interest at 14.88%, which is the average yield rate of BB grade bonds for a period of five years or more. There can be no question of comparing interest on trade receivables with interest on other capital bonds having a particular maturity period. Making such a comparison, as has been instantly done, leads to an inevitable conclusion that the international transaction of interest on trade receivables itself has been recharacterized as a transaction of interest on bonds, which is not permissible under Chapter X of the Act dealing with the transfer pricing provisions. The Hon’ble Delhi High Court in CIT VS. EKL Appliances Ltd. (2012) 345 ITR 241 (Delhi) has held that the authorities should not disregard the actual transaction or substitute other transactions for them. Examination of a controlled transaction should ordinarily be based on the transaction 19
And 4275/Del/2016 as it has been actually undertaken. Two exceptions to the aforesaid principle have been carved out, viz., (i) where the economic substance of a transaction differs from its form and (ii) where the form and substance of the transaction are the same but arrangements made in relation to the transaction, viewed in their totality, differ from those which would have been adopted by independent enterprises behaving in a commercially rational manner. It is not the case of the Revenue that the assessee’s case falls in any of the above two exceptions. As such, we cannot permit to recharacterize the international transaction of `interest on trade receivables’ with `interest on bonds with a fixed maturity period’. As such, the application of interest rate of 14.88 %, being the interest rate on bonds with a maturity period of 5 years or more, as a benchmark is disapproved and overturned.
Sub-clause (i) of rule 10B(1)(a) further provides for making a comparison with the price charged or paid `in a comparable uncontrolled transaction’. Thus it is discernible that what is to be compared under this method is the price charged or paid from a comparable uncontrolled
And 4275/Del/2016 transaction. The word 'comparable' may encompass internal comparable as well as external comparable. Where a potential comparable is available in the shape of an uncontrolled transaction of the same assessee, it is likely to have higher degree of comparability vis-a-vis the comparables identified amongst the uncontrolled transactions of third parties. The underlying object behind the computation of the ALP of an international transaction is to find out the profit which an enterprise would have earned if the transaction had been with some third party instead of related party. If data is available showing price charged or paid by the enterprise itself from a third party, it is advisable to have recourse to an internally comparable uncontrolled transaction. The reason is patent that the various factors having bearing on the quality of output, assets employed, input cost etc. continue to remain, by and large, same in case of an internal comparable. The effect of difference due to such inherent factors on comparison made with the third parties, gets neutralized when comparison is made with internal comparable. Ex consequenti, it follows that an internal comparable uncontrolled transaction is more noteworthy vis-a-vis its counterpart i.e. external 21
And 4275/Del/2016 comparable. However, the caveat is that the internal transaction sought to be compared with should, in fact, be comparable in a proper manner. Various Benches of the Tribunal have repeatedly held that internal comparables should be preferred over external comparables, if these are actually comparables. The Mumbai bench of the tribunal in Gharda Chemicals Ltd. vs. DCIT (2010) 130 TTJ (Mumbai) 556 has held that internal comparables should be preferred over the external comparables. Similar view has been taken by the Pune Bench of the Tribunal in ACIT vs. MSS India (P) Ltd. (2009) 123 TTJ Pune 657.
In context of an international transaction of interest on receivables, a suitable comparable uncontrolled transaction can be amount received/ receivable by the enterprise from invoices raised on unrelated parties. Reverting to the facts of the instant case, we find that the TPO has not brought on record any externally comparable uncontrolled transaction, except for interest on bonds, which we have held above to be not comparable transaction. In view of the foregoing discussion, we have no hesitation in holding that internal CUP is more
And 4275/Del/2016 reliable and authentic and hence on a better footing than the external CUP.
The ld. AR invited our attention towards certain internally comparable uncontrolled transactions listed on page 44 of the paper book in which period of delay ranges from 184 to 797 days. It was submitted that the assessee did not charge any interest on such delayed receipts even from non-AEs. The same being internal CUP, the ld. AR urged that the ALP of the international transaction of interest on receivables should also be taken as nil. In fact, this was the submission made before the ld. CIT(A) as well, which starts from page 23 and goes on up to page 44 of the paper book. As against this, the ld. CIT(A) has recorded in para 6.3 of the impugned order that: ‘the appellant has not brought on record any such uncontrolled transaction so as to show that no interest has been charged by it for similar delays nor any exact comparability has been established.’ It is, thus, evident that ld. CIT(A) did not take into consideration the cases cited by the assessee of internally comparable uncontrolled transactions in which no interest was And 4275/Del/2016 charged. Once, there are internal comparable transactions, the same need to be considered and preferred for benchmarking the international transaction.
However, we find from the assessee’s Profit & Loss Account, whose copy is placed on page 142 of the paper book, that there is an item of ‘Other income’ with the value of Rs.22,33,35,416/-. Break up of this amount is available in Schedule 9, which is available on page 148 of the paper book. The last item of this Schedule is ‘Interest.’ In addition to interest from bank, the assessee also declared to have earned interest from ‘Others’ to the tune of Rs.37,95,288/-. This shows that the assessee did earn interest from ‘Others.’ It is not clearly borne out as to whether such interest was received on account of trade receivables from unrelated parties or on some other account. Under such circumstances, we are of the considered opinion that interest of justice would meet adequately if the impugned order is set aside and the matter is restored to the file of the Assessing Officer/TPO for benchmarking the international transaction of ‘Interest on receivables’ on the basis of the internal CUP
And 4275/Del/2016 as discussed above and thereafter, to determine the amount of transfer pricing adjustment, if any. Needless to say, the assessee will be allowed a reasonable opportunity of hearing.
In the result, the appeal is allowed for statistical purposes.
The order pronounced in the open court on 07.11.2017.