2019 (4) TMI 1934 - AT - Income Tax

TP Adjustment - upward Arms Length Price adjustments made on its Associated Enterprise sales to Associated Enterprise corporate guarantee and overdue receivables as also adoption of TNMM as most appropriate method as against CUP - HELD THAT - Adoption of TNM Method as MAM against CUP - We are of the opinion that assessee having not maintained segmental results in its books of accounts nor prepared segmental results ld. TPO was justified in rejecting CUP as the most appropriate method. As pointed out by the ld. DRP adopting CUP means there should be exact comparables and a comparability done with rates of minerals put out in a publication in our opinion would not suffice the requirement of a CUP analysis. The above work out has not been disputed by the Revenue. It may be true that assessee had not maintained segmental accounts and the above working can have therein some allocation of common expenses. Nevertheless ld. TPO considered assessee to have maintained no segmental data. When the trading was mainly in minerals in our opinion there was no reason why an aggregated result could not have been considered for the Arms Length Price analysis when TNM was considered as MAM. Even if we presume that average PLI worked out by the ld. TPO was correct and even if we substituted the negative PLI of 6.54% worked out by the ld. TPO with the negative PLI 3.39% of considered by the assessee for its iron ore/ millscale segment still its aggregate PLI was much more than the average PLI of 4.89% of the selected comparables. In our opinion in such circumstances there was no scope for making any Arms Length Price adjustment based on TNMM method on the trading results of the assessee. We have thus no hesitation in deleting the upward adjustment of B12, 66, 82, 138/- made by the ld. Assessing Officer on assessee s trading with its Associated Enterprises. Upward adjustment for corporate guarantee fees - whether corporate guarantee would be amenable to a Arms Length Price adjustment when no fee is charged by assessee on an Associated Enterprise which was its wholly owned subsidiary stands answered by Kolkata Bench of the Tribunal in the case of EIH Ltd 2018 (1) TMI 1372 - ITAT KOLKATA - Following the decision of Kolkata Bench of the Tribunal in the case of EIH Ltd (supra) we are of the opinion that there was no scope for making any adjustment for corporate guarantee fees on the corporate guarantee given by the assessee to its Associated Enterprise. Upward addition on corporate guarantee fees stands deleted. Arms Length Price adjustment imputing interest on overdue receivables - Once there is complete uniformity followed by assessee in not charging any interest from any party whether Associated Enterprise or Non Associated Enterprises in our opinion there could not be any selective imputing of notional interest. Submission of the assessee that out of total sales of about of B261 Crores to its Associated Enterprise B100 Crores was received well within the due date and small delays were only in the balance of B161 Crores has not been disputed by the ld. Departmental Representative. Assessee had not offered any discount to any party for payment of bills before the expiry of the credit period. Hence it is only a natural corollary that it did not charge any interest for delays also. Where a good part of the dues were collected earlier to the due date in our opinion the instances where there were delays could not be selectively elected for a levy of charge of notional interest. Such an approach if accepted will completely overlook commercial realties. That apart once TNMM method is considered as the most appropriate method as held by Ahmedabad Bench of the Tribunal in the cases of Bisazza India (P) Ltd 2018 (8) TMI 1834 - ITAT AHMEDABAD the net margin worked out there under could take care of all such notional interest cost wherever it could be imputed and there could be no Arms Length Price adjustment for any overdue receivables. We therefore delete Arms Length Price adjustment made on overdue receivables.

Summary

Issues Involved:
1. Adoption of TNM Method as the Most Appropriate Method (MAM) against CUP.
2. Upward adjustment for corporate guarantee fees.
3. Arms Length Price (ALP) adjustment imputing interest on overdue receivables.

Issue-wise Detailed Analysis:

1. Adoption of TNM Method as the Most Appropriate Method (MAM) against CUP:
The Tribunal upheld the rejection of the Comparable Uncontrolled Pricing (CUP) method by the Transfer Pricing Officer (TPO) due to the lack of segmental results in the assessee's books. The TPO adopted the Transactional Net Margin Method (TNMM) and identified five comparables with an average Profit Level Indicator (PLI) of 4.89%. The Tribunal noted that the comparables selected by the TPO were engaged in varied businesses, including logistics and coal trading, and not solely in iron ore/millscale trading. The Tribunal found that the TPO's comparison of the segmented PLI of the assessee for iron ore/millscale with the aggregate PLI of the comparables was incorrect. The Tribunal held that if all segments traded by the assessee were aggregated, the PLI would be 8.33%, higher than the comparables' average PLI of 4.89%. Thus, no ALP adjustment was warranted based on TNMM, and the upward adjustment of Rs. 12,66,82,138/- was deleted.

2. Upward Adjustment for Corporate Guarantee Fees:
The Tribunal referred to the decision of the Kolkata Bench in the case of EIH Ltd., which held that providing a corporate guarantee by a parent company to its wholly-owned subsidiary without charging any fee does not constitute an international transaction under Section 92B(1) of the Income Tax Act. The Tribunal noted that the assessee had not charged any fee for the corporate guarantee provided to its subsidiary, and the guarantee did not have any bearing on the profits, income, losses, or assets of the assessee. Following the precedent, the Tribunal concluded that no ALP adjustment was required for the corporate guarantee fees, and the upward adjustment of Rs. 2,02,75,200/- was deleted.

3. Arms Length Price (ALP) Adjustment Imputing Interest on Overdue Receivables:
The Tribunal observed that the assessee did not charge interest on delayed receivables from both Associated Enterprises (AEs) and Non-AEs. The Tribunal emphasized that selective imputing of notional interest on overdue receivables from AEs, while ignoring the same for Non-AEs, was not justified. The Tribunal noted that a substantial part of the dues from AEs was received within the credit period, and only a small portion was delayed. The Tribunal also highlighted that once TNMM was adopted as the MAM, the net margin under TNMM would subsume any notional interest cost, eliminating the need for a separate ALP adjustment for overdue receivables. Consequently, the Tribunal deleted the ALP adjustment of Rs. 6,18,43,887/- made on overdue receivables.

Conclusion:
The Tribunal allowed the appeal of the assessee partly, deleting the upward ALP adjustments made for the corporate guarantee fees and overdue receivables, and rejecting the segmentation approach adopted by the TPO for the iron ore/millscale trading segment. The Tribunal emphasized the importance of considering the aggregate results for ALP analysis under TNMM and upheld the principle that providing a corporate guarantee without charging a fee does not constitute an international transaction requiring ALP adjustment.