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2020 (1) TMI 404 - AT - Income TaxTP Adjustment - adjustment on account of AMP expenses - existence of international transaction of AMP-expenses - HELD THAT:- Scope and value of the International Transaction cannot be expanded beyond the reimbursement received under MDF agreement to cover the entire gamut of AMP expenditure incurred by the assessee during the year. Regarding the applicability of the Bright Line Text [(BLT) to determine the adjustment in the AMP expenditure has been rejected by the Hon’ble Jurisdictional High Court in the case of Sony Ericsson Mobile Communications India Pvt. Ltd. [2015 (3) TMI 580 - DELHI HIGH COURT] . In view of the judgment of the Hon’ble High Court, we hereby hold that no International Transaction can be presumed to be in existence and hence no addition is called for. Inter company receivables - In this case, admittedly, the taxpayer has provided benefit to its AE by way of advancement of interest free loan in the garb of delay receipt of receivables - DRP held that the TPO charged interest on receivables beyond 30 days and directed to re-compute the interest on receivables beyond the period mentioned in the respective invoices - HELD THAT:- Having gone through entire factum of the issues, we find that the approach of the DRP is not based on sound legal principles. The interest cannot be recomputed treating the transaction as international transaction in case of sale & purchases (receivables and payables) based on each invoice. The test to be applied is whether the compensation paid for the products and services is at arm’s length, but at the same time it cannot be ignored that the two entities have a business and a commercial relationship. The transfer pricing is a mechanism to undo an attempt to shift profits and correct any under or over payment in a controlled transaction by ascertaining the fair market price. This is done by computing the arm’s length price. The purpose is to ascertain whether the transfer price is the same price which would have been agreed and paid for by unrelated enterprises transacting with each other, if the price is determined by market forces. An entity which permits a longer credit period of realizing its sale proceeds would want to receive compensatory interest which is often inbuilt in the price of goods/services sold. Similarly, a customer who is paying the full price upfront would want a discount to account for the prompt payment that is made. The necessity and desirability of an adjustment for the same is advocated by the OECD and the UN guidelines on Transfer Pricing as well. What is required to be done is to examine, by going through entire transaction between the AE and the non AE parties regarding the payment pattern and to arrive at a decision as to whether there is any overt or covert scheme to transfer the profits by the way of delaying the payments to the assessee by the AE and thus getting benefited. This pattern unless established by the revenue, no adjustment on outstanding receivables can be made. Hence, the decision of the TPO of determining the 30 days as the credit period for computing interest on outstanding receivables, without appreciating the actual credit terms offered to the AEs cannot be accepted. Once, the pattern has been established the issue of the netting of outstanding receivables and payables arises. Since, no such pattern is established by the revenue, we hereby direct that the addition made be deleted. Adjustment on account of disallowance of mark-up charged by the AE on the sale of fixed assets - TPO made an adjustment to the international transaction of purchase of fixed assets and made an adjustment to the depreciation claimed on these assets on account of disallowance of the mark-up charged by the AE on sale price of fixed assets - HELD THAT:- Regarding the mark-up, the IPC division charged not more than 1% on the procurement cost of fixed asset by the IPC division from the third party and iMarket Korea Inc. charged a mark-up of 5% of un procurement cost of the fixed assets. The said transactions were benchmark by the assessee using TNMM through a combined transaction approach under the manufacturing segment in TP documentation. The TPO made adjustment to the ALP of the complete import transaction amounts from SEC Korea ignoring the fact that the imports by the assessee were from 4 divisions of SEC Korea, wherein, only IPC division had charged a mark-up of 1% and the imports from other 3 divisions of SEC Korea were made at cost. TPO reduced the ALP of the transaction of purchase of fixed assets by the assessee from its AEs from ₹ 2,149,246,567/- to ₹ 2,085,191,606/- (reduced by ₹ 64,054,961/-) and thereafter, the AO disallowed depreciation of ₹ 20,526,740/-. The argument that segregation of this transaction from other transaction while retaining TNMM for other transactions as a whole cannot be accepted as in determination of ALP this transaction can be tested separately. The ld. AR’s submissions about the applicability of case of Magneti Marelli Powertrain India Pvt. Ltd. Vs CIT [2016 (11) TMI 123 - DELHI HIGH COURT] has been considered. The mark-up of 1% to 5% has to be allowed as it cannot be said that the AE would be in a position to extend services to the assessee at free of cost. The observation that only one division of AE charging mark-up while others do not charge cannot be a reason to make any adjustments in the mark-up and consequently to the depreciation. Hence, the ground of appeal of the assessee on this issue is allowed. The deduction of the ALP of the transaction on purchase of fixed assets by the assessee is directed to be deleted. Appeal of the assessee is allowed.
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