TMI Blog2015 (6) TMI 175X X X X Extracts X X X X X X X X Extracts X X X X ..... irically demonstrates that the differential impact of working capital of the vis-a-vis its comparables has already been factored in the pricing/profitability of the assessee which is more than that working capital adjusted margin of the comparables. Hence, any further adjustment to the margins of the assessee on the pretext of outstanding receivables is unwarranted and wholly unjustified. Thus set aside this issue to the record of the Assessing Officer / Transfer Pricing Officer and direct to re–do the exercise of determination of arm's length price in the light of the above decisions of the Tribunal. - Decided in favour of assessee for statistical purposes - ITA no.7757/Mum./2012 with C.O. no. 282/Mum./2013 - - - Dated:- 29-5-2015 - SHRI VIJAYPAL RAO AND SHRI B.R. BASKARAN, JJ. For the Appellant : Shri N.K. Chand For the Respondent : Shri Arun Chhabra ORDER PER VIJAYPAL RAO, JUDICIAL MEMBER The present appeal by the Revenue and the cross objection by the assessee are directed against the impugned order dated 9th October 2012, passed by the Commissioner (Appeals) 15, Mumbai, for the assessment year 2007 08. 2. We first proceed to dispose off the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... LR whereas the assessee is aggrieved against the finding that the credit period extended to the A.E. is a separate international transaction subject to arm's length price as per the transfer pricing provisions. 5. We have considered the rival submissions as well as the relevant material on record. At the outset, we note that the issue of adopting the PLR of the public sector banks or LIBOR for the purpose of arm's length interest has been considered by this Tribunal in the series of decisions. The decision of the Tribunal, Ahmedabad Bench, in Micro Inc. Ltd. v/s ACIT, ITA no.1668/Ahd./2006, vide order dated 6th August 2013, has considered an identical issue in Para 17 and 18, which is reproduced below: 17. As is evident from the above discussions, the relationship between the assessee and its step down subsidiary Micro USA was simply that of a lender and a borrower. Not only the Micro USA was a significant part of the marketing apparatus of the assessee, and the assessee and the Micro USA had significant commercial relationship on that count, the assessee was a de facto and de jure promoter of the Micro USA. In the light of this undisputed position, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... banks gives secure advances, for making profits out of so lending the money, to its customers. Strictly -speaking, there is no parity between these two types of transactions. Secondly, we are dealing with a situation in which the two enterprises are mutually dependent for commercial reasons. While Micro USA is dependent on the assessee for its sheer existence, the assessee is dependent on Micro USA for its business. Let us assume for a while that Micro USA is unconnected with the assessee so far as its management, capital and control is concerned, but even then and without this management, capital and control relationship, the assessee, as an independent enterprises, will make sense in giving interest free advances to Micro USA so as to ensure its continued market access in USA and for other commercial reasons. This is quite unlike a typical transaction on LIBOR plus rate in which only motivation for giving advance is earning interest. Clearly, thus, LIBOR plus rate cannot be adopted in this situation for two fundamental reasons - (i) first, that it is not a simplictor financing transaction between the assessee and Micro USA, as it is a transaction of investing in a step down subsi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... no separate adjustment can be made on account of credit period provided by the assessee to the A.E. for realisation of sale proceeds. He further contended that the credit period provided to the A.E. is not a separate international transaction but it is a closely linked transaction with the sale transaction with the A.E., therefore, this transaction has to be considered along with the international transaction of the assessee in respect of sale with the A.E. In support of his contention, he has relied upon the following decision: i) Goldstar Jewellery Ltd v/s JCIT, ITA no.6570/Mum./012, order dated 14.1.2015; and ii) Kusum Healthcare Pvt. Ltd. v/s ACIT, ITA no.6814/Del./ 2014, order dated 31.3.2015. 9. The learned Counsel for the assessee has submitted that the Tribunal in Gold Star Jewellery Ltd. (supra), while dealing with an identical issue, has held that the transaction of allowing credit period to A.E. on realisation of sale proceeds is not an independent international transaction but it is a closely linked or continuous transaction along with the sale transaction to the A.E. Therefore, the credit period extended by the assessee to the A.E. cannot be examined indepe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , Mumbai Benches, in Goldstar Jewellery Ltd. (supra), vide Para 8, held as under: 8. We have considered the rival submissions and relevant material on record. The assessee has reported international transaction in its TP report regarding sale to its AE from manufacture of jewellery units and diamond trading unit. The TPO accepted the price charged by the assessee from AE at arm s length. However, the TPO has made the adjustment on account of notional interest for the excess period allowed by the assessee to AE for realization of dues. The TPO applied 18.816% per annum as arm s length on the over due amounts of AE and proposed adjustment of ₹ 2,49,95,139/-. The DRP though concurred with the view of the Assessing Officer/TPO on the issue of international transaction, however, the adjustment was reduced by applying the interest rate of 7% instead of 18.816% applied by the TPO. The first issue raised by the assessee is whether the aggregate period extended by the assessee to the AE which is more than the average credit period extended to the non-AE would constitute international transaction. We are of the view that after the insertion of explanation to sectio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ult of sale transaction. Therefore no question of credit period allowed to the AE for realization of sale proceeds without having sale to AE. The credit period extended to the AE cannot be treated as a transaction stand alone without considering the main transaction of sale. The sale price of the product or service determined between the parties is always influenced by the credit period allowed by the seller. 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 the terms and conditions of sale as well as the price are determined based on the totality of the transaction and not on individual and separate transaction. The approach of the TPO and DRP in analyzing the credit period allowed by the assessee to the AE without considering the main international transaction being sale to the AE will give distorted result by disregarding the price charged by the assessee from AE. Though extra period allowed for realization of sale proceeds from the AE is an international transaction, however, for the purpose of determining the ALP, the same has to be clubbed or aggregated with the sale transacti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... turn for the longer credit period granted to customers. Similarly in return for longer credit period granted, a firm should be willing to pay higher purchase price which adds to the cost of goods sold. Therefore, high levels accounts receivable and inventory tend to overstate the operating results while high levels of accounts payable tend to understate them thereby necessitating appropriate adjustment. The appropriate adjustments need to be considered to bring parity in the working capital investment of the assessee and the comparables rather than looking at the receivable independently. Such working capital adjustment takes into account the impact of outstanding receivables on the profitability. In this regard, the reliance is placed on the following rulings wherein the need to undertake working capital adjustment has been appreciated by the Hon ble Tribunals : Mercer Consulting India Pvt. Ltd. [TS-170-ITAT-2014(DEL)] Mentor Graphics (Noida) Private Limited [109 ITD 101] Egain communication (P) Ltd. [ITA No. 1685/PN/2007] Sony India (Pvt.) ltd. [2011-TII-43-ITAT-DEL-TP] Capgemini India Private Limited [TS-45-ITAT-2013(Mum)-TP] 8. In view of the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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