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2016 (2) TMI 699 - ITAT MUMBAI

2016 (2) TMI 699 - ITAT MUMBAI - TMI - Notional adjustment of interest on delayed payment from Associated Enterprise - Held that:- Transaction relating to extended credit period provided to A.E. is required to be aggregated with other international transactions for computing ALP and cannot be done separately. For doing so rate of interest has to be on the basis of LIBOR+ basis point and not domestic PLR. As in the present case, TPO himself has worked out LIBOR rate of 2.69% same can be considere .....

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wance of interest expenditure attributable to interest free advances given to its AE. It is also a fact on record that before DRP, the assessee has not challenged the disallowance of the aforesaid interest expenditure. This fact clearly proves that the assessee had accepted the disallowance of interest expenditure of ₹ 94,44,829/- and that being the clear factual position, in our view, the assessee cannot raise this issue. Accordingly, we decline to entertain this ground raised by the asse .....

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ccepted the decision of the AO in the draft assessment proceedings, wherein he excluded the interest income while computing the deduction u/s 10AA of the Act. The final assessment order passed by the AO is only to give effect to the direction of DRP, wherein this issue was not raised by the assessee. As the DRP has not decided this issue and the final assessment order is only for implementing the direction of the DRP in terms of section 144C(13) of the Act, the assessee cannot raise this issue a .....

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llowance made by A.O. would enhance the profit of the assessee thereby making him eligible to claim deduction u/s 10AA on such enhanced profit is a purely legal issue. Therefore, assessee’s claim of deduction u/s 10AA has to be examined by keeping in view principle laid down in judicial precedents. However, considering the fact that this issue was neither raised before the AO nor before the DRP and has been raised for the first time before this forum, we deem it proper to remit the issue to the .....

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the assessment year 2009-10, pursuant to the direction of Dispute Resolution Panel (DRP). 2. The assessee has raised six grounds in the appeal. Grounds No.5 and 6 being general in nature do not require any specific adjudication. 3. At the time of hearing, the learned counsel appearing for the assessee expressed her intention of not pressing ground no.3, hence Ground No.3 is dismissed as not pressed. 4. This leaves us with Ground no.1, 2 and 4. Off-course, assessee has raised one more additional .....

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re and sale of studded jewellery. For this purpose assessee has set up a Unit in SEEPZ, Andheri (E), Mumbai. To briefly describe business profile of the assessee, it is a part of Dynamics Jewellery Group which has it business in India as well as abroad but are catering to the market in USA. Jewel America INC is a premium marketer, manufacturer and distributor of fine jewellery, serving all major retailers in USA. Looking at the market demand Jewel America INC procures jewellery from Dynamics Jew .....

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tions Amount in Rs. Method by assessee 1 Sale of studded jewellery to Jewel America Inc, USA 159,10,66,810 TNMM 2 Sale of studded jewellery to Ansari H K Co.Ltd, Hongkong 85,975 TNMM 3 Purchase of cut and polished diamonds, etc, from jewel America Inc. USA 44,13,864 TNMM 4 Purchase of colour stones from Ansari H K Co.Ltd, Hongkong. 51,60,114 TNMM 5 Purchase of cut and polished diamonds, etc, from Ansari H K Co.Ltd, Hongkong 22,56,310 TNMM 6 Purchase of gold from Ansari H K Co.Ltd, Hongkong 17,84 .....

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at 8.90 percent, the price charged for international transactions with AE were found to be within Arm s Length as per transfer pricing study. To find out the correctness of assessee s claim , the TPO undertook a search process independently and short listed 29 comparable companies with average arithmetic mean at 5.75% on cost. He observed that if effect of foreign exchange fluctuation is considered then margin would be at 4.18% on cost. Whereas, assessee s margin including foreign exchange fluc .....

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eived outside the credit period mentioned in the invoices. H, therefore, called upon assessee to explain why interest foregone on delayed export receipt should not be adjusted against the transactions with A.E. He also called upon the assessee to submit the invoice wise detailed working of export receipts and interest chargeable for such delay. After examining the data furnished by the assessee it was noticed by the TPO that while in case of AE there is a delay of even more than one year in real .....

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made from October 2008, the realisation is not within the normal credit period. The assessee submitted that no interest is charged for this delay due to: i. Slow down in world economy, more particularly US market to which the assessee company caters to. This factor on standalone basis resulted into delay in realisation of debt in the hands of the assessee company. ii. Rejections by the end customer of the AE resulting in rectifications and consequently, delay in acceptance of the goods by the AE .....

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terest on delayed dates from the associated enterprises in the absence of any contractual obligation. In this respect, the assessee relied on the decisions of ITAT Mumbai in the case of Nimbus Communication Ltd and ITAT Pune in the case of Patni Computer Systems Limited. vi. There are delays in the realisation of debt from non-associated enterprises also and no interest charged by this company to them. Therefore there is no difference in terms with associated enterprises and non-associated enter .....

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010] 42 SOT 15 (Mum) (URO). 7. The TPO after considering the submissions of the assessee however did not find merit in the pleas. He observed, the assessee has extended credit facilities to its AE. Though, lending or borrowing is not one of the activity of the business, however, assessee has not charged any interest or compensation for providing credit facilities provided by one party to another. He observed, by not charging interest for the extended period. assessee has passed on a tangible ben .....

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hat account assessee deserves to get some profit and also for the risk he is bearing on account of fact that AE is not in financially good position indicating a poor credit worthiness. For these reasons, he added further amount of 3% per annum to the average interest rate on secured loans obtained by the assessee during the previous year. Thus, the TPO adopting interest rate of 12.30% per annum on the delayed realisation of debts from the AE worked out the notional interest at ₹ 18,89,938/ .....

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ned assessment order. 8. The ld. AR reiterated the same submissions as made before the departmental authorities and further submitted, the TPO having found price charged by assessee for the transaction with A.E. within Arm s length, no separate adjustment on account of delay in realisation of export receivables should have been made. She submitted, there is no dispute to the fact that the TPO has accepted the margin reported by the assessee from export made to Jewel America INC which is much hig .....

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rate in his order. She submitted, as the margin of the assessee at 8.90% and 8.94% is much higher than the margin of 5.75% and 4.18% of the comparables selected by the TPO himself, such higher margin shown by the assessee takes care of the adjustment to be made on account of delayed credit facilities. She submitted, the price charged by the assessee to its AEs is taking into consideration such credit facilities. She, therefore, submitted that no separate adjustment on account of delayed realisa .....

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ot apply as transaction between the assessee and AE is international transaction, hence, international lending rate would apply. She submitted, as the TPO in the course of proceedings has himself worked out LIBOR rate of 2.69% that should be adopted as the rate of interest. She submitted, even if LIBOR rate of 2.69% is applied to the margin shown by the assessee it would still be higher than the margin of comparable companies requiring no further adjustment. 9. The ld. DR, on the other hand, sub .....

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orking capital on account of credit facility is already subsumed in the price. Hence, retrofitting of such adjustment to the price charged is not permissible. However, the ld.DR agreed that interest can be charged at LIBOR rate. He also relied upon the decision of ITAT, Pune Bench in the case of IGATE Computer System Ltd V/s Adl.CIT in ITA no.2504/PN/2012 (AY-2005-06) dated 27.5.2015. 10. We have considered the submissions of the parties and perused the materials on record as well as the decisio .....

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held in a number of judicial precedents. Therefore, we have to proceed on the basis that extended credit facility to AE is an international transaction. 11. Having held so, we have to examine whether the adjustment to ALP made by the TPO and upheld by the DRP on account of such extended credit facilities is valid or not. As stated earlier, the margin shown by the assessee of international transaction with its AE is at 13.67% on cost and at entity level is 8.9% on cost. Even including foreign ex .....

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stment can be made on account of credit facility as element of interest for delayed payment is subsumed in the higher margin charged by the assessee. Per contra, it is the contention of the department that assessee has not proved through documentation that interest component for delayed payment has been factored in, in the price charged. After analysing the facts on record, we find that assessee has provided extended credit facilities as far as realisation of export receivables to both A.E and n .....

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be examined whether higher margin charged to A.E. takes care of the extended credit period for realisation of export sale proceeds. In the present case, undisputedly, the margin of A.E. transaction is relatively higher than the margin of comparables brought on record both by assessee and the TPO. That being the case, it is all the more necessary to examine assessee s claim that cost involved due to delay in realisation of export receivables from A.E. was factored in while fixing the price of in .....

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ident from material on record as well as order of the Transfer Pricing Officer, assessee has benchmarked the price charged for international transactions with A.Es applying TNMM by aggregating all transacts viz., both purchase and sale. TPO has also not found fault with the aforesaid apprach of the assessee. Therefore, in our view, credit facility allowed to A.E. cannot be considered on stand alone basis for benchmarking but has to be aggregated to all international transactions with A.E. for de .....

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ed transactions. Thus, in terms with the statutory provisions the transaction relating to extra credit period to A.E has to be aggregated with the sale transactions for determining ALP. The Tribunal, Mumbai Bench, in M/s. Goldstar Jewellery Ltd. (supra) while considering indentical issue held as under. 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 inter .....

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falls in the ambit of international transaction. However, this transaction of allowing the credit period to AE on realization of sale proceeds is not an independent international transaction but it is a closely linked or continuous transaction along with sale transaction to the AE. The credit period allowed to the party depends upon various factors which also includes the price charged by the assessee from purchaser. Therefore, the credit period extended by the assessee to the AE cannot be exami .....

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ion of the transaction which is closely linked is also supported by OECD transfer pricing guidelines. In order to examine whether the number of transactions are closely linked or continuous so as to aggregate for the purpose of evaluation what is to be considered is that one transaction is follow-on of the earlier transaction and then the subsequent transaction is carried out and dependent wholly or substantially on the earlier transaction. In other words, if two transactions are so closely link .....

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e 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 pro .....

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or 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 transactions with the AE. Even by considering it as an independent transaction the same has to be compared with the internal CUP available in the shape of the credit allowed by the assessee to non AE. When the assessee is not making any difference for not charging the interest from AE as well as non-AE then the only d .....

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tion the lending rates, however, this is not a transaction of loan or advance to the AE but it is only an excess period allowed for realization of sales proceeds from the AE. Therefore, the arm s length interest in any case would be the average cost of the total fund available to the assessee and not the rate at which a loan is available. Accordingly, we direct the Assessing Officer/TPO to re-do the exercise of determination of ALP in terms of above observation. 13. Similar view has also been ex .....

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fitability. The decision of IGate Computer Softwares Ltd. v/s Addl. CIT is factually distinguishable as in that case assessee itself has considered the extended credit facility as a separate international transaction. Thus, taking into consideration, the principle laid down as above we are of the view that transaction relating to extended credit period provided to A.E. is required to be aggregated with other international transactions for computing ALP and cannot be done separately. For doing so .....

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purposes. 14. The ground No.2 raised by the assessee is reproduced below: 2. On the facts and in the circumstances of the case, the AO ought to have not made disallowance of interest of ₹ 94,44,829/- under section 36(1 )(iii) of the Act. 15. Briefly stated the facts of the issue are, during the assessment proceedings, the AO on verification of the balance-sheet of the assessee noticed that it has given interest free advances to its associate concern. He, therefore, called upon the assessee .....

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g the fact that assessee has not proved commercial expediency for advancing interest free loans and also the fact that borrowed funds were not diverted towards interest free advances and further taking into consideration the fact that assessee itself has offered to disallow proportionate interest expenditure relatable to interest free advances, disallowed the interest of ₹ 94,44,928/- and added to the total income of the assessee. Against this addition, the assessee did not file any object .....

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tion and also no grounds were raised before the TRP on the issue. 17. The ld. DR submitted before us, the assessee having itself disallowed the interest expenditure relating to interest free advances at the assessment stage and having not raised any ground before the DRP, now the assessee cannot raise this issue before the Tribunal. 18. Having considered the submissions of the parties and perused the material on records, we find that the assessee during the course of assessment proceedings on it .....

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ground raised by the assessee. The same is dismissed. 19. The ground No.4 taken by the assessee is as under: 4. On the facts and in the circumstances of the case, the AO ought to have reduced not the gross interest income but the net interest income of ₹ 13,46,522/- for qualifying the profits of the business for determining the eligible deduction u/ 10AA of the Act and the eligible deduction u/s 10AA of the Act should be recomputed accordingly. 20. It is the claim of the assessee that whil .....

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being part of business income should be included for computing deduction u/s 10AA of the Act. In response to the query raised by the AO it was submitted by the assessee that interest income earned by the assessee was on account of fixed deposits in banks which are pledged against guarantee given by bank for the purpose of assessee s business. It was therefore submitted, as the interest income has nexus with business activities it should form part of business income. Alternatively, it was submit .....

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ot raise this issue before the DRP while objecting to the draft assessment order. Therefore, the computation of deduction u/s 10AA after reducing the interest income was also repeated in the final assessment order. 22. The ld. AR submitted before us, firstly, the interest income has a direct nexus with the business activity hence, forms part of the business activity, therefore, cannot be excluded from the business income while computing the deduction u/s 10AA. Alternatively, it was submitted, if .....

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ssue by way of additional ground. 25. We have considered the rival contentions and perused the material on record. The ld. Counsel for the assessee has fairly admitted that this issue was not raised before the DRP. Therefore, when the assessee has not raised any objection on this issue before the DRP, in our view, the assessee cannot raise such issue before us at this stage as the assessee has accepted the decision of the AO in the draft assessment proceedings, wherein he excluded the interest i .....

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ed. 26. The assessee has also raised one additional ground which reads as under : 2.1 On the facts and in the circumstances of the case and in law, the A. O. Ought to have increase the profits of the business by the amount of interest disallowed under section 36(1)(iii) of the Act and the eligible deduction under section 10AA of the Act ought have been computed accordingly. 27. This ground raised by the assessee is consequential to ground no.2 of the appeal. It is the contention of the assessee .....

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