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2016 (2) TMI 699

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..... 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 assessee. Eligible deduction u/s 10AA - whether AO ought to have reduced not the gross interest income but the net interest income for qualifying the profits of the business for determining the eligible deduction u/ 10AA - Held that:- 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 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 .....

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..... of Dispute Resolution Panel [DRP] ought to have directed the Assessing Officer [AO] to delete the notional adjustment of interest on delayed payment from Associated Enterprise of ₹ 18,89,938/- in its entirety . 6. Facts relating to this issue are, assessee an Indian Company is engaged in the business of manufacture 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 Jewellery Group companies in India including the assessee. Thus, Jewel America operates as a Distributor on wholesale basis for the jewellery manufactured by its group companies in India. During the relevant previous year the assessee has entered into international transaction relating to export of jewellery to both Associated Enterprises (AEs) and non AEs. In the return filed .....

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..... TPO, price charged by the assessee for international transactions with its AEs was accepted as within ALP. However, the TPO on further verification noticed that the export of goods worth ₹ 159.12 crores to its AEs Jewel America Inc contains transactions where export receivable were received 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 realisation of the export receivables on certain instances in case of non-AE such delay do not exceed 180 days which is normal credit period given to AE. Accordingly, TPO tabulated the transactions with AE where delay in receipt is more than 180 days. For justifying the delay in receiving the export receivables the assessee submitted as under: 10.2 The normal credit period granted for sales to AE is 18 .....

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..... ssessee 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 benefit in the form of extended credit facilities to its AE as a result of which tax base of assessee stands transferred to A.E. thereby, causing avoidance of tax in India. From the details of loans as well as other materials as called for, the TPO noticed that the average cost of borrowed funds works out to 9.20%. He further was of the view that as the extended credit facilities to AE is like a short term loan without any security, the assessee is bearing foreign exchange fluctuation risk and on that 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 .....

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..... ernatively, she submitted, if at all separate adjustment on account of delayed credit facilities has to be made then domestic PLR cannot 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, submitted that the assessee has computed margin of its international transactions by adopting TNMM, therefore, he must have considered the net margin by taking into consideration all aspects, hence, it is for the assessee to prove with documentary evidence that while negotiating the price credit facilities was also factored in. Referring to Rule 10D(k) and (l), the ld.DR submitted that the assessee has not furnished any documentation for price negotiation to show that the adjustment to be made in working capital on account of credit facility is already subsume .....

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..... ion of export receivables to both A.E and non A.E. without charging interest. While credit facilities to non A.Es have never exceeded 180 days, in case of A.E. in some instances it has exceeded 180 days and even more than a year. However, before concluding that a tangible benefit has been passed on to the A.E. as a result of such extended credit facility, margin of both the transactions viz. A.E. and non A.E. have to be seen. If there is considerable difference between the margin of A.E. transaction with that of non A.E. then it needs to 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 international transaction with A.E. However, in our view, assessee has to establish such claim through proper documentary evidence which, as it appears, have n .....

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..... 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 examined independently but has to be considered along with the main international transaction being sale to the AE. As per Rule 10A(d) if a number of transactions are closely linked or continuous in nature and arising from a continuous transactions of supply of amenity or services the transactions is treated as closely linked transactions for the purpose of transfer pricing and, therefore, the aggregate and clubbing of closely linked transaction are permitted under said rule. This concept of aggregation 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 .....

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..... tanding amount of the AE is at arm s length in comparison to the average period of realization and multiplied by the outstanding from non AEs then no adjustment can be made being the transaction is at arm s length. The third aspect of the issue is that the arm s length interest for making the adjustment. Both the TPO and DRP has taken into consideration 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 expressed by the Tribunal, Mumbai Bench, in case of Tecnimount ICB House (supra). In fact, in case of Kusum Healthcare Pvt. Ltd. (supra), the Tribunal, Delhi Bench, held that if ALP of the main sale transaction computed under TNMM is accepted, no separate adjustment on account of outstanding receivables can be made. However, it needs to be men .....

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..... at 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 objection before the DRP. Thus, the disallowance made by the AO in the draft assessment order was also made basis for similar disallowance in the final assessment order. 16. The ld. Counsel submitted before us, the assessee had sufficient interest free funds available with it to make interest free advances; therefore, there is no case for disallowing the interest expenditure. However, the ld. Counsel admitted that the assessee before the AO has disallowed interest expenditure to avoid prolonged litigation 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 .....

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..... d merit in the submissions of the assessee and computed deduction u/s 10AA after reducing the interest income of ₹ 21,16,182/- from the business profit. As it appears the assessee did not 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 at all interest income has to be excluded from the business profit then the interest paid by the assessee should be netted off against the interest income and the net interest income should be reduced. 23. The ld. DR, on the other hand, raising preliminary objection submitted, assessee has not raised any ground on this issue before the DRP, therefore, no such ground can be raised at this stage as it does not emanate from the order of DRP. He submitted if at all, assessee could have raised the issu .....

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