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2016 (4) TMI 400

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..... oes not oppose this prayer. The cross-objection is accordingly dismissed as withdrawn. That leaves us with the cross appeals. 2. These cross appeals call into question correctness of the order dated 16th December, 2013 passed by the learned CIT(A) in the matter of assessment under section 143(3) of the Income Tax Act,1961, for the assessment year 2009- 10. Grievances raised by the parties are as follows: Grievances raised by the assessee: Ground 1: Transfer Pricing Adjustment of ₹ 4,47,04,460/- on account of charging interest on outstanding receivables from associated enterprises ( AE') (i) On the facts and in the circumstances of the case, and in law, the learned AO erred and the Hon ble DRP further erred in holding outstanding receivables from AE to be an international transaction. (ii) On the facts and in the circumstances of the case, and in law, the learned AO has erred and the Hon'ble DRP further erred in characterizing delay in receipts from debtors in ordinary course of sale as extension of credit and termed it as loan and thereby applying an interest. (iii) On the facts and in the circumstances of the case, and in law, .....

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..... rmining the ALP. 2. On the facts and circumstances of the case, the Hon'ble DRP-II, Mumbai failed to appreciate that the mark-up of 3% while determining the ALP was essential as it insulated the assessee from various types of risks like entity risk, country risk and exchange risk . 3. As the issues so raised in the cross appeals are interconnected, we will take up all these grounds of appeal together. 4. The relevant material facts are like this. The assessee is engaged in the business of manufacturing, import and export of cut and polished diamonds. During the relevant previous year, the assessee had international transactions with an associated enterprises by the name of Doshi Impex Limited, Hong Kong. The sale transactions to this AE were benchmarked on the basis of TNMM. That, however, is not the point of dispute before us. During the course of the proceedings before the Transfer Pricing Officer, it was noticed that as on the balance sheet date, this AE of the assessee owed ₹ 35.76 to assessee whereas assessee s entire exports is ₹ 94 crores. The receivables thus amounted to almost 40% of the entire exports. The TPO further noted that the assessee .....

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..... s this issue is concerned, the assessee, inter alia , stated as follows: We refer to the hearing dated October 16, 2013 which we had with your Honours. During the course of the hearing your goodself had requested for additional information on without prejudice basis with respect to Ground 7- Interest on receivables. The additional details/information are submitted below: 1. Your Honours had asked for the calculation of interest on unpaid receivable. In this respect, we would like to state that the since we have carried out working capital adjustments of comparable companies which take into account and neutralize the impact of embedded interest in die receivables and payables. Hence separate adjustment for interest on receivables is not required as otherwise it results into double adjustment. 2. Further, we would like to state that the interest chargeable on outstanding receivable does not fit within the meaning of international transactions, as the transfer pricing adjustment can be made u/s 92 in respect of an international transaction . A continuing debit balance is not an international transaction per se but is a result of the international transaction .....

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..... vable, we calculated the additional days of credit period granted to the AE. This calculation worked to 96 days (228 days minus 132 days). 9. The assessee also contends that the Id. TPO used SBI PLR plus 3% as the interest rate while calculating the adjustment. In this respect, we would like to mention state that since the outstanding is a result of international transactions, hence SBI PLR can not be taken as the interest rate, and instead interest on receivable should be calculated by adopting the London Inter-bank offered rate (LIBOR), 10. Without prejudice to all our contention, if we take SBI PLR plus 3% and interest for the period over-flowing the reasonable time limit, then the adjustment would reduce to ₹ 14,579,778. 6. While DRP did uphold the adjustment in principle, the interest rate, on the basis of which ALP adjustment was made, was taken as the PLR of the State Bank of India. In effect thus, the mark up on the PLR was deleted. In its brief order, the DRP held as follows: We have carefully considered the submissions made by the assessee and the reasons given by the Assessing Officer/ Transfer Pricing Officer in the order. We agree with .....

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..... th of, inter alia, these submissions, learned counsel urged us to delete the impugned ALP adjustment in respect of delayed realization of export proceeds from the AEs. 9. Learned Departmental Representative contends that the Finance Act 2012, with retrospective effect from 1st April 2012, has clarified that the expression international transaction would also include capital financing, including receivables, or any other kind of debt, arising during the course of business. He then submits that in view of this clarification, it is clear that overdue receivables would constitute an international transaction as per the provisions of Section 92B of the Act. He also refers to the order dated 27th May 2015 passed a coordinate bench of this Tribunal, in the case of i-Gate Computer Systems Ltd Vs ACIT and vice versa (ITA No. 2504/PN/2012), wherein it is, inter alia, stated that the Hon ble Bombay High Court, in assessee s own case relating to the assessment year 2002-03 in Income Tax Appeal No. 1148/2012, vide judgment dated 28.2.2013, has held that in view of the amendment by the Finance Act 2012 with retrospective effect from 1st April 2002, the said transaction of charging o .....

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..... e does not affect the PLI, and, therefore, the mere fact that the PLI of the tested party is found to comparable with that of the similarly placed comparables, it is wholly fallacious to come to the conclusion that since PLI is found to be comparable, separate adjustment in not required in respect of the interest on late realization of debts. 10. In his brief rejoinder, learned counsel reiterated his submissions and emphasized the contention that when time taken in realization of debts from AEs is considered vis- -vis the time taken in realization with non AEs, there is no delay at all. 11. We have heard the rival submissions, perused the material on record and duly considered facts of the case in the light of the applicable legal position. 12. In our considered view, even if we proceed on the basis that Explanation to Section 92B is indeed retrospective in effect and it does cover delay in realization of debts, as long as sale is benchmarked on TNMM basis, as in this situation before us, there cannot be any occasion to make a separate adjustment for delay in realization of debts. The reason is that the interest income is an integral part of the PBIT inasmuch as interest i .....

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..... enses as an international transaction, 8. By way of an example, this aspect of the matter was then explained by Hon'ble Delhi High Court as follows: An example given below would make it clear: Particulars Case 1 Case 2 Sales 1000 1,000 Purchase Price 600 500 Gross Margin 400 (40%) 500 Marketing Sale promotion 50 150 Overhead expense 300 300 Net profit 50 (5%) 50 (5%) The above illustrations draw a distinction between two distributors having different marketing functions. In case 2, a distributor having significant marketing functions incurs substantial expenditure on AMP, three times more than in case 1, but the purchase price being lower, the Indian AE gets adequately compensated and, therefore, no transfer pricing adjustment is required. In case we treat the AMP expenses in case .....

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..... separate adjustment for delayed realization of debtors and on the facts of this case, is thus devoid of legally sustainable merits. 10. The other aspect of the matter is that a separate adjustment for delayed realization of debtors can, even in a fit case, can only be made only to the extent the credit period allowed to the associated enterprises is more than the credit period allowed to independent enterprise in respect of the same or materially similar transactions. In the present case, it is an undisputed position that semi finished goods, as sold to Micro USA, is not sold to any other independent enterprises. The assessee did have trading transactions in respect of the finished goods with trading subsidiaries in China and Hong Kong but it is not even the case of the TPO that excessive credit period was allowed to these AEs vis- -vis the credit period allowed to independent enterprises, nor any ALP adjustment has been recommended in connection with the same. This fact, if anything, shows that the credit period allowed to the AEs is comparable with credit period of non AEs in respect of similar goods. To compare credit period in respect of finished goods with the credit per .....

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..... ize the impact of inter se relationships between the AEs and it is, therefore, not the delay simplictor in payment but delay in payment vis- -vis similar situations with non AEs (i.e. independent enterprises) which is of crucial consideration. Such a comparison cannot be based on the hypothesis as to what would have, in the wisdom of the TPO, happened if assessee was to have similar transactions with non- AEs. The comparison has to be based on real transactions of similar nature, if at all such transactions have taken place. When no such transactions have taken place, as is the case before us, there is obviously no occasion of any comparison. The stand taken by the learned Departmental Representative, therefore, is not only quite detached from commercial reality but also wholly untenable in law. In any case, what can be examined on the touchstone of arm's length principles is the commercial transaction itself, as a result of which the debit balance has come into existence, and the terms and conditions, including terms of payment, on which the said commercial transaction has been entered into. In this view of the matter, learned Departmental Representative's reliance on Azte .....

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..... the computation of PBIT as such incomes rarely constitute operational income, we see no need to be guided by such hypothesis and generalities. There is nothing on the records, as we have noted earlier, such exclusions on the facts of this case. In any event, setting off of interest expenditure with interest on account of delay in realization of debts, even if so, is not too common an occurrence and more of an exceptions than the rule. The apprehensions of the learned DR are purely hypothetical and, therefore, devoid of legally sustainable merits. 17. In view of these discussions, as also bearing in mind entirety of the case, we are of the considered view that no ALP adjustments can be made, on the facts of this case, in respect of delay in realization of sale proceeds. Such being our conclusions, we also see no need to address ourselves to the specific factual arguments advanced by the learned counsel. In effect thus, we uphold the grievance of the assessee, and direct the Assessing Officer to delete the impugned arm s length price adjustment. 18. As we have upheld the grievance of the assessee, and thus deleted the impugned ALP adjustment, grievance raised by the Assessing .....

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..... ) marketing related intangible assets, such as, trademarks, trade names, brand names, logos; (b) technology related intangible assets, such as, process patents, patent applications, technical documentation such as laboratory notebooks, technical know -how; (c) artistic related intangible assets, such as, literary works and copyrights, musical compositions, copyrights, maps , engravings; (d) data processing related intangible assets, such as, proprietary computer software, software copyrights, automated databases, and integrated circuit masks and masters; (e) engineering related intangible assets, such as, industrial design , product patents, trade secrets, engineering drawing and schematics, blueprints, proprietary documentation; (f) customer related intangible assets, such as, customer lists, customer contracts, customer relationship, open purchase orders; (g) contract related intangible assets, such as, favourable supplier, contracts, licence agreements, franchise agreements, non -compete agreements; (h) human capital related intangible assets, such as, trained and organised work force, employment agreements, union contracts; (i) lo .....

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..... due. Many factors, including terms of payment and normal business practices, influence the fact of payment in respect of a commercial transaction. Unlike a loan or borrowing, it is not an independent transaction which can be viewed on standalone basis. What can be examined on the touchstone of arm's length principles is the commercial transaction itself, as a result of which the debit balance has come into existence, and the terms and conditions, including terms of payment, on which the said commercial transaction has been entered into. The payment terms are an integral part of any commercial transaction, and the transaction value takes into account the terms of payment, such as permissible credit period, as well. The residuary clause in the definition of 'international transaction', i.e. any other transaction having a bearing on the profits, incomes, losses or assets of such enterprises, does not apply to a continuing debit balance, on the given facts of the case, for the elementary reason that there is nothing on record to show that as a result of not realizing the debts from associated enterprises, there has been any impact on profits, incomes, losses or assets of t .....

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..... ct' for short) by Finance Act, 2012 with retrospective effect from 1st April 2002, the question as framed may be restored to the file of the Tribunal for fresh decision in light on the amendment. Accordingly, this issue is remitted to the file of the Tribunal for fresh decision on merits 25. The observations so made by Hon ble jurisdictional High Court, in our limited understanding, cannot be construed as holding that in view of the amendment by the Finance Act 2012 with retrospective effect from 1st April 2002, the said transaction of charging of interest from the AEs is covered under the amended provision of Section 92B(1) of the Act . As it appears from the plain words of the statute- as extracted earlier, the issue is left open for adjudication by this Tribunal. 26. In any event, to this extent, this judgment does not involve an adjudication on a legal issue as it is a result of consensus of the parties. When both the parties before Their Lordships agreed, and so stated before Their Lordships, to let the matter be restored to the file of the Tribunal, there could not have been, and there was no, adjudication on any legal issue. 27. It is for this reason that the .....

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..... The matter could have been carried in appeal before higher judicial forums. If the decision of a judicial body does not satisfy the tax administration, nothing prevents them from going to the higher judicial forum or from so amending the law, with prospective effect, that there is no ambiguity about the intent of legislature and it is conveyed in unambiguous words. 31. Nullifying a judicial interpretation though legislative amendment, much as many of us may abhor it, is not too uncommon an occurrence. Of course, when legislature has to take an extreme measure to nullifying the impact of a judicial ruling in taxation, it is the time for, at least on a theoretical note, introspection for the draftsman as to what went so wrong that fundamental intent of law of law could not be conveyed by the words of the statute, or, perhaps for the judicial forums, as to what went so wrong that the interpretation was so off the mark vis- -vis fundamental principles of taxation or the sound policy considerations. However, amendment so made are generally prospective, and there is a sound conceptual foundation, as has been highlighted in the binding judicial precedents that we will deal with in a s .....

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..... rificatory amendment presumes the existence of a provision the language of which is obscure, ambiguous, may have made an obvious omission, or is capable of more than one meaning. In such case, a subsequent provision dealing with the same subject may throw light upon it. Yet, it is not every time that the legislature characterizes an amendment as retrospective that the Court will give such effect to it. This is not in derogation of the express words of the law in question, (which as a matter of course must be the first to be given effect to), but because the law which was intended to be given retrospective effect to as a clarificatory amendment, is in its true nature one that expands the scope of the section it seeks to clarify, and resultantly introduces new principles, upon which liabilities might arise. Such amendments though framed as clarificatory, are in fact transformative substantive amendments, and incapable of being given retrospective effect. . 37. An important question, which arises in this context, is whether a clarificatory amendment remains true to its nature when it purports to annul, or has the undeniable effect of annulling, an interpretation given b .....

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..... out in such anti abuse legislation. An anti-abuse legislation does not trigger the levy of taxes; it only tells you what behavior is acceptable or what is not acceptable. What triggers levy of taxes is non-compliance with the manner in which the anti-abuse regulations require the taxpayers to conduct their affairs. In that sense, all anti abuse legislations seek a certain degree of compliance with the norms set out therein. It is, therefore, only elementary that amendments in the anti-abuse legislations can only be prospective. It does not make sense that someone tells you today as to how you should have behaved yesterday, and then goes on to levy a tax because you did not behave in that manner yesterday. 37. When this is put to the learned Departmental Representative, his stock reply is that the amendment only clarifies the law, it does not expand the law. 38. Well, if the 2012 amendment does not add anything or expand the scope of international transaction defined under section 92B, assuming that it indeed does not- as learned Departmental Representative contends, this provision has already been judicially interpreted, and the matter rests there unless it is reversed by a .....

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..... t of the judicial hierarchy in this system. We are bound by the law laid down by Hon ble Courts above, and all that we are expected to do, and we do, is to decide the issues before us in accordance with the provisions of the statute, in accordance with the law laid down by Hon ble Courts above and in the light of binding judicial precedents. When a binding judicial precedent requires us to deviate from the specific words of the provisions of the statute in a particular manner, we have to do so. There is no escape from this call of duty. 41. There are a number of decisions in which our so tinkering with the specific words in the statute have been upheld, as long as this has been so done in accordance with the judicial principles and guidance in the judge made law. In the case of Rajeev Kumar Agarwal Vs ACIT [(2014) 249 ITD 363 (Agra)], insertion of second proviso to Section 40(a)(ia), though specifically stated to be with effect from 1st April 2013, was read to be effective from 1st April 2005. The reasoning adopted by the bench, speaking through one of us, was as follows: 8. With the benefit of this guidance from Hon ble Delhi High Court, in view of legislative amendments m .....

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..... ow the expenditure, due to non deduction of tax at source, even in a situation in which corresponding income is brought to tax in the hands of the recipient. The scheme of Section 40(a)(ia), as we see it, is aimed at ensuring that an expenditure should not be allowed as deduction in the hands of an assessee in a situation in which income embedded in such expenditure has remained untaxed due to tax withholding lapses by the assessee. It is not, in our considered view, a penalty for tax withholding lapse but it is a sort of compensatory deduction restriction for an income going untaxed due to tax withholding lapse. The penalty for tax withholding lapse per se is separately provided for in Section 271 C, and, section 40(a)(ia) does not add to the same. The provisions of Section 40(a)(ia), as they existed prior to insertion of second proviso thereto, went much beyond the obvious intentions of the lawmakers and created undue hardships even in cases in which the assessee s tax withholding lapses did not result in any loss to the exchequer. Now that the legislature has been compassionate enough to cure these shortcomings of provision, and thus obviate the unintended hardships, such an ame .....

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