TMI Blog2016 (5) TMI 279X X X X Extracts X X X X X X X X Extracts X X X X ..... and (ii) where the form and substance of the transaction are the same but arrangements made in relation to the transaction, viewed in their totality, differ from those which would have been adopted by independent enterprises behaving in a commercially rational manner. None of these conditions is satisfied in the present case. The form and substance of the transactions are the same. The Transfer Pricing Officer has not brought on record any material to demonstrate and establish that the form and substance of transactions are different. It is not, and it cannot be, the case of the Transfer Pricing Officer that the export transaction was a sham transaction to finance the AE. The assessee has also behaved in a commercially rational manner inasmuch as whatever are the terms of realization of his exports proceeds, the same are the terms of realization of exports from the non AEs. Recharcaterization of this transaction, therefore, is not permissible. The very foundation of the Transfer Pricing Officer is thus wholly unsustainable in law. - Decided in favour of assessee - I.T.A. No.7297/Mum/2014 - - - Dated:- 31-3-2016 - Pramod Kumar AM and Pawan Singh JM For The Appellant : Bh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... company which has been clearly established from the facts of the assessee company; c) that no interest has been charged from AE as well as Non-AE; d) that the outstanding are secured by way of payables as well as stock of AE remain in the custody of the assessee company and therefore if at all the interest ought to be imputed than it should be applied considering the rating of 'AAA' instead of 'BBB'; e) that the payment of interest by the assessee to its AE on the contention that it would reduce the income which is prohibited by the Act; f) that the assessee company has both, purchase and sales, transactions with the AE and AE has not charged interest on delay in payments by assessee company; g) that the assessee company is entitled to nett off each and every transactions of sales and purchase with the AE (in accounting terminology) and if that has been followed every year with each transaction on its due dates there would not have been a case of delayed debt and no interest would have been imputed on receivables which considered as delayed; h) that the assessee company operates in SEZ, Mumbai and it is bound by SEZ and FEMA and FEMA allows only one ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... charged from the non AEs, i.e. independent transactions, as well, there cannot be any occasion to make an ALP adjustment, for notional interest, on delay in realization of trade debts from the AEs. The very purpose of the arm s length price adjustments is to neutralize the impact of intra AE relationship on commercial transaction, but, given the above facts, there is no impact of intra AE relationship in the above case. As regards, the rechracterization of transaction as an unsecured loan, we find that CIT Vs EKL Appliances Limited [(2012) 345 ITR 241 (Del)], Hon ble Delhi High Court has held that recharacterization of a transaction is possible in only two situations i.e. (i) where the economic substance of a transaction differs from its form and (ii) where the form and substance of the transaction are the same but arrangements made in relation to the transaction, viewed in their totality, differ from those which would have been adopted by independent enterprises behaving in a commercially rational manner. None of these conditions is satisfied in the present case. The form and substance of the transactions are the same. The Transfer Pricing Officer has not brought on record any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... book), the arm's length price of exports to the AEs, including Micro USA, has been determined on the basis of the transactional net margin method (TNMM). By way of a note at page 51, it is specifically stated that further, the said amount of ₹ 2428.26 millions has also been determined/ computed by the assessee having regard to the arm's length price on application of Transactional Net Margin Method (TNMM), on aggregation of transactions, as prescribed under section 92C of the Income Tax Act, 1961 . In this backdrop, we can usefully refer to the decision of Hon'ble Delhi High Court, in the case of Sony Ericsson Mobile Corporation Pvt Ltd Vs ACIT [(2015) 374 ITR 118(Del)] wherein Their Lordships had, inter alia, observed as follows: Where the Assessing Officer/TPO accepts the comparables adopted by the assessed, with or without making adjustments, as a bundled transaction, it would be illogical and improper to treat AMP expenses as a separate international transaction, for the simple reason that if the functions performed by the tested parties and the comparables match, with or without adjustments, AMP expenses are duly accounted for. It would be incongruous ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... red in the TNMM analysis, by taking operating profit figure which incorporate financial impact of the excess credit period allowed, will be adjusted again separately as well. Of course, in the example used by Hon'ble Delhi High Court, the AMP expenses are deductibles in computation of operating profit but that does not make any material difference because the interest levy for late realization of debtors, being inextricably connected with the sales, is also part of operating income. In the case of Nirma Industries Limited Vs DCIT [(2006) 283 ITR 402 (Guj)], Hon'ble High Court has dealing with the nature of interest on debtors, held it to be integral to business income. The same is the principle for the transfer pricing cases to that extent interest is to be taken as integral to sale proceeds, and, as such, includible in operating income. When such an interest is includible in operating income and the operating income itself has been accepted as reasonable under the TNMM, there cannot be an occasion to make adjustment for notional interest on delayed realization of debtors. One can understand separate adjustment for excess credit period when the arm's length price for ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat the supplier is entitled to receipt of payment immediately on delivery irrespective of whether the finished goods is sold in the market, get spoiled in manufacturing or is damaged would probably be valid in the perfect market conditions which are more of a myth than reality. The only other merit of this approach is its simplicity, or, to put it more appropriately, naivety. The real life trade and commerce is seldom so simple. It is not at all necessary that a payment is to be made as soon as goods or services are delivered. A call is to be taken by the vendor, in consultation with its client and based on the business exigencies, as to what should be the terms on which payments for the supplies is to be made. It is a harsh commercial reality that immediate payments are more of exceptions rather than rule, and more so in a complex case in which the assessee is sole vendor and the very existence of the buyer is to process the semi- finished goods and sell it to the end buyers. Many factors, such normal business practices and the commercial exigencies, influence the fact of payment in respect of a commercial transaction. Whether a payment is made immediately by the AE or is made ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t in computation of profit before interest and taxes. The profit before tax and interest (PBIT) so computed takes into account interest income because, on the given facts, it is in the nature of other income which is duly included in the PBIT figure. It is only interest expenditure which is not taken into account in the PBIT computation. There is no warrant for the proposition that interest expenditure taken into account is net of interest income on account of delay in realization of debts. We, therefore, reject this contention of the Departmental Representative. 15. As for learned Departmental Representative s suggestion that it is to be verified whether the comparables include interest income, if any, all we can say is that the statutory provisions requires the interest income, unless it is an interest income of the finance and banking companies, to be included in the other income which is taken into account for computing PBIT (i.e. profit before interest and taxes). The presumption therefore is that the accounts are drawn up as per the statutory requirements, and the exclusions from other income are specifically discussed on the facts of each case, and as such constitu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, machinery, equipment, tools, plant, furniture, commodity or any other article, product or thing; (b) the purchase, sale, transfer, lease or use of intangible property, including the transfer of ownership or the provision of use of rights regarding land use, copyrights, patents, trademarks, licences, franchises, customer list, marketing channel, brand, commercial secret, know -how, industrial property right, exterior design or practical and new design or any other business or commercial rights of similar nature; (c) capital financing, including any type of long -term or short -term borrowing, lending or guarantee, purchase or sale of marketable securities or any type of advance, payments or deferred payment or receivable or any other debt arising during the course of business; (d) provision of services, including provision of market research, market development, marketing management, administration, technical service, repairs, design, consultation, agency, scientific research, legal or accounting service; (e) a transaction of business restructuring or reorganisation, entered into by an enterprise with an associated enterprise, irrespective of the fact that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... length price (ALP), and that this exercise includes the allowance for any expense or interest arising from an international transaction as well. That is the only provisions under which ALP adjustments can be made. In other words, therefore, arm's length price adjustments can only be made in respect of an 'international transactions'. The expression 'international transaction', on the other hand, is defined under section 92 B as a transaction between two or more associated enterprises, either or both of them are non-residents, in the nature of purchase, sale or lease of tangible or intangible property, or provision of services, or lending or borrowing of money, or any other transaction having a bearing on the profits, incomes, losses or assets of such enterprises as also transaction in the nature of cost or expense sharing arrangement. The question that we must address ourselves to is whether a continuing debit balance constitutes a 'transaction' in terms of the provisions of Section 92 B. 5. A continuing debit balance, in our humble understanding, is not an international transaction per se, but is a result of the international transaction. In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 . 23. However, when we perused Hon ble Bombay High Court s judgment referred to in this coordinate bench s order, we found the factual position to be slightly, but very materially, different. 24. The relevant question before Their Lordships, in the said case and as set out at page 2 of this judgment, was (c) whether, on the facts and circumstances of the case and in law, the Tribunal did not err in holding that the loss suffered by the assessee by allowing excess period of credit to the associated enterprises without charging any interest during such period would not amount to international transaction whereas Section 92B(1) of the Income Tax Act, 1961, refers to any other transaction having a bearing on the profits, income, losses or assets of such enterprise . Rather than answering this question on merits, and with the consent of both the parties, Their Lordships sent the matter back for fresh consideration of the Tribunal. While doing so, at page 3-4 of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of any type, including by way of deferred payment or receivable or any other debt arising during the course of business will constitute an international transaction under section 92B. Going by this definition any debts arising during the course of business will constitute an international transaction. A trade debt is, accordingly, covered by this definition. However, since the assessment year that we are dealing with is prior to the assessment year 2012-13, the next important question is whether this amendment could be held to be applicable in the assessment year before us as well. Undoubtedly, the amendment is said to be retrospective but then the question really is whether just stating the law to be retrospective will make it retrospective in effect. 30. The fact that judicial precedents, prior to the insertion of Explanation to Section 92B, held that a continuing debit balance, on a standalone basis, does not constitute an international transaction required to be benchmarked assumes considerable significance in the light of a new judicial development that we will deal with in a short while now. In the present case, we are dealing with a situation in which the amendment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be invoked in the cases where the order is passed without making inquiries or verification which should have been made , all ratio of all these decisions was nullified. That, however, is done with prospective effect, i.e. with effect from 1st June 2015. As a matter of fact, it is a laudable policy of the present tax administration to stay away from making the retrospective amendments, and thus contribute to greater certainty and congenial business climate. Nothing evidences it better than this subtle, but easily discernible, paradigm shift in the underlying approach to the amendments made in Section 263 in the very first full budget of the present Government. 32. What has, however, been done in the case before us is to amend the law with retrospective effect. Of course, it happened much before the current awareness about the evils of retrospective taxation having been translated into action. 33. Dealing with such a situation, Hon ble Delhi High Court has, in the case of DIT vs New Skies Satellite BV [TS-64- HC -DEL (2016)], observed as follows: 30. Undoubtedly, the legislature is competent to amend a provision that operates retrospectively or prospectively. N ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and to avoid making a legislature a court of last resort, the amendments can be made prospective only [Ref County of Sacramento v State (134 Cal App 3d 428) and In re Marriage of Davies (105 I II App 3d 66)] (Emphasis, by underlining, supplied by us) 34. Quite clearly, in view of the law so laid down by Their Lordships also, just because a provision is stated to be clarificatory, it does not become entitled to be treated as clarificatory by the judicial forums as well. The view taken by Hon ble Delhi High Court support this line of reasoning. Even without the benefit of guidance of Their Lordships, the views articulated by a coordinate bench of this Tribunal, in the case of Bharti Airtel (supra) were of a somewhat similar opinion when it was observed that, Undoubtedly, the scope of a charging provision can be enlarged with retrospective effect, but an anti-avoidance measure, that the transfer pricing legislation inherently is, is not primarily a source of revenue as it mainly seeks compliant behaviour from the assessee vis- vis certain norms, and these norms cannot be given effect from a date earlier than the date norms are being introduced . We may add that righ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tive amendment, which is almost like telling people how they should have benchmarked their international transactions in past and thus expecting them to do the impossible, 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 higher judicial forum. However, if the 2012 amendment does increase the scope of international transaction under section 92B, as is our considered view, there is no way it could be implemented for the period prior to this law coming on the statute i.e. 28th May 2012. The law is well settled. It does not expect anyone to perform an impossibility. Reiterating this settled legal position, Hon ble Supreme Court has, in the case of Krishnaswamy S Pd Vs Union of India [(2006) 281 ITR 305 (SC)], observed as follows: The other relevant maxim is, lex non cogit ad impossibilia-the law does not compel a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... main, subject to the approval by Hon ble Courts above. 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 made from time to time, which throw light on what was actually sought to be achieved by this legal provision, and in the light of the above analysis of the scheme of the law, we are of the considered view that section 40(a)(ia) cannot be seen as intended to be a penal provision to punish the lapses of non deduction of tax at source from payments for expenditure- particularly when the recipients have taken into account income embedded in these payments, paid due taxes thereon and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty 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 amendment in law, in view of the well settled legal position to the effect that a curative amendment to avoid unintended consequences is to be treated as retrospective in nature even though it may not state so specifically, the insertion of second proviso must be given retrospective effect from the point of time when the related legal provision was introduced. In view of these discussions, as also for the detailed reasons set out earlier, we cannot subscribe to the view that it ..... X X X X Extracts X X X X X X X X Extracts X X X X
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