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2016 (10) TMI 394 - ITAT CHENNAI

2016 (10) TMI 394 - ITAT CHENNAI - TM - Transfer pricing adjustment - determining Arm’s Length Price (ALP) of the Imports made by the assessee - Held that:- It is not disputed that the assessee is enjoying larger credit than printed in the invoice; it ranges 120 days to 240 days. In view of this, the price charged by AE to the assessee more than price charged to third parties. Hence, it is appropriate to be considered the extra credit period enjoyed by the assessee so as to determine the ALP. Fu .....

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ia’s External Debt, which is unadjusted industrial average. As held by the Special Bench of the Bangalore Bench in the case of Aztec Software & Technology Services Ltd. v. ACIT (2007 (7) TMI 50 - ITAT BANGALORE), we are of the opinion that the unadjusted interest rate in respect of India’s External Debt cannot be applied in assessee’s case. Since the assessee charged interest to its AE at LEBORE ±2% which is appropriate the same is to be considered by TPO/AO and we are of the opinion that there .....

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143(3) r.w.s. 92CA(3) of the Act, which is emanated from direction of the Dispute Resolution Panel (DRP), Chennai passed u/s.143(3) r.w.s. 92CA(3) r.w.s 144C (5) r.w.s 144C(8) of the Act dated 31.08.2012 of the Act pertaining to assessment year 2008-09. 2. The first ground in this appeal for our consideration is that the AO had erred in determining an erroneous Arm s Length Price (ALP) of the Imports made by the assessee. 3. The facts of the issue are that Salcomp India purchases critical raw ma .....

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of 5% on the third party purchase price for its supply chain management services. For the purpose of substantiating the Arm s length nature of international transaction, the assessee made adjustment for the actual credit period availed by the assessee and demonstrated the ALP using Comparable Uncontrolled Price (CUP) Method. The TPO vide her order dated 27.10.2011 examined the TP documentation and proposed downward adjustments on account of excess payment on purchases (Rs. 32,88,820/-), excess .....

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s. Therefore, the assessee enjoyed the benefit of additional credit period and hence, the price charged by its AE would include a markup for this additional benefit. The TPO found that there was a difference to the extent of US$ 3,32,964 in the price charged by the AE being higher than the price charged by the third party. When confronted, the assessee claimed that the AE provided it with an extended credit period of 180 days to 270 days which was factored into the price charged by the AE. Howev .....

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st as mentioned in the invoice and worked out the ALP value of purchases of raw material at US$ 61,75,658.70 as against the actual purchase price paid by the assessee to its AE of US$ 62,52,633.29. Thus, TPO arrived at the excess purchase price paid to the AE at US$ 81,974/- which amounted to 32,88,820/- at the average exchange rate of 40.12 per USD. Further, as per the TP documentation, the assessee paid to its AE an amount of 3,08,57,511/- towards interest on 5 millions USD (ECB-1), 2 million .....

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raw material. Hence, TPO made a downward adjustment to the price of raw material to the extent of ₹ 32,88,820/-. The DRP endorsed the view taken by the Ld. TPO. 3.3 In the assessment order, ld. Assessing Officer observed that the assessee s claim of ±5% variation is rejected since the benefit is available only in cases where more than one ALP is determined and the mean of them is considered for comparison. In assessee s case, only one price is taken as ALP for comparison. Since the .....

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nward adjustment to the expenditure of the assessee to the tune of ₹ 32,88,820.55.was made u/s.92CA(3) of the Act by the AO. Aggrieved with the order of the AO, the assessee is in appeal before us. 4. ld.A.R submitted before us that the AO had not made any adjustment on similar purchases from the same AE in next assessment year 2009-10 vide assessment order dated 27.12.2012 wherein the AO observed that the assessee has adopted internal CUP for the import of raw materials. The ld.A.R made s .....

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eration and the assessee enjoyed the credit period 120 days to 240 days, which is to be considered for price charged by AE and the treatment of payment mentioned in the invoice at 180 days cannot be considered and actual period of credit to be considered. 5. On the other hand, ld.D.R relied on the order of lower authorities. 6. We have heard both the parties and perused the material on record. It is not disputed that the assessee is enjoying larger credit than printed in the invoice; it ranges 1 .....

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taken by the assessee. 7. The next ground is with regard to the TPO/AO erred in determining an inappropriate ALP interest rate on the assessee s External Commercial Borrowing and by not providing an opportunity of being heard to the assessee. 8. The facts of the issue relating to the determining an inappropriate ALP interest rate on the assessec s External Commercial Borrowing, are that the TPO has not given an opportunity of being heard and that he has relied on an inappropriate source to erron .....

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losed Questionnaire in response to which the Authorized Representatives of the assessee have attended before him and furnished the details called for. Therefore, the DRP observed that opportunity which was required to be given statutorily was given to the assessee by the TPO. Further, after receiving the T.P.O order, the AO has given the assessee an opportunity of being head by discussing the contents of the TPO order with assessee s Authorised Representatives. Therefore, DRP held that there was .....

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e assessee has generally mentioned, the various difficult factors which determine the interest rate like credit rating, duration, collateral, fixed vs floating rate, and benchmark prime lending rate, it has not substantiated which critical factor has affected the interest rate in what way. Therefore, DRP held that there is no substance or merit in this objection. Accordingly the AO made adjustments as follows:- ECB-I 23,15,746 ECB-III 49,58,113 Against this, the assessee is in appeal before us. .....

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average, which cannot be considered in view of the OECD guidelines, which was considered by the Special Bench of Bangalore Bench of the Tribunal in the case of Aztec Software & Technology Services Ltd. Vs. ACIT 107 ITD 141(Bang.) wherein the Tribunal has held as under:- 163. The revenue has justified consideration of industrial average as comparable uncontrolled transaction. Before the Transfer Pricing Officer as also in proceedings before the Commissioner of Incometax (Appeals), the taxpay .....

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ricing 2006 published by Price Water House Coopers in chapter The Work of the OECD and Other Technical Considerations , it has been observed as under: Guidance for applying the arm s length principle The arm s length principle is usually applied by comparing the conditions (e.g. price or margin) of a controlled transaction with those of independent transactions. The Guidelines allow the use of inexact comparables that are similar to the controlled transaction but not the use of unadjusted indust .....

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hen a price is temporarily lowered. 9.1 In our opinion, there is a force in the argument of the Id. AR. The Assessing Officer cannot apply the implicit interest rate on India s External Debt, which is unadjusted industrial average. As held by the Special Bench of the Bangalore Bench in the case of Aztec Software & Technology Services Ltd. v. ACIT (supra), we are of the opinion that the unadjusted interest rate in respect of India s External Debt cannot be applied in assessee s case. Before u .....

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one week to one year. These rates are considered to be the most important rate in the European money market. The interest rates do provide the basis for the price and interest rates of all kinds of financial products like interest rate swaps, interest rate futures, saving account and mortgages. We find that the RBI in respect of export credit to exporters at internationally competitive rates under the scheme of pre-shipment credit in foreign currency (PCFC) and Rediscounting of Export Bills abro .....

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by the assessee in this regard has to be accepted. The AO is directed to work out the TP adjustment accordingly. Gr.No. 1 to 4 are thus partly allowed. 9.2 Further, it is to be noted that the Chennai Bench of Tribunal in the case of SIVA INDUSTRIES & HOLDINGS LTD. Vs. ACIT reported in [2012] 145 TTJ 497 (ITAT[Chen]) wherein it was held as under:- 11. We have considered the rival submissions. A perusal of the order of the TPO clearly shows that the assessee had raised the funds by way of issu .....

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n foreign currency and the transaction is an international transaction, then the transaction would have to be looked upon by applying the commercial principles in regard to international transaction. If this is so, then the domestic prime lending rate would have no applicability and the international rate fixed being LIBOR would come into play. In the circumstances, we are of the view that it LIBOR rate which has to be considered while determining the arm's length interest rate in respect of .....

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tion Ltd. reported in 33 Taxmann.com 187 9. On principle, we do concur with the view of the co-ordinate bench in the above said decision that the assessee is a tested party and economic/commercial as well as geographical condition in which the assessee is doing business are relevant to he considered for the purpose of determining the arm s length price. However, the Tribunal has followed the earlier decision of the co-ordinate bench to maintain the rule of consistency and accordingly directed th .....

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in order to ascertain arms length price of the international transaction as that of the assessee. We agree with the assessee's contention that where the transaction was of lending money in foreign currency to its foreign subsidiaries the comparable transactions, therefore, was of foreign currency lended by unrelated parties. The financial position and credit rating of the subsidiaries will be broadly the same as the holding company. In such a situation, domestic prime lending rate would hav .....

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