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AVL India Private Limited Versus DCIT, Circle-2 (1) , New Delhi

2017 (11) TMI 634 - ITAT DELHI

Transfer pricing adjustment towards interest on receivables - whether ‘interest on receivables’ is an international transaction? - Held that:- As going by the ld. CIT(A)’s version, there would have been no transfer pricing addition if the assessee had received the amount from one AE and paid to other AE, which would have been only an internal arrangement between the AEs. - Since the balances with these three AEs are, admittedly, on account of trading transactions, which belong to the same ‘ .....

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d similar transactions with AVL Fahrzeugdiagnose GmbH and AVL Zollner Marine GmbH as also part of the same international transaction. We, therefore, set aside the impugned order on this score and hold that the international transactions of trade receivables and trade payables with all the three AEs should be aggregated and processed as a single transaction of interest on receivables/payables. If the position is viewed in such a manner, there remains no amount of interest receivable from the AE l .....

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edents mandating for not making any disallowance u/s 14A of the Act in the absence of any exempt income, which are squarely applicable to the facts of the instant case, we overturn the view taken by the ld. CIT(A) and order for the deletion of disallowance sustained u/s 14A of the Act. - International transaction of interest on receivables - Assessment Year 2010-11 - Held that:- We find from the assessee’s Profit & Loss Account there is an item of ‘Other income’ with the value of ₹ 22, .....

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t adequately if the impugned order is set aside and the matter is restored to the file of the Assessing Officer/TPO for benchmarking the international transaction of ‘Interest on receivables’ on the basis of the internal CUP as discussed above and thereafter, to determine the amount of transfer pricing adjustment, if any. Needless to say, the assessee will be allowed a reasonable opportunity of hearing. - ITA No.4529/Del/2014 And ITA No.4275/Del/2016 - Dated:- 7-11-2017 - SHRI R.S. SYAL, VICE PR .....

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ansfer pricing adjustment towards interest on receivables. 3. Succinctly, the facts of the case are that the assessee is engaged in manufacturing, trading, marketing and also providing after-sales service for vehicles pollution monitoring equipments, instruction and test systems for engines/vehicles etc. The assessee reported ten international transactions in Form No.3CEB. The Assessing Officer (AO) referred the matter of determination of the arm s length price (ALP) of these international trans .....

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e TPO held that: any other debt arising during the course of business is also an international transaction. After considering the assessee s objections and arguments, it was opined that the assessee provided benefit to its AEs by way of advancing interest free loans in the garb of delayed receipt of receivables. Making a prudent estimate of 30 days for payment of receivables, the TPO held that any delay beyond such period was required to suffer transfer pricing adjustment. He applied Comparable .....

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s 180 days and further the benefit of netting of interest on receivables and payables was required to be given. The ld. CIT(A) concurred with the submissions put forth on behalf of the assessee and held that the credit period of 180 days should be allowed for computing the amount on which interest should be calculated. As regards the netting of interest payable with interest receivable, he held that the benefit of netting should be allowed for transactions with the same party. This resulted into .....

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val of doubts, gives meaning to the expression international transaction in an inclusive manner. Sub-clause (c) of clause (i) of this Explanation, which is relevant for our purpose, provides as under:- Explanation.-For the removal of doubts, it is hereby clarified that- (i) the expression "international transaction" shall include- (a) ………… (b) ……….. (c) capital financing, including any type of long-term or short-term borrowing, lending o .....

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nts, any other debt arising during the course of business has also been expressly recognized as an international transaction. That being so, the payment/non-payment of interest or receipt/non-receipt of interest on the loans accepted or allowed in the circumstances as mentioned in this clause of the Explanation, also become international transactions, requiring determination of their ALP. If payment of interest is excessive or there is no or low receipt of interest, then such interest expense/in .....

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s, the same is liable to be visited with the transfer pricing adjustment on account of interest income short charged or uncharged. Under such circumstances, the contention taken by the assessee before the authorities below that interest on receivables is not an international transaction, turns out to be bereft of any force. 6. The Hon ble Bombay High Court in the case of CIT vs. Patni Computer Systems Ltd., (2013) 215 Taxmann 108 (Bom.) dealt, inter alia, with the following question of law:- (c) .....

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stion, the Hon ble High Court noticed that an amendment to section 92B has been carried out by the Finance Act, 2012 with retrospective effect from 1.4.2002. Setting aside the view taken by the Tribunal, the Hon ble High Court restored this issue to the file of the Tribunal for fresh decision in the light of the legislative amendment. 8. The foregoing discussion makes it vivid that non-charging or undercharging of interest on the excess period of credit allowed to the AE for the realization of i .....

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ransaction. 9. On merits, the ld. AR contended that the ld. CIT(A) was not right in allowing netting of interest payable with interest receivable only for the same party. It was submitted that aggregate of the amounts receivable and payable from all the AEs should have been considered for the purpose of computing the amount of transfer pricing addition, if any, and not on transaction by transaction basis. 10. Section 92(1) of the Income-tax Act, 1961 (hereinafter also called the Act ) provides t .....

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s or functions performed by such persons or such other relevant factors as the Board may prescribe, namely ….. 11. It can be seen from the prescription of sub-section (1) to section 92C of the Act that the ALP is required to be determined having regard, inter alia, to nature of transaction or class of transaction. The term transaction has been defined in Rule 10A(d) of the Income-tax Rules, 1962 to include a number of closely linked transactions. When we consider the language of section 9 .....

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rmissible provided such transactions can be evaluated and adequately compared on aggregate basis. This proposition can be understood with the help of a simple illustration. If an assessee makes several transactions of sale of a particular product during a year to its two or three AEs, such several transactions of sale constitute one international transaction for the purpose of determining the ALP. One cannot contemplate benchmarking each and every sale transaction separately. Such sale transacti .....

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is manifest that he allowed the benefit of netting of interest payable of ₹ 4,32,737 with interest receivable of ₹ 9,41,224 from the same party only, viz. AVL List Graz and did not extend such benefit in respect of interest of ₹ 14,65,217 payable to AVL Fahrzeugdiagnose GmbH and ₹ 30,534 to AVL Zollner Marine GmbH. His point of view is that the benefit of netting of interest payable should be confined only to AVL List Graz and should not be extended to AVL Fahrzeugdiagno .....

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₹ 9,41,224 and paid interest of ₹ 4,32,737 from this party. The ld. CIT(A) has allowed set off of interest on payables of AVL List Graz with interest on receivables of AVL List Graz, thereby, computing addition of net interest on receivables at ₹ 5,08,487/-. Such addition was computed notwithstanding the fact that the assessee had certain trade payables to the other AEs, namely, AVL Fahrzeugdiagnose GmbH and AVL Zollner Marine GmbH as well, on which again no interest was paid. .....

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tality is an oversight of the fact that the assessee, in addition to AVL List Graz had also certain amounts payable in the same manner to the other two AEs. Even going by the ld. CIT(A) s version, there would have been no transfer pricing addition if the assessee had received the amount from one AE and paid to other AE, which would have been only an internal arrangement between the AEs. Since the balances with these three AEs are, admittedly, on account of trading transactions, which belong to t .....

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onsidered similar transactions with AVL Fahrzeugdiagnose GmbH and AVL Zollner Marine GmbH as also part of the same international transaction. We, therefore, set aside the impugned order on this score and hold that the international transactions of trade receivables and trade payables with all the three AEs should be aggregated and processed as a single transaction of interest on receivables/payables. If the position is viewed in such a manner, there remains no amount of interest receivable from .....

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owance u/s 14A to the tune of ₹ 52,449/-, being half percent of the average value of investments. The ld. CIT(A) echoed the addition. 16. Having heard the rival submissions and perused the relevant material on record, it is observed as an admitted position that the assessee did not earn any exempt income during the year and, still, the disallowance has been made u/s 14A. The Hon'ble Delhi High Court in Cheminvest Ltd. vs. CIT (2015) 378 ITR 33 (Del), has held that if there is no exempt .....

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tained u/s 14A of the Act. 17. In the result, the appeal is partly allowed. Assessment Year 2010-11 18. The first issue pressed in the instant appeal is transfer pricing adjustment on account of interest on receivables from the AE. 19. The factual matrix of the case is that the assessee continued to be engaged in assembling of diesel smoke meters, petrol exhaust gas analysers, computerized state of the art pollution monitoring systems for diesel and petrol vehicles and other engine diagnostic eq .....

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allowed credit period of 180 days, unlike 30 days allowed by him for the preceding year. The amount of international transaction of interest on receivables was worked out by allowing benefit of netting of interest receivable with interest payable. Interest rate of 14.88% was applied as a benchmark. Such rate was determined by considering the interest rate on BB Grade Corporate Bonds with duration of five years or more. That is how, the transfer pricing adjustment of ₹ 6,96,516/- was propos .....

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. Admittedly, there is no issue of setting off of interest receivable with interest payable for this year as the TPO has himself allowed the same and, further, the benefit of 180 days has also been allowed. 21. What remains is the determination of the ALP of the international transaction of Interest on receivables from its AE. This has two ingredients, viz., the amount on which interest should be charged and the arm s length rate at which the interest should be charged. In so far as the first as .....

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ng the ALP under this method has been set out in rule 10B(1)(a) as under : - (a) comparable uncontrolled price method, by which,- (i) the price charged or paid for property transferred or services provided in a comparable uncontrolled transaction, or a number of such transactions, is identified ; (ii) such price is adjusted to account for differences, if any, between the international transaction and the comparable uncontrolled transactions or between the enterprises entering into such transacti .....

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comparable uncontrolled transaction. The adjusted price becomes ALP under sub-clause (iii) in respect of the services provided by the assessee in the international transaction. Ergo, it is evident from the mandate of Rule 10B(1)(a) above that the ALP under this method can be determined only by making a comparison of the international transaction with similar uncontrolled transaction(s). 24. To be more specific, sub-clause (i) of rule 10B(1)(a) provides that the price charged or paid for property .....

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in uncontrolled transactions. 25. The TPO wrote a letter dated 26.11.2013 to the assessee calculating the amount due beyond the stipulated period and the number of days for which such delay was caused. A copy of such letter is available on pages 170 and 171 of the paper book. It can be seen from this letter that the maximum delay is of 94 days with the lowest delay of 8 days. As against that, the TPO has considered arm s length rate of interest at 14.88%, which is the average yield rate of BB gr .....

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provisions. The Hon ble Delhi High Court in CIT VS. EKL Appliances Ltd. (2012) 345 ITR 241 (Delhi) has held that the authorities should not disregard the actual transaction or substitute other transactions for them. Examination of a controlled transaction should ordinarily be based on the transaction as it has been actually undertaken. Two exceptions to the aforesaid principle have been carved out, viz., (i) where the economic substance of a transaction differs from its form and (ii) where the .....

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ty period . As such, the application of interest rate of 14.88 %, being the interest rate on bonds with a maturity period of 5 years or more, as a benchmark is disapproved and overturned. 26. Sub-clause (i) of rule 10B(1)(a) further provides for making a comparison with the price charged or paid in a comparable uncontrolled transaction . Thus it is discernible that what is to be compared under this method is the price charged or paid from a comparable uncontrolled transaction. The word 'comp .....

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n had been with some third party instead of related party. If data is available showing price charged or paid by the enterprise itself from a third party, it is advisable to have recourse to an internally comparable uncontrolled transaction. The reason is patent that the various factors having bearing on the quality of output, assets employed, input cost etc. continue to remain, by and large, same in case of an internal comparable. The effect of difference due to such inherent factors on compari .....

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rables, if these are actually comparables. The Mumbai bench of the tribunal in Gharda Chemicals Ltd. vs. DCIT (2010) 130 TTJ (Mumbai) 556 has held that internal comparables should be preferred over the external comparables. Similar view has been taken by the Pune Bench of the Tribunal in ACIT vs. MSS India (P) Ltd. (2009) 123 TTJ Pune 657. 27. In context of an international transaction of interest on receivables, a suitable comparable uncontrolled transaction can be amount received/ receivable b .....

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towards certain internally comparable uncontrolled transactions listed on page 44 of the paper book in which period of delay ranges from 184 to 797 days. It was submitted that the assessee did not charge any interest on such delayed receipts even from non-AEs. The same being internal CUP, the ld. AR urged that the ALP of the international transaction of interest on receivables should also be taken as nil. In fact, this was the submission made before the ld. CIT(A) as well, which starts from pag .....

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