TMI Blog2016 (3) TMI 1337X X X X Extracts X X X X X X X X Extracts X X X X ..... ection of the Hon’ble ITAT and delete the disallowances after due verification. Further, the effect of the disallowance upheld with reference to FD interest as discussed also has to be taken into account while giving effect to this order TPA - arm’s length price adjustment in respect of realization of export proceeds beyond 180 days from the AEs - Recharcaterization of transaction as an unsecured loan - Held that:- This is uncontroverted stand of the assessee that he has not charged interest on delay in realization of debts in non AE situations as well. Once it is not in dispute, as is the case before us, that no interest is 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 (4) TMI 346 - DEL ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n respect of the profits arising out of trading activity and in holding that trading is covered within the definition of 'services' under the SEZ Rule, without appreciating the fact that section 2(z) of the SEZ Act defines tradable services in general while under the specific provisions of section 10AA of the I T Act, which is inserted in pursuance of the SEZ Act and the general scheme of I T Act, trading activity does not fall within the meaning of 'services' and hence profit from trading activity does not qualify for the deduction provided u/s 10AA of the IT Act. 3. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in holding that by virtue of section 51 of the SEZ Act, the provisions of SEZ Act and the Rules will have overriding effect over the provisions of the Income-tax Act without appreciating the fact the necessary amendments have already been incorporated in various section of the Income-tax Act in pursuance of section 27 and various provisions in the Second Schedule of the SEZ Act . ITA No.142/Mum/2014 (By the assessee) 1) The order passed by learned Assessing Officer is against equity and justice. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te bench as evident from the following observations of the ld. CIT(A) :- The appellant has made detailed submissions and stated that Hon ble ITAT has decided the issue in its favour for A.Y. 2006-07 and 2007-08 on identical facts. The contention of the appellant on perusal of the order is found to be correct. Hon ble ITAT in paras 20, 21 22 have discussed the issue and the points raised by the CIT(A) have been upheld. In the final findings the CIT(A) had allowed deduction u/s.10AA on goods exported and imported from SEZ. It was also observed that no such benefit should be given for the local purchase and sale made by the appellant. The AO is directed to follow the direction of the Hon ble ITAT and delete the disallowances after due verification. Further, the effect of the disallowance upheld with reference to FD interest as discussed in ground no.3 also has to be taken into account while giving effect to this order. 6. Respectfully following the views so taken by the co-ordinate bench, we see no reasons to take any other view of the matter than the view so taken by the co-ordinate bench in assessee s own case the assessment years 2006-07 and 2007-08. These grounds of a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nces 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 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 fou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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 to accept the comparables and determine or accept the transfer price and still segregate AMP expenses 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 exports has been benchmarked on the CUP basis but not in a case when the arm's length price of the exports has been benchmarked on the basis of TNMM. The very conceptual foundation, for 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 ente ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 after six months cannot, therefore, be seen in isolation with what is the position is with respect to similar payments due from non AEs. The whole exercise of ALP adjustments is to neutralize 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, ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 constitute integral part of the transfer pricing documentation. There is nothing on record to show these exclusions. 16. As regards the contention that normally all interest incomes are excluded in 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 realiza ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 it has bearing on the profit, income, losses or assets of such enterprises at the time of the transaction or at any future date; (ii) the expression intangible property shall include - (a) 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 plain words, a continuing debit balance only reflects that the payment, even though due, has not been made by the debtor. It is not, however, necessary that a payment is to be made as soon as it becomes 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (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 the judgment, Their Lordships observed as follows: 2. So far as question (c) is concerned, counsel for the parties state that in view of the amendment to Section 92B(1) of the Income Tax Act, 1961 ('Act' 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 observation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 was made with retrospective effect and it covered certain issues which were already subjected to a judicial interpretation in a particular manner. The judicial interpretation so given was certainly not the end of the road. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le, 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. Nonetheless, when disputes as to their applicability arise in court, it is the actual substance of the amendment that determines its ultimate operation and not the bare language in which such amendment is couched .. 36. A clarificatory 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 tim ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urt 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 right now we are only concerned with the question of retrospective amendment in the transfer pricing legislation, which has, as we will see, its own peculiarities and significant distinction with normal tax laws which simply impose tax on an income. 35. Legislature may describe an amendment as clarificatory in nature, but a call will have to be taken by the judiciary whether it is indeed clarificatory or not. This determination, i.e. whether the amendment in indeed clarificatory or is the amendment to overcome a judicia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... preted, 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 man to do what he cannot possibly perform. The law itself and its administration is understood to disclaim as it does in its general aphorisms, all intention of compelling impossibilities, and the administration of law must adopt that general exception in the consideration of particular cases. [See : U.P.S.R.T.C. vs. Imtiaz Hussain 2006 (1) SCC 380, Shaikh Salim Haji Abdul Khayumsab vs. Kumar Ors. 2006 (1) SCC 46, Mohammod Gazi vs. State of M.P. Ors. 2000 (4) SCC 342 and Gursharan Singh vs. New Delhi Municipal Committee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 filed income tax returns in accordance with the law. As a corollary to this proposition, in our considered view, declining deduction in respect of expenditure relating to the payments of this nature cannot be treated as an intended consequence of Section 40(a)(ia). If it is not an intended consequence i.e. if it is an unintended consequence, even going by Bharti Shipyard decision (supra), removing unintended consequences to make the provisions workable has to be treated as retrospective notwithstanding the fact that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 could have been an intended consequence to punish the assessee s for non deduction of tax at source by declining the deduction in respect of related payments, even when the corresponding income is duly brought to tax. That will be going much beyond the obvious intention of the section. Accordingly, we hold that the insertion of second proviso to Section 40(a)(ia) is declaratory and curative in nature and it has retrospective effect from 1st April, 2005, being the date from which sub clause (ia) of section 40(a) was inser ..... X X X X Extracts X X X X X X X X Extracts X X X X
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