TMI Blog2019 (3) TMI 325X X X X Extracts X X X X X X X X Extracts X X X X ..... (A) has rightly applied the LIBOR for the purpose of bench-marking the credit allowed to the AE for realization of sale proceeds. CIT(A) has also considered the exchange rate gain against the said arm’s length interest which in our view, is not proper as the exchange gain or loss would be part of the sale proceeds and therefore would consequently increase or decrease the sale price at the time of computing the arm’s length price and bench-marking of international transaction. Hence the for ex-gain or loss has to be taken as part of the sale price in both the cases of international transaction as well as comparable uncontrolled price. In other words, the exchange gain or loss would be part of the sale price of the transaction between the assessee and AE as well as non-AE. The effect of the exchange gain or loss has to be given in computing of arm’s length price being the part of sale proceeds as well as comparable price. The adjustment on account of credit allowed to the AE beyond 60 days shall be made at the time of determining the arm’s length price of sale transaction and not to be considered as a separate international transaction. Accordingly, this issue is also set aside t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Method Value (in Rs.) 1. Sale of Carpet to M/s jaipur Rugs Inc, USA (11.25 lac Sq. feet) CUP 29,29,83743/ - During the course of the T.P. proceedings, it was noted that the assessee had substantial amount of outstanding receivables from the A/E M/s Jaipur Rugs inc. USA. These amounts remained outstanding for a prolonged period and no interest had been charged by the assessee on such amounts. the interest free credit allowed to AE was considered as international transaction and the same was evaluated in the course of the T.P. proceedings, in terms of the provision U/s 92CA)2A) of the IT Act. Thus, it is clear that the TPO has also noted that apart from the export to the associated enterprises, the assessee has also substantial amount of outstanding receivables from the AE M/s Jaipur Rugs Inc USA on which no interest has been charged by the assessee. Accordingly, the TPO considered the interest free credit allowed to the AE as international transaction and the same was evaluated in the course of TP proceedings in terms of Section 92CA(2A) of the Income Tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, the ld. CIT(A) has deleted the additions made by the Assessing Officer on account of transfer pricing adjustment. 5. Before us, the ld. CIT-DR has submitted that the assessee has applied CUP method by taking the average price of sale to the unrelated parties whereas the goods sold to the AE and to unrelated parties are not the same but there is a vast difference in the quality and variety of goods sold to the AE and to the non-AE parties. Therefore, aggregation of all the transactions of non-AE parties and then benchmarked the average rate of sales to the AE would not give the correct results. The ld CIT-DR has submitted that the TPO has rightly adopted the method of comparing the transaction one by one by taking the CUP rates and compared the same with the transactions of each category of carpets sold to related parties/AE. Hence, the ld DR has submitted that the TPO has adopted a correct method for bench-marking the transaction by adopting CUP of each and every transaction instead of clubbing of different transactions and then averaging out the arm s length price which is not giving the correct result. He has further contended that the ld. CIT(A) has accepted the transfer p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rt the Rules). The ld AR has further pointed out that the Rules 10A and 10B of the Rules permits the aggregation of the transactions if the transactions are closely related even under CUP and consequently when the average price charged to the AE is within the tolerance range of + 5% of the arm s length price then no adjustment is called for. In support of his contention, he has relied upon the decision of Pune Bench of the Tribunal in the case of Cummins India Limited Vs Addl.CIT in ITA No. 1616/PN/2011 order dated 31/12/2014. The ld AR has also relied upon the decision of Delhi Benches of the Tribunal in the case ITW India Limited Vs ACIT in ITA No. 521/Del/2013 order dated 30/01/2015 and submitted that the TPO cannot be allowed to cherry picking of the transaction while determining the arm s length price and consequential adjustment. Even otherwise if more than one comparable uncontrolled price are taken into consideration then the arithmetic mean of such prices should be taken as arm s length price for bench-marking the international transaction. The ld AR has also relied upon the decision of Hon ble Bombay High Court in the case of CIT Vs. Indo American Jewellery Ltd. (2014) 44 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... herefore, we find that the average method adopted by the assessee in working out the arm s length price under CUP does not give the correct results of arm s length price. Even the average price adopted by the assessee in respect of the international transaction is also not representing the correct price of the international transactions. Once the differences in the rate of the various varieties of carpets sold to the AE as well as to the non-AE is so apparent and substantial then taking a simple average price will not be a proper and reasonable method to work out the arm s length price as well as the price of the international transaction of such a large number of transactions. We note that the rate of the some of the carpets is as low as ₹ 4.00 per Sq.ft. and whereas the rate of some other carpets is ₹ 29.00 per sq.ft. If the quantity of carpet sold at lower rate and quantity of carpet sold at high rate are also having the difference of a high degree than such transactions having variation of more than of 7 times cannot be aggregated by taking a simple arithmetic mean. Though if the transactions are closely related and depending upon each other than Rule 10A(d) of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... duct, the arm s length price and comparison of the international transaction has to be taken on the total transactions instead of cherry picking of the transactions. Accordingly, we find that neither the assessee has applied the correct working nor the TPO adopted a valid and permissible approach while computing the arm s length price and bench-marking of international transaction. The ld. CIT(A) has accepted the working of the assessee and hence we find that the said acceptance of the arm s length price as well as bench-marking as reported by the assessee in the transfer pricing is also not acceptable. Hence, we find that the matter has not been properly examined by the TPO or by the ld. CIT(A) to work out the correct methodology for the purpose of computing the arm s length price and then bench-marking the same with the price of the international transaction. Hence, in the facts and circumstances of the case, we set aside this issue to the record of the A.O./TPO to carry out a fresh exercise of determining the arm s length price as well as the price of the international transaction by using weighted average instead of simple average of all the transactions entered into by the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y several co-ordinate benches like Goldstar Jewellery Ltd. v. Jt. CIT [2015] 53 taxmann.com 353/68 SOT 259 (URO) (Mum.) is applicable and in the case of Avnet India (P.) Ltd. v. Dy. CIT [2016] 65 taxmann.com 187 (Bang. - Trib.) to which one of us is a party, it has been held as follows: '8. We have heard the rival submissions. The assessee company reported international transactions in its TP report. On a reference by the AO, the learned TPO accepted that the price charged by the assessee company on these transactions are at arm's length. However, the TPO made adjustments on account of notional interest for the excess period allowed by the assessee- company to its AE for realization of its dues. The TPO applied 14% of interest on the outstanding amount of Rs. The learned DRP also had also concurred with the finding of learned TPO. There is no dispute that the transaction in question falls within the ambit of international transactions u/s 92B of the IT Act. However, this transaction is not an independent transaction. It is an integral part of transaction of sale made to the AE and therefore, it has to be considered alongwith the main transaction. The similar issue had co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ervice determined between the parties is always influenced by the credit period allowed by the seller. Therefore, the transaction of sale to the AE and credit period allowed in realization of sale proceeds are closely linked as they are inter linked and the terms and conditions of sale as well as the price are determined based on the totality of the transaction and not on individual and separate transaction. The approach of the TPO and DRP in analyzing the credit period allowed by the assessee to the AE without considering the main international transaction being sale to the AE will give distorted result by disregarding the price charged by the assessee from AE. Though extra period allowed for realization of sale proceeds from the AE is an international transaction, however, for the purpose of determining the ALP, the same has to be clubbed or aggregated with the sale transactions with the AE. Even by considering it as an independent transaction the same has to be compared with the internal CUP available in the shape of the credit allowed by the assessee to non-AE. When the assessee is not making any difference for not charging the interest from AE as well as non-AE then the only d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... saction and not on individual and separate transaction. Therefore, for the purpose of determining the arm s length price the transaction of allowing the credit to the AE for realization of sale proceeds has to be clubbed or aggregated with the sale transaction with the AE. It is also pertinent to note that the credit period allowed to the AE would not arise if there is no sale transaction to the AE, therefore, the said transaction of allowing the credit period is absolutely an outcome of the sale transaction and consequently would form part of international transaction of sale to the AE. The Hon ble Bombay High Court in the case of PCIT Vs Tecnimont (P) Ltd. (2018) 96 taxmann.com 223 (Bom) has upheld the order of the Tribunal in para 7 and 8 as under: 7. We note the finding of fact by the Tribunal that no interest is charged by the respondent assessee from its AEs as well as its non-AEs for delayed payment of export receivable and expenses. Further finding of fact that operating margin earned by the respondent assessee in respect of its transactions with AEs is higher than that earned on transactions with nonAEs entities. Thus, keeping the above finding of fact, we proceed to e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... action. Hence the for ex-gain or loss has to be taken as part of the sale price in both the cases of international transaction as well as comparable uncontrolled price. In other words, the exchange gain or loss would be part of the sale price of the transaction between the assessee and AE as well as non-AE. Therefore, the effect of the exchange gain or loss has to be given in computing of arm s length price being the part of sale proceeds as well as comparable price. The adjustment on account of credit allowed to the AE beyond 60 days shall be made at the time of determining the arm s length price of sale transaction and not to be considered as a separate international transaction. Accordingly, this issue is also set aside to the record of the TPO/A.O. for computation of arm s length price alongwith main international transaction of sale. Hence, appeal of the revenue for the A.Y. 2008-09 is allowed for statistical purposes only. 8. In the appeal for the A.Y. 2009-10, the assessee as well as the revenue has raised following grounds: Grounds of assessee s appeal: 1. In the facts and circumstances of the case and in law, the ld. CIT(A) has erred in confirming the action ..... X X X X Extracts X X X X X X X X Extracts X X X X
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