TMI Blog2018 (10) TMI 1863X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee company - HELD THAT:- Issue decided in own case [ 2013 (8) TMI 332 - ITAT AHMEDABAD] The credit period for finished goods cannot be compared with credit period for unfinished goods and raw materials, and in any case, when products are not the same, there cannot be any question of prices being the same. Unless the prices of the product and the product are the same, and yet extra credit period is allowed, there cannot be any occasion for making ALP adjustment on the basis of the excess credit period. None of the authorities below have even disputed that the ingredients, raw materials and semi-finished goods sold to Micro USA are not sold to any other concern. The very foundation of impugned addition in arm's length price on account of excess credit period is thus devoid of any legally sustainable merits or factual basis. When all these factors were pointed out to the learned Departmental Representative, he did not have much to say except to place his bland but dutiful reliance on the orders of the authorities below. However, for the reasons set out above and in the absence of any comparative price and credit period figures on comparable product to support the case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ereby disregarding requirements of Rule 10B and 10C of the Income-tax Rules, 1962 [ the Rules ]. 4. The moot point involved in this matter is as to which is the most appropriate method for determining the Arms Length Price (ALP) and the exports made by the assessee to its Associated Enterprises (AEs). 5. The assessee is engaged in the business of manufacturing of glass mosaic. The company has its manufacturing unit at Kadi in Gujarat. It is a subsidiary company of Trend Group SpA, Italy. It has five AEs in Italy, Malaysia, Hong Kong USA. During the year under consideration, the assessee-company has entered into international transactions with its associated enterprises. According to the assessee, the ALP of the International transactions representing sale of manufactured products to the associated enterprises (AE) is determined by applying Transactional Net Margin Method (TNMM) on aggregated international transactions to be the most appropriate method on the facts and circumstances of the case. On the contrary, the authorities below are of the opinion that Cost Plus Method (CPM) is the most appropriate method for ascertaining the ALP. 6. At the very outset of the proceed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld not have been available to the assessee. All shortcomings being equal in the application of the methods of determining the ALP, as at best is the case of the authorities below, the method to be preferred is the method for which necessary inputs are available in the public domain. As for the TNMM data not being available, as there is difference between the product that the assessee is manufacturing vis-a-vis the products being manufactured by the comparables adopted, it is only broad similarity in the product and economic similarity in the conditions which is need. While on this issue, it may be relevant to refer to following observations in the UN s Transfer Pricing Manual: TNMM is usually applied with respect to broad comparable functions rather than particular controlled transactions. Returns to these functions are typically measured by a PLI in the form of a net margin that arguably will be affected by factors unrelated to arm s length pricing. Consequently, one might expect the TNMM to be a relatively disfavoured method. Nevertheless TNMM is typically applied when two related parties engage in a continuing series of transactions and one of the parties controls intangible ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ning the arm s length price of assessee s transactions with the associated enterprises. We direct the AO/TPO to compute the ALP on the basis of the transactional net margin method. With these directions, we remit the matter to the file to the assessment stage for fresh determination of arm s length price. As the matter is being remitted to the assessment stage, it will be open to the assessee to take such other plea, on merits, on ascertainment of ALP under the TNMM as the assessee may deem fit and the same will have to be disposed of by way of a speaking order, in accordance with the law and after giving a fair and reasonable opportunity of hearing to the assessee. All those issues regarding computation part, as on now, are quite academic and wholly hypothetical. With these directions, the matter is remitted to the file of the Assessing Officer. 5. Representatives of both sides fairly conceded that the facts in issue for the appeal under consideration are similar to the facts in issue considered by the Co-ordinate Bench (supra). 6. In our considered opinion and on finding parity on the facts of the case in hand with the facts of A.Y. 2008-09, we do not find any reason why th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s raised by the assessee-company on various Associated Enterprises (AEs) that there were excess delay beyond the credit facility extended to those AEs in realization of sale invoices. By parking such amount at the disposal of the AEs for extra period, the assesseecompany had deprived its own funds available in its hand. According to the Revenue, in the independent third party scenario, no third party will extend such funds to any unrelated entity without expecting commensurate re-numeration/compensation for the same. Consequently, the non-charging of any commensurate remuneration from the associate enterprise in respect of such grant of funds by the assessee-company was not at arm s length and thus the amount outstanding from the AEs were considered as parking of funds in the nature of loan with the AEs by the assessee-company. In that view of the matter, for determining of ALP of such funds in the nature of loan with the AEs, the benchmark rate at which interest should have been charged from the AEs was determined by Revenue. Since the invoices were denomination in United States Dollar and Euro, the receivables pertaining to such invoices were treated as US Dollar and EURO denomin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r of Income-tax, Circle-1(1)(2), Ahmedabad reported in [2018] 97 taxmann.com 432 (Ahmedabad-Trib.) in support of his contention/refuting the upward adjustment of ₹ 15,74,438/- made by the TPO and confirmed by the authorities below. The relevant portion of the said order is as follows:- 6. We have heard the rival contentions and perused the material on record carefully. In this case, a reference u/s. 92CA(1) of the act for the computation of arm's length price in relation to international transaction entered into by the assessee with associated enterprise was made to the TPO. The TPO has worked out a upward adjustment of ₹ 98,47,085/- on account of ALP interest that was required to be charged by the assessee company from the associated enterprise in view of delay in realization of sale invoices beyond the credit period extended by the assessee company. The assessee has explained that it has applied TNMM method which takes into account all the income and expenditure of the entity and takes the net margin as profit level indicated. It was further submitted that TNMM takes care of the interest income if any forgone by the assessee on account of late payment received ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dit period of 56 days not be made, by computing time value of money @ 6.38% on LIBOR plus basis. In response to this show-cause notice, it was, inter alia, explained by the assessee that what is exported to Micro USA is semi-finished material which is required to be further processed and converted into saleable product. In effect thus, export to Micro USA cannot be compared with export of finished products as was done to the independent enterprises. The assessee had also pointed out that average credit period of third parties is 120 days whereas credit period granted to Micro USA is 135 days though actual highest average debtor days to third parties is 161 days whereas for Micro USA it is 186 days . It was also explained that considering the time taken in shipping the semi finished goods to Micro US, its processing in US, maintenance of inventory at US and credit realization time in US, the total cycle was about 210 days, but even if bare minimum period to complete a sale cycle is taken into account, it cannot be less than 170 days. It was thus pointed out that the average credit period to Micro USA, which was 135 days, was reasonable. On the basis of these arguments, it was sub ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ess credit period. None of the authorities below have even disputed that the ingredients, raw materials and semi-finished goods sold to Micro USA are not sold to any other concern. The very foundation of impugned addition in arm's length price on account of excess credit period is thus devoid of any legally sustainable merits or factual basis. When all these factors were pointed out to the learned Departmental Representative, he did not have much to say except to place his bland but dutiful reliance on the orders of the authorities below. However, for the reasons set out above and in the absence of any comparative price and credit period figures on comparable product to support the case of the revenue, we uphold the grievance of the assessee and direct the Assessing Officer to delete this ALP adjustment. The assessee gets the relief accordingly. 6. Learned counsel for the assessee submits that the issue being squarely covered, in favour of the assessee and on admittedly similar set of facts, there is no occasion to reconsider the matter. We are urged to follow the said decision and delete the impugned adjustment. On the other hand, while learned Departmental Representative ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eason 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 I Case 2 Sales 1000 1,000 Purchase Price 600 500 Gross Marin 400(40%) 500 Marketing Sale Promotion 50 150 Overhead expense 300 300 Net Profit 50(5%) 50(5%) The above illustrations draw a distinct ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cludible 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 enterprises is more than the credit period allowed to independent enterprise in respect of the same or materially similar transactions. In the present case, it is an undisputed position that semi-finished goods, as sold to Micro USA, is not sold to any other independent enterprises. The assessee did have trading transactions in respect of the finished goo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r 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, happened if assessee was to have similar transactions with non-AEs. The comparison has to be based on real transactions of similar nature, if at all such transactions have taken place. When no such transactions have taken place, as is the case before us, there is obviously no occasion of any comparison. The stand taken by the learned Departmental Repres ..... 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