Case Law Details
Gimpex Pvt. Ltd. Vs ACIT (ITAT Chennai)
There is no dispute with regard to the fact that receivables is included under the definition of international transactions by amending section 92B by the Finance Act, 2012 w.e.f. 01.04.2002. Therefore, we are of the considered view that there is no merit in the arguments advanced by the assessee that receivables is not international transactions. As regards benchmarking international transactions, once the assessee has adopted TNMM as most appropriate method , whether separate adjustment is required to be made in respect of receivables or not has been the subject matter of deliberations by the co-ordinate Bench of the Tribunal in assessee’s own case for the assessment year 2014-15 in IT(TP)No. 57/Chny/2018, where the Tribunal after considering relevant facts has held that once TNMM method is considered as the most appropriate method, the net margin worked out thereunder could take care of all such notional interest cost, wherever it could be imputed and there could be no arm’s length price adjustment for any overdue receivables. The Bench has also observed that once there is complete uniformity in not charging any interest from any party, whether Associated Enterprises or non- Associated Enterprises, there could not be any selective imputing of notional interest on receivable from AE for belated realization of export bills. The relevant findings of the Tribunal in IT(TP) No.57/Chny/2018 dated 05.04.2019 are as under:-
23. Now we take up the dispute regarding the Arms Length Price adjustment imputing interest on overdue receivables. It is not disputed by the Revenue that assessee had not charged interest either from its Associated Enterprise or from Non Associated Enterprises, for delay in collection of receivables. It is also not disputed that out of the total transactions of the assessee almost 57% were with its Non Associated Enterprises. Once there is complete uniformity followed by assessee in not charging any interest from any party, whether Associated Enterprise or Non Associated Enterprises, in our opinion there could not be any selective imputing of notional interest. Submission of the assessee that out of total sales of about of ` 261 Crores to its Associated Enterprise, ` 100 Crores was received well within the due date and small delays were only in the balance of ` 161 Crores has not been disputed by the ld. Departmental Representative. Assessee had not offered any discount to any party for payment of bills before the expiry of the credit period. Hence, it is only a natural corollary that it did not charge any interest for delays also. Where a good part of the dues were collected earlier to the due date, in our opinion the instances where there were delays could not be selectively elected for a levy of charge of notional interest. Such an approach if accepted will completely overlook commercial realties. That apart, once TNMM method is considered as the most appropriate method, as held by Ahmedabad Bench of the Tribunal in the cases of Bisazza India (P) Ltd (supra) and Gemstone Glass Pvt Ltd (supra) the net margin worked out there under could take care of all such notional interest cost, wherever it could be imputed and there could be no Arms Length Price adjustment for any overdue receivables. We therefore delete Arms Length Price adjustment of ` 6,18,43,887/- made on overdue receivables.”
In this view of the matter and consistent with the view taken by the co-ordinate Bench of this Tribunal in assessee’s own case for the earlier assessment year, we are of the considered view that when TNMM method has been applied as most appropriate method it could take care of all notional interest costs wherever it could be applied and there could be no separate upward adjustments on export receivables for belated realization of export bills. Hence, we direct the Assessing Officer to delete upward adjustment made towards overdue receivables from Associated Enterprises.
FULL TEXT OF THE ITAT JUDGEMENT
This appeal filed by the assessee is directed against final assessment order passed under section 143(3) r.w.s 92C(3) r.w.s 144C(13) of the Income Tax Act, 1961 (hereinafter referred to as “the Act”) dated 26.07.2019, in turn which has arisen out of directions of the Dispute Resolution Panel-2, Bengaluru issued u/s. 144C(5) of the Act dated 22.05.2019 and pertains to assessment year 2015-16.
2. The assessee has raised the following grounds of appeal:-
“1. The Final Assessment Order passed by the jurisdictional Assessing Officer pursuant to directions issued by the Dispute Resolution Panel is contrary to law, facts and circumstances of the case.
2. The directions of the Dispute Resolution Panel (DRP, the consequential transfer pricing order and the final assessment order is erroneous in so far as determining and quantifying downward adjustment to the value of international transactions with the associated enterprises (AE) of the Appellant.
Adjustment towards Interest on Overdue receivables
3.1 The TPO/AO) erred in imputing interest on overdue receivable and the DRP erred in sustaining the said adjustment.
3.2 The DRP/TPO/AO failed to appreciate that the outstanding receivables cannot be considered as an international transaction and it does not raft within the purview of capita! financing as contemplated under Section 92B of the Act.
3.3 The DRP/TPO/AO erred in not appreciating the fact that the Act provides far taxing only real income whether received or accrued under the normal provisions.
3.4 The DRP/TPO/AO erred in not appreciating the fact that transfer pricing adjustment cannot be made on hypothetical and notional basis until and unless there is some material on record that there has been under charging of real income.
3.5 The TPO/AO erred in imputing interest on delayed receivables despite the fact that the primary transaction has already been tested and considered to be at arms length.
3.6 The DRP/AO/TPO erred in not appreciating the fact that the AE have made an interest free security deposit & Rs,16.95 crores and as such there was no necessity to charge interest in relation to belated collection of outstanding trade receivables.
3.7 Without prejudice to the levy of notional interest, the DRP ought to have appreciated that when the TPO sought to impute interest on belated receipt of trade receivables, the same principle should be applied for early receipt of trade receivable and the interest proportionate to early receipt should be net off against the levy of belated receipt of interest, 3.8 Without prejudice to levy of notional interest, the DRP/TPO/AO erred in not considering higher number of days as credit period instead of considering 45 days as normal credit period which does not have any basis.
3.9 Without prejudice to ground no.6. the DRP/TPO/AO erred in not considering the fact that the RBI guidelines provides for a credit period of 270 days to collect the invoices raised.
3.10 Without prejudice to levy of notional interest the DRP/TPO ought to have reckoned the LIBOR rate of interest instead considering SBI interest rate as the trade receivable were in foreign currency.
3.11 Without prejudice to the above, the foreign exchange gain of `7,28,91,706/- should be netted off against the notional interest charged on delayed receipt of trade receivables.
3.12 Without prejudice to the above, the DRP ought to have appreciated that the TPO has not adopted any of the prescribed methods while imputing interest on trade receivables.
3.13 Without prejudice to the above, the DRP erred in directing the TPO to adopt SB’ interest rate at 14.60% whereas the actual SBI interest rate applicable for the subject ÀY is only 9.80%
3.14 Without prejudice to the above, the DRP erred in enhancing the adjustment without affording an opportunity to the appellant.
3.15 Without prejudice to the above, the levy of interest is high and arbitrary.”
3. Brief facts of the case are that assessee company is engaged in the business of mineral mining, trading and exports. The assessee company operates in the sphere of industrial minerals including metallic and non-metallic minerals. The assessee company trades in Millscale, Barites powder, yellow maize/corn, Bentonite powder, Barytes Lump, Coal and Iron ore fines. The assessee company has entered into various international transactions with its associated enterprises (AEs) and benchmark its international transactions under CUP method and stated that its international transactions with AEs are at arm’s length price. The assessee has filed its return of income for the assessment year 2015-16 on 24.11.2015, admitting total income of `19,59,35,990/-. The case was selected for scrutiny and during the course of assessment proceedings, a reference was made to Transfer Pricing Officer (TPO) for determination of arm’s length price of international transactions with its AEs. During the course of transfer pricing proceedings, the TPO has rejected CUP method selected by the assessee as most appropriate method and has applied TNMM as most appropriate method to benchmark international transactions with its AEs. The TPO after considering relevant facts and has selected certain comparables in each segment and held that assessee’s PLI is well above the PLI of the comparables and hence no upward adjustments is required in respect of international transactions of the assessee in trading in iron ore & Millscale segment, trading in coal segment and trading in mineral segment . Similarly, in respect of corporate guarantee, the TPO after taking note of the fact that although the assessee has provided corporate guarantee to its AEs without charging any fees, but because of interest free security deposits received from AE which is over and above the amount of corporate guarantee, there is no upward adjustment is required for providing corporate guarantee. However, in respect of export receivables, the TPO noted that in view of amendment to section 92B of the Income Tax Act, 1961 by the Finance Act, 2012 w.e.f. 01.04.2002 receivables has been included in the definition of international transactions under clause ‘c’ of Explanation to section 92B as Capital financing and hence, export receivables from AEs for belated realization needs to be benchmarked and accordingly, computed arm’s length price by taking interest rate of 13% over and above the normal credit period and made upward adjustment of `5,65,32,966/-
4. Pursuant to the TPO order, the Assessing Officer has passed draft assessment order u/s.143(3) r.w.s 144C(1) of the Act on 16.11.2018 and made upward adjustment of Rs.5,65,32,966/- towards interest on overdue receivables. Being aggrieved by the draft assessment order , the assessee has filed objections before the DRP-II, Bengaluru and challenged the upward adjustment made by the Assessing Officer towards receivables from AE on the ground that when the assessee has not charged any interest on receivables from the AE and non-AE, for belated realization of export receivables cannot be considered as international transactions for the purpose of determination of arm’s length price. The DRP-II, Bengaluru vide order dated 22.05.2019, after considering relevant submissions of the assessee and also taken note of amendment inserted by Finance Act, 2012 w.e.f 01.04.2002 held that definition of international transactions has been amended so as to include deferred payment or receivable or any other debt arising during the course of business and hence non-charging or undercharging of interest on the excess period of credit allowed to AE for realization of invoices would amount to international transactions. The DRP has discussed the issue in light of certain judicial precedents and held that when the assessee has allowed credit period over and above normal credit period allowed in business, then the same needs to be benchmarked, more particularly, if the agreement does not specify the term of payment or period of credit. The DRP has also rejected another argument taken by the assessee in light of interest free security deposits received from AE and held that, because receivables are separate international transactions on which arm’s length price is to be computed whether assessee has received interest free security deposits or not is not relevant to decide applicability of Chapter X of the Income Tax Act, 1961. Therefore, DRP opined that there is no error in computation of arm’s length price by the TPO by allowing normal credit period of 45 days on all export receivables by adopting 13% rate of interest by taking SBI prime lending rate. Being aggrieved by the DRP order, the assessee is in appeal before us.
5. The learned AR for the assesse, at the time of hearing, submitted that this issue is squarely covered in favour of the assessee by the decision of ITAT ‘D’ Bench, Chennai in assessee’s own case for the assessment year 2014-15, where under identical set of facts, the Tribunal deleted the upward adjustment made towards receivables on the ground that once TNMM method is considered as most appropriate method net margin worked out thereunder could take care of all such notional interest cost wherever it could be imputed and there could be no arm’s length price adjustment for overdue receivables. The facts are being identical for the year under consideration, the additions made by the Assessing Officer towards upward adjustment on overdue receivables should be deleted.
6. The learned DR, on the other hand, supporting the order of the TPO as well as DRP submitted that from the assessment year 200203 onwards the definition of international transactions has been amended so as to include receivables, therefore, when the assessee has allowed excess credit period over and above the normal credit period of AE, then the same needs to be benchmarked and hence there is no error in the findings recorded by the learned TPO as well as DRP in computing arm’s length price on export receivable and hence, their orders should be upheld.
7. We have heard both the parties, perused the material available on record and gone through the orders of the authorities below. There is no dispute with regard to the fact that receivables is included under the definition of international transactions by amending section 92B by the Finance Act, 2012 w.e.f. 01.04.2002. Therefore, we are of the considered view that there is no merit in the arguments advanced by the assessee that receivables is not international transactions. As regards benchmarking international transactions, once the assessee has adopted TNMM as most appropriate method , whether separate adjustment is required to be made in respect of receivables or not has been the subject matter of deliberations by the co-ordinate Bench of the Tribunal in assessee’s own case for the assessment year 2014-15 in IT(TP)No. 57/Chny/2018, where the Tribunal after considering relevant facts has held that once TNMM method is considered as the most appropriate method, the net margin worked out thereunder could take care of all such notional interest cost, wherever it could be imputed and there could be no arm’s length price adjustment for any overdue receivables. The Bench has also observed that once there is complete uniformity in not charging any interest from any party, whether Associated Enterprises or non- Associated Enterprises, there could not be any selective imputing of notional interest on receivable from AE for belated realization of export bills. The relevant findings of the Tribunal in IT(TP) No.57/Chny/2018 dated 05.04.2019 are as under:-
23. Now we take up the dispute regarding the Arms Length Price adjustment imputing interest on overdue receivables. It is not disputed by the Revenue that assessee had not charged interest either from its Associated Enterprise or from Non Associated Enterprises, for delay in collection of receivables. It is also not disputed that out of the total transactions of the assessee almost 57% were with its Non Associated Enterprises. Once there is complete uniformity followed by assessee in not charging any interest from any party, whether Associated Enterprise or Non Associated Enterprises, in our opinion there could not be any selective imputing of notional interest. Submission of the assessee that out of total sales of about of ` 261 Crores to its Associated Enterprise, ` 100 Crores was received well within the due date and small delays were only in the balance of ` 161 Crores has not been disputed by the ld. Departmental Representative. Assessee had not offered any discount to any party for payment of bills before the expiry of the credit period. Hence, it is only a natural corollary that it did not charge any interest for delays also. Where a good part of the dues were collected earlier to the due date, in our opinion the instances where there were delays could not be selectively elected for a levy of charge of notional interest. Such an approach if accepted will completely overlook commercial realties. That apart, once TNMM method is considered as the most appropriate method, as held by Ahmedabad Bench of the Tribunal in the cases of Bisazza India (P) Ltd (supra) and Gemstone Glass Pvt Ltd (supra) the net margin worked out there under could take care of all such notional interest cost, wherever it could be imputed and there could be no Arms Length Price adjustment for any overdue receivables. We therefore delete Arms Length Price adjustment of ` 6,18,43,887/- made on overdue receivables.”
8. In this view of the matter and consistent with the view taken by the co-ordinate Bench of this Tribunal in assessee’s own case for the earlier assessment year, we are of the considered view that when TNMM method has been applied as most appropriate method it could take care of all notional interest costs wherever it could be applied and there could be no separate upward adjustments on export receivables for belated realization of export bills. Hence, we direct the Assessing Officer to delete upward adjustment made towards overdue receivables from Associated Enterprises.
9. In the result, appeal filed by the assessee is allowed.
Order pronounced in the open court on 28th December, 2020
