Even if we accept the contention of the ld. DR that the non-charging of interest from AEs in the transaction of sale could in itself be construed as an international transaction, then also going by the CUP method, no such adjustment can be made because th0ontrolled transactions is comparable with that of non-charging from the uncontrolled transactions, no transfer pricing adjustment can be made on this count. We, therefore, hold that no addition on account of such interest can be made.
INCOME TAX APPELLATE TRIBUNAL, MUMBAI
ITA No. 5872/Mum/2009 : Asst. Year: 2005- 2006
The Dy. Commissioner of Income Tax
M/s. Indo American Jewellery Limited
Date of Pronouncement: 22.02.2012
O R D E R
Per R.S.Syal, AM:
This appeal by the Revenue arises out of the order passed by the Commissioner of Income-tax (Appeals) on 31.08.2009, in relation to the assessment year 2005-2006.
2. Ground nos.1 and 2 deal with the deletion of addition of Rs. 49,99,680 on account of adjustment made to arm’s length price (ALP) in respect of international transaction with Associated Enterprise (AEs). Briefly stated the facts of these grounds are that the assessee entered into international transactions with its AEs and others, as depicted on pages 1 and 2 of the TPO’s order dated 30.10.2008. The assessee followed TNMM for determining arm’s length price. In this way it showed operating profit margin to sales rate at 5.47% and operating profit margin to cost at 5.78%. The Transfer Pricing Officer (TPO), after making certain inclusions in and exclusions from the comparable cases given by the assessee, determined the operating profit margin to cost at the rate of 6.93% for the purposes of bench marking the price charged by the assessee. It has been brought to our notice that after passing of this order, on an application made by the assesse, the TPO rectified his order on 23.02.2009 by proposing adjustment to be made at Rs. 49,99,680. When the matter came up before the learned CIT(A), he observed that the exports to the AEs were very less at 3.59% of the total sales. He also noted that the assessee had carried out FAR analysis in its transfer pricing report and the TPO had not pointed out any specific defects in such report. The learned CIT(A) also noticed that in the assessee’s case one of the AEs was in USA where the marginal rate of tax is higher than that of India. Keeping these factors into consideration, he ordered for the deletion of addition.
3. We have heard the rival submissions and perused the relevant material on record. The undisputed facts of the case are that in the current year, the assessee depicted combined operating profit to cost rate at 5.78%. The authorities below have noted that that the facts of the case for the year in question are similar to those for the preceding year. The case for A.Y. 2004-05 came up for adjudication before the Tribunal in ITA No.6194/Mum/2008. Vide order dated 31.05.2010, the Tribunal has approved the action of the ld. CIT(A) in deleting the addition on account of transfer pricing adjustment. From the said order of the Tribunal for the immediately preceding year, it is observed that the assessee declared combined (both from AEs and non-AEs) operating profit margin to sales at 3.56% and to cost at 3.70%. The TPO determined operating profit margin to cost at 3.82% and made the addition of Rs. 3.39 crore, which eventually came to be deleted by the Tribunal. When we compare the last year’s operating profit to cost ratio at 3.7% with that of the current year at 5.78%, there remains no doubt that the rate of profit declared by the assessee in the current year is much higher than that of the preceding year. The adjustment made by the TPO in the earlier year came to be deleted.
4. The learned Departmental Representative contended that in the preceding year the profit margins were different in respect of sales to AEs and non-AEs. He, therefore, urged that the distinct operating profit margin to cost in the preceding year qua the AEs and non-AEs should not be applied to the ratio of operating profit to cost in the current year on a combined basis.
5. There is no dispute that we are concerned only with the operating profit margin in relation to the international transactions with the AEs. But the contention put for the by the ld. DR is not acceptable on merits for the reason that in the preceding year the net profit margin to sales was at 5.38% to AEs and 1.77% to non-AEs with aggregate operating profit margin to sales at 3.56% On the contrary in the current year the combined operating profit margin from both AEs and non-AEs is at 5.78%. Since the segmental accounts have been stated to be not maintained in respect of transactions with AEs and non-AEs, and further, neither the TPO has made any calculation nor the ld DR has placed any material on record to indicate that the profit margin on transactions with AEs for the current year is lower than the combined, we cannot accept the contention that the current year’s operating profit margin on transactions with the AEs is less. It is more specifically so for the reason that the combined operating profit margin at 5.78% for the current year is greater than that of the operating profit margin on transactions with the AEs in the preceding year at 5.38%. It is uncontroverted that the nature of international transactions of the assessee in the previous year relevant to the assessment year under consideration with its AEs and the comparable cases as taken note of by the assessee and also the TPO are similar to the preceding year. Keeping into consideration the fact that the operating profit margin for the last year’s transactions of the assessee with its AEs as determined by the TPO, which laid the foundation for the upward revision for the purposes of benchmarking for the current year’s transactions, has been held by the tribunal to be not sustainable, we are of the considered opinion that the ld. CIT(A)’s decision on this aspect of the matter does not warrant any interference because the operating profit margin for the current year compares favorably with that finally determined for the preceding year. It is noticed that the learned CIT(A), in deciding this issue in assessee’s favour, also inter alia drew strength from the fact that in the assessee’s case one of the AEs was in USA where the marginal rate of tax is higher than that of India. We do not approve this view point for the reasons discussed infra. To sum up, it is held that the addition of Rs. 49,99,680 has been rightly deleted in the first appeal. These grounds are not allowed.
6. The only other ground which survives for our consideration is against deletion of addition due to adjustment of Rs. 87,66,461 in respect of interest receivable on outstanding amount from the AEs. The facts apropos this ground are that the TPO, from the details of debtors furnished by the assessee, observed that there was outstanding balance of Rs. 8,76,64,611 from the AEs. It was also noticed that the assessee allowed credit period of 180 days to its AEs. He held that there was no reason for such a long delay in realization of the proceeds. According to the TPO, the interest receivable on such delayed payments should be accounted for. Taking rate of 10%, he proposed the addition of Rs. 87,66,461 which was made by the A.O. in his order u/s 143(3). The learned CIT(A) ordered for the deletion of this addition.
7. Having heard the rival submissions and perused the relevant material on record it is observed from para 5.3 of the impugned order that the total debt amounted to Rs. 8,73,64,611 which included non-AEs debt at Rs. 3,62,21,427. It is an admitted position, as recorded by the TPO himself, that the assessee allowed credit period of 180 days to its AEs. Page 109 of the paper book is the detail of outstanding debt with bifurcation into AEs and non-AEs giving invoice number, credit period, amount outstanding and number of days outstanding from the date of invoice. When we peruse the details in respect of outstanding balance from AEs, it can be observed that the as against the credit period of 180 days, the number of days for which the balances remained outstanding ranges from 13 to 353. Even if, for a moment, we accept the contention of the learned Departmental Representative that since there was a delay in the realization of amount from debtors beyond 180 days and hence interest should have been charged, still the period of delay beyond 180 days in certain cases would neutralize the early recoveries from the AEs in others.
8. Section 92 deals with the computation of income from international transactions having regard to arm’s length price. When we read sub-section (1) in juxtaposition to Explanation to sec. 92, it emerges that not only the items of ‘.income’ from international transactions [as per sub-section (1)] but also the ‘allowance for any expense or interest’ [as per Explanation] are also covered within the purview of this provision. Thus as per section 92, interest has been expressly included in the context of expenses and not the items of income. Now we turn to section 92B assigning meaning to ‘International transaction’. It provides that for the purposes of this section and sections 92, 92C, 92D and 92E, ‘international transaction’ means ‘.a transaction between two or more associated enterprises, either or both of whom are non-residents, in the nature of purchase, sale or lease of tangible or intangible property, or provision of services, or lending or borrowing money or any other transaction having a bearing on the profits, income, losses or assets of such enterprise…’. A close reading of section 92B transpires that the transactions of ‘.sale’ and ‘.lending … money’ have been distinctly set out. Transaction of ‘.sale’ results into profit and that of ‘.lending money’ gives interest income. Thus it is evident that interest income is associated only with the lending or borrowing of money and not with sale. So if the international transaction is that of ‘.sale’, the arm’s length price is determined qua the ‘.sale price’. Of course, while determining the ALP in a sale transaction, all the relevant aspects including the credit period allowed are taken into view. On the other hand, if the international transaction is that of ‘.lending or borrowing money’, the arm’s length price is gauged qua the ‘.interest’. When the international transaction is that of ‘.sale’, the interest aspect is embedded in it. There can be no separate international transaction of ‘.interest’ in the international transaction of ‘.sale’. Early or late realization of sale proceeds is only incidental to the transaction of sale, but not a separate transaction in itself. If the ALP in respect of an international transaction of ‘.sale’ is determined, then there can be no question of treating the non-receipt of interest in such sale transaction as a separate international transaction warranting any further adjustment. One may also contend that the expression ‘.any other transaction having a bearing on the profits, income, losses…..’ as employed in sec. 92B defining international transaction would encompass such interest from sale as the non-receipt of due interest would have the effect on profits or income. This contention also does not merit acceptance because when ‘sale’ and ‘lending money’ have been specifically included in definition of ‘international transaction’ u/s 92B, then the expression ‘any other transaction’ used in the later part of this provision will exclude all the items separately covered. In this view of the matter, it becomes manifest that there can be no separate international transaction of interest income which is part of the transaction of sale. Once ALP is determined in respect of the sale transaction, it would be deemed to be covering all the elements and consequences of the transaction of sale. Having determined ALP in a sale transaction, it cannot be accepted that separate adjustment de ho’ such determination is required in respect of interest.
9. Reverting to the facts of the case, it is noticed that while disposing of ground nos.1 and 2 of the Revenue’s appeal above, we have held that the price charged by the assessee in respect of international transactions of sale with AEs is at arm’s length. In that view of the matter it is not possible to hold that any adjustment towards the interest be also made, more specifically in view of the fact that it is a case of trade debtors and the price at which the sales have been made are at arm’s length.
10. There is one more reason for which, under the present circumstances, no addition on account of interest adjustment can be made. As will be seen infra that Chapter X of the Act, containing transfer pricing provisions, aims at preventing the avoidance of tax. Income in respect of international transactions is computed having regard to arm’s length price. Section 92C provides that the ALP shall be determined by any of the methods given in sub-section (1). Five methods have been specifically named therein and the last clause talks of such other method as may be prescribed by the Board. First method given is ‘.comparable uncontrolled price method’. Rule 10B of Income-tax Rules, 1962 elaborates the methodology of the five specified methods u/s 92C. As per this rule, under the comparable uncontrolled price method (CUP), the price charged or paid for property transferred or services provided in a comparable uncontrolled transaction is identified, which after making suitable adjustments so as to make it compatible with the international transaction, is taken as ALP for the purposes of comparison with the price actually charged by an assessee from its AE in an international transaction. If the price so bench marked is more than that charged by the assessee from its AE in an international transaction, then upward adjustment is required in such transaction. If however, the price charged by the assessee from its AE is higher than the ALP, then no further adjustment can be made. Thus it can be seen that under the CUP method the procedure is to compare the price charged from AE with the uncontrolled transaction, that is non-AE. If the price charged from non-AE is higher than that charged from AE under similar circumstances, then the addition to the extent of consequential difference between the two, is called for. If however the price charged from non-AE is comparable with non-AE, then no addition can be made under this Chapter. Coming back to the facts of the instant case, it can be seen from page 109 of the paper book, which gives details of outstanding debtors with the credit period allowed and the actual age of the debtors in respect of both AEs and non-AEs that apart from the late realization of debtors from AEs, there is delay in realizing debtors from non-AEs. Such period of non-realization in case of non-AEs is also ranging upto 352 days. It has not been shown that the assessee has charged any interest from non-AEs debtors in respect of delayed realization. It, therefore, proves that there is complete uniformity in the act of the assessee in not charging interest from both the AE and non-AE debtors for almost equal delay in the realization.
11. Even if we accept the contention of the ld. DR that the non-charging of interest from AEs in the transaction of sale could in itself be construed as an international transaction, then also going by the CUP method, no such adjustment can be made because the assessee is not avoiding any tax by intentionally not charging any interest from the AEs but charging it from non- AEs. As the case of non-charging of interest in the controlled transactions is comparable with that of non-charging from the uncontrolled transactions, no transfer pricing adjustment can be made on this count. We, therefore, hold that no addition on account of such interest can be made.
12. However, we are not agreeable with the reasoning given by the learned CIT(A) that no adjustment should be made on the ground that the AE was charged at a higher rate of tax and the assessee would not be benefited in any manner by not charging the interest income. This understanding belies the very concept of the transfer pricing provision contained in Chapter-X. The rationale behind the insertion of this Chapter is that India must get due tax from the international transactions of the assessee with its AEs. It is quite possible that the two AEs may agree in such a manner that the price in the international transactions is cooked up so as to siphon off the due tax from India. We are not concerned with the taxation of the entire group as one unit on international level where some associated enterprises may be subjected to tax in other countries at higher or lower rate. Rather the relevant consideration here is the taxation of the enterprises of the group that are chargeable to tax in India. If the concept of over all higher or lower rate/amount of tax in the other countries in which AEs are situated is taken into consideration, then Chapter-X of the Income-tax Act would become meaningless. The underlying rationale of these provisions is to ensure that India get its due share of tax in respect of transactions of the enterprises who are chargeable to tax in India with their associated enterprises abroad. As such we do not approve this reasoning given by the ld. CIT(A). Be that as it may, we have held that the addition on account of non-charging of interest on trade debtor from the AEs is not maintainable for the reasons discussed supra. This ground is not allowed.
13. In the result, the appeal is dismissed.
Order pronounced on this 22nd day of February, 2012.