TII Instant Update - 2017-TII-INSTANT-ALL-426

2017-TII-65-ITAT-DEL-TP

SWAROVSKI INDIA PVT LTD Vs ACIT: DELHI ITAT (Dated: February 10, 2017)

Income Tax - Section 36(1)(vii)

Keywords: CUP - remand - international transaction - benchmarking - determination of ALP & AMP expenses

The assessee was initially registered as a 100% EOU for undertaking activities of coating of raw beads, polishing and knotting of crystals etc. Later on, it had also started imports and sale of crystal goods and crystal components. Apart from 100% EOU division in Pune, it carries out its trading activities from a domestic unit in New Delhi which had further two sub-divisions. Assessee reported certain international transactions in Form no. 3CEB. AO referred the matter of determination of their ALP to TPO. Reported international transactions include a transaction of ‘Import of crystal and crystal components’ with transacted value of Rs.14,91,85,346/-. Assessee applied CUP method to demonstrate that international transaction was at ALP. In order to fortify the adoption of CUP as the most appropriate method, assessee argued that the imports were made as per the price list provided by its AE which was available for all its sales to group companies as internal comparable. It was also submitted that its AE also made direct sales of crystal components to Indian customers and the amount charged from such independent customers was higher than that charged from the assessee. It had also submitted that price charged by its AE from any other country through its group company/branch office was the same as that charged from customers in India. TPO rejected the application of CUP method and applied TNMM as MAM. On appeal, CIT(A) accepted the application of TNMM as the most appropriate method as against the main contention of assessee for application of CUP method or Resale Price method in alternate. CIT(A) observed that no TP analysis was done in respect of international transaction of AMP expenses. The assessee was called upon to benchmark this transaction. Taking note of bright line test and other relevant factual details, CIT(A) made an addition of Rs.2,51,69,338/- towards TP adjustment on AMP expenses.

Having heard the matter, the Tribunal held that,

Whether when there has been no benchmarking done in respect of AMP expenses before the AO/TPO, in order to determine TP adjustment, it is justifiable for the Tribunal to remand such issue - YES: ITAT

+ on perusal of the order of CIT(A), it emerges that while holding the AMP expenses to be an international transaction, he did not have the benefit of the judicial precedents now available for consideration, in some of which the transaction of AMP has been held as an international transaction, in others as not an international transactions, while still in some others, the matter has been restored for fresh consideration in the light of the judgment in Sony Ericson Mobile Communications (India) Pvt. Ltd. vs. CIT 2015-TII-06-HC-DEL-TP, in which the AMP expenses as an international transaction has been accepted. Respectfully following the predominant view of the High Court, we are of the considered opinion that it would be in the fitness of things if the impugned order is set aside and the matter is restored to the file of TPO/AO for a fresh determination of the question as to whether there exists an international transaction of AMP expenses. If the existence of such an international transaction is not proved, the matter would end there and then, calling for no transfer pricing addition. If, on the other hand, the international transaction is found to be existing, then the TPO would determine the ALP of such an international transaction in the light of the relevant judgments of HC, after allowing a reasonable opportunity of being heard to the assessee. To sum up, we set aside the impugned order on the issue of transfer pricing additions towards `Import of Crystal goods and Crystal components’ and `AMP expenses’ and remit the matter to the file of AO/TPO for fresh determination of the ALP in consonance with our directions given in the order for the A.Y. 2004-05. Needless to say, the assessee will be allowed a reasonable opportunity of being heard in such fresh proceedings. In the result, the appeal of the assessee is partly allowed and that of the Revenue is dismissed.

Assessee's appeal partly allowed

2017-TII-64-ITAT-MAD-TP

PROFESSIONAL ACCESS SOFTWAE DEVELOPMENT PVT LTD Vs DCIT: CHENNAI ITAT (Dated: February 9, 2017)

Income Tax - Sections 92CA, 143(3) & 144C

Keywords: Notional interest - stay petition - AE - average credit period & Prime Lending Rate

The assessee is a software development company. This appeal of the assessee was directed against directions of DRP u/s. 143(3) r.w.s.92CA r.w.s.144C, which was passed in consequent to draft Assessment order dated 04.03.2016 for A.Y 2012-13. The assessee also filed Stay Petition for AY 2012-13 seeking extension of stay for outstanding disputed demand of Rs.4,37,34,260/- till the disposal of the appeal. The first issue raised in its appeal relating to ground Nos. 2 to 6 was with regard to TP adjustments on account of notional interest on receivables from AE. TPO noted that average credit period allowed by the assessee to the AE on the receivables was very longer period as compared to that of the comparable companies. Thus, TPO found that two AEs of the assessee was getting benefit of making the late payments to assessee and that benefit was given to AE by assessee, which resulted in reduction of income of assessee, which necessitated the T.P adjustments by TPO. Accordingly, TPO adopting the Prime Lending Rate (PLR) for the relevant period to the previous year at 14.40%; the adjustments was proposed for the estimate period for credit beyond the payment duly, in the case of assessee, considering the average credit period allowed in the case of comparable worked out at average 90 days. However, the DRP given a direction to compute the notional interest on receivables to the AE for assessment year under consideration, which was outstanding beyond the period of 90 days as on 31.03.2012 @ 12.75% per annum.

Having heard the matter, the Tribunal held that,

Whether if outstanding balance of receivables from AE is generated out of international transactions, it can be argued that no adjustment could be made towards notional interest or receivables from AE - NO: ITAT

+ an argument was made that assessee's AE also giving longer credit period to its customers and AE was not benefited by extending the credit period to assessee and the AE immediately remitted the amount to the assessee as and when received from its customers. Since the assessee is not having any dealing with the customer of the AE, the assessee cannot be a party for the delay payment by AE customers. It is for the AE to see that its customers are paying in time so that it can pay the assessee in time. If the assessee's contention is accepted, it would also mean that the AE has no working capital of its own to pay the assessee in time. In other words, the AE was doing its business using the capital of the assessee. The AE collects money from its clients even beyond the normal period, which shows that the assessee is financing its AE by accommodating the delayed remittance. In the present case, the assessee parked a huge amount of funds for a longer period with its AE. It was only because the pricing of international taxation has been accepted for ALP test, it is not possible to hold that the TPO should not go into this question of parking of huge funds with its AE. If the funds are repatriated to India, the assessee would have been in a position to earn better profit from appropriate investment of those repatriated funds. This potential loss is definitely a factor to be considered while evaluating the financial impact of the international taxation concluded by the assessee with its AE. Therefore, in our opinion, it is required to keep the TP adjustments towards notional interest on receivables. The purpose of TP adjustments is in the larger context of anti-evasion measures. The outstanding balance of the receivables from the AE did not generate out of domestic transactions. Those receivables did generate from international transactions carried on by the assessee with its AE outside India. Therefore, there is no basis for argument that no adjustment could be made towards notional interest or receivables from AE. The outstanding receivables from AE is financial result of international transactions concluded by the assessee and therefore, the income effect arising, if any, to that outstanding receivables is very much relevant aspect of ALP. Therefore, the TPO is having the jurisdiction to examine the issue of outstanding receivables or non-charging interest thereon. In view of this, the grounds Nos. 1 to 6 raised by the assessee have no merit. In the result, the appeal of the assessee as well assessee the Stay Petition is dismissed.

Assessee's appeal dismissed