TII Instant Update - 2017-TII-INSTANT-ALL-503

2017-TII-90-HC-DEL-TP

CARGILL FOODS INDIA PVT LTD Vs ACIT: DELHI HIGH COURT (Dated: November 6, 2017)

Income tax - ALP - advances received from AEs - CUP - cash discount on sales to AEs - berry ratio - trade practice - TNMM

The Assessee company is a wholly owned subsidiary of M/s. Cargill Mauritius Limited, and is engaged in manufacturing & trading of edible oil and plastic films. For AY 2007-08, the Assessee company had declared net loss of Rs. 26,85,38,165/-. Upon scrutiny, the AO found that the returns involved international transactions with its AEs, and accordingly the matter was referred to the TPO, who largely accepted the ALP for various international transactions except with respect to two, i.e. principal payment towards purchase and sale, both aggregating Rs.3,25,20,839/-. The assessee’s plea to the DRP was unsuccessful. It, therefore, approached the Tribunal contending that the advance consideration it received from its AE was a commercially prudent arrangement which enabled it to save-up interest and that the other side of the transaction, i.e. sale at a discount of 5% to its AE was a part of normal trade practice. This contention was rejected by the Tribunal.

On appeal, the HC held that,

Whether once CUP has been accepted as most appropriate method, there is no question of applying any other method to corroborate the analysis made under CUP - YES: HC

Whether cash discounts said to be offered to AEs for early realization of advances, cannot be accepted, in absence of any rational explanation from Assessee's side - YES: HC

+ the findings of the Tribunal show that the assessee had worked-out its international transactions by application of CUP method, but during the course of the proceedings, it was modified to TNMM. Its contention was firstly rejected by advertence to Rule 10 of the 1962 Rules which arms the AO/TPO with the discretion of applying the most appropriate method. Next dealing with the application of Berry Ratio, the Tribunal then proceeded to deal with the Berry Ratio and other arguments pertaining to cash discount on advance payments; it observed that: "....In so far as allowing of cash discount is concerned there is no quarrel on the allowability of cash discounts. The Chennai Bench of the Tribunal in the case of M/s. Panasonic Sales & services (I) Company Limited Vs. Assistant Commissioner of Income Tax, had accepted the allowability of cash discounts without reducing selling price. The Tribunal in the said case had categorically observed that cash discounts cannot be equated with trade discounts. It is an undisputed fact that allowing discounts is normal practice in business transactions. The discounts are offered for early realization of payments and sometimes for receiving advance payments as well. However, such transactions have to be explained with rational for discounts offered....";

+ this Court is of the opinion that the Tribunal’s findings cannot be faulted. The interest offering which the assessee emphasises is nothing but an income attributable to the transaction which it had sought to utilize. In the circumstances, the authorities’ decision, therefore, cannot be characterized as erroneous. The provisions of the acts and rules apply in making the adjustments in the present case; the same would apply even in the case of discount for the sale transaction which was undertaken after six months.

Assessee's appeal dismised