| 2018-TII-INSTANT-ALL-547 | 23 March 2018 |
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CASE LAWS CIT Vs KEIHIN FIE PVT LTD: BOMBAY HIGH COURT (Dated: March 21, 2018) Income tax - ALP - exports made to AEs - FAR analysis - margins derived in domestic sales - TNMM The Assessee company is engaged in manufacture of carburettors and Air Suction Valves used in the manufacture of motorcycle and other two wheelers. In addition, the Assessee used to sell the parts & components which are used in the manufacture, to its AE. For benchmarking such international transaction, the Assessee adopted TNMM as the MAM to arrive at the ALP. The TPO while accepting the TNM method, bench marked the net margins derived from export of parts with the net margins derived from domestic sales, and this resulted in addition of Rs.62.72 lakhs. On appeal, the CIT(A) held that, it was incorrect to benchmark its margins from export of parts with margin in domestic sales of all its goods which consisted primarily of manufactured finished goods i.e. to the extent of 97% of total sales. Besides, the CIT(A) found that the internal comparable, if any, should have been with profits derived from sale of parts alone. On further appeal, the Tribunal found that there was difference in the nature of customers in the domestic and export market. Thus, the export of parts which go into the manufacture of finished goods, were not comparable with the finished goods. On appeal, the HC held that, Whether net margins derived from export of parts to AE, can be benchmarked with the net margins derived from domestic sales, for purpose of arriving at ALP - NO: HC + both the CIT(A) and the Tribunal, on facts, had found that the margins derived on export of parts to AE, are not comparable with the margins derived from sales made in the domestic market. This is primarily because the margin derived in the domestic market is on account of sales of finished goods to the extent of 97%. Besides, on facts, it was found that not only the parts and finished goods are not comparable, but the class of customers to whom they sold are also different. This resulted in difference as found on FAR analysis and this concurrent finding of fact is not shown to be perverse in any manner. Revenue's appeal dismissed GLOBERIAN INDIA PVT LTD Vs DCIT: DELHI HIGH COURT (Dated: March 20, 2018) Income - Explanation 1(c) to Section 92B Keywords - ALP - extended credit period - ITES segment - international transaction - outstanding receivables from AE The Assessee is a wholly owned subsidiary of Global Inc., USA and provides Information Technology Enabled Services to its AE i.e., Globerian Inc. In turn, the GI outsources all the ITES call centre services, such as, medical billing, medical coding and account receivable management services to the assessee which were offered by GI in USA. This international transaction between Assessee and its AE was benchmarked by adopting TNMM as MAM with OP/OC as the PLI. However, the TPO noticed form the audited financials of assessee that substantial amount of sales to AE were outstanding at the end of the year with a debt outstanding less than six months to the tune of Rs.13,21,46,636/- and proceeded to determine fair and reasonable rate of interest on the same. After considering the reply filed by assessee, the TPO proposed an adjustment of Rs.1,77,15,883/- being the arm's length interest to be charged by the assessee from its AE on extending credit facility/delay in realization of debit balances outstanding in the accounts of the AE. Pursuant to the ALP proposed by the TPO, AO assessed the income of the taxpayer at Rs.1,77,15,880/-. On appeal, the ITAT held that, Whether extended credit facility granted to AEs in case of outstanding receivables, should fall within ambit of 'international transaction' only with prospective effect as per amended Section 92B - YES: ITAT Whether when the business agreement is categoric enough to grant the grace period to make the payment, and all the payments have been made within six months, no adjustment on account of interest on receivables can be made - YES: ITAT Whether when profit margin of assessee has held to be at arm's length, there is no need to make separate addition on account of outstanding receivables from AEs - YES: ITAT + it is not disputed that the AO invoked Explanation (1)(c) to section 92B inserted by Finance Act, 2012 w.e.f. April 01, 2002 in order to determine the arm's length interest to be charged by the assessee from its AE on extending credit facility/delay in realization of debit balances outstanding in the accounts of AE vide which the term international transaction includes, "capital financing, including any type of long term or short term borrowing, lending or guarantee, purchase or sale of marketable securities or any type of advance, payments or deferred payment or receivable or any other debt arising during the course of business." The issue as to whether Explanation (1)(c) to section 92B is retrospective in nature has been decided by the coordinate Bench of the Tribunal in case of M/s. KGK Enterprises vs. ACIT - 2017-TII-472-ITAT-JAIPUR-TP in favour of the assessee in the light of the decision rendered by Delhi High Court in case of DIT vs. New Skies Satellite BV – 2016-TII-06-HC-DEL-INTL and Bombay High Court in case of Patni Computer Systems Limited vs. DCIT – 2011-TII-79-ITAT-PUNE-TP. So, in these circumstances, assuming this transaction is an international transaction, it has to be treated for AY 2013-14 whereas assessee is before the Tribunal in AY 2009-10; + as per Addendum to Agreement, grace period of 180 days has been given to make the payment of cost incurred and the mark up. When the business agreement is categoric enough to grant the grace period of 180 days to make the payment and all the payments have been made within six months, no adjustment on account of interest on receivables can be made. Moreover, when undisputedly profit margin of assessee has held to be at arm's length, there is no need to make separate addition on account of outstanding receivables as has been held by High Court of Delhi in CIT vs. Kusum Health Care Pvt. Ltd - 2017-TII-28-HC-DEL-TP. When undisputedly there is a grace period of 180 days to make the payment of the cost plus mark up by the AE to the taxpayer for rendering services, there is no question of charging any interest on receivables by recharacterizing the transaction as loan from its AE and as such, no adjustment on account of arm's length interest on receivables is sustainable. Assessee's appeal allowed |
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