|CORAM:||A. K. Garodia (AM), Vijay Pal Rao (JM)|
|CATCH WORDS:||AE, ALP, excess credit period, Transfer Pricing|
|DATE:||June 21, 2016 (Date of pronouncement)|
|DATE:||August 20, 2016 (Date of publication)|
|FILE:||Click here to download the file in pdf format|
|Transfer Pricing: Argument that transaction of extending credit period to AEs cannot be regarded as “international transaction” in the absence of any income arising therefrom is not acceptable. Observations in Vodafone vs. UOI 368 ITR 1 (Bom) are in a different context. The transaction of extending credit period to AEs is closely linked with the transaction of providing services to the AE and is not a separate transaction. Both transactions have to be aggregated for determination of ALP|
The TPO accepted the international transactions in respect of technical services rendered by the assessee to its AE of Rs.28,16,18,522 at arm’s length by noting the fact that the assessee’s margin at 81.89% in comparison to the mean margin of comparables at 25.14%. However the TPO proposed to proceed to apply the provisions of Chapter X by treating the outstanding due with the AE as international transaction. The TPO observed that the assessee has extended credit facility similar to a working capital loan to its AE without charging any interest. Similarly uncontrolled transaction would have provided for interest. Accordingly, the TPO was of the view that the international transactions representing extended credit facility without charging interest is not at arm’s length price within the meaning of Section 92C(3)(a)(b)(c) of the Act r.w. Rule 10B(1)(a) of the I.T. Rules. Consequently, the arm’s length interest is determined by the TPO by applying CUP method wherein the interest rate is determined @ 14% per annum being average outstanding balance. This was upheld by the DRP. Before the ITAT, the assessee claimed that:
(a) Allowing the credit period of realization of the sale proceeds to the AE does not constitute an international transaction. The Ld. AR referred to the Section 92(1) of the Income Tax Act, 1961 (in short ‘the Act’) and submitted that the provisions of Chapter X can be applied only for computation of income arising from an international transaction having regard to the ALP. When a transaction does not result any income or no income arises from the transactions then the same cannot be the subject matter of computation of ALP as per the provisions of Chapter X. The term “any income” arising from an international transaction therefore computation of income under this Chapter at “Arm’s Length” is subject to the condition that an income arises from the international transaction. The transaction of extending credit period to the AE does not give rise to income to the assessee and therefore in the absence of any income arising from the transaction, the same cannot be computed having regard to the ALP. The assessee did not charge any interest or has any right to charge interest on the outstanding due to the AE then the question of computation of income having regard to the ALP does not arise as per the provisions of Chapter X of the Income Tax Act, 1961. For applying the provisions of Chapter X income must arise from the transaction. In the absence of any income arising from the transaction the computation of ALP is not mandated under Chapter X of the Act. In support of his contention, he has relied upon the decision of Hon’ble Bombay High Court in the case of Vodafone India Services Pvt. Ltd. Vs. UOI (2014) 368 ITR 1 (Bom) and submitted that the Hon’ble High Court has held that income as understood in the Act must arises from an international transaction then only the measure is to be found on application of arm’s length so far Chapter X of the Act is concerned. The computation of ALP does not convert non-income into income. The tax can be charged only on income and in the absence of any income arising the issue of completing the measure of ALP to the value for consideration of itself does not arise. There must be an international value which is chargeable to tax for invoking the provisions of Chapter X. 4.2.1
(b) Alternately the ld. counsel submitted that it is not an independent international transaction when the TPO has accepted the international transactions provided to the AE at arm’s length. Therefore no separate adjustment can be made by treating the extension of the credit period to the AE as a separate international transaction.
HELD by the Tribunal:
(i) As regards the first proposition put forth by the ld. counsel for the assessee that the extending credit period cannot be regarded as international transaction in the absence of any income arises from the said transaction, we do not agree with the said proposition advanced by the ld. counsel for the assessee. It is pertinent to note that if the argument advanced by the ld. counsel for the assessee is accepted then it would result to render the provisions of Chapter X redundant. The proposition advanced by the ld. counsel for the assessee would lead to the situation where in a case the assessee is charging less price in comparison to the arm’s length price from its AE then the said transaction would be decided as per the provisions of Chapter X by comparing the same with uncontrolled comparable prices. On the contrary if the assessee does not charge any price for any international transaction with the AE then the provisions of Chapter X cannot be applied as claimed by the ld. counsel for the assessee. Thus such a proposition would be inconsistent with the object and scheme of the Chapter X of I T Act and hence cannot be accepted. Even otherwise if the intent of the legislature was to introduce the provisions of Chapter X was to compute income from international transaction only in the case where the assessee is charging or receiving the price under the international transaction then there cannot be any computation of income having regard to the ALP where the related parties decided not to charge any price of the international transaction and consequently the said provision of Chapter X would be conveniently circumvented by each and every assessee having international transaction with the AE by not charging any price or receiving any price from the international transaction.
(ii) The reliance placed by the ld. counsel for the assessee on the judgment of Hon’ble Bombay High Court in the case of Vodafone India Services Pvt. Ltd. (supra) is misconceived and misplaced as the Hon’ble High Court has made such observations while dealing with the issue of application of TP provisions of Chapter X in respect a transaction in capital field being transfer of share without charging premium.
(iii) It is clear from the observation of the Hon’ble High Court that there is a classical distinction between the income and capital which has been explained by the Hon’ble High Court by comparing the distinction between the fruits and trees. Therefore the said decision of the Hon’ble High Court in the case of Vodafone India Services Pvt. Ltd. Vs. UOI (supra) would not support the contention raised by the ld. counsel of the assessee. The transaction is otherwise capable of generating income but due to the related parties decided not to charge or pay to each other the basic character and nature of transaction would not change. Hence we do not find any substance in the arguments and propositions raised by the ld. counsel for the assessee that provisions of Chapter X are not applicable in this case.
(iv) As regards the alternative plea, we find that an identical issue has been considered by this Tribunal in a series of decisions. Following the earlier orders of this Tribunal, we hold that extending credit period for realization of sales to the AE is a closely linked transaction with the transaction of providing services to the AE and therefore cannot be treated as an individual and separate transaction of advance or loan. Accordingly, we direct the A.O/TPO to redo the exercise of determination of ALP by considering the credit period allowed in realization of sales proceeds as closely linked transaction with the transaction of providing services to the AE and therefore both has to be clubbed and aggregated for the purpose of determination of ALP.
i. CIT Vs. Indo American Jewellery Ltd. (2014) 44 taxmann.com 310 (Bom)
ii. Goldstar Jewellery Ltd. Vs. JCIT (ITA No.6570/Mum/2012 Dt.14.1.2015)
iii. Avnet India P. Ltd. Vs. DCIT (IT(TP)A No.757/Bang/2011 Dt.18.11.2015)
iv. ACIT Vs. Information System Resource Centre P. Ltd. (ITA No.