Tecnimont ICB House vs. DCIT (ITAT Mumbai)

DATE: July 8, 2015 (Date of pronouncement)
DATE: July 20, 2015 (Date of publication)
AY: 2009-10
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Transfer Pricing: Important principles on benchmarking transactions of advances/ credit period tp AEs reiterated

(i) Since sale price of the product or service was always influenced by the credit period allowed by the seller, the transaction of sale to the AE and credit period allowed in realization of sale proceeds are closely linked and the price determined for such sale is after consideration of the credit period provided by the seller. Further, it was also held that for the purpose of determining the ALP of sale transaction, the transaction of excess credit period provided by the seller to the AE is required to be aggregated with the sale transaction by the seller to the AE and cannot be benchmarked separately (Goldstar Jewellery Limited Vs JCIT (ITA No 6570/Mum/2012) Kusum Healthcare Pvt Ltd (ITA No 6814/DeI/2014) followed);

(ii) The addition on account of interest should be computed only till the end of financial year (i.e. till 31 march 2009 and not till the date of passing of transfer pricing order (i.e. 28 January 2013). It is trite law that income tax has to be computed with reference to previous year and as per Section 5 of the Act explains the scope of total income to be considered earned by any person during the previous year. In the present case, the TPO has made addition of notional interest till the date of passing of order (i.e. 28 January 2013) which is incorrect and against the basic principle of taxation as laid down by Income Tax Act. Hence, interest adjustment on delayed accounts receivables, if any, should be computed only upto 31 March 2009;

(iii) During the year under consideration, the assessee has received advances from AE’s for the purpose of export. Therefore computation of interest, if any, on delayed recovery of export receivables should be after reducing the advances received from AE’s for the purpose of export. Reliance is placed on the Mumbai Tribunal ruling in the case of Boston Scientific International BV India (40 SOT 11) (2010) wherein it has been held that interest income on accounts receivables of an assessee from its AE should be examined after considering the outstanding payables from that AE;

(iv) The notional interest has to be worked out for so called amount receivable from AE, by applying LIBOR interest rate for the purpose of computation of transfer pricing adjustment, if any. The Tribunal has upheld use of LIBOR for the purpose of benchmarking loan/advance given to foreign AE’s;

(v) In respect of the expenditure incurred on behalf of the AEs and which was reimbursed by the AE, the AO also levied interest thereon. The recovery of expenses was beyond the normal period of 60 days. Recovery of expenses beyond the normal period was in the nature of deemed loan in the hands of AEs and require transfer pricing adjustment. Accordingly, we do not find any infirmity in the transfer pricing adjustment made. However, we direct the AO to charge interest by applying LIBOR rate.

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