Taxpublishers.in - InterestingDecision/Flash_16194.htm - Tax Publishers Your Tax Solution Hub

Share via Whatsapp 189 Views


The Tax Publishers Rusabh Diamonds v. ACIT [ITA Nos. 2840 & 2497/Mum/2014, CO. No. 100/Mum/2014, dt. 31-3-2016] : 2016 TaxPub(DT) 1893 (Mum-Trib) TP addition of interest on outstanding receivables with AE *Facts: Assessee in the business of import and export of cut and diamonds. It was noticed that almost 40% of the outstanding receivables was with AE out of the overall export turnover. Since there was a delayed or an extended collection tenure the assessing officer added back the interest at average cost of borrowing + 3% on such outstanding receivables. The same was upheld by the DRP. On further appeal: Held in favour of the assessee that no addition was warranted by way of notional interest on the AE receivables for delayed/extended credit period. Assessees contentions were: The debit balance with the AE was not an international transaction. There was no interest on overdues with non-AEs. No agreement existed with the AEs to charge interest for belated payments. There was no reasonableness in the interest rate charged. Assessee benchmarked using TNMM which already takes into account the interest income as an integral part of the computation of ALP benchmarking thus transaction does not need any separate benchmarking using CUP. Following were the points considered by the ITAT while opining in favour of the assessee by quashing the addition. In Sony Ericsson Mobile Corporation Pvt. Ltd. v. ACIT [(2015) 374 ITR 118(Del)* it was held that once TNMM is used separate benchmarking for AMP expenditure is not warranted. Interest on debtors is integral to income. PBIT includes interest income and excludes interest expense so PLI or TNMM already treats interest impact in benchmarking. There is no extra credit granted to the AEs vis a vis third parties. A continuing debit balance arises out of the turnover thus is not a separate international transaction as held in Nimbus Communications Ltd. v. ACIT [(2011) 139 TTJ 214 (Bom) is incorrect, with amendments in the law with retrospective effect they are also international transaction which has been upheld in i-Gate Computer Systems Ltd v. ACIT & Vice-versa (ITA No. 2504/PN/2012). The amendments which brought in retrospective effect in section 92B explanation vide finance act 2012, are retrospective w.e.f. 1-4-2002 only to the extent the impact can influence post assessment year 2012-13. In respect of transactions prior to this amendment it could have never been thought out by the assessee the impact such an amendment could have on retro application of tax. A clarificatory amendment is retrospective only to the extent it is clarifactory to prospective transactions as retrospectively done transactions cannot be invalidated using the amendment as it was always a case of impossibility of performance. DIT v. New Skies Satellite BV [TS-64- HC -DEL (2016)] applied. 36. It is very important to bear in mind the fact that right now we are dealing with amendment of a transfer pricing related provision which is in the nature of a SAAR (specific anti abuse rule), and that every anti abuse legislation, whether SAAR (specific anti abuse rule) or GAAR (general anti abuse rule), is a legislation seeking the taxpayers to organize their affairs in a manner compliant with the norms set out in such anti abuse legislation. An anti-abuse legislation does not trigger the levy of taxes; it only tells you what behavior is acceptable or what is not acceptable. What triggers levy of taxes is non-compliance with the manner in which the anti-abuse regulations require the taxpayers to conduct their affairs. In that sense, all anti abuse legislations seek a certain degree of compliance with the norms set out therein. It is, therefore, only elementary that amendments in the anti-abuse legislations can only be prospective. It does not make sense that someone tells you today as to how you should have behaved yesterday, and then goes on to levy a tax because you did not behave in that manner yesterday. Note: Two other judgments also have the same principle of the same ITAT with same members on the same day. Hiraco Jewellery India P Ltd. v. DCIT/I.T.A. No.7297/Mum/2014/assessment year 2009-10/Mum ITAT/Dated 31-3-2016 Firestone Diamond P Ltd. v. ITO/I.T.A. No.139/Mum/2014/Assessment year 2008-09/Mum ITAT/Dated 31-3-2016

The Tax Publishers

Rusabh Diamonds v. ACIT [ITA Nos. 2840 & 2497/Mum/2014, CO. No. 100/Mum/2014, dt. 31-3-2016] : 2016 TaxPub(DT) 1893 (Mum-Trib)

TP addition of interest on outstanding receivables with AE

Facts:

Assessee in the business of import and export of cut and diamonds. It was noticed that almost 40% of the outstanding receivables was with AE out of the overall export turnover. Since there was a delayed or an extended collection tenure the assessing officer added back the interest at average cost of borrowing + 3% on such outstanding receivables. The same was upheld by the DRP. On further appeal:

Held in favour of the assessee that no addition was warranted by way of notional interest on the AE receivables for delayed/extended credit period.

Assessees contentions were:

The debit balance with the AE was not an international transaction.

There was no interest on overdues with non-AEs.

No agreement existed with the AEs to charge interest for belated payments.

There was no reasonableness in the interest rate charged.

Assessee benchmarked using TNMM which already takes into account the interest income as an integral part of the computation of ALP benchmarking thus transaction does not need any separate benchmarking using CUP.

Following were the points considered by the ITAT while opining in favour of the assessee by quashing the addition.

In Sony Ericsson Mobile Corporation Pvt. Ltd. v. ACIT [(2015) 374 ITR 118(Del) it was held that once TNMM is used separate benchmarking for AMP expenditure is not warranted.

Interest on debtors is integral to income.

PBIT includes interest income and excludes interest expense so PLI or TNMM already treats interest impact in benchmarking.

There is no extra credit granted to the AEs vis a vis third parties.

A continuing debit balance arises out of the turnover thus is not a separate international transaction as held in Nimbus Communications Ltd. v. ACIT [(2011) 139 TTJ 214 (Bom) is incorrect, with amendments in the law with retrospective effect they are also international transaction which has been upheld in i-Gate Computer Systems Ltd v. ACIT & Vice-versa (ITA No. 2504/PN/2012).

The amendments which brought in retrospective effect in section 92B explanation vide finance act 2012, are retrospective w.e.f. 1-4-2002 only to the extent the impact can influence post assessment year 2012-13. In respect of transactions prior to this amendment it could have never been thought out by the assessee the impact such an amendment could have on retro application of tax.

A clarificatory amendment is retrospective only to the extent it is clarifactory to prospective transactions as retrospectively done transactions cannot be invalidated using the amendment as it was always a case of impossibility of performance. DIT v. New Skies Satellite BV [TS-64- HC -DEL (2016)] applied.

36. It is very important to bear in mind the fact that right now we are dealing with amendment of a transfer pricing related provision which is in the nature of a SAAR (specific anti abuse rule), and that every anti abuse legislation, whether SAAR (specific anti abuse rule) or GAAR (general anti abuse rule), is a legislation seeking the taxpayers to organize their affairs in a manner compliant with the norms set out in such anti abuse legislation. An anti-abuse legislation does not trigger the levy of taxes; it only tells you what behavior is acceptable or what is not acceptable. What triggers levy of taxes is non-compliance with the manner in which the anti-abuse regulations require the taxpayers to conduct their affairs. In that sense, all anti abuse legislations seek a certain degree of compliance with the norms set out therein. It is, therefore, only elementary that amendments in the anti-abuse legislations can only be prospective. It does not make sense that someone tells you today as to how you should have behaved yesterday, and then goes on to levy a tax because you did not behave in that manner yesterday.

Note: Two other judgments also have the same principle of the same ITAT with same members on the same day.

Hiraco Jewellery India P Ltd. v. DCIT/I.T.A. No.7297/Mum/2014/assessment year 2009-10/Mum ITAT/Dated 31-3-2016

Firestone Diamond P Ltd. v. ITO/I.T.A. No.139/Mum/2014/Assessment year 2008-09/Mum ITAT/Dated 31-3-2016