Bisazza India Limited, Mehsana V. The Income Tax Officer, Ward-1(1)(3), Ahmedabad

ITA 3543/AHD/2016

• Counselvise Citation: [2018] 125 COUNSELVISE.COM (IT) 8350 (ITAT-AHMEDABAD)
• Duration Of Justice: 1 year(s) 4 month(s) 18 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 16-05-2018
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: SMC
• Assessment Year: 2012-2013
• Appeal Filed On: 29-12-2016
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: SAURABH SINGH HEARING CONCLUDE
• Keywords: Business income; Transfer pricing; International transaction; Wholly owned subsidiary; Notional interest
• Section: 92C; 143(3)

Judgement Text

ITA NO.3543/AHD/2016 ASSESSMENT YEAR: 2012-13 PAGE 1 OF 8 IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD D BENCH, AHMEDABAD [CORAM: PRAMOD KUMAR AM AND MADHUMITA ROY JM] ITA NO.3543/AHD/2016 ASSESSMENT YEAR: 2012-13 BISAZZA INDIA PVT. LTD., ..................APPELLANT 372/2, B/H. GAIL OFFICE, GIDC, KADI 382 715, (NORTH GUJARAT) DIST. MEHSANA. [PAN : AAACB 6284 G] VS. INCOME TAX OFFICER, CIRCLE-1(1)(3), AHMEDABAD. ............................RESPONDENT APPEARANCES BY S.N. SOPARKAR FOR THE APPELLANT SAURABH SINGH FOR THE RESPONDENT HEARING CONCLUDED ON: 09.05.2018 ORDER PRONOUNCED ON : 16.05.2018 O R D E R PER PRAMOD KUMAR, AM: 1. BY WAY OF THIS APPEAL, THE ASSESSEE APPELLANT HA S CHALLENGED CORRECTNESS OF THE ORDER DATED 28 TH OCTOBER, 2016, PASSED BY THE LD. CIT(A), IN THE MA TTER OF ASSESSMENT, UNDER SECTION 143(3) OF THE INCOME TAX ACT 1961, FO R THE ASSESSMENT YEAR 2012-13, ON THE FOLLOWING GROUNDS: 1. THE HONORABLE CIT(A) ERRED BOTH IN LAW AND ON FACTS IN CONFIRMING AN ADDITION OF RS.37,67,667/- TOWARDS UPWARD ADJUSTMEN T MADE UNDER SECTION 92CA IN RESPECT OF TRANSACTION OF SALES OF FINISH GOODS. IT BE SO HELD NOW AND ADDITION OF RS.37,67,667/- BE DELETED. 2. THE HONORABLE CIT(A) ERRED IN LAW AND FACTS IN HOLDING THAT INTEREST WAS REQUIRED TO BE CHARGED BY THE ASSESSEE COMPANY FROM THE AES IN VIEW OF DELAY IN REALIZATION OF SALES INVOICES BEYOND THE CREDIT PERIOD. IT BE SO HELD NOW AND ADDITION MADE BY WAY OF UPWARD ADJUSTMENT BE DELETE D. ITA NO.3543/AHD/2016 ASSESSMENT YEAR: 2012-13 PAGE 2 OF 8 3. THE HONORABLE CIT(A) FAILED TO APPRECIATE THE FACT THAT THE APPELLANT HAS APPLIED TRANSITIONAL NET MARGIN METHOD (TNMM) AS MO ST APPROPRIATE METHOD (MAM) WHICH TAKES CARE OF ALL SUCH COST LIKE INVOLV EMENT OF WORKING CAPITAL AND INTEREST COST FOR THE RECOVERY OF SALES PROCEEDS FR OM DEBTORS. ONCE THE AO/TPO HAVE ACCEPTED THE TRANSITIONAL NET MARGIN METHOD (T NMM) AS MOST APPROPRIATE METHOD (MAM), NO SEPARATE ADJUSTMENT FOR NOTIONAL I NTEREST ON DELAYED PAYMENT IS REQUIRED TO BE ADJUSTED. RELIANCE IS PLACED ON DECISION OF JURISDICTIONAL AH MEDABAD ITAT IN CASE OF MICROINK LTD. V ACIT ITA NO.2873/AHD/2010. 2. WE WILL TAKE UP ALL THESE GROUNDS OF APPEAL TOGE THER. 3. TO ADJUDICATE ON THIS APPEAL, ONLY A FEW MATERIA L FACTS NEED TO BE TAKEN NOTE OF. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE AS SESSING OFFICER NOTED THAT THERE IS A DELAY IN REALIZATION OF SALE INVOICES TO THE ASSO CIATED ENTERPRISES (AES) INASMUCH AS MANY INVOICES HAVE BEEN REALIZED BEYOND THE NORMAL CREDIT PERIOD OF 120 DAYS FROM THE DATE OF THE BILL OF LADING. HE WAS THUS OF THE VIEW THAT NOT CHARGING INTEREST ON SUCH DELAYS IN REALIZATION OF DUES ON AES CALL FOR AN AR MS LENGTH PRICE ADJUSTMENT IN RESPECT OF PERIOD OF DELAY IN REALIZATION OF DUES. ACCORDIN GLY, AN ALP ADJUSTMENT OF RS.49,35,629/- WAS MADE. AGGRIEVED, ASSESSEE CARRI ED THE MATTER IN APPEAL BUT WITHOUT MUCH SUCCESS. LEARNED CIT(A) CONFIRMED THE ACTION OF THE ASSESSING OFFICER IN PRINCIPLE BUT REDUCED THE QUANTUM OF ADJUSTMENT TO RS.37,67,667/-. THE ASSESSEE IS NOT SATISFIED AND IS IN FURTHER APPEAL BEFORE US. 4. WE HAVE HEARD THE RIVAL SUBMISSIONS, PERUSED THE MATERIAL ON RECORD AND DULY CONSIDERED FACTS OF THE CASE IN THE LIGHT OF THE AP PLICABLE LEGAL POSITION. 5. AS LEARNED COUNSEL FOR THE ASSESSEE RIGHTLY POIN TS OUT, THE ISSUE IN APPEAL IS COVERED, IN FAVOUR OF THE ASSESSEE, BY A SERIES OF ORDERS PASSED BY THE CO-ORDINATE BENCHES, INCLUDING IN THE CASE OF MICRO INK LTD. VS . ADDL. CIT [(2016) 157 ITD 132 (AHD)] WHEREIN THE CO-ORDINATE BENCH HAS, INTER ALI A, OBSERVED AS FOLLOWS: 4. THE RELEVANT MATERIAL FACTS, AS NECESSARY FOR OUR A DJUDICATION, ARE LIKE THIS. THE ASSESSEE BEFORE US IS A LEADING INK MANUFACTURE R IN INDIA. THE ASSESSEE HAS A WHOLLY OWNED SUBSIDIARY IN AUSTRIA, BY THE NAME O F MICRO INKS GMBH WHICH, IN TURN, OWNS MICRO INK CO USA. THIS STEP DOWN SUBSIDI ARY (MICRO USA, IN SHORT) MANUFACTURES PRINTING INK BY USING THE BASE MATERIA L SUPPLIED BY THE ASSESSEE. THE INKS MEANT FOR US MARKETS THUS ARE MIXED, AND G IVEN FINISHING TOUCHES, BY MICRO USA. THE ASSESSEE COMPANY ALSO HAS TRADING SU BSIDIARIES IN CHINA AND HONG KONG. DURING THE RELEVANT PREVIOUS YEAR, THE A SSESSEE SOLD GOODS WORTH RS 215.51 CRORE TO MICRO USA. THE TRANSFER PRICING OFFICER, IN THE COURSE OF PROCEEDINGS BEFORE THE TPO, IT WAS NOTED THAT THE A SSESSEE HAS SOLD GOODS ITA NO.3543/AHD/2016 ASSESSMENT YEAR: 2012-13 PAGE 3 OF 8 WORTH RS 215.51 CRORE TO MICRO USA AND ALLOWED IT A N AVERAGE CREDIT PERIOD OF 186 DAYS AS AGAINST AVERAGE CREDIT PERIOD OF 130 DA YS ALLOWED TO INDEPENDENT ENTERPRISES, I.E. NON-AES. IT WAS ALSO NOTED THAT OUT OF TOTAL EXPORT S MADE BY THE ASSESSEE, 45% EXPORTS WAS TO MICRO USA. ON THESE FA CTS, AND THE TPO BEING OF THE VIEW THAT 'IN A THIRD PARTY SITUATION, SUCH AN ALLOWANCE OF USE OF MONEY WOULD HAVE BEEN POSSIBLE ONLY UPON CHARGE OF A COST', THE TPO REQUIRED THE ASSESSEE TO SHOW CAUSE AS TO WHY ALP ADJUSTMENT IN RESPECT O F EXCESS CREDIT PERIOD OF 56 DAYS NOT BE MADE, BY COMPUTING TIME VALUE OF MONEY @ 6.38% ON LIBOR PLUS BASIS. IN RESPONSE TO THIS SHOW-CAUSE NOTICE, IT WA S, INTER ALIA , EXPLAINED BY THE ASSESSEE THAT WHAT IS EXPORTED TO MICRO USA IS SEMI -FINISHED MATERIAL WHICH IS REQUIRED TO BE FURTHER PROCESSED AND CONVERTED INTO SALEABLE PRODUCT. IN EFFECT THUS, EXPORT TO MICRO USA CANNOT BE COMPARED WITH E XPORT OF FINISHED PRODUCTS AS WAS DONE TO THE INDEPENDENT ENTERPRISES. THE ASS ESSEE HAD ALSO POINTED OUT THAT 'AVERAGE CREDIT PERIOD OF THIRD PARTIES IS 120 DAYS WHEREAS CREDIT PERIOD GRANTED TO MICRO USA IS 135 DAYS' THOUGH 'ACTUAL HI GHEST AVERAGE DEBTOR DAYS TO THIRD PARTIES IS 161 DAYS WHEREAS FOR MICRO USA IT IS 186 DAYS'. IT WAS ALSO EXPLAINED THAT CONSIDERING THE TIME TAKEN IN SHIPPI NG THE SEMI FINISHED GOODS TO MICRO US, ITS PROCESSING IN US, MAINTENANCE OF INVE NTORY AT US AND CREDIT REALIZATION TIME IN US, THE TOTAL CYCLE WAS ABOUT 2 10 DAYS, BUT EVEN IF BARE MINIMUM PERIOD TO COMPLETE A SALE CYCLE IS TAKEN IN TO ACCOUNT, IT CANNOT BE LESS THAN 170 DAYS. IT WAS THUS POINTED OUT THAT THE AVE RAGE CREDIT PERIOD TO MICRO USA, WHICH WAS 135 DAYS, WAS REASONABLE. ON THE BAS IS OF THESE ARGUMENTS, IT WAS SUBMITTED THAT NO ALP ADJUSTMENT IS WARRANTED I N RESPECT OF, WHAT WAS TERMED AS, 'EXCESS CREDIT PERIOD' ALLOWED TO THE MI CRO INK USA. NONE OF THESE SUBMISSIONS WERE ACCEPTED BY THE TPO. HE WAS OF THE VIEW THAT, TAKING 130 DAYS AS PERMISSIBLE INTEREST FREE CREDIT PERIOD, IN TEREST @6.38% SHOULD HAVE BEEN CHARGED ON THE EXCESS CREDIT PERIOD OF 56 ( I.E. 186-130) DAYS. AN AMOUNT OF RS 2,10,95,346, COMPUTED ON THIS BASIS, WAS PROPOSE D TO BE ADDED TO THE INCOME OF THE ASSESSEE AS AN ARM'S LENGTH PRICE ADJ USTMENT. THE ASSESSEE DID RAISE A GRIEVANCE, AGAINST THIS ALP ADJUSTMENT, BEF ORE THE DRP BUT WITHOUT ANY SUCCESS. THE ASSESSING OFFICER, THEREFORE, PROCEEDE D TO MAKE THE ADDITION OF RS.2,10,95,346, AGGRIEVED BY WHICH THE ASSESSEE IS IN APPEAL BEFORE US. 5. WE FIND THAT THIS ISSUE IS COVERED, IN FAVOUR OF TH E ASSESSEE, BY A DECISION OF THE COORDINATE BENCH IN ASSESSEE'S OWN CASE FOR THE ASSESSMENT YEAR 2002- 03 [REPORTED AS MICRO INKS LTD. V. ASSTT. CIT [2013] 144 ITD 610/36 TAXMANN.COM 50 (AHD.) , WHILE DELETING SIMILAR ADDITION, THE CO-ORDINATE B ENCH HAD OBSERVED AS FOLLOWS: '20. THE ONLY OTHER ALP ADJUSTMENT IN APPEAL BEFORE US IS WITH RESPECT TO, WHAT THE AUTHORITIES BELOW HAVE TREATED AS, EXCESS CREDIT PERIOD ALLOWED TO MICRO USA. THIS ADJUSTMENT MUST BE DELETED FOR THE SHORT REASON THAT IT WAS PART OF THE ARRANGEMENT THAT SPECIFIED CREDIT PERIO D WAS ALLOWED AND THUS THE COST OF FUNDS BLOCKED IN THE CREDIT PERIOD WAS INBU ILT IN THE SALE PRICE. THERE IS NO DISPUTE THAT SIMILAR PRODUCTS ARE NOT SOLD TO ANY OTHER CONCERN, AT SAME PRICE OR EVEN ANY OTHER PRICE, AND INTEREST IS LEVI ED ON THE SIMILAR CREDIT PERIOD ALLOWED TO THOSE INDEPENDENT PARTIES BUT NOT TO MICRO USA. THE QUESTION OF EXCESS CREDIT PERIOD ARISES ONLY WHEN T HERE IS A STANDARD CREDIT PERIOD FOR THE PRODUCT SOLD AT THE SAME PRICE AND T HE CREDIT PERIOD ALLOWED TO THE ASSOCIATED ENTERPRISES IS MORE THAN THE CREDIT PERIOD ALLOWED TO INDEPENDENT ENTERPRISES. THAT IS NOT THE CASE HERE. THE CREDIT PERIOD FOR FINISHED GOODS CANNOT BE COMPARED WITH CREDIT PERIO D FOR UNFINISHED GOODS ITA NO.3543/AHD/2016 ASSESSMENT YEAR: 2012-13 PAGE 4 OF 8 AND RAW MATERIALS, AND IN ANY CASE, WHEN PRODUCTS A RE NOT THE SAME, THERE CANNOT BE ANY QUESTION OF PRICES BEING THE SAME. UN LESS THE PRICES OF THE PRODUCT AND THE PRODUCT ARE THE SAME, AND YET EXTRA CREDIT PERIOD IS ALLOWED, THERE CANNOT BE ANY OCCASION FOR MAKING ALP ADJUSTM ENT ON THE BASIS OF THE EXCESS CREDIT PERIOD. NONE OF THE AUTHORITIES BELOW HAVE EVEN DISPUTED THAT THE INGREDIENTS, RAW MATERIALS AND SEMI-FINISHED GO ODS SOLD TO MICRO USA ARE NOT SOLD TO ANY OTHER CONCERN. THE VERY FOUNDAT ION OF IMPUGNED ADDITION IN ARM'S LENGTH PRICE ON ACCOUNT OF EXCESS CREDIT P ERIOD IS THUS DEVOID OF ANY LEGALLY SUSTAINABLE MERITS OR FACTUAL BASIS. WHEN A LL THESE FACTORS WERE POINTED OUT TO THE LEARNED DEPARTMENTAL REPRESENTAT IVE, HE DID NOT HAVE MUCH TO SAY EXCEPT TO PLACE HIS BLAND BUT DUTIFUL R ELIANCE ON THE ORDERS OF THE AUTHORITIES BELOW. HOWEVER, FOR THE REASONS SET OUT ABOVE AND IN THE ABSENCE OF ANY COMPARATIVE PRICE AND CREDIT PERIOD FIGURES ON COMPARABLE PRODUCT TO SUPPORT THE CASE OF THE REVENUE, WE UPHO LD THE GRIEVANCE OF THE ASSESSEE AND DIRECT THE ASSESSING OFFICER TO DELETE THIS ALP ADJUSTMENT. THE ASSESSEE GETS THE RELIEF ACCORDINGLY.' 6. LEARNED COUNSEL FOR THE ASSESSEE SUBMITS THAT THE I SSUE BEING SQUARELY COVERED, IN FAVOUR OF THE ASSESSEE AND ON ADMITTEDL Y SIMILAR SET OF FACTS, THERE IS NO OCCASION TO RECONSIDER THE MATTER. WE ARE URGED TO FOLLOW THE SAID DECISION AND DELETE THE IMPUGNED ADJUSTMENT. ON THE OTHER HA ND, WHILE LEARNED DEPARTMENTAL REPRESENTATIVE DOES NOT DISPUTE THAT T HIS ISSUE IS SQUARELY COVERED BY THE AFORESAID DECISION, HE SUBMITS THAT THE AFOR ESAID DECISION IS 'SEVERELY FLAWED' AS NO MATTER WHAT IS THE GOODS SOLD, 'A CRE DIT PERIOD IS A CREDIT PERIOD'. IT IS ALSO SUBMITTED THAT 'THE CREDIT PERIOD FOR SALE OF RAW MATERIAL TO AN INDEPENDENT MANUFACTURER WOULD BE LOWER AS THE SUPPLIER DOES NO T HAVE TO FACTOR THE LEAD TIME FOR THE SALE OF FINISHED GOODS BY THE MANUFACT URER' AND THAT 'THE SUPPLIER IS ENTITLED TO RECEIPT OF PAYMENT IMMEDIATELY ON DELIV ERY IRRESPECTIVE OF WHETHER THE FINISHED GOODS IS SOLD IN THE MARKET, GET SPOILED I N MANUFACTURING OR IS DAMAGED'. HE FURTHER SUBMITS THAT 'IT IS BY NOW ACKNOWLEDGED THAT GRANTING OF EXCESS CREDIT PERIOD IS A SERVICE RENDERED TO THE AE AND NEEDS TO BE BENCHMARKED'. A REFERENCE IS THEN MADE TO SPECIAL BENCH DECISION IN THE CASE OF AZTEC SOFTWARE &TECHNOLOGY SERVICES (P.) LTD. V. ASSTT. CIT [2007] 107 ITD 141/162 TAXMAN 119 (SB) (BANG.) , IN SUPPORT OF THE PROPOSITION THAT MERELY BY FINDI NG FAULT IN THE WORK DONE BY THE TPO, THE ADJUSTMENTS CANNOT BE DEL ETED AND THAT UNLESS THE ALP SUBMITTED BY THE TAXPAYER IS SPECIFICALLY ACCEP TED, THE APPELLATE AUTHORITIES, ON THE BASIS OF MATERIAL AVAILABLE ON RECORD HAVE T O DETERMINE ALP THEMSELVES. 7. WE FIND THAT, AS EVIDENT FROM AUDIT REPORT ON FORM 3CEB (PAGES 39 TO 52 OF THE PAPER-BOOK), THE ARM'S LENGTH PRICE OF EXPORTS TO THE AES, INCLUDING MICRO USA, HAS BEEN DETERMINED ON THE BASIS OF THE TRANSA CTIONAL NET MARGIN METHOD (TNMM). BY WAY OF A NOTE AT PAGE 51, IT IS SPECIFIC ALLY STATED THAT 'FURTHER, THE SAID AMOUNT OF RS 2428.26 MILLIONS HAS ALSO BEEN DE TERMINED/ COMPUTED BY THE ASSESSEE HAVING REGARD TO THE ARM'S LENGTH PRICE ON APPLICATION OF TRANSACTIONAL NET MARGIN METHOD (TNMM), ON AGGREGATION OF TRANSAC TIONS, AS PRESCRIBED UNDER SECTION 92C OF THE INCOME-TAX ACT, 1961'. IN THIS B ACKDROP, WE CAN USEFULLY REFER TO THE DECISION OF HON'BLE DELHI HIGH COURT, IN THE CASE OF SONY ERICSSON MOBILE CORPN. (P.) LTD. V. CIT [2015] 374 ITR 118/231 TAXMAN 113/55 TAXMANN.COM 240 (DELHI) , WHEREIN THEIR LORDSHIPS HAD, INTER ALIA , OBSERVED AS FOLLOWS: 'WHERE THE ASSESSING OFFICER/TPO ACCEPTS THE COMPAR ABLES ADOPTED BY THE ASSESSED, WITH OR WITHOUT MAKING ADJUSTMENTS, AS A BUNDLED TRANSACTION, IT ITA NO.3543/AHD/2016 ASSESSMENT YEAR: 2012-13 PAGE 5 OF 8 WOULD BE ILLOGICAL AND IMPROPER TO TREAT AMP EXPENS ES AS A SEPARATE INTERNATIONAL TRANSACTION, FOR THE SIMPLE REASON TH AT IF THE FUNCTIONS PERFORMED BY THE TESTED PARTIES AND THE COMPARABLES MATCH, WI TH OR WITHOUT ADJUSTMENTS, AMP EXPENSES ARE DULY ACCOUNTED FOR. I T WOULD BE INCONGRUOUS TO ACCEPT THE COMPARABLES AND DETERMINE OR ACCEPT T HE TRANSFER PRICE AND STILL SEGREGATE AMP EXPENSES AS AN INTERNATIONAL TR ANSACTION,' 8. BY WAY OF AN EXAMPLE, THIS ASPECT OF THE MATTER WAS THEN EXPLAINED BY HON'BLE DELHI HIGH COURT AS FOLLOWS: 'AN EXAMPLE GIVEN BELOW WOULD MAKE IT CLEAR: PARTICULARS CASE 1 CASE 2 SALES 1000 1,000 PURCHASE PRICE 600 500 GROSS MARGIN 400 (40%) 500 MARKETING SALE PROMOTION 50 150 OVERHEAD EXPENSE 300 300 NET PROFIT 50 (5%) 50 (5%) THE ABOVE ILLUSTRATIONS DRAW A DISTINCTION BETWEEN TWO DISTRIBUTORS HAVING DIFFERENT MARKETING FUNCTIONS. IN CASE 2, A DISTRIB UTOR HAVING SIGNIFICANT MARKETING FUNCTIONS INCURS SUBSTANTIAL EXPENDITURE ON AMP, THREE TIMES MORE THAN IN CASE 1, BUT THE PURCHASE PRICE BEING LOWER, THE INDIAN AE GETS ADEQUATELY COMPENSATED AND, THEREFORE, NO TRANSFER PRICING ADJUSTMENT IS REQUIRED. IN CASE WE TREAT THE AMP EXPENSES IN CASE 2 AS RS.501-, I.E. IDENTICAL AS CASE 1 AND AMP OF RS. 100 AS A SEPARA TE TRANSACTION, THE POSITION IN CASE 2 WOULD BE: PARTICULARS CASE 2 SALES 1,000 PURCHASE PRICE 500 GROSS MARGIN 500 (50%) ITA NO.3543/AHD/2016 ASSESSMENT YEAR: 2012-13 PAGE 6 OF 8 OVERHEAD EXPENSES 300 MARKETING EXPENSES 50 NET PROFIT 150 (15%) IT IS OBVIOUS THAT THIS WOULD NOT BE THE CORRECT WA Y AND METHOD TO COMPUTE THE ARM'S LENGTH PRICE. THE PURCHASE PRICE ADJUSTME NTS/SET OFF WOULD BE MANDATED TO ARRIVE AT THE ARM'S LENGTH PRICE, IF TH E AMP EXPENSES ARE SEGREGATED AS AN INDEPENDENT INTERNATIONAL TRANSACT ION.....' 9. BY THE SAME LOGIC, EVEN MAKING AN ADJUSTMENT FOR IN TEREST ON EXCESS CREDIT ALLOWED ON SALES TO AES WILL VITIATE THE PIC TURE, INASMUCH AS WHAT HAS ALREADY BEEN FACTORED IN THE TNMM ANALYSIS, BY TAKI NG OPERATING PROFIT FIGURE WHICH INCORPORATE FINANCIAL IMPACT OF THE EXCESS CR EDIT PERIOD ALLOWED, WILL BE ADJUSTED AGAIN SEPARATELY AS WELL. OF COURSE, IN TH E EXAMPLE USED BY HON'BLE DELHI HIGH COURT, THE AMP EXPENSES ARE DEDUCTIBLES IN COMPUTATION OF OPERATING PROFIT BUT THAT DOES NOT MAKE ANY MATERIAL DIFFEREN CE BECAUSE THE INTEREST LEVY FOR LATE REALIZATION OF DEBTORS, BEING INEXTRICABLY CON NECTED WITH THE SALES, IS ALSO PART OF OPERATING INCOME. IN THE CASE OF NIRMA INDUSTRIES LTD. V. DY. CIT [2006] 283 ITR 402/155 TAXMAN 330 (GUJ.) , HON'BLE HIGH COURT HAS DEALING WITH THE NATURE OF INTEREST ON DEBTORS, HELD IT TO BE INTEGR AL TO BUSINESS INCOME. THE SAME IS THE PRINCIPLE FOR THE TRANSFER PRICING CASES TO THAT EXTENT INTEREST IS TO BE TAKEN AS INTEGRAL TO SALE PROCEEDS, AND, AS SUCH, INCLUDI BLE IN OPERATING INCOME. WHEN SUCH AN INTEREST IS INCLUDIBLE IN OPERATING INCOME AND THE OPERATING INCOME ITSELF HAS BEEN ACCEPTED AS REASONABLE UNDER THE TNMM, THE RE CANNOT BE AN OCCASION TO MAKE ADJUSTMENT FOR NOTIONAL INTEREST ON DELAYED REALIZATION OF DEBTORS. ONE CAN UNDERSTAND SEPARATE ADJUSTMENT FOR EXCESS CREDI T PERIOD WHEN THE ARM'S LENGTH PRICE FOR EXPORTS HAS BEEN BENCHMARKED ON TH E CUP BASIS BUT NOT IN A CASE WHEN THE ARM'S LENGTH PRICE OF THE EXPORTS HAS BEEN BENCHMARKED ON THE BASIS OF TNMM. THE VERY CONCEPTUAL FOUNDATION, FOR SEPARATE ADJUSTMENT FOR DELAYED REALIZATION OF DEBTORS AND ON THE FACTS OF THIS CASE, IS THUS DEVOID OF LEGALLY SUSTAINABLE MERITS. 10. THE OTHER ASPECT OF THE MATTER IS THAT A SEPARATE ADJUSTMENT FOR DELAYED REALIZATION OF DEBTORS CAN, EVEN IN A FIT CASE, CAN ONLY BE MADE ONLY TO THE EXTENT THE CREDIT PERIOD ALLOWED TO THE ASSOCIATED ENTERPR ISES IS MORE THAN THE CREDIT PERIOD ALLOWED TO INDEPENDENT ENTERPRISE IN RESPECT OF THE SAME OR MATERIALLY SIMILAR TRANSACTIONS. IN THE PRESENT CASE, IT IS AN UNDISPUTED POSITION THAT SEMI- FINISHED GOODS, AS SOLD TO MICRO USA, IS NOT SOLD T O ANY OTHER INDEPENDENT ENTERPRISES. THE ASSESSEE DID HAVE TRADING TRANSACT IONS IN RESPECT OF THE FINISHED GOODS WITH TRADING SUBSIDIARIES IN CHINA AND HONG K ONG BUT IT IS NOT EVEN THE CASE OF THE TPO THAT EXCESSIVE CREDIT PERIOD WAS AL LOWED TO THESE AES VIS-- VIS THE CREDIT PERIOD ALLOWED TO INDEPENDENT ENTERPRIS ES, NOR ANY ALP ADJUSTMENT HAS BEEN RECOMMENDED IN CONNECTION WITH THE SAME. T HIS FACT, IF ANYTHING, SHOWS THAT THE CREDIT PERIOD ALLOWED TO THE AES IS COMPARABLE WITH CREDIT PERIOD OF NON-AES IN RESPECT OF SIMILAR GOODS. TO COMPARE CREDIT PERIOD IN RESPECT OF FINISHED GOODS WITH THE CREDIT PERIOD IN RESPECT OF SEMI-FINISHED GOODS, IS, THEREFORE, SOMEWHAT FALLACIOUS IN APPROACH AND UNTE NABLE IN LAW. IN OUR CONSIDERED VIEW, MERELY BECAUSE THERE IS A DELAY IN REALIZATION OF DEBTS CANNOT BE REASON ENOUGH TO MAKE AN ADDITION AS LONG AS SUC H A DELAY IS PECULIAR TO THE ITA NO.3543/AHD/2016 ASSESSMENT YEAR: 2012-13 PAGE 7 OF 8 TRANSACTIONS WITH AES. THE ADJUSTMENT BEFORE US IS AN ADJUSTMENT TO ARRIVE AT AN ARM'S LENGTH PRICE AND UNLESS THERE IS SOMETHING, M ORE THAN SWEEPING GENERALIZATIONS AS IMPLICIT IN THE ARGUMENTS BEFORE US, TO AT LEAST INDICATE THAT SUCH A DELAY IN REALIZATION OF DEBTS IN SIMILAR TRA NSACTIONS IS ABSENT IN ARM'S LENGTH TRANSACTIONS, THESE ADJUSTMENTS CANNOT BE MA DE EVEN WHEN SALES ARE BENCHMARKED ON CUP BASIS. THE DELAY IN REALIZATION OF DEBTS, RESULTING IN A CONTINUING DEBIT BALANCE, IS NOT A STAND-ALONE INTE RNATIONAL TRANSACTION PER SE , BUT IS A RESULT OF THE INTERNATIONAL TRANSACTION AS IT ONLY REFLECTS THAT THE RELATED PAYMENT HAS NOT BEEN MADE BY THE DEBTOR. AS FOR THE LEARNED DEPARTMENTAL REPRESENTATIVE'S STAND THAT 'THE SUPPLIER IS ENTITL ED TO RECEIPT OF PAYMENT IMMEDIATELY ON DELIVERY IRRESPECTIVE OF WHETHER THE FINISHED GOODS IS SOLD IN THE MARKET, GET SPOILED IN MANUFACTURING OR IS DAMAGED' WOULD PROBABLY BE VALID IN THE PERFECT MARKET CONDITIONS WHICH ARE MORE OF A M YTH THAN REALITY. THE ONLY OTHER MERIT OF THIS APPROACH IS ITS SIMPLICITY, OR, TO PUT IT MORE APPROPRIATELY, NAIVETY. THE REAL LIFE TRADE AND COMMERCE IS SELDOM SO SIMPLE. IT IS NOT AT ALL NECESSARY THAT A PAYMENT IS TO BE MADE AS SOON AS G OODS OR SERVICES ARE DELIVERED. A CALL IS TO BE TAKEN BY THE VENDOR, IN CONSULTATION WITH ITS CLIENT AND BASED ON THE BUSINESS EXIGENCIES, AS TO WHAT SHOULD BE THE TERMS ON WHICH PAYMENTS FOR THE SUPPLIES IS TO BE MADE. IT IS A HA RSH COMMERCIAL REALITY THAT IMMEDIATE PAYMENTS ARE MORE OF EXCEPTIONS RATHER TH AN RULE, AND MORE SO IN A COMPLEX CASE IN WHICH THE ASSESSEE IS SOLE VENDOR A ND THE VERY EXISTENCE OF THE BUYER IS TO PROCESS THE SEMI-FINISHED GOODS AND SEL L IT TO THE END BUYERS. MANY FACTORS, SUCH NORMAL BUSINESS PRACTICES AND THE COM MERCIAL EXIGENCIES, INFLUENCE THE FACT OF PAYMENT IN RESPECT OF A COMME RCIAL TRANSACTION. WHETHER A PAYMENT IS MADE IMMEDIATELY BY THE AE OR IS MADE AF TER SIX MONTHS CANNOT, THEREFORE, BE SEEN IN ISOLATION WITH WHAT IS THE PO SITION IS WITH RESPECT TO SIMILAR PAYMENTS DUE FROM NON-AES. THE WHOLE EXERCISE OF AL P ADJUSTMENTS IS TO NEUTRALIZE THE IMPACT OF INTER SE RELATIONSHIPS BETWEEN THE AES AND IT IS, THEREFORE, NOT THE DELAY SIMPLICTOR IN PAYMENT BUT DELAY IN PAYMENT VIS-- VIS SIMILAR SITUATIONS WITH NON-AES ( I.E. INDEPENDENT ENTERPRISES) WHICH IS OF CRUCIAL CONSIDERATION. SUCH A COMPARISON CANNOT BE BASED ON THE HYPOTHESIS AS TO WHAT WOULD HAVE, IN THE WISDOM OF THE TPO, HAPPE NED IF ASSESSEE WAS TO HAVE SIMILAR TRANSACTIONS WITH NON-AES. THE COMPARI SON HAS TO BE BASED ON REAL TRANSACTIONS OF SIMILAR NATURE, IF AT ALL SUCH TRAN SACTIONS HAVE TAKEN PLACE. WHEN NO SUCH TRANSACTIONS HAVE TAKEN PLACE, AS IS THE CA SE BEFORE US, THERE IS OBVIOUSLY NO OCCASION OF ANY COMPARISON. THE STAND TAKEN BY THE LEARNED DEPARTMENTAL REPRESENTATIVE, THEREFORE, IS NOT ONLY QUITE DETACHED FROM COMMERCIAL REALITY BUT ALSO WHOLLY UNTENABLE IN LAW . IN ANY CASE, WHAT CAN BE EXAMINED ON THE TOUCHSTONE OF ARM'S LENGTH PRINCIPL ES IS THE COMMERCIAL TRANSACTION ITSELF, AS A RESULT OF WHICH THE DEBIT BALANCE HAS COME INTO EXISTENCE, AND THE TERMS AND CONDITIONS, INCLUDING TERMS OF PA YMENT, ON WHICH THE SAID COMMERCIAL TRANSACTION HAS BEEN ENTERED INTO. IN TH IS VIEW OF THE MATTER, LEARNED DEPARTMENTAL REPRESENTATIVE'S RELIANCE ON AZTEC DECISION ( SUPRA ) IS OF NO ASSISTANCE TO THE CASE OF THE REVENUE. THE INTERNAT IONAL TRANSACTION IS EXPORTS OF GOODS WHICH HAS BEEN BENCHMARKED ON TNMM BASIS AND WHICH IS DULY ACCEPTED BY THE TPO. IN VIEW OF THESE DISCUSSIONS, AND RESPE CTFULLY FOLLOWING THE DECISION OF THE COORDINATE BENCH IN ASSESSEE'S OWN CASE FOR THE EARLIER YEARS, WE UPHOLD THE GRIEVANCE OF THE ASSESSEE AND DIRECT THE ASSESS ING OFFICER TO DELETE THE IMPUGNED ALP ADJUSTMENT OF RS.2,10,95,346. ITA NO.3543/AHD/2016 ASSESSMENT YEAR: 2012-13 PAGE 8 OF 8 6. WE SEE NO REASONS TO TAKE ANY OTHER VIEW OF THE MATTER THAN THE VIEW SO TAKEN BY THE CO-ORDINATE BENCH. RESPECTFULLY FOLLOWING T HE SAME, WE UPHOLD THE PLEA OF THE ASSESSEE AND DELETE THE IMPUGNED ALP ADJUSTMENT OF RS.37,67,667/-. THAT WAS THE ONLY ISSUE AGITATED BEFORE US. 7. IN THE RESULT, APPEAL IS ALLOWED IN THE TERMS IN DICATED ABOVE. PRONOUNCED IN THE OPEN COURT ON THIS 16 TH DAY OF MAY, 2018. SD/- SD/- MADHUMITA ROY PRAMOD KUMAR JUDICIAL MEMBER) (ACCOUNTANT MEMB ER) DATED: 16 TH MAY, 2018. PBN/* COPIES TO: (1) THE APPELLANT (2) THE RESPONDE NT (3) CIT (4) CIT(A) (5) DR (6) GUARD FILE BY ORDER ASSISTANT REGISTRAR INCOME TAX APPELLATE TRIBUNAL AHMEDABAD BENCHES, AHMEDABAD