DANIA ORO, MUMBAI V. ITO 8(1)(3), MUMBAI

ITA 6827/MUM/2012

• Counselvise Citation: [2013] 120 COUNSELVISE.COM (IT) 5063 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 1 month(s) 13 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 20-12-2013
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: K
• Assessment Year: 2008-2009
• Appeal Filed On: 07-11-2012
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: AJEET KUMAR JAIN
• Keywords: Transfer pricing; International transaction; Notional interest

Judgement Text

, IN THE INCOME TAX APPELLATE TRIBUNAL K BENCH, MUMBAI . . , , , BEFORE SHRI P.M. JAGTAP , ACCOUNTANT MEMBER AND SHRI AMIT SHUKLA , JUDICIAL MEM BER ( . ) . / ITA (TP) NO. 6827 / MUM./ 2012 ( / ASSESSMENT YEAR : 20 0 8 09 ) DANIA ORO JEWELLERY PVT. LTD. GALA NO.601 & 602, BLOCK NO.1 SEEPZ SEZ, SEEPZ++ ANDHERI (E), MUMBAI 400 096 .. / APPELLANT V/S INC OME TAX OFFICER WARD 8(1)(3), MUMBAI .... / RESPONDENT . / PERMANENT ACCOUNT NUMBER AACCD3214E / ASSESSEE BY : MR. AJIT SHAH / REVENUE BY : MR. AJEET KUMAR JAIN / DATE OF HEARING 16 . 1 2 .2013 / DATE OF ORDER 20.12.2013 / ORDER , / PER AMIT SHUKLA , J.M. THE PRESENT APPEAL HAS BEEN PREFERRED BY THE ASSESSEE ASSAILING THE IMPUGNE D FINAL ASSESSMENT ORDER PASSED IN PURSUANCE OF THE DIRECTIONS GIVEN BY THE DISPUTE RESOLUTION PANEL I, MUMBAI, VIDE ORDER DATED 30 TH AUGUST 2012 UNDER SECTION 144C(5) OF THE INCOME TAX ACT, 1961 (FOR SHORT 'THE ACT' ) FOR THE ASSESSMENT YEAR 2008 09. FOLLO WING GROUNDS HAVE BEEN RAISED BY THE ASSESSEE: DANIA ORO JEWELLER Y PVT. LTD. 2 RE: ADJUSTMENT ON ACCOUNT OF INTEREST ON DELAYED PAYMENT FROM THE ASSOCIATED ENTERPRISES (AES) RS.I0,12,676/ - : ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE HON'BLE MEMBERS OF THE DISPUTE RESO LUTION PANEL (DRP) OUGHT TO HAVE HELD THAT NO ADJUSTMENT ON ACCOUNT OF NOTIONAL INTEREST ON DELAYED PAYMENT FROM THE ASSOCIATED ENTERPRISES (AES) IS REQUIRED TO BE MADE U / S.92CA(3) OF THE INCOME TAX ACT, 1961 (THE ACT) AND CONSEQUENTLY, OUGHT TO HAVE D IRECTED THE AO NO T TO MAKE ADJUSTMENT U/S 92CA(3) OF THE ACT ON ACCOUNT OF DELAYED PAYMENT FROM AES. WITHOUT PREJUDICE TO ABOVE AND IN THE ALTERNATE ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, IF AT ALL ADJUSTMENT BY WAY OF INTEREST ON DELAY ED PAYMENT FROM AES WAS REQUIRED TO BE MADE, THEN, THE HON'BLE MEMBERS OF THE DRP OUGHT TO HAVE DIRECTED THE AO TO CONSIDER THE COST OF BORROWINGS IN THE HANDS OF THE APPELLANT AS THE RATE OF INTEREST FOR THE PURPOSE OF QUANTIFYING THE NOTIONAL INTEREST ON DELAYED PAYMENT FROM THE AES AS AGAINST THE AD - HOC RATE OF INTEREST AT 7%. IN VIEW OF THE SAME, THE HON'BLE MEMBERS OF DRP OUGHT TO HAVE DIRECTED THE AO TO MAKE ADJUSTMENT U / S. 92CA(3) OF THE ACT ON ACCOUNT OF NOTIONAL INTEREST ON DELAYED PAYMENT FRO M AES AS UNDER: (A) BY ADOPTING 4.14% REPRESENTING COST OF BORROWINGS IN THE HANDS OF THE APPELLANT BY NOT GIVING WEIGHTAGE TO INTEREST FREE FUNDS AVAILABLE IN THE HANDS OF THE APPELLANT; ALTERNATIVELY (B) BY ADOPTING 3.07% REPRESENTING COST OF BO RROWINGS IN THE HANDS OF THE APPELLANT BY GIVING WEIGHTAGE TO INTEREST FREE FUNDS AVAILABLE IN THE HANDS OF THE APPELLANT 2 . THE ONLY ISSUE INVOLVED IN THIS APPEAL IS TRANSFER PRICING ADJUSTMENT ON ACCOUNT OF NOTIONAL INTEREST ON DELAYED PAYMENT FROM THE A.E . 3 . DURING THE COURSE OF TRANSFER PRICING PROCEEDINGS, THE ASSESSEE WAS ASKED TO PROVIDE THE DETAILS OF PAYMENT RECEIVED FROM ITS A.E. ON A PERUSAL OF SUCH DETAILS, THE TPO NOTED THAT IN MANY CASES, THERE WAS CONSIDERABLE DELAY IN RECEIVING THE PAYMENTS. TH E ASSESSEE WAS REQUIRED BY THE TPO TO SUBMIT CALCULATION OF INTEREST FOR THE DELAY BEYOND 120 DAYS @ 15.68%. THE WORKING OF THE INTEREST UP TO 31 ST MARCH 2011, WORKED OUT AT ` 22,68,395. HE HELD THAT IN AN INDEPENDENT UNRELATED TRANSACTIONS INVOLVING EXTEN DED CREDIT FACILITY, THE THIRD PARTY EXPECTS SOME COMPENSATION IN THE FORM OF INTEREST. ACCORDINGLY, HE PROPOSED TO CHARGE ARMS LENGTH INTEREST RATE BY CONSIDERING THE RATES PREVAILING IN INDEPENDENT TRANSACTION I.E., SHORT TERM UNSECURED DEBIT. AFTER DET AIL REASONS TO JUSTIFY SUCH A TRANSFER PRICING ADJUSTMENT, HE CALCULATED THE RATE OF INTEREST ON THE DELAYED PAYMENT @ 15.68% AND, DANIA ORO JEWELLER Y PVT. LTD. 3 ACCORDINGLY, MADE THE ADJUSTMENT OF ` 2,26,98,395. THE REASONING GIVEN BY THE TPO TO JUSTIFY SUCH ADJUSTMENT HAS BEEN DEALT W ITH FROM PAGE 6 TO 10 OF THE TPOS ORDER. THE DRP HAD REDUCED THE RATE OF INTEREST @ 7% PER ANNUM AND HELD IT TO BE REASONABLE AND ACCORDINGLY, THE ASSESSING OFFICER WAS DIRECTED TO RECALCULATE THE INTEREST ADJUSTMENT AFTER TAKING INTEREST RATE @ 7% PER AN NUM. 4 . BEFORE US, THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE ASSESSEE HAD HUGE INTEREST FREE FUNDS AND IF THE AVERAGE COST OF BORROWINGS IN THE HANDS OF THE ASSESSEE IS TAKEN INTO CONSIDERATION BY GIVING WAITAGE TO THE INTEREST FREE FUNDS THEN THE AVERAGE COST OF BORROWING AT BEST BE 3.07%. IF AT ALL ANY INTEREST RATE IS TO BE APPLIED, THEN IT CAN BE ONLY 3.07%. HE HAS ALSO FILED THE WORKING OF THIS EXTENT AT PAGE 19 OF THE PAPER BOOK. HOWEVER, HE SUBMITTED THAT THE ASSESSEES MAIN CONTENTION IS THAT IT HAS NOT CHARGED INTEREST TO NON A.ES ALSO ON DELAYED PAYMENTS AND IT HAS NOT BEEN CONSIDERED AS INTERNATIONAL TRANSACTION IN THE TRANSFER PRICING STUDY REPORT. HE HAS ALSO FILED THE DETAILS OF TRANSACTIONS WITH THE A.E. / NON A.E. ALONG WITH THE P ERIOD OF CREDIT DAYS GIVEN TO THE A.E. / NON A.E.. ONCE THE INTEREST HAS NOT BEEN CHARGED FOR NON A.E. ALSO, THEN NO SUCH ADJUSTMENT SHOULD BE MADE. IN SUPPORT OF HIS SUBMISSION, HE RELIED UPON THE DECISION OF THE HON'BLE JURISDICTIONAL HIGH COURT IN INDO AMERICAN JEWELLERY LTD. V/S CIT, ITA NO.503/2012. HE ALSO BROUGHT TO OUR NOTICE THAT IN SUBSEQUENT YEAR, THE DRP HAS DELETED THE SAID ADJUSTMENT. THUS, IN THIS YEAR ALSO, NO SUCH ADJUSTMENT SHOULD BE MADE. 5 . BEFORE US, THE LEARNED DEPARTMENTAL REPRESENTATIV E SUBMITTED THAT ON A PERUSAL OF THE DETAILS OF THE SALES MADE TO THE A.E. / NON A.E., IT WOULD BE SEEN THAT IN CASE OF A.E., THE PERIOD OF REALIZATION AS GONE BEYOND 700 DAYS AND IN SOME CASES EVEN MORE TH A N 1,200 DAYS. IN CASE OF NON A.E., THE MAXIMUM PE RIOD OF DELAY IS ONLY 203 DAYS. THUS, THERE CANNOT BE ANY COMPARABILITY ANALYSIS IN THE TRANSACTIONS BETWEEN THE A.E. / NON A.E. H AD IT BEEN A REGULAR FEATURE IN THE CASE OF THE NON A.E. THEN ASSESSEES CONTENTION COULD HAVE BEEN SAID TO HAVE SOME FORCE. M OREOVER, HE SUBMITTED THAT THE SALE TRANSACTIONS WITH THE A.ES WERE AROUND 215 TRANSACTIONS WHEREAS IN THE CASE OF NON A.E. THERE WAS ONLY 11 TRANSACTIONS AND IT IS ONLY IN ONE INSTANCE DANIA ORO JEWELLER Y PVT. LTD. 4 IN THE CASE OF NON A.E. THAT THE TERMS OF CREDIT WAS 145 DAYS AND THE OVERDUE DELAY WAS 203 DAYS. WHEREAS, IN ASSESSEES CASE, DELAY IN MOST OF THE CASES HAD FAR EXCEEDED THE TERMS OF CREDIT DAYS. THEREFORE, THERE COULD NOT BE ANY COMPARABILITY AND THE DECISION OF THE HIGH COURT CANNOT BE HELD TO BE APPLICABLE ON THE PECULIA R FACTS OF THE CASE. HE THUS SUBMITTED THAT THE ADJUSTMENT MADE ON ACCOUNT OF INTEREST ON DELAYED PAYMENT RECEIVED FROM THE A.E. HAS RIGHTLY BEEN ADDED AND ADJUSTMENTS HAVE BEEN MADE. 6 . WE HAVE HEARD THE RIVAL CONTENTIONS, PERUSED THE FINDINGS OF THE AUTHO RITIES BELOW AS WELL AS THE MATERIAL AVAILABLE ON RECORD. THE MAIN ISSUE INVOLVED IN THE PRESENT CASE IS, WHETHER IN THE SALES TRANSACTIONS MADE TO THE A.E., THE INTEREST CAN BE CHARGED ON THE DELAYED PAYMENT WHICH HAS EXCEEDED THE CREDIT PERIOD. THE ASSES SEES MAIN CONTENTION HAS BEEN THAT IN THE CASE OF NON A.E. ALSO, THE ASSESSEE HAS NOT CHARGED ANY INTEREST ON SUCH DELAYED PAYMENTS. HOWEVER, ON A PERUSAL OF THE DETAILS OF THE TRANSACTIONS WITH THE A.E. AS WELL AS THE NON A.E., IT IS SEEN THAT THE ASSESS EE HAS UNDERTAKEN 215 TRANSACTIONS WITH THE A.E., WHEREAS IN THE CASE OF THE NON A.E., THE ASSESSEE HAS UNDERTAKEN ONLY 11 TRANSACTIONS. THE TERMS OF CREDIT WITH THE A.E. RANGES FROM 115 145 DAYS. IN MOST OF THE TRANSACTIONS WITH THE A.E., THERE HAS BEEN O VER DUE OF THE PAYMENTS FROM THE TERMS OF CREDIT. IT IS ALSO SEEN IN SOME OF THE CASES THE TERMS OF CREDIT HAS EVEN EXTENDED BEYOND 700 DAYS AND IN SOME OF THE CASES, IT HAS GONE BEYOND 1,200 DAYS. IN CONTRAST TO THAT IN THE CASE OF NON A.E., THE MAXIMUM D ELAY IS OF 203 DAYS AND THAT TO BE IN ONE SALE TRANSACTION. UNDER THESE CIRCUMSTANCES, IT CANNOT BE HELD THAT THERE CAN BE DIRECT COMPARISON BETWEEN THE CONTROLLED TRANSACTIONS WITH THE A.E. AND UNCONTROLLED TRANSACTIONS WITH THE THIRD PARTY. THEREFORE, SO ME KIND OF ADJUSTMENT IS REQUIRED TO BE MADE ON SUCH TRANSACTION WITH THE A.E. LOOKING TO THE FACT THAT IN THE CASE OF NON A.E., THERE HAS BEEN MAXIMUM DELAY OF 200 DAYS, WE ARE OF THE OPINION THAT FOR BENCH MARKING THE SAME, UPTO THE DELAY OF 200 DAYS IN THE C ASE OF A.E. ALSO, NO INTEREST SHOULD BE CHARGE ABLE . IN CASE OF DELAY BEYOND THE PERIOD OF 200 DAYS, THE TRANSFER PRICING ADJUSTMENT IS REQUIRED TO BE MADE ON ACCOUNT OF CHARGING OF SOME INTEREST. THE LEARNED COUNSEL FOR THE ASSESSEE WAS REQUIRED TO FURNISH THE WORKING OF PERIOD OF DELAY WHICH ARE BEYOND 200 DAYS DANIA ORO JEWELLER Y PVT. LTD. 5 AND TO CALCULATE INTEREST AT THE LIBOR RATE PREVALENT FOR THE FINANCIAL YEAR 2007 08 PLUS 150 P O INTS I.E., 1.5%. THE LEARNED COUNSEL FOR THE ASSESSEE HAS SUBMITTED THIS WORKING BEFORE US. AS PER THE SAID WORKING THE LEARNED COUNSEL INFORMED THAT LIBOR RATE DURING THE FINANCIAL YEAR 2007 08 WAS AROUND 4.7% AND IF 1.5% IS ADDED, THEN INTEREST RATE WOULD WORK OUT TO 6.21%. ACCORDINGLY, WE DIRECT THE ASSESSING OFFICER / TPO TO VERIFY THE WORKING AND APPL Y INTEREST RATE OF LIBOR + 1.5% AND WORKOUT THE ADJUSTMENT ON ACCOUNT OF INTEREST FOR THE PERIOD BEYOND 200 DAYS . THE ASSESSEE WILL FURNISH THIS WORKING BEFORE THE TPO FOR VERIFICATION. THUS, THE GROUNDS RAISED BY THE ASSESSEE ARE TREATED AS PARTLY ALLOWED . 7 . 7. IN THE RESULT, ASSESSEES APPEAL IS TREATED AS PARTLY ALLOWED. 20 TH DECEMBER 2013 ORDER PRONOUNCED IN THE OPEN COURT ON 20 TH DECEMBER 2013 SD / - . . P.M. JAGTAP ACCOUNTANT MEMBER SD / - AMIT SHUKLA JUDICIAL MEMBER MUMBAI, DATED : 20 TH DECEMBER 2013 / COPY OF THE ORDER FORWARDED TO : ( 1 ) / THE ASSESSEE ; ( 2 ) / THE REVENUE; ( 3 ) ( ) / THE CIT(A ) ; ( 4 ) / THE CIT, MUMBAI CITY CONCERNED ; ( 5 ) , , / THE DR, ITAT, MUMBAI ; ( 6 ) / GUARD FILE . / TRUE COPY / BY ORDER . / PRADEEP J. CHOWDHURY / SR. PRIVATE SECRETARY / / (DY./ASSTT. REGISTRAR) , / ITAT, MUMBAI