Section 92B—Transfer Pricing—Extension of credit to the Associated Enterprises (‘AEs’) beyond the stipulated credit period vis-a-vis others cannot be construed as an “international transaction” for the purposes of section 92B(1) so as to require adjustment for ascertaining the ALP.
Section 92B—Transfer pricing—Adjustment for cost of consultancy fees paid for undertaking study for the purpose of restructuring the assessee’s organisational structure—Apportionment of impugned cost is permissible only in a situation where there exists a “mutual agreement or arrangement” between two or more AEs for apportionment of cost.
Section 10A—Establishment of three new units at three different locations, with investments in fixed assets is not mere expansion and would be eligible for deduction u/s 10A.
Facts I:
Assessee had international transactions with AEs and on this count, the AEs had some outstandings due to the assessee. Such outstandings were overdue and no interest was charged by the assessee on such amounts. The TPO has considered non-charging of interest as an ‘international transaction’ requiring adjustment to determine the ALP on the basis that the normal period of credit allowed to the AEs was 90 days, and to the other similarly placed customers the credit period allowed was 30 to 45 days. The fundamental question raised by the assessee was as to whether extending the credit limit can be considered as “international transaction” under section 92B(1) of the Act.
Held I:
Relying on the judgement of the Mumbai Bench Tribunal in case of Nimbus Communications Ltd. vs. Asst. CIT. ITA No. 6597/Mum/2009, it was held that a continuing debit balance is not an international transaction per se, but is a result of international transaction. The commercial transaction, as a result of which the debit balance has come into existence, and the terms and conditions, including terms of payment, has to be examined for the purpose of arm’s length price.
Facts II:
The assessee had undertaken a study for the purpose of restructuring the organisational structure. According to the TPO, changes proposed in the study would also give benefits to the AEs and thus an arm’s length allocation of cost of consultancy expenses paid for study was required to be made. According to the Revenue, it was imperative for the assessee to have recovered such costs from the AEs and since the assessee had not done so, certain expenditure was allocated by the TPO on this score.
Held II:
Apportionment of impugned cost is permissible only in a situation where there exists a “mutual agreement or arrangement” between two or more AEs for apportionment of cost. There existed no such agreement or arrangement in the given case. The study reports may bring certain intangible benefits in the form of enhanced productivity to the businesses of the AEs, however, this would not ipso facto justify the apportionment of the cost incurred, where the use of such studies by the AEs is not obligated in terms of any mutual agreement or arrangement between the assessee and the AEs, but the use is only discretionary on the part of the foreign AEs.
Moreover, there would not be any justification for apportioning the expenditure unless it is shown that the expenses incurred on such activities was disproportionate and the benefit which accrued to the AEs in the form of increased business productivity was not merely incidental, but was tangible and concrete. There was no material to show that any tangible and concrete benefit has accrued to the AEs as a result of the expenditure incurred by the assessee in obtaining consultancy.
Facts III:
The AO noted that the assessee has treated three new units as separate independent units for the purpose of deduction u/s. 10A of the Act. The AO further noted that approval from STPI reflected the new units as expansion of existing units. On the basis of this the AO concluded that the profitability of the aforesaid three units was liable to be combined with that of the corresponding old units and thus the eligible period for deduction u/s. 10A of the Act with respect to the said three units would be reckoned from the first year of the eligibility of the corresponding old units. The CIT(A), however, held that the assessee fulfilled all the conditions prescribed u/s. 10A(2) of the Act. All the three units had their own plant and machinery having substantial investment and substantial turnover and were located in different premises.
Held III:
For claim of deduction u/s. 10A of the Act, examination as to whether the three units are independent units and whether they fulfil the conditions prescribed u/s. 10A(2) of the Act is important. There is no prohibition that an expansion in the same line of business achieved by setting up a new independent unit would lead to denial of deduction u/s. 10A of the Act. The assessee would not be disentitled to deduction u/s. 10A merely due to the fact that the requisite permissions from STPI refer them as expansions of the existing units.
