The Bangalore bench of Income Tax Appellate Tribunal recently ruled that transaction of extending credit period to Associate Enterprises can be regarded as “international transaction” for the purpose of determination of Arm’s Length Price. While rejecting the submissions made by the assessee, the Tribunal observed that the observations made by the Bombay High Court in Vodafone Case is not applicable to such cases.
The assessee in the instant case, M/s. Tally Solutions Pvt. Ltd. is engaged in the business of rendering software research and development services and other related services to its AE, Tally Solutions FZ LLC, Dubai, UAE. The assesse produced all its financial results as well as international transactions before the Transfer Pricing Officer, who has initiated proceedings against the assessee by applying the provisions of Chapter X by treating the outstanding due with the AE as international transaction on ground that they have extended credit facility similar to a working capital loan to its AE without charging any interest. According to him, such transactions is not at arm’s length price within the meaning of Section 92C(3)(a)(b)(c) of the Income Tax Act r.w. Rule 10B(1)(a) of the Income Tax Rules.
The First Appellate Authority rejected the contentions of the assessee and upheld the impugned order. Therefore, the assessee approached the Appellate Tribunal for relief.
Before the Tribunal, the assessee relied upon the decision in Vodafone India Services Pvt. Ltd. Vs. UOI (2014) 368 ITR 1(Bom) in which, the Bombay High Court has held that income as understood in the Act must arises from an international transactionthen only the measure is to be found on application of arm’s length so far Chapter X of the Act is concerned. The computation of ALP does not convert non-income into income. The tax can be charged only on income and in the absence of any income arising the issue of completing the measure of ALP tothe value for consideration of itself does not arise. There must be an international value which is chargeable to tax for invoking the provisions of Chapter X.
The assessee further contended that no separate adjustment can be made by treating the extension of the credit period to the AE as a separate international transaction since the assessee is not an independent international transaction when the TPO has accepted the international transactions provided to the AE at arm’s length.
First of all, the Tribunal rejected the contention raised by the assessee that the extending credit period cannot be regarded as international transaction in the absence of any income arises from the said transaction. Regarding this, the Tribunal observed that “It is pertinent to note that if the argument advanced by the ld. counsel for the assessee is accepted then it would result to render the provisions of Chapter X redundant. The proposition advanced by the ld. counsel for the assessee would lead to the situation where in a case the assessee is charging less price in comparison to the arm’s length price from its AE then the said transaction would be decided as per the provisions of ChapterX by comparing the same with uncontrolled comparable prices. On the contrary if the assessee does not charge any price for any international transaction with the AE then the provisions of Chapter X cannot be applied as claimed by the ld. counsel for the assessee. Thus such a proposition would be inconsistent with the object and scheme of the Chapter X of I T Act and hence cannot be accepted. Even otherwise if the intent of the legislature was to introduce the provisions of Chapter X was to compute income from international transaction only in the case where the assessee is charging or receiving the price under the international transaction then there cannot be any computation of income having regard to the ALP where the related parties decided not to charge any price of the international transaction and consequently the said provision of Chapter X would be conveniently circumvented by each and every assessee having international transaction with the AE by not charging any price or receiving any price from the international transaction.”
On the basis of the above findings, the Tribunal found that the ratio of Vodafone case cited above is not applicable to the facts of the instant case. It was observed that “The transaction is otherwise capable of generating income but due to the related parties decided not to charge or pay to each other the basic character and nature of transaction would not change.”
Regarding the alternative plea raised by the assessee that separate adjustment cannot be made by treating the extension of the credit period to the AE as a separate international transaction, the Tribunal applied the ration of Information System Resource Centre P. Ltd. and M/s. Avnet India P. Ltd. and held that“extending credit period for realization of sales to the AE is a closely linked transaction with the transaction of providing services to the AE and therefore cannot be treated as an individual and separate transaction of advance or loan. Accordingly, we direct the A.O/TPO to redo the exercise of determination of ALP by considering the credit period allowed in realization of sales proceeds as closely linked transaction with the transaction of providing services to the AE and thereforeboth has to be clubbed and aggregated for the purpose of determination of ALP.
Read the full text of the order below.
