Thursday, January 22, 2015

Longer credit period allowed to AE on realization of sale proceeds would be an international transaction under TP


Longer credit period to AE is 'international transaction' in terms of Explanation to section 92(1) but same is 'closely linked' to international transaction of sale or service to AE in terms of Rule 10A(d). This is not a transaction of loan or advance to the AE but is only an excess period allowed for realization of sales proceeds from the AE. Therefore, the arm's length interest rate would be the average cost of the total fund available to the assessee and not the rate at which a loan is available.

The issues that arose before the Tribunal were as follows:


a)Whether allowance of longer credit period to AE could be treated as an international transaction in terms of Explanation to section 92(1)?

b)Whether allowance of longer credit period to AE could be treated as transaction of loan or advance to AE so as to determine arms’ length interest rate at a rate at which a loan was available?

The Tribunal held as under:

1)After the insertion of Explanation to section 92B(1), the payment or deferred payment or receivable or any debt arising during the course of business would fall under the expression international transaction. Thus, in view of the expanded meaning of the international transaction, the delay in realization of dues from the AE in comparison to non-AE would certainly fall in the ambit of international transaction.

2)As per Rule 10A(d) if a number of transactions are closely linked or continuous in nature and arising from a continuous transactions of supply of amenity or services the transactions is treated as closely linked transactions for the purpose of transfer pricing and, therefore, the aggregation and clubbing of closely linked transaction are permitted under said rule.

3)When the transactions are influenced by each other, particularly in determining the price and profit involved in the transactions, then those transactions can safely be regarded as closely linked transactions.

4)In the instant case, the credit period extended to the AE was a direct result of sale transaction. The sale price of the product or service determined between the parties would always influenced by the credit period allowed by the seller. Therefore, the transaction of sale to the AE and credit period allowed in realization of sale proceeds were closely linked.

5)When the assessee was not making any difference for not charging the interest from AE as well as non-AE then the only difference between the two could be considered as the average period allowed along with outstanding amount.

6)If the average period multiplied by the outstanding amount of the AE was at arm's length in comparison to the average period of realization and multiplied by the outstanding from non-AEs then no adjustment could be made being the transaction was at arm's length.

7)The transaction in question was not a transaction of loan or advance to the AE but it was only an excess period allowed for realization of sales proceeds from the AE. Therefore, the arm's length interest in any case would be the average cost of the total fund available to the assessee and not the rate at which a loan was available. - GOLDSTAR JEWELLERY LTD. V. JCIT [2015] 53 taxmann.com 353 (Mumbai - Trib.)
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