Thursday, November 29, 2012

Super profit making comparables and 'notional interest' on credit period to AEs irrelevant factors for TP adjustments

In this case, assessee had received certain commission from its AE. Consequently, it raised debit note for Rs.18,43,796 as commission @ 3%. Assessee claimed that the commission earned by him was more than the industry’s average, thus, the test of arm's length principle was satisfied. On being referenced, the TPO compared the commission of 3% with controlled transactions of Indian clients of assessee where the average commission rate was worked out to be 3.375%. However, the average rate included commission rate of 7% received from ‘E’. In addition to above the TPO noticed that assessee had allowed extended credit period to its AE. Accordingly, the TPO made an addition in respect of notional interest for extended credit period and for the difference of 0.375% in the rate of commission.

Ruling in favour of assessee, the Tribunal held as under:

1) As per industry’s policy, the media agency earns commission @2.5%; the case of ‘E’ was an extreme case of earning 7% commission. Keeping in view the principle that the extreme profit companies are to be excluded, this company couldn’t be considered as a comparable for arriving at the average mean;

2) Therefore, AO/TPO was directed to exclude ‘E’ from list of comparables and work out the commission accordingly;

3) With reference to the calculation of interest on the so-called credit period it was noticed that the assessee was not charging any interest from clients for the services rendered/debit notes provided for delay in payments as a policy;

4) It was also noticed that in some of the transactions the credit period was ranging from 5 to 476 days, which indicated that the clients would not pay amount unless they verified the bills and services rendered;

5) Since it was practice of assessee not to charge interest from any client, this aspect should not be considered as an international transaction exclusively in the case of AE as it was not assessee’s policy to provide credit to any client specifically - Lintas India (P.) Ltd. v. ACIT [2012] 27 300 (Mumbai - Trib.)

6) The nature of the service and the fees being charged to ‘E’ were entirely different when compared to the other clients, which were considered as comparable. Therefore, the fixed fee received from ‘E’ couldn’t be used for comparison as it was not comparable to the transactions of commission undertaken by assessee with the other clients;