2014 (2) TMI 1230 - AT - Income Tax

Addition on account of royalty payment - Held that - Liable to be considered as standard bought-out components are such material on which no further processing is required and are directly fitted into the final product; and cost of such material only needs to be deducted from the sale price to compute the royalty payable. Applying the said clarification to the present situation considering the manufacturing process explained it cannot be construed that the so-called constituent material are merely fitted into the final product; on the contrary it is a case where such material also undergoes a chemical reaction in the process of producing the final product and the same are irretrievable once the finished product is manufactured. For the said reason also in our considered opinion the so-called constituent materials classified by the TPO cannot be equated to standard bought-out components so as to reduce their cost from the sales value to compute the royalty payable. For all the above reasons we therefore find no justification on the part of the TPO in rejecting the methodology adopted by the assessee to calculate net sales for the purposes of computing the royalty payable. TPO considering 5% rate of royalty payment on export sales as arm s length price as against 8% paid by the assessee - Held that - We hold that the TPO erred in (i) re-working the stated value of the international transaction of royalty payment based on his interpretation of the expression Net Sales and (ii) considering the royalty payment by TNAPC to the AE as a comparable transaction under the CUP method for the purposes of determining the arm s length price of the international transaction of royalty payment claimed by the assessee. As a consequence the adjustment/addition of 91, 66, 061/- made in respect of royalty payment is directed to be deleted. Addition on account of the international transaction on export of a product namely Trigonox 25C75 to the AE - Held that - The adjusted price of 300/- per kg. in our view is liable to be taken as an arm s length price in respect of export of Trigonox 25C75 to the AE instead of the stated price of 239/- per kg.. As a result the addition of 11, 34, 000/- made by the TPO on this count shall be scaled down to 5, 49, 000/-. Accordingly we direct the Assessing Officer to restrict the adjustment on account of international transaction of export to the AE to 5, 49, 000/- instead of 11, 34, 000/2-6. Thus on this aspect assessee partly succeeds. Addition on international transaction relating to receipt on intending commission and marketing support fee - selection of comoarable - Held that - Alfred - Ostensibly the financial data reflects inconsistent results and in the absence of any credible explanation for the inconsistencies it has been rightly excluded from the list of comparables. M/s IDC (India) Ltd. - assessee is justified in claiming that concern IDC (India) Ltd. be considered as a comparable for the purposes of benchmarking international transactions of Intending commission and marketing support fees The nature of activity being performed by the assessee in its Marketing and Sales support Segment have already been noted and on that basis we uphold assessee s plea for exclusion on ICRA Online Ltd. (Information Services Segment) for the purposes of benchmarking its international transaction of Intending commission and marketing support fee for the assessment year 2007-08. Accordingly the TPO is directed to re-work the adjustment on account of the Marketing and Sales support Services segment by excluding ICRA Online Ltd. from the list of comparables

Issues Involved:
1. Transfer Pricing Adjustment for Royalty Payment
2. Transfer Pricing Adjustment for Export of Finished Goods
3. Transfer Pricing Adjustment for Marketing and Sales Support Services
4. Grant of +/- 5% Range Benefit
5. Initiation of Penalty Proceedings under Section 271(1)(c)

Detailed Analysis:

1. Transfer Pricing Adjustment for Royalty Payment:
The primary issue was the addition of Rs. 91,66,061/- made on account of the international transaction of royalty payment to the AE. The TPO rejected the assessee's method of aggregating the royalty payment with the manufacturing segment and benchmarking it under the TNM method, instead adopting the CUP method. The TPO interpreted 'Net Sales' as sales reduced by bought-out components and benchmarked the royalty rate at 5% instead of 8% for export sales. The Tribunal found that the TPO's action of reworking the royalty payable based on his interpretation of 'Net Sales' was unjustified. The Tribunal held that the TPO should examine the transaction as structured by the associated enterprises and not rework it. The Tribunal also found that the TPO's classification of certain raw materials as 'constituent chemicals' was incorrect. Consequently, the adjustment of Rs. 91,66,061/- was deleted.

2. Transfer Pricing Adjustment for Export of Finished Goods:
The TPO made an adjustment of Rs. 11,34,000/- for the export of Trigonox 25C75 to the AE by adopting the internal CUP method, comparing it with the price charged to a third party in India. The Tribunal found that while the CUP method was appropriate, adjustments were needed for differences in volume, geographical, functional, and risk factors. The Tribunal adjusted the comparable uncontrolled price from Rs. 365/- per kg to Rs. 300/- per kg, scaling down the addition to Rs. 5,49,000/-.

3. Transfer Pricing Adjustment for Marketing and Sales Support Services:
The TPO rejected three of the five comparables used by the assessee and accepted only Priya International Ltd., resulting in an adjustment of Rs. 11,75,224/-. The Tribunal found the rejection of Alfred Herbert India Ltd. justified due to inconsistent financial results but accepted IDC (India) Ltd. as a comparable, as it was used in the subsequent assessment year. The Tribunal directed the TPO to rework the adjustment considering IDC (India) Ltd. as a comparable.

4. Grant of +/- 5% Range Benefit:
The Tribunal rendered this ground academic due to subsequent amendments in law.

5. Initiation of Penalty Proceedings under Section 271(1)(c):
The Tribunal found the initiation of penalty proceedings premature and dismissed this ground.

Assessment Year 2007-08:
The issues for this year were similar to those in the previous year, except for the inclusion of ICRA Online Ltd. as a comparable in the Marketing and Sales Support Services segment. The Tribunal found ICRA Online Ltd. functionally incomparable and directed its exclusion, instructing the TPO to rework the adjustment.

Conclusion:
Both appeals were partly allowed, with specific adjustments directed by the Tribunal for the issues of royalty payment, export of finished goods, and marketing and sales support services. The Tribunal provided detailed reasons for accepting or rejecting comparables and adjustments, ensuring adherence to legal standards and guidelines.

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