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2014 (11) TMI 728 - AT - Income TaxTransfer pricing adjustment -Payment of royalty and technical service fee disallowed Held that - Following the decision in Kirby Building Systems India Ltd. Versus Additional Commissioner of Income-tax, Range-8, Hyderabad 2014 (10) TMI 696 - ITAT HYDERABAD - Kirby Building Systems India P. Ltd., is a wholly owned subsidiary of Alghanim Industries, a Kuwait based Multi-Billion Conglomerate - It is one of the world s largest producers of Pre- Engineered Steel Buildings (in short PEB ) and has been operational for more than 38 years since 1976 - There is no dispute with reference to the fact that assessee was promoted by the Kirby Building Systems, Kuwait and its original technical service agreement for payment of lump sum amount of 2 million dollars as technical knowhow fee and royalty of 2.5% in the first year and 5% from second year onwards up to March 31, 2007 was approved by the RBI and Ministry of Industries - assessee did not remit any of those amounts in those years and the agreement was amended periodically - in the year assessee has paid 1 lakh dollars as technical knowhow fee and royalty at 7.5% on domestic sales as per the agreements entered into and approved by the authorities - apart from legal position, even on merits the disallowance of entire technical knowhow payment and part disallowance of royalty payment to AE was not warranted. The agreements were periodically approved by RBI and by Ministry of Industry and assessee was paying the amounts as per the agreements - Even though approval by the other Governmental authorities does not prevent TPO in examining the ALP as per the provisions of the Act, TPO did not examine the issue under the T.P. provisions at all but took upon the role of an A.O. in analyzing the commercial expediency of payment of royalty and technical knowhow under the provisions of section 37(1) - Since the agreements were approved by the authorities and the royalty fee and technical knowhow are at arm s length and that assessee s claim should be allowed as such - There is no information brought on record by the TPO that the payment at 7.5% on the net sales is not at arm s length as there was no other comparable case brought on record - Generally, the Government of India is approving the royalty payments at 7.5% of the sales and this approval given by the RBI and Ministry of Industry is at par with similar agreements being approved in other contracts/agreements - royalty and technical knowhow payments made by the assessee to its AE are considered at arm s length and the grounds raised by the assessee on this issue are allowed Decided in favour of assessee. Reimbursement costs TPO was of the opinion that the services provided by Kirby India in implementation of SAP comes under support services which are required to be marked-up - Held that - Assessee allocated costs on man-month basis for implementation expenses and man-hour basis for license cost - there is no denial of executing the work by assessee - assessee also extended credit to AEs and TPO charged interest for the credit period - this is not a pure reimbursement of cost but cost sharing exercise in implementing ERP systems in the group - It certainly involves services by assessee company - mark up is warranted under the TP provisions. Rate of markup Held that - Some services are certainly required and assessee has to incur cost in the beginning there by extending some credit facility, a markup of 5% on the reimbursement cost would justify the facts of the case Decided in favour of assessee.
Issues Involved:
1. Disallowance of payment of royalty and technical service fee. 2. Determination of Arm's Length Price (ALP) for reimbursement costs. 3. Imposition of interest under section 234B of the Income Tax Act. 4. Initiation of penalty proceedings under section 271(1)(c) of the Income Tax Act. Detailed Analysis: 1. Disallowance of Payment of Royalty and Technical Service Fee: The primary issue pertains to the disallowance of payment of royalty and technical service fee to M/s. Kirby Building Systems, Kuwait, analyzed under the provisions of transfer pricing. The assessee, M/s. Kirby Building Systems India Ltd., engaged in the business of manufacturing Pre-Engineered Steel Building System (PEB) Products, filed returns declaring specific incomes for the respective assessment years. The Assessing Officer (A.O.) determined higher total incomes and made adjustments under section 92CA of the I.T. Act. The Tribunal examined the issue, referring to earlier years' orders (ITA.No.1651/Hyd/2010 and ITA.No.1975/Hyd/2011 for A.Ys. 2006-07 and 2007-08). The Tribunal noted that the TPO (Transfer Pricing Officer) had not analyzed the payments under TNMM (Transactional Net Margin Method) or any other method required under the provisions. The TPO's decision to determine the ALP (Arm's Length Price) at NIL was not sustainable, as the agreements were originally entered into before the TP provisions came into statute. The Tribunal cited the Delhi High Court's decision in CIT vs. EKL Appliances, emphasizing that the TPO cannot dictate commercial decisions or deny claims based on business necessity. The Tribunal concluded that the royalty and technical knowhow payments made by the assessee to its AE (Associated Enterprise) were at arm's length and allowed the assessee's claim. The agreements were approved by the RBI and Ministry of Industry, and no comparable cases were brought on record by the TPO. Therefore, the Tribunal directed the A.O. to allow the amounts as claimed by the assessee. 2. Determination of ALP for Reimbursement Costs: The second issue concerns the determination of ALP for reimbursement costs. The assessee maintained an I.T. Data Centre and used SAP ERP enterprise services across the group. The cost of implementation was initially paid by the assessee and later recovered from the respective group companies without any markup. The TPO, however, considered these transactions as international transactions and applied a 20% markup on the reimbursement costs, which was contested by the assessee. The Tribunal noted that the services provided by the assessee in implementing the ERP systems involved cost-sharing and were not pure reimbursements. Therefore, a markup was warranted under TP provisions. However, the Tribunal found the 20% markup arbitrary and reduced it to 5%, referencing the decision in M/s Zydus Atlanta Healthcare P.Ltd. The A.O./TPO was directed to rework the calculations accordingly. 3. Imposition of Interest under Section 234B: Ground No. 13 in both appeals pertains to the imposition of interest under section 234B of the Act on transfer pricing adjustments. The Tribunal found this ground to be consequential in nature, implying that the decision on this issue would follow the outcomes of the primary issues discussed above. 4. Initiation of Penalty Proceedings under Section 271(1)(c): Ground No. 14 in the first appeal and Ground No. 13 in the second appeal pertain to initiating penalty proceedings under section 271(1)(c) of the Act. The Tribunal found these grounds to be premature and did not require separate adjudication at this stage. Conclusion: The appeals were partly allowed. The Tribunal directed the A.O. to allow the royalty and technical service fee claims and to rework the reimbursement costs with a 5% markup. The imposition of interest under section 234B was noted as consequential, and the initiation of penalty proceedings under section 271(1)(c) was deemed premature. The orders were pronounced in open court on 19.11.2014.
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