2015 (5) TMI 350 - AT - Income Tax

Transfer pricing adjustment - payment of export commission - Held that - TPO is to conduct a Transfer Pricing analysis to determine the arm s length price (ALP) and not to determine whether there is a service from which assessee has derived benefit or not. The exercise to determine whether assessee had derived any benefit or not from payment of such management fee is to be examined by the AO and appropriate disallowance u/s 37 is called for. In the instant case, the TPO had determined the ALP of payment of export commission at NIL by holding that the assessee did not derive any benefit from services rendered by the AE. Therefore, keeping in view the dictum laid down by the judgment of the Hon ble Jurisdictional High Court in the case of CIT-I Vs. Cushman and Wakefield (India) (P.) Ltd. reported in 2014 (5) TMI 897 - DELHI HIGH COURT necessarily AO as to determine whether the assessee has derived any benefit from payment of export commission and if any benefit had derived, whether such payment is commensurate to comparable transaction has to be examined by the TPO. For the above said purpose, the Transfer Pricing issue is restored to AO/TPO for denovo consideration. - Decided in favour of assessee for statistical purposes. Payment of royalty for export to Associated Enterprises (AEs) - Held that - The assessee has sold the goods to AE on principal to principal basis and has received the sale consideration. In view of the above, in our opinion, there is no justification for disallowance of the royalty on the export. We may reiterate that the Revenue has disallowed the entire royalty paid even on domestic sale which has been considered at length by us in the earlier paragraph of this order and we have arrived at the conclusion that the payment or royalty was a revenue expenditure, incurred for the purpose of business. Accordingly, the addition made by the TPO by determining arm s length price of royalty on export at nil is deleted. There is no justification for disallowance of royalty on the export made to the AEs. Accordingly, the addition made by the AO/TPO by determining the ALP of royalty on exports to the AEs at nil is deleted - Decided in favour of assessee. Sales tools expense disallowed - expense incurred by the Assessee for subsidizing 50 percent of the basic cost of standard tools / fixtures for standardization of Honda Exclusive Authorized Dealers HEAD outlets - Held that - It is observed that position on this issue is similar to that of the immediately preceding issue inasmuch as neither the ld. AR nor the ld. DR is aware of the final position on this issue in the earlier years. We, therefore, set aside the impugned order on this score and remit the matter to the file of AO for deciding it in consonance with the final view taken on it in earlier years. - Decided in favour of assessee for statistical purposes.

Summary

Issues Involved:
1. Transfer pricing adjustments related to export commission and royalty payments.
2. Corporate tax matters concerning the disallowance of sales tools expenses.

Detailed Analysis:

Transfer Pricing Adjustments:

Export Commission:
The assessee, a subsidiary of Honda Motors Company Ltd., Japan, faced a transfer pricing adjustment of Rs. 6,87,02,000/- for export commission payments. The Transfer Pricing Officer (TPO) determined the Arm's Length Price (ALP) of this transaction as "nil," asserting that no services were rendered by the Associated Enterprises (AEs) to justify the commission. The Disputes Resolution Panel (DRP) upheld this view. However, referencing the Delhi High Court's judgment in CIT-I Vs. Cushman and Wakefield (India) (P.) Ltd., it was noted that the TPO's role is to determine the ALP and not to assess the benefit derived by the assessee. This task falls under the jurisdiction of the Assessing Officer (AO) under Section 37. Consequently, the matter was remanded to the AO/TPO for fresh consideration, emphasizing the need to determine whether the assessee derived any benefit from the export commission and if the payment was commensurate with comparable transactions.

Royalty Payments:
The TPO disallowed Rs. 1,22,06,657/- of royalty payments for exports to AEs, arguing that the assessee, being a "contract manufacturer," should not pay royalties as the benefits were reaped by the AE. The DRP confirmed this adjustment. The assessee contended that it was a full-risk bearing independent manufacturer, not a contract manufacturer, and highlighted its financial results showing higher profits from exports to AEs compared to non-AEs. The Tribunal found that the assessee had independent sales and received sales consideration on a principal-to-principal basis, thus justifying the royalty payments. The Tribunal referenced a similar case involving the assessee's sister concern, M/s. Hero MotoCorp Ltd., where royalty payments were allowed. Consequently, the addition made by the AO/TPO was deleted, and the royalty payments were deemed justified.

Corporate Tax Matters:

Sales Tools Expenses:
The assessee claimed a deduction for sales tools expenses amounting to Rs. 73,59,000/-, incurred to subsidize 50% of the cost of standard tools/fixtures for standardizing Honda Exclusive Authorized Dealers (HEAD) outlets. The AO disallowed this expense, following the view taken in earlier years. The Tribunal noted that neither party was aware of the final position on this issue in previous years. Therefore, the matter was remitted to the AO for reconsideration in line with the final view taken in earlier years.

Conclusion:
The appeal was allowed for statistical purposes, with the Tribunal remanding the transfer pricing issues back to the AO/TPO for fresh consideration and the corporate tax matter to the AO for a decision consistent with prior years' rulings. The judgment emphasized the importance of adhering to established legal principles and ensuring that transfer pricing adjustments are based on a thorough and proper analysis of comparable transactions and the actual benefits derived by the assessee.