2018 (3) TMI 1657 - AT - Income Tax

Transfer pricing adjustment on payment of Royalty - selection of MAM - TNMM - Held that - As decided in assessee s own case for assessment year 2002-03 Tribunal decided the issue in favour of assessee by upholding Transactional Net Margin Method (TNMM) adopted by assessee as the most appropriate method for benchmarking its international transaction including payment of Royalty and also emphasized on the rule of consistency. Addition made on account of homologation expenses - Held that - Assessing Officer without examining the details furnished by the assessee has made ad-hoc disallowance of 10, 00, 000/- merely on the basis that disallowance was made in assessment year 2002-03 therefore some disallowance has to be made in assessment year 2003-04 as well. This reasoning is certainly not acceptable for making disallowance even if it is on estimation basis. Once having missed the opportunity to examine material available to the Assessing Officer during assessment proceedings second innings cannot be granted to the Assessing Officer to examine the same. No infirmity in the order of Commissioner of Income Tax (Appeals) in deleting ad-hoc disallowance with respect to homologation charges. - Decided in favour of assessee

Summary

Issues Involved:
1. Transfer pricing adjustment on payment of Royalty.
2. Consistency in the application of benchmarking methods.
3. Deletion of addition on account of homologation expenses.
4. Remitting the issue of expenditure on capitalized cars back to the Assessing Officer.

Issue-wise Detailed Analysis:

1. Transfer Pricing Adjustment on Payment of Royalty:
The Department questioned the CIT(A)'s decision to reject the Comparable Uncontrolled Price (CUP) method in favor of the Transactional Net Margin Method (TNMM) for evaluating the Arm's Length Price (ALP) of royalty payments. The Tribunal noted that this issue had been previously adjudicated in favor of the assessee for the assessment year 2002-03. The agreement under which the royalty was paid remained unchanged. The Tribunal upheld the TNMM as the most appropriate method, emphasizing that the CUP method used by the TPO was inappropriate since it compared controlled transactions (Maruti Udyog Ltd. and Suzuki). The Tribunal cited several precedents supporting the use of TNMM and the rule of consistency, concluding that the CIT(A)'s decision to reject the CUP method was justified.

2. Consistency in the Application of Benchmarking Methods:
The Department argued that the CIT(A) failed to maintain consistency by not treating each assessment year separately. The Tribunal reiterated that the facts and circumstances for the assessment years in question were identical to those of the previous year, and the same agreement was in place. The Tribunal upheld the CIT(A)'s decision, emphasizing the rule of consistency and noting that the TPO's approach was inconsistent across different years.

3. Deletion of Addition on Account of Homologation Expenses:
The Department challenged the deletion of the addition made on homologation expenses. The assessee explained that homologation is a mandatory process for vehicle approval in India, and the expenses incurred were for materials supplied to the Automotive Research Association of India (ARAI). The Tribunal found that the Assessing Officer had made an ad-hoc disallowance without examining the details provided by the assessee. The Tribunal upheld the CIT(A)'s decision to delete the disallowance, stating that the Assessing Officer's reasoning was not acceptable and that the details furnished by the assessee should have been examined.

4. Remitting the Issue of Expenditure on Capitalized Cars Back to the Assessing Officer:
The Department contested the CIT(A)'s decision to remit the issue of expenditure on capitalized cars back to the Assessing Officer. The Tribunal found no error in the CIT(A)'s decision, stating that the Assessing Officer should consider the additional evidence provided by the assessee and decide the issue afresh. The Tribunal allowed this ground for statistical purposes, directing the Assessing Officer to re-examine the evidence and make a decision in accordance with the law.

Conclusion:
- The appeals by the Department for the assessment years 2003-04 and 2004-05 regarding the transfer pricing adjustment on royalty payments were dismissed.
- The deletion of the addition on account of homologation expenses was upheld for both assessment years.
- The issue of expenditure on capitalized cars was remitted back to the Assessing Officer for re-examination for the assessment year 2004-05.
- The cross objection by the assessee for the assessment year 2004-05 was allowed for statistical purposes.