2016 (4) TMI 1361 - AT - Income Tax

TP adjustment in relation to the international transaction of Payment of export commission - ALP determination - HELD THAT - As per the ratio decidendi in Cushman Wakefield India 2014 (5) TMI 897 - DELHI HIGH COURT TPO was required to simply determine the ALP of the international transaction of Payment of export commission unconcerned with the fact if any benefit accrued to the assessee and thereafter it was for the AO to decide the deductibility of this amount u/s 37(1). As the TPO in the instant case initially determined Nil ALP by holding that no benefit accrued to the assessee and the AO made the addition without examining the applicability of section 37(1) we find the actions of the AO/TPO running in contradiction to the ratio laid down in Cushman Wakefield (supra). Respectfully following the precedent we set aside the impugned order and remit the matter to the file of AO/TPO for deciding this issue in conformity with the law laid down above. TPA from the international transaction of Payment of royalty for exports to AEs - HELD THAT - We are not able to appreciate the view point of the TPO in allowing royalty payment in respect of goods sold to non-AEs and disallowing the same in respect of sales to AEs. Accepting royalty payment to AE in respect of sales to non-AEs goes to show that the ALP of royalty payment stood accepted by the Revenue. Nil ALP has been determined only of the royalty paid in respect of exports made to AEs. Royalty is payable on the basis of manufacturing of goods and not on the sales made. As the rate of royalty paid in respect of exports to AEs is equal to that in respect of sales to non-AEs which has been accepted by the TPO at ALP we fail to see as to how royalty paid in respect of exports to AEs is not at ALP - Tribunal has consistently deleted the addition in respect of royalty payment by considering the same to be at ALP we are disinclined to accept the stand of the ld. DR for restoring the matter to the file of AO/TPO for a fresh determination of the ALP of this international transaction. This issue is decided in the assessee s favour. Grant of depreciation u/s 32 on Moulds used for plastic components - @ 15% OR 30% claimed by the assessee - HELD THAT - AO reduced the depreciation rate on plastic moulds by following the view taken by him in the preceding years. Neither the ld. AR nor the ld. DR could specifically point out the fate of such addition in the earlier years inasmuch as whether the assessee accepted such addition or if assailed then the final view taken by the Tribunal in the preceding years on this issue. Similar issue when came up for consideration before the tribunal for the AY 2006-07 it restored the matter to the AO for deciding this issue afresh after ascertaining the necessary facts. As there is still no clarity on this issue we deem it fit to follow the view taken by the tribunal for the A.Y. 2006-07. Resultantly we set aside the impugned order on this issue and remit the matter to the file of AO for deciding the matter afresh.

Summary

Issues:
1. Addition of ?22,85,36,863 on account of transfer pricing adjustment for 'Payment of export commission.'
2. Addition of ?8,60,70,816 on account of transfer pricing adjustment from the international transaction of 'Payment of royalty for exports to AEs.'
3. Dispute regarding the grant of depreciation at a reduced rate of 15% on Moulds used for plastic components instead of the claimed 30%.

Issue 1 - Transfer Pricing Adjustment for 'Payment of Export Commission':
The assessee appealed against the addition of ?22,85,36,863 made by the Assessing Officer based on the Transfer Pricing Officer (TPO) determining the arm's length price (ALP) at Nil for the international transaction of 'Payment of export commission.' The TPO concluded that no benefit accrued to the assessee from the commission payment, thus recommending the adjustment. However, the Tribunal found that the TPO's role was limited to determining ALP and not deciding the existence of services or benefits to the assessee. Following the precedent in CIT v. Cushman & Wakefield, the Tribunal set aside the order and remitted the matter to the AO/TPO for a fresh decision considering the deductibility under section 37(1) of the Act.

Issue 2 - Transfer Pricing Adjustment for 'Payment of Royalty for Exports to AEs':
The second issue involved the addition of ?8,60,70,816 due to transfer pricing adjustment from the international transaction of 'Payment of royalty for exports to AEs.' The TPO determined the ALP at Nil based on the view that the assessee was a 'Contract manufacturer' for its AEs, leading to the addition by the AO. The Tribunal disagreed with the TPO's characterization, noting that the transactions were on a principal-to-principal basis, and the royalty rates were consistent for AEs and non-AEs. Citing past decisions in the assessee's favor, the Tribunal ruled in favor of the assessee, rejecting the need for a fresh determination of ALP.

Issue 3 - Depreciation on Moulds Used for Plastic Components:
The final issue pertained to the grant of depreciation at a reduced rate of 15% on Moulds used for plastic components, as opposed to the claimed 30%. The AO's decision to lower the depreciation rate was based on previous years' practices. The Tribunal, lacking clarity on the previous treatment of this issue, remitted the matter to the AO for a fresh decision in line with the directions provided.

In conclusion, the Tribunal partly allowed the appeal, setting aside the orders on the issues of transfer pricing adjustments and depreciation, remitting them for fresh consideration, while ruling in favor of the assessee on the transfer pricing adjustment for 'Payment of royalty for exports to AEs.'