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2019 (2) TMI 1666 - AT - Income TaxTP adjustment in export of finished goods to AE - MAM selection - assessee applyed TNMM, which the TPO has accepted a major part of the sales of finished products to the AEs to be at arm's length but raised objections in respect of the turnover relating to specific finished products - HELD THAT - Undisputedly, in the facts of the present appeal, the TPO has compared the price charged to non AEs located in India with the price charged to AEs in foreign countries. Therefore, the AEs and non AEs being situated in different geographical locations, there may be various factors/reasons which could have influenced the price charged by the assessee to the AEs and non AEs. Hence, the price charged to non AEs cannot be considered to be a CUP to determine the arm's length price of the price charged for sale of finished products to the AEs. Co ordinate Bench, while deciding an appeal relating to assessee s sister concern viz. Firmenich Aromatics Production (India) Pvt. Ltd., 2018 (11) TMI 862 - ITAT MUMBAI had an occasion to deal with identical issue relating to comparability of the price charged to AEs and non AEs situated in different geographical locations. The Tribunal held that in such circumstances CUP cannot be applied as the most appropriate method. Therefore, we hold that CUP method applied by the TPO to determine the arm's length price of the price charged for sale of finished products to the AEs is invalid. Accordingly, accepting assessee s claim we delete the addition made by the AO. Ground raised is allowed. TP adjustment made to the payment of royalty for use of technical knowhow - assessee has benchmarked the transactions adopting TNMM as the most appropriate method and TPO has rejected the benchmarking primarily for the reason that the payment of royalty not being for the purpose of business has to be disallowed u/s 37(1) - HELD THAT - As decided in own case 2018 (9) TMI 1007 - ITAT MUMBAI when the comparable proposed by the TPO are in different geographical location we do not understand how they can be compared to the assessee. TPO having not determined the arm's length price in conformity with statutory provision and in the process having failed to demonstrate that arm's length price shown by the assessee is incorrect, the contention of the learned DR to restore the issue to TPO for fresh determination of arm's length price is unacceptable - adjustment made to the arm's length price of royalty payment is unsustainable.- Decided in favour of assessee TP adjustment to payment of interest on External Commercial Borrowing (ECB) loan - HELD THAT - Determination of arm's length price of the interest charged on ECB loan on the basis of 46 comparables appearing in Bloomberg Database cannot be said to be valid comparable. In contrast, the TPO himself has stated that while granting permission to the assessee for availing ECB loan, the RBI vide letter dated 8th June 2012, has fixed the interest rate at six months USD LIBOR plus 350 basis points. Even, the RBI circular referred to by the learned AR, a copy of which is at Page 311 of the paper book, the interest rate for ECB loan availed for a period of three years and up to five years has been fixed at six months LIBOR plus 350 basis points. In view of the aforesaid facts, we are of the opinion that arm's length price of the interest charged to the AE can be more accurately determined by following the rate of interest fixed by the RBI in respect of ECB loan. In view of the aforesaid, we accept learned Authorised Representative s contention that the arm's length price of the interest to be charged on the ECB loan availed from the AE has to be determined at six months USD LIBOR rate plus 300 basis points. The Assessing Officer is directed to carry out the adjustment accordingly. This ground is partly allowed. TP adjustment to availing of information systems (IS) services - HELD THAT - Undisputedly, the TPO has made an adjustment to the arm's length price of the payment made towards information services to the AE by following the same reasoning on the basis of which he has made similar adjustment in assessment year 2012 13. Moreover, it is evident, the adjustment made by the TPO is not by following anyone of the most appropriate methods prescribed under the statute but on an ad hoc or estimate basis. In fact, learned DRP has upheld the adjustment made by the TPO simply relying upon their decision in assessment year 2012 13. Notably, while deciding identical issue in assessee s own case in assessment year 2012 13, in the decision referred to above, the Tribunal has deleted the addition made on account of transfer pricing adjustment . TPO himself agrees that the AE has provided software and certain services, there is no reason for not accepting the payment made to the AE to be at arm's length in the absence of any contrary evidence brought on record and by simply applying the benefit test. If the TPO did not agree to the arm's length price shown by the assessee it was open for him to determine the arm's length price by applying one of the most appropriate methods being backed by supporting material. Without complying to the statutory provisions, the Transfer Pricing Officer certainly cannot determine the arm's length price on ad hoc / estimation basis Facts relating to the disputed issue being identical in the impugned assessment year, respectfully following the decision of the Co ordinate Bench in assessee s own case, we delete the addition made on account of adjustment to the arm's length price of payment made to the AE towards availing of information system services
Issues Involved:
1. Transfer pricing adjustment in relation to export of finished goods to Associated Enterprises (AE). 2. Transfer pricing adjustment made to the payment of royalty for use of technical knowhow. 3. Transfer pricing adjustment in relation to payment of interest on External Commercial Borrowing (ECB) loan. 4. Transfer pricing adjustment in relation to availing of information systems (IS) services. 5. Levy of interest under section 234B and 234C of the Income Tax Act, 1961. Issue-wise Detailed Analysis: 1. Transfer Pricing Adjustment in Relation to Export of Finished Goods to AE: The assessee, an Indian company engaged in manufacturing and marketing industrial flavors, fragrances, and chemical specialties, challenged the addition made on account of transfer pricing adjustment related to the export of finished goods to its AEs. The Transfer Pricing Officer (TPO) observed that the assessee sold identical products to both AEs and non-AEs, with higher prices charged to non-AEs. The TPO applied the Comparable Uncontrolled Price (CUP) method to determine a difference of ?73,04,480, which was added as an adjustment. The assessee argued that the transactions with AEs and non-AEs were not comparable due to differences in geographical location, volume, and marketing costs. The Tribunal agreed with the assessee, stating that geographical location and market conditions must be considered under Rule 10B(2) of the I.T. Rules. The Tribunal found that the TPO's comparison was invalid as it did not account for these differences and deleted the adjustment. 2. Transfer Pricing Adjustment Made to the Payment of Royalty for Use of Technical Knowhow: The TPO questioned the payment of ?20.12 crore as royalty to the AE, arguing that the assessee failed to provide evidence of technical knowhow transfer and that such payments were not justified after many years of operations. The TPO allowed only 10% of the royalty payment, proposing an adjustment of ?20,76,49,475. The assessee contended that the royalty payment was benchmarked using the Transactional Net Margin Method (TNMM) and had been accepted in previous years. The Tribunal upheld the assessee's position, referencing its own decision in the assessee's case for the previous year, which stated that the TPO cannot determine the arm's length price on an ad-hoc basis and must use one of the prescribed methods. The Tribunal deleted the adjustment, affirming that the royalty payment was at arm's length. 3. Transfer Pricing Adjustment in Relation to Payment of Interest on ECB Loan: The TPO adjusted the interest on an ECB loan, benchmarking it at USD LIBOR plus 143.62 basis points based on Bloomberg Database data, resulting in an adjustment of ?30,53,362. The assessee argued that the interest rate was as per RBI approval, which set it at six months USD LIBOR plus 350 basis points. The Tribunal found that the TPO's benchmarking was not valid as it did not provide all relevant data to the assessee and did not account for the RBI's prescribed rate. The Tribunal directed the Assessing Officer to adjust the interest rate as per the RBI's approval, partially allowing the assessee's ground. 4. Transfer Pricing Adjustment in Relation to Availing of Information Systems (IS) Services: The TPO determined the arm's length price of payment for IS services at ?1,62,05,000, against the assessee's payment of ?14,26,34,846, proposing an adjustment of ?12,64,29,846. The TPO used an estimation method, which the Tribunal found invalid. The Tribunal noted that the TPO did not follow any prescribed method and relied on ad-hoc estimation. The Tribunal referenced its own decision in the assessee's case for the previous year, which stated that the TPO must use one of the prescribed methods to determine the arm's length price. The Tribunal deleted the adjustment, upholding the assessee's benchmarking. 5. Levy of Interest Under Section 234B and 234C: The issue of levy of interest under sections 234B and 234C was deemed consequential and did not require adjudication at this stage, hence dismissed. Conclusion: The Tribunal allowed the assessee's appeal partly, deleting the adjustments made on account of transfer pricing for export of finished goods, royalty payment, and IS services, and directed the adjustment of interest on ECB loan as per RBI approval. The levy of interest under sections 234B and 234C was dismissed as consequential.
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