2019 (5) TMI 1719 - AT - Income Tax

TP Adjustment - arm s length price determination by AO with regard international transaction - rejection by DRP of the benchmarking report submitted by the assessee - HELD THAT - TPO in this case has asked the assessee to submit benchmark analysis report done on the basis of royalty research database. The assessee could not provide the same when proceedings were going on before the TPO. The same could be provided only before DRP. Learned DRP asked for the remand report from the TPO. Learned TPO refused to offer any comment on the documents submitted by the assessee on the ground that the same was not submitted earlier before him. Despite this learned DRP accepted the additional evidence and proceeded to observe that the report was unauthenticated in as much as it was unsigned and did not contain seal of the reporting party. As gone through the copy of the said report submitted. We find that the said report is submitted by Altus International. It contains covering letter which contains full address and website address of the firm. Based on the report of Altus International, range of royalty rate is also mentioned in the covering letter. It has duly been signed by the partner of the firm. It also contains contact persons and phone number for any question regarding report. In these circumstances, in our considered opinion, rejection by DRP of the benchmarking report submitted by the assessee is not sustainable. If authorities below have any doubt about the authenticity of the document, same could have very well inquired from the address and phone number mentioned therein. Hence in our considered opinion, interest of justice demands that this issue may be remitted to the TPO. Non-allowance of depreciation on fixed asset - why claim of depreciation should not be allowed as business was not set up - HELD THAT - Authorities below have erred in appreciating the facts of the case as being claimed by the assessee. Assessee s claim is that machines were duly put to use during the year in a trial run. In the trial run prototype engines were duly manufactured and they were then sold for validation and testing. Sale of said prototype engine has been duly reflected in audited annual accounts as per details submitted above. In these circumstances, in our considered opinion, this issue needs to be remitted to the file of the AO to consider the issue afresh in the light of the assessee s submission as above. Accordingly, issue stands remitted to the file of the Assessing Office. Appeal of the assessee stands allowed for statistical purposes.

Summary

Issues Involved:
1. Jurisdiction of the Transfer Pricing Officer (TPO) in initiating transfer pricing proceedings.
2. Transfer pricing adjustments related to royalty payments.
3. Rejection of the Comparable Uncontrolled Price (CUP) method and the use of the Discounted Cash Flow (DCF) methodology.
4. Acceptance of benchmarking analysis based on the Royalty Stat database.
5. Non-allowance of depreciation on fixed assets.

Issue-wise Detailed Analysis:

1. Jurisdiction of the Transfer Pricing Officer (TPO):
The appellant contended that the Assessing Officer (AO) erred in referring the computation of arm's length price (ALP) to the TPO without demonstrating the necessity and expediency of such a referral. The appellant argued that the transfer pricing proceedings initiated under section 92CA(1) of the Income-tax Act were without jurisdiction and should be quashed.

2. Transfer Pricing Adjustments Related to Royalty Payments:
The appellant, a joint venture between Mahindra & Mahindra Limited and International Truck and Engine Mauritius Holding Limited, paid a lump sum of USD 10 million as royalty to LuxIPCO, Luxembourg. The AO/TPO made a transfer pricing adjustment amounting to INR 52,35,76,599, determining the value of the international transaction of royalty paid in the current year at Rs. Nil. The appellant argued that transactions between joint venture partners are always at arm's length and that the adjustment was unwarranted.

3. Rejection of the Comparable Uncontrolled Price (CUP) Method and the Use of the Discounted Cash Flow (DCF) Methodology:
The appellant adopted the CUP method to benchmark its international transaction but was asked by the TPO to undertake appropriate benchmarking based on the Royalty Stat database. The TPO rejected the appellant's approach of using the DCF/present value methodology for the purpose of valuation of technical and intellectual property, leading to a significant transfer pricing adjustment.

4. Acceptance of Benchmarking Analysis Based on the Royalty Stat Database:
The appellant submitted a benchmarking analysis based on the Royalty Stat database before the Dispute Resolution Panel (DRP). The DRP admitted the additional evidence but dismissed the benchmarking analysis on the grounds that it lacked authentication, seal, or signature of any agency. The appellant argued that the report was submitted under the letterhead of Altus International and was duly signed by a partner of the firm. The Tribunal found that the rejection by the DRP was not sustainable and remitted the issue back to the TPO for fresh consideration, directing the TPO to verify the authenticity of the document.

5. Non-allowance of Depreciation on Fixed Assets:
The AO disallowed the depreciation claim of INR 14,63,03,230 on the grounds that the business was not set up by 31.3.2010. The appellant argued that the assets were put to use during the relevant previous year, conducting trial runs and manufacturing prototype engines, which were sold for validation testing. The Tribunal referred to the decision of the Bombay High Court in the case of Larsen & Toubro Limited, which allowed depreciation even if the machinery was used for trial production. The Tribunal remitted the issue back to the AO to reconsider the claim of depreciation in light of the appellant's submissions.

Conclusion:
The appeal of the assessee was allowed for statistical purposes, with directions to the TPO to reconsider the benchmarking analysis and to the AO to reassess the claim of depreciation on fixed assets. The Tribunal emphasized the need for proper verification and consideration of the appellant's submissions and evidence.