2018 (5) TMI 2026 - AT - Income Tax

TP Adjustment - Characterization of distribution fee - Royalty or not? - HELD THAT - As decided in own case for assessment year 2011 -12 we remit the issue in the present case also to the file of the transfer pricing officer/A.O. to consider the issue afresh in light of the directions as above. As regards the learned counsel of the assessee s submission that since the impugned payments cannot be treated as royalty as settled by the decision of Hon ble High Court in the case law from Set India Pvt . Limited 2015 (6) TMI 1174 - BOMBAY HIGH COURT a finding should be given we are of the considered opinion that there is no need to reiterate the binding nature of Hon ble jurisdictional High Court. When facts are identical the Hon ble jurisdictional High Court s decision is binding upon all the authorities below. Appeal by the assessee stands allowed for statistical purposes.

Issues Involved:
1. Assessment of total income.
2. Transfer pricing adjustment.
3. Reference to the Transfer Pricing Officer (TPO).
4. Characterization of distribution fee as royalty.
5. Rejection of economic analysis from the transfer pricing study report.
6. Selection of comparables for transfer pricing analysis.
7. Methodology for benchmarking international transactions.
8. Internal comparability.
9. Short grant of tax deducted at source (TDS).
10. Interest under Section 234D.
11. Initiation of penalty proceedings.

Issue-wise Detailed Analysis:

1. Assessment of Total Income:
The appellant contested the assessment of total income at ?436,47,34,833 against ?22,51,21,420 as computed by the appellant in its return of income. The primary contention was that the Assessing Officer erred in making this assessment.

2. Transfer Pricing Adjustment:
The appellant argued that the transfer pricing adjustment of ?413,96,13,415 was incorrect, as the international transactions with its associated enterprises (AEs) were at arm's length. The tribunal noted that the effective ground of appeal was the addition made by the assessing officer under the head ‘transfer pricing adjustment’. The appellant's counsel highlighted that a similar issue was considered in the appellant's case for the assessment year 2011-12, where the tribunal had remitted the issue to the TPO.

3. Reference to the Transfer Pricing Officer (TPO):
The appellant claimed that the reference to the TPO under Section 92CA(1) was made without satisfying the necessary conditions. The tribunal observed that the TPO’s role is crucial in transfer pricing cases and that the appellant had not complied with the TPO’s directions to provide certain details, leading to the addition.

4. Characterization of Distribution Fee as Royalty:
The appellant contended that the distribution fee paid to its AEs was wrongly characterized as royalty. The tribunal acknowledged that the Dispute Resolution Panel (DRP) had accepted that the impugned payment could not be treated as ‘royalty’ based on the jurisdictional High Court decision in Set India Pvt. Limited. However, due to a pending special leave petition by the Department, the DRP did not accept this fully.

5. Rejection of Economic Analysis from the Transfer Pricing Study Report:
The appellant argued that the economic analysis undertaken in its transfer pricing study report was wrongly rejected. The tribunal noted that the TPO had directed the appellant to file certain details, which were not provided, leading to the rejection of the analysis.

6. Selection of Comparables for Transfer Pricing Analysis:
The appellant claimed that the TPO erred in rejecting certain companies as comparables and in selecting royalty agreements as comparables. The tribunal found that the TPO had not supplied the entire documents of the comparables to the appellant, violating the principles of natural justice. It was noted that the comparables were not Indian entities, which could impact the fairness of the comparison.

7. Methodology for Benchmarking International Transactions:
The appellant argued that the TPO erred in selecting the Comparable Uncontrolled Price (CUP) method instead of the Transaction Net Margin Method (TNMM) for benchmarking international transactions. The tribunal emphasized the need for a method acceptable to both parties and remitted the issue back to the TPO/AO for fresh adjudication.

8. Internal Comparability:
The appellant contended that internal comparables were more suitable than the royalty agreements selected by the TPO. The tribunal noted the need for further investigation and verification, directing the TPO/AO to decide the issue afresh after affording a reasonable opportunity of hearing to the appellant.

9. Short Grant of Tax Deducted at Source (TDS):
The appellant claimed a short grant of credit for taxes deducted at source amounting to ?2,64,14,172. This issue was not elaborated upon in the judgment, indicating that it may be addressed during the fresh adjudication.

10. Interest under Section 234D:
The appellant contested the levy of interest under Section 234D, arguing that the amount was incorrectly computed. The tribunal did not provide a detailed analysis of this issue, suggesting it would be considered in the fresh adjudication.

11. Initiation of Penalty Proceedings:
The appellant disputed the initiation of penalty proceedings under Section 271(l)(c). The tribunal did not delve into this issue in detail, implying it would be part of the comprehensive review by the TPO/AO.

Conclusion:
The tribunal remitted the issues back to the TPO/AO for fresh adjudication, emphasizing the need for a thorough and fair analysis in light of the directions provided. The appeal was allowed for statistical purposes, and the tribunal underscored the binding nature of the jurisdictional High Court's decision when facts are identical.

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