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2019 (7) TMI 1726 - AT - Income TaxTP Adjustment - adjustment to the arm's length price of international transaction with the Associated Enterprises (AEs) relating to export of finished goods - Whether or not learned DRP is empowered under the Act to enhance the income in respect of a transaction for which neither any variation has been proposed in the draft order nor the assessee has raised any objection? - HELD THAT - In respect of an assessee availing the DRP route, power of enhancement would be restricted only to the variations objected to by the assessee. In our humble opinion, this cannot be the intention of the legislature while enacting the provision of section 144C(8) of the Act. The power of enhancement conferred upon the DRP under section 144C(8) of the Act cannot be interpreted in a manner to restrict it only to the variations objected by the assessee - any interpretation of section 144C(8) of the Act leading to curtailment of DRP's power of enhancement would defeat the purpose for which section 144C(8) was enacted. - Explanation brought to section 144C(8) of the Act does not expand the scope of the main provision, but only clarifies it and brings to the fore the intention of the legislature for enacting such provision. Identical view was expressed by the tribunal also in case of M/s. Hamon Shriram Cottrell Pvt. Ltd. v/s ITO 2014 (1) TMI 69 - ITAT MUMBAI . In our view, the aforesaid decisions of the Tribunal clearly clinch the issue in favour of the Revenue. In view of the aforesaid, we hold that learned DRP has validly exercised its power under section 144C(8) of the Act. Ground no.2.2 is dismissed. Whether the internal TNMM, as applied by learned DRP to determine the arm's length price of the export of HPC and beverages to the AEs, is the most appropriate method? - On a perusal of learned DRP's directions, it appears, learned DRP has not at all considered the objections of the assessee in an objective manner. In fact, the segmental results of AE and non-AE segments furnished by the assessee have been rejected by learned DRP on the flimsy ground that the auditor's certificate showing such segmental results is not acceptable since he had not initially audited the books of account of the assessee. What was required to be examined by learned DRP is the correctness of assessee's claim and not who has audited the books of account of the assessee. Further, learned DRP has not provided any valid reason why the benchmarking done by the assessee under external TNMM is not acceptable. Merely because the assessee had entered into transactions both with the AEs and non-AEs, it does not render applicability of external TNMM redundant. While in the transactions with the AEs creation of market and the end users is not the responsibility of the assessee but in the transaction with non-AEs, it is the responsibility of the assessee to create and maintain the market and end users. Thus, it affects the FAR profile materially which ultimately would have an impact on the profitability. It is quite noticeable, various submissions made by the assessee regarding non-applicability of internal TNMM have been disregarded/ignored by learned DRP without proper examination. Similarly, learned DRP has not provided any valid reasoning why external TNMM is not applicable. Though, we hold that external TNMM applied by the assessee has to be treated as the most appropriate method in the given facts and circumstances of the case, however, since neither the Transfer Pricing Officer nor learned DRP have examined the acceptability or otherwise of the comparables selected by the assessee, we restore the issue to the Assessing Officer to examine this aspect and determine the arm's length price accordingly after due opportunity of being heard to the assessee. Notional interest on overdue receivables from the AEs - HELD THAT - As a matter of policy, the assessee does not charge any interest on overdue receivables either from the AEs or non-AEs. Further, the contention of the assessee that it is a debt free company has not been controverted by the Department. It is also a fact that the assessee raises invoices on the AEs at cost plus 9%. Thus, it can be said that in the mark-up charged, the assessee has factored in the interest element on the overdue receivables. In these circumstances, applying the ratio laid down in the decisions relied upon by the learned Sr. Counsel for the assessee, we are of the view that no adjustment on account of notional interest on overdue receivables from the AEs should be made. Accordingly, we delete the addition. Grounds raised are allowed. Adjustment to the arm's length price on account of payment of royalty/fee for services - HELD THAT - While examining the royalty payment in case of Hindustan Unilever Ltd. in assessment year 2013-14, the Transfer Pricing Officer has accepted royalty paid to the AE to be at arm's length. Similarly, in the order passed under section 92CA(3) of the Act in respect of AE, the Transfer Pricing Officer has accepted the royalty payment to be at arm's length. That being the case, the arm's length price of royalty payment at the hands of the assessee cannot be determined at nil. In any case of the matter, it is not disputed that the assessee is remunerated by the AE on cost plus mark-up basis. That being the case, royalty paid to the AE forms part of the cost base of the assessee on which it has charged mark-up @ 9%. In the aforesaid circumstances, if the payment of royalty to the AE is disallowed by determining the arm's length price at nil, then logically the income of the assessee also should be reduced. This is the view expressed in Mercer Consulting Pvt. Ltd. 2016 (8) TMI 62 - ITAT DELHI . Thus adjustment made by determining the arm's length price of royalty payment at nil deserves to be deleted.
Issues Involved:
1. Adjustment to the arm's length price of international transactions. 2. Authority and jurisdiction of the Dispute Resolution Panel (DRP) in enhancing the income. 3. Adjustment on account of notional interest on overdue receivables from Associated Enterprises (AEs). 4. Adjustment to the arm's length price on account of payment of royalty/fee for services. Issue-wise Detailed Analysis: 1. Adjustment to the Arm's Length Price of International Transactions: The assessee, an Indian company engaged in the manufacture, trading, and marketing of FMCG products, had various international transactions with its AEs, including the export of HPC products and beverages. The Transfer Pricing Officer (TPO) proposed adjustments for royalty fees and interest on receivables but did not propose any adjustment for the export of HPC products and beverages. The DRP, however, examined the benchmarking done by the assessee and observed that the profit margin on sales to non-AEs was significantly higher than sales to AEs. Consequently, the DRP issued a show-cause notice proposing to enhance the income by applying internal TNMM instead of external TNMM used by the assessee. The Tribunal held that the DRP's power to enhance income extends to all matters arising out of assessment proceedings, irrespective of whether any variation was proposed or objected to by the assessee. However, the Tribunal found that the DRP did not objectively consider the assessee's objections and documentary evidence, leading to the conclusion that internal TNMM was not applicable. The issue was restored to the Assessing Officer for verification of the comparables selected by the assessee under external TNMM. 2. Authority and Jurisdiction of the DRP in Enhancing the Income: The legal issue raised by the assessee was whether the DRP had the authority to enhance the income in respect of a transaction where no variation was proposed by the TPO and no objection was raised by the assessee. The Tribunal analyzed section 144C(8) of the Act and its Explanation, concluding that the DRP's power to enhance extends to any matter arising out of the assessment proceedings, regardless of whether the issue was raised by the assessee. The Tribunal dismissed the assessee's contention that the DRP's power of enhancement is limited to variations proposed in the draft assessment order and objected to by the assessee. 3. Adjustment on Account of Notional Interest on Overdue Receivables from AEs: The TPO proposed an adjustment for notional interest on overdue receivables from AEs. The assessee argued that it does not charge interest on overdue receivables from either AEs or non-AEs and that any delay in payments was factored into the mark-up charged to AEs. The Tribunal found that the average delay in receivables from AEs was less than that from non-AEs and that the assessee is a debt-free company. It concluded that no adjustment for notional interest was warranted and deleted the addition. 4. Adjustment to the Arm's Length Price on Account of Payment of Royalty/Fee for Services: The TPO determined the arm's length price of royalty payments for central services at nil, alleging that the assessee could not specify the exact nature of services provided. The Tribunal observed that the TPO's determination was not based on any prescribed method and that similar royalty payments were accepted as arm's length in the case of Hindustan Unilever Ltd. and the AE. The Tribunal held that the adjustment made by the TPO was not in accordance with statutory provisions and deleted the adjustment, noting that the royalty payments were part of the cost base on which the assessee charged a mark-up. Conclusion: The Tribunal partly allowed the assessee's appeals, directing the Assessing Officer to verify the comparables selected by the assessee under external TNMM and deleting the adjustments for notional interest on overdue receivables and royalty payments. The stay applications were dismissed as infructuous.
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