2018 (8) TMI 2029 - AT - Income Tax

TP Adjustment - DRP adopting TNMM method to bench mark the international transactions and while doing so rejecting the comparable submitted by the Assessee - HELD THAT - After perusing the aforesaid findings of the Ld. DRP, it is clear that Ld. DRP has not applied its mind and there is no finding on the submissions of the Assessee. Under these facts and circumstances of the case, we deem it appropriate to restore this issue to the DRP to decide it afresh by giving its speaking finding. We hold and direct accordingly. Nature of expenditure - Treatment of Royalty paid as capital in nature - HELD THAT - As decided in own case 2016 (7) TMI 1608 - ITAT DELHI no where does the agreement mention that Patent/Trademark/Software copyright/know-how is being purchased by the licensee/assessee and that the assessee will have an unfettered right over the same. The ld. DR could not point out to any clause in the agreement which would suggest that there was a transfer of ownership right and that by virtue of the agreement the assessee will become the owner of such trademark/ patent/technical know-how. It is undisputed that the royalty expenditure is a recurring expenditure in the present appeals and is payable for every year the technical know-how/patent/trade-mark continues to be used. Thus held it to be revenue expenditure. Depreciation on UPS being computer peripherals at the rate of 15% instead of 60% - HELD THAT - As decided in own case 2016 (7) TMI 1608 - ITAT DELHI as relying on CIT vs. BSES Yamuna Power Ltd. 2010 (8) TMI 58 - DELHI HIGH COURT while deleting the disallowance held that computer accessories and peripherals such as, printers, scanners and server etc. form an integral part of the computer system. In fact, the computer accessories and peripherals cannot be used without the computer. Consequently, as they are the part of the computer system, they are entitled to depreciation at the higher rate of 60%.

Summary

Issues Involved:
1. Validity of the AO/DRP order.
2. Reference to the TPO without hearing the Assessee.
3. Analysis of arm’s length nature of international transactions.
4. Appropriateness of using TNMM over RPM for benchmarking.
5. Attribution of losses to related party transactions.
6. Selection criteria for comparable companies.
7. Arithmetical inaccuracies in computation of operating margins.
8. Adjustments for differences in functions, risks, and assets.
9. Reliance on non-public financial data.
10. Application of amended Proviso to section 92C.
11. Treatment of royalty payments as capital expenditure.
12. Allowance of royalty payments as revenue expenditure.
13. Depreciation rate on UPS as computer peripherals.

Detailed Analysis:

1. Validity of AO/DRP Order:
The Assessee contended that the order passed by the AO/DRP was bad in law due to failure to appreciate the facts and relevant law. However, this ground was considered general in nature and not adjudicated separately.

2. Reference to TPO without Hearing:
The Assessee argued that the AO erred in not providing an opportunity of being heard before referring transfer pricing issues to the TPO. The Tribunal did not provide a specific ruling on this procedural ground.

3. Analysis of Arm’s Length Nature of International Transactions:
The Assessee claimed that the TPO/DRP misunderstood the business and economic conditions, leading to inaccurate analysis of arm's length pricing. The Tribunal found that the DRP had passed a non-speaking order without addressing the Assessee’s submissions and remanded the issue back to the DRP for fresh consideration with a speaking order.

4. Appropriateness of Using TNMM Over RPM:
The Assessee argued that the RPM method, previously accepted by the authorities, should be used instead of TNMM. The Tribunal noted that the DRP did not adequately justify the switch to TNMM and remanded the issue for reconsideration, directing the DRP to provide a detailed rationale for its decision.

5. Attribution of Losses to Related Party Transactions:
The Assessee contended that the TPO/DRP attributed the entire losses in the distribution division to related party transactions without considering the business circumstances. The Tribunal directed the DRP to re-examine this issue in light of the Assessee’s submissions and provide a detailed explanation.

6. Selection Criteria for Comparable Companies:
The Assessee argued that the TPO used incorrect criteria for selecting comparable companies and cherry-picked comparables. The Tribunal remanded this issue to the DRP for reconsideration, instructing it to address the Assessee’s concerns and provide a reasoned decision.

7. Arithmetical Inaccuracies in Computation of Operating Margins:
The Assessee claimed that the DRP did not correct arithmetical inaccuracies in the computation of operating margins of comparable companies. The Tribunal directed the DRP to re-evaluate the computations and ensure accuracy.

8. Adjustments for Differences in Functions, Risks, and Assets:
The Assessee argued that the TPO/DRP failed to make appropriate adjustments for differences in functions performed, risks undertaken, and assets employed. The Tribunal remanded this issue to the DRP for a detailed examination and appropriate adjustments.

9. Reliance on Non-Public Financial Data:
The Assessee contended that the TPO relied on financial data not available in the public domain at the time of the economic analysis. The Tribunal instructed the DRP to reconsider the use of such data and ensure compliance with the legal requirements.

10. Application of Amended Proviso to Section 92C:
The Assessee argued that the TPO erred in applying the amended Proviso to section 92C and failed to allow a 5% downward variation in determining the arm's length price. The Tribunal directed the DRP to re-examine this issue and provide a reasoned decision.

11. Treatment of Royalty Payments as Capital Expenditure:
The Assessee contended that the AO/DRP erred in treating royalty payments as capital expenditure. The Tribunal noted that in earlier and subsequent years, similar payments were held to be revenue expenditure by the Tribunal and the Hon'ble Jurisdictional High Court. Accordingly, the Tribunal held that the royalty payments are revenue expenditure and deleted the addition.

12. Allowance of Royalty Payments as Revenue Expenditure:
The Tribunal, following its own precedents and decisions of the Hon'ble Jurisdictional High Court, held that the royalty payments were revenue expenditure and allowed the Assessee’s claim.

13. Depreciation Rate on UPS as Computer Peripherals:
The Assessee argued for a higher depreciation rate of 60% on UPS, treating it as computer peripherals. The Tribunal, following the Hon'ble Delhi High Court's decision in a similar case, allowed the higher depreciation rate of 60% on UPS and decided the issue in favor of the Assessee.

Conclusion:
The appeal was partly allowed for statistical purposes, with several issues remanded back to the DRP for fresh consideration and detailed findings. The Tribunal directed the DRP to provide a reasoned decision on each remanded issue, ensuring compliance with legal requirements and addressing the Assessee’s submissions comprehensively.