2019 (4) TMI 2071 - AT - Income Tax

TP adjustment on account of CBUs and on account of royalty - selection of MAM - comparable selection - assessee had selected TNMM method as most appropriate method wherein the margins of assessee were 8.58% - HELD THAT - The assessee was engaged in carrying out all the activities i.e. import of raw materials import of CBUs and also import of spare parts from its associated enterprises and other transactions. All these transactions are to be benchmarked under the umbrella of manufacturing activity on an aggregate basis and after applying TNMM method margins shown by assessee needs to be compared with the mean margins of finally selected concerns. In this regard Authorized Representative for the assessee stressed that in the instant year the factual aspects to this extent were different as the TPO had taken note of selection of comparables by assessee and rejected 6 of them. The said deliberations are in part (vii) at pages 241 to 243 of Paper Book. The mean margins of balance comparables worked out to 6.28%. However in all fairness since the TPO in the final analysis applied RPM method and not TNMM method we direct the TPO / Assessing Officer to verify the stand of assessee in this regard and where the said 6 concerns which were finally selected by him are comparable may be adopted for benchmarking the transactions under TNMM method. The margins shown by assessee on an aggregate basis were 8.58% and if on verification the mean margins of comparables are at 6.28% then no addition is to be made in the hands of assessee on this count. Hence grounds of appeal No.2 4 and 5 as pressed by assessee are allowed. The grounds of appeal No.3 8 and additional grounds of appeal No.13 and 14 would become academic and hence the same are dismissed. The issue in ground of appeal No.7 i.e. benefit of /-5% range is consequential and hence the same is also dismissed. The ground of appeal No.1 is general and does not need any adjudication. Adjustment made on account of royalty payment wherein the TPO had applied CUP method by comparing with unit rate of Maruti Udyog Ltd. - The Tribunal in assessment year 2005-06 held that payment of royalty is to be benchmarked along with other transactions by applying TNMM method under the umbrella of manufacturing activity and the Assessing Officer was directed to include the said payment while applying transfer pricing provisions. The issue raised in the present appeal vide ground of appeal No.6 is identical and following the same parity of reasoning we accordingly direct the Assessing Officer / TPO to include payment of royalty and aggregate the same along with other international transactions undertaken by assessee. Nature of expenditure - Disallowance of balance royalty as capital expenditure - Tribunal in 2005-06 noted that the issue stands covered by earlier orders of Tribunal in assessment years 2002-03 to 2004-05 and following the same parity of reasoning it was held that the said balance royalty payment of 3.30 crores is to be allowed as revenue expenditure in the hands of assessee. Following the same parity of reasoning as in paras 61 and 62 of order of Tribunal relating to assessment year 2005-06 we allow this ground of appeal in favour of assessee. Project Assistance Technical Fees were disallowed as capital expenditure - Tribunal in assessment years 2002-03 to 2004-05 and also in the appeal of Revenue in assessment year 2005-06. The Tribunal following the same parity of reasoning as in earlier years has upheld the order of CIT(A) in assessment year 2005-06 in directing the Assessing Officer to allow Project Assistance Technical Fees as deductible expenditure under section 37(1) of the Act. The relevant findings are in paras 63 and 64 and following the same parity of reasoning we direct the Assessing Officer to allow the claim of assessee as expenditure. Payment of Star Diagnostic - payment towards its usage for a year which was disallowed being capital expenditure - The said Star Diagnostic was the property of Daimler AG and payment of usage charges was to be made only when the same was used by assessee and on its usage no new capital asset comes into existence. In the entirety of the said facts and circumstances the said expenditure merits to be allowed as revenue expenditure in the hands of assessee. We further find that similar expenditure has been claimed by assessee starting from assessment year 1999-2000 onwards. The expenditure has been allowed in the hands of assessee either by CIT(A) or DRP in earlier years and from assessment year 2008-09 no disallowance on this account has been made by Assessing Officer in the hands of assessee. In view thereof following the consistency approach we find no merit in the disallowance made in the hands of assessee.

Summary

Issues Involved:
1. Transfer Pricing Adjustments
2. Rejection of Combined Transaction Approach
3. Application of Resale Price Method (RPM)
4. Application of Comparable Uncontrolled Price Method (CUP)
5. Non-consideration of +/- 5% Range Benefit
6. Disallowance of Royalty as Capital Expenditure
7. Disallowance of Project Assistance Technical Fees
8. Disallowance of Star Diagnostic Payment
9. Taxation of Prior Period Transactions

Detailed Analysis:

1. Transfer Pricing Adjustments:
The primary issue was the addition of ?12,36,57,880 to the total income of the assessee for AY 2006-07 due to transfer pricing adjustments. The Tribunal noted that the assessee had applied the Transactional Net Margin Method (TNMM) and selected 12 comparables with a mean margin of 4.92%, while the assessee's margin was 8.58%. The Tribunal held that the transactions of import of Completely Built Units (CBUs) and spare parts were closely linked to the manufacturing of cars and should be benchmarked on an aggregate basis under TNMM.

2. Rejection of Combined Transaction Approach:
The Tribunal referenced its earlier decision for AY 2005-06, where it had allowed the combined transaction approach and directed the application of TNMM on an aggregated basis. The Tribunal reiterated that the import of CBUs and spare parts were interlinked with the manufacturing activity and should be benchmarked together.

3. Application of Resale Price Method (RPM):
The Tribunal rejected the RPM method applied by the TPO, which compared the gross margins of CBUs with spare parts. It held that the TPO's approach of using RPM was incorrect as the transactions were not functionally comparable. The Tribunal directed the TPO to apply TNMM on an aggregate basis.

4. Application of Comparable Uncontrolled Price Method (CUP):
The TPO had applied the CUP method for benchmarking the payment of royalty by comparing it with Maruti Udyog Ltd. The Tribunal found no merit in this approach and held that the payment of royalty should be benchmarked under TNMM along with other transactions.

5. Non-consideration of +/- 5% Range Benefit:
The Tribunal noted that this issue was consequential to the main transfer pricing adjustments and would be addressed based on the final determination of arm's length price.

6. Disallowance of Royalty as Capital Expenditure:
The Tribunal referenced its earlier decisions and held that the entire royalty payment of ?6.56 crores should be allowed as revenue expenditure. The Tribunal emphasized that the royalty payment was for the use of technology and did not result in the creation of any capital asset.

7. Disallowance of Project Assistance Technical Fees:
The Tribunal followed its earlier decisions and directed the Assessing Officer to allow the Project Assistance Technical Fees as deductible expenditure under section 37(1) of the Income Tax Act.

8. Disallowance of Star Diagnostic Payment:
The Tribunal noted that the payment for Star Diagnostic was for the usage of hardware and software updates and did not result in the acquisition of any new capital asset. The Tribunal held that the expenditure should be allowed as revenue expenditure.

9. Taxation of Prior Period Transactions:
The Tribunal addressed the issue of prior period transactions related to the Third Party Account. The Assessing Officer had taxed ?8.13 crores out of ?12.42 crores as prior period income. The Tribunal directed the Assessing Officer to verify the details and determine the correct taxation based on the evidence provided by the assessee.

Conclusion:
The Tribunal allowed the appeals of the assessee, directing the Assessing Officer/TPO to apply TNMM on an aggregate basis for benchmarking the international transactions and to allow the royalty payment, Project Assistance Technical Fees, and Star Diagnostic expenditure as revenue expenditure. The Tribunal also directed the Assessing Officer to verify the details of prior period transactions and apply the +/- 5% range benefit as applicable.