2021 (9) TMI 1465 - AT - Income Tax

TP adjustment in respect of royalty and commission - HELD THAT - It is also not in dispute that the commission sales by the assessee constitutes only about 0.42% of the total revenue of the assessee whereas 99.58% of income is from trading of chemicals, as pleaded by the assessee - TPO compared the rate of commission charged by the assessee to one AE with the rate of commission charged by the assessee to other AEs. Such an exercise is not permissible under the provisions of section 92F(ii) read with section 92 of the Act, as has been held by the co-ordinate Bench in the case of assessee for the assessment year 2013-14 since the TPO was supposed to compare the controlled transaction with other uncontrolled transactions. We are of the considered opinion that the orders of the authorities below do not stand the test of judicial scrutiny in so far as the adjustment on the aspect of royalty and commission are concerned and since there is no change in the facts and circumstances of the case from the assessment year 2013-14, while respectfully following the findings of the Tribunal in the order 2018 (5) TMI 946 - ITAT DELHI we hold that the adjustment in respect of royalty and commission cannot be sustained and the same shall be deleted. Interest on receivables - AO was of the opinion that any delay beyond the credit period shall be bench marked as an international transaction and by applying the same - AO calculated the interest chargeable on receivables by taking the credit period as 30 days and TPO suggested adjustment - HELD THAT - It is not the case of the Revenue that even in respect of non-AEs also, the assessee is charging any interest. It is the policy of the assessee, as submitted that the assessee does not charge interest either from AEs or non-AEs and accordingly does not pay interest from AEs. Assessee demonstrated that as on 31.03.2016, a sum was receivable from AEs whereas the sum was payable by the assessee, resulting in net payable as per their books. There is nothing contrary to this averment made by the assessee with reference to the books. In Kusum Health Care Pvt. Ltd. 2017 (4) TMI 1254 - DELHI HIGH COURT We are of the considered opinion that the authorities below are not justified in making adjustment on account of interest receivable and therefore, impugned adjustment on account of interest receivable is directed to be deleted. Consequently, the appeal of the assessee deserves to be allowed.

Summary

Issues:
Transfer Pricing Adjustment - Royalty and Commission
Interest on Receivables

Transfer Pricing Adjustment - Royalty and Commission:
The appeal concerns an Assessment Order for the assessment year 2016-17 where the assessee, a subsidiary company, disputed the Transfer Pricing Officer's proposed adjustment of Rs. 5,41,06,552 related to international transactions with Associated Enterprises. The Assessing Officer contended that the adjustment should be treated as cumulative under section 92CA of the Income Tax Act, 1961. The assessee argued that the royalty and commission payments were benchmarked within its business activities using the Transaction Net Margin Method (TNMM). The authorities disagreed with the assessee, citing a pending appeal from a previous year. However, the Tribunal held that the TPO's role is limited to determining the Arm's Length Price and cannot assess the business needs of the assessee. The Tribunal also emphasized that the TNMM approach adopted by the assessee was appropriate and that comparing commission rates with other AEs was not permissible under the Act. Consequently, the adjustment for royalty and commission was deemed unsustainable and was directed to be deleted.

Interest on Receivables:
Regarding interest on receivables, the Assessing Officer proposed an adjustment of Rs. 9,91,252 based on a benchmarking approach for delays beyond the credit period. The assessee contended that it did not charge interest on receivables from AEs as per its policy, and the interest payable exceeded the receivables. The Tribunal noted that the assessee's credit policy was consistent for AEs and non-AEs, and the interest on receivables was integral to sales transactions. Citing a High Court decision, the Tribunal held that not all receivables automatically qualify as international transactions. As the assessee did not charge interest from AEs or non-AEs, the adjustment on interest receivables was deemed unjustified and directed to be deleted. Consequently, the appeal was allowed, and the stay application was dismissed.

In conclusion, the Tribunal ruled in favor of the assessee, dismissing the adjustments related to royalty, commission, and interest on receivables, emphasizing the correctness of the TNMM approach and the consistency in the assessee's credit policy for both related and unrelated parties.