2018 (3) TMI 1989 - AT - Income Tax

TP Adjustment - determination of the arm s length price (ALP) of the international transaction of Payment of application cost at nil - HELD THAT - In view of the fact that the payment of application cost is a separate international transaction unrelated with royalty the next question is the determination of its ALP. The TPO as well as the DRP have taken Nil ALP of the international transaction of payment of Application cost under the CUP method for the reason adduced in their respective orders which has been found above to be not sustainable. In such a situation a separate benchmarking of this international transaction is required. However we find that no data for determining the ALP of payment of application cost is available nor has it been discussed by the TPO - we are of the considered opinion that the ends of justice would meet adequately if the impugned order on this score is set aside and the matter is remitted to the file of AO/TPO for determining the ALP of the international transaction of payment of Application cost afresh as per law after allowing a reasonable opportunity of being heard to the assessee. Discussion made infra holds good here as well which justifies restoration of the issue. Addition for receipt of services - TPO proposed the transfer pricing adjustment equal to the stated value of three international transaction at Rs.1.22 crore and odd by holding that no benefit was received by the assessee as a result of availing the services or these amounted to duplication of services and hence no payment on this score was warranted - HELD THAT - AO in his draft order has taken the ALP of the international transaction at Nil on the basis of recommendation of the TPO without carrying out any independent investigation in terms of the deductibility or otherwise of such payment in terms of section 37(1) of the Act. This addition has been made by the AO in his final assessment order giving effect to the direction given by the DRP and not by invoking section 37(1) of the Act. As per the ratio decidendi of Cushman Wakefield India (P.) Ltd. 2014 (5) TMI 897 - DELHI HIGH COURT TPO was required to simply determine the ALP of the international transaction unconcerned with the fact if any benefit accrued to the assessee and thereafter it was for the AO to decide the deductibility of this amount u/s 37(1) - As the TPO in the instant case initially determined Nil ALP by holding that no benefit accrued to the assessee etc. and the AO made the addition without examining the applicability of section 37(1) of the Act we find the actions of the AO/TPO running in contradiction to the ratio laid down in Cushman Wakefield (supra). Following this decision we remit the matter to the file of AO/TPO for deciding it in conformity with the law laid down by the Hon ble jurisdictional High Court in this case.

Summary

Issues Involved:
1. Determination of the arm’s length price (ALP) of the international transaction of ‘Payment of application cost’.
2. Addition for receipt of services.

Issue-wise Detailed Analysis:

1. Determination of the Arm’s Length Price (ALP) of the International Transaction of ‘Payment of Application Cost’:

Assessment Year 2009-10:

The assessee, a manufacturer of automobile components, reported 13 international transactions, including ‘Payment of application cost’ of Rs.6,63,24,025/-. The Assessing Officer (AO) referred the matter to the Transfer Pricing Officer (TPO), who rejected the Transactional Net Margin Method (TNMM) applied by the assessee and adopted the Comparable Uncontrolled Price (CUP) Method. The TPO determined the ALP of the ‘Payment of application cost’ at nil, reasoning that the payment was covered under the royalty payments already made by the assessee. The Dispute Resolution Panel (DRP) upheld this addition.

Upon review, the Tribunal found that the ‘Technical information’ provided under the royalty agreement did not cover the customization of designs for specific customers in India, which necessitated a separate fee termed as ‘Application cost’. The Tribunal noted that the assessee did not pay any royalty on products for which the application cost was paid, contradicting the TPO's and DRP's view that the payment was additional to the royalty. Consequently, the Tribunal remitted the matter back to the AO/TPO for fresh determination of the ALP of the ‘Payment of application cost’ after allowing the assessee a reasonable opportunity to be heard.

Assessment Year 2010-11:

The facts and circumstances for this year were similar to those of the previous year. Following the Tribunal's decision for AY 2009-10, the matter was remitted back to the AO/TPO for fresh determination of the ALP of the ‘Payment of application cost’.

2. Addition for Receipt of Services:

Assessment Year 2009-10:

The assessee paid Rs.1.22 crore for intra-group services and provided a detailed list of services received from Denso Japan, including corporate, managerial, financial, and other business services. The TPO determined the ALP of these services at nil, arguing that the services were either not received or amounted to duplication, and the DRP upheld this view.

The Tribunal noted that the TPO applied the ‘Benefit test’ and determined the ALP at nil without bringing any comparable uncontrolled instances on record. The Tribunal emphasized that the TPO's role was limited to determining the ALP and not to decide if the services existed or benefited the assessee, as per the jurisdictional High Court’s decision in CIT v. Cushman & Wakefield (India) (P.) Ltd. The Tribunal found that the AO made the addition based on the TPO’s recommendation without independently examining the deductibility of the payment under section 37(1) of the Act. Consequently, the Tribunal remitted the matter back to the AO/TPO for fresh consideration in line with the High Court’s decision, allowing the assessee a reasonable opportunity to be heard.

Assessment Year 2010-11:

The facts and circumstances for this year were similar to those of the previous year. Following the Tribunal's decision for AY 2009-10, the matter was remitted back to the AO/TPO for fresh determination of the ALP of the ‘Payment for intra-group services’.

Conclusion:

In both assessment years 2009-10 and 2010-11, the Tribunal remitted the matters concerning the determination of the ALP of the international transactions of ‘Payment of application cost’ and ‘Payment for intra-group services’ back to the AO/TPO for fresh consideration. The Tribunal directed the authorities to allow the assessee a reasonable opportunity to be heard and to determine the ALP in accordance with the law, ensuring compliance with the jurisdictional High Court’s decision.