2018 (7) TMI 2328 - AT - Income Tax

TP Adjustment - royalty payment made to associate enterprise - Nil ALP determined - HELD THAT - As decided in own case 2018 (6) TMI 1843 - ITAT KOLKATA the lower authorities have been very fair in not holding the assessee s royalty transactions to be a sham ones. They have applied benefit and commercial expediency test in the instant case whilst computing nil ALP. We see no reason to approve the same these two tests of benefits and commercial expediency are not to be invoked as per the above legal position. The impugned action of the lower authorities under challenge is therefore held to be not sustainable. Quantification impugned ALP - TPO admittedly applied CUP method in his order (supra). He appears to have treated the tax payer itself as a valid comparable as it had not paid any royalty to the very payee in earlier assessment years. This made him to adopt nil price of the impugned royalty so as to make the adjustment in question. No reason to concur with such a course of action since the assessee itself having paid Nil amount in the past to the AE cannot be taken as a valid comparable. This tribunal in the case of Technimont ICB India (P) Ltd. 2013 (9) TMI 595 - ITAT MUMBAI has concluded long back that a transaction between payee and its AE is not an uncontrolled one so as to be taken as a comparable. We accept the assessee s instant first substantive ground both on legality as well as on quantification therefore. The impugned ALP adjustment stands deleted accordingly. Disallowing provision for leave encashment u/s 43B(f) - HELD THAT - This issue deserves to be remitted back to the Assessing Officer for taking a fresh call after the hon ble apex court s decision in the Revenue s special leave petition converted to appeal staying operation of hon ble jurisdictional high court s judgment in Exide Industries Ltd.. 2007 (6) TMI 175 - CALCUTTA HIGH COURT deleting identical disallowance as well as holding the statutory provision itself to be unconstitutional. We accept this fair stand and direct the AO to keep the instant issue in abeyance to be decided after the hon ble apex court s final verdict in the department s appeal hereinabove. Assessee s appeal is treated as partly allowed.

Summary

Issues:
1. Transfer pricing adjustment of royalty payment made to associate enterprise.
2. Disallowance of provision for leave encashment under section 43B(f).

Issue 1: Transfer Pricing Adjustment
The appeal was against the assessment order making a transfer pricing adjustment of Rs.1,78,49,737 in relation to royalty payment to an associate enterprise. The dispute centered around whether the assessee derived tangible benefits from the payment. The lower authorities held against the assessee, stating no benefit was received. However, the Tribunal disagreed, citing legal precedents that the arm's length price cannot be nil without satisfying specific conditions under the Income Tax Act. The Tribunal emphasized that the focus should be on the price paid by an independent enterprise. It was concluded that the lower authorities' action was not sustainable as they incorrectly applied the benefit and commercial expediency test. The Tribunal deleted the adjustment, emphasizing that the assessee's past royalty transactions were not sham and rejecting the quantification based on the Comparable Uncontrolled Price method.

Issue 2: Disallowance of Leave Encashment Provision
Regarding the disallowance of the provision for leave encashment under section 43B(f), the Tribunal decided to remit the issue back to the Assessing Officer. This decision was based on the pending final verdict of the apex court in a related matter. The Tribunal directed the Assessing Officer to defer the decision on this issue until the apex court's judgment. The Tribunal allowed this ground for statistical purposes, maintaining judicial consistency and ensuring the assessee's success in this aspect.

In conclusion, the Appellate Tribunal ITAT Kolkata, in its judgment, partly allowed the assessee's appeal concerning the transfer pricing adjustment of royalty payment and the disallowance of the provision for leave encashment. The Tribunal emphasized legal principles related to transfer pricing and directed a fresh consideration of the leave encashment provision issue in light of the pending apex court decision. The judgment provided detailed reasoning and cited relevant legal precedents to support its conclusions on both issues.