2018 (9) TMI 2130 - AT - Income Tax

TP Adjustment - royalty payment made to associate enterprise - while the royalty rate was 0.5% of net revenue the ALP determined by the revenue was 1.67% of net revenue - HELD THAT - As decided in own case 2018 (7) TMI 2328 - ITAT KOLKATA 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 of the impugned ALP - TPO admittedly applied CUP method in his order - 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. We see 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.

Summary

Issues involved:
1. Transfer Pricing Adjustment
2. Provision for leave encashment
3. Disallowance u/s 40A(9)
4. Interest levy u/s 234B
5. Premature dismissal of Ground No. 11

Transfer Pricing Adjustment:
The appeal was against the order of the Assessing Officer under the Income Tax Act for Assessment Year 2013-14. The Assessing Officer made several additions, including Transfer Pricing Adjustment, Provision for leave encashment, Disallowance u/s 40A(9), and Employees' Contribution to PF/ESI. The Transfer Pricing Adjustment was related to royalty payment to an Associated Enterprise (A.E.). The ALP determined by the revenue was 1.67% of net revenue, resulting in an adjustment of Rs.1,93,83,735. The ITAT considered the same issue for the Assessment Year 2012-13 and ruled in favor of the assessee, deleting the ALP adjustment. The ITAT emphasized that the TPO cannot sit in judgment on a taxpayer's business expediency and that the transfer pricing regime focuses on the price paid by an independent enterprise. The Tribunal allowed the grounds of the assessee, following judicial consistency.

Provision for leave encashment:
The appeal also contested the provision for leave encashment. The Tribunal had dealt with a similar issue for the Assessment Year 2012-13 and directed the Assessing Officer to reconsider the matter after a final verdict from the apex court. The Tribunal restored this issue to the Assessing Officer following the same approach as in the previous year. The grounds were allowed for statistical purposes.

Disallowance u/s 40A(9):
Another issue was the disallowance made under section 40A(9) for a subsidy paid to a club. The assessee argued that the payment was for the employees' recreational benefits due to the remote location lacking facilities. Previous orders had allowed similar expenditures for other assessment years. Citing precedents, the Tribunal deleted the disallowance based on consistency and legal principles, allowing the ground raised by the assessee.

Interest levy u/s 234B:
The Tribunal dismissed the ground related to the levy of interest under section 234B as it was considered consequential in nature.

Premature dismissal of Ground No. 11:
Ground No. 11 was dismissed as premature, without detailed discussion.

In conclusion, the appeal was partially allowed by the ITAT Kolkata on various issues including Transfer Pricing Adjustment, Provision for leave encashment, and Disallowance u/s 40A(9), while dismissing the interest levy ground and a premature ground. The Tribunal relied on judicial consistency, legal principles, and previous precedents to make its decisions.