2022 (5) TMI 1620 - AT - Income Tax

TP Adjustment - Adoption of the Most Appropriate Method (MAM)in determining the ALP in respect of an international transaction of payment of royalty to its Associated Enterprise (AE) u/s.92 - TNMM v/s Profit Split Method (PSM) - HELD THAT - The facts in AY 2016-17 2021 (6) TMI 855 - ITAT MUMBAI are identical and the reasoning given in AY 2013-14 2020 (3) TMI 947 - ITAT BANGALORE will equally apply to the AY 2016-17 also. Respectfully following the aforesaid decision, we set aside the question of determination of ALP to the TPO afresh applying TNMM as the most appropriate method as was done in Assessment Years 2013-14 and 2014-15 in the order referred to above. The other issues with regard to determination of ALP under the PSM is academic and does not require adjudication. Rate of tax on dividend distributed to non-resident shareholders - whether DDT is a tax on the Company or the Shareholder since the distributable surplus stands reduced to the extent or DDT? - HELD THAT - We find that the ITAT Mumbai Bench in the case of Dy Cit 11 (3)(1), Mumbai vs Total Oil India Pvt Ltd. 2021 (6) TMI 855 - ITAT MUMBAI in Assessment year 2016-17 has for identical reasons given by the DRP, made a reference to Special Bench disagreeing with the view of the ITAT Delhi in the case of Gieseck. Devrient India Pvt Ltd. 2020 (10) TMI 750 - ITAT DELHI Since the issue has not attained finality, we are of the view that it would be just and appropriate to remand the issue to the TPO/AO for fresh consideration in accordance with law. The grounds are treated as partly allowed for statistical purpose.

Summary

Issues Involved:
1. Determination of Arm's Length Price (ALP) for the international transaction of payment of royalty.
2. Rate of tax on dividend distributed to non-resident shareholders.

Detailed Analysis:

1. Determination of Arm's Length Price (ALP) for the International Transaction of Payment of Royalty:
- The primary issue revolves around the determination of the Most Appropriate Method (MAM) for calculating the ALP for the payment of royalty to the Associated Enterprise (AE), Toyota Motor Corporation, Japan (TMC).
- The assessee, engaged in the manufacture of automotive components, paid Rs. 46,56,77,516 as royalty for using TMC's technology.
- The assessee adopted the Transactional Net Margin Method (TNMM) as the MAM in its Transfer Pricing (TP) study, which was rejected by the Transfer Pricing Officer (TPO) in favor of the Profit Split Method (PSM).
- The Dispute Resolution Panel (DRP) upheld the TPO’s decision, leading to the appeal before the Tribunal.
- The Tribunal noted that the issue of MAM had been previously settled in favor of the assessee for Assessment Years (AY) 2013-14 and 2014-15, where TNMM was deemed the most appropriate method.
- The Tribunal reiterated that the TPO and DRP had no basis to conclude that the technology's economic life was only five years or that the assessee was a start-up.
- The Tribunal emphasized that PSM is applicable only when both parties make unique and valuable contributions, which was not the case here as the assessee only leveraged TMC's technology without contributing unique intangibles.
- The Tribunal directed the TPO to apply TNMM as the MAM for AY 2016-17, consistent with the earlier years' decisions.

2. Rate of Tax on Dividend Distributed to Non-Resident Shareholders:
- The assessee contended that the Dividend Distribution Tax (DDT) on dividends paid to non-resident shareholders should be restricted to 10% as per Article 10 of the India-Japan Double Tax Avoidance Agreement (DTAA), instead of the 20.925% applied.
- The DRP held that DDT is a tax on the company, not on the shareholder, referencing the Bombay High Court’s decision in Godrej & Boyce Mfg. Co. Ltd Vs. Dy. CIT, which stated that DDT is a tax on the profits of the company.
- The DRP also cited similar positions upheld by the ITAT Mumbai in various cases and a South African High Court decision, asserting that DDT is outside the ambit of the tax treaty.
- The Tribunal noted that the ITAT Mumbai Bench had referred a similar issue to a Special Bench due to differing views, indicating that the matter had not attained finality.
- Consequently, the Tribunal remanded the issue to the TPO/AO for fresh consideration in accordance with the law.

Conclusion:
- The appeal was partly allowed, with the Tribunal directing the TPO to apply TNMM as the MAM for determining the ALP for the royalty payment and remanding the issue of the DDT rate on dividends to non-resident shareholders for fresh consideration.