2022 (6) TMI 1462 - AT - Income Tax

TP Adjustment - MAM determination - determination of ALP of an international transaction between the assessee and its Associate Enterprises (AE) u/s 92 - application of residual PSM OR TNMM - HELD THAT - The facts in the present asst. year are identical with issue covered by the decision of coordinate bench in the assessee s own case in 2020 (3) TMI 947 - ITAT BANGALORE for the assessment year 2013-14 thus 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 2015-16 in the order referred to above. Needless to say the assessee shall be given reasonable opportunity of hearing. Assessee does not make any unique contribution to the transaction hence PSM in this case cannot be applied. Appeal of the assessee is allowed for statistical purposes.

Summary

Issues Involved:
1. Determination of Arm's Length Price (ALP) of international transactions.
2. Rejection of Transfer Pricing (TP) documentation.
3. Disregard of Transactional Net Margin Method (TNMM).
4. Computation errors in percentages of purchase and sale to Associated Enterprises (AEs).
5. Adoption of Profit Split Method (PSM) for benchmarking royalty transactions.
6. Incorrect application of residual PSM.
7. Imposition of interest under section 234B.
8. Initiation of penalty proceedings under section 274 read with section 270A.

Detailed Analysis:

1. Determination of Arm's Length Price (ALP) of International Transactions:
The primary issue was the adjustment of INR 38,75,40,000/- to the ALP of the appellant's international transactions with its AEs. The Tribunal noted that the facts of the present assessment year (2017-18) were identical to previous years (2013-14 and 2015-16), where the Tribunal had upheld the use of TNMM as the Most Appropriate Method (MAM). The Tribunal rejected the TPO and DRP's conclusion that the economic life of the technology impacted the MAM, affirming that the technology continued to be used effectively by the assessee.

2. Rejection of Transfer Pricing (TP) Documentation:
The AO, TPO, and DRP erred in rejecting the TP documentation maintained by the appellant by invoking provisions of subsection (3) of 92C of the Act. The Tribunal found no basis for this rejection, as the appellant had consistently used TNMM, which had been upheld in previous assessments.

3. Disregard of Transactional Net Margin Method (TNMM):
The Tribunal held that the TNMM was the MAM for determining the ALP, as upheld in previous years. The TPO and DRP's decision to disregard TNMM based on the perceived economic life of the technology was unfounded. The Tribunal emphasized that the conditions necessary for applying PSM as MAM were not met in the appellant's case.

4. Computation Errors in Percentages of Purchase and Sale to AEs:
The Tribunal did not specifically address this issue in detail, but the overall decision to apply TNMM would inherently correct any computational errors related to the percentages of purchase and sale to AEs.

5. Adoption of Profit Split Method (PSM) for Benchmarking Royalty Transactions:
The Tribunal found that the PSM was incorrectly applied by the AO, TPO, and DRP. The appellant did not contribute any unique intangibles to the transaction, making PSM inappropriate. The Tribunal referenced OECD guidelines, which support the use of PSM only in cases involving unique and valuable contributions by both parties.

6. Incorrect Application of Residual PSM:
The Tribunal rejected the application of residual PSM, noting that the appellant merely used the licensed technology to manufacture products without making any unique contributions. The Tribunal directed the AO to apply TNMM as the MAM, consistent with previous assessments.

7. Imposition of Interest under Section 234B:
Interest under section 234B was deemed consequential and did not require separate adjudication. The Tribunal noted that once the adjustments were deleted, the interest would be nullified.

8. Initiation of Penalty Proceedings under Section 274 read with Section 270A:
The Tribunal found the initiation of penalty proceedings under section 274 r.w.s 270A to be premature and not requiring adjudication at this stage. The Tribunal emphasized that differences of opinion between the appellant and the AO did not amount to furnishing inaccurate particulars of income.

Conclusion:
The Tribunal allowed the appeal for statistical purposes, directing the AO to determine the ALP afresh using TNMM as the MAM, in line with previous assessments. The Tribunal also provided that the appellant should be given a reasonable opportunity of hearing. The issues related to interest under section 234B and penalty proceedings were deemed consequential and premature, respectively. The order was pronounced on 2nd June 2022.