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2016 (10) TMI 423 - AT - Income TaxApplying most appropriate method for benchmarking royalty transactions - Held that - We find that while passing the order for the last AY the TPO had held that TNMM was the most appropriate method for benchmarking, that he had made an adjustment of ₹ 1. 50 crores under the head royalty payment, that the Tribunal had decided the issue in favour of the assessee. We find that the TPO had not given any reasons for not following the TNMM as most appropriate method the year under consideration. No doubt the income tax authorities are not bound by the orders of the earlier years, but they have to pass a reasoned order for deviating from the stand taken from the earlier years. We find that the TPO has not brought on record the differences, if any, of the facts of the earlier AY. and the year under appeal. Secondly, the Tribunal has already decided the issue in favour of the assessee. Addition under the head provision for warranty (GOA-7-9) - Held that - Since, the finding on the issue of warranty provision under normal computation of income will have bearing on the computation of book profit u/s 115JB, therefore, we remit this issue of adjustment u/s 115JB to the record of AO for decision the same as per law. Addition to the income of the assessee in respect of purchase of fixed assets - Held that - We find that the machine purchased by the assessee was included in the WIP. In the case of Ciena India (P. )Ltd. (2015 (5) TMI 352 - ITAT DELHI) it has been clearly held that in case of purchase of fixed assets from AE it is amount of depreciation on purchase of fixed assets which will be considered for making addition and not difference between the transacted valued the ALP determined at Nil (Paragraphs 15. 1-15. 6). We hold that the FAA was not justified in making the addition of ₹ 17. 06 lakhs. He should have added only the depreciation-amont. It will affect the computation of depreciation for subsequent years. Therefore,we are of the opinion that matter should be restored back to the file of the AO for determine the depreciation and restrict the disallowance to that extent only. Effective ground of appeal, raised by the assessee,is decided in its favour, in part
Issues Involved:
1. Benchmarking of royalty transactions. 2. Addition under the head provision for warranty. 3. Addition in respect of purchase of fixed assets. Issue-wise Detailed Analysis: 1. Benchmarking of Royalty Transactions: The primary issue revolves around the most appropriate method for benchmarking royalty transactions. The Assessing Officer (AO) and Transfer Pricing Officer (TPO) questioned the royalty payments made by the assessee to its Associated Enterprises (AE), arguing that the payment did not result in any economic benefit and should be considered at Nil for arms-length price (ALP). The assessee contended that the technology provided by the AE led to increased profit margins and cost savings. The First Appellate Authority (FAA) sided with the assessee, referencing previous years' orders and determining that the Transaction Net Margin Method (TNMM) was appropriate. The Tribunal upheld the FAA's decision, citing the lack of a reasoned deviation from previous years' methods by the TPO and confirming that the overall price of the assessee was within the 5% tolerance range of ALP. 2. Addition under the Head Provision for Warranty: The AO disallowed the assessee's claim for provision for warranty, arguing that it was not based on reliable estimates. The FAA did not provide a detailed discussion on whether the provision was based on reliable estimates. The Tribunal referred to the Supreme Court's decision in Rotork Controls India Pvt. Ltd. vs. CIT, which mandates that provisions must be based on reliable estimates of obligations. The Tribunal remitted the issue back to the AO for fresh adjudication, instructing the AO to examine the relevant facts and decide in light of the Supreme Court's guidelines. 3. Addition in Respect of Purchase of Fixed Assets: The AO made an adjustment of ?17.06 lakhs to the income of the assessee for the purchase of a used machining center from a group entity, arguing that the transaction was not at ALP. The FAA upheld the AO's decision, stating that transfer pricing provisions apply to both capital and trading transactions. The assessee argued that the machinery was part of Capital Work in Progress (CWIP) and no depreciation was claimed for the year under appeal. The Tribunal agreed with the assessee, referencing the case of Ciena India (P.) Ltd., which held that only depreciation on the purchase of fixed assets should be considered for addition, not the difference in transaction value. The Tribunal remitted the matter back to the AO to determine the depreciation and restrict the disallowance accordingly. Conclusion: The appeals filed by both the AO and the assessee were partly allowed. The Tribunal emphasized the need for reasoned orders when deviating from previous years' methods and the importance of reliable estimates for provisions. The Tribunal also clarified that in transfer pricing adjustments involving fixed assets, only depreciation should be considered for addition. The order was pronounced in the open court on 05th October 2016.
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