2017 (2) TMI 116 - AT - Income Tax

Adjustment on account of Royalty Payments in relation to Corn and Sunflower seeds - comparable agreements which are based on different geographical region - Held that - The geographical location becomes very vital factor in certain cases because one has to take into account the market condition, the laws in force, cost of labour, capital, overall economic level of competition, etc. However, in the present case, it has been brought to our notice that, the Assessing Officer/TPO in earlier years consecutively in three assessment years has specifically dealt and analyse the similar agreements of the assessee s AEs with third parties in the different geographical regions. Therefore, no exception should be carved out in this year and accordingly, these agreements can be examined or analyzed by the TPO if the geographical location does not have any material effect on the determination of the prices. Thus, we direct the TPO/AO that while carrying out the comparability analysis under CUP method, should also examine these agreements as referred to above by different AE s with third parties to benchmark the ALP of royalty payment . In case, the Internal CUP are not available or the comparability analysis is not possible then External CUP can be explored by looking into the Royalty Stat Data available for the Indian comparables working under the similar kind of technical agreements and conditions for which royalty is being paid. Thus, with this direction, the issue of royalty is being sent back to the file of the AO/TPO for re-adjudication in line of the direction given herein above. Transfer Pricing Adjustment on account of location savings - addition made by the TPO on the reasoning that assessee has not received any compensation from the AE on account of the advantage of location, that is, operating in India has led to a lower cost saving on account of cheap labour, etc. - Held that - Comparison of the transactions with an uncontrolled transaction is the key factor and primary requirement under our Transfer Pricing Laws before resorting to any kind of adjustment of the ALP. It is also not clear whether the TPO has treated the location saving as an independent international transaction or it is just an adjustment on the determination of profit of the assessee. If it is an independent international transaction, then it needs to be benchmarked with uncontrolled transaction by carrying out comparability analysis under prescribed methods. On the other hand, if it is an adjustment on the profit of the assessee, then the TPO has to demonstrate that firstly, the profit margin of the assessee, under TNMM is incapable of determining the Arm s Length Prices and in the case of the assessee there are no independent local comparables in India to carry out the comparability analysis for determining of the ALP. Such an arbitrary adhocism for making such huge adjustment in the profit sans any Transfer Pricing analysis under the prescribed provisions cannot be sustained. Hon ble Delhi High Court in Li and Fung India Pvt. Ltd (supra) too has observed that. Tax authorities should base their conclusions on specific facts and not on vague generalities, such as significant risks , functional risks , enterprise risk etc. without any material on record to establish such findings. If such findings are warranted, they should be supported by demonstrable reason, based on objective facts and the relative evaluation of their weight and significance . Thus, the Transfer Pricing adjustment cannot be on vague generalities. Accordingly, the adjustment made on account of location saving for sums amounting to ₹ 54,69,43,636/- is directed to be deleted. Transfer Pricing adjustment on account of green environmental cost savings - Held that - The working of the environmental cost attributed by the assessee has already been incorporated above, which has not been rebutted by any of the authorities. The TPO and the DRP without referring to any comparable data or carrying any kind of comparability analysis with local Indian comparables operating in similar economic circumstance as the assessee itself, where all the comparable companies in the similar industry carry similar risk has proceeded to make the adjustment on account of environment saving or green costs in the ALP which again is against the Transfer Pricing principles as enshrined in our Income-tax provisions. Any such savings if at all is embedded in the margin of the comparables and there cannot be any additional attribution. Such an ad-hoc adjustment in an arbitrary manner sans any sanction or authority under the Income-tax provisions and that to be without there any comparable transactions with the local comparables cannot be sustained. The TPO has not demonstrated as to how and under what comparability analysis he has found that assessee has got the benefit of environmental/green costs savings and it is materially affecting the price under arms length conditions. Our finding and observations given with regard to location saving adjustment in the foregoing paragraphs will also apply here. Accordingly, we do not find any reason and justification for such adjustment and same is directed to be deleted. Setting off the brought forward loss pertaining to Profenofos unit against the profits of the current year while computing deduction under Section 80-IB - Held that - Each undertaking or unit is to be treated as independent and separate unit and it is those industrial undertaking which have a profit or gain are to be considered for computing the deduction. The loss making industrial undertaking would not come into picture at all. Thus we allow the claim of the assessee. Addition of closing stock on account of un-utilized CENVAT credit - Held that - Restore the matter to the file of the Assessing Officer for deciding this issue in line with the directions given above that adjustment on account of duty u/s 145A is required to be made at all stages including opening stock purchase and sales which is in the line of the decision of Hon ble Bombay High Court in the case of Mahalaxmi Glass Works Pvt. Ltd (2009 (4) TMI 182 - BOMBAY HIGH COURT ). Non granting of depreciation on repairs and maintenance of the building treated as capital in nature in the final assessment order of the assessment year 2008-09 as raised vide ground No.9, before us it has been submitted that, similar depreciation has been granted by Assessing Officer for the assessment year 2010-11, however, the same has not been given in this year. Accordingly, we direct the Assessing Officer to grant the depreciation as repair and maintenance to the building has been treated as capital expenditure and also in line with the assessment year 2010-11. Non-granting of TDS credit, we direct the Assessing Officer to look into the matter and grant the credit accordingly. Chargeability of interest under section 234B - Held that - We accordingly direct the Assessing Officer to compute the interest under section 234B after giving due credit of the TDS amount.

Summary

Issues Involved:

1. Adjustment in Contract Manufacturing Segment
2. Disallowance of Royalty Payment
3. Adjustment on Account of Location Savings
4. Adjustment on Account of Green (Environmental) Cost
5. Set-off of Brought Forward Losses for Deduction under Section 80-IB
6. Addition to Closing Stock on Account of Unutilized CENVAT Credit
7. Depreciation on Repairs and Maintenance to Building
8. Non-granting of TDS Credit
9. Chargeability of Interest under Section 234B

Detailed Analysis:

1. Adjustment in Contract Manufacturing Segment:
The TPO re-characterized the activities of the assessee from toll manufacturer to contract manufacturer and made adjustments. The DRP remanded the issue to the TPO, who accepted the exclusion of a comparable company with significant related party transactions. The recomputed mean margin of comparables fell within the tolerance range, leading to deletion of the addition.

2. Disallowance of Royalty Payment:
The TPO disallowed royalty payments for corn and sunflower seeds, arguing no transfer of technology and non-patented products. The DRP upheld this disallowance. However, the Tribunal set aside this issue to the TPO for examining Internal CUP and comparable agreements in different geographical regions. The Tribunal directed the TPO to benchmark the ALP of royalty payments using these agreements or external CUP if necessary.

3. Adjustment on Account of Location Savings:
The TPO attributed location savings to the assessee due to cheaper labor costs in India. The Tribunal found no provision in Indian TP laws for such an adjustment and noted that the assessee's profit margins were already higher than comparables. It directed the deletion of the adjustment, emphasizing that location savings should be reflected in the comparables' operating margins.

4. Adjustment on Account of Green (Environmental) Cost:
The TPO argued that the assessee saved costs due to softer environmental norms in India. The Tribunal rejected this, noting the assessee's compliance with Indian environmental laws and significant environmental costs incurred. It directed the deletion of the adjustment, stating that such savings are embedded in the comparables' margins.

5. Set-off of Brought Forward Losses for Deduction under Section 80-IB:
The AO set off brought forward losses against profits for computing deduction under Section 80-IB. The Tribunal, following earlier years' decisions, held that each unit should be treated independently, and loss-making units should not affect the deduction of profit-making units. The Tribunal allowed the assessee's claim.

6. Addition to Closing Stock on Account of Unutilized CENVAT Credit:
The AO added unutilized CENVAT credit to closing stock without adjusting opening stock, purchases, and sales. The Tribunal, following earlier decisions, directed the AO to make adjustments at all stages, including opening stock, purchases, and sales, in line with the decision of the Bombay High Court.

7. Depreciation on Repairs and Maintenance to Building:
The AO did not grant depreciation on repairs and maintenance treated as capital expenditure. The Tribunal directed the AO to grant depreciation, consistent with the treatment in the assessment year 2010-11.

8. Non-granting of TDS Credit:
The Tribunal directed the AO to verify and grant the TDS credit accordingly.

9. Chargeability of Interest under Section 234B:
The Tribunal directed the AO to compute interest under Section 234B after giving due credit for the TDS amount.

Conclusion:
The Tribunal allowed the assessee's appeals on various grounds, directing the AO/TPO to re-examine and make necessary adjustments as per the guidelines provided. The revenue's appeal was dismissed.