2017 (12) TMI 48 - AT - Income Tax

Transfer pricing addition in respect of international transaction of payment of Royalty - ALP - deductibility or otherwise of such a payment in terms of section 37(1) - Held that - TPO proposed the transfer pricing adjustment equal to the stated value of transaction of royalty payment with Nil ALP by holding that no benefit etc. was received by the assessee because of the intra-group services received by it and hence no payment on this account was warranted. The AO in his draft order has taken ALP of this international transaction at Nil on the basis of recommendation of the TPO without carrying out any independent investigation as to the deductibility or otherwise of such a payment in terms of section 37(1) of the Act. This addition has been made by the AO in his final assessment order giving effect to the direction given by the DRP and not by invoking section 37(1) of the Act. As the TPO in the instant case initially determined Nil ALP by holding that no benefit etc. accrued to the assessee because of Royalty payment and the AO made the addition without examining the applicability of section 37(1) of the Act we find the actions of the AO/TPO running in contradiction to the ratio laid down in Cushman & Wakefield (2014 (5) TMI 897 - DELHI HIGH COURT ). Respectfully following the precedent we set aside the impugned order and remit the matter to the file of AO/TPO for deciding this issue - Decided in favour of assessee for statistical purposes.

Summary

Issues:
1. Transfer pricing addition in relation to the international transaction of purchase and sale of goods from the Associated Enterprise (AE).
2. Transfer pricing addition in respect of international transaction of payment of Royalty.

Transfer Pricing Addition - Purchase and Sale of Goods:
The appeal was against the transfer pricing addition concerning the international transaction of buying and selling goods from the Associated Enterprise (AE). The assessee, a subsidiary of Honda Motor Co. Ltd., entered agreements with various Honda subsidiaries in India for distributing spare parts. The Assessing Officer applied the Resale Price Method (RPM) for determining the transfer pricing adjustment, leading to a substantial addition. The Tribunal previously directed a fresh determination of arm's length price (ALP) for similar issues in preceding years. The High Court emphasized that the authority should reconsider the matter without being influenced by prior observations. The Tribunal, considering the functional profile of the assessee, set aside the order for a fresh determination of ALP.

Transfer Pricing Addition - Payment of Royalty:
The second issue involved a transfer pricing addition related to royalty payments made by the assessee to Honda Motor Co. Ltd., Japan. The Transfer Pricing Officer (TPO) determined Nil ALP for the royalty payment transaction, alleging it was only to transfer profits to the parent company. The TPO's decision was adopted by the Assessing Officer without further examination. However, the High Court clarified that the TPO's role is limited to determining ALP, not deciding on the existence of services or benefits. The matter was remanded to the AO for assessment considering the deductibility under section 37(1) of the Income-tax Act. The Tribunal found the AO's action contradictory to the legal principle and remitted the matter for a fresh decision within the parameters set by the High Court.

In conclusion, the Tribunal allowed the appeal for statistical purposes, directing a fresh determination of ALP for both transfer pricing issues, emphasizing adherence to legal precedents and providing the assessee with a reasonable opportunity to present their case.