2018 (5) TMI 1578 - AT - Income Tax

Method of determination of arm s length price for international transactions - Held that - It is trait law that the transactions have to be independently benchmarked applying the appropriate method in benchmarking of the transactions - reasons for rejection of the CUP and RPA methods should be given to the assessee and the same is part of the submissions - onus is kept on the assessee by mentioning that the assessee agreed for substituting the TNMM method as an appropriate method, which is not proper - Considering the deficiencies, we are of the opinion the matter should be set aside to the file of the TPO/AO for fresh adjudication - AO/TPO shall grant a reasonable opportunity of being heard to the assessee as per the set principles of natural justice - thus allowed for statistical purposes Disallowance of compensatory payment to foreign companies for non deduction of TDS - Held that - assessee has made impugned payment to the foreign companies in the form of compensatory payment as per agreement - in order to compensate such loss compensation is paid - the impugned payment shall constitute business receipts in the hands of the recipient companies - in the nature of compensation received for loss of business - the foreign company does not have permanent establishment in India - thus payments are not liable for taxation in their hands in India and no TDS shall be deducted u/s 195 - decided in favor of assessee

Summary

Issues involved:
1. Transfer Pricing adjustment made to the license fee paid by the assessee.
2. Disallowance made under section 40(a)(ia) of the Act.

Detailed Analysis:
Issue 1: Transfer Pricing Adjustment
The judgment addresses the common issue in both appeals related to the Transfer Pricing adjustment made to the license fee paid by the assessee. The assessee, engaged in software distribution, paid 50% of the license fees collected as royalty to its parent company. The Transfer Pricing Officer (TPO) rejected the Comparable Uncontrolled Price (CUP) method adopted by the assessee and used the Transactional Net Margin Method (TNMM) instead. The Dispute Resolution Panel (DRP) upheld this decision. The assessee argued that in previous years, the TPO had also rejected the CUP method without providing reasons. The Tribunal had previously set aside such cases for reevaluation. The DRP in a subsequent year accepted the CUP method, which the assessee sought to apply to these years. However, the DR disagreed, emphasizing the need for a comprehensive approach considering various factors. The Tribunal, following previous decisions, set aside the Assessing Officer's order and directed a fresh examination by the TPO.

Issue 2: Disallowance under section 40(a)(ia) of the Act
In the second appeal for A.Y. 2012-13, the assessee contested the disallowance of a specific amount under section 40(a)(ia) of the Act. The Assessing Officer noted a discrepancy between the reported disallowance and the actual amount not disallowed concerning payments to non-residents. The assessee argued that these payments were compensatory and not taxable in India due to lack of permanent establishment. The Assessing Officer, however, viewed the payments as technical service-related and disallowed them under section 40(a)(ia). The DRP upheld this decision. The assessee contended that the payments were compensatory and should not be subject to tax deduction at source. The Tribunal agreed with the assessee, highlighting the compensatory nature of the payments and the lack of permanent establishment in India for the recipients. The Tribunal emphasized the importance of Form No. 15CA & 15CB over the tax audit report in determining the nature of payments, ultimately directing the deletion of the disallowance for A.Y. 2012-13.

In conclusion, the Tribunal allowed both appeals, setting aside the orders of the Assessing Officer in both issues.