2018 (9) TMI 413 - AT - Income Tax

Determination of the arms length price of international transaction of business support service - Held that - As during the course of proceedings before the ld TPO assessee has shown the copies of the email which shows that certain services are received however same are only sample emails which are stated by the assessee as proof of receipt of the services. The emails are dated 16.08.2012, 13.06.2010, 02.05.2012, 07.05.2013, 14.06.2013. Some of the emails are not pertaining to the impugned assessment year and from these emails it is for the assessee to show before the ld TPO that services have been received by the assessee - the additional evidences filed by the assessee before the ld DRP also contains certain emails which have not been considered by the lower authorities. These are also required to be considered - referring to history of determination of ALP by the ld AO in case of the assessee for earlier and subsequent years and in the interest of justice, it is necessary that the issue with respect to determination of the ALP of the international transaction of business support services and technical service fees are remitted back to the file of the ld Transfer Pricing Officer for determination of their ALP. with respect to the royalty payment of ₹ 42055227/- ALP of which determined by ld TPO of ₹ 4715664/-, we also remit the issue back to the file of the ld AO with a direction to the assessee to show how payment of royalty is inextricably linked with the manufacturing activities and why it ought to be aggregated and benchmarked together with other international transaction under transactional net margin method.

Summary

Issues Involved:
1. Determination of Arm's Length Price (ALP) for international transactions related to business support services, technical support services, and royalty payments.
2. Rejection of the aggregation approach and application of the transaction-by-transaction approach.
3. Non-consideration of submitted evidence by the lower authorities.
4. Consistency in the approach for determining ALP across different assessment years.
5. Application of Comparable Uncontrolled Price (CUP) method without furnishing comparable data.

Detailed Analysis:

1. Determination of Arm's Length Price (ALP):
The assessee, a company engaged in manufacturing and marketing EGR systems, filed its return showing an income of ?20,58,49,610/-. The Assessing Officer (AO) referred the case to the Transfer Pricing Officer (TPO) for examining the ALP of international transactions. The TPO determined the ALP for business support services (?4,08,06,578/-) and technical support services (?1,73,61,018/-) at ?Nil and adjusted the royalty payment from ?4,20,55,227/- to ?47,15,664/-, resulting in an adjustment of ?9,55,07,159/-. Consequently, the AO assessed the total income at ?30,13,59,066/-. The assessee appealed against this order, arguing that the ALP determination was erroneous and not in accordance with the law.

2. Rejection of Aggregation Approach:
The TPO rejected the aggregation approach followed by the assessee for benchmarking the transactions and applied a transaction-by-transaction approach. The TPO relied on multiple judicial precedents to justify this approach. However, the assessee contended that the transactions were closely linked and should be evaluated together under the Transactional Net Margin Method (TNMM), as was done in previous and subsequent years. The assessee argued that the TPO's approach lacked consistency and did not consider the principle of commercial wisdom as upheld by the Delhi High Court in the case of Sony Ericsson.

3. Non-Consideration of Submitted Evidence:
The assessee submitted various documents, including email communications and invoices, to substantiate the receipt of business and technical support services. These were not adequately considered by the lower authorities. The Dispute Resolution Panel (DRP) also did not provide a clear finding on the additional evidence submitted by the assessee. The Tribunal noted that the TPO and DRP failed to consider the evidence properly, which could prove the receipt of services.

4. Consistency in Approach:
The assessee highlighted that in the assessment years 2011-12 and 2014-15, the TPO had accepted the aggregation approach for similar transactions without any adjustments. The Tribunal emphasized the need for consistency in the approach unless there is a significant change in facts and circumstances. The TPO should provide detailed reasons if deviating from the established approach. The Tribunal found that the TPO did not provide sufficient justification for the deviation in the current assessment year.

5. Application of CUP Method:
The TPO applied the CUP method to determine the ALP for business and technical support services but did not furnish comparable data to support this determination. The Tribunal pointed out that the TPO failed to provide details of comparable uncontrolled transactions, which is a requirement under Rule 10B of the Income Tax Rules. The TPO's approach was based on presumptions without concrete evidence.

Conclusion:
The Tribunal remitted the issue of determining the ALP for business support services, technical support services, and royalty payments back to the TPO for fresh consideration. The TPO was directed to verify the evidence submitted by the assessee and consider the aggregation approach in line with the principle of consistency. The Tribunal also instructed the TPO to provide detailed reasons for any deviation from the established approach. The appeal was partly allowed for statistical purposes, and general grounds were dismissed.