2020 (8) TMI 442 - AT - Income Tax

TP Adjustment - action of AO in determining the ALP of international transactions involving Research and Development fees and Management fees at Nil without applying most appropriate method - HELD THAT - Hon ble High Court of Bombay in the case of Johnson Johnson Ltd. 2017 (4) TMI 1281 - BOMBAY HIGH COURT we find that the TPO had made transfer pricing adjustment on account of sales promotion and publicity expenses being payable by the assessee to its parent company M/s. Johnson Johnson, USA. TPO did not follow any method prescribed u/s. 92C(1) of the Act r.w.s. 10B made adjustment. The Hon ble High Court of Bombay was pleased to hold that the TPO is obliged under the law to determine the ALP by following any one of the prescribed methods of determining the ALP as detailed in section 92C(1) of the Act and upheld the order of Tribunal in allowing assessee s appeal by deleting the addition made on account of sales promotion and publicity expenses. Hon ble High Court of Bombay in the case of Merck Ltd. 2016 (8) TMI 561 - BOMBAY HIGH COURT pleased to hold the entire transfer pricing agreement becomes unsustainable in law in not adopting one of the mandatorily prescribed methods to determine the ALP in respect of fees of technical services payable by the assessee therein to its AE. The Hon ble High Court of Bombay held the view taken by the Tribunal in deleting the adjustment made by the TPO without applying any of the method prescribed u/s. 92C to determine ALP is a possible view. TPO has to confine himself to one of the prescribed methods for determination of the ALP of international transaction, for which mechanism has been prescribed in Rule 10B of the Income-tax Rules, 1962. Further, it held the ALP of an international transaction can be determined only by applying one of the prescribed methods given under section 92C(1) of the Act and the ALP is determined by TPO by not applying any method at all or by choosing a method which is not prescribed u/s.92C(1) of the Act, then such a determination of ALP frustrates the transfer pricing addition and deleted the transfer pricing addition made thereon by holding the methods prescribed for determining the ALP are statutory prescription, it is absolutely essential for the TPO to compute the ALP by adhering strictly to one of such methods. Thus, adjustment made in Research and Development fees and Management fees without following prescribed method under law is deleted. Granting weighted deduction u/s. 35(2AB) - HELD THAT - Tribunal in the case of M/s. East West Seeds Ltd. 2019 (8) TMI 1524 - ITAT PUNE wherein this Tribunal while placing reliance on the decision of Torrent Pharmaceuticals Ltd 2009 (11) TMI 819 - ITAT AHMEDABAD allowed the claim of weighted deduction u/s. 35(2AB).

Summary

Issues Involved:
1. Determination of Arm's Length Price (ALP) for international transactions involving Research and Development fees and Management fees.
2. Granting of weighted deduction under section 35(2AB) of the Income Tax Act.

Detailed Analysis:

1. Determination of ALP for International Transactions:

The primary issue in the appeals was the challenge against the Assessing Officer's (AO) action in determining the ALP of international transactions involving Research and Development fees and Management fees at Nil without applying the most appropriate method as prescribed under section 92CA of the Income Tax Act. The assessee argued that the AO/TPO (Transfer Pricing Officer) did not follow the prescribed procedure and relied on similar issues from previous assessment years (2009-10 and 2010-11) without applying any method. The Tribunal noted that the AO/TPO made upward adjustments without following any prescribed method under section 92C of the Act, which was liable to be deleted. The Tribunal referred to decisions from the Hon’ble Bombay High Court in the cases of Commissioner of Income Tax Vs. Johnson & Johnson Ltd. and Commissioner of Income Tax Vs. Merck Ltd., which held that transfer pricing adjustments without determining the ALP by prescribed methods are unsustainable in law. Consequently, the Tribunal allowed the assessee's grounds regarding the ALP determination.

2. Granting of Weighted Deduction under Section 35(2AB):

In the appeal for the assessment year 2012-13, the assessee questioned the TPO's action in not granting weighted deduction under section 35(2AB) of the Act. The Tribunal found that the issue was covered by previous orders, including the case of M/s. East West Seeds Ltd. and Bharat Forge Ltd., where the Tribunal had allowed the claim of weighted deduction. The Tribunal observed that once the R&D facility is approved by the Department of Scientific and Industrial Research (DSIR), the entire expenditure incurred on the development of the facility is eligible for weighted deduction. The Tribunal emphasized that the role of the AO is to allow the expenditure incurred on in-house R&D facility as weighted deduction under section 35(2AB) once the facility is recognized by the prescribed authority. The Tribunal allowed the assessee's grounds regarding the weighted deduction.

Consolidated Order:

Given the similarity of issues and facts across the appeals for the assessment years 2011-12, 2012-13, and 2013-14, the Tribunal decided to pass a consolidated order for convenience. The Tribunal allowed the appeals for all the assessment years, holding that the adjustments made by the AO/TPO without following the prescribed methods were unsustainable and that the assessee was entitled to the weighted deduction under section 35(2AB).

Result:

All the appeals of the assessee were allowed, and the Tribunal pronounced the order in the open court on 18th August 2020.