2022 (2) TMI 589 - AT - Income Tax

Addition made on account of unaccounted royalty - HELD THAT - According to the reconciliation statement filed by the assessee, if methodology considered by the AO is adopted for computing royalty, then royalty income receivable by the assessee from M/s. Ford India Private Limited, shall work out to ₹ 91.68 crores, which is lesser than the amount of royalty income received by the assessee. The facts with regard to consideration of cost associated with those passenger vehicle models which has negative revenue base by the AO is not forthcoming from records. Reconciliation statement filed by the assessee explaining difference between royalty income computed by the assessee and royalty income determined by the AO was also not available with the AO. Therefore, to consider the above aspect and also reconciliation statement filed by the assessee, the issue needs to go back to the file of the AO for fresh consideration. Hence, we set aside the issue to file of the AO and direct the Assessing Officer to reconsider the issue in light of royalty agreement between the parties, revenue base of passenger vehicles assembled in India and reconciliation statement filed by the assessee explaining difference between royalty income computed by the assessee and royalty income determined by the Assessing Officer. Appeal filed by the Revenue is treated as allowed for statistical purposes.

Summary

Issues:
1. Computation of royalty income as per agreement clauses.
2. Discrepancy in royalty income computation between the assessee and the Assessing Officer.
3. Consideration of expenses related to loss-making models in royalty computation.
4. Application of transfer pricing principles in determining royalty income.
5. Relevance of previous/subsequent assessment years in determining royalty adjustments.
6. Authority of Transfer Pricing Officer in determining arm's-length price.

Analysis:
1. The case involved a dispute over the computation of royalty income as per the agreement clauses between the parties. The agreement specified a minimum royalty of 2.5% on the sale of vehicles assembled in India in case of financial loss and 5% in case of profit. The Assessing Officer computed royalty based on the gross revenue, leading to a variance with the royalty income declared by the assessee.

2. The discrepancy in royalty income computation arose due to the inclusion of all passenger vehicle models, including those with negative revenue base, by the Assessing Officer. The assessee argued that royalty was received only from models with positive revenue base, and if negative base models were considered, associated costs should also be factored in. The reconciliation between the assessee's and AO's calculations highlighted the variance in royalty income determination.

3. The Assessing Officer's failure to consider expenses related to loss-making models, such as New Fiesta and Endeavour, impacted the net revenue base for royalty computation. The CIT(A) recognized this oversight and adjusted the royalty income accordingly, leading to a reduction compared to the amount declared by the assessee.

4. The application of transfer pricing principles in determining the arm's-length price of royalty income was a crucial aspect of the case. The dispute centered around whether the Transfer Pricing Officer's order should be binding on the Assessing Officer, with reference to relevant legal precedents and interpretations of the Delhi High Court.

5. The relevance of previous/subsequent assessment years in determining royalty adjustments was debated, with the principle of res judicata questioned in income tax proceedings. The consistency in approach across assessment years and the authority of the Assessing Officer in determining benefits to the taxpayer were key arguments presented.

6. The case highlighted the authority and role of the Transfer Pricing Officer in conducting transfer pricing analysis to determine the arm's-length price. The distinction between determining the arm's-length price and assessing the benefit to the taxpayer was emphasized based on legal interpretations, necessitating a clear understanding of the TPO's jurisdiction and the Assessing Officer's role.

This detailed analysis reflects the intricacies of the legal judgment, addressing each issue comprehensively while preserving the key legal terminology and significant arguments presented in the original text.