2024 (10) TMI 928 - AT - Income Tax

TP Adjustment - royalty paid to non UK entities as the Assessee has not entered into APA/MPA proceedings for AY 2017-18 with UK entities - payment of royalty and the Assessee has entered into Mutual Agreement Procedure (MAP) with respect to the transactions with UK entities - HELD THAT - It is the case of the Assessee that no royalty adjustment should be made with non-UK entities and alternatively has also prayed for application for APA/MPA signed for assessment year 2018-19 to 2022-23 for the year under consideration as well. Admittedly, for assessment year 2017-18 is not covered within APA period. The similar issue came for consideration for the assessment year 2013-14 wherein the Tribunal has remitted the matter to the file of the TPO to determine arm s length price of international transaction entered into by the Assessee with associated enterprise in Germany. Taking a consistent view of the matter, we remit the issue in dispute to the file of the AO/TPO for fresh consideration on similar lines. Appeal filed by the assessee is partly allowed for statistical purposes

Summary

Issues Involved:

1. Transfer Pricing Adjustment and Arm's Length Price (ALP) of Royalty Payments.
2. Application of Mutual Agreement Procedure (MAP) and Advance Pricing Agreement (APA).
3. Protective Adjustment and Misinterpretation of Technology Transfer Agreements.
4. Tax Credit and Computation Errors.
5. Levy of Interest under Sections 234A, 234B, and 234C.

Detailed Analysis:

1. Transfer Pricing Adjustment and Arm's Length Price (ALP) of Royalty Payments:

The primary issue revolved around the transfer pricing adjustment made by the Assessing Officer (AO) and Transfer Pricing Officer (TPO) concerning the royalty payments. The AO assessed the total income of the Assessee at INR 11,98,34,09,834, against the returned income of INR 10,32,25,22,480, resulting in a transfer pricing adjustment of INR 1,66,08,87,354. The Assessee contended that the AO/DRP/TPO erred in making these adjustments without considering the arm's length price of royalty payments for the 3DX model, which was previously agreed at 4% under the India-UK Double Taxation Avoidance Agreement (DTAA). The Tribunal noted that the Assessee had entered into an Advance Pricing Agreement (APA) for subsequent years, which covered similar transactions, and argued for consistency in applying the royalty rate determined in the APA.

2. Application of Mutual Agreement Procedure (MAP) and Advance Pricing Agreement (APA):

The Assessee withdrew certain grounds related to the MAP proceedings with UK entities for prior assessment years, as these were settled under the provisions of Article 27 of the India-UK DTAA. However, for the assessment year 2017-18, which was not covered under the APA period, the Assessee sought the application of the APA rate for royalty transactions with non-UK entities. The Tribunal, drawing from past decisions, remitted the matter back to the AO/TPO to determine the arm's length price of the international transactions with non-UK entities, considering the principles of consistency and the APA's persuasive value.

3. Protective Adjustment and Misinterpretation of Technology Transfer Agreements:

The Assessee challenged the protective adjustment made by the AO, arguing that it was against the mandate of law and misinterpreted the benefits received under the Technology Transfer Agreements. The Tribunal noted that the AO had misinterpreted disclosures in the Annual Report, erroneously alleging that the Assessee was engaged in R&D activities and import substitution. The Tribunal directed the AO/TPO to reconsider these adjustments, emphasizing the need to accurately understand the business model and key value drivers of the Assessee.

4. Tax Credit and Computation Errors:

The Assessee raised issues regarding the non-granting of credit for tax deducted at source and Dividend Distribution Tax (DDT) paid, amounting to significant sums. Additionally, there were errors in computing interest under Section 115P, despite timely deposit of DDT by the Assessee. The Tribunal acknowledged these computational errors and directed the AO to rectify them, ensuring that the Assessee receives the appropriate tax credits and adjustments.

5. Levy of Interest under Sections 234A, 234B, and 234C:

The Assessee contested the levy of interest under Sections 234A, 234B, and 234C of the Income Tax Act. The Tribunal, in line with its decision to remit the primary issues back to the AO/TPO for fresh consideration, implied that the interest levies should also be reconsidered in light of the final determination of the Assessee's tax liability.

Conclusion:

The Tribunal partly allowed the appeal for statistical purposes, remitting key issues back to the AO/TPO for fresh consideration. The decision emphasized the importance of consistency in applying transfer pricing principles and acknowledged the need for accurate computation and granting of tax credits. The stay petition filed by the Assessee was dismissed as infructuous following the decision on the appeal.