2025 (4) TMI 847 - AT - Income Tax

TP Adjustment - Benchmarking of AMP expenditure - HELD THAT - We find that in Sony Ericsson 2015 (3) TMI 580 - DELHI HIGH COURT Hon ble High Court was though dealing with question whether AMP expenditure is a separate international transaction and further on the methodology to be adopted to benchmark such transaction and the Hon ble High Court upheld the tax department s proposal that AMP was a separate international transaction in the batch of cases under consideration. However would show that even where AMP is a separate international transaction it is permissible under the Act to benchmark the same as a closely connected transaction with the core distribution business. Concept of set-off has also been dealt with in detail. Noting that the purpose of chapter X was to be construed harmoniously with the objective under the Act viz. assessment of income for the purpose of levying tax Hon ble Court concluded that the concept of set-off is embedded in the provisions of chapter X. These paras 193 and 194 show that once margins are found to be at arm s length by application of TNNM then same deserves to be accepted as benchmarking all transactions including AMP transaction involved in that batch of case. Major international transactions with AE s are import of raw materials and sale of semi-finished goods - In the case in hand all the transactions emanate from common agreement and arrangement between the assessee and AE thus such transactions can be held to be closely linked as the nature characteristic and terms of such transactions substantially flow from the said agreement as a single transaction for purpose of determining arm s length price. It is sufficiently established that these transactions were inextricably linked to each other in terms of nature and range of exclusivity of the product being manufactured by the assessee. Then we find that Tax authorities were not justified to question the use of technology by Assessee alleging assessee was not able to demonstrate that each year some new technology was transferred to it. In fact we find that during the year itself the assessee has entered into an international transaction of purchase of machinery and parts worth Rs.29.83 crores which has been found to be at arms length and not disturbed from TNMM. The allegation that the assessee is running a full- fledged business in India so there is no justification that personnel belonging to a company located in Singapore will need to travel to India to support on marketing procurement etc. is based on mere conjectures. Such reasoning also establishes that there was no reason to question the applicability of TNMM at entity level. Then we find that the TPO has not been able to substantiate the rejection of the transfer pricing study of the assessee by any significant evidences reasoning or conclusions. The reasons may have been sufficient to show cause the assessee for rejecting the TPS but while reaching a different pricing the reasons should have been substantiated on the basis of tests of comparability which is not done. Though not relevant to the ground before us if we take into consideration for conclusiveness how after rejecting the aggregation approach with regard to disputed transaction the TPO went on to examine the margins we find that the TPO has miserably failed to establish on the basis of comparability tests that these transactions once removed from TNMM would in any way disturb the net martin determined in the TPS. TPO thus arbitrarily disturbed the same. A careful perusal of the TP order reveals that based on very general assumptions and relying case laws which over the years have evolved the conclusion was drawn. The same thus cannot be sustained. In the case in hand before us the TPO has not alleged as to on what basis the three disputed transactions were not connected to the rest so as to determine the arm s length price separately from and independent of others. The three disputed transactions which the AO has examined independently in the case of the present assessee were such that they were dependent upon and related to the pricing of other transactions and the same have been accordingly aggregated by the assessee while calculating the margins of 16.99% which stands accepted. So the case relied is very distinguishable and rather helps the assessee before us as here the assessee has combined transactions which are intrinsically related to manufacture of single line of product. Then the judgement in the case of Bombardier Transportation India Pvt. Ltd 2015 (11) TMI 1527 - ITAT DELHI was in regard to a company engaged in manufacturing metro trains and supply of coaches under a consortium. The assessee in that case had preferred CUP as MAM method but tax authorities were of the view that TNMM is the most appropriate method. We are of the considered view that without establishing that the nature of transactions under scrutiny are similar in regard to similarly situated assessee such the judicial pronouncements cannot come to the rescue of the Revenue. Issue may be restored to the TPO for fresh determination of comparability ld. Counsel has invited our attention to the decision of Rajesh Bhabhubhai Damania 2000 (6) TMI 5 - GUJARAT HIGH COURT that there cannot be multiple opportunities and second innings for completing assessment and we are of considered view that where the impugned order is not having any apparent defect out of lack of opportunity with the ld. Tax authority below to complete the enquiry or determination of fiscal liability then for improving the case the issue cannot be resorted to them again. Tax authorities have fallen in error in rejecting the TNMM as MAM for determining the disputed international transactions and erred in segregating these three disputed transactions to determine their arm s length separately. The findings arrived in for AY 2014-15 apply mutatis mutandis to appeals for other AY before us. Disallowance u/s 37 towards entrance fee and subscription paid during the subject assessment years 2013-14 and 2014-15 and disallowance u/s 36(1(va) of the Act on account of delayed deposit of employees contribution of PF in AY 2012-13 no substantial contention was raised so as to interfere in findings of ld. Tax authorities below. In any case as with regard to delayed deposit of the employee s contribution the issue now stands settled against the assessee by the judgement of the Hon ble Supreme Court in the case of Checkmate Services P. Ltd. 2022 (10) TMI 617 - SUPREME COURT thus corresponding grounds are dismissed.

Summary

ISSUES PRESENTED and CONSIDERED

The Tribunal considered several core legal questions related to the assessment of the arm's length price (ALP) for international transactions under the Income Tax Act, 1961. The primary issues were:

• Whether the Transfer Pricing Officer (TPO) erred in rejecting the Transfer Pricing Study (TPS) of the assessee without explicitly stating reasons for rejection.
• Whether the TPO was justified in adopting the Comparable Uncontrolled Price (CUP) method instead of the Transactional Net Margin Method (TNMM) for determining the ALP of transactions involving technical fees, royalty payments, and support services.
• Whether the transactions should be treated as closely linked and assessed collectively under TNMM.
• Whether the adjustments made by the TPO to the ALP of the disputed transactions were arbitrary and lacked substantiation.
• Whether the disallowance under Section 37 of the Income Tax Act for club entrance fees was justified.
• Whether the initiation of penalty proceedings under Section 271(1)(c) was appropriate.
• Whether the levy of interest under Sections 234B and 234C was justified.

ISSUE-WISE DETAILED ANALYSIS

1. Rejection of Transfer Pricing Study (TPS)

The Tribunal noted that the TPO had not explicitly rejected the TPS submitted by the assessee. The TPO's approach was to independently determine the ALP of the disputed transactions without first rejecting the TPS. The Tribunal found that the TPO's failure to explicitly reject the TPS rendered the adjustments arbitrary. The Tribunal relied on precedents that require a clear rejection of the TPS before making adjustments.

2. Adoption of Comparable Uncontrolled Price (CUP) Method

The Tribunal examined whether the TPO's adoption of the CUP method over the TNMM was justified. The Tribunal found that the TPO failed to substantiate the rejection of the TNMM and did not provide adequate comparables for the CUP method. The Tribunal emphasized that closely linked transactions should be assessed collectively under TNMM, especially when they emanate from a common agreement.

3. Treatment of Closely Linked Transactions

The Tribunal held that the transactions involving technical fees, royalty payments, and support services were inextricably linked and should be treated as a single composite transaction. The Tribunal found that the TPO's approach of segregating these transactions was inappropriate, given their interconnected nature.

4. Substantiation of Adjustments

The Tribunal criticized the TPO for failing to substantiate the adjustments made to the ALP of the disputed transactions. The Tribunal found that the TPO's conclusions were based on general assumptions and lacked a detailed comparability analysis. The Tribunal held that the adjustments were arbitrary and could not be sustained.

5. Disallowance under Section 37

The Tribunal found no substantial contention raised by the assessee regarding the disallowance of club entrance fees under Section 37. The Tribunal upheld the disallowance, noting that the fees were considered personal in nature.

6. Penalty Proceedings under Section 271(1)(c)

The Tribunal noted that the initiation of penalty proceedings was based on the alleged concealment of income. However, the Tribunal did not provide a detailed analysis of this issue, as it was consequential to the main grounds of appeal.

7. Levy of Interest under Sections 234B and 234C

The Tribunal found that the levy of interest was a result of the adjustments made by the TPO. Since the adjustments were found to be arbitrary, the Tribunal suggested that the interest levy should be reconsidered.

SIGNIFICANT HOLDINGS

The Tribunal established several core principles:

• The TPO must explicitly reject the TPS with reasons before making adjustments to the ALP.
• Closely linked transactions should be assessed collectively under TNMM when they emanate from a common agreement.
• Adjustments to the ALP must be substantiated with detailed comparability analysis and evidence.
• Disallowances under Section 37 require clear justification, especially when deemed personal in nature.

The Tribunal concluded that the TPO erred in rejecting the TNMM as the most appropriate method and in segregating the disputed transactions. The Tribunal allowed the appeal for AY 2011-12 and partly allowed the appeals for the remaining assessment years, emphasizing the need for a harmonized approach in assessing interconnected transactions.