2014 (1) TMI 388 - AT - Income Tax

Addition proposed by the TPO on account of Technical fee paid to AE Addition Related to Royalty or charges Method of Payment Held that - The assessee chose CUP as the most appropriate method for this segment and also relied on Government s directives - the issue was covered by FIPB instructions, where royalty is accepted to be 5% to 8% - on the basis of global study, reliance can be made on one entity, which can be accepted to be CUP, so far as the business of the assessee and its affiliates are concerned, where the TP study identified the uncontrolled transaction of royalty of 10%, against which, the assessee s payment was at 3%, which can be accepted to be the ALP - the comparables as suggested by the TPO cannot be accepted in the defined segment of the business, which does not have global presence - the assessee has done its business, strictly in accordance with the business agreement with its parent AE and has made the payments also in accordance with the norms as prescribed by the Government of India regulations and FIPB, Ministry of Commerce the adjustment proposed by TPO reversed Thus, the assessee s payment made on account of royalty/license fee to be at arm s length Decided in favour of Assessee. Payment on account of research and development Held that - The CIT(A) has very categorically observed that, there is nothing on record to suggest the bench marking the ALP - Even in the records, there is nothing specific, which clearly suggests the bench mark for the addition FIPB approval cannot be treated as acceptance of arm s length price more so in view of the specific method prescribed under the Act - thus, the matter remitted to the AO for fresh adjudication. Disallowance of delayed payment - Contribution to PF on account of ESIC and fund Held that - The payment have been made before the due date of filing of the return Thus, the addition cannot be made.

Summary

Issues Involved:
1. Transfer Pricing (TP) issues related to technical fees and royalty/license fees.
2. Payment of Research and Development (R&D) expenses.
3. Disallowance of delayed payment of contributions to Provident Fund (PF), Employees' State Insurance Corporation (ESIC), and other funds.
4. Allowance of Tax Deducted at Source (TDS) credit.
5. Appeals and cross objections for the assessment year 2003-04.

Detailed Analysis:

1. Transfer Pricing Issues:
- Technical Fees and Royalty/License Fees:
The assessee challenged the addition of Rs. 15,988,100 proposed by the Transfer Pricing Officer (TPO) concerning the technical fee paid to the Associated Enterprise (AE). The TPO adopted the Transactional Net Margin Method (TNMM) to test the payment of royalty and proposed adjustments based on comparables from European countries, which the TPO deemed inappropriate for Indian business conditions. The TPO suggested an adjustment by lowering the Arm's Length Price (ALP) and computed it at Rs. 1,59,88,100.

The assessee argued that the payments were made in accordance with agreements approved by the Foreign Investment Promotion Board (FIPB) and that the royalty rate of 3% was within the arm's length range of 2.5% to 4% as per an international benchmarking study. The CIT(A) sustained the TPO's adjustment, but the ITAT reversed this, holding that the payment of Rs. 1,59,88,100 was at arm's length, considering the FIPB approvals and the global benchmarking study.

2. Payment of Research and Development (R&D) Expenses:
- The assessee paid Rs. 28,794,000 for R&D expenses, which was also referred to the TPO. The TPO determined the ALP for this transaction at nil, stating that the assessee failed to justify the cost allocation and the expected benefits from the arrangement. The CIT(A) confirmed the TPO's adjustment, noting the absence of a clear method for sharing benefits in the cost-sharing arrangement.

The ITAT restored the issue to the Assessing Officer (AO) for fresh appraisal, providing the assessee an opportunity to present its case and justify the R&D expenses.

3. Disallowance of Delayed Payment of Contributions:
- The AO disallowed Rs. 70,844 for delayed payment of PF contributions, Rs. 45,907 for ESIC, and Rs. 32,518 for other funds. The ITAT found that these payments were made before the due date of filing the return and deleted the disallowance.

4. Allowance of TDS Credit:
- The AO was directed to allow the credit of Rs. 5,44,475 on account of TDS as per law, and this ground was allowed.

5. Appeals and Cross Objections for Assessment Year 2003-04:
- The department's appeal and the assessee's cross objection both addressed the arm's length nature of the technical fees and ASF costs. The ITAT, relying on its detailed observations for the previous year, held that the payment of license fee at 3% was at arm's length and rejected the department's grounds while allowing the assessee's cross objections.

For the R&D expenses, the ITAT restored the issue to the AO for reconsideration, ensuring consistency with the previous year's treatment.

Conclusion:
- The ITAT allowed the appeal for AY 2002-03 partly, directing the AO to reconsider the R&D expenses and allowing the TDS credit. For AY 2003-04, the ITAT dismissed the department's appeal, allowed the assessee's cross objections partly, and restored the R&D expenses issue to the AO for fresh consideration.