2016 (4) TMI 202 - AT - Income Tax

Transfer pricing adjustment - MAM - Held that - To determine the ALP of the international transaction pertaining to payment of intra-group services, TNMM has to be applied following the aggregation approach as the transactions are closely linked and integral to the manufacturing operations of the assessee and therefore the determination of ALP on an aggregate basis would be more appropriate. Adjustment in connection with notional interest - Held that - In the present case, since no income has been earned or can be said to have been earned by the assessee in respect of interest chargeable from AEs, the question of applying the provisions of section 92 of the Act does not arises. Lower authorities erred in making TP adjustment on account of notional interest on outstanding receivables from AEs and hence the assessee s ground(s) of appeal on this issue is allowed.

Issues Involved:
1. Transfer Pricing Adjustment on Cost Contribution Charges
2. Transfer Pricing Adjustment on Notional Interest on Outstanding Receivables
3. Short Credit of Taxes Deducted at Source (TDS)
4. Interest under Section 234B

Detailed Analysis:

1. Transfer Pricing Adjustment on Cost Contribution Charges:

Background:
The assessee, engaged in manufacturing and trading of various equipment, filed a return declaring an income of Rs. 27,81,885, which was processed and scrutinized. The case was referred to the Transfer Pricing Officer (TPO) for determining the arm's length price (ALP) of international transactions. The TPO made a TP adjustment of Rs. 1,64,44,290, including Rs. 1,53,40,000 for management fees.

Assessee's Arguments:
- The assessee argued that the TPO and Dispute Resolution Panel (DRP) erred in considering the ALP of cost contribution charges and in selecting the Comparable Uncontrolled Price (CUP) method over the Transactional Net Margin Method (TNMM).
- The assessee paid Rs. 2,57,42,489 towards cost contribution charges for services from its AE, including administration, finance, and IT support. These charges were allocated based on headcount and annualized sales, following OECD guidelines.
- The assessee emphasized that the allocation method was rational and systematic, and the AE charged only actual costs without any markup. Evidence of services rendered, including emails and presentations, was provided.

Tribunal's Decision:
- The Tribunal noted that the TPO failed to substantiate the application of the CUP method and did not identify any uncontrolled comparable transactions.
- The Tribunal highlighted that the OECD guidelines support the allocation of costs based on rational methods and that the assessee's approach was consistent with these guidelines.
- Citing previous decisions, the Tribunal held that the cost contribution charges were at arm's length and deleted the TP adjustment of Rs. 1,53,40,000.

2. Transfer Pricing Adjustment on Notional Interest on Outstanding Receivables:

Background:
The TPO imputed notional interest of Rs. 11,04,290 on receivables from AEs exceeding six months, treating them as loans.

Assessee's Arguments:
- The assessee argued that the TPO tried to tax hypothetical income, which is not permissible under the Act.
- It was submitted that the assessee did not charge interest on receivables from both AEs and non-AEs, and the delay in payments was due to business reasons.
- The assessee cited judicial precedents supporting the view that notional interest cannot be taxed in the absence of an agreement to charge interest.

Tribunal's Decision:
- The Tribunal referred to its previous decision in the assessee's case for AY 2006-07, where it was held that notional interest on delayed receivables cannot be taxed.
- The Tribunal remanded the issue to the AO/TPO to verify if there was any agreement to charge interest. If no such agreement existed, the TP adjustment should be deleted.

3. Short Credit of Taxes Deducted at Source (TDS):

Background:
The AO granted TDS credit of Rs. 5,92,70,316 against the claimed Rs. 6,05,12,937, resulting in a short credit of Rs. 12,42,621.

Tribunal's Decision:
- The Tribunal remitted the issue back to the AO to examine and rework the short credit of TDS.

4. Interest under Section 234B:

Background:
The AO levied interest under Section 234B amounting to Rs. 2,31,864.

Tribunal's Decision:
- The Tribunal upheld the AO's action, stating that charging interest under Section 234B is mandatory as per the Supreme Court's decision in Anjum M.H. Ghaswala.
- The AO was directed to recompute the interest after giving effect to the Tribunal's order.

Conclusion:
The appeal by the assessee was partly allowed, with the Tribunal deleting the TP adjustment on cost contribution charges, remanding the issue of notional interest for verification, and directing the AO to rework the TDS credit and recompute interest under Section 234B.

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