2016 (7) TMI 732 - AT - Income Tax

Transfer pricing adjustment - whether the international transaction made by the assessee was at arm s length? - Held that - AO as well as the DRP found that the assessee has not received any service from the parent company. In fact, the Chief Financial Officer of the parent company was summoned under Section 131 of the Income-tax Act, 1961 (in short the Act ). He admitted before the Assessing Officer that it is not possible to provide the details of the administrative services provided to the Indian company. Considering the functions performed by the joint venture partners as shareholders of the Indian company, the DRP found that the services rendered by the shareholders does not require any compensation from the assessee-company even as per the OECD guidelines. The DRP further found that the contribution said to be made by the joint venture partners to the sales of the existing business of the assessee-company was not available on record. In the absence of any material to indicate that services were rendered by the joint venture company, this Tribunal is of the considered opinion that the DRP has rightly confirmed the order of the Transfer Pricing Officer. Disallowance of payment of royalty - revenue v/s capital nature - Held that - The DRP found that the payment was made by the assessee for right to use the technology and technical information for a prescribed period and it is not perpetual. The DRP has also found that the assessee does not obtain any enduring benefit. The payment is also recurring in nature. Therefore, the DRP for the assessment year 2009-10 found the payment as revenue expenditure. Admittedly, this direction of the DRP was not challenged by the Revenue further. Therefore, it attained finality. Since the nature of payment was examined by DRP and it was found as revenue expenditure and the direction of the DRP attained finality, this Tribunal is of the considered opinion that the CIT(Appeals) has rightly found that the payment was revenue in nature. Therefore, this Tribunal do not find any reason to interfere with the order of the lower authority and accordingly the same is confirmed.

Summary

Issues:
1. Disallowance of payment made by the assessee for services rendered by the parent company.
2. Disallowance of payment of royalty claimed as revenue expenditure.

Issue 1: Disallowance of payment made by the assessee for services rendered by the parent company:
The assessee, a joint venture company, paid administrative charges to the parent company for services rendered, but the Assessing Officer disallowed the payment due to lack of evidence. The Ld. counsel argued that the Transaction Net Margin Method was used to determine arm's length price, claiming the international transaction was at arm's length. However, the parent company's ability to provide services in India was questioned. The DRP confirmed the disallowance, stating that services by shareholders did not require compensation. The Tribunal upheld the DRP's decision, emphasizing the lack of evidence of services rendered, leading to the confirmation of the Transfer Pricing Officer's order.

Issue 2: Disallowance of payment of royalty claimed as revenue expenditure:
The dispute revolved around the payment of royalty by the assessee for the right to use technical know-how. The Assessing Officer treated it as a capital expenditure, but the CIT(Appeals) allowed it as revenue expenditure. The Ld. counsel argued that the payment was for a prescribed period, not resulting in enduring benefits, thus qualifying as a business expenditure. The DRP for the assessment year 2009-10 deemed the payment as revenue expenditure, a decision not challenged by the Revenue. The Tribunal upheld this decision, stating that since the payment was recurring, did not provide enduring benefits, and was previously deemed revenue expenditure, it should be allowed as such. Consequently, the Tribunal dismissed both the Revenue's and the assessee's appeals.

This judgment highlights the importance of providing evidence for payments made for services and the distinction between capital and revenue expenditures, emphasizing the need for consistency in tax treatment based on previous rulings and the nature of the payment.