2016 (8) TMI 561 - HC - Income Tax

Transfer pricing adjustment - whether the transactions of import of pigments and fees for technical knowhow were at arm s length? - Held that - Chapter X of the Act provides for computation of income arising from an International Transaction on the basis of the ALP in respect of transactions between AEs. Section 92(3) of the Act, which is part of Chapter X of the Act provides that the Transfer Pricing provisions will not apply where it results in reduction of income chargeable to tax. The result of accepting the Revenue s contention that the import of pigments is at a price lower than the ALP, would increase the import price of pigments, resulting in a reduction in income chargeable to tax. This is not permitted. Therefore, the reliance upon the email dated 27th August, 2002 submitted by the Assessee establishes a pricing policy with a view to finish local competition, does not in any manner have any impact on determining the ALP on import of pigment. The finding arrived at by the Tribunal on the basis of imposition of antidumping duty by the Customs is not challenged before us. The finding of the Tribunal that no adjustment is called for in the price paid by the Assessee for import of pigments for its AE s is a finding of fact which is not shown to be perverse and/or arbitrary. Technical knowhow/ Consultancy Fee -The finding of the Tribunal that the agreement for technical knowhow / consultancy was in respect of all the twelve services and Respondent-Assessee could avail of all or any one of these twelve areas listed out in the agreement as and when the need arose. We find the Agreement is similar to a retainer agreement. Consequently, the finding of the Assessing Officer attributing nil value to nine of the services listed in the agreement which were not availed of by the Respondent-Assessee in the present facts was not justified. Moreover, not adopting one of the mandatorily prescribed methods to determine the ALP in respect of fees of technical services payable by the Respondent-Assessee to its AE, makes the entire Transfer PricingAgreement unsustainable in law. Entitlement to deduction under Section 80HHC - non reduction of the amount credited to the Profit & Loss Account on revaluation of assets - Held that - Explanation (baa) to Section 80HHC of the Act applies only to receipt by way of brokerage, commission, interest, rent charges or any other receipt of a similar nature included in the profits. The amount credited on account of revaluation of the assets though included in the business income does not fall in the nature of receipts spelled out in Explanation (baa) to Section 80HHC of the Act nor is it a receipt of similar nature. In the above view, the impugned order held that Explanation (baa) to Section 80HHC of the Act cannot be invoked in the case of the amount credited to the Profit & Loss Account on account of revaluation of the assets. Resultantly, holding that the Respondent-Assessee is entitled to the deduction under Section 80HHC of the Act without reduction of the amount credited to the Profit & Loss Account on revaluation of assets.

Summary

Issues involved:
1. Arms Length Price (ALP) for import of pigments and technical knowhow/consultancy fees.
2. Eligibility of write back of loss for deduction under Section 80HHC.
3. Double deduction under Section 80IB and 80HHC of the Income Tax Act.

Issue 1 - Arms Length Price (ALP) for import of pigments and technical knowhow/consultancy fees:
The judgment addresses the ALP for import of pigments and technical knowhow/consultancy fees. For pigments, the Tribunal found no Transfer Pricing Adjustment necessary as the consideration paid was deemed normal. The Revenue argued that the Assessee's pricing policy aimed to undercut local competition, but the Tribunal disagreed, citing Section 92(3) of the Act. Regarding technical knowhow/consultancy fees, the Tribunal upheld the Assessee's position that payment covered all 12 services listed, not just those availed. The Revenue's contention that only services used should be paid for was dismissed. The Tribunal found the ALP determination flawed and allowed the Assessee's appeal.

Issue 2 - Eligibility of write back of loss for deduction under Section 80HHC:
The case involved a revaluation loss reversed in the previous year, credited in the current year's Profit & Loss Account. The Assessing Officer treated this credit as business income, reducing the deduction under Section 80HHC. The Tribunal disagreed, stating the credit did not constitute a receipt under Explanation (baa) to Section 80HHC. The Revenue did not dispute this finding, leading to the Tribunal allowing the Assessee's deduction under Section 80HHC without reduction.

Issue 3 - Double deduction under Section 80IB and 80HHC of the Income Tax Act:
The Tribunal allowed concurrent deduction under Sections 80HHC and 80IB, following a previous court decision. The Revenue, while not disputing this decision, referenced a pending case before a Larger Bench. However, the Tribunal declined to admit the question, relying on the binding precedent. Consequently, the issue was not entertained, and the Appeal was dismissed without costs.

In conclusion, the judgment addressed various issues related to Transfer Pricing, deduction eligibility, and concurrent deductions under different sections of the Income Tax Act. The Tribunal's decisions were based on legal provisions and precedents, ensuring fair treatment and adherence to tax laws.