2017 (4) TMI 908 - AT - Income Tax

Transfer pricing adjustment - arm s length price in relation to international transactions - selection of comparable - Held that - The assessee was engaged in the business of manufacture and sale of drive train components namely propeller shafts, universal joints, axles and components thereof which constitute heart of the transmission system. The assessee had set up units to manufacture different components at different places. Thus companies dissimilar with that of assessee in functionality will be deselected for final list of comparable. Working of operating profit margins of the assessee - rectification application - Held that - In view of our decision in holding that there is a mistake in working out the PLI of assessee company, we direct the Assessing Officer to adopt the figure as adopted in order passed under section 154 read with Rule 13 of the DRP Rules dated 26.09.2014. The Assessing Officer is directed to verify the said claim of assessee and determine the refund due to the assessee along with interest as per the Act. The ground of appeal raised by the assessee is thus, allowed. Disallowance of Management Fees - Held that - Where there is nexus between the expenditure incurred and the purpose of business, then the revenue cannot put itself in the arm chair of the businessman to decide how much of the expenditure is reasonable. Applying the proposition laid down in S.A. Builders Ltd. Vs. CIT 2006 (12) TMI 82 - SUPREME COURT we hold that the expenditure incurred by the assessee on management fees in order to facilitate smooth running of its business is an allowable expenditure in the hands of assessee. Similar expenditure has been allowed in the hands of assessee in preceding year. Another aspect of the issue is that the said management fees is to be taxed in the hands of recipient and even the service tax has been paid by the recipient, evidence of which is placed in the Paper Book. Once the commercial expediency of expenditure is established, then the same is to be allowed as business expenditure in the hands of assessee. - Decided in favour of assessee Royalty paid by the assessee to its associate enterprises - TPA - Held that - where the Royalties were paid in terms of approval granted by SIA / RBI, then the same are to be considered at arm s length rate. Following the said proposition laid down in CIT Vs. SGS India Pvt. Ltd. (2015 (11) TMI 1619 - BOMBAY HIGH COURT) and ACIT Vs. M/s. Dow Agrosciences India Pvt. Ltd. (2016 (12) TMI 936 - ITAT MUMBAI ), we hold that where the payment of Royalty by the assessee to its associate enterprise Dana Corporation is @ 2.85%is liable to be considered at arm s length rate and no addition is warranted on this count. Accordingly, the claim of assessee is thus, allowed. In any case, the jurisdiction and power of TPO is to determine arm s length price of Royalty and the order of TPO holding that the assessee had not derived any benefit under the said Agreement is beyond the scope of TPO while benchmarking the international transaction for the purpose of determining arm s length price. Accordingly, we hold so.- Decided in favour of assessee

Issues Involved:
1. Transfer Pricing Adjustment
2. Corporate Tax Adjustment
3. Levy of Interest under Section 234B
4. Levy of Penalty under Section 271(1)(c)
5. Rectification by DRP
6. Working Capital Adjustment
7. Arm's Length Price of Royalty Payment

Detailed Analysis:

1. Transfer Pricing Adjustment:
The assessee contested the inclusion of Shanthi Gears Ltd. and International Combustion (India) Ltd. as comparables for determining the arm's length price of international transactions. The Tribunal found that Shanthi Gears Ltd. was engaged in manufacturing gears for non-automotive industries, and International Combustion (India) Ltd. was involved in mining and capital goods, making both functionally incomparable to the assessee. Consequently, the Tribunal directed the TPO to exclude these companies and re-compute the arithmetic mean of the comparables.

2. Corporate Tax Adjustment:
The assessee challenged the disallowance of management fees amounting to ?8,11,62,596/- paid to AIPL. The Tribunal found that the assessee had provided sufficient evidence of the services received and the benefits derived from AIPL. The Tribunal held that the expenditure incurred was for the purpose of business and allowed the deduction under section 37(1) of the Act, emphasizing that the Assessing Officer cannot question the commercial expediency of the expenditure.

3. Levy of Interest under Section 234B:
The assessee argued against the levy of interest under section 234B, contending that the transfer pricing adjustment was due to a difference of opinion, making it impossible to estimate the tax liability accurately. The Tribunal did not explicitly address this issue in the detailed analysis.

4. Levy of Penalty under Section 271(1)(c):
The assessee contended that the proposed penalty under section 271(1)(c) was unjustified as the transfer pricing adjustment resulted from a difference of opinion. The Tribunal did not explicitly address this issue in the detailed analysis.

5. Rectification by DRP:
The Revenue challenged the DRP's power to pass rectification orders under Rule 13 of the DRP Rules. The Tribunal upheld the DRP's power to rectify mistakes apparent from the record, finding no error in the DRP's exercise of jurisdiction. The Tribunal also upheld the DRP's decision to apply proportionate adjustment to international transactions rather than at the entity level.

6. Working Capital Adjustment:
The Revenue contested the DRP's direction to grant working capital adjustment to the assessee. The Tribunal found that the issue was raised before the TPO and the DRP in the original proceedings but was not adjudicated. The Tribunal upheld the DRP's rectification order directing the Assessing Officer to examine the computation of working capital adjustment and adopt the correct operating margins of comparable companies.

7. Arm's Length Price of Royalty Payment:
The assessee contested the TPO's determination of the arm's length price of royalty payment to Dana Corporation at Nil. The Tribunal noted that similar payments were accepted as arm's length in prior and subsequent years. The Tribunal held that the royalty payment approved by SIA and RBI constituted reliable CUP data, making the transaction at arm's length. The Tribunal emphasized that the TPO's role was to determine the arm's length price, not to assess the admissibility of the expenditure. The Tribunal allowed the assessee's claim, holding that the payment of royalty at 2.85% was at arm's length.

Conclusion:
The Tribunal provided relief to the assessee on multiple grounds, including the exclusion of certain comparables in transfer pricing, allowance of management fees as a business expenditure, and acceptance of the royalty payment as being at arm's length. The Tribunal also upheld the DRP's power to rectify mistakes and directed the Assessing Officer to re-compute adjustments accordingly.

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