2017 (4) TMI 1011 - AT - Income Tax

Transfer pricing adjustment - payment of royalty made by the assessee to its Associated Enterprise (AE) - Held that - In our considered opinion the rates of payment of royalty approved by the RBI or by the FIPB (relying upon the rates allowed by RBI under automatic route) would not become per se or conclusively or ipsofacto ALP rates. In our opinion both the legislation operate into different fields. The rates allowed under the automatic route by the RBI or FIPB are meant to achieve objectives in different areas. The whole thrust of the income tax proceedings and transfer pricing regulations is to ensure that taxable profit earned by an entity India are not shifted to foreign tax jurisdiction without payment of legitimate share of tax due in India. Therefore, in our considered opinion, independent exercise of determination of ALP is needed to be done to find out if payment of royalty has been dome in line with Arm s Length Price or not. It has become all the more necessary now in view of Press Note No.8 (2009 series) dated 16.12.2009 brought on record before us, since restriction on the rates of payment of royalty has been waived by concerned authorities. Therefore, the ALP of the royalty needs to be determined in accordance with the Transfer Pricing Regulations. However, we also find force in the contention raised by the Ld. Counsel that if an authority by way of any specific approval has allowed a particular rate of payment, then it does carry persuasive value and can of course act as one of the supportive tools for carrying out bench marking of transaction of payment of royalty. Thus, under these circumstances and in view of aforesaid discussion, we find it appropriate to send this issue back to the file of the AO, as has been done by Tribunal in AY 2010-11 in assessee s own case. The assessee shall be free to carry out fresh transfer pricing study and independently bench mark its aforesaid international transaction with independent comparables for establishing the payment made by it at Arm s Length Price. The AO/TPO shall also be free and duty bound to take on record and consider all the evidences as may be brought on record by assessee to justify ALP of the impugned transaction. Thus, with these directions this issue is sent back to the file of the Assessing Officer/TPO and may be treated as allowed in favour of assessee for statistical purposes. Disallowance on account of late payment of employees contribution towards provident fund and ESIC - Held that - The fact was shown to us that entire payment has been deposited within the financial year 2011-12, as has also been mentioned by the Assessing Officer in the assessment order itself. Under these circumstances, we find that the disallowance made by lower authorities is not sustainable and therefore same is hereby deleted. - Decided in favour of assessee

Summary

Issues Involved:
1. Transfer Pricing Adjustment on account of payment of Royalty.
2. Disallowance of employee contribution towards Provident Fund and ESIC.

Detailed Analysis:

1. Transfer Pricing Adjustment on account of payment of Royalty:
The primary contention revolves around the determination of the arm’s length price (ALP) for royalty payments made by the assessee to its Associated Enterprise (AE). The assessee had paid royalty at the rate of 3% on net sales to its AE, which was benchmarked using the Comparable Uncontrolled Price (CUP) method, supported by an approval from the Foreign Investment Promotion Board (FIPB). The Assessing Officer (AO) and the Dispute Resolution Panel (DRP) rejected this approach, determining the ALP as nil due to the absence of comparable royalty agreements, leading to the disallowance of ?1,91,03,040/-.

The Tribunal noted that in the previous assessment year (2011-12), the Tribunal had ruled in favor of the assessee, relying on the Bombay High Court’s decision in SGS India Private Limited, which accepted FIPB approval as a valid CUP for benchmarking purposes. However, the Tribunal also acknowledged the Press Note No. 8 (2009 series) issued by the Ministry of Commerce & Industry, which liberalized the policy on royalty payments, placing them under the automatic route without requiring specific government approval. This change necessitated a fresh transfer pricing study to determine the ALP independently, as automatic route approvals do not ipso-facto establish the ALP under transfer pricing regulations.

The Tribunal emphasized that while FIPB/RBI approvals carry persuasive value, they cannot conclusively determine ALP without a proper transfer pricing analysis. Consequently, the Tribunal remanded the matter back to the AO/TPO for a fresh examination, allowing the assessee to present additional evidence and carry out a new transfer pricing study to justify the royalty payments.

2. Disallowance of employee contribution towards Provident Fund and ESIC:
The AO disallowed the employee’s contribution towards Provident Fund and ESIC amounting to ?12,03,002/- on the grounds of delayed payment. The assessee argued that the payments were made within the financial year and before the due date of filing the return, thus should be allowed as per the Supreme Court’s decision in CIT vs. Alom Extrusions Ltd.

The Tribunal referred to its previous decision in the assessee’s case for AY 2011-12, where it was held that contributions made before the due date of filing the return should be allowed, in line with the Supreme Court’s ruling. Since the AO acknowledged that the payments were made within the financial year, the Tribunal found the disallowance unsustainable and deleted it.

Conclusion:
The appeal was partly allowed. The issue of transfer pricing adjustment was remanded back to the AO/TPO for a fresh determination of ALP, while the disallowance of employee contributions towards Provident Fund and ESIC was deleted.