2018 (2) TMI 1088 - AT - Income Tax

Adjustment on account of royalty payment - ALP adjustment - Held that - Since the issue as to payment of royalty by the taxpayer to its AE is one of the actual business arrangement, there is no material on file to take a different view on the issue as the same has already been settled in favour of the taxpayer in AY 2010-11 and AY 2011-12, so ALP adjustment on account of royalty payment made by the TPO/AO is not sustainable in the eyes of law, hence ordered to be deleted by the AO. Consequently, the appeal filed by the taxpayer is hereby allowed.

Summary

Issues Involved:
1. Completion of assessment at an income of "Nil" post adjustment of brought forward losses.
2. Validity of the draft order passed by the AO.
3. Rejection of the economic analysis of the Appellant.
4. Non-consideration of decisions by higher appellate authorities in the Appellant's own case.
5. Rejection of the combined transaction approach adopted by the Appellant.
6. Adoption of Comparable Uncontrolled Price (CUP) method as the Most Appropriate Method (MAM).
7. Questioning the commercial rationale of legitimate business expenses.
8. Transfer pricing adjustment based on incorrect assumptions.
9. Non-provision of full credit of taxes claimed in the return of income.
10. Initiation of penalty proceedings under section 271(1)(c) of the Act.

Detailed Analysis:

1. Completion of Assessment at an Income of "Nil":
The Appellant argued that the assessment completed at an income of "Nil" post adjustment of brought forward losses against the returned income of Nil is erroneous and bad in law. The Tribunal examined the facts and circumstances and found that the assessed income being Nil post such adjustments does not hold any legal infirmity.

2. Validity of the Draft Order:
The Appellant contended that the draft order passed by the AO was void ab-initio as the reference to the TPO was not in accordance with CBDT instruction no 3/2016 and was beyond the timeline provided. The Tribunal, however, did not find merit in this argument as the procedural aspects were adhered to by the AO.

3. Rejection of the Economic Analysis:
The Appellant's economic analysis for determining the arm's length price (ALP) was rejected by the TPO/DRP. The Tribunal noted that the TPO/DRP did not accept the taxpayer's use of the Transactional Net Margin Method (TNMM) and instead applied the CUP method. The Tribunal found that the rejection of the economic analysis was not justified as the conditions set out in section 92C(3) of the Act were not satisfied.

4. Non-Consideration of Decisions by Higher Appellate Authorities:
The Appellant argued that the TPO disregarded the orders of higher appellate authorities in its own case for AY 2010-11 and AY 2011-12. The Tribunal confirmed that the issue had already been settled in favor of the taxpayer in previous years and affirmed by the Hon'ble High Court. The Tribunal directed the AO to follow the decisions of the higher appellate authorities, thereby deleting the adjustment made on account of royalty payment.

5. Rejection of the Combined Transaction Approach:
The Appellant's combined transaction approach for benchmarking the impugned transactions was rejected by the TPO/DRP. The Tribunal found that the rejection of the TNMM as the MAM was not justified, as the taxpayer had used a consistent and reliable method.

6. Adoption of CUP Method as the MAM:
The TPO/DRP adopted the CUP method as the MAM for determining the ALP of the international transaction without identifying any comparable uncontrolled transactions. The Tribunal held that the adoption of the CUP method was not appropriate in the absence of comparable transactions, and the TNMM should have been accepted as the MAM.

7. Questioning the Commercial Rationale of Business Expenses:
The TPO/DRP questioned the commercial rationale of the legitimate business expenses incurred by the taxpayer. The Tribunal held that the scope of assessment under section 92CA should be restricted to determining the ALP of the international transaction using one of the prescribed methods, and questioning the commercial rationale was beyond the TPO's jurisdiction.

8. Transfer Pricing Adjustment Based on Incorrect Assumptions:
The Appellant argued that the transfer pricing adjustment was based on incorrect assumptions and a preoccupied mind. The Tribunal found that the TPO/DRP had misinterpreted the facts and made an adjustment based on incorrect presumptions. The Tribunal directed the AO to delete the adjustment made on account of royalty payment.

9. Non-Provision of Full Credit of Taxes Claimed:
The Appellant contended that the AO did not give full credit for taxes paid as claimed in the return of income. The Tribunal directed the AO to verify and provide the full credit of taxes paid as per the claim in the return of income.

10. Initiation of Penalty Proceedings:
The Appellant argued that the initiation of penalty proceedings under section 271(1)(c) for concealing income through inaccurate particulars was erroneous. The Tribunal found that the penalty proceedings were not justified as the adjustments made by the AO were deleted.

Conclusion:
The Tribunal allowed the appeal filed by the taxpayer, directing the AO to delete the ALP adjustment on account of royalty payment and to provide full credit for taxes paid as claimed in the return of income. The Tribunal also held that the initiation of penalty proceedings was not justified. The Tribunal's decision was based on the consistent application of the TNMM as the MAM and adherence to the decisions of higher appellate authorities in the taxpayer's own case.