2018 (5) TMI 946 - AT - Income Tax

Adjustment u/s 92CA - addition on account of adjustments determined by the TPO and treated as cumulative adjustment - benchmarking - commission earned - Held that - A perusal of the order of the TPO shows that the TPO has, in fact, reorganized the business of the assessee thereby putting himself in the shoes of the assessee and deciding which expenditure should be incurred by the assessee for doing its business. The DRP fell into same error by affirming the findings of the TPO. In so far as the commission earned is concerned, we find that in the earlier years, the rate of commission was 2% which came down to 1% from 2008. This means that since 2008 and upto 2012, the Revenue has accepted the charging of commission @1%. It is only in this year the Revenue has changed its stand and questioned the rate of commission @ 1% and changed it to 4%. This shows that the TPO has compared the rate of commission charged by the assessee with the rate of commission charged by the assessee to its other AEs. This is clearly barred by the provisions of section 92F(ii) r.w.s. 92 of the Act. What the TPO has done is he has compared controlled transaction with other controlled transaction whereas he should have compared the controlled transaction with other uncontrolled transactions. Action of the Assessing Officer is not as per the provisions of law because section 92F(ii) defines ALP as a price which is applied or proposed to be applied in a transaction between persons other than associated enterprises in uncontrolled conditions. Considering all no merit in the adjustments made by the TPO/DRP. We, therefore, set aside the findings of the DRP and direct the Assessing Officer to delete the addition on account of adjustments determined by the TPO and treated as cumulative adjustment u/s 92CA. Assessee has bench marked the transaction by using the combined transaction approach by applying TNMM as against the approach of TPO in bench marking the transaction separately. The bench marking done by the assessee is correct and the approach of the TPO is not sustainable.

Issues Involved:
1. Benchmarking of payment of royalty and technical fees using the Comparable Uncontrolled Price (CUP) method.
2. Transfer Pricing (TP) adjustments for commission rate.

Detailed Analysis:

1. Benchmarking of Payment of Royalty and Technical Fees:

The assessee challenged the correctness of the order framed under section 143(3) read with section 144C of the Income-tax Act, 1961, for the assessment year 2013-14. The primary grievance was that the Dispute Resolution Panel (DRP) and Transfer Pricing Officer (TPO) erred in benchmarking the payment of royalty and technical fees by taking the Arm's Length Price (ALP) at Rs. NIL using the CUP method.

The TPO issued a show cause notice asking the assessee to justify the payment of royalty and technical fees. The TPO concluded that the assessee failed to demonstrate any benefit from the brand and technical assistance, thus treating the ALP for both payments as NIL. The TPO argued that the brand was unknown in India, and the marketing efforts were solely by the assessee. For technical fees, the TPO stated that the manufacturer (AE) should have borne the cost of training customers, and the payment was due to the related party relationship.

The DRP upheld the TPO's findings, emphasizing that the assessee failed to substantiate the services claimed and their relevance to its business. The DRP referred to OECD guidelines, which require proving that services provide economic or commercial value to the paying entity.

The Tribunal observed that both the TPO and DRP delved into the necessity of the expenses vis-à-vis the benefits, which is beyond the TPO's jurisdiction. The TPO’s role is to determine if the international transaction was at ALP, not to assess the business need for the expenses. The Tribunal cited the Gujarat High Court's decision in Rajesh Babubhai Damania vs. CIT, stressing that the appellate jurisdiction should not give "one more innings" to the Assessing Officer (AO) when sufficient material is already available.

Furthermore, the Tribunal noted that neither the TPO nor the DRP rejected the TNMM method adopted by the assessee. According to the Delhi High Court's judgment in Li and Fung India [P] Ltd vs. CIT, the TPO must first reject the assessee's method before adopting a different approach. The Tribunal concluded that the TPO's action was legally flawed, and the DRP erred in affirming it.

The Tribunal also dismissed the Revenue's contention that the payment of royalty led to double deduction, noting that the raw material was purchased from one AE, while royalty was paid to another AE.

2. TP Adjustments for Commission Rate:

The TPO adjusted the commission rate from 1% to 4%, arguing that the reduction from 4% to 1% was not justified by any economic and business principles. The TPO compared the commission rate charged by the assessee to its other AEs, which is against the provisions of section 92F(ii) read with section 92 of the Act, as it compares controlled transactions with other controlled transactions instead of uncontrolled ones.

The Tribunal noted that the commission rate of 1% had been accepted by the Revenue in previous years (2008-2012). The sudden change in the Revenue's stance for the assessment year 2013-14 was not justified. The Tribunal emphasized that the TPO should compare controlled transactions with uncontrolled transactions to determine the ALP.

The Tribunal concluded that the TPO's adjustments were not in accordance with the law. The Tribunal set aside the DRP's findings and directed the AO to delete the addition on account of adjustments determined by the TPO, amounting to ?5,62,52,600.

Conclusion:

The Tribunal allowed the appeal of the assessee, holding that the benchmarking done by the assessee using the TNMM method was correct and the TPO's approach was unsustainable. The Tribunal directed the AO to delete the additions made by the TPO. The order was pronounced in the open court on 07.05.2018.

← Previous Next →