2018 (11) TMI 43 - AT - Income Tax

TPA - selection of MAM for determining ALP of transaction - APM v/s RPM - comparable selection - functinal dissimilarity - Held that - We advert to functions performed by assessee. It is admitted fact that assessee simply purchase products from its AE s and is resold without any further value addition. Assessee has cataragorised itself to be low risk bearing entity. There is no dispute regarding very minimal risk/no risk withstood by assessee on the basis of low intensity function performed by it. The product imported from AEs representing international transaction, is neither processed further, nor used as raw material for manufacturing any other product. Thus on the basis of legal position enumerated hereinabove, in our considered opinion RPM has to be the most appropriate method to determine ALP of transaction having regard to the arrangement between assessee and the AE of simple purchase and sale of product without having any value addition by assessee. Thus, we are inclined to uphold APM to be the MAM for determining ALP of transaction. Once it is held, RPM to be the most appropriate method, comes the turn of AO/TPO/DRP to satisfy himself that not only correct method has been applied by assessee but also that proper data for determination of a repeat under such method has been made available. Admittedly, comparables proposed by assessee and used by Ld.TPO/AO/DRP for purposes of analysis, do have significant intensity functions, as compared to that of assessee. AO/TPO/DRP overlooked these huge differences between low risk function performed by assessee vis-a-vis high intensity functions performed by comparables which is not acceptable when RPM is used as MAM. We are thus of opinion that Ld.AO/TPO erred in not conducting fresh search of comparables which would have strict functional similarity while using RPM as MAM. TPO erred in not conducting fresh search of comparables for purposes of determining the comparability of the arm s length price by using RPM as MAM. Further before DRP even after assessee having submitted additional evidence in relation to fresh comparables for determining ALP by using RPM as most appropriate method was rejected. Adjustment on account of difference in the ALP of the international transaction of receipt of localisation support - Held that - We reject the benefit test applied Ld. TPO. On careful perusal of the agreement it is observed that supply of know-how and training by AE is to the suppliers and not to assessee. In our considered opinion, it cannot be said that such expenditure is subsumed with royalty agreement. Ld.TPO was required to simply determine ALP of transaction, unconnected with the fact, of any benefit that is accrued to assessee. Ld.AO/TPO/DRP has acted contrary to ratio laid down by Hon ble High Court in case of Cushman & Wakefield India (Pvt.)(Ltd.) 2014 (5) TMI 897 - DELHI HIGH COURT . We accordingly set aside the issue to Ld.AO/TPO for deciding this issue within broader parameters

Summary

Issues Involved:
1. Adjustment of income under Section 144C read with Section 143(3) of the Income-tax Act, 1961.
2. Rejection of Transactional Net Margin Method (TNMM) and substitution with Resale Price Method (RPM) for benchmarking international transactions.
3. Adjustment on account of the difference in the arm’s length price of the international transaction of receipt of localization support.
4. Treatment of expenditure incurred on account of payment of royalty as capital expenditure.

Issue-wise Detailed Analysis:

1. Adjustment of income under Section 144C read with Section 143(3) of the Income-tax Act, 1961:
The assessing officer completed the assessment at an income of ?52,40,79,350 against the income of ?36,00,05,207 returned by the appellant. The adjustment of ?13,31,08,735 was made on account of the difference in the arm’s length price of the international transaction of import of finished goods based on the order under Section 92CA(3) by the Transfer Pricing Officer (TPO).

2. Rejection of Transactional Net Margin Method (TNMM) and substitution with Resale Price Method (RPM) for benchmarking international transactions:
The TPO rejected the TNMM applied by the appellant and substituted it with RPM for benchmarking the international transaction of import of finished goods. The TPO observed that the assessee, a limited risk distributor, did not undertake any significant economic functions or value addition while supplying products purchased from its AEs to Maruti. The TPO used RPM as the most appropriate method and computed the arm’s length price using gross basis analysis with selected comparables. The adjustment amounted to ?13,31,08,735. The Tribunal upheld RPM as the most appropriate method but directed the TPO to conduct a fresh search of comparables with similar functional intensity and admit additional evidence submitted by the assessee.

3. Adjustment on account of the difference in the arm’s length price of the international transaction of receipt of localization support:
The TPO made an adjustment of ?52,22,479 by determining the arm’s length price of the localization support services at nil, concluding that no service or benefit was received by the appellant. The Tribunal observed that the TPO should not determine whether the taxpayer derives benefit from any services but should conduct transfer pricing analysis to determine the ALP. The Tribunal set aside the issue to the TPO for deciding within the parameters laid down by the Hon’ble Delhi High Court in the case of Cushman & Wakefield India (Pvt.)(Ltd.).

4. Treatment of expenditure incurred on account of payment of royalty as capital expenditure:
The assessing officer treated the expenditure of ?2,57,43,018 on account of payment of royalty as capital expenditure, holding that the appellant secured an advantage of enduring nature. The Tribunal noted that the issue was covered in the assessee’s own case by the order passed in the preceding assessment year, where the royalty payment was accepted as revenue expenditure. The Tribunal deleted the disallowance, following the precedent set in the earlier years.

Conclusion:
The Tribunal partly allowed the appeal, upholding RPM as the most appropriate method for determining the ALP of the transaction related to the import of products from AE, and directed the TPO to conduct a fresh search of comparables. The Tribunal also set aside the issue of localization support services to the TPO for reconsideration and allowed the royalty payment as revenue expenditure, following the precedent set in the earlier assessment years.