2019 (9) TMI 609 - AT - Income Tax

Subvention/ subsidy money receipt from its parent company Nalco, USA - revenue receipt exigible to tax or not? - Assessing Officer / TPO, pursuant to directions of DRP treated the said subvention amount received from its associated enterprises as non-operating income - HELD THAT - The issue vis- -vis its taxability i.e. receipt of subvention from parent company now stands settled by recent decision of Hon'ble Supreme Court in Siemens Public Communication Network (P.) Ltd. Vs. CIT 2016 (12) TMI 507 - SUPREME COURT had held that voluntary payments made by parent company to its loss making Indian company can also be understood to be payments made in order to protect the capital investment of assessee company. It was further held that if that is so, then the payment in question could not be held to be revenue receipts, hence they were capital receipts in the hands of assessee. Applying the said proposition to the facts of present case, where the assessee had received the alleged subvention amount or the subsidy as referred to by the Assessing Officer / TPO / DRP, the amount received by assessee from its parent company Nalco, USA was a capital receipt in the hands of assessee and hence, was not taxable in its hands. Treatment of said amount while determining the PLI of assessee - assessee claims that the amount is to be taken as operating income since the said receipt was to make good losses incurred by assessee in earlier years and also current year - HELD THAT - Once the subsidy of ₹ 65.19 crores was credited, there was profit of ₹ 2.03 crores. In other words, profit during the year was attributable to subvention amount of ₹ 65.19 crores and hence, it cannot be held that the amount was not operational in nature. The item of receipt was undoubtedly, an exceptional item of income but was not an extraordinary item of income. The assessee was also compensated for additional revenue expenses incurred by it for transferring its establishment from Kolkata to Pune and then running the same at Pune. Such onetime payment received by assessee is thus, operating in nature. The learned Authorized Representative for the assessee had pointed out that the subvention amount related to two years. We hold that amount relatable to the year, need to be considered for computing PLI of the assessee. We direct the Assessing Officer to carry out the said exercise. We in the final analysis hold that subvention income is capital receipt in the hands of assessee, hence not taxable. Further, we hold that the said subvention amount is operating in nature and has to be included as operating income while computing PLI in the hands of assessee restricted to the amount relatable to the instant assessment year. Thus, ground of appeal No.2 raised by assessee against taxability of subvention income is allowed and ground of appeal No.11 also stands allowed in favour of assessee. Depreciation on assets installed at the customers premises - HELD THAT - Decided in favour of assessee as relying on own case 2017 (4) TMI 446 - ITAT KOLKATA Transfer pricing adjustment to the value of management charges paid to associated enterprises - case of assessee before us is that it had provided substantive documentary evidences before the TPO and also submitted additional evidences before the DRP demonstrating the need, actual receipt of services and benefit thereon - adjustment made on account of charges for intra-group services paid by assessee to its associated enterprises - HELD THAT - In the facts and circumstances of the present case before us, which are similar to the facts and circumstances in the case of Emerson Climate Technologies (India) P. Ltd. Vs. DCIT 2018 (6) TMI 1565 - ITAT PUNE and Eaton Fluid Power Ltd. Vs. ACIT , 2018 (6) TMI 1266 - ITAT PUNE we hold that there is no merit in the observations of TPO in holding that the assessee had not availed any services, hence the arm's length price of transactions was to be adopted at Nil. We reverse the findings of authorities below in this regard. Intra-group fees paid by assessee to Nalco US for providing services such as information technology, engineering support services, business development services, supply chain services - HELD THAT - Services were availed, payment for which was made at cost without any markup and such cost was attributed to the assessee on the basis of particular methodology adopted by US company for recovering the expenditure from all entities under Nalco group and the same cannot be disturbed in the hands of assessee. The payment made by assessee was thus, at arm's length price and no adjustment needs to be made on this account. Further, in any case, where when in the hands of Nalco US the services have been taxed as fees for included services, then corollary which follows is that the arm's length price of payment made for such services cannot be determined at Nil. Accordingly, we reverse the order of Assessing Officer/TPO/DRP and the grounds of appeal are thus, allowed Adjustment made vis- -vis international transactions pertaining to royalty - whether CUP method was the most appropriate method to benchmark the aforesaid transaction of payment of royalty? - HELD THAT - Applying the rule of consistency which has been applied by the TPO himself in earlier years and also where the rate of payment of royalty at 6% had been approved by RBI for the earlier years and also for the part of year, then the same should not have been disturbed. The second aspect of issue is whether the rate of payment of royalty which has been approved by the Government of India i.e. RBI would constitute CUP data and the same could be applied for holding the transactions to be at arm's length. This proposition has been applied by the Hon ble Bombay High Court in CIT Vs. SGS India (P.) Ltd. 2015 (11) TMI 1619 - BOMBAY HIGH COURT . In case the said dictate is applied, then we hold that the payment of royalty by assessee to its associated enterprise @ 6% / 4% is to be considered at arm's length rate and no adjustment is warranted in the hands of assessee. Where the royalty rates were approved by RBI, CUP method was the most appropriate method to be applied to determine arm's length price of royalty payments made during the year. Accordingly, we reverse the order of Assessing Officer in holding that royalty payment is to be benchmarked with that of payment of raw material and other goods bought. The said transaction of royalty payment is to be benchmarked independently by applying CUP method and since the rates of commission paid to other concerns is at arm's length, no adjustment on this account is warranted in the hands of assessee. Accordingly, the TPO is directed to re-calculate the PLI of assessee by excluding the payment of royalty out of PLI determined for the segment of payment for raw materials and other goods bought - Decided in favour of assessee Benchmarking analysis applied by authorities below while using TNMM method for benchmarking the international transactions pertaining to manufacturing segment - assessee is also aggrieved by the set of comparables which are finally selected by the Assessing Officer / TPO - HELD THAT - It is only after the PLI / margins of assessee are re-worked in line with our decision in respect of various issues raised which affect the operating margins of assessee, the need would come to look at the margins of comparables. Our decision on the inclusion / exclusion of comparables at this stage would be an academic exercise. In such facts and circumstances of the case, we first direct the Assessing Officer to re-work the operating margins of assessee and thereafter to look into the objections raised by assessee vis- -vis the comparables finally selected and also the comparables which have not been finally selected. The assessee shall furnish complete details in this regard and the Assessing Officer shall decide the issue of final selection of comparables after taking into consideration the settled position on the issues after appreciating the facts relating to each of the comparables and in accordance with law. Hence, the ground of appeal raised by assessee is allowed for statistical purposes. Transfer pricing adjustment vis- -vis in proportion with the value of international transactions - HELD THAT - Issue now stands settled in CIT Vs. Hindustan Unilever Ltd. 2018 (10) TMI 1611 - SC ORDER and CIT Vs. Firestone International P. Ltd. 2015 (6) TMI 1123 - BOMBAY HIGH COURT . The benchmarking on account of transfer pricing adjustment, if any, has to be done for associated enterprises transactions only and not the entire turnover. Accordingly, we direct the Assessing Officer to carry out the said exercise after verifying the computation of proportionate adjustment filed by assessee before us and also after calculating the margins of assessee in line with our directions in the paras above. Use of multiple year data stands decided against the assessee, hence the same is dismissed. Non-granting of benefit of /- 5% range - decided against the assessee and hence, the same is dismissed. Charging of interest under section 234B of the Act, which is consequential, hence the same is also dismissed.

Summary

Issues Involved:

1. Transfer Pricing Adjustment
2. Corporate Taxation
3. Depreciation Disallowance
4. Management Charges to Associated Enterprises
5. Royalty Payments Benchmarking
6. Computation of Arm's Length Price for Manufacturing Segment
7. Proportionate Adjustment of Transfer Pricing
8. Treatment of Subsidy
9. Use of Multiple Year Data
10. Non-granting of +/- 5% Range
11. Levying of Interest under Section 234B
12. Initiation of Penalty Proceedings

Issue-wise Detailed Analysis:

1. Transfer Pricing Adjustment:
The assessee challenged the transfer pricing adjustment of INR 7,95,78,453 made by the AO/TPO, arguing that the benchmarking methodology adopted by the assessee was unjustly modified. The Tribunal noted that the TPO had not applied any specific method as prescribed by law and had not carried out any comparability analysis. The Tribunal emphasized that the TPO cannot sit in the judgment of the business model of the assessee and its intention to avail or not to avail any services from its associated enterprises. The role of the TPO is to determine the arm's length price of international transactions undertaken by the assessee and whether the same is at arm's length price when compared with similar transactions undertaken by external entities or internal comparables.

2. Corporate Taxation:
The assessee received INR 65,19,47,000 as subvention money from its parent company, which was treated as a revenue receipt by the AO/TPO. The Tribunal referred to the decision of the Hon'ble Supreme Court in Siemens Public Communication Network (P.) Ltd. Vs. CIT, holding that subvention received by the assessee was a capital receipt and not taxable. Consequently, the Tribunal directed the AO to treat the subvention amount as a capital receipt and not include it in the operating income while computing the PLI for the year under consideration.

3. Depreciation Disallowance:
The AO disallowed depreciation of INR 64,09,577 on plant and machinery installed at customers' premises, arguing that they were not 'put to use' in the business of the assessee. The Tribunal followed the decision of the Kolkata Bench of Tribunal in the assessee's own case for assessment year 2008-09 and allowed the claim of depreciation.

4. Management Charges to Associated Enterprises:
The assessee paid INR 25,70,30,000 to Nalco Singapore and INR 12,73,22,000 to Nalco US for regional management assistance and headquarter common expenses, respectively. The TPO rejected the methodology adopted by the assessee and determined the arm's length price at Nil. The Tribunal, however, found that the assessee had demonstrated the availment of intra-group services and provided substantive documentary evidence. The Tribunal held that the TPO cannot question the need for services availed by the assessee and reversed the findings of the authorities below.

5. Royalty Payments Benchmarking:
The assessee applied the CUP method for benchmarking the payment of royalty of INR 12,79,33,000 to Nalco IP Holder LLC. The TPO rejected this method and aggregated the payment of royalty with other transactions, applying the TNMM method. The Tribunal held that the CUP method was the most appropriate method for determining the arm's length price of royalty payments and directed the TPO to re-calculate the PLI by excluding the payment of royalty from the PLI determined for the segment of payment for raw materials and other goods bought.

6. Computation of Arm's Length Price for Manufacturing Segment:
The Tribunal directed the AO to re-work the operating margins of the assessee after considering the subvention amount as operating income, allowing the payment of intra-group services and royalty at arm's length price. The Tribunal emphasized that the AO should then look into the objections raised by the assessee regarding the comparables finally selected and those not selected.

7. Proportionate Adjustment of Transfer Pricing:
The Tribunal directed the AO to restrict the transfer pricing adjustment to the value of international transactions, following the dictate of the Hon'ble Supreme Court in CIT Vs. Hindustan Unilever Ltd. and the Hon'ble Bombay High Court in CIT Vs. Firestone International P. Ltd.

8. Treatment of Subsidy:
The Tribunal held that the subvention amount received by the assessee from its parent company was a capital receipt and not taxable. However, it was considered operating in nature for computing the PLI, as it was received to make good losses incurred by the assessee.

9. Use of Multiple Year Data:
The Tribunal dismissed the ground of appeal regarding the use of multiple year data against the assessee.

10. Non-granting of +/- 5% Range:
The Tribunal dismissed the ground of appeal regarding the non-granting of the benefit of +/- 5% range as per the proviso to Section 92C(2) of the Income Tax Act, 1961.

11. Levying of Interest under Section 234B:
The Tribunal noted that the issue of charging interest under Section 234B is consequential and dismissed the ground of appeal.

12. Initiation of Penalty Proceedings:
The Tribunal dismissed the ground of appeal regarding the initiation of penalty proceedings under section 271(1)(c) of the Act as premature.

Conclusion:
The Tribunal partly allowed the appeal of the assessee, providing relief on several grounds related to transfer pricing adjustments, corporate taxation, depreciation disallowance, and treatment of subvention income, while dismissing other grounds.