2019 (11) TMI 705 - AT - Income Tax

Transfer Pricing Adjustment - ALP adjustment - assessee has benchmarked the transaction on TNMM basis - HELD THAT - As decided in MERCK LIMITED VERSUS DY. COMMISSIONER OF INCOME TAX, RANGE 6 (3) , MUMBAI AND VICA-VERSA 2016 (3) TMI 1105 - ITAT MUMBAI We do not think benefit test has too much relevance in the arm s length price ascertainment. When evaluating the ALP of a service, it is wholly irrelevant as to whether the assessee benefits from it or not; the real question which is to be determined in such cases is whether the price of this service is what an independent enterprise would have paid for the same. In case TPO can demonstrate that the consideration for similar services, under the CUP method, is NIL, he can very well do so. That s not, however, his case. He only states that these services are not worth the amount paid by the assessee. Such band statements and sweeping generalizations cannot help the case of the revenue authorities. The assessee has benchmarked the transaction on TNMM basis, and unless the revenue authorities can demonstrate that some other method of ascertaining the arm s length price on the facts of this case will be more appropriate a method of ascertaining the arm s length price, the TNMM cannot be discarded. In the present case, though a finding is given to the effect that no services are rendered, in the light of the contradictions in this finding and the observations above, it is clear that in effect commercial expediency of this payment is questioned. That exercise, in our considered view- particularly in the light of Hon ble Delhi High Court s judgment in the case of EKL Appliances 2012 (4) TMI 346 - DELHI HIGH COURT , cannot be conducted in the course of ascertaining the arm s length price. In view of the above discussions, as also bearing in mind entirety of the circumstance, it is clear that the impugned ALP adjustment is contrary to the scheme of the Act. The authorities below have been swayed by the considerations which were not germane to the issue. We, therefore, uphold the grievances of the assessee and direct the Assessing Officer to delete the ALP adjustments in respect of the payment of fees for technical services. The assessee gets the relief accordingly. Disallowance u/s 14A r.w.r. 8D - assessee had offered suo-moto disallowance - After adjusting the suo-moto disallowance of ₹ 1.13 Lacs as made by the assessee, Ld. AO proposed additional disallowance - HELD THAT - Additional disallowance as made by Ld. AO would not be sustainable in view of the fact that the assessee had already offered suo-moto disallowance in its computation of income which far exceed the exempt income earned by the assessee during the year under consideration. Therefore, by deleting the impugned addition of ₹ 2,404/-, we allow this ground of appeal. Depreciation on Fictitious assets - HELD THAT - Upon perusal of chart, we find that this issue would go back to the file of Ld.AO for re-adjudication de-novo on similar lines as directed by coordinate bench of this Tribunal in assessee s own case for AYs 2007-08 2008-09, ITA No. 3943-44/Mum/2013 order dated 25/01/2017. The Ld. AO is directed to re-adjudicate the same in the light of stand taken in AYs 2007-08 2008-09 pursuant to the aforesaid directions of the Tribunal. Disallowance u/s 145A - HELD THAT - Upon perusal of chart, we find that this issue would also go back to the file of Ld.AO for re-adjudication de-novo on similar lines as directed by co-ordinate bench of this Tribunal in assessee s own case for AYs 2007- 08 2008-09. AO is directed to re-adjudicate the same in the light of stand taken in AYs 2007-08 2008-09 pursuant to the aforesaid directions of the Tribunal. The ground stand allowed for statistical purposes. Disallowance u/s 43B - provision for leave encashment - AR had drawn attention to para 12.2 of the Ld. DRP s order to submit that there was actually a write-back of ₹ 7.55 Lacs during the year and therefore, no disallowance would be warranted - HELD THAT - Keeping in view the submissions made, we direct Ld. AO to re-adjudicate the same de-novo in the light of submissions made by Ld. AR. The ground stand allowed for statistical purposes. Interest u/s 234 and initiation of penalty - HELD THAT - These grounds being consequential, would not require any specific adjudication. The Ld. AO is directed to compute interest in accordance with law.

Issues Involved:
1. Transfer Pricing Adjustments
2. Disallowance under Section 14A
3. Depreciation on Intangible Assets
4. Application of Section 145A
5. Disallowance under Section 43B
6. Charging Interest under Sections 234B and 234D
7. Initiation of Penalty under Section 271(l)(c)

Issue-wise Detailed Analysis:

1. Transfer Pricing Adjustments:
The primary issue was the addition of ?1,12,36,000 in respect of technical consultancy fees paid by the assessee to its Associated Enterprise (AE). The Transfer Pricing Officer (TPO) and the Dispute Resolution Panel (DRP) concluded that the arm's length price (ALP) of the technical know-how fees was Nil, asserting that no tangible benefit was derived from the services. The Tribunal found that similar issues were covered in favor of the assessee by the Tribunal's decision in the case of its group concern, Merck Limited, where the adjustment was deleted. The Tribunal noted contradictions in the findings of the authorities below and held that the payment for the right to receive a package of services should not be questioned based on the actual use of individual services. The Tribunal emphasized that the benefit test is irrelevant in ALP determination and directed the deletion of the impugned additions.

2. Disallowance under Section 14A:
The assessee earned dividend income of ?13,656, which was claimed to be exempt under Section 10(35). The Assessing Officer (AO) computed a disallowance of ?1.16 Lacs under Rule 8D, which included interest and expense disallowances. The Tribunal found that the additional disallowance of ?2,404 was unsustainable as the assessee had already offered a suo-moto disallowance exceeding the exempt income earned. Therefore, the Tribunal deleted the additional disallowance.

3. Depreciation on Intangible Assets:
The assessee claimed depreciation of ?924.21 Lacs on intangible assets. The AO disallowed the claim, citing that the assets were fictitious, a stance confirmed by the DRP. The Tribunal directed the AO to re-adjudicate the issue de-novo, following the directions given in the assessee's own case for AYs 2007-08 and 2008-09.

4. Application of Section 145A:
The AO invoked Section 145A, mandating the inclusive method of accounting, and proposed an adjustment of ?110.43 Lacs due to CENVAT credit receivables. The assessee argued that it followed the net method of accounting, which had no overall impact. The Tribunal directed the AO to re-adjudicate the issue de-novo, in line with the Tribunal's directions in the assessee's own case for AYs 2007-08 and 2008-09.

5. Disallowance under Section 43B:
The AO disallowed a provision for leave encashment amounting to ?57.32 Lacs under Section 43B. The assessee contended that there was a write-back of ?7.55 Lacs during the year, which was not considered. The Tribunal directed the AO to re-adjudicate the issue de-novo, considering the submissions made by the assessee.

6. Charging Interest under Sections 234B and 234D:
The AO charged interest of ?21,87,732 under Section 234B and ?82,49,678 under Section 234D. The Tribunal noted that these grounds were consequential and directed the AO to compute interest in accordance with the law.

7. Initiation of Penalty under Section 271(l)(c):
The AO initiated penalty proceedings under Section 271(l)(c) in respect of transfer pricing adjustments, disallowance of depreciation on intangibles, adjustment under Section 145A, and disallowance of leave salary under Section 43B. The Tribunal did not provide a specific adjudication on this issue, as it was consequential to the other findings.

Conclusion:
The appeal was partly allowed, with directions for re-adjudication on several issues and deletion of certain disallowances. The Tribunal emphasized the need for a consistent approach in line with previous decisions in the assessee's own cases and related group concerns.

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