2020 (3) TMI 947 - AT - Income Tax

TP Adjustment - Determination of ALP in respect of an international transaction between the assessee and its Associate Enterprises (AE) u/s. 92 - application of PSM as the MAM or TNMM - comparable selection - HELD THAT - It is clear from the OECD guidelines that in 'order to determine the profits to be split, the crux is to understand the functional profile of the entities under consideration. Although the comparability analysis is at the heart of the application of the arm's length principle , likewise, a functional analysis has always been a cornerstone of the comparability analysis. In the present case the Assessee leverages on the use of technology from the AE and does not contribute any unique intangibles to the transaction. It may be true that the Assessee aggregated payment of royalty with the transaction of manufacturing as it was closely linked and adopted TNMM but that does not mean that the transactions are so interrelated that they cannot be evaluated separately for applying PSM. Assessee does not make any unique contribution to the transaction, hence PSM in this case cannot be applied. Therefore, we are of the view that TNMM is the Most Appropriate Method in the case of assessee. Tribunal has upheld TNMM as MAM from AY 2007-08 to 2011-12. In those AYs the dispute was whether TNMM or CUP was the MAM. It is for the first time in AY 2013-14 that the revenue has sought to apply PSM as MAM. In the given facts and circumstances, we are of the view that TNM Method is the Most Appropriate Method and the AO is directed to apply the said method in determining the ALP, after affording opportunity of being heard to the assessee. The grounds of appeal of the assessee are treated as allowed. Claim of depreciation of assets acquired from KSL on the basis of valuation report of the Assessee - slump sale - HELD THAT - As far as AY 2013-14 is concerned, in the final assessment order dated July 7, 2017 passed for AY 2013-14, the AO disallowed excess depreciation of ₹ 9,762,694, being the difference between depreciation on value of assets as per valuation report and depreciation on WDV in the hands of KSL. This is because the issue of depreciation had not attained finality in AY 2003-04 the year of slump sale. Now that the issue has been resolved, the DRP has already given a direction on this issue by holding that the issue is consequential to the order for AY 2003-04 and the AO is directed to give consequential effect based on the decision rendered in AY 2003-04. Now that the Tribunal in AY 2003-04 has already approved the value at which the assets were capitalized in the books of account, the depreciation as claimed by the assessee has to be allowed - addition made in the present assessment year cannot be sustained and accordingly the same is directed to be deleted.

Summary

Issues Involved:
1. Determination of Arm's Length Price (ALP) for royalty payments in international transactions.
2. Disallowance of depreciation on assets purchased through slump sale.

Issue-wise Detailed Analysis:

1. Determination of Arm's Length Price (ALP) for Royalty Payments:

The primary issue in both assessment years (AY 2013-14 and AY 2014-15) was the determination of the ALP for royalty payments made by the assessee to its Associate Enterprise (AE), Toyota Motor Corporation, Japan (TMC). The assessee used the Transaction Net Margin Method (TNMM) as the Most Appropriate Method (MAM) to determine the ALP, aggregating the royalty transaction with other manufacturing operations. The Transfer Pricing Officer (TPO) rejected TNMM, arguing that the technology provided by TMC was startup technology with an economic life of 4-5 years and proposed the Profit Split Method (PSM) as the MAM. The TPO attributed 50% of the royalty payment as excessive, leading to an adjustment in the assessee's total income.

The Disputes Resolution Panel (DRP) upheld the TPO's application of PSM, reasoning that the economic facts had changed since the initial years of operation, and the technology's useful economic life had lapsed. The DRP emphasized the complex and inter-related functions justifying PSM as the MAM.

The Tribunal, however, disagreed with the TPO and DRP, stating that the issue of the MAM had already been settled by the Tribunal in earlier years, where TNMM was upheld as the MAM. The Tribunal found no basis for the TPO and DRP's conclusion that the technology was only for startups or that its economic life was just 5 years. The Tribunal highlighted that the conditions necessary for applying PSM were not met, as there was no contribution of unique intangibles by the assessee and the transactions were not so interrelated that they could not be evaluated separately. The Tribunal directed the AO to apply TNMM as the MAM for determining the ALP.

2. Disallowance of Depreciation on Assets Purchased Through Slump Sale:

For AY 2013-14, the assessee challenged the disallowance of depreciation on assets acquired through a slump sale from Kirloskar Systems Limited (KSL) in June 2002. The AO disallowed excess depreciation, arguing that the valuation of assets had not been finalized in AY 2003-04. The Tribunal noted that the issue of valuation had been remanded to the AO for fresh verification in AY 2002-03, and the AO had subsequently allowed the depreciation based on the assessee's valuation report.

The Tribunal held that since the valuation issue had been resolved in AY 2003-04, the depreciation claimed by the assessee for AY 2013-14 should be allowed. Consequently, the addition made by the AO was directed to be deleted.

Conclusion:

The Tribunal allowed the appeals by the assessee for both AY 2013-14 and AY 2014-15. It directed the AO to apply TNMM as the MAM for determining the ALP and to allow the depreciation on assets purchased through slump sale based on the resolved valuation issue.