2020 (5) TMI 305 - AT - Income Tax

TP Adjustment - selection of MAM - CUP method against the TNMM as the most appropriate method - HELD THAT - Hon ble Jurisdictional High Court of Punjab Haryana in NISSIN BRAKE INDIA PVT. LTD. . 2020 (1) TMI 1190 - PUNJAB AND HARYANA HIGH COURT held that there is no need to deviate from TNMM followed by the assessee to CUP method followed by the revenue. Hence, keeping in view the judgment above we hereby direct the revenue to determine adjustments considering the TNMM as the most appropriate method. TPA - Comparable selection - rejection of one comparable selected by the assessee in their TP documentation and selection of five comparables by the revenue in their TP study - HELD THAT - Since, the business of the assessee is core auto components , we hold that it cannot be compared with an entity which is in the business of non- core auto components . Capacity Utilization Adjustment - HELD THAT - We have gone through the record and the orders of the Tribunal for the earlier three assessment years i. e. assessment yeas 2010-11, 2012-13 and 2013-14 wherein the capacity utilization adjustment has been duly granted. Keeping in view the industrial standing of the comparable, we hereby direct that the same benefit may be accorded in the instant year. Brought forward losses - HELD THAT - AO is directed to consider relief on account of brought forward losses as per the Income Tax Act after taking into consideration the business losses and unabsorbed depreciation as per the earlier returns filed by the assessee.

Summary

Issues Involved:

1. Assessment of total income.
2. Transfer pricing adjustment on substantive basis.
3. Application of benefit test and Comparable Uncontrolled Price (CUP) method.
4. Demonstration of benefit received from royalty and product development fees.
5. Determination of Arm's Length Price (ALP) for royalty and product development payments.
6. Commercial expediency of royalty and product development expenditure.
7. Rejection of supplementary benchmarking exercise.
8. Comparison with third-party payments.
9. Consideration of group companies' payments.
10. Evidence for product development fees.
11. Reliance on prior years' orders.
12. Acceptance of Transactional Net Margin Method (TNMM) in prior years.
13. Rejection of comparable company in transfer pricing documentation.
14. Selection of additional comparable companies.
15. Profit Level Indicator (PBDIT/Sales).
16. Adjustment for under-utilization of capacity.
17. Capacity utilization adjustment in prior years.
18. Inclusion of royalty and product development fees in total value of international transactions.
19. Relief on brought forward losses.
20. Interest under sections 234B and 234C.
21. Penalty proceedings under section 271(1)(c).

Detailed Analysis:

1. Assessment of Total Income:
The assessee contested the assessment of total income at INR 19,52,28,784 against the returned income of Nil. The Tribunal found that the adjustments made by the AO were not justified and directed the revenue to reassess the income considering the TNMM as the most appropriate method.

2. Transfer Pricing Adjustment on Substantive Basis:
The AO made a substantive adjustment of INR 7,21,09,339 and a protective adjustment of INR 1,86,28,342. The Tribunal directed the revenue to determine adjustments using TNMM as the most appropriate method, following the judgment of the Jurisdictional High Court.

3. Application of Benefit Test and CUP Method:
The AO applied the benefit test and CUP method to benchmark the ALP of royalty and product development payments as Nil. The Tribunal noted that this approach was previously rejected in the assessee's own case for AY 2013-14 and AY 2014-15 and directed the revenue to follow TNMM.

4. Demonstration of Benefit Received:
The AO held that the assessee had not demonstrated any benefit received from the royalty and product development fees paid to AEs. The Tribunal found that the assessee had provided sufficient evidence of the benefits received and directed the revenue to consider this evidence.

5. Determination of ALP for Royalty and Product Development Payments:
The AO determined the ALP of royalty and product development payments as Nil, alleging that the effective royalty payments amounted to 7.2%. The Tribunal directed the revenue to reassess the ALP using TNMM, considering the expenses related to the royalty and product development payments.

6. Commercial Expediency:
The AO questioned the commercial expediency of the royalty and product development expenditure. The Tribunal found that the expenditure was incurred wholly and exclusively for business purposes and directed the revenue to accept the assessee's contention.

7. Rejection of Supplementary Benchmarking Exercise:
The AO rejected the supplementary benchmarking exercise for payment of royalty. The Tribunal directed the revenue to consider the benchmarking submitted by the assessee, comparing the transaction with companies operating in the automotive industry.

8. Comparison with Third-Party Payments:
The AO did not consider the benchmarking showing that third parties also paid royalty to Nissin Kogyo at a similar rate. The Tribunal directed the revenue to take this into account.

9. Consideration of Group Companies' Payments:
The AO did not consider that other group companies in the Nissin Group also paid royalty and product development fees to Nissin Kogyo. The Tribunal directed the revenue to consider this evidence.

10. Evidence for Product Development Fees:
The AO did not consider the detailed evidence furnished by the assessee regarding product development fees. The Tribunal directed the revenue to review the evidence provided.

11. Reliance on Prior Years' Orders:
The AO relied on prior years' orders despite sufficient information/documentation being furnished for the current year. The Tribunal directed the revenue to consider the current year's documentation.

12. Acceptance of TNMM in Prior Years:
The AO disregarded the approach adopted in prior years where TNMM was accepted as the most appropriate method. The Tribunal directed the revenue to follow TNMM as the most appropriate method.

13. Rejection of Comparable Company:
The AO rejected one comparable company selected by the assessee in its transfer pricing documentation. The Tribunal directed the revenue to reassess the comparables considering the functional similarity.

14. Selection of Additional Comparable Companies:
The AO selected additional comparable companies for determining the ALP of the manufacturing segment. The Tribunal reviewed the comparables and directed the revenue to consider only those that are functionally similar.

15. Profit Level Indicator (PBDIT/Sales):
The AO rejected the alternative approach to consider PBDIT/Sales as the Profit Level Indicator. The Tribunal directed the revenue to reassess using the appropriate Profit Level Indicator.

16. Adjustment for Under-Utilization of Capacity:
The AO rejected the adjustment sought for under-utilization of capacity. The Tribunal directed the revenue to grant the capacity utilization adjustment, considering the assessee's different level of capacity compared to comparables.

17. Capacity Utilization Adjustment in Prior Years:
The AO disregarded the approach adopted in prior years where capacity utilization adjustment was granted. The Tribunal directed the revenue to grant the same benefit for the current year.

18. Inclusion of Royalty and Product Development Fees:
The AO included the payment of royalty and product development fees while calculating the total value of international transactions. The Tribunal directed the revenue to reassess the total value excluding these payments.

19. Relief on Brought Forward Losses:
The AO failed to provide relief on account of brought forward losses. The Tribunal directed the AO to consider the relief as per the Income Tax Act.

20. Interest Under Sections 234B and 234C:
The AO proposed to charge interest under sections 234B and 234C. The Tribunal directed the AO to reassess the interest charges based on the revised income assessment.

21. Penalty Proceedings Under Section 271(1)(c):
The AO initiated penalty proceedings under section 271(1)(c). The Tribunal did not find sufficient grounds for the penalty and directed the AO to drop the proceedings.

Conclusion:
The appeal of the assessee was allowed, with the Tribunal directing the revenue to reassess the adjustments using TNMM as the most appropriate method, consider the evidence provided by the assessee, and grant the necessary reliefs as per the Income Tax Act.