2021 (1) TMI 238 - AT - Income Tax

Transfer pricing adjustment made in respect of royalty payment - HELD THAT - We notice that the co-ordinate bench, in AY 2005-06 and 2006-07, has given a specific direction to the effect that, if the TPO could not find any comparable in respect of royalty payment, then the TPO/AO may consider the royalty payment as part of the international transactions under trading segment and he may consider royalty payment as part of operating cost for the purpose of computing margin in the trading segment. According to Ld A.R, the TPO has followed the alternative direction given by ITAT while giving effect to the order of the ITAT in AY 2005-06 and 2006-07. CIT(A) did not properly consider the direction given by ITAT on an identical issue in AY 2005-06 2006-07, more particularly, the alternative direction given by ITAT. Hence we are inclined to follow the order passed by ITAT in the assessee s own case for AY 2005-06 2006-07. Accordingly, we set aside the order passed by Ld CIT(A) on this issue in all the three years under consideration and, following the decision rendered by ITAT in AY 2005-06 2006-07 on an identical issue, we restore this issue to the file of the AO/TPO in all the three years under consideration with similar direction. Re-computation of deduction allowable u/s 10A - A.R submitted that it is well settled principle that the deduction u/s 10A is allowed at undertaking level and not at entity level and the Ld CIT(A) has, however, considered the profits available at entity level while adjudicating this issue, which is not correct proposition of law - HELD THAT - We notice that the Ld CIT(A) has not discussed on jurisdictional issue. Further, it is the submission of the assessee that the Ld CIT(A) has considered the profits at entity level instead of the considering the profit at undertaking level. In any case, it is the submission of Ld A.R that the assessee was not given opportunity of being heard by the AO before making adjustment in the quantum of deduction allowed u/s 10A . Thus we set aside the order passed by Ld CIT(A) on this issue in all the years under consideration and restore the same to the file of the AO.

Summary

Issues:
1. Transfer pricing adjustment made in respect of royalty payment.
2. Re-computation of deduction allowable u/s 10A of the Act.

Transfer Pricing Adjustment - Royalty Payment:
The assessee, engaged in medical diagnostic equipment business, challenged transfer pricing adjustments on royalty payments for assessment years 2002-03 to 2004-05. Initially, the Tribunal directed the TPO to determine the Arms Length Price (ALP) of royalty payments. Subsequently, the TPO determined the ALP as NIL, leading to disallowance of royalty payments. The assessee contended that no comparables were found, and the TPO treated royalty as part of the operating cost in the trading segment. The CIT(A) upheld the TPO's order. The ITAT directed reconsideration based on earlier orders, setting aside the issue to the TPO/AO for further examination in line with prior directions. The ITAT emphasized that if no comparables were found, royalty payments should be considered part of international transactions under the trading segment. The CIT(A) failed to consider the ITAT's direction, prompting the ITAT to set aside the CIT(A)'s order and restore the issue to the AO/TPO for reconsideration.

Re-computation of Deduction u/s 10A:
The second issue pertained to the re-computation of deduction u/s 10A of the Act. The assessee argued that the AO exceeded jurisdiction by altering the deduction without providing an opportunity for explanation. The ITAT noted that the deduction u/s 10A is allowed at the undertaking level, not entity level. The CIT(A) upheld the AO's action without considering the jurisdictional aspect and the principle that the deduction is granted at the undertaking level. The ITAT, considering the jurisdictional issue and the incorrect consideration of profits at the entity level, set aside the CIT(A)'s order and restored the issue to the AO for proper examination, emphasizing the need for the assessee to be given a fair opportunity to present explanations.

In conclusion, the ITAT, in a detailed judgment, addressed the transfer pricing adjustment on royalty payments and the re-computation of deduction u/s 10A for the assessed years. The ITAT emphasized adherence to prior directions, proper consideration of jurisdictional aspects, and the need for the assessee to have a fair opportunity to present their case. The orders passed by the CIT(A) were set aside, and the issues were restored to the AO/TPO for reconsideration in line with the ITAT's directives.