9911796707
|
Home
Forgot password New User/ Regiser ⇒ Register to get Live Demo
2021 (1) TMI 472 - AT - Income TaxTP Adjustment - royalty paid by the assessee to its AE - determining of the ALP of royalty at nil by the TPO - benchmarking of the transaction of payment of royalty by the assessee to its AE - HELD THAT - It is a matter of fact borne from the records that the TPO in the course of the remand proceedings had vide his report dated 14th November, 2014 accepted that the assessee had received technical assistance from its AE. On a perusal of the order passed by the TPO, we find that he had without following any of the methods prescribed in Sec. 92C determined the arm s length price of the royalty paid by the assessee to its AE at Nil, for the reason, that as per him the assessee was not required to pay any royalty without receiving any new technology from the AE. - TPO had clearly traversed beyond scope of his jurisdiction which is restricted to determination of the arm s length price of the transaction by following any of the method provided in Sec. 92C - Also, the TPO is not vested with any jurisdiction to question the commercial expediency of the transaction carried out by the assessee with its AE, and his jurisdiction is restricted to determining of the arm s length price of the transaction Now when the TPO without following any of the methods prescribed under Sec. 92C of the Act had determined the ALP of the royalty paid by the assessee to its AE at Nil, the same, on the said count also is liable to be struck down. Alternate transfer pricing adjustment made by the TPO by selecting CUP method and considering an agreement entered into between two group companies of the assessee i.e Dow UK King Lynn Plant (Dow, UK) with Dow BV (Dow Netherland), whereby Dow, UK had paid royalty @ 3% of its domestic sales and @ 5% of its export sales for manufacture and sale of Chlorpyrifos - We are unable to persuade ourselves to accept the determining of the alternate transfer pricing adjustment of 5% of the export sales made by the TPO. Admittedly, the aforesaid transaction acted upon by the TPO for benchmarking the royalty paid by the assessee to its AE is a transaction between two AE s and hence, the same by no means could have been regarded as a valid comparable. As per Sec. 92F(ii) of the Act, the Arm s Length Price means a price which is applied or proposed to be applied in a transaction between persons other than associated enterprises in uncontrolled conditions. Also, Rule 10B(1)(a) provides that for the purpose of applying CUP method the price paid by the assessee to its AE is to be compared with an uncontrolled transaction. Insofar the definition of Uncontrolled transaction is concerned, the same is provided in Rule 10A(ab), as per which, the same means a transaction between enterprises other than associated enterprises, whether resident or non-resident. As the aforesaid transaction considered by the TPO is between two AE s, the same, thus, being in blatant violation of the mandate of Sec.92F(ii) r.w. Rule 10B(i)(a) could not have been considered for the purpose of determining the arm s length price of the royalty paid by the assessee to its AE. Our aforesaid view is supported by the decision of a third member of the ITAT, Mumbai in the case of Tecnimont ICB P. Ltd. 2013 (9) TMI 595 - ITAT MUMBAI wherein held by the Tribunal that a controlled transaction or a transaction with an AE cannot be taken as a comparable for the purpose of determining the arm s length price of an international transaction of the assessee with its AE. Accordingly, in the backdrop of our aforesaid deliberations, we herein vacate the alternate transfer pricing adjustment. Sustainability of the arm s length price determined by the TPO in the course of the remand proceedings by benchmarking the royalty transaction on the basis of an agreement between AARC Corporation and CCT Corporation found in the Royaltstat database - We concur with the ld. A.R that what has been relied and acted upon by the TPO is only an amendment agreement and as the full agreement is neither available in the Royaltstat database nor in the public domain, therefore, in the absence of the terms and conditions being available the same could not have been adopted for benchmarking the payment of royalty by the assessee to its AE. Since the agreement selected by the TPO was not in force during the year, therefore, we agree with the ld. A.R that the same could not have been considered for the purpose of benchmarking the payment of royalty by the assessee to its AE. As the aforesaid agreement had been entered into between the parties based in USA, therefore, on account of geographical difference between the aforesaid agreements the same could not have been feasibly adopted for the purpose of comparability .Also as the products licensed under the aforesaid amendment agreement are biological granular matrix pest control as opposed to Chlorpyrifos in the case of the assessee, therefore, on account of the variance in the products also the aforesaid agreement could not have been selected for the purpose of comparability. Benchmarking the royalty paid by the assessee to its AE using CUP method - On a perusal of the orders of the lower authorities, we find that they had accepted the benchmarking analysis applying the TNM method for all other transactions. We find that the CUP method cannot be applied as the TPO has not been able to find a similar transaction which could be compared with the transaction of the assessee company. As regards the remaining methods, viz. Resale Price Method (RPM), Cost Plus Method (CPM) and Profit Split Method (PSM), the same are not applicable to the aforesaid transaction under consideration i.e payment of royalty by the assessee to its AE. As such, we are of the considered view that since comparable transactions cannot be found under the CUP method AND RPM, CPM PSM are not applicable on the prevalent facts, therefore, the transaction of payment of royalty by the assessee to its AE had rightly been benchmarked by the assessee by applying the TNM method - as the net margin of the assessee company is shown to be higher than the margin of the comparables, therefore, the adjustment made by TPO/DRP on the said count also could not have been sustained. We herein conclude that the transfer pricing adjustment made by the AO/TPO as regards the royalty paid by the assessee company to its AE viz. Dow AgroSciences BV cannot be sustained and is liable to be vacated. Accordingly, we herein direct the A.O to delete the transfer pricing adjustment. Transfer pricing adjustment as regards the Intra-Group services received by the assessee from its AEs - HELD THAT - Lower authorities had erred in rejecting the benchmarking analysis of the assessee on the ground that the cost and benefit analysis was not done by the assessee, and it had not shown as to what benefit was derived by it from rendition of the aforesaid services by its AEs. We are afraid that the aforesaid observations of the lower authorities cannot be sustained. It is not obligatory for the assessee to demonstrate as to whether or not the international transaction had resulted into an economic benefit or not, for the reason, that the same would depend on various factors and would be beyond the control of the assessee. Apart from that, whether a benefit is obtained is a matter of perception for a businessman, and it is not open for the revenue to sit in judgment over this exercise. Accordingly, we are unable to subscribe to the rejection of the benchmarking analysis by the TPO/DRP, for the reason, that the assessee had failed to demonstrate the benefits which were derived by it from rendition of the services by its AEs - Also, we are unable to persuade ourselves to subscribe to the determination of the ALP of the Intra-Group Services received by the assessee from its AEs at Nil by the TPO without following any of the method provided in Sec. 92C. TPO is obligated to benchmark the arm s length price of an international transaction by adopting any of the prescribed method contemplated in Sec. 92C of the Act, failing which the adjustments made by him cannot be sustained in the eyes of law. Accordingly, in the backdrop of our aforesaid deliberations, the transfer pricing adjustment carried out by the TPO as regards the intra-group services received by the assessee from its AEs cannot be sustained and is liable to be struck down. Benchmarking of the intra-group services received by the assessee from its AEs by applying TNM method could not have been faulted with by the lower authorities. D.R had stated that majority of the payments were made by the assessee to a Chinese AE, which primarily comprised of a payment stated to have been made in respect of services of a person, viz. Mr. Jeorge La Roza who is stated to be responsible for overall commercial performance of the region - The details as regards the services rendered by Mr. Jeorge La Roza to the assessee, as well as the basis of the charge so raised formed part of the additional evidence that was filed by the assessee with the DRP. In fact, no adverse inference as regards the aforesaid payment made by the assessee company finds any mention in the order of the DRP. In our considered view, as there is no justifiable reason for drawing of any adverse inferences as regards the payments that were made by the assessee to the aforesaid person, we, thus, not being able to persuade ourselves to subscribe to the claim of the ld. D.R that there was no material available on record which would justify the basis of the costs to the AE, reject the same. We herein vacate the transfer pricing adjustment made by the AO/TPO as regards the intra-group services received by the assessee from its aforesaid AEs. Error computing its tax liability and also allowed short credit of advance tax deposited - HELD THAT - As stated by the assessee that a rectification application dated 01.03.2016 had thereafter been filed with the A.O seeking rectification of the aforesaid mistakes, which, however, is pending as on date. It is stated by the assessee that the A.O may be directed to rectify the errors in light of the rectification application filed by the assessee. We have given a thoughtful consideration and in the backdrop of the aforesaid claim of the assessee, we direct the A.O to consider its aforesaid grievances while giving appellate effect to our order.
Issues Involved:
1. Adjustment to the total income. 2. Transfer Pricing Adjustments. 3. Payment of Royalty to Associated Enterprise (AE). 4. Availing of Information Technology Services, Finance and Treasury Support Services, Financial and Accounting Support Services, and Legal and Administrative Support Services from AEs. 5. Short granting of credit of advance tax paid. 6. Short grant of credit for tax deducted at source (TDS). 7. Levy of interest under sections 234B and 234C of the Income Tax Act. 8. Initiation of penalty proceedings under section 271(1)(c) of the Income Tax Act. Detailed Analysis: 1. Adjustment to the Total Income: The Assessing Officer (AO) assessed the total income of the assessee company at ?88,34,41,810 against the returned income of ?80,04,98,533 for A.Y. 2010-11. This adjustment was contested by the assessee. 2. Transfer Pricing Adjustments: The Transfer Pricing Officer (TPO) made adjustments to the Arm's Length Price (ALP) of international transactions. The adjustments were primarily related to the payment of royalty and intra-group services received from AEs. 3. Payment of Royalty to Associated Enterprise (AE): - General: The TPO made an adjustment of ?4,29,47,493 to the total income of the assessee under Section 92CA(3) of the Act on account of the adjustment in the ALP of the international transaction of payment of royalty. - Rejection of Economic Analysis: The TPO did not accept the economic analysis undertaken by the assessee, including the Transactional Net Margin Method (TNMM), and rejected the Comparable Uncontrolled Price (CUP) method as the appropriate method. - Disregarding Commercial Benefits: The TPO did not appreciate the commercial benefits received from the AE and the commercial rationale for extending the technology agreement and making royalty payments. - Inappropriately Considered Controlled Transaction as CUP: The TPO compared the royalty rate paid by the assessee to its AE with a controlled transaction (i.e., the royalty rate paid by Dow UK to Dow Netherlands) and suggested an alternate adjustment. - Additional Evidence: The assessee submitted additional evidence to substantiate the receipt of technical assistance from its AE. The TPO accepted that the assessee received technical assistance but argued that no new technology was received, thus no royalty should be paid. - Judicial Pronouncements: The Tribunal referred to various judicial pronouncements, including the Hon'ble High Court of Bombay and the ITAT, which supported the assessee's stance on the royalty payments being at arm's length. 4. Availing of Information Technology Services, Finance and Treasury Support Services, Financial and Accounting Support Services, and Legal and Administrative Support Services from AEs: - General: The TPO made an adjustment of ?3,99,95,779 to the total income of the assessee under Section 92CA(3) of the Act on account of the adjustment in the ALP of the international transaction of availing of services. - Rejection of Economic Analysis: The TPO did not accept the economic analysis undertaken by the assessee, including the analysis using TNMM. - Inappropriate Application of CUP Method: The TPO used a hypothetical CUP method for determining the ALP, which was not in accordance with the transfer pricing regulations. - Benefit Test/Commercial Expediency: The TPO failed to appreciate the business model and the benefits derived from the services rendered by the AEs. - Ignored Evidence: The TPO brushed aside the additional evidence submitted by the assessee to prove the existence and benefits received from the services. - Judicial Pronouncements: The Tribunal referred to various judicial pronouncements which supported the assessee's stance on the intra-group services being at arm's length. 5. Short Granting of Credit of Advance Tax Paid: The AO granted credit of advance tax of ?23,00,000 against the total advance tax paid by the assessee of ?27,70,00,000. The Tribunal directed the AO to rectify the errors in light of the rectification application filed by the assessee. 6. Short Grant of Credit for Tax Deducted at Source (TDS): The AO granted credit of TDS of ?1,35,18,126 against the total TDS credit claimed by the assessee of ?1,46,98,582. The Tribunal directed the AO to consider the assessee's grievance while giving appellate effect to the order. 7. Levy of Interest under Sections 234B and 234C of the Income Tax Act: - Section 234B: The AO levied interest of ?3,29,22,946 under Section 234B of the Act. - Section 234C: The AO levied interest of ?61,07,852 under Section 234C of the Act. The Tribunal directed the AO to consider the assessee's grievance while giving appellate effect to the order. 8. Initiation of Penalty Proceedings under Section 271(1)(c) of the Income Tax Act: The AO initiated penalty proceedings under Section 274 read with Section 271(1)(c) of the Act. The Tribunal noted that the grievance of the assessee was premature and dismissed the ground of appeal. Conclusion: The Tribunal allowed the appeals of the assessee for A.Y. 2010-11, A.Y. 2011-12, and A.Y. 2012-13, directing the AO to delete the transfer pricing adjustments and rectify the errors in the computation of tax liability and granting of credits. The Tribunal also dismissed the initiation of penalty proceedings as premature.
|
