9911796707
|
Home
Forgot password New User/ Regiser ⇒ Register to get Live Demo
2021 (10) TMI 1206 - AT - Income TaxTP adjustment on Export of finished products - Selection of MAM - application of CUP method - HELD THAT - While considering the issue of comparability with an uncontrolled transaction, the condition prevailing in the market in which the respective parties to the transaction operate, including the geographical location along with other factors would be relevant to decide which method would be suitable for benchmarking the transactions. Finally, the application of CUP method has been rejected by the bench and the adjustment has been deleted - we reject application of CUP method and delete the impugned adjustment as proposed by Ld. TPO. This ground stand allowed. TP adjustment against payment for technical know-how (Royalty) - AO Adopted the benchmarked royalty rate of 4% as against effective rate of 4.57% paid by the assessee and proposed an adjustment - TPO disallowed the royalty payment on adhoc basis and benchmarked the transactions using CUP method - HELD THAT - Tribunal deleted the adjustment on the premises that Ld. TPO was bound to determine the ALP by following any one of the prescribed method and determination of ALP on adhoc basis could not be sustained. It was also held that CUP method could not be applied since comparable agreements were between entities located outside India. In AY 2014-15 2019 (7) TMI 1314 - ITAT MUMBAI , Ld. TPO applied CUP method to benchmark the transactions. However, the coordinate bench, in its order for AY 2014-15, held that CUP was not most appropriate method for benchmarking the transactions because of geographical differences. We find that in this year, Ld. TPO has followed same methodology as in AY 2014-15 and applied CUP method which has already been rejected by Tribunal in AY 2014-15. Therefore, following consistent view of Tribunal, we delete this adjustment. The ground thus raised stands allowed. TP Adjustment against payment of interest on ECB Loan - HELD THAT - ALP of such transaction could be more accurately determined by following rate of interest fixed by RBI in respect of ECB loan. This decision has subsequently been followed in AY 2014-15 2019 (7) TMI 1314 - ITAT MUMBAI - The assessee has followed the same RBI rate to benchmark the transactions in this year. Therefore, respectfully following earlier stand of Tribunal, we delete the impugned adjustment. The grounds thus raised stand allowed. TP adjustment against payment to AE for Software charges - According to the terms of agreement, the assessee was required to pay two (2) charges namely, IS charge (a recurrent service fee for regular recurrent services) and S3 charge (a specific service fee for development /acquiring and implementation of S3 ERP Program ) - HELD THAT - We find that IS charges were paid by the assessee for obtaining access to ERP software and for regular recurrent services and such charges were paid in earlier years also. In AY 2012-13, similar adjustment proposed by Ld. TPO was deleted by coordinate bench on the premises that Ld. TPO was duty bound to determine ALP by following any one of the prescribed methods and determination of ALP on adhoc basis could not be sustained. It was also observed that the assessee had submitted substantial evidences in support of the claim. This order was followed subsequently in AY 2013-14. In AY 2014-15, Ld. TPO allowed external cost but did not allow cost allocated to the assessee on the ground that the claim was unsubstantiated. This adjustment was also deleted by the Tribunal. Therefore, we find that this issue is recurring in nature. The charges have been paid pursuant to the agreement and the assessee has already placed on record third part audit certificate along with sample third party invoices raised by the vendors on its AE. In support of benefits, the assessee submitted a flowchart of the manufacturing operations, depicting the inter-linkage between the manufacturing operation and application provided /services received as part of IS and S3 services. Therefore, Ld. TPO, in our opinion, was not justified in denying this cost to the assessee.
Issues Involved:
1. Transfer Pricing (TP) adjustment in relation to export of finished products. 2. TP adjustment in relation to payment of royalty for availing technical know-how. 3. TP adjustment in relation to payment of interest on External Commercial Borrowing (ECB). 4. TP adjustment in relation to payment of Information System (IS) charges. 5. Initiating penalty proceedings under section 271(1)(c) of the Act. 6. Levy of interest under section 234B and 234C of the Act. Detailed Analysis: 1. TP Adjustment on Export of Finished Products: The primary issue was the determination of the Arms' Length Price (ALP) for the export of finished products. The assessee used the Transactional Net Margin Method (TNMM) at the entity level, arriving at a mean margin of 4.55% against its own margin of 7.74%. The Transfer Pricing Officer (TPO) rejected this approach and applied the Comparable Uncontrolled Price (CUP) method, leading to a TP adjustment of ?75.07 Lacs. The Tribunal found that the TPO's application of the CUP method was invalid as it did not consider geographical differences and other relevant factors. The Tribunal followed its earlier decisions, rejecting the CUP method and deleting the adjustment. 2. TP Adjustment in Relation to Payment of Royalty for Technical Know-How: The assessee paid royalty to its AE for technical know-how at 5% on local sales and 8% on export sales, benchmarked using the TNMM method. The TPO applied the CUP method and proposed an adjustment of ?329.13 Lacs. The Tribunal noted that in previous years, similar adjustments were deleted as the CUP method was not appropriate due to geographical differences. Following the consistent view, the Tribunal deleted the adjustment. 3. TP Adjustment in Relation to Payment of Interest on ECB: The assessee obtained an ECB loan from its AE at an interest rate of 6 months USD LIBOR + 350 basis points, benchmarked as per RBI circulars. The TPO computed a lower benchmark rate, leading to a TP adjustment of ?58.05 Lacs. The Tribunal found that the issue was covered by its earlier decisions, which held that the RBI rate should be followed for benchmarking. Consequently, the Tribunal deleted the adjustment. 4. TP Adjustment in Relation to Payment of IS Charges: The assessee paid ?11.08 Crores for software usage, including IS and S3 charges. The TPO accepted the S3 charge but proposed an adjustment of ?166.33 Lacs for IS charges, stating insufficient evidence. The Tribunal noted that similar adjustments in previous years were deleted, as the assessee had provided substantial evidence, including third-party audit certificates and sample invoices. The Tribunal found the TPO's denial unjustified and deleted the adjustment. 5. Initiating Penalty Proceedings under Section 271(1)(c) of the Act: The Tribunal did not specifically adjudicate on the initiation of penalty proceedings under section 271(1)(c), as it was consequential to the main issues. 6. Levy of Interest under Section 234B and 234C of the Act: The Tribunal did not specifically adjudicate on the levy of interest under sections 234B and 234C, as it was consequential to the main issues. Conclusion: The appeal was partly allowed, with the Tribunal deleting the TP adjustments related to the export of finished products, payment of royalty for technical know-how, payment of interest on ECB, and payment of IS charges. The remaining grounds were considered consequential or premature and did not require specific adjudication.
|
