2022 (8) TMI 858 - AT - Income Tax

Transfer pricing adjustment - management services availed by the assessee from its associated enterprise - HELD THAT - The management fees paid by the assessee forms part of the cost base, while computing the net margin of the assessee, which has already been accepted to be at arm s length by the TPO. Therefore, once margin of profit in distribution segment has been accepted after consideration of management fees, then there is no question of making any separate adjustment insofar as payment of management fees is concerned. As relying on SONY ERICSSON MOBILE COMMUNICATIONS INDIA PVT. LTD. (NOW KNOWN AS SONY INDIA LIMITED) 2015 (3) TMI 580 - DELHI HIGH COURT we are of the considered opinion that TPO / Assessing Officer was not justified in making adjustment in respect of international transaction of Payment of Management Fees in the present case. Accordingly, grounds raised in assessee's appeal are allowed. Addition u/s 40(a)(i) of the Act for the non-deduction of tax at source on payment made by the assessee to Tekla Corporation for purchase of license, upgrades and maintenance - HELD THAT - In the present case, though during the course of hearing, learned AR placed reliance upon the aforesaid order passed by the coordinate bench of Tribunal and prayed for similar directions, however, despite adequate opportunity being granted the assessee did not file any additional evidence as were filed in preceding assessment years. Be that as it may, since, as submitted, similar issue is still pending before the Assessing Officer pursuant to aforesaid remand in preceding assessment years, in the larger interest of justice we deem it appropriate to remand this issue, in the present appeal, to the file of Assessing Officer for de novo adjudication with similar directions as were passed by the coordinate bench of Tribunal in aforesaid order. AO further directed to examine the documentary evidence either presented by the assessee or gathered by the Assessing Officer through enquiries which he may deem fit in the facts of the case. Needless to mention that no order shall be passed without affording opportunity of hearing to the assessee. As a result, grounds No. 12 to 15 raised in assessee s appeal are allowed for statistical purpose.

Issues Involved:
1. Determination of total taxable income
2. Transfer pricing adjustment for management services availed
3. Reference to Transfer Pricing Officer (TPO)
4. Provision of sufficient opportunity of being heard
5. Benefit test for management services
6. Commercial substance of management services
7. Benchmarking analysis for management services
8. Use of method for benchmarking international transactions
9. Disallowance under Section 40(a)(i) of the Income Tax Act
10. Eligibility for benefit under India-Finland Tax Treaty
11. Levy of interest under Sections 234B and 234D
12. Initiation of penalty proceedings under Section 271(1)(c)

Detailed Analysis:

1. Determination of Total Taxable Income:
The assessee challenged the determination of its total taxable income at Rs. 14,59,36,820 instead of Rs. 10,77,004 as reported in the return. This general ground was noted but required no separate adjudication.

2. Transfer Pricing Adjustment for Management Services Availed:
The issue pertained to the adjustment in respect of management services availed by the assessee from its associated enterprise (AE). The assessee, engaged in software distribution, had entered into a Service Agreement with its AE for availing administrative services. The TPO treated the arm's length price (ALP) of the "Payment of Management Fees" as NIL, proposing an upward adjustment of Rs. 57,97,930. The DRP upheld this adjustment, stating the assessee failed to satisfy the "benefit test" and "willingness to pay test." However, the Tribunal found that the TPO did not adopt any prescribed method for benchmarking and did not find any fault in the assessee's combined benchmarking analysis using TNMM. Citing precedents, the Tribunal ruled that the TPO's approach was not justified and allowed the assessee's appeal on this issue.

3. Reference to Transfer Pricing Officer (TPO):
The assessee contended that the reference to the TPO was made without proper application of mind and satisfaction. This ground was implicitly addressed within the broader transfer pricing discussions.

4. Provision of Sufficient Opportunity of Being Heard:
The assessee argued that it was not provided sufficient opportunity to present its case regarding the ALP of the management services. This was considered within the transfer pricing adjustment issue.

5. Benefit Test for Management Services:
The DRP held that the assessee failed to demonstrate the receipt and benefit of management services. The Tribunal, however, noted that the TPO's role is to determine the ALP, not the existence or benefit of services, and found the "benefit test" application inappropriate.

6. Commercial Substance of Management Services:
The assessee's commercial rationale for availing management services was not appreciated by the lower authorities. The Tribunal found that the lower authorities did not properly consider the commercial expediency and the benchmarking analysis provided by the assessee.

7. Benchmarking Analysis for Management Services:
The assessee's combined transaction approach using TNMM was accepted by the TPO for software distribution but not for management fees. The Tribunal found this inconsistent and ruled in favor of the assessee, emphasizing that the management fees formed part of the cost base in the accepted benchmarking analysis.

8. Use of Method for Benchmarking International Transactions:
The TPO did not use any prescribed method for benchmarking the management fees transaction. The Tribunal emphasized that the TPO must adopt a prescribed method and cannot arbitrarily determine the ALP as NIL.

9. Disallowance under Section 40(a)(i) of the Income Tax Act:
The issue involved the disallowance of Rs. 13,90,61,888 for non-deduction of tax at source on payments made to Tekla Corporation for software licenses, upgrades, and maintenance. The Tribunal remanded this issue to the Assessing Officer for de novo adjudication, following a similar approach as in the assessee's previous assessment years.

10. Eligibility for Benefit under India-Finland Tax Treaty:
The assessee claimed that the payments did not qualify as "royalty" under the India-Finland Tax Treaty. The Tribunal remanded this issue for reassessment, aligning with the approach taken in previous years.

11. Levy of Interest under Sections 234B and 234D:
The levy of interest under Sections 234B and 234D was deemed consequential and allowed for statistical purposes.

12. Initiation of Penalty Proceedings under Section 271(1)(c):
The initiation of penalty proceedings was considered premature and dismissed.

Conclusion:
The appeal by the assessee was partly allowed for statistical purposes, with significant issues remanded for reassessment and others decided in favor of the assessee. The Tribunal emphasized the need for proper benchmarking methods and the inappropriate application of the "benefit test" by the TPO.

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