2023 (6) TMI 338 - AT - Income Tax

TP Adjustment - adjustment made by the TPO towards technical know-how fees despite accepting the entity level margins - HELD THAT - On facts of the present case, it would be impractical and also inappropriate to evaluate payment of technical know-how fee on an individual or on a stand-alone basis (dehors the segment to which a benefit from such services accrues). For the year under consideration, the net profit margin of the assessee is 12.34% which is higher than the net profit margin of the comparable companies arrived at 9.23%. It is undisputed that the TPO had accepted the benchmarking analysis of the assessee for all transactions except for the payment of technical know-how fee to AE. This in our view would mean that the TPO has accepted the entity level margins earned by the assessee but proceeded to make TP adjustment on payment towards technical know-how. The Hon'ble Delhi High Court in the case of Sony Ericsson Mobile Communications India (P.) Ltd. 2015 (3) TMI 580 - DELHI HIGH COURT held that once the revenue accepts the entity level margins as per the most appropriate method, it would be inappropriate to treat a particular expenditure as a separate international transaction. It was held that such an exercise would lead to unusual and absurd results. Also in Lenovo (India) (P.) Ltd. case 2023 (1) TMI 1242 - ITAT BANGALORE held that if margins of assessee with respect to its trading segment were accepted to be at arm's length by TPO, then no separate adjustment of AMP expenses could be made by treating it as an international transaction. Thus adjustment made by the TPO towards technical know-how fees despite accepting the entity level margins, is hereby deleted. Adjustment invoking the provisions of section 40(a)(i) - we note that the assessee could not establish whether or not the tax had been deducted at source on the impugned payment due to absence of historical records. Irrespective of such fact, in our view, the action of the CIT(A) to invoke section 40(a)(i) of the Act is misplaced. As noted above, the payment towards technical know-how was capitalized in the books of the assessee and depreciation on the same was claimed. We note that in Nector Beverages (P.) Ltd. 2009 (7) TMI 5 - SUPREME COURT in the context of section 41, held that depreciation, by its very nature, is neither a loss, nor an expenditure, nor a trading liability. On this count, invoking section 40(a)(i) of the Act which prohibits claim of revenue expenditure, is incorrect. Thus alternative proposal to disallow the impugned expense u/s 40(a)(i) of the Act made by the CIT(A), is not sustainable.

Summary

Issues Involved:

1. Adjustment of INR 9,07,39,440 in respect of international transactions.
2. Determination of Arm's Length Price (ALP) for technical know-how acquired from Associated Enterprise (AE).
3. Disallowance under section 40(a)(i) of the Income Tax Act due to non-deduction of tax at source.
4. Jurisdiction of the Additional Commissioner to pass the assessment order.

Summary:

1. Adjustment of INR 9,07,39,440 in respect of international transactions:
The Transfer Pricing Officer (TPO) accepted the benchmarking analysis of the assessee for all international transactions except for the payment of technical know-how. The TPO concluded that the technical know-how fees should not have been paid by the assessee to its AE and made an adjustment of Rs. 9,07,39,440 by treating the ALP of such payment at NIL.

2. Determination of Arm's Length Price (ALP) for technical know-how acquired from AE:
The assessee had aggregated all international transactions for computation of ALP and benchmarked them at the entity level using the Transaction Net Margin Method (TNMM). The TPO, however, treated the technical know-how fee as a separate transaction and made an adjustment. The ITAT held that once the TPO accepts the entity level margins as per the most appropriate method, it would be inappropriate to treat a particular expenditure as a separate international transaction, as this would lead to unusual and absurd results. The ITAT referenced the Delhi High Court's decision in Sony Ericsson Mobile Communications India (P.) Ltd. Vs. CIT and similar cases, concluding that the adjustment made by the TPO towards technical know-how fees despite accepting the entity level margins is deleted.

3. Disallowance under section 40(a)(i) of the Income Tax Act due to non-deduction of tax at source:
The CIT(A) alternatively held that the payment of technical know-how was disallowable under section 40(a)(i) of the Act as it was made without deduction of tax at source. The ITAT noted that the payment towards technical know-how was capitalized in the books of the assessee, and depreciation on the same was claimed. It referenced the Supreme Court's decision in Nector Beverages (P.) Ltd. v DCIT, which held that depreciation is neither a loss, nor an expenditure, nor a trading liability. Therefore, invoking section 40(a)(i) for capitalized payments is incorrect. The ITAT also cited the Karnataka High Court's decision in PCIT Vs. Tally Solutions (P) Ltd., affirming that section 40(a)(i) does not apply to depreciation claims. Consequently, the alternative proposal to disallow the expense under section 40(a)(i) by the CIT(A) was not sustainable.

4. Jurisdiction of the Additional Commissioner to pass the assessment order:
The assessee raised additional grounds challenging the jurisdiction of the Additional Commissioner to pass the assessment order under section 143(3) of the Act. However, since the ITAT allowed the grounds on merits, the additional ground regarding the jurisdiction of the AO was not adjudicated and left open.

Conclusion:
The appeal of the assessee was allowed, with the ITAT deleting the transfer pricing adjustment made by the TPO and rejecting the disallowance under section 40(a)(i) proposed by the CIT(A). The additional ground regarding the jurisdiction of the AO was not adjudicated.