2023 (9) TMI 737 - AT - Income Tax

TP Adjustment - addition of 15% Mark-up on reimbursement of expenses received by the assessee/Foreign Company for expenses relating to registration of Patents and Trademark for the Indian Subsidiary - HELD THAT - According to us, the Adhoc mark-up directed by Ld. DRP cannot be accepted since the Ld. DRP did not follow any method prescribed u/s 92C for determining the ALP of International Transaction between two Associated Enterprises u/s 92B of the Act. And it is trite that the ALP has to be determined as per section 92C of the Act. And further for any comparability analysis, the Ld. DRP ought to have followed the mandate u/r 10B(1)(a) of the Rules, i.e. one of the method prescribed u/s 92C of the Act needs to be used while determining the ALP as held in the case of Kodak India Pvt. Ltd 2013 (11) TMI 667 - ITAT MUMBAI . Therefore, the action of Ld. DRP directing mark-up of 15% without adhering to the methods prescribed u/s 92C of the Act, cannot be countenanced since it would breach the Rule of law and makes the order arbitrary. Therefore, this ground of appeal of the assessee is allowed and the addition made by AO pursuant to such a direction of Ld. DRP is directed to be deleted. Addition as Fees for Technical Services ignoring the assessee s contention that it was purely reimbursement received for Construction and Management Expenses - Documents submitted before us, we note that other than the expenses of Euro 5,900/- raised by cross border consultancy which has given the nature of expenses as being advance towards statutory expenses to be incurred for incorporation of subsidiary company of assessee dated 21.06.2013 a perusal of the other invoices, it is not discernable as to whether the expenses pertains to the subsidiary company or not. And without as certaining the nature of the expenses, it is not possible to determine whether the claim of assessee that it is only reimbursement is possible. Since the Ld. AR pleaded that provided an opportunity is given to the assessee, it would be able to bring in evidence to show that the expenses have been made for the purpose of setting up of the business of the subsidiary company. Therefore, we set aside this issue back to the file of the AO for deciding this issue afresh after giving an opportunity to the assessee. This issue is allowed for statistical purposes.

Summary

Issues Involved:
1. Passing of Transfer Pricing (TP) order by the Transfer Pricing Officer (TPO) beyond the prescribed limitation period.
2. Addition of 15% Mark-up on reimbursement of expenses for registration of Patents and Trademark.
3. Addition of Rs. 1,81,61,306/- as 'Fees for Technical Services' instead of reimbursement for Construction and Management Expenses.

Summary:

1. Passing of Transfer Pricing (TP) order beyond the prescribed limitation period:
The assessee challenged the TPO's action of passing the TP order after the due date prescribed in section 92(3A) r.w.s 153 of the Income Tax Act. The assessee cited decisions from the Hon'ble Madras High Court in the cases of M/s. Saint Gobain India (P) Ltd. and M/s. Pfizer Healthcare India Pvt. Ltd., which supported the contention that the TP order should have been passed on or before 31.10.2019. Since the TP order was digitally signed on 01.11.2019, it was held to be barred by limitation and thus invalid. The Tribunal agreed with the assessee, finding the TP order passed beyond the limitation period prescribed by the Act and thus non-est in the eyes of law.

2. Addition of 15% Mark-up on reimbursement of expenses for registration of Patents and Trademark:
The AO made an addition of 15% Mark-up on reimbursement of expenses received by the assessee for registration of Patents and Trademark for its Indian Subsidiary. The DRP directed the AO to charge 15% markup for services provided to its AE by the assessee. The Tribunal held that the DRP's direction to mark-up 15% was erroneous as it did not follow any method prescribed u/s 92C of the Act for determining the Arm's Length Price (ALP). The Tribunal cited precedents where adhoc determination of ALP was not sustained and directed the deletion of the addition made by the AO.

3. Addition of Rs. 1,81,61,306/- as 'Fees for Technical Services':
The AO treated the reimbursement of Construction and Management Expenses as 'Fees for Technical Services'. The assessee contended that the expenses were incurred on behalf of its Indian subsidiary for setting up the company and were reimbursed on a cost-to-cost basis without any service element. The Tribunal noted that the assessee provided documentation to establish the nature of expenditure and held that the transaction was included in the form 3CEB filed for the corresponding year, which was accepted by the TPO. The Tribunal found that the AO and DRP did not properly ascertain the nature of expenses and set aside the issue to the AO for fresh consideration, allowing the issue for statistical purposes.

Conclusion:
The Tribunal ruled in favor of the assessee on the legal issue of limitation, thereby making grounds 2, 4 to 8 infructuous. It allowed the appeal partly for statistical purposes, directing the deletion of the 15% markup addition and remanding the issue of Rs. 1,81,61,306/- back to the AO for fresh consideration.