2023 (11) TMI 496 - AT - Income Tax

TP Adjustment - determining of payment of royalty fee - applicability of CUP Method instead of TNMM - DRP has held that ALP of royalty payment could not be taken as NIL and benefit test could not be applied and directed to adopt royalty rate of 3% for benchmarking the royalty payment - AR submitted that the issue of methodology to be adopted and arbitrary selection of royalty rate of 3% without bringing any correct comparables has been considered and Coordinate bench has set aside the adjustments HELD THAT - The Bench has given thoughtful consideration to the facts and submissions, and at the very outset has no hesitation to not sustain the submission of Ld. DR about adopting comparables as per law as the order indicate that instead of making analysis on the parameters merely following judicial precedent in the case of Federal Mogul 2012 (7) TMI 971 - DELHI HIGH COURT and Climate Systems India Ltd. case 2009 (10) TMI 116 - DELHI HIGH COURT the 3% royalty has been adopted. As decided in 2023 (7) TMI 1318 - ITAT DELHI for A.Y. 2012-13 has observed as follows arbitrary selection of royalty rate of 3% by the Id. DRP is without brining any correct comparables on record. With regard to payment of FTS in A.Y. 2012-13, the Id. DRP agreed that the TPO failed to apply CUP correctly and is determination of ALP at Nil is incorrect. The Hon'ble High Court of Delhi in Magneti Marelli 2016 (11) TMI 123 - DELHI HIGH COURT held that if segregation approach is permissible, TNMM shall apply. Decided in favour of assessee.

Summary

Issues involved:
The appeal challenges the final assessment order under Income Tax Act, 1961 along with DRP direction.

Transfer Pricing Methodology Issue:
The appellant, engaged in manufacturing, challenged the adoption of CUP Method for royalty payment analysis instead of TNMM. The TPO applied 3% royalty rate without economic analysis, following DRP directions. The appellant objected to the CUP Method and royalty rate, arguing for TNMM and higher royalty rate.

Comparables Selection Issue:
The TPO and DRP were directed to re-compute ALP based on comparables. The appellant contended that no fresh exercise was done, and the 3% royalty rate was adopted without proper justification. The Bench found the selection of comparables arbitrary and not in line with the law.

Judicial Precedents and ALP Determination Issue:
The co-ordinate Bench referred to previous cases and observed that the arbitrary selection of 3% royalty rate without correct comparables was unjustified. The Bench allowed the appeal, noting that the facts did not support the DR's arguments on comparables selection.

Penalty Proceedings Issue:
The appellant challenged the initiation of penalty proceedings under section 270A, arguing against the charging of interest under sections 234B, 234C, and 234D. The Bench upheld the appeal, finding no legal basis for the penalty and interest charges.

Summary:
The appellant contested the assessment order and DRP directions regarding transfer pricing methodology, comparables selection, and penalty proceedings. The Bench found the adoption of CUP Method and 3% royalty rate without proper economic analysis unjustified. Referring to judicial precedents, the Bench allowed the appeal, noting the lack of correct comparables and arbitrary selection of royalty rate. The penalty proceedings and interest charges were also set aside.