2024 (2) TMI 386 - AT - Income Tax

TP Adjustment - benchmarking the royalty payment - TPO is directed to include Technical Know-how fee and exclude software expenses and other expenses while benchmarking the royalty payment - HELD THAT - Similar issue came for consideration before this Tribunal in assessee s own case in for the assessment year 2015-16 2016-17 2024 (2) TMI 290 - ITAT BANGALORE as held that no separate benchmarking of royalty payment is required i f the TNMM approach has been adopted at entity level and this issue is decided in favour of the assessee. Taxability of dividends - Dividend Distribution Tax (DDT) - dividend is declared, distributed or paid by a domestic company to a non-resident shareholder(s) - whether CIT(A) has erred in not appreciating that under India Japan DTAA, the dividends are taxable at the rate of 10% and such rate is also applicable for discharge of DDT? - Appellant submits that DDT paid in excess of 10% is liable to be refunded - HELD THAT - This issue came for consideration before Special Bench in the case of Total Oil India Pvt. Ltd. 2023 (4) TMI 988 - ITAT MUMBAI (SB) wherein it answered the following question in favour of the revenue as held where dividend is declared, distributed or paid by a domestic company to a non-resident shareholder(s), which attracts Additional Income Tax (Tax on Distributed Profits) referred to in Sec. 115-O of the Act, such additional income tax payable by the domestic company shall be at the rate mentioned in Section 115- O of the Act and not at the rate of tax applicable to the non-resident shareholder(s) as specified in the relevant DTAA with reference to such dividend income. Nevertheless, we are conscious of the sovereign's prerogative to extend the treaty protection to domestic companies paying dividend distribution tax through the mechanism of DTAAs. Thus, wherever the Contracting States to a tax treaty intend to extend the treaty protection to the domestic company paying dividend distribution tax, only then, the domestic company can claim benefit of the DTAA, if any. Decided against assessee. Levy of interest u/s 234B 234C of the Act, which is consequential and mandatory in nature and to be calculated accordingly.

Summary

Issues Involved:
1. Validity of CIT(A)'s order.
2. Confirmation of AO and TPO's actions.
3. Benchmarking of royalty payments.
4. Methodology for ALP computation.
5. Inclusion of comparables.
6. Application of India-Japan DTAA on DDT.
7. Levy of interest under sections 234B and 234C.

Summary:

1. Validity of CIT(A)'s Order:
The appellant contended that the CIT(A)'s order was "bad in law" and prejudicial. However, these grounds were deemed too general and did not require adjudication.

2. Confirmation of AO and TPO's Actions:
The appellant argued that the AO and TPO erred by not appreciating the definition of "income" and the provisions of section 40A(2). The appellant also claimed there was no motive for tax evasion. The CIT(A) upheld the TPO's rationale for treating royalty as a separate transaction, noting that the appellant's international transactions included various unrelated expenses.

3. Benchmarking of Royalty Payments:
The appellant paid substantial royalties to its AEs, which were contested by the TPO for being constant over years despite the company's long-standing establishment. The TPO proposed separate benchmarking of royalty using the CUP method. The CIT(A) upheld this approach, citing that the appellant's manufacturing and trading activities were not entirely interlinked with the technical know-how.

4. Methodology for ALP Computation:
The appellant's argument for using TNMM at the entity level was rejected. The TPO's selection of comparables and the methodology for computing ALP were upheld by the CIT(A). However, the TPO was directed to compute the royalty ratio using net manufacturing sales, exclusive of excise duty.

5. Inclusion of Comparables:
The appellant's request to include Tata Motors Ltd. and Mahindra and Mahindra Ltd. as comparables was rejected, as these companies failed the 25% RPT filter. The CIT(A) upheld the TPO's selection of comparables.

6. Application of India-Japan DTAA on DDT:
The appellant contended that DDT paid in excess of 10% under the India-Japan DTAA should be refunded. However, this issue was dismissed based on the Special Bench's decision in the case of Total Oil India Pvt. Ltd., which held that additional income tax payable by a domestic company shall be at the rate mentioned in Section 115-O of the Act.

7. Levy of Interest under Sections 234B and 234C:
The appellant contested the levy of interest under sections 234B and 234C. The Tribunal noted that the levy of interest is consequential and mandatory, to be calculated accordingly.

Conclusion:
The appeal was partly allowed, with specific directions to the TPO regarding the computation of royalty ratio and the exclusion of certain expenses. The grounds related to the computation of royalty and the levy of interest were left open or dismissed as academic.