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2025 (4) TMI 469 - AT - Income TaxTP Adjustment - adjustment in respect of technical know-how fees - HELD THAT - It is an admitted fact that the assessee is a part of the MNE that is providing services worldwide to remain in sync needs identical platform to perform its business activity. Undoubtedly this is the only activity carried on by the assessee and therefore the services availed by the associate is inextricably linked with the business of the assessee. Further for the year under consideration it was also noted that had seen not received this technical know-how from the AE it would not have been able to efficiently carry out its business. As regards the quantification of the royalty for the use of technical know-how it is noted that had assess not toward any profit even after the receipt of services from the age no amount was charged by the AE. The table reproduced of the objections filed before the DRP indicates that associate has been able to retain a consistent high margin. For the year under consideration assessee had earned a net profit margin of 10.92% as compared to 4.11% of the comparable companies which is not being considered by the authorities below. It is not doubted that TDS is deducted by the associate on payments made towards the technical know-how fees as royalty. It is also noted that the DRP has not agreed with the submissions of the assessee and the plethora of evidence filed in support of the need benefit test only because revenue has preferred appeal on this issue before Hon ble High Court and the issue needs to be kept alive. It is an admitted possession of the factual matters being identical and similar to the earlier assessment years where this Tribunal analysed identical issues based on the scene agreement. On analysis of the issue and respectfully following the view taken by coordinate bench of the treble in assessee s own case for assessment in 2018-19 we do not have any reason to uphold the adjustment made by the Ld.AO. Alternative disallowance proposed by the DRP u/s 37 regarding technical know-how fees paid by the assessee to its AE - We have already observed based on the evidences relied by the assessee in the preceding paragraphs that these expenses has to be incurred by the assessee for purposes of its business. The assessee filed sufficient evidence to establish need of the technical know-how in order to carry out its business activity smoothly. It is also recorded hereinabove that these are inextricably linked to the services rendered by the assessee and therefore are in the nature of business expenditure. Addition proposed markup of 4.11% on recovery of expenses from the AE - For the year under consideration it is noted that by adopting net margin method assessee has earned a margin of 10.92% as compared to 4.11% in case of the compatibles. As assessee has earned better margin no adjustment is warranted. Respectfully following the view taken by court made bench of the tribunal in assessee s own case for assessment year 2018-19 we do not find any reason to uphold the adjustment made by Ld.AO/TPO. Grant the TDS credit - We direct the Ld.AO/TPO grant the TDS credit after necessary verifications of the documents filed by the assessee in support of the same. Interest u/s 234A and B - AO is directed to verify if the return filed by the assessee falls within the extended time limit by the CBDT in the above circulars and then to compute the interest u/s 234 A if there is any delay after considering the extended period from the date of filing of return. In respect of the interest under section 234B also we direct to AO to verify and to consider the claim in accordance with law.
ISSUES PRESENTED and CONSIDERED
The core legal questions considered in this judgment include: 1. Whether the adjustment of INR 202,061,842 to the appellant's total income by the Transfer Pricing Officer (TPO) and upheld by the Dispute Resolution Panel (DRP) under Chapter X of the Income-tax Act, 1961, was justified. 2. Whether the final assessment order was passed beyond the statutory time limit, rendering it void ab initio. 3. Whether the arm's length price for the technical know-how fees paid by the appellant to its Associated Enterprise (AE) was correctly determined as 'NIL' by the TPO and DRP. 4. Whether the alternative disallowance of the technical know-how fees under Section 37 of the Act was justified. 5. Whether the imputation of a 4.11% markup on the recovery of expenses from the AE was appropriate. 6. Whether the short grant of Tax Deducted at Source (TDS) credit was accurate. 7. Whether the levy of interest under Section 234A and 234B of the Act was justified. 8. Whether the initiation of penalty proceedings under Section 270A of the Act was appropriate. ISSUE-WISE DETAILED ANALYSIS 1. Adjustment of INR 202,061,842 to Total Income The Tribunal considered whether the adjustment made by the TPO and upheld by the DRP was justified. The relevant legal framework involved the provisions of Chapter X of the Income-tax Act, 1961, concerning transfer pricing regulations. The appellant argued that the adjustment was not warranted as the transactions were at arm's length. The Tribunal reviewed previous decisions in the appellant's own cases for earlier years, where similar adjustments were deleted. The Tribunal found that the appellant had provided sufficient evidence to demonstrate that the services were necessary for its business and were rendered by the AE, resulting in financial and operational benefits. Consequently, the Tribunal did not uphold the adjustment. 2. Final Assessment Order Passed Beyond Time Limit The appellant contended that the final assessment order was passed beyond the statutory time limit, rendering it void. However, since the issues on merits were decided in favor of the appellant, the Tribunal did not adjudicate this legal issue, leaving it open for consideration in appropriate circumstances. 3. Arm's Length Price for Technical Know-How Fees The Tribunal examined whether the technical know-how fees paid to the AE were correctly determined as 'NIL.' The appellant argued that the fees were justified based on the need and benefit tests. The Tribunal found that the appellant had provided adequate evidence to establish the necessity and benefit of the technical know-how for its business. The Tribunal noted that similar adjustments in earlier years were deleted and concluded that the adjustment made by the TPO was not warranted. 4. Alternative Disallowance under Section 37 The DRP had proposed an alternative disallowance of the technical know-how fees under Section 37, questioning the commercial expediency of the expenses. The Tribunal found that the expenses were incurred for the appellant's business purposes and were inextricably linked to the services rendered. Therefore, the Tribunal did not uphold the alternative disallowance. 5. Imputation of 4.11% Markup on Recovery of Expenses The Tribunal considered whether the 4.11% markup on the recovery of expenses from the AE was justified. The appellant argued that the recovery of expenses was a pass-through transaction and should not be subject to a markup. The Tribunal referred to previous decisions in the appellant's own cases, where similar adjustments were deleted, and found that no markup was warranted in this case. 6. Short Grant of TDS Credit The appellant claimed that there was a short grant of TDS credit. The Tribunal directed the Assessing Officer to verify the documents submitted by the appellant and grant the correct TDS credit. 7. Levy of Interest under Section 234A and 234B The appellant contested the levy of interest under Sections 234A and 234B, arguing that the due dates for filing returns were extended due to the COVID-19 pandemic. The Tribunal directed the Assessing Officer to verify whether the return was filed within the extended time limits and to compute the interest accordingly. 8. Initiation of Penalty Proceedings The Tribunal found that the initiation of penalty proceedings was premature and did not require adjudication at this stage. SIGNIFICANT HOLDINGS The Tribunal's significant holdings include: - The adjustment of INR 202,061,842 to the appellant's total income was not justified, and the Tribunal deleted the adjustment. - The alternative disallowance of technical know-how fees under Section 37 was not upheld, as the expenses were incurred for business purposes. - The imputation of a 4.11% markup on the recovery of expenses was deleted, following previous decisions in the appellant's own cases. - The Tribunal directed the Assessing Officer to verify and grant the correct TDS credit. - The Tribunal directed the Assessing Officer to verify the applicability of extended due dates for filing returns and compute interest under Sections 234A and 234B accordingly. Overall, the Tribunal allowed the appeal filed by the appellant, providing relief on the contested issues.
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