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Income Tax Appellate Tribunal, MUMBAI BENCH “J”, MUMBAI
Before: SHRI A.D. JAIN & SHRI RAJESH KUMAR
Per Rajesh Kumar, Accountant Member:
The present appeal has been preferred by the assessee against the order of Dispute Resolution Panel-III, Mumbai [hereinafter referred to as the DRP] relevant to assessment year 2011-12.
The assessee has raised the following grounds of appeal: “1. On the facts and in the circumstances of the case and in law, the Hon'ble Dispute Resolutions Panel ('DRP') erred in directing and the Assistant Commissioner of Income-tax, Range-l(2)(2), Mumbai, ('AO') / the Deputy Commissioner of Income- tax, Transfer Pricing Officer- 1(2)(1), Mumbai ('TPO') erred in making an adjustment of Rs. 2,95,54,1707- on account of write off of bridge fees and Rs. 6,65,15,9407- on account of service fees for purchase of merchandise, under Chapter X of the Income-tax Act, 1961 ('Act').
2 ITA No.1777/M/2016 M/s. MC Retail Pvt. Ltd. 2. On the facts and in the circumstances of the case and in law, the Hon'ble DRP erred in directing and the learned AO 7 TPO erred in treating the accounting entry of write off of advances as a separate international transaction and computing the arm's length price of the alleged international transaction.
On the facts and in the circumstances of the case and in law, the Hon'ble DRP erred in directing and the learned AO 7 TPO erred in disallowing the write off of the bridge fees in entirety by the Appellant considering prudent accounting principles.
On the facts and in the circumstances of the case and in law, the Hon'ble DRP erred in directing and the learned AO 7 TPO erred in disallowing the Service fees in entirety in AY 2011-12 not giving cognisance to the commercial rationale and business realities considered by the assessee for payment of service fees.
On the facts and in the circumstances of the case and in law, the Hon'ble DRP erred in directing and the learned AO 7 TPO erred in determining the arm's length price of the transaction without following the methodology prescribed under Section 92C of the Act.
On the facts and in the circumstances of the case and in law, the Hon'ble DRP erred in directing and the learned AO 7 TPO erred in not being consistent in following their own approach to determine the arm's length price of the bridge fees as well as service fees transaction in the previous year.
The appellant prays that the additions/disallowances made by the learned AO and TPO and upheld by the learned DRP be deleted and consequential relief may be given.
First we will take up ground no. 4 for adjudication.The issue raised by the assessee in this ground is against the order DRP upholding the order of the TPO determining the arm length price of the international transactions without following any of the prescribed method as prescribed under section 92C of the Act.
The Ld. A.R. took us through the order of TPO at page No.3, para 6.1.4 wherein the Ld. A.R. submitted that ALP of the international transactions of writing off bridge fees amounting to Rs.3,32,54,170/- was taken as nil and accordingly an adjustment of the same amount was proposed to be made in the aggregate value of international transactions reported by the
3 ITA No.1777/M/2016 M/s. MC Retail Pvt. Ltd. assessee without following any prescribed method. The Ld. A.R. also took us through para No.6.2.4 of TPO’s order wherein the ALP of the international transactions qua certificate fee for purchase of franchise amounting to Rs.6,65,15,940/- was taken at nil and an adjustment of the same amount was proposed to be made in the aggregate value of international transactions repayment of the assessee that too without following any prescribed method under section 92C of the Act.
Similarly, the Ld. A.R. submitted that the Ld. DRP has grossly erred in upholding the order of TPO by ignoring the fact that no specific method as provided in section 92C was followed and giving the direction to the TPO /AO in para No.8.3.3 and 9.3.3. Finally, the Ld. A.R. submitted that the order passed by the TPO without following any of the methods mandated by provisions of section 92C of the Act is bad in law and has to be quashed. In defence of the arguments, the Ld. D.R. relied on the decision of Hon’ble Bombay High Court in the case of CIT vs. Johnson and Johnson Ltd. in ITA No.1030 of 2014 order dated 02.03.2014, CIT vs. Kodak India Pvt. Ltd. in ITA No.15 of 2014 order dated 11.07.2016 (Bom. HC), and CLSA India Pvt. Ltd. in ITA No.1182/Mum/2017 A.Y. 2012-13 order dated 16.01.2019. The Ld. A.R., relying on the ratio laid down in the above decisions of the Hon’ble Bombay High Court and the co-ordinate bench of the Tribunal, prayed before the Bench that since the order of TPO has proposed the adjustment to the international transactions without following the any of the prescribed methods as provided under section 92C of the Act and therefore same may kindly be quashed.
4 ITA No.1777/M/2016 M/s. MC Retail Pvt. Ltd. 6. The Ld. D.R., on the other hand, submitted that tough it is not mentioned in the TPO’s order as to which method was followed for ascertaining the ALP of the international transactions but apparently an incidental cup method has been followed by the TPO. The Ld. D.R. submitted that the case laws relied on by the assessee are not applicable as in all these cases the disallowances were made on adhoc basis whereas in the present case the facts are different. The Ld. D.R. relied on the order of DRP and TPO/AO and prayed that the same may kindly be affirmed.
We have heard the rival submissions of both the parties and perused the material on record. The only dispute raised before us that TPO has not followed any of the prescribed methods as mandated by the provisions of section 92C of the Act. We observe that in respect of advance given to AE which has been written off by the assessee, the TPO has taken the ALP of the international transaction of writing off of the bridge fee amounting to Rs.3,32,54,170/- as nil and an equal adjustment has been proposed to be made in the aggregate value of international transactions reported by the assessee. Similarly, in respect of service fees for purchase of franchise, the ALP of the international transaction has been taken at nil and equal adjustment is proposed. In both these transactions, we observe that no prescribed method has been followed by the TPO as envisaged by the provisions of section 92C of the Act. The Ld. DRP has also upheld the order of TPO while allowing some relief on the additions proposed. In our view the TPO is duty bound to propose additions/adjustments in ALP after following any of the methods as prescribed in section 92C of the Act. The case of the
5 ITA No.1777/M/2016 M/s. MC Retail Pvt. Ltd. assessee is also supported by the decision of the Hon’ble Bombay High Court in the case of CIT vs. Johnson and Johnson Ltd. (supra) wherein the Hon’ble Bombay High Court has held as under: “(d) We find that the impugned order of the Tribunal upholding the order of the CIT(A) in the present facts cannot be found fault with. The TPO is mandated by law to determine the ALP by following one of the methods prescribed in Section 92C of the Act read with Rule 10B of the Income Tax Rules. However, the aforesaid exercise of determining the ALP in respect of the royalty payable for technical know how has not been carried out as required under the Act. Further, as held by the CIT(A) and upheld by the impugned order of the Tribunal, the TPO has given no reasons justifying the technical know how royalty paid by the Assessing Officer to its Associated Enterprise being restricted to 1% instead of 2%, as claimed by the respondent assessee. This determination of ALP of technical know how royalty by the TPO was ad-hoc and arbitrary as held by the CIT(A) and the Tribunal,
(e) In the above view, the question as proposed does not give rise to any substantial question of law. Thus, not entertained.”
Similarly, in the case of CIT vs. Kodak India Pvt. Ltd. (supra) the Hon’ble Bombay High Court has held as under: “10. We must also record the fact that the ALP was arrived at by the Transfer Pricing Officer (TPO) by not adopting any of the methods prescribed under Section 92G of the Act. The method to determine the ALP adopted was not one of the prescribed methods for computing the ALP. It was not even any method prescribed by the Board. At the relevant time, i.e. for A.Y. 2008-09 Section 92C of the Act did not provide for other method as provided in Section 92C(l)(f) of the Act. The impugned order of the Tribunal holds that the method adopted by the Revenue to determine the ALP was alien to the methods prescribed under Section 92C of the Act. In the above circumstances, the Tribunal declined to restore the issue to the Assessing Officer for re-determining the ALP by adopting one of the methods as listed out in Section 92C of the Act. This finding of the Tribunal has also not been challenged by the Revenue.
In view of the fact that the Revenue has accepted the order of the Tribunal on its finding on facts on the two issues as pointed out hereinabove as well as the refusal of the Tribunal to restore the issue of determination of ALP to the TPO by following one of the methods prescribed under Section 92C of the Act. Thus, the questions as formulated for our consideration even if answered in favour of the Revenue would become academic in the present facts. Thus, we see no reason to entertain this appeal. However, we make it clear that issues of law which has been raised in the present appeal are left for consideration in an appropriate case.
In view of the above, the questions as formulated in the peculiar facts and circumstances of the case, would make the entire exercise academic. Therefore,
6 ITA No.1777/M/2016 M/s. MC Retail Pvt. Ltd. the questions as proposed do not give rise to any substantial question of law. Thus, not entertained.
The appeal is dismissed. No order as to costs.”
In both the decisions, the Hon’ble Bombay High Court has held that it is obligatory on the TPO to follow one of the method as mandated by provisions of section 92C of the Act and therefore we are inclined to set aside the order of DRP/TPO and direct the AO to delete the additions.The ground no 4 is allowed.
Since we have adjudicated the issue in favour of the assessee raised in ground No. 4 ,the other grounds raised by the assessee become academic and needs no adjudication.
In the result, the appeal of the assessee is allowed.
Order pronounced in the open court on 17.12.2019.
Sd/- Sd/- (A.D. Jain) (Rajesh Kumar) VICE PRESIDENT ACCOUNTANT MEMBER
Mumbai, Dated: 17.12.2019. * Kishore, Sr. P.S.
Copy to: The Appellant The Respondent The CIT, Concerned, Mumbai The CIT (A) Concerned, Mumbai The DR Concerned Bench //True Copy// [ By Order
Dy/Asstt. Registrar, ITAT, Mumbai.