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Income Tax Appellate Tribunal, DELHI BENCHES : I-1 : NEW DELHI
Before: SHRI R.S. SYAL, AM & SHRI KULDIP SINGH, JM
PER R.S. SYAL, AM:
This appeal by the assessee arises out of the final assessment order passed by the Assessing Officer (AO) u/s 143(3) read with section 144C of the Income-tax Act, 1961 (hereinafter also called ‘the Act’) in relation to the assessment year 2009-10.
First issue raised in this appeal is against the making of addition of Rs.1,99,53,876/- on account of transfer pricing adjustment on the international transaction of ‘Payment of Corporate expenses.’
Briefly stated, the facts of the case are that the assessee, initially set up in April, 1993 as a joint venture between Hilton Rubbers Ltd., India and A/S Roulunds Fabriker (RF), Denmark, is engaged in manufacture and marketing of Wrapped B-belts, Raw edge V-belts and Industrial hoses. Six international transactions were reported in audit report in Form No. 3CEB which, inter alia, include payment of ‘Corporate expenses’ amounting to Rs.1,99,53,876/-. The assessee employed Transactional Net Margin Method (TNMM) as the most appropriate method on aggregate basis for all the international transactions taken together with the Profit level indicator (PLI) of Operating Profit/Operating Cost (OP/OC). Its own OP/OC was computed at 15.8%. 19 companies were selected as comparable, whose mean margin, using current year’s data, was worked out at 11.08%. That is how, the assessee demonstrated that its international transactions were at arm’s length price (ALP). The AO referred the question of determination of ALP of these international transactions to the Transfer Pricing Officer (TPO), who determined Nil ALP of international transaction of ‘Corporate expenses.’ The assessee remained unsuccessful before the Dispute Resolution Panel (DRP). In the final assessment order, the AO made addition for the equal sum. The assessee is aggrieved against the making of such addition.
We have heard the rival submissions and perused the relevant material on record. The assessee has submitted an application under Rule 29 of the Income-tax Appellate Tribunal Rules, 1963, filing additional evidence running into 321 pages concerning this issue. The ld. AR contended that these documents could not be filed before the authorities below because of their non-availability from its AEs at the material point.
It was, therefore, prayed that the additional evidence be admitted and the issue be decided on merits. The ld. DR objected to the same.
It is observed that similar position prevailed in the assessment of the immediately preceding assessment year, namely, 2008-09. The assessee filed additional evidence before the Tribunal in support of its claim on the disallowance of payment of ‘Corporate expenses.’ The Tribunal vide its order dated 29.8.2014 in has admitted the additional evidence and remitted the matter to the file of AO/TPO for a fresh determination of the ALP of this international transaction in the light of such additional evidence. A copy of such order has been placed on record. In the absence of any distinguishing feature in the facts of the instant year vis-à-vis the preceding year and respectfully following the precedent, we also admit the additional evidence and send the matter back to the file of AO/TPO for fresh determination of the ALP of this international transaction, after allowing a reasonable opportunity of being heard in the light of the additional evidence filed before us.
Next ground of appeal is against the addition of Rs.84,79,239/- on account of transfer pricing adjustment on the international transaction of ‘Payment of Royalty’ which is, in fact, akin to the payment of fees for the use of technical know-how.
7. Succinctly, the facts of this ground are that the assessee made payment of Rs.84,79,239/- towards royalty for use of technical know-how to its two AEs, namely, ContiTech Antriebssysteme GmbH (CAG) and Roulunds Rubber A/s (RR) pursuant to two different agreements both dated 1st July, 2007. As all the international transactions were processed under TNMM on consolidated basis, the assessee claimed this international transaction also at ALP. After considering the reply filed by the assessee, the TPO opined that the application of TNMM on entity level was not appropriate. He held the Comparable Uncontrolled Price Method (CUP) as the most appropriate method in so far as the international transaction of `Payment of royalty’ is concerned. On being called upon to justify the ALP of this transaction, the assessee stated that its AEs were providing technical know-how which was used for the purposes of manufacturing. As a quid pro quo, royalty was paid at the specified rate on total sales effected with the use of such technical know- how. The TPO noticed that the goods manufactured by the assessee with the help of such technical know-how received from its AEs were also exported to the AEs. He further observed that the assessee was purchasing raw material from AEs, goods were manufactured in India and, then, a part of the same were exported to these AEs alone. Payment of royalty as a percentage of sales to the AEs was treated as uncalled for, as in the opinion of the TPO, the assessee was acting like a contract manufacturer on behalf of these AEs. He, therefore, treated ALP of the international transactions relating to payment of royalty for exports to AEs amounting to Rs.33,04,471/- at Nil. The DRP, in turn, noticed on perusal of Agreements between the assessee and these AEs that there was a constant inward and outward flow of technology and know-how between the assessee and its AEs and, hence, it was not a case of the AE bringing in new technology to the tax payer warranting any payment of royalty. On a perusal of the order passed by the TPO, the DRP observed that ALP of royalty was determined at Nil, thereby making addition of Rs.33,04,471/- as against actual payment of royalty amounting to Rs.84,79,239/-. The assessee was required to provide correct value of the 6 royalty paid to the TPO and, accordingly, the TPO was directed to disallow the correct amount of royalty. In the consequential order passed by the TPO, a part of which has been reproduced in the impugned assessment order, the TPO determined Nil ALP of the international transaction of payment of royalty to the tune of Rs.84,79,239/-. The AO in the final order made addition for the said sum. The assessee is aggrieved against this addition.
We have heard the rival submissions and perused the relevant material on record. It is observed that the TPO has computed ALP of the international transaction of `Payment of Royalty’ at Nil by holding that the assessee did not avail any benefit and the services provided by the foreign AEs were unwarranted. In doing so, he rejected the assessee’s adoption of TNMM as the most appropriate method and followed the CUP method. That is how, he computed ALP of this international transaction at Nil. The AO in his order has simply incorporated the conclusion of the TPO in determining the ALP of this international transaction at Nil without carrying out any independent analysis or evaluation as to whether or not such use of technical know-how was required/availed by the assessee in terms of section 37(1) of the Act. The ld. AR fairly admitted that there is no independent discussion in the assessment order about the disallowance of royalty payment, except for reproduction of the relevant parts from the order of the TPO.
The Hon'ble Delhi High Court in CIT v. Cushman & Wakefield (India) (P.) Ltd. (2014) 367 ITR 730(Del) has held that the authority of the TPO is limited to conducting transfer pricing analysis for determining the ALP of an international transaction and not to decide if such services exist or benefits did accrue to the assessee. Such later aspects have been held to be falling in the exclusive domain of the AO. In that case, it was observed that the E-mails considered by tribunal from Mr. Braganza and Mr. Choudhary dealt with specific interaction and related to benefits obtained by assessee, providing a sufficient basis to hold that benefit accrued to assessee. Since the details of specific activities for which cost was incurred by both AEs (for activities of Mr. Braganza and Mr. Choudhary), and attendant benefits to assessee were not considered, the Hon'ble High Court remanded the matter to file of concerned AO for an ALP assessment by TPO, followed by AO's assessment order in accordance with law considering the deductibility or otherwise as per section 37(1) of the Act.
When we advert to the facts of the instant case, it turns out that the TPO proposed the transfer pricing adjustment with Nil ALP of the international transaction of `Payment of royalty’ on the ground that no such payment was warranted and further no cost benefit analysis on this count was brought to his notice and as such the payment of royalty was not required. The AO in his final assessment order dated 26.12.2013 has taken the ALP at Nil on the basis of recommendation of the TPO without carrying out any independent investigation in terms of the deductibility or otherwise of such payment in terms of section 37(1) of the Act. As per the ratio decidendi of Cushman & Wakefield India (P.) Ltd. (supra), the TPO was required to simply determine the ALP of this transaction unconcerned with the fact, if any benefit accrued to the assessee and thereafter, it was for the AO to decide the deductibility of this amount u/s 37(1) of the Act.
Since the authorities below have acted in contradiction to the ratio laid down in Cushman & Wakefield (supra), we set aside the impugned order on this score and remit the matter to the file of AO/TPO for deciding it in conformity with the law laid down by the Hon'ble jurisdictional High Court in the case of Cushman & Wakefield (India) (P.)
Ltd. (supra).
Before parting with this issue, we want to clarify that we have desisted from examining the correctness of any aspect of this international transaction, be it the calculation of the amount paid as royalty or determination of ALP of this international transaction, such as, the most appropriate method and comparables etc. because the matter is being sent to the AO/TPO for redoing in accordance with the judgment in the case of Cushman & Wakefield (India) (P.) Ltd. (supra). It is further seen that the TPO has also recommended the transfer pricing adjustment of the full amount of royalty payment, without checking the veracity of the calculation of royalty payment in terms of rate(s) as given in the Agreements with both the AEs. Now the ball is in the court of the lower authorities to independently do the needful.
Next ground is against the disallowance of a sum of Rs.2,57,500/- u/s 14 of the Act.
Facts apropos this issue are that the assessee received exempt dividend income u/s 10(34) amounting to Rs.46,46,453 and did not offer any disallowance u/s 14A of the Act. The AO made disallowance u/s 14A amounting to Rs.5,15,100/-. The DRP directed the AO to work out the amount based on a proper methodology and to make suitable amendment in the working of the amount of average value of investments and related computation while passing the final order. The AO made disallowance u/s 14A as per Rule 8D @ 0.5% of the average investments, which resulted into addition of Rs.2,57,500/-.
We have heard the rival submissions and perused the relevant material on record. The ld. AR was fair enough to concede that similar issue has been decided by the Tribunal in the preceding year against the assessee and the facts are not distinguishable. The ld. DR supported the impugned order.
Having regard to the facts of the instant case and the submissions advanced on behalf of the assessee about the confirmation of similar disallowance u/s 14A by the tribunal for the immediately preceding year @ 0.5% of the average value of investments in terms of Rule 8D(2)(iii), we approve the action of the AO in making the disallowance to this extent alone. This ground fails.
In the result, the appeal is partly allowed for statistical purposes.
The order pronounced in the open court on 18.02.2016.