2014 (10) TMI 696 - AT - Income Tax

Tribunal directs allowance of claimed amounts for royalty & fees, emphasizes ALP determination over disallowance.

The Tribunal allowed both appeals of the assessee, directing the AO to allow the claimed amounts for royalty and technical know-how fees and the sales tax ... Transfer pricing adjustment - Payment of royalty and technical service fee – Held that:- Kirby Building Systems India P. Ltd., is a wholly owned subsidiary of Alghanim Industries, a Kuwait based Multi-Billion Conglomerate - It is one of the world’s largest producers of Pre- Engineered Steel Buildings (in short “PEB”) and has been operational for more than 38 years since 1976 - There is no dispute with reference to the fact that assessee was promoted by the Kirby Building Systems, Kuwait and its original technical service agreement for payment of lump sum amount of $ 2 million dollars as technical knowhow fee and royalty of 2.5% in the first year and 5% from second year onwards up to March 31, 2007 was approved by the RBI and Ministry of Industries - assessee did not remit any of those amounts in those years and the agreement was amended periodically - in the year assessee has paid $ 1 lakh dollars as technical knowhow fee and royalty at 7.5% on domestic sales as per the agreements entered into and approved by the authorities - apart from legal position, even on merits the disallowance of entire technical knowhow payment and part disallowance of royalty payment to AE was not warranted. The agreements were periodically approved by RBI and by Ministry of Industry and assessee was paying the amounts as per the agreements - Even though approval by the other Governmental authorities does not prevent TPO in examining the ALP as per the provisions of the Act, TPO did not examine the issue under the T.P. provisions at all but took upon the role of an A.O. in analyzing the commercial expediency of payment of royalty and technical knowhow under the provisions of section 37(1) - Since the agreements were approved by the authorities and the royalty fee and technical knowhow are at arm’s length and that assessee’s claim should be allowed as such - There is no information brought on record by the TPO that the payment at 7.5% on the net sales is not at arm’s length as there was no other comparable case brought on record - Generally, the Government of India is approving the royalty payments at 7.5% of the sales and this approval given by the RBI and Ministry of Industry is at par with similar agreements being approved in other contracts/agreements - royalty and technical knowhow payments made by the assessee to its AE are considered at arm’s length and the grounds raised by the assessee on this issue are allowed – Decided in favour of assessee. Deferred sales tax u/s 43B - Provisions of A.P. VAT Act, 2005 – Held that:- As decided in assessee’s own case for the earlier assessment year, it has been held that the AO disallowed the claim of the assessee stating that it failed to produce a copy of the agreement with the Sales Tax department on conversion of deferment into interest free loan - As per this document, which the photocopy is enclosed herewith, the benefit availed under sales tax deferment scheme - They have also produced the letter of Asst. Commissioner, Large tax payers Unit, Charminar Division in their favour – thus, the AO is directed to allow the amount as well – Decided in favour of assessee. Issues Involved:1. Transfer Pricing Adjustments (TP adjustments)2. Disallowance under Section 43B of the Income Tax Act, 19613. Levy of Interest under Sections 234B and 234D4. Initiation of Penalty Proceedings under Section 271(1)(c)Detailed Analysis:1. Transfer Pricing Adjustments (TP adjustments):The primary issue in both appeals pertains to the disallowance of payment of royalty and technical service fees to the Associated Enterprise (AE), Kirby Building Systems, Kuwait, under the provisions of transfer pricing.- The assessee, engaged in the manufacture of Pre-Engineered Steel Building Systems, had international transactions with its AE amounting to Rs. 15,96,89,713/-. The Transfer Pricing Officer (TPO) accepted certain transactions but contested the payment of royalty and technical service fees totaling Rs. 13,70,97,902/-, deeming them not at arm's length.- The TPO concluded that there was no necessity for the taxpayer to pay any royalty or technical service fees to the AE, suggesting that these payments were a means to shift profits to no-tax jurisdictions like Kuwait and Mauritius. The TPO determined the arm's length price (ALP) of these payments at NIL.- The Dispute Resolution Panel (DRP) partially upheld the TPO's decision, allowing royalty payments at 3.5% on sales instead of the claimed 7.5%, and disallowing the technical service fees entirely.- The assessee argued that the TPO and DRP lacked jurisdiction to deny the claim entirely and should have only examined the ALP. The assessee also contended that the agreements for royalty and technical fees were approved by the Reserve Bank of India (RBI) and the Department of Industries, and such approvals should not be disregarded by the TPO/DRP.- The Tribunal found that the TPO had overstepped by questioning the business prudence of the assessee and disallowing the entire payment instead of determining the ALP as required under transfer pricing provisions. The Tribunal referred to the Delhi High Court's decision in CIT vs. EKL Appliances Ltd., which held that the TPO should not disallow expenses based on business prudence but should determine the ALP of the transaction.- The Tribunal concluded that the royalty and technical know-how payments were at arm's length and directed the Assessing Officer (AO) to allow the amounts as claimed by the assessee.2. Disallowance under Section 43B:- The issue involved the disallowance of Rs. 3,45,52,755/- pertaining to sales tax deferment under the provisions of the A.P. VAT Act, 2005. The AO disallowed the amount under Section 43B, stating that the assessee did not furnish adequate information regarding the deferment.- The DRP upheld the AO's decision, citing incomplete documentation from the assessee.- The Tribunal noted that similar disallowances had been allowed in the subsequent assessment year (A.Y. 2007-08) based on evidence provided by the assessee. Considering the consistency in facts and the evidence provided, the Tribunal directed the AO to allow the amount in the current year as well.3. Levy of Interest under Sections 234B and 234D:- The assessee contested the levy of interest under Sections 234B and 234D. However, the Tribunal found these grounds to be consequential and academic in nature, thus dismissing them without detailed adjudication.4. Initiation of Penalty Proceedings under Section 271(1)(c):- The assessee raised a ground against the initiation of penalty proceedings under Section 271(1)(c). The Tribunal deemed this ground premature and dismissed it without adjudication.Conclusion:The Tribunal allowed both appeals of the assessee, directing the AO to allow the claimed amounts for royalty and technical know-how fees and the sales tax deferment. The Tribunal emphasized the necessity for the TPO to determine the ALP rather than disallowing expenses based on business prudence. The issues of interest levy and penalty proceedings were dismissed as academic and premature, respectively.