Tribunal allows appeals, directs reassessment. Interest and penalty proceedings deemed premature.

M/s. Kirby Building Systems India Ltd. Versus ACIT, Circle 8(1), Hyderabad

M/s. Kirby Building Systems India Ltd. Versus ACIT, Circle 8(1), Hyderabad - TMI Issues Involved:
1. Disallowance of payment of royalty and technical service fee.
2. Determination of Arm's Length Price (ALP) for reimbursement costs.
3. Imposition of interest under section 234B of the Income Tax Act.
4. Initiation of penalty proceedings under section 271(1)(c) of the Income Tax Act.

Detailed Analysis:

1. Disallowance of Payment of Royalty and Technical Service Fee:
The primary issue pertains to the disallowance of payment of royalty and technical service fee to M/s. Kirby Building Systems, Kuwait, analyzed under the provisions of transfer pricing. The assessee, M/s. Kirby Building Systems India Ltd., engaged in the business of manufacturing Pre-Engineered Steel Building System (PEB) Products, filed returns declaring specific incomes for the respective assessment years. The Assessing Officer (A.O.) determined higher total incomes and made adjustments under section 92CA of the I.T. Act.

The Tribunal examined the issue, referring to earlier years' orders (ITA.No.1651/Hyd/2010 and ITA.No.1975/Hyd/2011 for A.Ys. 2006-07 and 2007-08). The Tribunal noted that the TPO (Transfer Pricing Officer) had not analyzed the payments under TNMM (Transactional Net Margin Method) or any other method required under the provisions. The TPO's decision to determine the ALP (Arm's Length Price) at NIL was not sustainable, as the agreements were originally entered into before the TP provisions came into statute. The Tribunal cited the Delhi High Court's decision in CIT vs. EKL Appliances, emphasizing that the TPO cannot dictate commercial decisions or deny claims based on business necessity.

The Tribunal concluded that the royalty and technical knowhow payments made by the assessee to its AE (Associated Enterprise) were at arm's length and allowed the assessee's claim. The agreements were approved by the RBI and Ministry of Industry, and no comparable cases were brought on record by the TPO. Therefore, the Tribunal directed the A.O. to allow the amounts as claimed by the assessee.

2. Determination of ALP for Reimbursement Costs:
The second issue concerns the determination of ALP for reimbursement costs. The assessee maintained an I.T. Data Centre and used SAP ERP enterprise services across the group. The cost of implementation was initially paid by the assessee and later recovered from the respective group companies without any markup. The TPO, however, considered these transactions as international transactions and applied a 20% markup on the reimbursement costs, which was contested by the assessee.

The Tribunal noted that the services provided by the assessee in implementing the ERP systems involved cost-sharing and were not pure reimbursements. Therefore, a markup was warranted under TP provisions. However, the Tribunal found the 20% markup arbitrary and reduced it to 5%, referencing the decision in M/s Zydus Atlanta Healthcare P.Ltd. The A.O./TPO was directed to rework the calculations accordingly.

3. Imposition of Interest under Section 234B:
Ground No. 13 in both appeals pertains to the imposition of interest under section 234B of the Act on transfer pricing adjustments. The Tribunal found this ground to be consequential in nature, implying that the decision on this issue would follow the outcomes of the primary issues discussed above.

4. Initiation of Penalty Proceedings under Section 271(1)(c):
Ground No. 14 in the first appeal and Ground No. 13 in the second appeal pertain to initiating penalty proceedings under section 271(1)(c) of the Act. The Tribunal found these grounds to be premature and did not require separate adjudication at this stage.

Conclusion:
The appeals were partly allowed. The Tribunal directed the A.O. to allow the royalty and technical service fee claims and to rework the reimbursement costs with a 5% markup. The imposition of interest under section 234B was noted as consequential, and the initiation of penalty proceedings under section 271(1)(c) was deemed premature. The orders were pronounced in open court on 19.11.2014.