2016 (8) TMI 1412 - AT - Income Tax

Appeal partly allowed, remanded for fresh adjudication. Tribunal rules for assessee on transfer pricing.

M/s Rolls Royce Industrial Power (India) Ltd. Versus Dy. Director of Income Tax, Circle-2 (1), International Taxation, New Delhi

M/s Rolls Royce Industrial Power (India) Ltd. Versus Dy. Director of Income Tax, Circle-2 (1), International Taxation, New Delhi - TMI Issues Involved:1. Legality of the order passed u/s 143(3) read with section 144C of the Income Tax Act.2. Calculation of total income by the AO.3. Application of transfer pricing regulations on the Liaison Office (LO) of the assessee.4. Determination of Arm’s Length Price (ALP) and markup percentage.5. Treatment of receipts under the Operation and Maintenance Agreement (O&M) as Fees for Technical Services (FTS).6. Taxation of other incomes from the Godavari Operation & Maintenance Project.7. Adjustment of unabsorbed brought forward losses and unabsorbed depreciation.8. Charging of interest u/s 234B.Detailed Analysis:1. Legality of the Order Passed u/s 143(3) read with Section 144C:The assessee contended that the order passed was bad in law. However, this ground was general and did not require adjudication.2. Calculation of Total Income by the AO:The assessee challenged the computation of total income at Rs. 386,356,928 against the returned income of Rs. 9,66,73,030, claiming it to be illegal and erroneous. The tribunal did not provide specific detailed analysis on this point separately but addressed it within the context of other issues.3. Application of Transfer Pricing Regulations on the Liaison Office (LO):The assessee argued that applying transfer pricing regulations on the LO was erroneous. The tribunal referred to its previous orders (ITA Nos. 1410 to 1413/Del/2007, 1682 & 1683/Del/2008, and 1297/Del/2008) where it was held that the LO's activities did not constitute a Permanent Establishment (PE) under Article 5 of the DTAA. The tribunal decided this issue in favor of the assessee.4. Determination of Arm’s Length Price (ALP) and Markup Percentage:The AO applied a markup of 27.08% instead of the 16.21% proposed by the TPO. This issue was linked to the transfer pricing regulations applied to the LO. Since the tribunal decided the application of transfer pricing regulations in favor of the assessee, this issue became academic and was dismissed.5. Treatment of Receipts under the O&M Agreement as FTS:The AO treated the receipts from the Godavari O&M project as FTS under Section 9(1)(vii) and Article 13(4)(c) of the DTAA, taxing them on a gross basis. The tribunal referred to its previous orders (ITA Nos. 5437 & 5438/Del/2011) and held that the income from the O&M project should be taxed on a net basis as business income, not as FTS. This issue was decided in favor of the assessee.6. Taxation of Other Incomes from the Godavari O&M Project:The AO taxed various other incomes on a gross basis. The tribunal followed its earlier decisions and directed that these incomes should be taxed on a net basis. Specific incomes like interest from foreign banks, profit on sale of fixed assets, and exchange gains were discussed, and the tribunal directed the AO to follow the principles laid down in previous orders, ensuring fair treatment.7. Adjustment of Unabsorbed Brought Forward Losses and Unabsorbed Depreciation:The assessee raised additional grounds regarding the adjustment of unabsorbed losses and depreciation. The tribunal admitted these grounds, citing the Supreme Court's decision in National Thermal Power Co. Ltd. Vs CIT, and remanded the issue back to the AO for fresh adjudication.8. Charging of Interest u/s 234B:The tribunal noted that there was no discussion on the applicability of interest u/s 234B in the orders of the AO or DRP. It remanded this issue back to the AO for fresh adjudication, considering the relevant facts and providing a reasonable opportunity for the assessee to be heard.Conclusion:The appeal was partly allowed and partly allowed for statistical purposes, with several issues remanded to the AO for fresh adjudication in accordance with the tribunal's directions and previous judgments.