2019 (2) TMI 1613 - AT - Income Tax

Tribunal favors assessee in transfer pricing dispute, approves TNMM method over CUP

The Tribunal allowed the assessee's appeal and dismissed the revenue's appeal, upholding the use of the Transactional Net Margin Method (TNMM) over the ... TPA - MAM selection - CUP or TNMM - profits on transactions with AEs and the non AEs - assessee selected TNMM method this year wherein TPO selected internal CUP which was also taken by assessee in earlier years - HELD THAT:- A method of determining arm’s length price, to be held as a ‘most appropriate method’ (MAM), should be, as provided in rule 10C(1), a method “which is best suited to the facts and circumstances of each particular transaction” and a method and “which provides the most reliable measure of arm’s length price of the international transaction”. Under rule 10C(2)(c), “the availability, coverage and reliability of data necessary for application of the method” is one of the crucial factors determining suitability of a method of determination of arm’s length price in a particular fact situation. Similarly, it is also important to determine whether accurate adjustments can be made for the differences between the international transactions and the comparable uncontrolled transactions, and unless such adjustments can be made the related method cannot be said to be most appropriate method. In our considered view, the application of CUP method was indeed not justified on the facts of the present case. The intra AE transactions, on the facts of this case, were so fundamentally different in character in economic circumstances and contractual terms, that these cannot be compared with the independent transactions entered into by the assessee. We, therefore, reject the stand of the authorities below on this issue. The assessee has applied TNMM by comparing the profits on transactions with AEs and the non AEs and no specific defects have been pointed out in the allocation of costs in the segmental accounts which are duly reconciled with entity level consolidated accounts. Dealing with the Internal TNMM adopted by the assessee the TPO had expressed the view that the basis of allocating the overheads was not clear, in response to which it was explained by the assessee that revenue and expenses have been allocated on actual basis wherever these are directly allocable, and wherever these are not directly allocable, the allocation has been done on the basis of appropriate allocation key such as ration of sales quantity, sales revenue, total revenue. It was also explained that the segmental details have been reconciled with entity level audited accounts. The assessee had further submitted that “in case if in your view there are any inappropriate cost allocations, we would appreciate if you can kindly let us know which cost allocations are not appropriate and why these are not appropriate so that we can accordingly clarify and explain on those aspects”. We have noted that the TPO did not have any specific comment on this request and he simply rejected the explanation of assessee as “not accepted”. No specific adjustments were suggested to the allocations made in the segmental accounts and the discussions were confined to generalities. In these circumstances, we see no reasons to disturb the internal TNMM adopted by the assessee. We, therefore, delete the impugned ALP adjustment. Allowabilty of total Research and Development Expenditure - claim made first time before CIT(A) - HELD THAT:- Powers of the Tribunal to admit a new claim at this stage of proceedings either. In the case of NTPC Limited Vs CIT [1996 (12) TMI 7 - SUPREME COURT] has categorically observed that “The power of the Tribunal in dealing with appeals is thus expressed in the widest possible terms. The purpose of the assessment proceedings before the taxing authorities is to assess correctly the tax liability of an assessee in accordance with law” - we deem it fit and proper to admit the claim of the assessee but remit the same to the file of the Assessing Officer for adjudication on merits in accordance with the law, by way of a speaking order and after giving a fair and reasonable opportunity of hearing to the assessee. Allowability of repairs and replacements - amortized in the accounts - HELD THAT:- We find Hon’ble Apex Court in the case of Taparia Tools Limited vs. JCIT [2015 (3) TMI 853 - SUPREME COURT] has accepted a similar proposition that allowability of revenue expenditure claim cannot be denied merely on the ground that the same has been amortized or claimed for over a period of years. We accordingly accept assessee’s corresponding substantive ground and direct the Assessing Officer to delete the impugned disallowance. Allowability of revenue expenditure - expenses on account of replacement of glass line, Ela Battery, Butterfly valve size 8, LPG Burner Torch, weight scale platform, Oxygen Sensor, Hydrogen Butene Sensor and Ultrasonic Thickness Tester - HELD THAT:- As evidence from a plain look at the nature of expenditure, overwhelming part of the expenses is clearly in the nature of replacement and repairs and the mere fact that its benefit will be beyond one year cannot be reason enough to decline the treatment as revenue expenditure. This threshold of benefit being beyond one year for an expense to be treated as capital expenditure is alien to the tax jurisprudence. Enduring benefit is a test often resorted to but enduring benefit does not mean benefit beyond one year and it is not of unqualified application such as in replacement repairs. Glass line replacement cannot be an acquisition of independent asset or anything other than replacement repairs. Similarly, battery and valve cannot be treated as standalone assets and are in the nature of replacements. The remaining expenses are small expenses and integral to the R&D facilities maintenance. In any case, the authorities below have not assigned any specific reasons, beyond the vague generalities, for treating these expenses as capital expenditure. - Decided in favour of assessee. Issues Involved:1. Confirmation of addition under Section 92 of the Income Tax Act, 1961.2. Rejection of Transactional Net Margin Method (TNMM) and adoption of Comparable Uncontrolled Price (CUP) method.3. Adjustments for differences between AE and non-AE transactions.4. Allowability of research and development expenditure.5. Disallowance of amortized expenses.6. Treatment of certain expenditures as capital or revenue expenditure.Issue-wise Detailed Analysis:1. Confirmation of Addition under Section 92 of the Income Tax Act, 1961:The assessee challenged the addition of Rs. 2,78,02,502 to its income concerning international transactions with its Associated Enterprises (AEs). The Tribunal examined whether the addition was justified under Section 92, which deals with transfer pricing adjustments.2. Rejection of Transactional Net Margin Method (TNMM) and Adoption of Comparable Uncontrolled Price (CUP) Method:The assessee had shifted from using the internal CUP method to TNMM for determining the arm’s length price (ALP) of transactions. The Transfer Pricing Officer (TPO) and CIT(A) rejected this shift, insisting on the CUP method. The Tribunal noted that although direct methods like CUP are generally preferred, their applicability depends on the availability of reliable data and the ability to make accurate adjustments for differences between transactions. The Tribunal found that the TPO's approach of comparing average prices and not individual transactions was flawed. It was also noted that the TPO did not adequately address the differences in economic circumstances and contractual terms between AE and non-AE transactions, such as advance payments and guaranteed purchase obligations, which significantly impacted comparability.3. Adjustments for Differences between AE and Non-AE Transactions:The Tribunal observed that the CIT(A) acknowledged the possibility of adjustments but did not allow them on merits. It was emphasized that significant variations in payment terms, contractual obligations, and economic circumstances between AE and non-AE transactions made the CUP method unsuitable without proper adjustments. The Tribunal concluded that accurate adjustments could not be made, rendering the CUP method inappropriate for this case. Consequently, the Tribunal upheld the use of TNMM by the assessee, noting that no specific defects were pointed out in the allocation of costs in the segmental accounts.4. Allowability of Research and Development Expenditure:The assessee claimed a deduction of Rs. 1,29,56,391 under research and development expenditure, which was initially claimed at Rs. 53,76,524. The CIT(A) rejected this claim on procedural grounds, stating it should have been made via a revised return. The Tribunal, however, admitted the claim and remitted it to the Assessing Officer for adjudication on merits, citing the Tribunal's power to admit additional claims even without a revised return, as established in the NTPC Limited case.5. Disallowance of Amortized Expenses:The assessee claimed Rs. 3,32,012 as amortized expenses for repairs and replacements, which the CIT(A) disallowed, treating it as capital expenditure. The Tribunal referenced a previous decision in the assessee's favor, recognizing the expenses as revenue expenditure and directed the deletion of the disallowance.6. Treatment of Certain Expenditures as Capital or Revenue Expenditure:The assessee contested the disallowance of Rs. 23,14,803, which included expenses for replacement and repairs. The Tribunal found these expenses to be in the nature of replacement and repairs, not capital expenditure, and directed the deletion of the disallowance. The Tribunal emphasized that enduring benefit does not necessarily imply capital expenditure and that the nature of the expenses should be considered.Separate Judgments:The Tribunal allowed the assessee's appeal and dismissed the revenue's appeal, rendering the issue of partial relief granted by the CIT(A) academic and infructuous. The Tribunal's decision was pronounced on February 12, 2019.