Tribunal allows appeal, deletes transfer pricing adjustments, directs interest adjustment on ECB loan

The Tribunal partially allowed the assessee's appeal by deleting transfer pricing adjustments for export of finished goods, royalty payment, and information systems services. It directed the adjustment of interest on an External Commercial Borrowing loan as per RBI approval. The levy of interest under sections 234B and 234C was dismissed as consequential.

---

---

Issues Involved:

1. Transfer pricing adjustment in relation to export of finished goods to Associated Enterprises (AE).
2. Transfer pricing adjustment made to the payment of royalty for use of technical knowhow.
3. Transfer pricing adjustment in relation to payment of interest on External Commercial Borrowing (ECB) loan.
4. Transfer pricing adjustment in relation to availing of information systems (IS) services.
5. Levy of interest under section 234B and 234C of the Income Tax Act, 1961.

Issue-wise Detailed Analysis:

1. Transfer Pricing Adjustment in Relation to Export of Finished Goods to AE:

The assessee, an Indian company engaged in manufacturing and marketing industrial flavors, fragrances, and chemical specialties, challenged the addition made on account of transfer pricing adjustment related to the export of finished goods to its AEs. The Transfer Pricing Officer (TPO) observed that the assessee sold identical products to both AEs and non-AEs, with higher prices charged to non-AEs. The TPO applied the Comparable Uncontrolled Price (CUP) method to determine a difference of Rs. 73,04,480, which was added as an adjustment. The assessee argued that the transactions with AEs and non-AEs were not comparable due to differences in geographical location, volume, and marketing costs. The Tribunal agreed with the assessee, stating that geographical location and market conditions must be considered under Rule 10B(2) of the I.T. Rules. The Tribunal found that the TPO's comparison was invalid as it did not account for these differences and deleted the adjustment.

2. Transfer Pricing Adjustment Made to the Payment of Royalty for Use of Technical Knowhow:

The TPO questioned the payment of Rs. 20.12 crore as royalty to the AE, arguing that the assessee failed to provide evidence of technical knowhow transfer and that such payments were not justified after many years of operations. The TPO allowed only 10% of the royalty payment, proposing an adjustment of Rs. 20,76,49,475. The assessee contended that the royalty payment was benchmarked using the Transactional Net Margin Method (TNMM) and had been accepted in previous years. The Tribunal upheld the assessee's position, referencing its own decision in the assessee's case for the previous year, which stated that the TPO cannot determine the arm's length price on an ad-hoc basis and must use one of the prescribed methods. The Tribunal deleted the adjustment, affirming that the royalty payment was at arm's length.

3. Transfer Pricing Adjustment in Relation to Payment of Interest on ECB Loan:

The TPO adjusted the interest on an ECB loan, benchmarking it at USD LIBOR plus 143.62 basis points based on Bloomberg Database data, resulting in an adjustment of Rs. 30,53,362. The assessee argued that the interest rate was as per RBI approval, which set it at six months USD LIBOR plus 350 basis points. The Tribunal found that the TPO's benchmarking was not valid as it did not provide all relevant data to the assessee and did not account for the RBI's prescribed rate. The Tribunal directed the Assessing Officer to adjust the interest rate as per the RBI's approval, partially allowing the assessee's ground.

4. Transfer Pricing Adjustment in Relation to Availing of Information Systems (IS) Services:

The TPO determined the arm's length price of payment for IS services at Rs. 1,62,05,000, against the assessee's payment of Rs. 14,26,34,846, proposing an adjustment of Rs. 12,64,29,846. The TPO used an estimation method, which the Tribunal found invalid. The Tribunal noted that the TPO did not follow any prescribed method and relied on ad-hoc estimation. The Tribunal referenced its own decision in the assessee's case for the previous year, which stated that the TPO must use one of the prescribed methods to determine the arm's length price. The Tribunal deleted the adjustment, upholding the assessee's benchmarking.

5. Levy of Interest Under Section 234B and 234C:

The issue of levy of interest under sections 234B and 234C was deemed consequential and did not require adjudication at this stage, hence dismissed.

Conclusion:

The Tribunal allowed the assessee's appeal partly, deleting the adjustments made on account of transfer pricing for export of finished goods, royalty payment, and IS services, and directed the adjustment of interest on ECB loan as per RBI approval. The levy of interest under sections 234B and 234C was dismissed as consequential.

---