2018 (8) TMI 2046 - HC - Income Tax

High Court upholds Tribunal's decision on royalty payment & treatment of segments for Arm's Length Price

The High Court dismissed the appeal filed by the Revenue concerning royalty payment to associated enterprises and the treatment of trading and ... Royalty to its associated enterprises - Whether Royalty payment cannot be allowed and therefore proposed an TP Adjustment under 92CA - HELD THAT:- We find that the relevant record and evidence was duly produced by the assessee before the TPO and therefore the DRP is justified in not accepting the finding of the TPO in determining the Arm’s Length Price of royalty at NIL. An identical issue was considered by this Tribunal in assessee’s own case for the Assessment Year 2007-08 [2018 (7) TMI 1848 - KARNATAKA HIGH COURT] and further for the Assessment Year 2008-09. [2014 (8) TMI 1153 - ITAT BANGALORE] Determining the ALP under TNMM - HELD THAT:- Tribunal was of the view that in the fitness of things and in the facts and circumstances of the case where the comparable companies are also trading in spares and components then it would be appropriate to combine the trading and manufacturing segments for computing the ALP. A similar view was taken by the Tribunal after having a detailed discussion on the issue for the Assessment Year 2007-08 [2018 (7) TMI 1848 - KARNATAKA HIGH COURT]. Substantial question of law - Unless an ex-facie perversity in the findings of the learned Income Tax Appellate Tribunal is established by the appellant, the appeal at the instance of an assessee or the Revenue under Section 260-A of the Act is not maintainable - See M/S. SOFTBRANDS INDIA P. LTD. [2018 (6) TMI 1327 - KARNATAKA HIGH COURT] Issues:1. Interpretation of substantial questions of law regarding royalty payment to associated enterprises.2. Treatment of trading and manufacturing segments separately for determining the Arm's Length Price.Interpretation of Substantial Question of Law No.1 - Royalty Payment:The appeal raised the issue of whether the Tribunal was correct in confirming the direction of the Dispute Resolution Panel (DRP) regarding the payment of royalty to associated enterprises. The Tribunal considered the technical assistance agreement under which royalty was paid for vehicles assembled using design, technology, and specifications provided by the parent company. The Tribunal found that the DRP was justified in not accepting the Transfer Pricing Officer's (TPO) finding of Nil royalty, as evidence was produced by the assessee. Previous Tribunal decisions for the Assessment Years 2007-08 and 2008-09 supported this view. Therefore, the Tribunal upheld the DRP's direction on royalty payment.Interpretation of Substantial Question of Law No.2 - Trading and Manufacturing Segments:The second issue involved the Tribunal's decision on treating trading and manufacturing segments separately for determining the Arm's Length Price. The Tribunal noted previous cases where it considered the segments as an integrated transaction for determining the ALP under the Transactional Net Margin Method (TNMM). Relying on past orders, the Tribunal directed the Assessing Officer/TPO to compute the ALP by treating the trading and manufacturing segments as an interlinked and combined transaction. This decision was based on the view that combining the segments was appropriate when comparable companies were also trading in spares and components. The Tribunal's consistent approach in previous cases supported this decision.Conclusion:The High Court, after considering the arguments and previous decisions, found no substantial question of law in the case. The Court referred to a previous judgment emphasizing that dissatisfaction with Tribunal findings alone is not sufficient to invoke Section 260-A of the Act before the Court. As a result, the appeal filed by the Revenue was dismissed, and no costs were awarded.