TNM Method Recommended for ALP in Royalties; TDS Not Applicable on Employee Reimbursements under Sec 195

The ITAT Bangalore held that the TNM method is the most appropriate for determining ALP in royalty transactions, directing the AO/TPO to apply it after hearing the assessee. Regarding TDS under section 195, the tribunal ruled that reimbursements for seconded employees do not constitute fees for technical services and are not taxable under section 195, ordering deletion of disallowance under section 40(a)(i). On plant layout charges, the tribunal found insufficient evidence to classify the expenditure as capital or revenue and directed the assessee to submit detailed information for AO's verification per Supreme Court principles.

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Issues Involved:
1. Transfer Pricing Adjustment for Royalty Payments
2. Disallowance of Reimbursement of Salary for Seconded Employees
3. Treatment of Plant Layout Charges as Capital Expenditure
4. Non-granting of Credit for Advance Tax Paid
5. Levy of Interest under Sections 234B and 234C

Issue-wise Detailed Analysis:

1. Transfer Pricing Adjustment for Royalty Payments:
The assessee, engaged in manufacturing automobile components, filed returns for AY 2013-14 and 2015-16. The case was selected for scrutiny due to international transactions exceeding Rs. 15 crores. The TPO observed that the assessee used TNMM to benchmark international transactions, aggregating all transactions. The TPO, however, applied the Profit Split Method (PSM) for royalty transactions, proposing an adjustment of Rs. 9,02,28,585/-. The Tribunal noted that similar issues were addressed in the case of Toyota Kirloskar Auto Parts Ltd., where TNMM was upheld as the Most Appropriate Method (MAM). The Tribunal concluded that TNMM should be applied for benchmarking royalty transactions, directing the AO/TPO to apply TNMM after providing the assessee an opportunity to be heard.

2. Disallowance of Reimbursement of Salary for Seconded Employees:
The DRP treated the reimbursement of expat salaries as "fee for technical services" (FTS) and disallowed the amount under Section 40(a)(i) due to non-deduction of TDS. The Tribunal examined the "Agreement for Employees on Loan" and concluded that the seconded employees worked under the control of the assessee, with salaries subjected to TDS under Section 192. The Tribunal relied on various judicial precedents, including the Karnataka High Court decision in DIT vs. Abbey Business Services India (P.) Ltd., holding that reimbursements to Toyota Corporation, Japan, were not FTS and thus not taxable under Section 195. The Tribunal directed the AO to delete the disallowance.

3. Treatment of Plant Layout Charges as Capital Expenditure:
The assessee incurred expenses for plant layout changes, which the AO treated as capital expenditure, allowing only depreciation. The DRP upheld this view, citing the Supreme Court decision in Ballimal Naval Kishore & Anr vs. CIT. The Tribunal noted the lack of detailed evidence from the assessee and directed the AO to re-examine the issue based on the principles laid down by the Supreme Court, allowing the assessee to provide relevant details.

4. Non-granting of Credit for Advance Tax Paid:
The assessee raised an issue regarding the non-granting of credit for advance tax paid. The Tribunal directed the assessee to furnish requisite evidence, instructing the AO to verify and grant the credit accordingly.

5. Levy of Interest under Sections 234B and 234C:
The assessee challenged the levy of interest under Sections 234B and 234C. The Tribunal noted that this ground was consequential and did not require adjudication, allowing it for statistical purposes.

Conclusion:
The Tribunal allowed the appeals for AY 2013-14 and 2015-16, directing the AO/TPO to apply TNMM for transfer pricing adjustments, delete disallowances related to seconded employees' salaries, re-examine plant layout charges, and verify advance tax credits, while noting that the levy of interest was consequential.

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