2022 (4) TMI 1443 - AT - Income Tax

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

Toyota Boshoku Automotive India Pvt. Ltd. Versus The Deputy Commissioner of Income Tax, LTU, Circle-1 and The Assistant Commissioner of Income Tax, LTU, Circle – 2, Bangalore.

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 ... TP Adjustment - MAM selection - adjustment made to the royalty as independent international transaction by using PSM as the most appropriate method - HELD THAT:- There is no dispute that, factual metrics and background our identical and the nature of payment having considered identically by the revenue authorities in both these cases. We are therefore respectfully following the view taken by coordinate bench of this tribunal in case of Toyota Kirloskar [2015 (1) TMI 921 - ITAT BANGALORE] we are of the view that TNM Method is the Most Appropriate Method and the Ld. AO/TPO is directed to apply the said method in determining the ALP, after affording opportunity of being heard to the assessee. TDS u/s 195 - Disallowance of reimbursement of salary or seconded employees on account of non-deduction of tax at source - HELD THAT:- Respectfully following the above views expressed in DIT vs. Abbey Business Services India (P.) Ltd. [2020 (12) TMI 570 - KARNATAKA HIGH COURT], Hon'ble AAR in Cholamandalam MS General Insurance Co. Ltd. [2009 (1) TMI 19 - AUTHORITY FOR ADVANCE RULINGS], Hon'ble Bombay High Court in case of Marks & Spencer Reliance India Pvt. Ltd. [2017 (5) TMI 1638 - BOMBAY HIGH COURT] Hon'ble Delhi High Court in the case of DIT Vs. HCL Infosystems Ltd. [2004 (1) TMI 16 - DELHI HIGH COURT] Coordinate bench of this Tribunal in case of IDS Software Solutions [2009 (1) TMI 363 - ITAT BANGALORE-A], Hon'ble Pune Tribunal in case of M/s. Faurecia Automative Holding [2019 (7) TMI 402 - ITAT PUNE], Hon'ble Ahmedabad Tribunal in the case of Burt Hill Designs (P) Ltd. [2017 (3) TMI 1515 - ITAT AHMEDABAD], we are of the view that the reimbursement made by the assessee in India to Toyota Corporation, Japan, towards the seconded employees cannot be regarded as 'Fee For technical Services' and therefore not taxable u/s. 195 of the Act. We therefore direct the Ld. AO to delete the disallowance made u/s. 40(a)(i) of the Act. Nature of expenditure - treatment of payment towards plant layout charges - revenue or capital expenditure - HELD THAT:- We note that the alleged expenditure has been claimed as plant layout charges to improve utilisation of resources, besides improvement in quality and safety. The Ld. AR however alternatively prayed that, in the event the said expenditure is upheld to be capitalised, depreciation may be granted. We note that the assessee has not provided any details in respect of the expenditure incurred towards layout of plant, and why was it necessary to be incurred. In our view this issue needs to be revisited based on the evidences filed by the assessee having regard to the principles laid down by Hon'ble Supreme Court in case of Ballimal Naval Kishore & Anr [1997 (1) TMI 3 - SUPREME COURT] of DRP order. Accordingly, we direct the assessee to file all relevant details in support of the claim which would be verified by the AO in accordance with law. Issues Involved:1. Transfer Pricing Adjustment for Royalty Payments2. Disallowance of Reimbursement of Salary for Seconded Employees3. Treatment of Plant Layout Charges as Capital Expenditure4. Non-granting of Credit for Advance Tax Paid5. Levy of Interest under Sections 234B and 234CIssue-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.