Tribunal upholds assessee's position on royalty, commission & interest adjustments, emphasizing TNMM approach

The Tribunal ruled in favor of the assessee, dismissing the adjustments related to royalty, commission, and interest on receivables. It emphasized the correctness of the Transaction Net Margin Method (TNMM) approach for benchmarking royalty and commission payments and highlighted the consistency in the assessee's credit policy for both related and unrelated parties. The Tribunal held that the Transfer Pricing Officer's role is limited to determining the Arm's Length Price and cannot assess the business needs of the assessee, ultimately deeming the adjustments unsustainable and directing their deletion.

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Issues:
Transfer Pricing Adjustment - Royalty and Commission
Interest on Receivables

Transfer Pricing Adjustment - Royalty and Commission:
The appeal concerns an Assessment Order for the assessment year 2016-17 where the assessee, a subsidiary company, disputed the Transfer Pricing Officer's proposed adjustment of Rs. 5,41,06,552 related to international transactions with Associated Enterprises. The Assessing Officer contended that the adjustment should be treated as cumulative under section 92CA of the Income Tax Act, 1961. The assessee argued that the royalty and commission payments were benchmarked within its business activities using the Transaction Net Margin Method (TNMM). The authorities disagreed with the assessee, citing a pending appeal from a previous year. However, the Tribunal held that the TPO's role is limited to determining the Arm's Length Price and cannot assess the business needs of the assessee. The Tribunal also emphasized that the TNMM approach adopted by the assessee was appropriate and that comparing commission rates with other AEs was not permissible under the Act. Consequently, the adjustment for royalty and commission was deemed unsustainable and was directed to be deleted.

Interest on Receivables:
Regarding interest on receivables, the Assessing Officer proposed an adjustment of Rs. 9,91,252 based on a benchmarking approach for delays beyond the credit period. The assessee contended that it did not charge interest on receivables from AEs as per its policy, and the interest payable exceeded the receivables. The Tribunal noted that the assessee's credit policy was consistent for AEs and non-AEs, and the interest on receivables was integral to sales transactions. Citing a High Court decision, the Tribunal held that not all receivables automatically qualify as international transactions. As the assessee did not charge interest from AEs or non-AEs, the adjustment on interest receivables was deemed unjustified and directed to be deleted. Consequently, the appeal was allowed, and the stay application was dismissed.

In conclusion, the Tribunal ruled in favor of the assessee, dismissing the adjustments related to royalty, commission, and interest on receivables, emphasizing the correctness of the TNMM approach and the consistency in the assessee's credit policy for both related and unrelated parties.

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