2018 (6) TMI 1843 - AT - Income Tax

Transfer pricing adjustment on royalty payments deleted due to incorrect benefit test application and nil comparables

Indian Explosives Limited Versus D.C.I.T. Circle-11 (1), J.C.I.T. Range-11 Kolkata

ITAT Kolkata allowed the assessee's appeal partly. The tribunal deleted the transfer pricing adjustment on royalty payments to associate enterprises, ... TP Adjustment - royalty payment made to associate enterprise - Nil ALP determined - HELD THAT:- It is clear first of all that the lower authorities have been very fair in not holding the assessee’s royalty transactions to be a sham ones. They have applied benefit and commercial expediency test in the instant case whilst computing nil ALP. We see no reason to approve the same these two tests of benefits and commercial expediency are not to be invoked as per the above legal position. The impugned action of the lower authorities under challenge is therefore held to be not sustainable. Quantification of the impugned ALP - TPO admittedly applied ‘CUP' method in his order (supra). He appears to have treated the tax payer itself as a valid comparable as it had not paid any royalty to the very payee in earlier assessment years. This made him to adopt nil price of the impugned royalty so as to make the adjustment in question. No reason to concur with such a course of action since the assessee itself having paid Nil amount in the past to the AE, cannot be taken as a valid comparable. This tribunal in the case of Technimont ICB India (P) Ltd.[2013 (9) TMI 595 - ITAT MUMBAI] has concluded long back that a transaction between payee and its AE is not an uncontrolled one so as to be taken as a comparable. We accept the assessee’s instant first substantive ground both on legality as well as on quantification therefore. The impugned ALP adjustment stands deleted accordingly. Disallowing provision for leave encashment u/s 43B(f) - HELD THAT:- This issue deserves to be remitted back to the Assessing Officer for taking a fresh call after the hon’ble apex court’s decision in the Revenue’s special leave petition converted to appeal staying operation of hon’ble jurisdictional high court’s judgment in Exide Industries Ltd.. [2007 (6) TMI 175 - CALCUTTA HIGH COURT] deleting identical disallowance as well as holding the statutory provision itself to be unconstitutional. We accept this fair stand and direct the AO to keep the instant issue in abeyance to be decided after the hon’ble apex court’s final verdict in the department’s appeal hereinabove. Accrual of expenditure - Addition of commission charges - year of allowability - disallowance on the ground that the same is raised on accrual basis without any details being submitted - HELD THAT:- Departmental Representative, fails to dispute that the assessee’s stand throughout is of having filed all the relevant details before the AO. We therefore conclude that in absence of any material doubting accrual of the impugned expenditure in the relevant previous year, the same has to be held allowable in the assessment year in question only as per decision in the case of Bharat Earth Movers [2000 (8) TMI 4 - SUPREME COURT The assessee succeeds in its instant substantive ground. Computing book profit u/s 115JB when Section 14A r.w.r 8D disallowance pertaining to its exempt income - HELD THAT:- Learned counsel’s only plea during the course of hearing is that the assessee has already offered the very sum in its return at the first instance. We therefore leave it open for the Assessing Officer to carry out necessary verification in order to avoid double disallowance. This substantive ground is taken as accepted for statistical purposes. TP Adjustment - goods exported to Associate Enterprises outside India forming subject matter of international transactions - MAM selection - whether such domestic sales in case of independent parties vis-à-vis export sales to AEs could be taken as comparables or not? - HELD THAT:- A co-ordinate bench in M/s. Wrigley India Private Limited[2015 (1) TMI 193 - ITAT DELHI] declined the Revenue’s similar arguments applying CUP Method in identical circumstances -Undoubtedly, direct methods of determining ALP, including cost plus method, have an inherent edge over the indirect methods, such as TNMM, but such a preference can come into play only when appropriate comparable uncontrolled transactions can be identified and analysed accordingly. That has not been done in the present case. There is, therefore, no good reason to disturb the TNMM method adopted by the assessee. Addition of club expenditure invoking Section 40(9) - HELD THAT:- No dispute about genuineness of the impugned expenditure to have incurred in a club set up at IEL, Gomia for entertainment and seminars. We observe in this backdrop that the lower authorities have wrongly invoked Section 40(9) as the same is attracted in case of specified purpose only and not qua a claim raised u/s 37 - DRP has deleted the very disallowance in the preceding assessment year. The same has attained finality. We thus adopt judicial consistency to delete the impugned disallowance as well. Assessee appeal partly allowed. Issues Involved:1. Arm's Length Price (ALP) adjustment for royalty payments.2. Leave encashment provision under Section 43B(f) of the Income Tax Act.3. Disallowance of commission charges.4. Disallowance under Section 14A while computing book profit under Section 115JB.5. ALP adjustment for goods exported to Associate Enterprises.6. Disallowance of club expenditure under Section 40(9).Detailed Analysis:1. ALP Adjustment for Royalty Payments:The primary issue was the ALP adjustment of Rs.16,24,110/- for royalty payments made to the Associate Enterprise (AE) Orica International PTE Limited, Singapore. The Assessing Officer and the Transfer Pricing Officer (TPO) proposed a 'nil' ALP by adopting the Comparable Uncontrolled Price (CUP) method, arguing that the brand value was already established and no direct benefit was derived from the Orica brand. The Dispute Resolution Panel (DRP) upheld this view, emphasizing that the brand value was long established and the benefit from using the Orica name was nebulous. However, the Tribunal disagreed, citing various legal precedents that Chapter-X provisions do not require the taxpayer to prove the necessity of the expenditure, and an ALP cannot be nil if the TPO's order does not satisfy the conditions of Section 92C(3). The Tribunal concluded that the lower authorities' action was not sustainable and deleted the ALP adjustment.2. Leave Encashment Provision:The issue of leave encashment provision of Rs.15,97,944/- was remitted back to the Assessing Officer to be decided after the Supreme Court's final verdict in the Revenue’s appeal against the jurisdictional High Court’s judgment in Exide Industries Ltd. vs. UOI, which had deleted identical disallowance and held the statutory provision unconstitutional.3. Disallowance of Commission Charges:The disallowance of Rs.12,12,157/- claimed as commission charges was contested on the grounds that the expenses were accrued but not detailed. The Tribunal accepted the assessee's argument that the commission expenses were allowable on an accrual basis as per the mercantile system of accounting, and in the absence of any material doubting the accrual, the expenditure was held allowable in the assessment year in question.4. Disallowance under Section 14A while Computing Book Profit under Section 115JB:The issue of disallowance of Rs.1,03,896/- under Section 14A while computing book profit under Section 115JB was left open for the Assessing Officer to verify to avoid double disallowance, as the assessee had already offered the sum in its return.5. ALP Adjustment for Goods Exported to Associate Enterprises:For the subsequent assessment year 2011-12, the ALP adjustment of Rs.1,66,27,119/- for royalty payments was deleted following the same reasoning as the previous year. Additionally, the ALP adjustment of Rs.18,84,152/- for goods exported to AEs was contested. The TPO had compared the Free on Board (FOB) price to domestic sales prices, which the assessee argued was not comparable due to geographical and volume differences. The Tribunal restored the issue back to the TPO for fresh adjudication, emphasizing that the domestic sales could not be valid comparables for export sales due to different business models and FAR profiles.6. Disallowance of Club Expenditure:The disallowance of Rs.2,06,838/- for club expenditure under Section 40(9) was contested. The Tribunal observed that the expenditure was genuine and incurred for entertainment and seminars, and Section 40(9) was wrongly invoked. The DRP had deleted the disallowance in the preceding year, and the Tribunal adopted judicial consistency to delete the disallowance for the current year as well.Conclusion:The appeals were partly allowed, with significant adjustments and remittals for fresh adjudication based on legal precedents and the specific facts of the case.