Tribunal upholds 4% royalty rate as arm's length price, restores notional interest matter for fresh examination

ITAT Bengaluru ruled on transfer pricing adjustment for royalty payments, holding that 4% royalty rate should be treated at arm's length price based on tribunal's own precedent from AY 2013-14. Regarding notional interest computation, matter was restored to AO for fresh examination to determine whether interest income is real or notional, directing that notional interest should not be taxed. On tax collected at source credit claim, tribunal directed AO to examine assessee's claim and decide according to law.

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Issues Involved:
1. Transfer Pricing Adjustment
2. Corporate Tax Matters

Summary:

Issue 1: Transfer Pricing Adjustment

The assessee, a company engaged in the manufacturing and supply of industrial gases, filed a return of income for AY 2018-19 declaring 'Nil' income. The assessment was selected for scrutiny, and the Transfer Pricing Officer (TPO) proposed TP adjustments regarding Royalty payment, restricting the ALP on Royalty at 1% (assessee had claimed 4%). The Assessing Officer (AO) incorporated the TP adjustment proposed by the TPO in the draft assessment order. The Dispute Resolution Panel (DRP) confirmed the TPO's view. Aggrieved, the assessee appealed to the Tribunal, arguing that the issue is covered by the Tribunal's orders in the assessee's own case for AY 2012-13 to 2016-17. The Tribunal found that on identical facts, it had previously decided in favor of the assessee, holding that the payment of Royalty at 4% is to be treated at arm's length. Consequently, Ground No. 5 and its sub-grounds were allowed.

Issue 2: Corporate Tax Matters

Ground 6.3: Addition of Notional Income

The AO made an addition of Rs.32,72,532/- being notional interest while computing the total income for AY 2018-19. The DRP directed the AO to re-examine the issue, but due to time constraints, the AO sustained the addition without detailed examination. The Tribunal restored the matter to the AO to decide afresh, directing the AO to examine whether the interest income is real or notional and if it is notional, it should not be taxed during the relevant assessment year.

Ground 6.4: Credit of Tax Collected at Source

The assessee contended that credit of tax collected should be given at Rs.5,86,229/- as claimed in the return of income instead of Rs.5,71,912/- granted in the final assessment order. The Tribunal directed the AO to examine the claim and take a decision in accordance with the law.

Conclusion:

The appeal filed by the assessee was partly allowed. The Tribunal ruled in favor of the assessee on the transfer pricing adjustment issue and remanded the corporate tax matters for fresh examination by the AO. The order was pronounced in the open Court on 28th February, 2023.

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