2016 (12) TMI 1402 - AT - Income Tax

Tribunal Rules on Jurisdiction, Transfer Pricing, Royalty Payment, and Fixed Assets

M/s. Fosroc Chemicals (India) Pvt. Ltd. Versus The Deputy Commissioner of Income Tax, Large Taxpayer Unit, Circle 1, Bangalore and The Assistant Commissioner of Income Tax, Large Taxpayer Unit, Bangalore Versus M/s. Fosroc Chemicals (India) Pvt. Ltd.

The Tribunal ruled in favor of the assessee on various issues, including jurisdiction of the Dispute Resolution Panel (DRP) to entertain objections ... Transfer pricing adjustment - royalty payment - TPO concluded that the assessee did not show as to what is tangible and substantial commercial benefit derived by the assessee from the allied services and consequent payment of technical and management cost and on this basis, he disallowed the entire payment - Held that:- We find that the assessee is paying royalty @ 8% on exports and 5% for sale within India as per the license agreement dated 31.10.2003. Subsequently, the principal agreed to waive royalty in respect of Rudrapur plant of the assessee w.e.f. 1st April, 2007. It is not the case of the AO or the TPO that the royalty rate of other units excluding Rudrapur unit has been increased on waiver of royalty for Rudrapur unit. It is also not the case of AO/TPO that sales from Rudrapur unit was also included to compute royalty payable to the principal. Under these facts, in our considered opinion, no part of royalty payment can be considered as royalty of Rudrapur unit and therefore, the action of AO/TPO to apportion part of royalty payment to Rudrapur unit is not valid and proper. We hold accordingly and appeal of Revenue for AY 2010-11 is dismissed and ground Nos. 9 & 10 of assessee’s appeal for AY 2011-12 are allowed. Issues Involved:1. Jurisdiction of the Dispute Resolution Panel (DRP) under Section 144C.2. Opportunity of being heard by the Transfer Pricing Officer (TPO).3. Determination of Arm's Length Price (ALP) using the Transactional Net Margin Method (TNMM) vs. Comparable Uncontrolled Price (CUP) method.4. Validity of the royalty payment for the Rudrapur unit.5. Addition to fixed assets.Issue-wise Detailed Analysis:1. Jurisdiction of the Dispute Resolution Panel (DRP) under Section 144C:The assessee challenged the DRP's decision, asserting that it erred in holding that it had no jurisdiction to entertain objections against the draft assessment order passed following the Tribunal's directions. The Tribunal reversed the DRP's decision, clarifying that the DRP should have decided the issue on merits. It held that the words 'first instance' in Section 144C do not limit the DRP's jurisdiction to only the original draft assessment order but also include orders passed as per the Tribunal's directions. Consequently, the Tribunal directed the DRP to decide the issue on merits.2. Opportunity of being heard by the Transfer Pricing Officer (TPO):The assessee contended that the TPO did not provide an opportunity to be heard before passing the consequential order under Section 92CA. The Tribunal found that the TPO's order did not mention any opportunity of being heard provided to the assessee. Therefore, it remanded the matter back to the TPO for a fresh decision after providing a reasonable opportunity of being heard to the assessee.3. Determination of Arm's Length Price (ALP) using the Transactional Net Margin Method (TNMM) vs. Comparable Uncontrolled Price (CUP) method:The Tribunal addressed the grounds related to the determination of ALP. It noted that the TPO had disallowed the entire payment for allied services, stating the assessee did not demonstrate substantial commercial benefits. Referring to its previous order for AY 2007-08, the Tribunal reiterated that the TPO should not disallow expenses based on the lack of demonstrated benefits but should determine the ALP using appropriate comparables. It remanded the issue back to the TPO for fresh consideration with similar directions as given in AY 2007-08.4. Validity of the royalty payment for the Rudrapur unit:The Tribunal examined the issue of royalty payment for the Rudrapur unit. It found that the principal waived the royalty for the Rudrapur unit from April 1, 2007, and there was no increase in royalty rates for other units. The Tribunal held that no part of the royalty payment could be attributed to the Rudrapur unit and dismissed the revenue's appeal for AY 2010-11 while allowing the assessee's related grounds for AY 2011-12.5. Addition to fixed assets:The assessee's claim regarding the addition to fixed assets was rejected by the Tribunal. It noted that the DRP observed the assessee provided only a sample copy of the invoice and not full details and supporting invoices. Therefore, the Tribunal found no reason to interfere with the AO/TPO's order and rejected the assessee's ground on this issue.Conclusion:In summary, the Tribunal allowed the assessee's appeals for AY 2007-08 and 2010-11 for statistical purposes, partly allowed the appeal for AY 2011-12 for statistical purposes, and dismissed the revenue's appeal for AY 2010-11. The Tribunal emphasized the need for the TPO to provide a hearing opportunity and to determine the ALP using appropriate comparables without disallowing expenses based on the lack of demonstrated benefits.