2018 (4) TMI 503 - AT - Income Tax

Tribunal decision: adjustments deleted, lease rentals allowed, fresh adjudication on depreciation, TDS credit, and Arm's Length Price reconsideration.

The Tribunal partly allowed the appeal, deleting adjustments for Management Support Services and Advertisement and Marketing Promotion expenses, allowing ... Arm's Length Price - Intra-group services / Benefit test - Stewardship services - International transaction (section 92B/92F) - Rule of consistency - Bright Line Test - Transfer Pricing - Most Appropriate Method (TNMM/CUP) - Comparability and comparables selection - Working capital adjustment (OECD) - Depreciation - rate for moulds - Finance lease - deduction of lease rentalsArm's Length Price - Intra-group services / Benefit test - Stewardship services - Transfer Pricing - Most Appropriate Method (TNMM/CUP) - Rule of consistency - Determination of ALP for Management Support Services (MSSA) charged by KPENV to the assessee - HELD THAT: - The Tribunal held that the TPO's determination of ALP at nil was unwarranted. While recognising the TPO/DRP analyses (including consideration of stewardship character and the benefit test), the Tribunal found that the assessee had placed on record contemporaneous evidences of services received and benefits (including prior years' acceptance and a DRP finding in KPENV's own assessment treating receipts as FTS/royalty). Applying the principle of consistency where facts remained unchanged, and having regard to precedents discussed, the Tribunal concluded that the MSSA charges could not be benchmarked to nil and deleted the upward adjustment made by the TPO. The Tribunal therefore accepted that the services were not to be treated as having nil ALP and allowed the assessee's grounds in this regard. [Paras 6]Upward adjustment to ALP for Management Support Services deleted; grounds allowing the assessee's challenge to NIL valuation are allowed.International transaction (section 92B/92F) - Bright Line Test - Arm's Length Price - Comparability and comparables selection - Rule of consistency - Whether AMP (advertisement and marketing) expenses constitute an international transaction and whether the TPO/DRP adjustment to AMP spend is sustainable - HELD THAT: - The Tribunal applied its earlier reasoning in the assessee's own decisions and the Delhi High Court authority distinguishing manufacturers from pure distributors. Finding that the assessee is a manufacturer-cum-distributor and that facts were unchanged from earlier years where AMP was accepted, the Tribunal held that AMP expenses in the facts of this case could not be characterised as an international transaction attracting a separate TP adjustment. Accordingly, following precedents and the consistency principle, the Tribunal deleted the AMP-related upward adjustment and allowed the relevant grounds. [Paras 11]Adjustment relating to alleged excess AMP expenses deleted; grounds allowing the assessee's challenge are allowed.Arm's Length Price - Comparability and comparables selection - Working capital adjustment (OECD) - Transfer Pricing - Most Appropriate Method (TNMM/CUP) - Determination of ALP for software segment (Philips Software Centre) and selection of comparables / adjustments - HELD THAT: - The Tribunal examined the set of comparables relied upon by the TPO/DRP and found two comparables (E-Infochips Bangalore Ltd and Thirdware Solutions Ltd) to be functionally non-comparable on the record (diversified activities, significant related party transactions, absence of segmental data). The Tribunal directed exclusion of those two comparables, accepted the need for working capital adjustments for the remaining six comparables as per OECD formula (to be furnished by the assessee and verified by TPO/AO), and directed correction of margins where necessary (Sasken). On that basis the Tribunal held that, subject to implementation of these recalculations and adjustments, the assessee's margin would be within arm's length range and no adjustment would be warranted; accordingly the matter is remitted for computation in accordance with these directions. [Paras 13]Issue remitted to TPO/AO for recomputation after exclusion of specified comparables, inclusion of working capital adjustments per OECD, and correction of margins; grounds allowed for statistical purposes.Finance lease - deduction of lease rentals - Arm's Length Price - Deductibility of lease rentals paid under finance lease for cars - HELD THAT: - The Tribunal followed the Supreme Court authority (ICDS Ltd. v. CIT) and other precedents which recognise the lessee's entitlement to deduct lease rentals where the lessor claims depreciation. The Revenue conceded applicability of the Supreme Court decision. Applying that binding authority, the Tribunal allowed the assessee's ground on lease rentals. [Paras 15]Disallowance of lease rentals set aside; deduction allowed in favour of the assessee.Depreciation - rate for moulds - Rule of consistency - Rate of depreciation on moulds (30% v. 15%) - HELD THAT: - The Tribunal noted absence of documentary proof on record that moulds were used in plastic/rubber factories which would justify 30% rate. Observing that earlier years had divergent treatments and in the interest of justice, the Tribunal declined to decide on merits on the present record and restored the matter to the file of the AO for fresh adjudication, permitting the assessee to produce supporting evidence (including proof of exclusive use by job-workers under control/supervision). [Paras 16]Matter remitted to the AO for fresh adjudication on admissibility of higher depreciation rate; grounds allowed for statistical purposes.Final Conclusion: The appeal is partly allowed: (a) TPO/DRP adjustments in respect of Management Support Services (MSSA) and AMP expenses are deleted and decided in favour of the assessee; (b) the software segment ALP determination is remitted for recomputation after excluding specified non comparables, giving working capital adjustments per OECD and correcting margins; (c) disallowance of lease rentals is set aside in favour of the assessee; and (d) claim for higher depreciation on moulds is remitted to the AO for fresh adjudication. Other consequential and verification matters to be dealt with by the AO in accordance with this order. Issues Involved:1. Determination of Arm’s Length Price (ALP) for Management Support Services.2. Determination of ALP for Advertisement and Marketing Promotion (AMP) Expenses.3. Determination of ALP for Software Segment.4. Disallowance of Lease Rentals.5. Depreciation on Moulds.6. Non-Grant of Deduction u/s 80G.7. Short Credit of Tax Deducted at Source.8. Levy of Interest u/s 234B and 234D.9. Initiation of Penalty u/s 271(1)(c).Issue-wise Detailed Analysis:1. Determination of Arm’s Length Price (ALP) for Management Support Services:The assessee, part of the Royal Philips Organisation, engaged in international transactions with its associated enterprises (AEs) and benchmarked these transactions using the Transactional Net Margin Method (TNMM). The Transfer Pricing Officer (TPO) applied the Comparable Uncontrolled Price (CUP) Method and determined the ALP for Management Support Services (MSSA) to be NIL, leading to an upward adjustment of Rs. 300,40,09,360/-. The Dispute Resolution Panel (DRP) upheld the TPO's adjustment, stating that the services did not meet the benefit test. However, the Tribunal, following its earlier decisions in the assessee's own case for previous assessment years, held that the determination of ALP for MSSA at NIL was unwarranted and deleted the adjustment.2. Determination of ALP for Advertisement and Marketing Promotion (AMP) Expenses:The TPO treated the AMP expenses as an international transaction and applied the Bright Line Test (BLT) to determine an upward adjustment of Rs. 1,55,30,056/-. The DRP upheld the TPO's view but directed the TPO to exclude government-owned entities from the comparables. The Tribunal, following its earlier decisions and the Delhi High Court's ruling in Maruti Suzuki India Ltd, held that AMP expenses could not be construed as an international transaction and deleted the adjustment.3. Determination of ALP for Software Segment:The TPO selected comparables and determined an upward adjustment of Rs. 44,18,68,242/-. The DRP directed the TPO to exclude certain comparables if segmental data was unavailable. The Tribunal, after excluding E-Infochips Bangalore Ltd and Thirdware Solutions Ltd from the comparables and directing the TPO to provide working capital adjustments for the remaining comparables, remanded the matter back to the TPO for fresh adjudication.4. Disallowance of Lease Rentals:The AO disallowed lease rentals paid for motor cars taken on finance lease, treating them as capital expenditure. The DRP upheld the AO's view. The Tribunal, following the Supreme Court's decision in ICDS Ltd vs CIT, allowed the deduction of lease rentals.5. Depreciation on Moulds:The AO disallowed excess depreciation claimed at 30% on moulds, allowing only 15%. The DRP upheld the AO's decision. The Tribunal, following its earlier decision in the assessee's own case, restored the matter to the AO for fresh adjudication, allowing the assessee to produce necessary documents.6. Non-Grant of Deduction u/s 80G:The AO granted the deduction u/s 80G in the final order, and hence, this ground was dismissed by the Tribunal as the assessee could not be aggrieved.7. Short Credit of Tax Deducted at Source:The AO granted TDS credit of Rs. 6,60,46,860/- against the claim of Rs. 7,08,61,424/-. The Tribunal directed the AO to verify the necessary evidences and grant the eligible TDS credit.8. Levy of Interest u/s 234B and 234D:The Tribunal noted that the levy of interest u/s 234B and 234D is consequential in nature and does not require specific adjudication.9. Initiation of Penalty u/s 271(1)(c):The Tribunal stated that the initiation of penalty u/s 271(1)(c) would be decided afresh by the AO while giving effect to this order.Conclusion:The Tribunal partly allowed the appeal for statistical purposes, providing relief on several grounds, including the deletion of adjustments for MSSA and AMP expenses, allowing lease rentals, and directing fresh adjudication on depreciation for moulds and TDS credit.