2019 (2) TMI 351 - AT - Income Tax

Tribunal adjusts commission rate, emphasizes consistency in transfer pricing

Tata Technologies Limited Versus The Deputy Commissioner of Income Tax, Circle-7, Pune.

The Tribunal allowed the appeal in part, directing the Transfer Pricing Officer to recognize the arm's length commission paid to the Singapore Entity at ... TP adjustment for payment of commission to Associate Enterprises (AEs) - TPO has not accepted the international transaction of the assessee to be at arm’s length - Held that:- The facts on record shows that there is a commission agreement dated 01.12.2007 between the assessee and TTPL. That on examining the clauses contained therein and after giving considerable thought on those clauses, it is crystal clear that TTPL was facilitating the purchases in respect of the assessee from Dassault UK. It was the responsibility of TTPL to undertake marketing efforts through telemarketing and inbound inquiries through its dedicated support. TTPL also worked towards maintenance of relationship with the key global customers of the assessee. The agreement also specifies that the said service through TTPL was at arm’s length commission @6%. Before us, it is demonstrated by the Ld. AR through a series of emails exchanges between the assessee, TTPL and Dassault UK. This evidence demonstrates that purchases of software licenses were done by the assessee from Dassault UK and TTPL was facilitating the entire process and ensuring the smooth selling of the transaction. These are sufficient evidence to demonstrate the services rendered by the TTPL for which commission payment was made to the AE. Taking the practicability of the business in to consideration, these are the tangible evidence that can be placed on record which the assessee has done in order to justify the commission payment. There is copy of commission agreement. There is also no objection letter and series of emails exchanged involving all the concerned parties. We are of considered view that arm’s length commission @6% to TTPL is justified and we direct the TPO to determine the arm’s length commission of the international transaction accordingly. Thus, grounds of appeal No. 1 to 5 and 8 raised by the assessee are allowed. Disallowance u/s.14A r.w. Rule 8D - Held that:- With regard to the interest income part as contemplated under Rule 8D(ii) and with regard to the investment which yielded exempt income which are to be considered while calculating disallowance under Rule 8D(2)(iii). These aspects have to be verified in detailed. Therefore, we are of considered view that this issue is restored back to the file of Assessing Officer for verification and re-adjudication of the same after providing reasonable opportunity of hearing to the assessee. Accordingly, ground No.11 raised in appeal by the assessee is allowed for statistical purposes. Provision for written back for Mediclaim Insurance Scheme (Medicare) for employees not to be considered as taxable income - Held that:- Assessing Officer has already disallowed such provision for those years, then in the present year when the assessee has specifically offered this to tax in return of income, the same should not be taxed again by the Assessing Officer. Therefore, this issue needs to be verified. Accordingly, this matter is restored back to the file of Assessing Officer for verification and re-adjudication after following the principles of natural justice. The Assessing Officer shall grant reasonable opportunity of hearing to the assessee. Enhanced deduction u/s.10A - Held that:- We are inclined to go with the view of the DRP on this issue. We observe that within the parameter of Income Tax Act, 1961, as per Section 92C(4) of the Act, TP addition has to be separately done, whatever may be the addition in respect of other aspects but that cannot be brought together with TP adjustment or addition. Therefore, it does not qualify for enhanced deduction u/s.10A of the Act - decided against assessee. Issues Involved:1. Transfer Pricing Adjustment for Payment of Commission to Associate Enterprises (AEs)2. Rejection of Economic Analysis for Arm's Length Nature of Commission3. Re-computation of Arm's Length Price (ALP) of Commission to AE at 'Nil'4. Principle of Consistency in Determining ALP of Commission to AE5. Ignoring Comparable Uncontrolled Data for ALP of Commission to AE6. Deemed International Transaction for Purchase of Software Licenses7. ALP of Purchase of Software Licenses from Dassault Systemes K.K. at 'Nil'8. Contradictory Position on Deemed International Transaction and ALP of Commission9. Disallowance of Amortization of Premium on Leasehold Land10. Disallowance of Provision for Expenditure under Bhavishya Kalyan Yojana (BKY)11. Disallowance under Section 14A by Applying Rule 8D12. Reversal of Provision for Medicare Expenses13. Enhanced Deduction under Section 10A14. Charging of Interest under Section 234B15. Initiation of Penalty Proceedings under Section 271(1)(c)Detailed Analysis:Transfer Pricing Grounds:1. TP Adjustment for Payment of Commission to AEs:- The assessee paid Rs. 3,73,21,943 as commission to its Singapore Entity (TTPL) for facilitating discounts from Dassault UK. The TPO rejected the transaction as not being at arm's length, determining the ALP as 'Nil'. The DRP upheld this view, citing lack of evidence of services rendered by TTPL.- The Tribunal found sufficient evidence, including commission agreements and email exchanges, demonstrating TTPL's role in facilitating transactions and securing discounts. It directed the TPO to determine the arm's length commission at 6%, allowing grounds 1 to 5 and 8.2. Rejection of Economic Analysis for Arm's Length Nature of Commission:- The Tribunal noted that TTPL provided significant procurement and marketing support services, and the commission paid was comparable to rates paid to other third parties. The Tribunal accepted the economic analysis conducted by the assessee.3. Re-computation of ALP of Commission to AE at 'Nil':- The Tribunal disagreed with the TPO's re-computation of ALP at 'Nil', emphasizing the practical evidence of TTPL's involvement in the transactions. The Tribunal directed the TPO to recognize the commission at 6%.4. Principle of Consistency in Determining ALP of Commission to AE:- The Tribunal upheld the principle of consistency, noting that similar transactions in previous assessment years were accepted at arm's length. It directed the TPO to follow the same consistency for the assessment year 2012-13.5. Ignoring Comparable Uncontrolled Data for ALP of Commission to AE:- The Tribunal found that the comparable data provided by the assessee was valid and should be accepted. It directed the deletion of the transfer pricing adjustment.Corporate Tax Grounds:6. Deemed International Transaction for Purchase of Software Licenses:- Grounds 6 and 7 were not pressed by the assessee and were dismissed as 'not pressed'.7. ALP of Purchase of Software Licenses from Dassault Systemes K.K. at 'Nil':- Grounds 6 and 7 were not pressed by the assessee and were dismissed as 'not pressed'.8. Contradictory Position on Deemed International Transaction and ALP of Commission:- The Tribunal found the DRP's position contradictory and directed the TPO to recognize the arm's length commission at 6%.9. Disallowance of Amortization of Premium on Leasehold Land:- The Tribunal followed the decision in the assessee's own case for previous years, where the issue was decided against the assessee. Ground 9 was dismissed.10. Disallowance of Provision for Expenditure under BKY:- The Tribunal followed the decision in the assessee's own case for previous years, where the issue was decided against the assessee. Ground 10 was dismissed.11. Disallowance under Section 14A by Applying Rule 8D:- The Tribunal found merit in the assessee's argument that interest income exceeded interest expenditure and that only investments yielding exempt income should be considered for disallowance. The issue was remanded to the AO for verification and re-adjudication. Ground 11 was allowed for statistical purposes.12. Reversal of Provision for Medicare Expenses:- The Tribunal noted that if the provision was disallowed in earlier years, it should not be taxed again when written back. The issue was remanded to the AO for verification. Ground 12 was allowed for statistical purposes.13. Enhanced Deduction under Section 10A:- The Tribunal upheld the DRP's view that TP adjustments do not qualify for enhanced deduction under Section 10A as per Section 92C(4) of the Act. Ground 13 was dismissed.Common Grounds:14. Charging of Interest under Section 234B:- Ground 14 was consequential and required no adjudication.15. Initiation of Penalty Proceedings under Section 271(1)(c):- Ground 15 was consequential and required no adjudication.Conclusion:The appeal was partly allowed for statistical purposes, with specific issues remanded for further verification and re-adjudication by the AO.