2019 (4) TMI 1505 - AT - Income Tax

Tribunal rules in favor of assessee, directs re-evaluation of transfer pricing adjustment

M/s. Carraro India Private Limited Versus DCIT, Circle-1 (1), Pune

The Tribunal dismissed the Revenue's appeal and allowed the assessee's appeal for statistical purposes. It directed the Assessing Officer to re-evaluate ... TP adjustment - ALP of payment of royalty - revenue expense vs capital expenditure - HELD THAT:- As per circular issued by the Chief General Manager, RBI, royalty @ 8% on exports and 5% on domestic sales is permitted under the automatic route, without any restriction on the duration of royalty payments. Press Note No.9 (2000 series) dated 08-09-2000 issued by the Government of India, Ministry of Commerce and Industry provides that : “Payment of Royalty upto 2% for exports and 1% for domestic sales is allowed under automatic route on use of trade mark and brand name of the foreign collaborator without technology transfer”. It is thus seen that payment for use of trade mark and brand name, under Press Note No.9 (2000 series), is allowed under automatic route at 1% for domestic sales. The case of the assessee is that it paid royalty @ 0.5% on sales made in India to certain persons other than OEMs and hence such payment should be construed at ALP. Nothing has been brought on record to demonstrate that the view canvassed by the Tribunal on this issue for the preceding years [2013 (2) TMI 877 - ITAT PUNE] has been either reversed or modified in any manner by the Hon’ble High Court. Respectfully following the precedent, we do not approve the action of the AO in treating royalty payment as a capital expenditure. To sum up, out of the total payment of royalty at ₹ 1,01,81,033/- in respect of two agreements, the only amount which is to be disallowed is a sum to be calculated afresh, representing duplicate payment in respect of royalty for use of trade mark towards steering, axle and accessories for 35 and 55 HP tractors, included in the sum of ₹ 75.41 lakh. The AO is directed to grant relief accordingly. TP adjustment - Corporate/Management services fee - The assessee applied “Cost plus” method in the transfer pricing documentation for showing that the international transactions was at ALP - whether the assessee availed any services from its AEs pursuant to the two Agreements? - HELD THAT:- It is for the assessee to decide the way in which it has to carry on its business. If it feels that services are required to be availed, the TPO cannot reject the allowability of such payment simply on the ground that no benefit was derived. It is not necessary that every incurring of expenditure must necessarily result in to some benefit. Had it been the situation, then no businessman would have ever incurred loss, which is a proposition far away from the stark reality. Once it is proved that the services were availed by the assessee, then his jurisdiction gets restricted to determining the ALP of the transaction. We have noticed above that the assessee did avail services from its AEs. In such a situation, it is held that the view point of the authorities that NIL ALP should be determined because the assessee did not get any benefit out of the services, is rejected. In our considered opinion, the contention of the ld. AR for aggregating the payment for Corporate/Managerial services with other international transactions and then applying the TNMM on entity level cannot be accepted. Section 92C(1) of the Act provides that the ALP in relation to the international transaction shall be determined by any of the prescribed methods having regard to the “nature of transaction or clause of transaction”. Rule 10A(d) defines the term “transaction” as including ‘a number of closely linked transactions’. Thus, it is evident that the two or more transactions can be aggregated for determination of the ALP, if they are closely linked transactions. It is thus held that the methodology adopted by the assessee for computation of ALP in respect of its international transaction of intra-group services by choosing foreign AE as a tested party under the Cost plus method as well as under the TNMM or by aggregating this transaction with others under the TNMM cannot be and is hereby rejected in entirety. It has been noted above that the TPO proceeded to determine Nil ALP on the reason that the assessee did not avail any services. We have found out supra that the services were, in fact, availed by the assessee. Since neither the exercise done by the TPO for benchmarking the international transaction, either originally or during the course of the first appellate proceedings, is sustainable nor the view point of the TPO determining Nil ALP can be affirmed because of the assessee having actually availed the services, we are of the considered opinion that the ends of justice would meet adequately if the impugned order is set aside and the matter is restored to the file of AO. It is directed that the AO/TPO will firstly determine the most appropriate method and then find out the ALP of the international transaction in accordance with our above observations and directions. Issues Involved:1. Transfer pricing adjustment for royalty payment.2. Treatment of royalty payment as capital or revenue expenditure.3. Transfer pricing addition for Corporate/Management services fee.Issue-wise Detailed Analysis:1. Transfer Pricing Adjustment for Royalty Payment:The assessee contested the addition of Rs. 75,41,558 made by the Assessing Officer (AO) based on the Transfer Pricing Officer's (TPO) recommendation, who determined the arm's length price (ALP) of the royalty payment at NIL. The TPO questioned the necessity of the new royalty agreement and the justification for the royalty payment, leading to the AO's final order treating the entire royalty payment as a capital expenditure. The CIT(A) upheld the TPO's NIL ALP determination but treated the royalty as revenue expenditure. The Tribunal noted that the ALP determination by the TPO for the previous agreement was accepted, but the AO deviated from the TPO's order by treating the entire royalty as capital expenditure. The Tribunal held that the royalty payment of Rs. 75.41 lakh was within the permissible range as per the RBI's circular and should be considered at ALP. However, it directed the AO/TPO to verify and disallow any duplicate royalty payment included in the Rs. 75.41 lakh.2. Treatment of Royalty Payment as Capital or Revenue Expenditure:The Revenue appealed against the CIT(A)'s direction to treat the royalty payment as revenue expenditure. The Tribunal referred to its previous orders for earlier assessment years where similar royalty payments were treated as revenue expenditure. Since there was no reversal or modification of the Tribunal's earlier view by the High Court, the Tribunal upheld the CIT(A)'s direction, dismissing the Revenue's grounds.3. Transfer Pricing Addition for Corporate/Management Services Fee:The assessee reported an international transaction of Rs. 4,35,34,910 for Corporate/Management services fee. The TPO determined NIL ALP for this transaction, citing lack of evidence for availing services and no benefit derived by the assessee. The CIT(A) upheld the TPO's determination. The Tribunal found that the assessee did avail services from its AEs and rejected the TPO's view of NIL ALP based on no benefit derived. The Tribunal also rejected the assessee's method of benchmarking using foreign AE as a tested party and aggregating the transaction with others under TNMM. The Tribunal remanded the matter to the AO for fresh determination of ALP using the most appropriate method and directed the AO/TPO to allow an opportunity for hearing to the assessee.Conclusion:The Tribunal dismissed the Revenue's appeal and allowed the assessee's appeal for statistical purposes, directing the AO to re-evaluate the transfer pricing adjustment for royalty payment and Corporate/Management services fee as per the Tribunal's observations and directions.