2019 (7) TMI 1314 - AT - Income Tax

ITAT rules for assessee, deletes TP adjustments, Provident Fund contributions, and more.

Firmenich Aromatics (India) Pvt Ltd Versus ACIT-9 (3) (1), Mumbai

The ITAT ruled in favor of the assessee, deleting Transfer Pricing (TP) adjustments related to export of finished goods, payment of royalty for technical ... TP Adjustment - in relation to export of finished goods - HELD THAT:- In assessee’s own case for AY 2013-14 in [2019 (2) TMI 1666 - ITAT MUMBAI] had an occasion to consider an identical issue in light of the facts brought out by the AO and rule 10B of I.T. Rules, 1962 and held that while considering the issue of comparability with an uncontrolled transaction, the condition prevailing in the market for which the respective parties to the transaction operate, including the geographical location alongwith other factors relevant to decide which method is suitable for benchmarking transaction. We are of the considered view that the TPO as well as the Ld.DRP were erred in applying CUP as most appropriate method to determine the arm’s length price of transactions of the assessee with its AEs for sale of finished goods. Accordingly, we direct the AO / TPO to delete TP adjustment of ₹ 3,18,81,702 in relation to export of finished goods. Payment of royalties for use of technical know how - HELD THAT:- We find that the Tribunal had an occasion to consider an identical issue in assessee’s own case for AY 2013-14 [2019 (2) TMI 1666 - ITAT MUMBAI] and after considering relevant submissions of the assessee and also by following its earlier order in assessee’s own case for AY 2012-13 held that CUP is not most appropriate method for benchmarking royalty payment for use of technical know how because of geographical differences. We direct the AO / TPO to delete TP adjustment in relation to payment of royalty for use of technical know how. Payment of interest on external commercial borrowings (ECB) loan - HELD THAT:- As in assessee’s own case for AY 2013-14 [2019 (2) TMI 1666 - ITAT MUMBAI] had considered an identical issue and by following its earlier decision in the case of ION Exchange India Ltd vs ADIT [2014 (2) TMI 1331 - ITAT MUMBAI] held that arm’s length price of the interest to be charged on the ECB loan availed from the AE has to be determined at six months USD LIBOR rate (+) 300 points. We direct the AO / TPO to delete TP adjustment made in relation to payment of interest on external commercial borrowing loan. TP adjustment in relation to availing of information systems (IS) services - HELD THAT:- We find that the coordinate bench of the ITAT, Mumbai Bench “K” in assessee’s own case for AY 2012-13 [2018 (9) TMI 1007 - ITAT MUMBAI] had considered an identical issue. We further noted that the Tribunal in assessee’s own case for AY 2013-14, after considering relevant facts, held that the TPO was erred in not following any one of the most appropriate method prescribed under the statute to determine arm’s length price of international transactions of the assessee with its AE, but made adjustment on an adhoc or estimate basis without any valid reasons. We direct the AO / TPO to delete TP adjustment in relation to availing of information system services. Disallowance in respect of employees contribution to provident fund - not paid within the due dates specified under the respective Act u/s 2(24)(x) r.w. Explanation to section 36(1)(viia) - HELD THAT:- This legal proposition is supported by the decision of Hon’ble Bombay High Court in the case of CIT vs Ghatge Patil Transport [2014 (10) TMI 402 - BOMBAY HIGH COURT] . This legal proposition is further supported by the decision in the case of CIT vs Jaipur Vidyut Vitran Nigam Ltd [2018 (7) TMI 1327 - SC ORDER] where the Hon’ble Supreme Court has dismissed SLP filed by the revenue against the decision of Hon’ble Rajasthan High Court [2014 (1) TMI 1085 - RAJASTHAN HIGH COURT] by holding that amount claimed on payment of PF & ESI having been deposited on or before due date of filing of return, same cannot be disallowed u/s 43B or u/s 36(1)(viia). In this view of the matter and respectfully following the case laws discussed hereinabove, we are of the considered view that the AO was erred in disallowing employees contribution to PF u/s 43B, even though such payment has been made on or before due date of filing return of income u/s 139(1) . Hence, we direct the AO to delete addition made towards disallowance of employees contribution to PF. Issues Involved:1. Transfer Pricing (TP) adjustment in relation to export of finished goods.2. TP adjustment in relation to payment of royalty for use of technical know-how.3. TP adjustment in relation to payment of interest on External Commercial Borrowing (ECB) loan.4. TP adjustment in relation to availing of Information Systems (IS) services.5. Adjustment in relation to employees' contribution to Provident Fund.6. Adjustment in relation to 'Other Miscellaneous EG expenses'.7. Initiating penalty proceedings under section 271(1)(c) of the Act.8. Levy of interest under section 234B and 234D of the Act.Detailed Analysis:1. Transfer Pricing (TP) Adjustment in Relation to Export of Finished Goods:- Facts: The assessee exported finished goods to its AE and benchmarked the transactions using the Transactional Net Margin Method (TNMM). The TPO applied both Comparable Uncontrolled Price (CUP) and TNMM methods, leading to a TP adjustment of Rs. 3,18,81,702.- Arguments: The assessee argued against using two methods simultaneously and highlighted differences in geographical markets, transaction volumes, and functional profiles.- Judgment: The ITAT held that using CUP was incorrect due to geographical and market differences, following previous judgments in the assessee's own case and sister concern. Thus, the TP adjustment of Rs. 3,18,81,702 was deleted.2. TP Adjustment in Relation to Payment of Royalty for Use of Technical Know-How:- Facts: The assessee paid royalty to its AE for technical know-how, benchmarked using TNMM. The TPO questioned the necessity and quantum of royalty, suggesting an ad-hoc adjustment.- Arguments: The assessee contended that the royalty payment was justified and supported by previous years' acceptance.- Judgment: The ITAT found that the TPO's ad-hoc adjustment was not based on any prescribed method and deleted the TP adjustment of Rs. 3,96,90,306, following previous decisions in the assessee's own case.3. TP Adjustment in Relation to Payment of Interest on ECB Loan:- Facts: The assessee paid interest on ECB loans based on LIBOR (+) 300 basis points, as per RBI guidelines. The TPO used a different benchmark, leading to a TP adjustment of Rs. 51,74,209.- Arguments: The assessee argued that the interest rate was justified based on RBI guidelines.- Judgment: The ITAT held that the arm’s length price should be determined at six months USD LIBOR rate (+) 300 basis points, deleting the TP adjustment of Rs. 51,74,209, consistent with previous decisions.4. TP Adjustment in Relation to Availing of Information Systems (IS) Services:- Facts: The TPO rejected the assessee's TNMM benchmarking for IS services and made an ad-hoc adjustment based on estimated man-hour rates, leading to a TP adjustment of Rs. 2,21,62,308.- Arguments: The assessee provided detailed documentation supporting the IS services received.- Judgment: The ITAT found the TPO's ad-hoc adjustment without following a prescribed method to be incorrect and deleted the TP adjustment of Rs. 2,21,62,308, following previous decisions in the assessee's own case.5. Adjustment in Relation to Employees' Contribution to Provident Fund:- Facts: The AO disallowed employees' contribution to PF paid beyond the due date under the relevant Act but before the due date for filing the return.- Arguments: The assessee cited the decision of the Hon’ble Bombay High Court in CIT vs Ghatge Patil Transport, which allows such deductions if paid before the return filing due date.- Judgment: The ITAT directed the AO to delete the disallowance, following the legal precedent that contributions paid before the return filing due date are deductible.6. Adjustment in Relation to 'Other Miscellaneous EG Expenses':- Facts: The AO disallowed expenses related to the write-off of rent deposits.- Arguments: The assessee chose not to press this ground due to the small amount involved.- Judgment: The ground was dismissed as not pressed.7. Initiating Penalty Proceedings Under Section 271(1)(c) of the Act:- Judgment: No detailed analysis provided as the focus was on the substantive adjustments.8. Levy of Interest Under Section 234B and 234D of the Act:- Judgment: The ITAT directed that consequential interest be deleted based on the adjustments made.Conclusion:The ITAT ruled in favor of the assessee on most issues, particularly regarding TP adjustments, by adhering to established legal precedents and rejecting the TPO's ad-hoc methods. The appeal was partly allowed, with significant deletions of TP adjustments and disallowances.