2019 (9) TMI 372 - AT - Income Tax

Tribunal rules in favor of assessee, rejects TPO's adjustments. Commercial necessity and documentation key.

Goodyear South Asia Tyres Pvt. Ltd. Versus The Asst. Commissioner of Income Tax, Circle 1, Aurangabad

The Tribunal allowed the appeals of the assessee, holding that the Transfer Pricing Officer's adjustment of the Regional Service Charges payments to Nil ... TP adjustment - payment of Regional Service Charges (RSC) - comparable operating margins - arithmetic mean of margins - Proof of the services rendered by the associated companies - assessee had aggregated most of the international transactions and applied TNMM method AND transactions relating to sale of machinery and payment of technical and license fees were benchmarked using CUP method - TPO expressly held the transaction to be at arm's length price - whether the TPO while ascertaining whether the price paid for availment of services was at arm's length price or not ? HELD THAT:- Issue squarely covered by the order of Pune Bench of Tribunal in Emerson Climate Technologies (India) Limited Vs. DCIT [2017 (12) TMI 1568 - ITAT PUNE] and following the same parity of reasoning, we hold that there is no merit in adjustment made by the Assessing Officer / TPO in taking arm's length price of transaction of payment of RSC at Nil. The said payments being accepted in the hands of assessee to be at arm's length price in earlier years, we delete the adjustment made on this count. As refer to the order of DCIT, Circle-Gurgaon International Taxation, who has completed the assessment in the case of associated enterprise Goodyear Tire & Rubber Co. for assessment year 2011-12 under section 143(3) r.w.s. 144C(1) of the Act and has held that service charges received by it were taxable as fees for technical services or alternatively as royalty, both under the provisions of Income Tax Act as well as under the provisions of Indo-USA DTAA. Without going into merits of the facts whether the same is taxable or not in the hands of associated enterprises, we hold that fall out is that the payment made by assessee on account of RSC was for services availed from associated enterprise and there is no merit in the order of Assessing Officer in holding that no services have been availed by assessee in this regard. Duplication of services i.e. payments - held that:- these payments were towards reimbursement of cost incurred by regional entities in providing assistance to the assessee with regard to engineering, quality assurance, safety, etc. and the same was not towards technology, know-how being made available to the assessee by associated enterprise. The assessee had also submitted the list of personnel at the Region engaged in providing the aforesaid services in different countries of Asia Pacific Region, where the group did not have any R&D / Innovation center. On the other hand, the technical assistance and license fees were for know-how developed by R&D Center located in Akron, USA and Luxemburg, Europe. In other words, there was no similarity in the nature of payments made under technical assistance and license agreement and under the service agreement for Production and Tire Performance / Product Resolution. Hence, there is no merit in the observations of TPO in this regard and we reverse the same. Under Rule 10B(4) of the Income Tax Rules, 1962, it is provided that international transactions which are inter-linked need to be benchmarked on aggregate basis and since the payment has been made, which is linked to other transactions undertaken by assessee i.e. import of raw materials and spare parts, import of machineries, sale of raw materials and sale of machineries including the payment of technical assistance and license fees and that aggregation has not been disturbed by TPO. On the other hand, he further observed that the payment of RSC can be independently benchmarked. We have already in the paras above reversed the finding of TPO and hold that payment of royalty also needs to be aggregated. In any case even if benchmarked separately, the same is at arm's length price and no adjustment at Nil, merits to be made. Accordingly, we hold that no adjustment on account of payment of RSC merited in the hands of assessee. - Decided in favour of assessee Issues Involved:1. Transfer Pricing Adjustment for Regional Service Charges (RSC).2. Determination of Arm's Length Price (ALP) for RSC.3. Duplication of Services.4. Penalty Proceedings under Section 271(1)(c) of the Income-tax Act, 1961.Detailed Analysis:1. Transfer Pricing Adjustment for Regional Service Charges (RSC):The primary issue in the appeals was the determination of the arm's length price (ALP) for international transactions related to the payment of Regional Service Charges (RSC) by the assessee to its associated enterprises (AE). The assessee had paid RSC amounting to Rs. 16.55 crores, which the Transfer Pricing Officer (TPO) adjusted to Rs. 13.80 crores, determining the ALP as Nil, except for IT services which were accepted at Rs. 2.70 crores.2. Determination of Arm's Length Price (ALP) for RSC:The TPO's contention was that the services charged by the AE were either performed by the assessee itself or by another resident entity, Goodyear India Ltd., and thus, the payment for RSC was not justified. The TPO also noted that the assessee had provided voluminous documents, including e-mails and presentations, but concluded that these were more in the nature of information exchange rather than actual services rendered.The assessee argued that the payment for RSC was made as per a service agreement effective from 01.04.2006, renewed in 2010, and that similar payments had been accepted in previous years without any adjustments. The assessee provided extensive documentation, including invoices and an auditor's certificate, to substantiate the services received and the allocation of costs among various entities.The Tribunal found merit in the assessee's arguments, noting that the voluminous documents provided evidenced the receipt of services. The Tribunal held that the TPO could not question the commercial wisdom of the assessee in availing these services and that the TPO's role was limited to determining whether the price paid was at arm's length. The Tribunal relied on precedents, including the decision in Emerson Climate Technologies (India) Limited Vs. DCIT, to conclude that the TPO's adjustment was not justified.3. Duplication of Services:The TPO had also argued that there was duplication of services, particularly between the payments made under the 'Technical Assistance and License Agreement' and the 'Production and Tire Performance / Product Resolution fees.' The Tribunal rejected this argument, noting that the payments under the technical assistance agreement were for the use of technology and know-how, while the RSC payments were for services related to engineering, quality assurance, and safety, which were distinct from the technical know-how.4. Penalty Proceedings under Section 271(1)(c):The assessee also challenged the initiation of penalty proceedings under Section 271(1)(c) of the Income-tax Act, 1961. The Tribunal found this issue to be premature and dismissed it accordingly.Conclusion:The Tribunal allowed the appeals of the assessee, holding that the TPO's adjustment of the RSC payments to Nil was not justified. The Tribunal emphasized that the TPO could not question the commercial necessity of the services and that the extensive documentation provided by the assessee evidenced the receipt of services. The Tribunal also rejected the TPO's argument of duplication of services and found no merit in the initiation of penalty proceedings. The decision was applied mutatis mutandis to the subsequent assessment year 2012-13, with similar grounds being allowed and the penalty-related grounds dismissed as premature or not pressed.