2020 (9) TMI 65 - AT - Income Tax

Tribunal allows appeal, directs deletion of adjustment related to international transaction arm's length price.

The Tribunal partly allowed the appeal by directing the deletion of the adjustment of Rs. 5,870,089 related to the arm's length price of the international ... TP Adjustment - determining the Arm’s length price of the international transaction of reimbursement of expenses paid to the associated enterprises determined by the ld TPO at Rs. Nil - HELD THAT:- As decided in own case [2020 (4) TMI 749 - ITAT DELHI] in the instant case, the assessee has incurred expenditure and not making payment of mark-up is not adverse to the entity in Indian Jurisdiction. The assessee has claimed the expenditure paid by the AE on its behalf. The contention of the TPO is that the assessee was not required to incur the said expenses. But it was under jurisdiction of the AO whether particular expenditure was incurred wholly and exclusively for the purpose of business and not in the domain of the TPO to hold that in view of the warranty etc., the assessee was not required to incur expenditure on firewall charges. Contention of the assessee seems plausible that motors were required to checked for content of moisture acquired in transport from India to the USA, i.e., the destination point and it was the responsibility of the assessee to provide defect free motors to the end customers. Thus, respectfully following the finding of the Hon'ble Delhi High Court [2012 (4) TMI 346 - DELHI HIGH COURT] we delete the transfer pricing adjustment. We direct the ld AO/ TPO to delete the adjustment arising on account of determination of ALP of the international transaction of reimbursement of expenses paid by the assessee to its associated enterprises on account of testing charges. Issues Involved:1. Legality of the order passed by the CIT (A).2. Determination of the arm's length price (ALP) of the international transaction of reimbursement of expenses.3. Initiation of penalty proceedings under section 271(1)(c) of the Income Tax Act.4. Levy of interest under sections 234B, 234C, and 234D of the Income Tax Act.Issue-wise Detailed Analysis:1. Legality of the Order Passed by the CIT (A):The assessee contended that the order passed by the CIT (A) under section 250 of the Indian Income Tax Act was 'bad in law.' However, this ground was general in nature and was dismissed by the Tribunal.2. Determination of the Arm's Length Price (ALP) of the International Transaction of Reimbursement of Expenses:The primary dispute was regarding the ALP of the international transaction related to the reimbursement of expenses amounting to Rs. 5,870,089 paid by the assessee to its associated enterprises (AE). The assessee argued that these expenses were for testing/firewall charges incurred on a cost-to-cost basis and were essential to ensure the quality of motors exported to the US market. The Transfer Pricing Officer (TPO) had determined the ALP of these charges to be Nil, reasoning that such expenses were not at arm's length since an unrelated party would not bear these charges.The Tribunal examined the facts and noted that the identical issue had been decided in favor of the assessee in earlier assessment years (2007-08 and 2009-10). It was observed that the expenses were incurred to maintain the brand reputation and avoid potential liability claims in the US market. The Tribunal referred to the Delhi High Court's decision in the case of EKL Appliances Ltd., which held that the TPO should examine the international transaction as it is and not disallow the expenditure on extraneous grounds. The Tribunal concluded that the expenses were genuine business expenditures incurred wholly and exclusively for the purpose of the business and directed the deletion of the adjustment of Rs. 5,870,089.3. Initiation of Penalty Proceedings under Section 271(1)(c) of the Income Tax Act:The assessee argued that the penalty proceedings under section 271(1)(c) were initiated mechanically without recording any satisfaction. The Tribunal found this ground to be premature and dismissed it.4. Levy of Interest under Sections 234B, 234C, and 234D of the Income Tax Act:The assessee contended against the levy of interest under sections 234B, 234C, and 234D. The Tribunal noted that the levy of interest was consequential in nature and dismissed this ground as well.Conclusion:The Tribunal partly allowed the appeal of the assessee by directing the deletion of the adjustment of Rs. 5,870,089 related to the ALP of the international transaction of reimbursement of expenses. The other grounds of appeal were dismissed as being general, premature, or consequential in nature. The order was pronounced in the open court on 31/08/2020.