2021 (10) TMI 605 - AT - Income Tax

Tribunal directs re-examination under TNMM, penalty proceedings deemed erroneous

Zuari Cement Limited Versus The Asst. Commissioner of Income Tax, Circle 1 (1), Kadapa.

The Tribunal allowed the assessee's appeal, setting aside the lower authorities' orders and directing the Transfer Pricing Officer (TPO) to re-examine the ... TP Adjustment - MAM selection - payment(s) of sub-license fee for use of trade mark of “Italcementi”, procurement services fee, consultancy service fee and payment of consultancy fee for using EASY supply portal - transactions followed by adoption of the transactional net margin method (TNMM) as the most appropriate method “MAM” - as per DR lower authorities have rightly adopted a direct method i.e., CUP which carries precedence over all other indirect methods - HELD THAT:- We find no reason to accept the Revenue’s instant argument more particularly in view of the fact that this is second round of consequential proceedings wherein the earlier learned co-ordinate bench had already rejected the very contentions seeking to decline both aggregation as well as TNMM. Assessee had not even furnished the relevant details having adopted aggregation as well as TNMM method in the consequential proceedings. We find no substance in the Revenue’s instant last argument as well since this is once again a second round of assessment wherein no such objections had been put forth from the departmental side in the former round. Be that as it may, we therefore accept the assessee’s contentions seeking to imply “aggregation” as well as TNMM method and leave it open for the “TPO” to finalize the consequential computation as per law. We further make it clear that it shall be very much open for the assessee to file on record all the necessary details pertaining to the comparable(s) list submitted in “TNMM” in the consequential computation. Issues Involved:1. Transfer Pricing2. Payment of Sub-license Fee for the Use of Trademark3. Payment of Procurement Services Fee4. Payment of Consultancy Fee for Construction of a New Manufacturing Facility5. Payment of Consultancy Fee for Using EASY Supply Portal6. Levy of PenaltyDetailed Analysis:1. Transfer Pricing:The assessee challenged the correctness of the lower authorities' action in making adjustments to the arm's length price (ALP) of international transactions with its Associated Enterprises (AEs). The primary contention was the rejection of the transfer pricing analysis undertaken by the assessee and the adoption of the Comparable Uncontrolled Price (CUP) method over the Transactional Net Margin Method (TNMM). The Tribunal noted that this was the second round of remand proceedings and referred to the earlier order which had rejected the Revenue’s arguments against aggregation and TNMM. The Tribunal found no reason to deviate from the earlier findings and upheld the assessee's method of aggregation and TNMM.2. Payment of Sub-license Fee for the Use of Trademark:The Tribunal addressed the issue of the sub-license fee paid for the use of the Italcementi trademark. The lower authorities had determined the ALP for this transaction as 'NIL' under the CUP method, questioning the commercial expediency and tangible benefits of the payment. The Tribunal found that the TPO's analysis was faulty and biased, noting that the Italcementi Group never used the Zuari brand, and thus the TPO's conclusion of a transfer of economic value was incorrect. The Tribunal reiterated that rejecting the entire payment without proper analysis was not justified.3. Payment of Procurement Services Fee:The Tribunal examined the payment of procurement services fees and found that the lower authorities had erred in questioning the commercial expediency and tangible benefits of the payment. The Tribunal noted that the TPO had disregarded the evidence submitted by the assessee demonstrating the need for services, actual services rendered, and benefits derived. The Tribunal directed the TPO to re-examine the transaction under the TNMM method.4. Payment of Consultancy Fee for Construction of a New Manufacturing Facility:The Tribunal addressed the payment of consultancy fees related to the construction of a new manufacturing facility. The lower authorities had determined the ALP for this payment as 'NIL', questioning the commercial expediency and tangible benefits. The Tribunal found that the TPO had failed to consider the evidence submitted by the assessee and had not followed the directions of the DRP to examine whether the payment formed part of the Capital Work-in-progress. The Tribunal directed the TPO to re-evaluate the transaction under the TNMM method.5. Payment of Consultancy Fee for Using EASY Supply Portal:The Tribunal reviewed the payment of consultancy fees for using the EASY supply portal. The lower authorities had determined the ALP for this payment as 'NIL', questioning the commercial expediency and tangible benefits. The Tribunal found that the TPO had disregarded the evidence submitted by the assessee and had not followed the directions of the DRP. The Tribunal directed the TPO to re-assess the transaction under the TNMM method.6. Levy of Penalty:The Tribunal noted that the initiation of penalty proceedings under Section 271(1)(c) of the Income Tax Act was erroneous as there was no concealment of facts or willful misstatement by the assessee. The Tribunal directed the TPO to re-consider the entire order and analyze the transactions afresh, first by determining the most appropriate method and then analyzing the transactions under the provisions of the transfer pricing regulations.Conclusion:The Tribunal allowed the assessee's appeal, setting aside the orders of the lower authorities and directing the TPO to re-examine the transactions under the TNMM method. The Tribunal emphasized the need for a detailed and proper analysis, taking into account the evidence submitted by the assessee.