2022 (8) TMI 1272 - AT - Income Tax

ITAT partially rules for assessee on transfer pricing and directs reassessment.

M/s. Praxair India Private Limited Versus The Deputy Commissioner of Income-tax, Large Tax Payer Unit, Circle 1 Bangalore.

The ITAT partly allowed the appeal, ruling in favor of the assessee on transfer pricing adjustments for royalty payments, technical services fees, and ... TP Adjustment - payment of royalty @ 1% - HELD THAT:- As in assessee’s own case for assessment year 2012- 2013 [2022 (2) TMI 1279 - ITAT BANGALORE] we hold that payment of royalty at 4% on sale is to be treated at arm’s length. It is ordered accordingly. TP Adjustment being payments made towards fees for technical services - HELD THAT:- There is no merit in the finding of the TPO that the payment of technical services fees is already covered by the royalty payment. Similarly, the TPO has not explained on what basis and under which method of computation of ALP (CUP, TNMM etc) 1 % is to be determined as the ALP for the payment of engineering and technical services fees. The aggregation of these transactions with other transactions on account of close linkage to the manufacturing operations, thereby warranting the application of TNMM has not been found fault or disputed by the TPO. Having found that payment for fees for technical service is not duplication of payment of Royalty and the factum of assessee having received the services from the AEs for which the payments were made, the AO / TPO is directed to revisit the TP analysis of the assessee and determine whether payments are at ALP. TPO shall follow one of the prescribed methods to arrive at ALP of payments towards fees for technical service. TP Adjustment on payments of interest on Compulsory Convertible Debentures (CCDS) - HELD THAT:- Tribunal, in assessee’s own case [2022 (2) TMI 1279 - ITAT BANGALORE] the issue raised with regard to payment of interest on CCDs is decided in favour of the assessee. Disallowance u/s 14A in computation of total income under regular provisions and book profits - HELD THAT:- In the present case, the AO has recorded vague, stereotyped reasons de hors the accounts of the assessee for making the disallowance under section 14A. There is no satisfaction of the AO having regard to the accounts of the assessee - in the case of CIT v. Gokaldas Images P Ltd. [2020 (11) TMI 345 - KARNATAKA HIGH COURT] has held that disallowance u/s 14A cannot be added to book profits of assessee under section 115JB. We delete the disallowance made under section 14A in computing the total income under regular provisions and book profits under section 115JB. Disallowance u/s 37 - being foreign exchange fluctuation loss incurred in respect of loans availed - HELD THAT:- As in assessee’s own case AY 2012- 2013[2022 (2) TMI 1279 - ITAT BANGALORE] the issue raised in ground with regard to disallowance of loss incurred on fluctuation of foreign currency is decided in favour of the assessee. Issues Involved:1. Transfer Pricing adjustment for royalty payment.2. Transfer Pricing adjustment for technical services fees.3. Transfer Pricing adjustment for interest on Compulsorily Convertible Debentures (CCDs).4. Disallowance under Section 14A of the Income Tax Act.5. Disallowance under Section 37 of the Income Tax Act for foreign exchange fluctuation loss.Detailed Analysis:1. Transfer Pricing Adjustment for Royalty Payment:The assessee benchmarked the payment of royalty by aggregating it with other transactions and using the CUP method. The TPO rejected this approach and determined the ALP for royalty payment at 1%, which was confirmed by the DRP. The ITAT noted that in previous years (2009-2010 to 2012-2013), the Tribunal had accepted a 4% royalty payment as being at arm's length. Therefore, the ITAT held that the royalty payment at 4% should be treated as at arm's length for the year under consideration.2. Transfer Pricing Adjustment for Technical Services Fees:The assessee argued that the payment for technical services was not a duplication of royalty payments. The TPO and DRP considered the payments for technical services as duplicative and set the ALP at 1% of sales. The ITAT found that the technical services were distinct from the royalty payments and were essential for the construction and operation of plants. The ITAT directed the TPO to reassess the ALP using one of the prescribed methods, acknowledging the distinct nature of technical services from royalty payments.3. Transfer Pricing Adjustment for Interest on Compulsorily Convertible Debentures (CCDs):The assessee benchmarked the interest payments on CCDs using the CUP method, concluding that the interest rates of 9% and 12% were at arm's length. The TPO re-characterized the CCDs as ECBs and benchmarked the interest rate against LIBOR, resulting in a significant adjustment. The ITAT, referencing its own decision and other judicial precedents, held that CCDs should not be treated as ECBs and that the interest rates should be benchmarked against the currency in which the loan is repaid (INR). Therefore, the ITAT ruled in favor of the assessee, accepting the interest rates as at arm's length.4. Disallowance under Section 14A of the Income Tax Act:The AO disallowed Rs. 5,99,10,687 under Section 14A, which was confirmed by the DRP. The ITAT noted that the AO did not record any dissatisfaction with the assessee's claim regarding the non-incurrence of expenditure related to exempt income. Citing judicial precedents, the ITAT emphasized the necessity of recording dissatisfaction before making a disallowance under Section 14A. Additionally, the ITAT ruled that such disallowances cannot be added to book profits under Section 115JB. Consequently, the ITAT deleted the disallowance.5. Disallowance under Section 37 of the Income Tax Act for Foreign Exchange Fluctuation Loss:The AO and DRP disallowed the foreign exchange fluctuation loss on the grounds that the loan was used for investment and purchase of fixed assets. The assessee argued that the loan was for general corporate working capital purposes, and any gains from the same loan had been taxed in previous years. The ITAT, referencing its previous decision, held that if the loan is used for revenue purposes, the forex loss should be allowed as a deduction. The ITAT found in favor of the assessee, allowing the deduction for the forex loss.Conclusion:The ITAT partly allowed the appeal, ruling in favor of the assessee on the key issues of transfer pricing adjustments for royalty payments, technical services fees, and interest on CCDs, as well as disallowances under Sections 14A and 37 of the Income Tax Act. The ITAT directed the AO to reassess certain issues and give due credit for taxes collected at source.