Appellant's Appeal Allowed: New Transfer Pricing Method, Disallowance Deleted, Charges Treatment Verified

The Tribunal allowed the appellant's appeal, directing the Assessing Officer to apply the Transactional Net Margin Method for determining the arm's length price, delete the disallowance under section 40(a)(i) for the reimbursement of salary, and verify the details of plant layout charges to determine the appropriate treatment. The appeal was allowed in favor of the appellant.

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Issues Involved:
1. Transfer pricing adjustment related to payment of royalty.
2. Disallowance of reimbursement of salary of seconded employees due to non-deduction of tax at source.
3. Treatment of plant layout charges as capital expenditure.

Detailed Analysis:

1. Transfer Pricing Adjustment Related to Payment of Royalty:
The primary issue under this ground is the adjustment made by the Transfer Pricing Officer (TPO) to the arm's length price of the appellant's international transaction of payment of royalty amounting to Rs. 75,274,460. The TPO rejected the appellant's use of the Transactional Net Margin Method (TNMM) and instead applied the Profit Split Method (PSM) as the most appropriate method to benchmark the international transaction. The TPO's rationale was that the TNMM could be misused to justify profit shifting and did not accurately reflect the arm's length nature of the royalty transactions. The TPO concluded that the residual profit split steps should be applied to get the profit split, and the adjustment was made accordingly.

The appellant contested this adjustment, arguing that the facts of the present assessment year 2016-17 are identical to those covered by the decision of the co-ordinate Bench in the appellant's own case for the assessment year 2013-14 and 2015-16. The Tribunal found that the functions performed by the appellant and the sister concern were identical and that the TNMM was the most appropriate method for benchmarking the international transactions, including the payment of royalty. The Tribunal directed the Assessing Officer/TPO to apply the TNMM in determining the arm's length price, following the decision of the co-ordinate Bench.

2. Disallowance of Reimbursement of Salary of Seconded Employees Due to Non-Deduction of Tax at Source:
The second issue pertains to the disallowance of Rs. 5,38,09,953 on account of non-deduction of tax at source on the reimbursement of salary of seconded employees. The appellant argued that the reimbursement was a pure cost-to-cost reimbursement without any profit element and that tax was already deducted at source under section 192 of the Act on the entire salary paid, including the salary paid in Japan.

The Tribunal noted that the facts of the present assessment year 2016-17 are identical to those covered by the decision of the co-ordinate Bench in the appellant's own case for the assessment year 2013-14 and 2015-16. The Tribunal held that the reimbursement made by the appellant to the foreign entity towards the seconded employees could not be regarded as "Fees for Technical Services" and therefore was not taxable under section 195 of the Act. The Tribunal directed the Assessing Officer to delete the disallowance made under section 40(a)(i) of the Act.

3. Treatment of Plant Layout Charges as Capital Expenditure:
The third issue involves the treatment of payment towards plant layout charges amounting to Rs. 90,58,664 as capital expenditure. The appellant argued that these expenses were incurred to facilitate material movement, rearrange production lines, and optimize space utilization, and therefore should be treated as revenue expenditure.

The Tribunal noted that the facts of the present assessment year 2016-17 are identical to those covered by the decision of the co-ordinate Bench in the appellant's own case for the assessment year 2013-14 and 2015-16. The Tribunal observed that the alleged expenditure was claimed as plant layout charges to improve resource utilization, quality, and safety. The Tribunal directed the appellant to file all relevant details in support of the claim, which would be verified by the Assessing Officer in accordance with the principles laid down by the Supreme Court in the case of Ballimal Naval Kishore v. CIT. The Tribunal allowed the grounds for statistical purposes, directing the Assessing Officer to verify the details and grant the necessary relief.

Conclusion:
The Tribunal allowed the appeal of the appellant, directing the Assessing Officer to apply the TNMM for determining the arm's length price, delete the disallowance under section 40(a)(i) for the reimbursement of salary, and verify the details of plant layout charges to determine the appropriate treatment. The appeal was allowed in favor of the appellant.

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