2024 (12) TMI 1258 - AT - Income Tax

Transfer pricing ruling rejects base erosion and mirror ALP arguments but allows income characterization relief

The ITAT Ahmedabad ruled on multiple transfer pricing issues involving an assessee and its Associate Enterprises. The tribunal rejected the assessee's ... TP adjustment - international transactions undertaken by the assessee with its Associate Enterprise (AE) - HELD THAT:- We hold that the Special Bench in the case of Instrumentarium [2018 (8) TMI 1192 - ITAT KOLKATA] has laid down principle of law to the effect that there is no base erosion by ALP adjustment in the income of the non-resident in respect of its transactions with the Indian AEs. In view of the above we reject this argument of assessee that the decision of the Special Bench in the case of Instrumentarium (supra) rejecting the base erosion argument of the assessee would not apply in the facts of the present case. Assessee, thereafter pointed out that in the preceding year, it had raised an argument, regarding Benefit of Treaty (DTAA) against applicability of TP provisions in reference to Article 9(1) of the India Netherlands Tax Treaty .Assessee fairly conceded that this argument of the assessee had been rejected by the ITAT in its order in the case of the assessee for Asst.Year 2007-08 to 2010-11.This argument of the assessee, therefore, is also dismissed. Principle of mirror ALP - argument of the assessee was that, if the ALP of a transaction with one of the AE’s to an international transaction is determined, the same ALP is to be applied with respect to other AE also - HELD THAT:- No merit in the contentions of the ld.counsel that the ALP adjustment should be deleted by applying the principle of mirror ALP. We have gone through the order of the ITAT in the case of the assessee for Asst.Year 2011-12 to 13-14 and have noted that it had referred to the decision of Filtrex Technologies P.Ltd. [2018 (4) TMI 1957 - ITAT BANGALORE] has categorically held that in terms of provision of law relating to TP, there could not be any case of mirror ALP at all. Income received by the assessee on account of rendering of services was taxable in the source country only on receipt basis - We restore the issue back to the AO with the direction to apply the decision of the Special Bench in Ampacet Cyprus Ltd [2020 (9) TMI 25 - ITAT MUMBAI] on the issue of applicability of ALP adjustment to receipts which are otherwise not taxable in terms of provisions of DTAA as argued by the assessee before us. He shall consider the facts of the case and give due opportunity of hearing to the assessee while doing so. Income from software treated as royalty in nature - The above issue is covered in favour of the assessee by the decision of the ITAT on the identical issue for Asst.Year 2011-12 [2023 (10) TMI 771 - ITAT AHMEDABAD] the addition made to the income of the assessee by treating the receipts on account of supply of software licence, as royalty is deleted. Income from rendering Global P&T Functional Services treated as fees for technical services - Since admittedly the above issue is covered in favour of the assessee by the decision of the ITAT on the issue for Asst.Year 2012-13, addition made to the income of the assessee by treating the receipts on account of service rendered by the assessee to its subsidiary “SIMPL” for providing Global P&T Functional services as fee for technical services u/s 9(1)(vii) is deleted. Addition on account of receipt from HLPL as fees for technical services made to the income of the assessee is deleted. Addition made on account of income received from L&T services, as fee for technical services under section 9(1)(vii) is deleted. Issues Involved:1. Transfer Pricing Adjustment2. Income from Software Treated as Royalty3. Income from Rendering Global P&T Functional Services Treated as Fees for Technical Services4. Income from HLPL Treated as Fees for Technical Services5. Income from Larsen & Toubro Limited Treated as Fees for Technical Services6. Short Credit of Tax Deducted at Source (TDS)7. Validity of Power of AttorneyDetailed Analysis:1. Transfer Pricing Adjustment:The primary issue revolved around the Transfer Pricing (TP) adjustment made to the international transactions undertaken by the assessee with its Associate Enterprises (AEs). The TPO had made an upward adjustment of INR 220,39,59,249 to the transactions with Hazira LNG Private Limited (HLPL) and Shell India Markets Private Limited (SIMPL), using a third-party rate as an internal CUP for benchmarking. The assessee argued against the TP adjustment, stating that it resulted in base erosion, and cited the Special Bench decision in Instrumentarium Corporation Ltd. However, the Tribunal upheld the TP adjustment, rejecting the base erosion argument and the applicability of the 'mirror ALP' principle. The Tribunal directed a fresh comparability analysis for the transaction with HLPL and deferred the issue of ALP adjustment applicability to the Special Bench's pending decision.2. Income from Software Treated as Royalty:The assessee contested the treatment of INR 28,68,584 received from Bharat Oman Refineries Limited and Bharat Petroleum Corporation Limited for software licenses as royalty. The Tribunal ruled in favor of the assessee, following the Supreme Court's decision in Engineering Analysis Centre of Excellence P.Ltd., which held that payments for software licenses do not qualify as royalty.3. Income from Rendering Global P&T Functional Services Treated as Fees for Technical Services:The assessee challenged the classification of INR 87,46,96,276 received from SIMPL for Global P&T Functional Services as fees for technical services. The Tribunal, referencing its prior decision for the assessment year 2012-13, ruled that the services did not make available any technical knowledge or skill to SIMPL, thus not qualifying as fees for technical services under the India-Netherlands Tax Treaty.4. Income from HLPL Treated as Fees for Technical Services:The issue pertained to INR 8,74,34,868 received from HLPL being treated as fees for technical services. The Tribunal, consistent with its prior ruling for the assessment year 2012-13, found that the services did not make available any technology to HLPL, and thus, the receipts did not qualify as fees for technical services under the DTAA.5. Income from Larsen & Toubro Limited Treated as Fees for Technical Services:The assessee contested the treatment of INR 73,92,399 received from L&T as fees for technical services. The Tribunal, aligning with its decision for the assessment year 2011-12, concluded that the services were rendered outside India for L&T's overseas projects, and thus, the income was not taxable in India under Section 9(1)(vii) of the Act.6. Short Credit of Tax Deducted at Source (TDS):The issue of short credit of TDS amounting to INR 10,69,502 was rendered infructuous as the necessary rectification had already been passed by the AO.7. Validity of Power of Attorney:The Revenue's cross-objection questioned the validity of the Power of Attorney used for filing the appeal. The Tribunal dismissed the objection, referencing its earlier decision in the Stay Petition, which confirmed the validity of the Power of Attorney holder for filing the appeal.Conclusion:The Tribunal allowed the appeal of the assessee partly for statistical purposes, directing fresh analysis for certain TP adjustments and dismissing the Revenue's cross-objection. The Tribunal's decisions largely favored the assessee on issues of software royalty and fees for technical services, following precedents and applicable treaties.