2025 (9) TMI 837 - AT - Income Tax

Benchmarking method affirmed, ALP adjustment deleted for international air-ticket sales to AE; depreciation restored on patents/copyrights opening WDV

ITAT held that the other method adopted for benchmarking the international sale of air tickets to the AE was the most appropriate and, finding no evidence ... TP Adjustment - assessee has entered international transaction with its associated enterprise of sale of air tickets - to benchmark this transaction, the assessee adopted the other method as the most appropriate method. The cost of a ticket is a third-party cost which does not have any impact on sale of tickets to related party or an associated enterprise which neither the assessee nor the related party or associated enterprise has any control - HELD THAT:- We hold that according to the information available with respect to the comparison of invoices, the other method adopted by the assessee is the most appropriate method and further as there is no evidence available that assessee has charged to non-associated enterprises higher than what is chargeable to associated enterprises, allowing ground and its sub- grounds, we direct the learned assessing officer to delete the adjustment made to the arm’s-length price of the international transaction of sale of air tickets. Disallowing the depreciation - block of assets the assessee has one particular asset of Patents and Copyrights - HELD THAT:- We fail to understand what assessee is required to establish when there is no addition in the assets during the year but in earlier years assessee has claimed depreciation as per the prescribed rate on the opening WDV of the block of assets. We do not find any reason to sustain the disallowance. Accordingly, we direct the learned assessing officer to delete the disallowance of depreciation allowance to the assessee on opening written down value of patents and copyrights. Accordingly ground of the appeal is allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether the taxpayer's adoption of the 'other method' (rule 10AB) to benchmark surcharge income from sale of air tickets to associated enterprises is permissible and whether the Transfer Pricing Officer (TPO) was justified in rejecting that method and instead applying the Transactional Net Margin Method (TNMM) to make an arm's-length adjustment on the entire ticket business rather than only on the international transaction with associated enterprises. 2. Whether the assessing officer was justified in disallowing depreciation claimed on patents and copyrights (opening written down value) for the assessment year by treating the opening WDV as unsubstantiated and thereby adding back depreciation under section 32(1). ISSUE-WISE DETAILED ANALYSIS Issue 1 - Appropriateness of 'other method' (rule 10AB) vs. TNMM; scope of adjustment (entire business v. only international transactions) Legal framework: For determination of arm's-length price, section 92C(1)(f) read with rule 10AB permits the 'other method' where the method takes into account prices charged or which would have been charged in same or similar uncontrolled transactions under similar circumstances. The Transfer Pricing Officer functions under section 92CA and may adopt the most appropriate method after reference and analysis. Precedent treatment: Judicial authority was invoked before the Tribunal (the lower authorities relied on precedents in argument). The Tribunal followed the established principle that benchmarking adjustments must be based on comparable uncontrolled transactions and that the 'other method' is permissible where same/similar uncontrolled transactions under similar circumstances exist; it also followed the principle that transfer-pricing adjustments should be restricted to international transactions with associated enterprises rather than applied to the taxpayer's entire turnover. Interpretation and reasoning: The assessee asserted that ticket cost is a third-party cost and that the only remunerative element in dispute was the surcharge, charged at the same rate to associated and non-associated parties. The assessee produced invoices showing identical surcharge rates for AE and non-AE customers. The TPO rejected the assessee's transfer-pricing study on the ground of absence of agreements and an allegation of selective production of invoices, and then adopted TNMM using a filtered comparable set to compute adjustment. The Tribunal analysed rule 10AB's statutory text and found that where uncontrolled transactions under similar circumstances show the same price charged, the 'other method' is an appropriate benchmarking method. The Tribunal held that invoices documenting the transactions constituted a form of agreement sufficient to establish comparability and that mere absence of a separate written contract does not, without further enquiry, justify wholesale rejection of the taxpayer's method. The Tribunal further held that the TPO's suspicion of selective invoice production, without initiating enquiries or adducing contrary evidence, was an allegation insufficient to displace the assessee's evidentiary material or to convert the appropriate method to TNMM. Ratio versus obiter: The holding that (a) invoices can constitute adequate documentary evidence of identical pricing for comparable uncontrolled transactions when circumstances are the same, and (b) absence of separate agreements is not by itself a valid basis to reject the 'other method,' is ratio decidendi for the appeal on transfer-pricing. The observation that the TPO, if suspicious, was empowered to make enquiries is supporting reasoning (mixed ratio/obiter) but underlines the requirement of active fact-finding by revenue authorities before rejecting taxpayer methodology. Conclusions: The Tribunal concluded that the assessee's adoption of the 'other method' was not unjustified on the facts available and that the TPO's rejection on grounds of absence of agreements and alleged selective invoice production was not sustained. The Tribunal allowed the taxpayer's ground: the transfer-pricing adjustment was deleted to the extent of Rs. 47,174,000 applied to the claimed international transaction amounting to Rs. 15,313,905; in sum, the 'other method' was held to be the most appropriate and the TPO's TNMM-based adjustment unsupported. Issue 1 - Limitation of adjustment to international transactions with associated enterprises Legal framework: Adjustments under the transfer-pricing provisions are directed at international transactions with associated enterprises and are governed by section 92C read with rules; the monetary effect of an adjustment should correspond to the international transaction under scrutiny. Precedent treatment: The Tribunal relied on established judicial principles submitted before it (citations not reproduced here) holding that any transfer-pricing adjustment must be confined to the relevant international transactions rather than applied to the taxpayer's entire revenues where the benchmarking exercise relates only to specified AE transactions. Interpretation and reasoning: Even if the TPO's TNMM determination were accepted, the Tribunal reasoned that the adjustment should have been restricted to the AE international transactions (the surcharge revenue arising from AE supplies) and not multiplied over the entire ticket turnover. The magnitude of the TPO's adjustment (several times the international transaction value) rendered it unreasonable and contrary to the statutory scheme. The Tribunal observed that the TPO's approach producing an adjustment three times the AE transaction value lacked justification and therefore could not be sustained. Ratio versus obiter: The definitive holding that an arm's-length adjustment must be restricted to the international transactions with associated enterprises is ratio and dispositive for quantum; subsidiary comments about proportionality and reasonableness of adjustments are also part of the operative ratio. Conclusions: The Tribunal directed deletion of the adjustment of Rs. 47,174,000 made to the arm's-length price vis-à-vis the international sale of air tickets of Rs. 15,313,905, holding that any valid adjustment cannot be applied beyond the international transactions with associated enterprises. Issue 2 - Disallowance of depreciation claimed on opening WDV of patents and copyrights Legal framework: Section 32(1) permits deduction for depreciation on tangible and intangible assets in accordance with prescribed rates; proof of asset existence and WDV must ordinarily be established via books of account, audited financials, tax audit reports and earlier returns where applicable. Precedent treatment: The Tribunal considered the records and documentary evidence produced (audited financial statements, tax audit reports and earlier year accounts) and applied the principle that an assessee is not required to produce unusual or extra documentary proof for a depreciation claim that flows from the opening WDV of the block where earlier years' claims have been substantiated in statutory records. Interpretation and reasoning: The assessing officer and DRP disallowed depreciation on the ground that the assessee failed to substantiate the opening WDV and initial acquisition values. The Tribunal examined the asset block movement over prior years (opening WDV, prior year depreciation and closing WDV carried forward) and found a consistent trail in audited accounts and tax audit reports demonstrating that no additions were made and that the depreciation claimed in the impugned year was calculated at prescribed rate on an opening WDV carried forward. The Tribunal found no legal basis to demand further documentary proof in the absence of any allegation of fabrication or concealment or of fresh additions that required evidence. The lower authorities' insistence on additional proof was held unjustified. Ratio versus obiter: The conclusion that depreciation on an established opening WDV in statutory books is allowable where prior years' audited accounts and tax audit reports support the opening balance is ratio regarding entitlement to depreciation; observations about the sufficiency of accounts as evidence are ratio and binding for the facts at hand. Conclusions: The Tribunal directed deletion of the disallowance of depreciation of Rs. 1,845,615 and ordered that the assessing officer allow the depreciation claimed on the opening written down value of patents and copyrights. Cross-References and Outcome Both issues were examined on the record before the TPO/AO/DRP and the Tribunal. The Tribunal allowed the appeal in part by (a) deleting the transfer-pricing adjustment made to the assessed international transaction and (b) deleting the disallowance of depreciation; other procedural grounds (general challenge to framing of assessment, certain grounds not pressed, interest issues) were not entertained as substantive grounds in the decision.