2026 (3) TMI 115 - AT - Income Tax

Transfer Pricing: statutory methods required - ad hoc NIL ALP rejected and royalty adjustment deleted on documented benchmarking.

Transfer pricing adjustment rejecting royalty payments on an ad hoc NIL arm's length price is unsustainable where the TPO/AO fails to apply any statutory ... TP adjustment - Royalty payment to Associated Enterprise (AE) - HELD THAT:- The adjustment on account of Royalty payment was covered in favour of the assessee in its own case for the earlier Asst. years [2019 (7) TMI 923 - ITAT MUMBAI] as held AO has determined the ALP of the royalty payment at nil by simply relying upon the decision of the TPO in assessment year 2005-06. As noted earlier, while deciding the appeal of the revenue for assessment year 2005- 06, the Tribunal has upheld the decision of CIT (Appeals) in deleting the adjustment proposed by the TPO. Thus, in our view, the issue is squarely covered decision of the Tribunal in assessee's own case for preceding assessment decision. Deduction u/s. 80IA(4) - participation in the Andhra Pradesh Micro Irrigation Project (APMIP) - only basis for disallowance made by the AO was with reference to the name 'Netafim ACS and India Ltd.” on the first page of the Agreement which was a typographical error - HELD THAT:- During the appellate proceeding the assessee placed on record various documentary evidences to substantiate that it was in fact the executing party, copy of the agreement signed by the assessee’s Managing Director, work orders, invoices, payment advices, performance certificates, TDS certificates. After considering the same CIT[A] granted the relief to the assessee of deduction u/s. 80IA(4). Revenue could not place on record any contrary material to deny the claim of deduction u/s. 80IA(4). Issues: (i) Whether the Transfer Pricing Officer's and Assessing Officer's upward adjustments disallowing the royalty payments (determining ALP at NIL) were legally sustainable, and whether the Commissioner of Income Tax (Appeals) was justified in deleting the adjustment; (ii) Whether the Commissioner of Income Tax (Appeals) was correct in allowing deduction under section 80IA(4) of the Income-tax Act, 1961 in respect of participation in the Andhra Pradesh Micro Irrigation Project.Issue (i): Whether the addition on account of royalty payments determined at NIL by the TPO/AO was sustainable in law and whether aggregation under TNMM and deletion by CIT(A) was correct.Analysis: The dispute concerns benchmarking of royalty paid to an associated enterprise. Statutory methods under section 92C of the Income-tax Act, 1961 and Rule 10B of the Income-tax Rules, 1962 require the TPO to apply a prescribed transfer pricing method to determine ALP. The appellate authority examined the TPO's order and found no application of any prescribed methodology, noted that the assessee had maintained transfer pricing documentation and applied CUP/TNMM approaches, and relied on coordinate Bench decisions of the Tribunal and higher court judgments which treated the royalty as within the scope of aggregated benchmarking with manufacturing transactions or otherwise supported the assessee's benchmarking. The appellate authority also relied on the proviso to section 92C(2) concerning permissible variation and compared operating margins of the assessee with comparables. The Tribunal, following preceding coordinate Bench decisions and absence of any contrary higher forum reversal, applied those precedents and found the TPO/AO's ALP determination at NIL to be ad hoc and unsustainable.Conclusion: The determination of ALP of royalty at NIL by the TPO/AO is not sustainable; the deletion of the transfer pricing adjustment by the Commissioner of Income Tax (Appeals) is upheld. This issue is decided in favour of the assessee.Issue (ii): Whether the assessee was rightly allowed deduction under section 80IA(4) of the Income-tax Act, 1961 for amounts relating to APMIP despite a typographical name discrepancy in the agreement.Analysis: The appellate authority examined documentary evidence including the executed agreement, work orders, invoices, payment advices, performance certificates, Form 10CCB and TDS records. The sole basis of AO's disallowance was a name discrepancy on the agreement's first page, alleged to indicate contracting on behalf of the holding company and characterization as a works contract. The appellate analysis applied the legal test of dominant intention for classification of contracts and found that the assessee independently executed supply, installation and commissioning obligations and accounted income and expenditure in its books. No contrary material was placed on record by Revenue.Conclusion: The deduction claimed under section 80IA(4) of the Income-tax Act, 1961 is correctly allowed by the Commissioner of Income Tax (Appeals). This issue is decided in favour of the assessee.Final Conclusion: Both grounds of appeal raised by the Revenue - relating to disallowance of royalty payments (transfer pricing adjustment) and denial of deduction under section 80IA(4) - are without merit; the Tribunal dismisses the Revenue's appeals and upholds the CIT(A)'s deletions and allowance, following applicable transfer pricing methodology requirements and relevant coordinate Bench and higher court precedents.Ratio Decidendi: Where a Transfer Pricing Officer determines arm's length price, he must apply one of the prescribed methods under section 92C of the Income-tax Act, 1961 and Rule 10B of the Income-tax Rules, 1962; an ad hoc determination without applying statutory methods or rejecting the taxpayer's documented benchmarking is legally unsustainable, and documented evidence establishing the assessee as the contracting party satisfies eligibility for deduction under section 80IA(4) of the Income-tax Act, 1961.