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2019 (9) TMI 1342 - AT - Income TaxTransfer pricing adjustment in respect of technical knowhow fees paid by the assessee to its AE - TPO determining the ALP of a particular international transaction at Nil without resorting to any methods prescribed - assessee considered Net Profit Margin (NPM) as an appropriate Profit Level Indicator (PLI ) - HELD THAT - Duty of the Ld. TPO is restricted only to the determination of arm s length price of an international transaction between two related parties by applying any of the methods prescribed under section 92C of the Act r/w rule 10B of the Rules. Thus there is no provision under the Act empowering the Ld. TPO to determine the arm s length price on estimation basis that too by entertaining doubts with regard to the business expediency of the payment and in the process stepping into the shoes of the Ld. AO for making disallowance under section 37(1) of the Act. This in our considered opinion it is not in conformity with the statutory provision hence unacceptable. The Ld. TPO is duty bound to determine the arm s length price of the international transaction by adopting one of the method prescribed under the statute and cannot deviate from the restrictions/conditions imposed under the statute. We find that the ld. TPO having not determined the ALP in conformity with the statutory provision and in the process having failed to demonstrate that ALP shown by the assessee is incorrect the contentions of the ld. DR to restore the issue to the file of the ld. TPO for fresh determination of the ALP is unacceptable. Respectfully following the aforesaid decision we hold that there is no provision made in the statute empowering the ld. TPO for determining the ALP of a particular international transaction at Nil without resorting to any methods prescribed. Since the relief is granted to the assessee on the preliminary issue of the ld. TPO not following the prescribed methods as provided in the statute for determination of ALP the other arguments advanced by the ld. AR and the ld. DR on merits of ALP adjustment are left open and not adjudicated herein. Accordingly the ground Nos. 1.1 to 1.3 raised by the assessee are allowed. Transfer pricing adjustment in relation to mark up of recovery of expenses by the assessee from its AEs - primary facts are that the transaction being recovery of expenses from AE by the assessee is not in dispute and hence the same are not reiterated herein for the sake of brevity - HELD THAT - It is not in dispute that the entire transaction of recovery of expenses is a pass through transaction which had been categorically accepted by the ld. TPO in his order. Once it is a pass through transaction it is only a balance sheet item for the assessee. Hence there cannot be any mark-up on the same. We find that assessee also reimburses certain expenses incurred by the AE without any mark-up. These facts are also accepted categorically by the ld. TPO. We hold that there cannot be any mark-up on income side of the transaction alone as contemplated by the ld. TPO. Hence the entire issue herein is only academic. We find that the Co-ordinate Bench decision of Bangalore Tribunal in the case of Tesco Hindustan Service Centre Pvt. Ltd. vs. DCIT 2015 (5) TMI 1129 - ITAT BANGALORE in the context of ALP adjustment on reimbursement - we direct the ld. AO/TPO to delete the ALP adjustment made on recovery of expenses. The other arguments made by the ld. AR and DR on inclusion/exclusion of comparables are not adjudicated herein as the relief is granted on preliminary issue. Accordingly the Ground No. 2.1 raised by the assessee is allowed.
Issues Involved:
1. Transfer pricing adjustment regarding technical know-how fees. 2. Transfer pricing adjustment related to the markup of recovery of expenses. 3. Inclusion/exclusion of comparables. 4. Disallowance under Section 40(a)(ia) of the Income Tax Act. Issue-wise Detailed Analysis: 1. Transfer Pricing Adjustment Regarding Technical Know-how Fees: The primary issue was the transfer pricing adjustment made by the Transfer Pricing Officer (TPO) concerning the technical know-how fees of Rs. 10,21,00,004 paid by the assessee to its Associated Enterprise (AE). The TPO determined the Arm's Length Price (ALP) of the technical know-how fees to be Nil, rejecting the assessee's benchmarking analysis under the Transaction Net Margin Method (TNMM). The TPO's conclusion was based on the lack of documentation proving the receipt of technology and training, statements from employees, and the method of computation of the fees. The Dispute Resolution Panel (DRP) upheld the TPO's decision based on previous years' decisions. However, the Tribunal found that the TPO did not follow any prescribed methods under Section 92C(1) read with Rule 10B, which is mandatory. The Tribunal cited the jurisdictional High Court's decision in CIT v/s. Johnson & Johnson Ltd., emphasizing that the TPO must determine the ALP using one of the prescribed methods and cannot estimate it arbitrarily. Consequently, the Tribunal allowed the assessee's appeal on this ground, stating that the TPO's determination of the ALP at Nil without following the prescribed methods was unacceptable. 2. Transfer Pricing Adjustment Related to the Markup of Recovery of Expenses: The second issue involved the transfer pricing adjustment amounting to Rs. 56,87,125 related to the markup on the recovery of expenses by the assessee from its AE. The assessee argued that the recovery of expenses was a pass-through transaction and should not attract any markup. The TPO, however, applied a markup of 4.39% on the recovery of expenses, considering it a part of the operational profit. The DRP upheld the TPO's decision based on previous years' orders. The Tribunal, however, found that since the transaction was a pass-through and only a balance sheet item, there should be no markup. The Tribunal referenced the Bangalore Tribunal's decision in Tesco Hindustan Service Centre Pvt. Ltd. v/s. DCIT, which held that reimbursements of expenses should not attract a markup. Thus, the Tribunal directed the deletion of the ALP adjustment on the recovery of expenses, allowing the assessee's appeal on this ground. 3. Inclusion/Exclusion of Comparables: The third issue regarding the inclusion/exclusion of comparables became infructuous due to the Tribunal's decisions on the first two issues. Since the relief was granted on the preliminary issues, there was no need to adjudicate this ground. 4. Disallowance Under Section 40(a)(ia) of the Income Tax Act: The fourth issue involved a disallowance of Rs. 1,05,534 under Section 40(a)(ia) of the Income Tax Act. Due to the smallness of the amount, the assessee did not press this ground during the hearing. Consequently, the Tribunal dismissed this ground as not pressed. Conclusion: The appeal of the assessee was partly allowed, and the stay petition became infructuous due to the disposal of the main appeal. The Tribunal emphasized the necessity for the TPO to follow statutory methods for determining the ALP and disallowed arbitrary estimations.
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