2018 (11) TMI 1782 - AT - Income Tax

TP Adjustment - Selection of MAM - TNMM OR CUP - TPO has rejected TNMM as the Most Appropriate Method (MAM) to benchmark its international transactions qua payment of royalty and applied CUP method - Fee for receipt of technical support services and royalty - HELD THAT - Applying the law laid down in CIT vs. EKL Appliances Ltd. 2012 (4) TMI 346 - DELHI HIGH COURT and the fact that the Revenue has been applying TNMM approach on year to year basis in case of the taxpayer but during the year under assessment the TPO has abruptly applied the CUP method without assigning any reason and the TPO has decided the issue by sitting on the armchair of the businessman/taxpayer by applying the benefit test which is not permissible and the fact that payment of royalty and product development fee are intrinsically interlinked with the productions and sales and can only be decided under TNMM this issue is required to be set aside to the TPO to decide afresh after providing an opportunity of being heard to the taxpayer. Comparable selection - Munjal Showa Ltd. as a valid comparable - HELD THAT - TPO retained this comparable on the ground that it is engaged into manufacturing of auto parts - it is admitted fact on the file that the taxpayer has not contested this comparable before TPO by filing TP study. When we examine the order passed by DRP though it is discussed that the assessee is in initial year of production so its base and scale of operation is quite low whereas the comparable companies selected in the transfer pricing study in relation to the manufacturing segment are into manufacturing of auto components for years ranging from 31 years to 51 years and discussed the same in tabulated form but retained the Munjal Showa Ltd. as a valid comparable. Even during the course of arguments before the Tribunal the taxpayer has not come up with financials of Munjal Showa Ltd. In the given circumstances we deem it fit to remand this issue to ld. TPO to decide afresh. Bosch Chasis Systems India - It is the settled principle of law laid down by Hon ble Delhi High Court in Mckinsey Knowledge Centre case 2015 (3) TMI 1226 - DELHI HIGH COURT that a comparable cannot be rejected merely on the ground of having different financial year in case annual result can be reasonably extrapolated. Moreover the ld. TPO was empowered enough to call for the complete data u/s 133 of the Act to reach at the logical conclusion. So in these circumstances we remand this issue to the TPO directing him to decide afresh - Appeal allowed for statistical purposes. Capacity utilization adjustment - HELD THAT - When we examine the order passed by the ld. DRP of the order it is recorded that complete data for claiming capacity utilization adjustment by the taxpayer has not been brought on record so in these circumstances we have no option except to remand this issue back to the TPO to decide afresh on providing complete data by its taxpayer to substantiate the claim for capacity utilization adjustment and after providing an opportunity of being heard to the taxpayer.

Issues Involved:
1. Assessment of total income.
2. Transfer pricing adjustment for royalty and product development service fees.
3. Inclusion of inappropriate comparables.
4. Rejection of functionally comparable companies.
5. Rejection of capacity utilization adjustment.
6. Determination of benefits from royalty and service fees.
7. Initiation of penalty proceedings.
8. Charging of interest under sections 234B and 234C.

Detailed Analysis:

GROUND NO.1:
The first ground is general in nature and does not require any adjudication.

GROUND NO.2 & 6:
The taxpayer paid Rs. 8,14,05,540 for technical support services and royalty. The TPO rejected TNMM as the Most Appropriate Method (MAM) for benchmarking international transactions for royalty payments and applied the CUP method, determining the ALP of royalty and technical support fee at nil. The TPO's rejection was based on the taxpayer's failure to provide evidence of benefits from royalty payments and the lack of a cost-benefit analysis. However, the taxpayer provided supplementary analysis showing royalty payments by independent third parties and other group entities at similar rates. The Tribunal found that the TPO's application of the benefit test and abrupt switch to CUP without reason was inappropriate. The issue was remanded to the TPO for fresh consideration after providing the taxpayer an opportunity to be heard.

GROUNDS NO.3 & 4:
The taxpayer challenged the inclusion of Munjal Showa Ltd. and the exclusion of Bosch Chasis Systems India Ltd. as comparables. The TPO retained Munjal Showa Ltd. despite its different manufacturing activities and significantly larger turnover. The Tribunal remanded this issue to the TPO for reconsideration based on the taxpayer's cited decisions. Bosch Chasis Systems India Ltd. was rejected by the TPO solely due to a different financial year. The Tribunal noted that functional similarity existed and remanded the issue to the TPO to determine its suitability as a comparable after providing the taxpayer an opportunity to be heard.

GROUND NO.5:
The taxpayer's claim for capacity utilization adjustment was denied by the TPO/DRP/AO. The taxpayer argued that it operated at a different capacity level compared to older, more established comparables. The Tribunal noted that the TPO provided no reason for rejecting the claim and remanded the issue back to the TPO for fresh consideration, requiring the taxpayer to provide complete data to substantiate the claim.

GROUND NO.7:
This ground was deemed premature and required no specific findings.

GROUND NO.8:
This ground was consequential in nature and required no specific findings.

Conclusion:
The appeal filed by the taxpayer was allowed for statistical purposes, and several issues were remanded to the TPO for fresh consideration after providing the taxpayer an opportunity to be heard. The Tribunal emphasized the need for consistency and proper reasoning in the TPO's decisions, particularly regarding the application of transfer pricing methods and the assessment of benefits from royalty and service fees.

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