2023 (7) TMI 1568 - AT - Income Tax

TP Adjustment - rendition of services or their benefit - HELD THAT - Neither the AO nor the TPO nor the CIT(A) doubted either the actual rendition of services rendered by the AE or the utility of such services to the assessee. To this fact situation the decision of EKL Appliances Ltd. 2012 (4) TMI 346 - DELHI HIGH COURT is applicable on all fours as held it is not necessary for the assessee to show that any legitimate expenditure incurred by him was also incurred out of necessity. It is also not necessary for the assessee to show that any expenditure incurred by him for the purpose of business carried on by him has actually resulted in profit or income either in the same year or in any of the subsequent years. The only condition is that the expenditure should have been incurred wholly and exclusively for the purpose of business and nothing more. It is this principle that inter alia finds expression in the OECD guidelines in the paragraphs which we have quoted above. Even Rule 10B(1)(a) does not authorise disallowance of any expenditure on the ground that it was not necessary or prudent for the assessee to have incurred the same or that in the view of the Revenue the expenditure was unremunerative or that in view of the continued losses suffered by the assessee in his business he could have fared better had he not incurred such expenditure. These are irrelevant considerations for the purpose of Rule 10B. So long as the expenditure or payment has been demonstrated to have been incurred or laid out for the purposes of business it is no concern of the TPO to disallow the same on any extraneous reasoning. As provided in the OECD guidelines he is expected to examine the international transaction as he actually finds the same and then make suitable adjustment but a wholesale disallowance of the expenditure particularly on the grounds which have been given by the TPO is not contemplated or authorised. Application of CUP as most appropriate method - The view taken by the Tribunal in the case of DCIT vs. M/s. Knorr Bremse India Pvt. Ltd. 2021 (1) TMI 1289 - ITAT DELHI is relevant wherein as placed reliance on the decision of the Tribunal which was upheld 2019 (12) TMI 1630 - PUNJAB AND HARYANA HIGH COURT to hold that when the learned TPO did not bring on record any instance where comparable services were provided to an independent enterprise in the recipient market the CUP method was not the most appropriate method but on the contrary TNMM method would be most appropriate method because it was difficult to apply the CUP method or the cost plus method in such situation. The Tribunal accordingly held that the TNMM was the most appropriate method in the absence of a CUP which is applicable where the nature of the activities involved assets used and risk assumed are comparable to those undertaken by an independent enterprise. No decision contrary to the view taken by the Tribunal in the case M/s. Knorr Bremse India Pvt. Ltd. (supra) is brought to our notice. Hence respectfully following the said decision of the Co-ordinate Bench of the Tribunal we hold the issue in favour of the assessee. It is true that resjudicata is not applicable to tax proceedings but the Hon ble Supreme Court held in many cases including Radhasoami Satsang 1991 (11) TMI 2 - SUPREME COURT that it is not open for the Revenue to take various stands for various years and Rule of Consistency demands that in case of a particular assessee under identical circumstances different views cannot be taken. This factor also goes against the Revenue. Therefore based on the Rule of Consistency rejection of the same for the years under appeal is unjustified. Government of India reviewed the extant policy and decided to permit payments for royalty lumpsum fee for transfer of technology and payments for use of trade mark/brand name on the automatic route i.e. without any approval of the Government of India and there is no cap for such payment as was there in the earlier press note. The authorities below are therefore not correct in referring to the press notes to determine the arm s length price either at 8% or 7.5% of the sales. Viewing from any angle we find force in submissions advanced on behalf of the assessee and therefore find it difficult to sustain the orders of the authorities below. Consequently we allow the grounds of appeal relating to transfer pricing matters for both the years. Not allowing of set-off the brought forward business loss and double disallowance of the service tax - CIT(A) directed the AO to verify those issues and to adjust the set-off of brought forward business losses against the income of that assessment year and also to allow the service tax receivable. No grievance could be made out by the assessee on these aspects and hence they are dismissed.

Summary

ISSUES PRESENTED and CONSIDERED

The core legal questions considered in this judgment include:

• Whether the Transactional Net Margin Method (TNMM) or the Comparable Uncontrolled Price (CUP) method is the most appropriate method for determining the arm's length price (ALP) of the technical service fee paid by the assessee to its Associated Enterprise (AE).
• Whether the re-characterization of the technical service fee as a royalty payment by the Transfer Pricing Officer (TPO) was justified.
• Whether the Press Note-2 (2003 series) or the Press Note-8 (2009 series) should be applied in determining the arm's length price for the technical service fee.
• Application of the Rule of Consistency in the context of transfer pricing adjustments for similar transactions in different assessment years.
• Corporate tax issues concerning the set-off of brought forward business losses and service tax disallowance.
• Concerns regarding TDS credit for the assessment years in question.

ISSUE-WISE DETAILED ANALYSIS

1. Determination of the Most Appropriate Method (TNMM vs. CUP)

The legal framework involves the selection of the most appropriate method under the Income Tax Rules, 1962, specifically Rule 10B. The TPO rejected TNMM, favoring CUP based on a comparison with RBI guidelines for royalty payments. The Tribunal, however, found that the TPO did not provide comparable instances, making CUP inapplicable. Instead, TNMM was deemed appropriate due to the absence of comparable uncontrolled transactions.

The Tribunal referenced the decision in the case of DCIT vs. M/s. Knorr Bremse India Pvt. Ltd., where TNMM was preferred in similar circumstances due to the difficulty in applying CUP for intangibles. The Tribunal concluded that TNMM, focusing on profitability rather than the exact price of services, was suitable.

2. Re-characterization of Technical Service Fee as Royalty

The Tribunal addressed whether the characterization of the technical service fee as royalty was appropriate. It referred to the decision in CIT vs. EKL Appliances Ltd., emphasizing that the necessity or prudence of an expenditure is not a criterion for its allowability as a business expense. The Tribunal found that the TPO's re-characterization was unjustified, as the expenditure was incurred wholly and exclusively for business purposes.

3. Application of Press Notes in Determining ALP

The Tribunal considered the applicability of Press Note-2 (2003 series) versus Press Note-8 (2009 series). The latter removed the cap on payments for technical services, allowing them under the automatic route without government approval. The Tribunal found that the authorities erred in applying the earlier press note to cap the payment at 8% or 7.5% of sales, as the newer regulation permitted unrestricted payments.

4. Rule of Consistency in Transfer Pricing Adjustments

The Tribunal addressed the issue of consistency, noting that for assessment years 2009-10 and 2012-13, similar transactions were accepted without adjustments. Citing the Supreme Court's stance in Radhasoami Satsang vs. CIT, the Tribunal emphasized that different stands for identical circumstances in different years are unjustified. The Tribunal ruled that the rejection of TNMM for the years under appeal was inconsistent with prior acceptance.

5. Corporate Tax Issues

Regarding the set-off of brought forward business losses and service tax disallowance, the CIT(A) directed verification and adjustment by the Assessing Officer. The Tribunal found no grievance from the assessee on these issues, dismissing the related grounds.

6. TDS Credit Concerns

The Tribunal noted that the grounds concerning TDS credit were not pressed by the assessee, leading to their dismissal.

SIGNIFICANT HOLDINGS

The Tribunal held that:

• "So long as the expenditure or payment has been demonstrated to have been incurred or laid out for the purposes of business, it is no concern of the TPO to disallow the same on any extraneous reasoning."
• The TNMM is the most appropriate method for determining the ALP of the technical service fee due to the lack of comparable uncontrolled transactions.
• The application of Press Note-8 (2009 series) permits unrestricted payments for technical services, rendering the earlier cap inapplicable.
• The Rule of Consistency demands uniform treatment of similar transactions across different assessment years unless materially different circumstances justify a deviation.

In conclusion, the Tribunal allowed the appeals concerning transfer pricing matters, while dismissing the grounds related to corporate tax issues and TDS credit. The decision underscores the importance of consistent application of transfer pricing methods and adherence to updated regulatory frameworks.