9911796707
TMI Blog2025 (5) TMI 829X X X X Extracts X X X X X X X X Extracts X X X X ..... sue raised in Ground No. 31 pertains to the initiation of penalty proceedings under section 270A of the Income Tax Act. As this matter is premature at this stage, it is dismissed accordingly as infructuous. 5. The interconnected issue raised by the assessee in Grounds Nos. 4 to 13 of its appeal pertains to the action of the learned DRP/TPO/AO in benchmarking the payment of royalty at NIL. 6. The facts in brief are that the assessee company is jointly owned by Tayota Boshoku Corporation-Japan (70%), Tayota Boshoku Asia Company Ltd- Thailand (25%) and Tayota Tsusho Corporation- Japan (5%). The assessee company is engaged in the business of manufacturing of automotive components such as seats, door trims and interior of passenger cars. For carrying out the manufacturing activity of automotive components, it has obtained licence from parent company namely Tayota Boshoku Corporation-Japan (hereafter- TBC) for which the assessee has been paying royalty. During the year under consideration, the assessee has paid royalty of Rs. 29,43,07,119/- which was claimed to be at ALP. 7. The TPO during the assessment proceedings conducted a detailed examination of the business carried out by the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y transferred an excessive cost burden to Indian entities, at the same time reducing TKML's taxable income in India. This cost-sharing arrangement distorted the true economic substance of the transactions and misrepresented the actual value creation within the Toyota supply chain. 7.3 To further validate its findings, the TPO conducted a benchmarking analysis comparing Royalty payments of similar multinational corporations (MNCs). The analysis revealed that other MNCs in comparable circumstances do not pay Royalty on intra-group sales. Given that TBI functions as a Contract Manufacturer without independent market-facing responsibilities, its Royalty payments were deemed unjustifiable. Consequently, the TPO benchmarked the Royalty payment of Rs. 45,83,94,469/- to NIL, resulting in a Transfer Pricing (TP) adjustment of the same amount. The TPO also noted that TBI failed to provide a detailed breakup of Royalty payments related to transactions with both related and unrelated parties. Due to this non- disclosure, the entire Royalty payment was assumed to be linked to intra-group transactions and was disallowed in full. 7.4 Based on above observation, the TPO concluded that Royalty pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... market risks arise if the demand for TKMP's cars declines, thereby affecting the assessee. Therefore, the claim that the assessee faces no market risk is incorrect. Furthermore, the assessee's production is based on projected demand from TKMP, which is a standard business practice and does not support the TPO's contention that the assessee is a contract manufacturer. 12.2 The learned AR argued that the TPO's analysis of functions, assets, and risks (FAR) is flawed and has been manipulated to conclude that the assessee carries no risks merely because most of its sales are to a related party. The TPO incorrectly assumes that any sales to a related party automatically classifies the entity as a contract manufacturer. This issue has already been adjudicated in the case of SC Enviro Agro India Pvt. Ltd. (ITA No. 6060/Mum/2011), where the Tribunal dismissed a similar contention by the TPO, holding that revenue authorities cannot dictate business decisions and that expenses incurred for business purposes cannot be disallowed on arbitrary grounds. 12.3 The learned AR submitted that the TPO has also wrongly disallowed royalty payments by assuming that a contract manufacturer should not p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nal, vide its order dated 13-04-2022, decided the issue in favor of the assessee by holding that TNMM was the most appropriate method. Accordingly, it directed the TPO to benchmark the royalty transaction as per TNMM. The relevant observations of the Tribunal are as follows: 11.2. We have perused submissions advanced by both sides in light of records placed before us. We note that the functions performed by the assessee before us, and that of Toyota Kirloskar (supra) considered by Coordinate Bench of this Tribunal, being the sister concern, are identical in nature. Both these assessee are engaged in manufacture of automotive components, peculiar to automobile industry. The assessee before us aggregated all the international transaction by using TNNM as the most appropriate method to benchmark the international transactions. The Ld.TPO segregated management fees and royalty payment, which constituted major part of the transaction. The entire dispute before us, is in respect of the method used for benchmarking the royalty transaction by separately benchmarking it under PSM. 11.3. The overall margin computed by the assessee was at 5.26%. From the transfer pricing study, we note ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TPO and DRP to come to a conclusion that the Assessee is a start up in manufacture of various parts for automobiles. The technology in question was that of TMC Japan. The technology is being used by the Assessee even today. There is no basis for the TPO/DRP's conclusion that the useful economic life of the technology would be only 5 years. In any event passage of time cannot be the basis to discard TNMM which is already held by the Tribunal and upheld by the Hon'ble High Court as no longer the MAM because the conditions necessary for PSM as MAM are not met in the case of the Assessee. Even going by Rule 10B(1)(d), there should be contribution by each of the parties to a transaction for earning profits from sale of goods or provision of services. Then the contribution of each of the parties is identified and the profit is split between those parties. In the case of the Assessee the technology is given by TMC, Japan for which royalty is paid. The use of the technology in manufacturing and the sale of the product so manufactured contribute to the profit of the Assessee and TMC, Japan has nothing to do with that. There is therefore absence the first condition for application of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... quires a two-sided analysis (or a multi-sided analysis of the contributions of more than two associated enterprises, where necessary) irrespective of which transfer pricing method is ultimately found to be the most appropriate. 2.126. The existence of unique and valuable contributions by each party to the controlled transaction is perhaps the clearest indicator that a transactional profit split may be appropriate. The context of the transaction, including the industry in which it occurs and the factors affecting business performance in that sector can be particularly relevant to evaluating the contributions of the parties and whether such contributions ale unique and valuable. Depending on the facts of the case, other indicators that the transactional profit split may be the most appropriate method could include a high level of integration in the business operations to which the transactions relate and /or the shared assumption of economically significant risks (or the separate assumption of closely related economically significant risks) by the parties to the transactions. It is important to note that the indicators are not mutually exclusive and on the contrary may often be fou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s the dispute was whether TNMM or CUP was the MAM. It is for the first time in AY 2013-14 that the revenue has sought to apply PSM as MAM. In the given facts and circumstances, we are of the view that TNM Method is the Most Appropriate Method and the AO is directed to apply the said method in determining the ALP, after affording opportunity of being heard to the assessee. The grounds of appeal of the assessee are treated as allowed 11.5. We note that, the Ld.TPO in present facts of the assessee before us, used identical comparables in order to ascertain the transaction to be at arms length as it was used in case of the sister concerns case referred to herein above. There is no dispute that, factual metrics and background our identical and the nature of payment having considered identically by the revenue authorities in both these cases. We are therefore respectfully following the view taken by coordinate bench of this tribunal in case of Toyota Kirloskar (supra), we are of the view that TNM Method is the Most Appropriate Method and the Ld.AO/TPO is directed to apply the said method in determining the ALP, after affording opportunity of being heard to the assessee. 14.2 We furthe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... contention that the receivables transaction should not be separately benchmarked as it was part of an overall business arrangement with the AE. As such, the TPO noted that aggregation of transactions is permissible only when the underlying transactions are continuous, closely interlinked, and have a direct bearing on pricing. The burden of proving such linkage rests with the taxpayer, which, in this case, failed to provide substantial evidence to justify aggregation. Hence, the TPO proceeded with a transaction-by-transaction approach for benchmarking the delayed receivables. 16.2 The TPO also rejected the assessee claim regarding the delay in receivables was compensated through set-offs in other transactions. The TPO held that, as per OECD guidelines, a set-off does not inherently imply that both transactions are at Arm's Length. The assessee failed to demonstrate with evidence that the delay was indeed adjusted through a corresponding benefit in any other transaction. The TPO observed that the set-off transactions must be independently benchmarked, which the taxpayer did not do. Hence, the TPO rejected the set-off argument and treated the delayed receivables as a separate Interna ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en the transaction of nominal interest on extension of credit period cannot be disputed. The assessee in support of its argument placed reliance on the decision of Delhi Tribunal in case of Kusum Healthcare Pvt Ltd vs. ACIT in ITA No. 6814/Del/2014 reported in 62 taxmann.com 79 and the decision of this tribunal in case of ACIT vs. Millipore (India) Ltd in IT(TP)A No 327/Bang/2015 reported in 80 taxmann.com 12 as well as various other case laws. 18.3 The assessee further submitted that a continuing debit balance does not constitute an international transaction under section 92B(1) of the Act, as it is merely a reflection of an unpaid invoice from an existing international transaction rather than a separate transaction. In a normal scenario, payments are not necessarily made immediately upon becoming due, as they are influenced by factors such as invoice processing time, agreed payment terms, and standard business practices. Since the impact of receivables is already factored into the sale price, there is no need for any separate compensation or transaction. 19. The TPO's attempt to charge notional interest on outstanding receivables is unjustified, as the Income Tax Act does not t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urthermore, the AR pointed out that against the Trade Receivables of Rs. 4,09,41,774, there were Trade Payables of Rs. 1,19,78,936, and it is a settled principle that Trade Payables should be netted off from Trade Receivables before computing the interest on delayed receivables. Additionally, the AR emphasized that the credit period of 30 days had been taken into account without conducting any analysis. In support of these arguments, reliance was placed on decisions of the Hon'ble Tribunal in the cases of Verifone India Technology Pvt. Ltd. - IT(TP)A No. 290/Bang/2021 and Tecnimont Pvt. Ltd. - ITA No. 1238 & 5427/Mum/2017. 23. On the other hand, the learned DR submitted that the outstanding receivables is the international transaction and therefore the same should be subject to the benchmarking so as to determine the arm length price between the associated enterprise. The learned DR vehemently supported the order of the authorities below. 24. We have heard the rival contentions of both the parties and perused the materials available on record. The first question before us arises as to whether or not the outstanding receivables is an international transaction. This issue is no lon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ere any business enterprise is required to pay interest on delayed payment, it would examine the cost of interest and if the same is higher then the amount of interest payable on funds obtained locally, it would take a loan from local sources and pay the amounts payable for exports and expenses within time. Therefore, extending of credit beyond the normal period of 60 days is in substance a granting of loan to an AE so as to enjoy the funds, which the AE would otherwise have to repay within the period of 60 days. The aforesaid finding of ours also finds support from the question of law at Sr. No.2 as proposed by the Revenue. Thus, in these circumstances, in the facts of this case order of the Tribunal computing interest at LIBOR rates as the rate prevailing in country where the loan is received/consumed by the AE cannot in these facts be faulted as it is in line with the decision of this Court in Tata Autocomp Systems Ltd. (supra). 8. In the above view, the two questions of law as proposed do not give rise to any substantial question of law. Thus, not entertained. 24.2 In view of the above, we hold that the PLR rate, therefore, would not be applicable and should not be applied f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es, citing that it was not allowable under section 43B of the Act. As per the assessee, this disallowance is incorrect as the payment was made before the due date for filing the return of income. The assessee contended that payments made after March 31, 2020, but before the due date of ROI filing, are still deductible under section 43B of the Act. The company made the gratuity payment on September 15, 2020, and proof of this payment is available in the records. The AO has failed to appreciate this legal provision and has mechanically disallowed the amount. Additionally, the AO did not issue a show cause notice or provide an opportunity for the assessee to explain the payment before making the disallowance. This procedural lapse has deprived the assessee of a fair hearing, violating the principles of natural justice. The ld. DRP is therefore requested to consider this aspect while adjudicating the case. 28. Based on the above facts, the assessee urges the DRP to delete the disallowance made by the AO and treat the gratuity payment as an allowable expense under provision of section 43B of the Act. 29. The learned DRP observed that the disallowance of Rs. 5,13,01,761/- for gratuity ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to appreciate that the adjustment made in the intimation pertains to a payment that qualifies for deduction under section 43B of the Act. The learned AR emphasizes that once the payment has been made within the prescribed timeframe, the deduction should not have been disallowed. 31.2 The learned AR also submits that the DRP's conclusion that it lacks jurisdiction is incorrect, as the doctrine of merger of intimation order with the assessment order should have been applied in this case. The learned AR, therefore, urges us to grant appropriate relief by directing the AO to allow the deduction and rectify the unjust disallowance. 32. On the contrary the learned DR before us vehemently supported the order of the authorities below. 33. We have heard the rival contentions of both the parties and perused the materials available on record. Upon careful consideration of the rival submissions and the material available on record, we find that the key issue for adjudication revolves around whether the disallowance of gratuity expenses made in the intimation issued under section 143(1) of the Act can be raised and addressed in an appeal arising from an assessment under section 143(3) o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s with the assessment passed u/s 143(3). Therefore, it loses its relevance once the regular assessment is processed, and it is only an intimation towards the accuracy of the information submitted by the assessee. In the given case, the assessee has claimed deduction u/s 11 and failed to file the form 10B along with the ROI. Based on the above observation, the claim of the assessee was denied by the AO in sec.143(1) proceedings. Therefore, there is no denial of fact that AO can make the above disallowance, however, the validity of the intimation issued u/s 143(1) is limited to mere intimation of correctness and accuracy of the income declared in ROI and its accuracy based on the information submitted along with the ROI. It does not carry the legitimacy of an assessment. When the assessment was processed under regular assessment then it loses its individuality and merges with the regular assessment. We are in agreement with the findings of Ld CIT(A) that the intimation u/s 143(1) merges with the order passed u/s 143(3) of the Act and the appeal against the above intimation becomes infructuous. In our view, he should have stopped with the above findings and should not have proceeded t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e AO should have taken into account this compliance before disallowing the expense. 33.6 We further note that identical issue was recently examined by this tribunal in the case of Ariba Technologies India Pvt Ltd vs. DCIT reported in 172 taxmann.com 304. The tribunal after examination of detailed decided the issue in favour of the assessee. The finding of the tribunal is extracted as under: 25. We have heard the rival contentions of both the parties and perused the materials available on record. From the preceding discussion we note that the controversy before us relates whether the adjustment made in the intimation order under section 143(1) of the Act can be agitated in the proceedings under section 143(3) of the Act or in the appeal proceeding arising out of assessment order under section 143(3) of the Act. In this regard, let us understand the scope of the provisions of section 143(1) of the Act. Section 143(1) of the Act deals with prima facie adjustments made during the processing of an income tax return before assessment. The adjustments that can be made under this section include: 1. Mathematical Errors - Correction of any arithmetical or clerical errors in the return. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 154 of the Act or appeal under section 246 of the Act. The assessee is required to choose the right course of action diligently which depends upon different facts and circumstances. 25.5 Nevertheless, the object for making the adjustment in the intimation under section 143(1) of the Act or framing the assessment under section 143(3) of the Act is to determine the income and tax liability correctly as per the provisions of law. 25.6 It is also important to note that in the present case the adjustment made under section 143(1) of the Act has been incorporated in the assessment framed under section 143(3) r.w.s. 144C of the Act. Thus, a question arises whether there is double demand in the records of the Department for the adjustment made under the provisions of section 143(1) of the Act as well as in the assessment framed under section 143(3) of the Act. Certainly, there can't be double demand for the same item of the disallowance or the addition. 25.7 Admittedly the adjustments are made by the CPC under section 143(1) of the Act whereas the assessment is framed by NFAC. However, the NFAC is not unknown to the adjustment made by the CPC i.e. automated process under sectio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hough, the assessee might have chosen a wrong channel for redressal of his grievance, all the same, it is incumbent upon the Tax authorities to burden the assessee only with correct amount of tax and not to unjustly benefit at the cost of tax payer. Therefore, in the interest of substantial justice, we deem it expedient to restore the issue to the file of the Assessing officer with a direction to pass appropriate orders deleting the addition / disallowance after duly considering the settled judicial position in this regard, which have been decided in the three cases as enumerated above in Para 25.10 In view of the above, we are not inclined to encourage the assessee not to prefer separate appeal against the intimation generated under section 143(1) of the Act but in the interest of justice and fair play we accept the issue arising from intimation under section 143(1) of the Act in the proceedings arising under the provisions of section 143(3) r.w.s. 144C of the Act. 33.7 It is also pertinent to highlights that the statute does not permit the collection of tax beyond what is legitimately due from the assessee. Taxation must be based on liability established under the law, and mer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... authorities below. 38. We have heard the rival contentions of both the parties and perused the materials on record. The issue under consideration relates to the disallowance of foreign tax credit amounting to Rs. 49,75,683/- claimed by the assessee in the return of income for the relevant assessment year. It is noted that while processing the return under section 143(1) of the Act, the CPC disallowed the claim. Subsequently, the AO, while completing the final assessment, also did not grant the foreign tax credit and relied on the earlier disallowance made under section 143(1) of the Act. 38.1 The assessee has submitted that the foreign tax credit was rightfully claimed in accordance with the provisions of the Act, and the same was duly supported by the filing of Form 67, as mandated under Rule 128 of the Income Tax Rules. The disallowance appears to have been made without examining the merits of the supporting documents or the claim itself. 38.2 In view of the above facts and in the interest of justice, we find merit in the assessee's contention. If the requisite documentation, including Form 67, was furnished within the prescribed time, then the assessee is entitled to the cre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... interest under section 115P of the Act. 43.2 In light of the submissions made, we are of the view that the matter requires proper verification by the AO. If the DDT payment as claimed was indeed made by the assessee on the date stated above and is supported by the challan and corresponding entries in the assessee's records, then the credit of such payment must be granted and the consequential levy of interest under section 115P of the Act should be appropriately revised. Accordingly, in the interest of justice and fair-play, we restore the issue to the file of the AO with a direction to verify the DDT payment claim made by the assessee and allow the credit as per law. The AO shall also recompute interest under section 115P of the Act accordingly after granting due credit for the DDT, if found in order. Hence, this ground of appeal is allowed for statistical purposes. 44. The issue raised by the assessee through ground No. 30 of its appeal is that the AO levied ad-hoc interest of Rs. 2,35,955/- without having any basis. 44.1 The learned AR before us submitted that in computation sheet forming part of final assessment order an interest of Rs. 2,35,955/- was charged without assigni ..... X X X X Extracts X X X X X X X X Extracts X X X X
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