2016-TII-INSTANT-ALL-361
16 August 2016   

CASE LAW

2016-TII-57-HC-MUM-TP

CIT Vs MERCK LTD: BOMBAY HIGH COURT (Dated: August 8, 2016)

Income tax - ALP - AE - attribution of Nil value - import of pigment - pricing policy & technical knowhow fees.

Whether the pricing policy undertaken by an entity with a view to compete out local competitors, can be said to have any impact on determining the ALP on import of pigments by such entity from its AE, so as to attract TP adjustment - NO: HC

Whether merely because there is an agreement between the assessee and the AE and the latter is obligated to provide a list of services, any adjustment is warranted even if no services are availed nor any payment in this respect is made - NO: HC

A) The assessee had entered into an agreement with its AE to provide technical knowhow/consultancy for a consideration of Rs.1.57 Crores. During subject A.Y, the assessee availed services of its AE during the subject Assessment Year only in three out of twelve fields listed in the agreement. The TPO, therefore, proceeded to hold that the entire consideration of Rs.1.57 Crores was attributable to the three technical services which the assessee availed of and held that no consideration was payable in respect of nine services provided for in the agreement. It further held that only Rs.40 lakhs could be considered as ALP attributable to three services and made adjustment of Rs.1.17 Crores resulting in its addition to the taxable income. On appeal, the Tribunal observed that there was was no obligation upon the assessee to obtain technical assistance in all the 12 areas listed in the Agreement. The Tribunal further held that the entire TP adjustment was done by the Revenue without having been applied any of the methods prescribed u/s 92C to determine at the ALP.

B) The Revenue had preferred the present appeal challenging the order, whereby the Tribunal held that no TP adjustment was required to arrive at the ALP in respect of import of pigment made by assessee from its AE, inter alia, on the ground that the consideration paid for import of pigments to its AE was less than the normal consideration as evidenced by imposition of antidumping duty on its import of pigment under the Customs Tariff Act, 1975.

Having heard the parties, the High Court held that,

Technical know-how fees

+ the finding of the Tribunal that the TPO has not applied any of the method prescribed u/s 92C to determine the ALP in respect of fees for technical knowhow/consultancy fee paid by the assessee to its AE is not disputed. Further, the finding of the Tribunal that even in respect of three fields where assessee had availed the services, no exercise to benchmark the same with similar transactions entered into between independent parties was carried out before holding that the ALP in the three areas availed is Rs.40 lakhs, is not disputed. The finding of the Tribunal that the agreement for technical knowhow / consultancy was in respect of all the twelve services and assessee could avail of all or any one of these twelve areas listed out in the agreement as and when the need arose. We find the Agreement is similar to a retainer agreement. Consequently, the finding of the AO attributing nil value to nine of the services listed in the agreement which were not availed of by the assessee in the present facts was not justified. Moreover, not adopting one of the mandatorily prescribed methods to determine the ALP in respect of fees of technical services payable by the Assessee to its AE, makes the entire TP adjustment unsustainable in law. In view of the above, the finding of fact arrived at by the Tribunal that Rs.1.57 Crores paid by it to its AE is in respect of its right to avail and the obligation of the AE to provide technical assistance in any of the twelve services listed out in the technical knowhow agreement entered into between Assessee with its AE is not shown to be perverse;

Import of pigment from AE

+ it is to be noted that chapter X of the I-T Act provides for computation of income arising from an international transaction on the basis of the ALP in respect of transactions between AEs. Section 92(3) provides that the TP provisions will not apply where it results in reduction of income chargeable to tax. The result of accepting the Revenue's contention that the import of pigments is at a price lower than the ALP, would increase the import price of pigments, resulting in a reduction in income chargeable to tax. This is not permitted. Therefore, the reliance upon the email submitted by the Assessee establishes a pricing policy with a view to finish local competition, does not in any manner have any impact on determining the ALP on import of pigment. The finding arrived at by the Tribunal on the basis of imposition of antidumping duty by the Customs is not challenged before this court. The finding of the Tribunal that no adjustment is called for in the price paid by the Assessee for import of pigments for its AE's is a finding of fact which is not shown to be perverse and/or arbitrary. Therefore, question as formulated in respect of import of pigment does not give rise to any substantial question of law.

Revenue's appeal dismissed

 

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