Relief to TATA Power: ITAT deletes Adjustment made Towards Technical Know-How Fees Despite Accepting Entity Level Margins [Read Order]

The Bangalore Bench of Income Tax Appellate Tribunal (ITAT) has granted relief to TATA Power deleting the adjustment made towards technical know-how fees despite accepting the entity-level margins.

The assessee, TATA Power Solar Systems Limited had entered into various international transactions with its Associated Enterprises (AEs) which inter alia included payment towards technical know-how. The said payment was pursuant to a licence agreement entered into by the assessee with its AE.

The said payment towards technical know-how was capitalised in the books of the assessee and depreciation on the same was claimed. The assessee aggregated all the international transactions on grounds of being inextricably and closely linked to each other, for the purposes of computation of Arm’s Length Price (ALP) and benchmarked them at entity level.

The assessee considered also Transaction Net Margin Method (TNMM) as the most appropriate method with Operating Profit (OP) as the profit level indicator.

During the course of assessment, the TPO upon considering the benchmarking analysis of the assessee, accepted the same for all international transactions except for the payment of technical know-how. The TPO thereafter concluded that the technical know-how fees should not have been paid by the assessee to its AE.

Thus, by treating the ALP of such payment at NIL, the TPO made an adjustment under Section 92CA(3) of the Income Tax Act.

Vikram Udupa, on behalf of the assessee, submitted that once the net profit margin was accepted to be at arm's length by the TPO, it presupposes that the various components of income and expenditure were also at arm's length.

He further contended that since the payment towards technical know-how was capitalised in its books, the difference between transacted value and ALP could not be added since there was no effect to the total income.

Sunil Kumar Singh on behalf of the revenue relied on the order of the TPO to support his contentions.

The two-member Bench of George George K, (Judicial Member) and Laxmi Prasad Sahu, (Accountant Member) observed that t the TPO had accepted the entity-level margins earned by the assessee but proceeded to make TP adjustment on payment towards technical know-how.

The Bench referred to the decision of the Delhi High Court in Sony Ericsson Mobile Communications India (P.) Ltd. Vs. CIT which held that once the revenue accepts the entity-level margins as per the most appropriate method, it would be inappropriate to treat a particular expenditure as a separate international transaction. It was held that such an exercise would lead to unusual and absurd results.

In view of the aforesaid judicial pronouncement, the Bench deleted the adjustment made by the TPO towards technical know-how fees despite accepting the entity-level margins.

To Read the full text of the Order CLICK HERE

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