UAPA Principles must Guide Transfer Pricing Analysis: ITAT restricts Royalty and FTS Adjustment to CBDT-Accepted Rates [Read Order]

The Delhi Bench of the Income Tax Appellate Tribunal (ITAT) held that Transfer Pricing analysis must be guided by the principles in the Unilateral Advance Pricing Agreement) (UAPA), while restricting royalty and Fees for Technical Services (FTS) adjustments to rates accepted by the Central Board of DirectTaxes (CBDT).

The assessee, Bellsonica Auto Component India Private Limited, electronically filed its return of income declaring a loss of Rs. 1,68,40,482, and the case was selected for scrutiny. Notices under Sections 143(2) and 142(1) of the Income Tax Act, were issued, and the assessee was represented by its authorised representative, who furnished requisite details and books of account during assessment proceedings.

A reference under Section 92CA(1) of the Income Tax Act was made to the TransferPricing Officer (TPO), with approval of the Principal Commissioner of Income Tax (Pr. CIT), for determination of Arm’s Length Price (ALP) of international transactions for AY 2014–15.

The TPO, under Section 92CA(3) of the Income Tax Act, proposed an adjustment of Rs. 8,47,87,697/-. Based on the TPO’s order, the Assessing Officer passed a draft assessment order under Sections 143(3) read with 144C of the Income Tax Act making the said addition, followed by the final assessment order. The CIT(A) subsequently dismissed the assessee’s appeal and hence the present appeal.

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The assessee submitted that assessee has entered UAPA (Unilateral Advance Pricing Agreement) with Central Board of Direct Taxes (“CBDT”) on November 29, 2022 (attached as Annexure 1 to the Synopsis) wherein, rate of 1.9% of the net sales was agreed for consolidated payment on account of royalty and fees for technical services. The assessee has also moved an application for renewal of UAPA on March 28, 2023 which is in the final stage and has requested Hon’ble Tribunal to cap the rate of royalty and fees for technical services at 1.9%.

The Authorized Representative for assessee submitted that the CIT(A) erred in enhancing the income of assessee by Rs. 8,47,87,690/- pertaining to payment made for royalty and a technical fee and that the CIT(A) grossly erred in rejecting economic analysis undertaken by the assessee in the Transfer Pricing documentation in terms of /section 92D of the Income Tax Act read with Rule 10D.

The Departmental Representative submitted that appellant/assessee failed to show as to what benchmarking analysis and cost benefit analysis was done at the time of entering into agreement. The assessee could not substantiate the claim that services received had actually been availed.

The Tribunal of S. Rifaur Rahman, Accountant Member and Vimal Kumar, Judicial Member held that “In view of above material facts and ratio of judgment the impugned addition being excessive is set aside and AO is directed to cap the rate of royalty in fees for technical services as per the rates accepted by the CBDT with the Annexure ‘A1’. In the given case, it is accepted @ 1.9% of the net sales.”

Reliance was placed on the judgment in Ranbaxy Laboratories Ltd, wherein it was held that the agreement entered into by CBDT with the assessee, which has considered all the aspects of the manner of determination of ALP which are also similar for the this year, should be given highest sanctity and therefore mechanism suggest in that agreement should be necessarily followed in determining ALP of the transactions for this year

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