Findings of another Adjudicating Authority being decisive (not persuasive) in Income Tax Proceedings!

Indian taxpayers have always been prone to transfer pricing disputes whereby the Indian Tax Authorities generally adopt an aggressive approach towards scrutinising the transfer pricing methodology employed by such taxpayers. Whilst doing so the Transfer Pricing Officers (“TPO”) in their overzealous attitude often tend to transgress their jurisdiction and flagrantly flout the provisions of the Income Tax Act, 1961 (“Act”).

Recently, the Income Tax Appellate Tribunal (“Tribunal”) in the case of Reckitt Benckiser (India) Pvt. Ltd. v. DCIT, [TS-448-ITAT-2023(Kol)-TP], dealt with such an instance whereby the royalty paid to the Associated Enterprise (“AE”) was doubted whilst alleging that such royalty was embedded in the import price of the products sold by the taxpayer in India.

In the peculiar facts of the case, the taxpayer had imported finished goods from an AE for the purposes of testing the same in Indian market. Further, the taxpayer in terms of its agreement with foreign AE/s being the owner of Patents and licenses, paid royalty on sales of such products. The TPO questioning the transaction, held the value of the transaction at NIL whilst alleging that taxpayer ought not to have made payments of royalty on sales of such imported goods, since the price paid to the AE for such imports “would have included” the element of royalty. Hence, the TPO proceeded to test the commercial expediency of the international transaction entered by the taxpayer. Thus, the payment made to the foreign AE/s was taken as NIL whilst determining arm’s length price under section 92 of the Act.

On appeal, the Tribunal rejected the approach adopted by the TPO whilst observing that the payment of royalty was made in consonance with the agreement entered by the taxpayer with its AE way back in 2005. Further, the Tribunal relying on the order of the customs authority which had given a categorical finding of the element of Royalty not being loaded on the import cost, deleted the adjustment as made by the TPO. Moreover, whilst noting that such payments were not a one-off transaction and that such payments had been made for the preceding years as well, not questioned by the Department, the Tribunal affirming the principle of consistency deleted the adjustment.

The judgement rendered by the Tribunal assumes significance as it upholds the principle of certainty by rejecting the approach of the TPO in transgressing its jurisdiction by questioning the commercial expediency of the business model adopted by the taxpayer. Further, the decision also paves way for the taxpayers to rely on the findings of another adjudicating authority rendered on the same subject matter as being decisive and not merely persuasive.

Royalty, Custom Authorities and Transfer Pricing

CIT v. ZTE Corporation, [2023] 454 ITR 541 (SC)

On the issue of taxation of “sale of copyright and copyrighted article”, the Hon’ble Apex Court whilst following the decision of three-judge bench in the case of Engineering Analysis Centre of Excellence (P.) Ltd. v. CIT, [2022] 3 SCC 321, dismissed the petition filed by Income Tax Department against the ruling of the Hon’ble High Court of Delhi wherein the payment made towards supply of software embedded in telecom equipment resulting in sale of copyrighted article was held to be not in the nature of royalty, not amenable to tax in India.

It would be interesting to keep an eye on this issue as the Income Tax Department has filed a review petition against the judgement of Apex Court in Engineering Analysis (supra). The present controversy is alive from past 21 years and will have a behemoth effect in international tax arena, if decided in favour of the Income Tax Department.

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Prem Kumar Chopra v. ACIT, [Order dated 25.05.2023 in W.P.(C) in 12104/2022] (Delhi HC)

In a first of its kind ruling, the Hon’ble High Court of Delhi whilst emphasizing on the principle of consistency to be antidote to the vice of arbitrariness and adherence to it procedurally for ensuring predictability of the decision, quashed the initiation of re-assessment proceedings. In the peculiar facts of the case, the Hon’ble High Court observed that when re-assessment proceedings were dropped against the Assessee for an assessment year, on identical facts, re-assessment proceedings for subsequent Assessment Year could not be initiated without highlighting any change in facts.

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DCIT v. Aedas Pte. Ltd., [Order dated 10.07.2023 in ITA No. 716/Del/2020] (Del. Trib.) 

Whilst providing certainty to the taxpayers and assuring confidence in the judicial system of the India qua taxation of non-residents, the Delhi Bench of Tribunal adjudged the issue pertaining to taxability of architectural design services rendered by a Singapore based firm to customers in India, as FTS under Article 12 of the India-Singapore DTAA, in favour of the assessee and held that rendition of project specific architectural services rendered to customers in India, in the absence of make-available, would not trigger the rigors of Article 12 of DTAA.

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