ITAT Deletes TP-Adjustment On Payment Of Export Commission And Model Fee Against Honda Subsidy

The Delhi Bench of the Income Tax Appellate Tribunal (ITAT) has deleted the adjustment on account of Arm's Length Pricing (ALP) of the export commission payment against the Honda subsidy.

The bench of Challa Nagendra Prasad (Judicial Member) and Shamim Yahya (Accountant Member) has observed that the issues of transfer pricing adjustment with respect to the determination of an ALP of Rs. nil on export commission and payment of royalty are decided in favour of the assessee.

As per the Income Tax Act, of 1961, Arm's Length Price (ALP) is the price applied/ proposed to be applied when two unrelated persons enter into a transaction in uncontrolled conditions.

The appellant/assessee is a subsidiary of Honda Motor Co., Ltd., Japan. Honda Group is engaged in the manufacture and sale of motorcycles and scooters. Honda is one of the world's leaders in the manufacture and distribution of automobiles, motorcycles, and power products and has substantial expertise, technical know-how, and brand equity.

The assessee had entered into an export agreement dated July 13, 2000, under which Honda Motor Co. Ltd. Japan accorded consent to the assessee to export specific models of two-wheelers to certain countries on payment of a 5% export commission of the FOB value of such exports.

The assessee, in its TP study, benchmarked the transactions related to the Export Commission using a combined transaction approach using TNMM. The TPO rejected this approach without any basis, selected two transactions, and decided to benchmark them separately using the CUP method.

On the payment of the export commission, the TPO/DRP determined the arm's length price at NIL.

The assessee submitted that the transaction of payment of export commission was intrinsically linked with the main activity of manufacture and sale of products and, as such, could not be alienated to be benchmarked separately. The TPO order is self-contradictory because, in one place, it is held that the assessee is providing services for building the brands of the AEs in terms of its export activities. On the other hand, it was held that the services provided by HMJ in terms of providing the dealer network were only an incidental benefit to the assessee being part of MNE. The TPO observed that no special benefit was received by the assessee from the expense, and as such, no service was provided by the AE. Therefore, the TPO held the arm's length price (ALP) of the export commission paid to be nil.

The ITAT directed the AO/TPO to delete the addition on account of the export commission.

Case Title: Honda Motorcycle and Scooter India Pvt. Ltd. Versus ACIT

Case No.: ITA No.1523/Del./2022

Date: 22.08.2023

Counsel For Appellant: Harpreet Singh Ajmani

Counsel For Respondent: Rajesh Kumar

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