2014 (10) TMI 460 - AT - Income Tax

Tribunal directs TPO to adopt combined transaction approach for ALP & identify suitable comparables

Toyota Kirloskar Motor (P.) Ltd. Versus Assistant Commissioner of Income-tax, LTU, Bangalore

Toyota Kirloskar Motor (P.) Ltd. Versus Assistant Commissioner of Income-tax, LTU, Bangalore - [2014] 33 ITR (Trib) 700 (ITAT [Bang]) Issues Involved:1. Combined Transaction Approach for Transfer Pricing2. Segmentation of Royalty Payment, Technical Fees, and Other Payments3. Determination of Arm's Length Price (ALP) for Royalty Payment4. Economic Benefit from Know-How Received from Associated Enterprises (AE)Detailed Analysis:1. Combined Transaction Approach for Transfer PricingThe assessee, a subsidiary of Toyota Motor Corporation, Japan, engaged in manufacturing and trading, argued that its trading and manufacturing segments are intertwined and inter-related, warranting a 'Combined Transaction Approach' in arriving at the arm's length price (ALP). The Transfer Pricing Officer (TPO) disagreed, insisting on separate evaluations for manufacturing and trading activities, citing Rule 10B(2) of the Income Tax Rules, 1962, which emphasizes applying the most appropriate method for each class of transaction.The Income Tax Appellate Tribunal (ITAT) noted that the Act and Rules allow for determining ALP by aggregating international transactions that are interlinked or inter-related. The Tribunal referenced the OECD Guidelines and Australian Tax Office (ATO) Taxation Ruling 97/20, which support a combined transaction approach when transactions are closely linked or continuous. The Tribunal found that the TPO and Dispute Resolution Panel (DRP) failed to consider the assessee's submissions adequately. The Tribunal concluded that the trading and manufacturing segments are interlinked, warranting a combined transaction approach, and directed the TPO to compute the ALP at the entity level by combining both segments.2. Segmentation of Royalty Payment, Technical Fees, and Other PaymentsThe TPO separately evaluated royalty payments, technical fees, and other payments using the Comparable Uncontrolled Price (CUP) method. The TPO concluded that the ALP for these payments was NIL, arguing that the assessee failed to demonstrate any economic benefit from the know-how received from the AE.The Tribunal found that the TPO's approach was incorrect. The Tribunal emphasized that the TPO must work out the ALP of the international transaction by applying recognized methods under the Act and cannot determine the ALP as NIL based on the perceived lack of economic benefit. The Tribunal cited the decision of the Mumbai ITAT in the case of Dresser Rand (India) Pvt. Ltd. v. ACIT, which held that the TPO cannot compute ALP at NIL on the ground that no real services were received by the assessee or that the assessee did not benefit under a cost contribution arrangement.3. Determination of Arm's Length Price (ALP) for Royalty PaymentThe TPO determined the ALP for royalty payments at NIL, arguing that the assessee did not provide evidence of receiving technical know-how during the year, and there was no proof that other group concerns or third parties were charged identical royalty. The Tribunal found that the TPO's determination of ALP at NIL was not sustainable. The Tribunal noted that similar payments made in A.Y. 2009-10 were upheld by the DRP, which found that the assessee received technology support and related intangibles, benefiting from these technological practices and know-how.The Tribunal held that the TPO must identify suitable comparables and determine the appropriate ALP for royalty payments. The Tribunal referenced the decision of the Hon'ble Delhi High Court in the case of CIT v. EKL Appliances Ltd., which held that the TPO cannot disregard the actual transaction or substitute other transactions for them, barring exceptional cases.4. Economic Benefit from Know-How Received from Associated Enterprises (AE)The TPO argued that the assessee did not derive any economic benefit from the alleged know-how received from the AE, justifying the determination of the ALP for royalty payments at NIL. The Tribunal found that the TPO's conclusion was not supported by facts and evidence. The Tribunal noted that the assessee's existence was based on the know-how provided by the AE, and there was no alternative source for obtaining automobile technology.The Tribunal held that the TPO's determination of ALP at NIL was not justified and directed the TPO to identify suitable comparables and determine the appropriate ALP for royalty payments, considering the evidence of technology support and related intangibles received by the assessee.Conclusion:The appeal by the assessee was allowed, with the Tribunal directing the TPO to adopt the combined transaction approach for determining the ALP and to identify suitable comparables for determining the ALP for royalty payments. The Tribunal emphasized that the TPO cannot determine the ALP as NIL based on the perceived lack of economic benefit and must apply recognized methods under the Act.