High Court Upholds ITAT Decision on Royalty vs. Technical Assistance Fees 'sLength

Magneti Marelli Powertrain India Pvt. Ltd. Versus Deputy Commissioner Of Income Tax

Magneti Marelli Powertrain India Pvt. Ltd. Versus Deputy Commissioner Of Income Tax - [2016] 389 ITR 469 Issues Involved:
1. Segregation of royalty and technical assistance fee as separate transactions for benchmarking and computing arm's length price (ALP).
2. Applicability of the Transactional Net Margin Method (TNMM) versus the Comparable Uncontrolled Price (CUP) method for benchmarking technical assistance fee.

Detailed Analysis:

Issue 1: Segregation of Royalty and Technical Assistance Fee
The High Court examined whether the Income Tax Appellate Tribunal (ITAT) was correct in treating royalty and technical assistance fee as separate transactions for benchmarking and computing ALP. The assessee, a Joint Venture Company, had categorized multiple international transactions under one broad head for benchmarking using the TNMM. The Transfer Pricing Officer (TPO) rejected this entity-level approach, arguing that each transaction should be benchmarked separately. The ITAT upheld this view, stating that combined benchmarking of all international transactions is not in accordance with law. The ITAT also noted that the assessee used projected operating profit margins rather than actual figures, which is incorrect under Rule 10B(4). The High Court concurred, emphasizing that the initial burden is on the assessee to prove that international transactions are at arm's length. The court held that the explanation for the payment of technical assistance fees was correctly not accepted, and the remit directed by the ITAT was upheld.

Issue 2: Applicability of TNMM versus CUP Method
The second issue was whether the ITAT was right in rejecting the TNMM for benchmarking the technical assistance fee and instead applying the CUP method. The TPO had accepted TNMM for other international transactions but applied the CUP method for the technical assistance fee, determining its ALP as nil. The ITAT found this approach flawed, stating that when technical information was admittedly obtained, it could not be said that the assessee should not have paid any consideration. The High Court agreed with the ITAT, noting that the TPO should have sought comparable uncontrolled transactions for a proper CUP method application. The court emphasized that once a method is accepted as the most appropriate, it should be applied consistently across all transactions. The High Court concluded that the TPO's selective application of the CUP method for the technical assistance fee was incorrect. The second question was answered in favor of the assessee, affirming that TNMM should have been applied for the technical fee payment as well.

Conclusion:
The High Court dismissed the appeal, upholding the ITAT's decision to remand the case for fresh determination of ALP by the TPO/AO while applying the TNMM consistently across all transactions, including the technical assistance fee.