Court Overturns Tribunal's Ruling; Upholds TNMM Methodology, Aligns with Established Precedents on Royalty Payments.

The court ruled in favor of the Assessee, finding the Tribunal's decision inconsistent with its previous rulings. The Tribunal's rejection of the aggregation approach and its separate benchmarking of royalty payments contradicted established methodologies. The court concluded that the Tribunal misapplied case law and should have adhered to the TNMM method for all transactions, allowing the appeals.

---

---

Issues Involved:
1. Consistency of the Appellate Tribunal's decision with its previous rulings.
2. Legality of the Tribunal's order ignoring previous methodologies accepted by the department.
3. Appropriateness of the Tribunal's reliance on a specific case law.

Summary:

Issue 1: Consistency of the Appellate Tribunal's Decision
The first issue was whether the Appellate Tribunal erred in law by passing an order contrary to its previous rulings in the Assessee's own case for earlier assessment years without referring the issue to a Special (Full) Bench. The Tribunal had previously upheld the principles of aggregation for benchmarking international transactions of manufacturing activity. However, in the current case, it rejected the aggregation approach and made an upward adjustment to the value of the international transaction pertaining to the payment of royalty on export sales. The Tribunal's decision was deemed inconsistent with its earlier rulings, which had accepted the aggregation approach.

Issue 2: Legality of the Tribunal's Order Ignoring Previous Methodologies
The second issue questioned the legality of the Tribunal's order, which ignored the fact that the department had accepted the methodology applied by the Assessee for benchmarking transactions for transfer pricing purposes in seven earlier years. The Tribunal upheld the TPO's decision to separately benchmark the royalty payment transaction, despite the TPO having accepted the TNMM method as the most appropriate method for the Assessee's international transactions under the manufacturing segment in previous years. The court concluded that the TPO could not subject only one element, i.e., payment of royalty, to a different method (CUP) when the TNMM method had been accepted for all international transactions.

Issue 3: Appropriateness of the Tribunal's Reliance on Specific Case Law
The third issue was whether the Tribunal erred in relying on the Delhi High Court's decision in the case of Magneti Marelli Power Train India P. Ltd. Vs. Deputy Commissioner of Income-tax. The Tribunal held that the international transaction of payment of royalty could not be clubbed with other international transactions under the manufacturing segment. However, the court found that the Tribunal misread the law as laid down in Magneti Marelli, where it was held that once the TNMM method is accepted as the most appropriate, it is not permissible to apply a different method to a single element of the transaction. The court emphasized that each method is a package containing necessary elements to judge the soundness of an international transaction, and disturbing this would result in a distorted outcome.

Conclusion:
The court concluded that the Tribunal was incorrect in its approach and should have followed its earlier orders, which accepted the aggregation of royalty payments with other international transactions under the manufacturing segment. The court answered all three questions in favor of the Assessee and allowed the appeals.

---