Rule 10AB Other Method deemed most appropriate for benchmarking royalty payments to associated enterprises over CUP method

ITAT Mumbai held that the "Other Method" under Rule 10AB r.w.s. 92C(1) is the most appropriate method (MAM) for benchmarking royalty payments to associated enterprises, rather than the Comparable Uncontrolled Price (CUP) method. The tribunal found CUP unsuitable due to lack of reliable comparables and unique nature of intangibles involved. The Transfer Pricing Officer was directed to adopt the Other Method as MAM, requiring fresh examination of costs and profits attributable to manufacturing, sales to non-AEs, and royalty allocation. All grounds raised by the assessee were allowed for statistical purposes.

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Issues Involved:
1. Transfer Pricing Adjustment for Royalty Payment
2. Benchmarking Method for Royalty Payment

Summary:

Issue 1: Transfer Pricing Adjustment for Royalty Payment

The assessee, a subsidiary of Nissel ASB Machine Co Ltd (ASB Japan), challenged the transfer pricing adjustment of Rs. 7,51,00,267/- on account of royalty paid to its AE. The assessee manufactures Injection Stretch Blow Molding (ISB) machines and components, with operations segmented into AE and non-AE segments. The AE segment involves manufacturing machines exclusively for ASB Japan under a Sales & Purchase Agreement (SPA), whereas the non-AE segment involves domestic sales using intangibles licensed by ASB Japan under a Technical License Agreement (TLA) with a royalty rate of 12%.

Issue 2: Benchmarking Method for Royalty Payment

The Transfer Pricing Officer (TPO) rejected the assessee's entity-level Transactional Net Margin Method (TNMM) for benchmarking royalty payments, requiring a Comparable Uncontrolled Price (CUP) analysis instead. The TPO determined the Arm's Length Price (ALP) at "Nil" and adjusted the entire royalty payment of Rs. 13,91,42,366/-. The Dispute Resolution Panel (DRP) upheld the CUP method and rejected the assessee's "other method" under Rule 10AB, leading to a reduced adjustment of Rs. 7.51 Crores and an ALP of 5.5%.

The Tribunal noted the unique and valuable nature of the intangibles provided by ASB Japan, which made finding suitable comparables under the CUP method challenging. The Tribunal emphasized the OECD Guidelines, which support the use of "other methods" in cases involving unique intangibles. The Tribunal directed the TPO to adopt the "other method" as the Most Appropriate Method (MAM) and re-examine the costs and profits attributable to the non-AE segment to determine the appropriate royalty payment.

Conclusion:

The Tribunal concluded that the "other method" under Rule 10AB is the MAM for benchmarking the royalty payment due to the lack of reliable comparables and the unique nature of the intangibles involved. The appeal was allowed for statistical purposes, directing the TPO to re-evaluate the royalty payment using the "other method".

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