Separate royalty benchmarking unnecessary under TNMM approach but DDT taxable under Section 115-O at statutory rates

The ITAT Bangalore ruled on multiple issues. For TP adjustment regarding royalty payment benchmarking, the Tribunal held that separate benchmarking is unnecessary when TNMM approach is adopted at entity level, favoring the assessee based on precedent from assessment years 2015-16 and 2016-17. On DDT taxability, following the Special Bench decision in Total Oil India Pvt. Ltd., the Tribunal ruled against the assessee, holding that DDT under Section 115-O applies at statutory rates, not DTAA rates, unless the treaty specifically extends protection to domestic companies paying DDT. Interest under sections 234B and 234C was deemed consequential and mandatory.

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Issues Involved:
1. Validity of CIT(A)'s order.
2. Confirmation of AO and TPO's actions.
3. Benchmarking of royalty payments.
4. Methodology for ALP computation.
5. Inclusion of comparables.
6. Application of India-Japan DTAA on DDT.
7. Levy of interest under sections 234B and 234C.

Summary:

1. Validity of CIT(A)'s Order:
The appellant contended that the CIT(A)'s order was "bad in law" and prejudicial. However, these grounds were deemed too general and did not require adjudication.

2. Confirmation of AO and TPO's Actions:
The appellant argued that the AO and TPO erred by not appreciating the definition of "income" and the provisions of section 40A(2). The appellant also claimed there was no motive for tax evasion. The CIT(A) upheld the TPO's rationale for treating royalty as a separate transaction, noting that the appellant's international transactions included various unrelated expenses.

3. Benchmarking of Royalty Payments:
The appellant paid substantial royalties to its AEs, which were contested by the TPO for being constant over years despite the company's long-standing establishment. The TPO proposed separate benchmarking of royalty using the CUP method. The CIT(A) upheld this approach, citing that the appellant's manufacturing and trading activities were not entirely interlinked with the technical know-how.

4. Methodology for ALP Computation:
The appellant's argument for using TNMM at the entity level was rejected. The TPO's selection of comparables and the methodology for computing ALP were upheld by the CIT(A). However, the TPO was directed to compute the royalty ratio using net manufacturing sales, exclusive of excise duty.

5. Inclusion of Comparables:
The appellant's request to include Tata Motors Ltd. and Mahindra and Mahindra Ltd. as comparables was rejected, as these companies failed the 25% RPT filter. The CIT(A) upheld the TPO's selection of comparables.

6. Application of India-Japan DTAA on DDT:
The appellant contended that DDT paid in excess of 10% under the India-Japan DTAA should be refunded. However, this issue was dismissed based on the Special Bench's decision in the case of Total Oil India Pvt. Ltd., which held that additional income tax payable by a domestic company shall be at the rate mentioned in Section 115-O of the Act.

7. Levy of Interest under Sections 234B and 234C:
The appellant contested the levy of interest under sections 234B and 234C. The Tribunal noted that the levy of interest is consequential and mandatory, to be calculated accordingly.

Conclusion:
The appeal was partly allowed, with specific directions to the TPO regarding the computation of royalty ratio and the exclusion of certain expenses. The grounds related to the computation of royalty and the levy of interest were left open or dismissed as academic.

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