TaxTMI 
TaxTMI 
2015 (2) TMI 203
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....section 92C(3) of the Act while making transfer pricing adjustments and accordingly the order passed by ld. AO/Ld. Panel should be set aside in entirety. 3. The ld. AO/Ld.TPO/Ld. Panel have erred by disregarding the benchmarking approach and methodology followed by the appellant with regard to payment of royalty to Associated Enterprise. 4. The ld. AO/Ld. TPO/Ld. Panel erred by acting in arbitrary and ad-hoc manner by determining the arm's length price of payment of royalty to be 2% of net sales, and also by not following any prescribed transfer pricing methodology, as required u/s 92C of the Act while determining arm's length price for payment of royalty." 2. As can be seen from the grounds, solitary issue arising for consideration is with regard to determination of arm's length price (ALP) of royalty paid to AE by Transfer Pricing Officer (TPO) and confirmed by DRP at 2% as against 3% claimed by assessee. 3. Briefly the facts relating to the aforesaid issue in dispute are, assessee an Indian company is a wholly owned subsidiary of RAK Ceramics PSC, United Arab E....
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....nsactions, such as, sale and purchase of goods. Further, he observed that as assessee has considered three years data, which is not as per the TP provisions, TP analysis cannot be accepted. Accordingly, AO was of the view that an independent analysis under the TNMM has to be undertaken by using contemporaneous data. Since the only adjustment made by TPO is confined to payment of royalty, it is appropriate to confine the discussions to that issue alone. As can be seen from the discussions made by TPO, he rejected analysis done by assessee under TNMM, as far as payment of royalty is concerned. TPO also rejected alternative analysis done by assessee under CUP by observing that comparables selected being USA companies, the analysis made cannot be accepted. Having rejected assessee's TP analysis both under TNMM as well as CUP, AO proceeded to determine arm's length percentage of royalty payment by applying the benefit test. TPO observed, though assessee claims that it has been benefitted by technical know-how received from the AE, but, such claim of assessee is not supported by facts and figures. TPO observed that increase in sales is because of assessee's own advertisement and marketi....
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....y assuming the role of AO. The specific duty of the TPO is to determine ALP by following the method prescribed under the statute. TPO cannot apply the benefit test for determining ALP as he cannot assess the benefit derived by assessee in a particular transaction. Further, ld. AR submitted, the benefit derived by assessee from technical know-how and assistance is proved from the fact that not only the sales have increased many fold while production remained same which is a result of premium pricing but also there is minimal product recalls, low after sales maintenance cost which proves the fact that such achievements could not have been possible without upgradation of technology. Thus, TPO having not controverted the fact that assessee has been benefitted from the technical know-how and assistance provided by AE, the reduction of royalty form 3% to 2% on adhoc basis is unreasonable and unjustified. Ld. AR submitted, TPO has not brought on record a valid reason why the comparables brought by assessee both under TNMM as well as CUP should not be accepted. It was submitted, had TPO brought his own set of comparables justifying the rate of royalty at 2%, then, he could have reduced th....
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.... the net ex-factory sale price of the products on both domestic as well as export sales during the tenure of the royalty agreement. 8. From the clauses of the royalty agreement referred to above, it becomes clear not only RAK, UAE, will provide the technical knowhow and assistance for manufacturing products, but, assessee will also have to manufacture by using such technical know-how, assistance in accordance with international standards and guidelines set by RAK, UAE. For using such technical know-how, assistance, etc. assessee is required to pay royalty of 3% to its AE both on domestic and export sales. Department has not denied existence of royalty agreement nor the fact that payment of royalty at 3% is as per the terms of the agreement. TPO has also not disputed the fact that there is transfer of technical know-how and assistance from the AE to assessee. What the TPO disputes is the quantum of royalty paid. As can be seen from the TP report of the assessee as well as other materials on record, assessee has benchmarked ALP of royalty paid to AE by applying TNMM. As average margin of comparables selected was 4.32% as against assessee's margin of 11.69%, payment of royalty was fo....
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....after repeatedly scanning through his order, we failed to find any such analysis being done by him. Similarly, though in para 5.1.1, ld. DRP has observed that TPO has benchmarked intangible transactions by using CUP, but, the order passed by TPO does not support such conclusion. It is an accepted principle of law that TPO has to determine the ALP by adopting any one of the methods prescribed u/s 92C of the Act. Mode and manner of computation of ALP under different methods have been laid down in rule 10B. Even, assuming that TPO has followed CUP method for determining ALP of royalty payment, as held by ld. DRP, it needs to be examined if it is strictly in compliance with statutory provisions. Rule 10B(1)(a) lays down the procedure for determining ALP under CUP method. As per the said provision, TPO at first has to find out the price charged or paid for property transferred or services provided in a comparable uncontrolled transaction, or a number of such transactions. Thereafter, making necessary adjustments to such price, on account of differences between the international transaction and comparable uncontrolled transactions or between the enterprises entering into such transaction....
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....ts sale and other income. We are unable to agree with this strange method followed by the TPO to make a TP adjustment in respect of royalty payment which is not sustainable either in law or on the facts of the case. She has neither rejected the method followed by the assessee to bench-mark the transaction in respect of payment of royalty nor has been adopted any recognized method to determine the ALP of the said transactions. The approval of SIA adopted by the TPO as basis to make TP adjustment in respect of royalty payment was untenable and even going by the said basis wrongly adopted by the TPO, no TP adjustment in respect of royalty payment was liable to be made. As per the said basis, the net sales of the assessee after excluding export sale and other income were to the extent of Rs. 1118.70 crores and the royalty paid thereon at Rs. 24.38 crore being less than the rate of 3.5% approved by SIA, there was no case of any excess payment made of royalty by assessee than approved by SIA to justify its disallowance by way of TP adjustment. In our opinion, the ld. CIT (A) could not appreciate these infirmities in the order of the TPO despite the same were specifically brought to his n....