TaxTMI 
TaxTMI 
2015 (5) TMI 350
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....issue are as follows. The assessee is a company engaged in manufacturing, sale and service of two wheelers, parts and accessories thereof. The assessee is a wholly owned subsidiary of M/s. Honda Motors Company Ltd., Japan. The assessee had reported ten international transactions. On reference made by the Assessing Officer, the Transfer Pricing Officer (TPO) accepted eight international transactions at Arm's Length Price (ALP). As regards the international transaction of payment of "export commission", the TPO held that no services were rendered by the AEs to deserve the export commission. It is in this context the TPO determined the ALP of this international transaction at "nil". As regards international transaction of payment of "royalty", the TPO accepted payment of royalty at ALP in respect of domestic sales and export sales made to non-AE's. However, he disputed the payment of royalty in respect of exports made to AE's. In doing so, the TPO held that the assessee is a "contract manufacturer". Accordingly, he opined that since assessee is making a part of its sales to its related parties and benefit of producing components is reaped by the AE, the payment of royalty did not conf....
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.... enough to do this work. For example, the Transfer Pricing Officer had pointed out that the assessee has qualified accounting staff which could have handled the audit work and in any case the assessee has paid audit fees to external firm. Similarly, the Transfer Pricing Officer was of the view that the assessee had management experts on its rolls, and. therefore, global business oversight services were not needed. It is difficult to understand, much less approve, this line of reasoning. It is only elementary that how an Assessee conducts his business is entirely his prerogative and it is not for the revenue authorities to decide what is necessary for an Assessee and what is not. An Assessee may have any number of qualified accountants and management experts on his rolls, and yet he may decide to engage services of outside experts for auditing and management consultancy; it is not for the revenue officers to question Assessee's wisdom in doing so. The Transfer Pricing Officer was not only going much beyond his powers in questioning commercial wisdom of Assessee's decision to take benefit of expertise of Dresser Rand US, but also beyond the powers of the Assessing Officer. We....
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....amount. However, this is different from the TPO stating that the assessee did not benefit from these services, which amounts to disallowing expenditure. That decision is outside the authority of the TPO. This aspect was made clear by the ITAT in Delloite Consulting India (P.) Ltd. v. Dy. CIT/ITO [2012] 137 ITD 21122 taxmann.com 107 (Mum): "37. On the issue as to whether the Transfer Pricing Officer is empowered to determine the arm's length price at "nil", we find that the Bangalore Bench of the Tribunal in Gemplus India (P.) Ltd. v. Asstt. CIT [IT Appeal No. 352 (Bang.) of 2009, dated 20-10-2010] held that the assessee has to establish before the Transfer Pricing Officer that the payments made were commensurate to the volume and quality service and that such costs are comparable. When commensurate benefit against the payment of services is not derived, then the Transfer Pricing Officer is justified in making an adjustment under the arm's length price. 38. In the case on hand, the Transfer Pricing Officer has determined the arm's length price at "nil" keeping in view the factual position as to whether in a comparable case, similar payments would have been made or ....
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....o benefits obtained by the assessee, provide a sufficient basis to hold that benefit accrued to the assessee. However, this determination remains unclear and inchoate. The devil here lies in the details. The details of the specific activities for which cost was incurred by both CWS and CWHK (for the activities of Mr. Braganza and Mr. Choudhary), and the attendant benefit to the assessee, have not been considered till date. This must be provided, in addition to a consideration of the ALP vis-avis the total cost claimed by these AEs. To this extent, for the consideration of ALP in respect of these transactions, the matter is remanded back to the file of the concerned AO, for an ALP assessment by the TPO, followed by the AO's assessment order in accordance with law." 7. The Hon'ble High Court categorically held that the TPO is to conduct a Transfer Pricing analysis to determine the arm's length price (ALP) and not to determine whether there is a service from which assessee has derived benefit or not. The Hon'ble Court held that the exercise to determine whether assessee had derived any benefit or not from payment of such management fee is to be examined by the AO and appropriat....
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....-TP], where it was held that payment of royalty by a contract manufacturer is not at arm's length. Based on the discussion above the ALP of the transaction related to payment of royalty for exports to AE of Rs. 12,206,657 is held to be 'nil'." 9. The DRP confirmed the above transfer pricing adjustment made by the TPO by observing as under :- "4.3 As far as payment of Royalty is concerned, the TPO has determined the ALP of the same at NIL for the export sales made to AEs. Needless to say, the analysis has germinated from the above findings of the assessee being a contract manufacturer, which in our opinion is correct. The assessee has said that under independent circumstances no one would impart with the technology without a compensation. In our opinion this fact has to be examined under each situation. Though we are of the opinion that this statement holds good but at the same time, if an enterprise is imparting a technology for manufacture off shore and imports are made then the payment of royalty is not justified. In such a situation, the technology is reaped by the assessee for its own sales but only for exports to the entity or the group from whom the technology fl....
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....3, 2000. The relevant clauses of the agreement, namely, Articles 2, 3 & 11 regarding payment of consideration read as under :- "ARTICLE 2 - GRANT OF LICENSE 2.1 Subject to the terms and conditions herein contained, the LICENSOR hereby grants to the LICENSEE an indivisible and non-transferable exclusive right and license, without the right to grant sublicenses, to manufacture, use and sell the Products and the Licensed Parts within the Territory under the Intellectual Property Rights and by using the Technical Information and Technical Material provided by the LICENSOR to the LICENSEE hereunder. 2.2 Notwithstanding the provision of Article 2.1 above, the LICENSOR reserves the right to sell or otherwise supply even within the Territory to any third party the Parts for repair or replacement of the Products or other products of the LICENSOR. ARTICLE 3 - FURNISHING OF TECHNICAL INFORMATION 3.1 During the term of this Agreement, the LICENSOR shall furnish the LICENSEE with the Technical Information and Technical Material to the extent deemed necessary by the LICENSOR, by disclosing it in a documentary form, and advising them as to the application of the Technical Informati....
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....installment in the amount of six hundred sixty six thousand six hundred sixty seven (US$666,667) shall be paid within one hundred twenty days (120) days after the day on which the manufacture of the Products on a commercial basis has started. (c) The third installment in the amount of six hundred sixty six thousand six hundred sixty seven (US$666,667) shall be paid within one hundred eighty days (180) days after the day on which the manufacture of the Products on a commercial basis has started. 11.3 Payments and remittances by the LICENSEE hereunder shall be free and clear of any deductions for taxes or other charges in the Territory, except for the taxes and other governmental charges set forth in Article 12 hereof. Receipt by the LICENSOR of any payment tendered hereunder shall not constitute the LICENSOR's acceptance of any account, schedule or figure on which such payment is based. All payments made or to be made by the LICENSEE to the LICENSOR hereunder shall not be refundable to the LICENSEE, even if any of the Intellectual Property Rights licensed to the LICENSEE will have been extinguished or otherwise come into nonexistence for any reason whatsoever, or even if a....
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....by HMCL for manufacture and sale of two wheelers and parts. Royalty is to be paid for the goods manufactured by the assessee, whether sold within India or outside India. It is not in dispute that the 92 ITA- 5130/Del/2010 motorcycles which were exported by the assessee, were manufactured by using the technical knowhow provided by HMCL under the technical know-how agreement dated 02.06.2004. Therefore, royalty is payable on such manufacturing of goods. The contention of the learned TPO that the goods are exported to subsidiaries of the Associate Enterprise i.e. AE of Honda Japan and the assessee also paid export commission, would be no ground for disallowance of the royalty or determining arm's length price of the royalty at nil. The assessee is exporting goods to AE of Honda on principal to principal basis and the price at which export is made is higher than the domestic price. While discussing the disallowance of export commission, we have discussed this issue at length and have noted that even after reducing the export commission, the assessee derived the benefit of Rs. 13.05 crores by export. At the cost of repetition, we would like to mention that the export sale value was more....