AI Drafter 
TaxTMI 
TaxTMI 
TaxTMI 
2016 (6) TMI 123
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....al transactions for the year in question in Form No. 3CEB including 'Payment of royalty' with transacted value of Rs. 185,76,44,174/-. The assessee used the Transactional Net Margin Method (TNMM) to benchmark its major international transactions. Profit Level Indicator (PLI) of Operating Profit to Total Cost (OP/TC) was adopted. The assessee employed Comparable Uncontrolled Price (CUP) Method qua the international transaction of `Payment of royalty' to demonstrate that the same was at arm's length price (ALP). On a reference made by the AO to the Transfer Pricing Officer (TPO), the latter disputed only the international transaction of 'Payment of royalty.' The TPO observed that out of total royalty payment of Rs. 185.76 crore, the assessee paid a royalty amounting to Rs. 164,74,23,297/- in respect of product 3DX to its associated enterprise (AE) @ 5% of domestic sales and 8% of export sales. A show cause notice was issued requiring the assessee to explain as to why such royalty of Rs. 164 crore and odd was paid on model 3DX machine which was nothing, but replication of model 3D, whose patent expired long back. At this stage, we consider it relevant to mention that the view point of....
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.... held that - payment of royalty requires separate analysis on the basis of transaction by transaction approach and for that CUP method is to be applied as the most suitable method for the royalty payment transaction; new product 3DX is existing old product 3D with the same Indian manufacturer of Kirloskar Ltd.; and the assessee had not paid any royalty on product 3D from the year 1987 to financial year 2005-06. As regards the use of the CUP method by the assessee for benchmarking the international transaction of `Payment of royalty' on 3DX for the year under consideration, the TPO did not find any convincing reasons to accept three comparables chosen by the assessee on several grounds tabulated on para 14 of his order including difference in type of technology and different geographical locations inasmuch as both the payers and payees were foreign parties. Then, the TPO viewed the assessee's annual reports for earlier years which indicated the carrying on of R&D activity by it in respect of the products including 3DX. Considering the fact that there was not much difference between the product 3D, on which the assessee did not pay any royalty from 1987 till the financial year 2005 o....
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....ot accepted by him as the most appropriate method. However, on merits it was found that no companies cited by the assessee were comparable and that since the assessee did not derive any benefit, the ALP of this transaction was Nil. It is only pursuant to the direction of the DRP that finally the ALP was determined at 0.25% of the amount of sales as against 5% and 8% paid by the assessee on domestic and export sales. It is an admitted position that this is a recurring issue from the A.Y. 2006-07 when the assessee started paying royalty on product 3DX. The Tribunal vide its combined order dated 18.9.2013 for the assessment years 2006-07 to 2008-09 has not approved the assessee's approach in following the TNMM for benchmarking all its international transactions including `Payment of royalty' in an aggregated manner. It has been held that the benchmarking should be done on a transaction to transaction basis. In simple words, the Tribunal recommended the following of the CUP method qua the international transaction of payment of royalty. It further found that the ALP of the international transaction could not be taken 0.25% on ad hoc basis. In the ultimate analysis, it restored the matt....
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....der in accordance with law considering the deductibility or otherwise as per section 37(1) of the Act. In our considered opinion, the argument of the ld. AR advocating for the deletion of the addition on the sole ground of the AO not disallowing any amount u/s 37(1) of the Act is sans merit. There is no doubt that the TPO initially determined Nil ALP of the international transaction of `Payment of royalty', which was given effect to by the AO in the impugned order, after taking into consideration the direction given by the DRP. It is obvious that when the TPO determined Nil ALP of this transaction, nothing was left with the AO to do further. In sequence, the TPO passes his order first and then after passing through the route of the DRP, the matter comes to the AO for passing the final order of assessment. Once a particular amount has been added on account of transfer pricing adjustment by relying on the TPO's order, there cannot be one more disallowance of the same amount or some part of it by the AO u/s 37(1) of the Act. Rather its converse is true. It is possible that the TPO may find a particular international transaction to be at ALP and the AO, may thereafter make disallowance....
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....the CUP method by the assessee. It was argued that the assessee's main emphasis in the TP study report and also before the TPO was that the TNMM should be applied on entity level and that the determination of ALP of the international transaction of payment of royalty under the CUP method was without prejudice to its main argument of the applicability of the TNMM. Notwithstanding the fact that such a contention has been repelled by the tribunal for earlier years, still the ld. AR canvassed this view before us by relying on the judgment of the Hon'ble jurisdictional High Court in Sony Ericsson Mobile Communications India (P) Ltd. VS. CIT (2015) 374 ITR 118 (Del), which in the opinion of the ld. AR, is an authority for the proposition that aggregation of all the international transactions for benchmarking under the TNMM is permissible and, there is no need to separately determine the ALP of any international transaction including `Payment of royalty'. 7.2. We are unable to countenance this contention. In a group of appeals by `Distributors' (not Manufacturers) led by Sony Ericson Mobile Communications (supra), their Lordships espoused the determination of the ALP of Advertisement, ....
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....g undertaken similar activities of distribution of the products and also incurring of AMP expenses, should be chosen [Paras 194(i), (ii), (viii) & others]; • _ If no comparables having performed both the functions in a similar manner are available, then, suitable adjustment should be made to bring international transactions and comparable transactions at par [Para 194 (iii)] ; • _ If adjustment is not possible or comparable is not available, then, the TNMM on entity level should not be applied [Paras 100, 121, 194(iii) & (vi)] ; • _ In the above eventuality, international transaction of AMP should be viewed in a de-bundled manner or separately [Paras 121& 194(xi)] ; • _ In separately determining the ALP of AMP expenses, the TPO is free to choose any other suitable method [Para 194(xiii)]; • _ In so making a TP adjustment on account of AMP expenses, a proper set off/purchase price adjustment should be allowed from the other transaction of distribution of the products [Para 93] ; 7.4. Though the judgment in Sony (supra) lays down at length the broader principles for determination of the ALP of AMP expenses in the cas....
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....ation of TNM Method is not appropriate and proper in case the assessee is engaged in manufacturing activities. In such circumstances, the import of raw material for manufacture would be an independent international transaction viz., marketing and distribution activities or functions. The essence of the above para is that two or more unrelated transactions cannot be aggregated and in case of a `Manufacturer', the international transactions concerned with the manufacturing activity cannot be aggregated with the AMP activities as both are separate and distinct. 7.6. Nitty gritty of the above discussion is that aggregation of related transactions is permissible, but there is no rule that all the related and unrelated transactions can be combined and shown at ALP under the TNMM on entity level. The Hon'ble Punjab & Haryana High Court in Knorr-Bremse India P. Ltd. vs. ACIT (2016)380 ITR 307 (P&H) has held that in order to combine two or more transactions, it is essential that they should be either inextricably linked to each other either by way of a package deal or that a number of transactions are priced differently but on the understanding that the assessee will accept all of them t....