TaxTMI 
TaxTMI 
TaxTMI 
2016 (11) TMI 123
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....or the purpose of benchmarking and computing arms length price? 2. Whether the Income Tax Appellate Tribunal was right in holding that Transactional Net Margin Method should not be applied for benchmarking/computing arm's length price in respect of transaction relating to ''technical assistance fee"? 2. The assessee is a Joint Venture Company (JV) of M/s. Magneti Marelli Powertrain SPA, Italy, Maruti Suzuki India Ltd. and Suzuki Motor Corporation, Japan. It was incorporated in India to manufacture and sell Engine Control Units (ECUs). It reported six international transactions including "Payment of technical assistance fee" to the extent of Rs. 38,58,80,000/- This transaction alone is the subject matter of dispute; the TPO did not question the other five international transactions. The relevant facts for this transaction are that the assessee entered into agreement with its foreign Associated Enterprise (A.E.) for acquiring technology required for the purpose of manufacturing ECUs in respect of the following : - "(1) Euro IV/75 HP 1.3 SDE/Suzuki Swift car application (2) Bharat III/75 HP 1.3 SDE/MS Swift application (3) Bharat III/75 HP 1.3 SDE/Tata Ind....
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....ed distinctly for the four different car makes and their application was not disputed. Therefore, the character of international transaction was- according to ITAT, left intact. The assessee did not dispute this aspect. The ITAT, therefore, held that: "6. It is seen that the assessee clubbed transactions of import of raw material, sub-assembles and components, payment of technical assistance fees, payment of royalty, payment of software and purchase of fixed assets under one segment of 'Manufacturing of the automotive components' and analyzed all such transactions on a combined basis. This type of combined benchmarking of all the international transactions is not in accordance with law. The mere fact that the overall profit earned by the assessee is more, would not ipso facto lead to the interference then all the international transactions are at ALP. The Special Bench of the Tribunal in the case of LG Electronics India Pvt. Ltd. Vs ACIT 2013 140 ITD 41 (Delhi) (SB) has held to this extent. Thus, the approach so adopted by the assessee in combining so many international transaction for determining ALP on a consolidated basis, is incorrect. 7. The next major flaw in....
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....national transaction of payment of technical fee at Nil, has no legal legs to stand on. When he resorted to the application of CUP method, it was incumbent upon him to ask the assessee for the submission of details of some comparable uncontrolled transactions. There is no reference to the asking or supplying of any such information by the assessee in the first instance, or the TPO thereafter venturing to find out such comparables at his own. What is required under the CUP method is to compare the price paid with certain uncontrolled comparable transaction to analyze if the price paid in an international transaction is at ALP. Nothing of the sort has been done by the TPO to make comparison of any comparable case with that of the assessee. He simply proceeded to adopt nil value of as ALP of the international transaction of payment of technical fee and proposed addition for the full amount. In our considered opinion, when the assessee did receive technical information and earned income by using the same, it cannot be said that it has ALP at nil. Some sort of comparison is inevitable under this method, unless it is shown that the assessee did not get any advantage at all by making paym....
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....r or not the same is formal or in writing, whether or not it is intended to be enforceable by legal proceedings. Rule 10A in clause (d) states that "for the purpose of this rule and rules 10AB and 10E", the term "transaction" would "include a number of closely linked transactions". This rule in positive terms declares that the legislative intent is not to deviate from the generic rule that singular includes plural. The meaning or definition of the expression "transaction" in clause (d) of rule 10A read with sub-section (1) of section 92C, therefore, does not bar or prohibit clubbing of closely connected or intertwined or continuous transactions. This is discernible also from sub-rule (2) of rule 10B quoted above. The sub-rule refers to "services provided", "functions performed", "contractual terms (whether or not such terms are formal or in writing) of the transactions" which lay down explicitly or impliedly the responsibilities, risks and benefits to be divided between the respective parties to the transactions. The use of plurality by way of necessity and legislative mandate is evident in the said rule. 81. Similarly, sub-rule (3) of rule 10B refers to transactions being ....
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....advocating a broad-brush approach but, a detailed scrutinized ascertainment and determination whether or not the aggregation or segregation of transactions would be appropriate and proper while applying the particular Method, is necessary. ********** ***************** ******* 147. Tax authorities examine a related and associated parties' transaction as actually undertaken and structured by the parties. Normally, tax authorities cannot disregard the actual transaction or substitute the same for another transaction as per their perception. Restructuring of legitimate business transaction would be an arbitrary exercise. This legal position stands affirmed in EKL Appliances Ltd. (supra). The decision accepts two exceptions to the said rule. The first being where the economic substance of the transaction differs from its form. In such cases, the tax authorities may disregard the parties' characterisation of the transaction and re-....
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....lace themselves in the position of businessmen. If in a given case, seemingly different transactions are placed together, because of purely commercial compulsions, the autonomy in the decision making of the tax payer should not be lightly disturbed as it would strike at the root of economic viability of the concern. Mr. Vohra here submitted that the purpose of making technical fee payments was to obtain access to technology and services that went to the establishment of the unit. Royalty was a recurring payment, in accordance with the agreement; however technical service charges were not recurring annual payments. Without agreeing to this payout, the assessee would not have been able to secure access to the entire repertoire of products and services that it eventually used to manufacture the car models in question. The law being flexible on the issue, de-segregation or separation of the said fee component and subjecting it to separate examination was not justified. On the second question, it was argued that the findings of the TPO were erroneous and inconsistent. Having upheld the deployment of the TNMM, it was not open to use the CUP method for only one part of the transaction, i.....
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....lity to be subjected to assessment. The Income Tax Rules were also appropriately amended to give effect to this Parliamentary intent. Broadly, the Act and rules posit the disclosure of various international transactions by domestic tax-payers to their "Associated Enterprises" (AE) with which they have disclosed nexus. The methodology indicated by law for identification of amounts, which otherwise would be income, but are shown as some form of payment, to the AEs, is the "Arm's Length Price" (or ALP) determination, where the particular business of the enterprise taxed is taken into consideration. Rule 10-B which is relevant, reads as follows: "10B. (1) For the purposes of sub-section (2) of section 92C, the arm's length price in relation to an international transaction or a specified domestic transaction shall be determined by any of the following methods, being the most appropriate method, in the following manner, namely :- (a) comparable uncontrolled price method, by which,- (i) the price charged or paid for property transferred or services provided in a comparable uncontrolled transaction, or a number of such transactions, is identified; (ii) such price is adjusted to ....
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....r of such transactions, is determined; (iii) the normal gross profit mark-up referred to in sub-clause (ii) is adjusted to take into account the functional and other differences, if any, between the international transaction or the specified domestic transaction and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect such profit mark-up in the open market; (iv) the costs referred to in sub-clause (i) are increased by the adjusted profit mark-up arrived at under sub-clause (iii); (v) the sum so arrived at is taken to be an arm's length price in relation to the supply of the property or provision of services by the enterprise; (d) profit split method, which may be applicable mainly in international transactions or specified domestic transactions involving transfer of unique intangibles or in multiple international transactions or specified domestic transactions which are so interrelated that they cannot be evaluated separately for the purpose of determining the arm's length price of any one transaction, by which- (i) the combined net profit of the associated enterprises arising from ....
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....computed having regard to the same base; (iii) the net profit margin referred to in sub-clause (ii) arising in comparable uncontrolled transactions is adjusted to take into account the differences, if any, between the international transaction or the specified domestic transaction and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect the amount of net profit margin in the open market; (iv) the net profit margin realised by the enterprise and referred to in sub-clause (i) is established to be the same as the net profit margin referred to in sub-clause (iii); (v) the net profit margin thus established is then taken into account to arrive at an arm's length price in relation to the international transaction or the specified domestic transaction; (f) any other method as provided in rule 10AB." 12. In short, the relevant provisions, i.e Sections 92, 92-C, 92-D and 92-E read together with Rule 10-B and 10-D indicate the approach of the TPO tasked with the obligation to discern, if in a given set of circumstances, the assessee has disclosed international transactions, as well as an AL....
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....ect the capabilities of the assessee company so that Deloitte gets work, is not supported by any evidence and, hence, without basis. In our view, under similar circumstances a uncontrolled comparable company would not incur such expenditure. Hence, the ALP is rightly determined at "nil". As no expenditure would have been incurred, there is no necessity to apply a particular method to arrive at such conclusion. In fact, by all the five methods or any one of them, when applied to the fact that there is no necessity of payment, the result of "nil" ALP will come." 13. Sony Ericsson Mobile is a later decision by another Bench of this Court, which reviewed the methodology that TPOs are to adopt while determining ALP. There are observations, undoubtedly, in that judgment indicating that aggregation of various payments and outgoings is permissible under the Act and the rules. At the same time, Denso India (supra) - while endorsing that view- also stated that whether to permit aggregation or not is a fact dependent decision, driven by the materials in any given case. 14. The assessee/appellant during 2008-09 entered into four License & Technology Assistance Agreements (LTAAs) with its ov....
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....by relying on profits. Undoubtedly the assessee was obliged to make the payment and that obligation arose from the agreements, a pre-incorporation binding contract. However, that such contractual obligation existed cannot ipso facto be the end of the enquiry. ALP determination in respect of every payment that is part of an international transaction is to be conducted irrespective of such obligation undertaken by the parties. If the transactions are, in the opinion of the TPO, not at arm's length, the required adjustment has to be made, as provided in the Act, irrespective of the fact that the expenditure is allowable under other provisions of the Act. There can conceivably be various reasons not to subject such payments, such as for instance, if no similar data exists at all; or that sectional data for such payments is absent. Quite possibly, this may also be a general pattern of expenditure which AEs may insist to part with technology; further, similarly, other models of payment- deferred or lump sum, along with royalty or inclusive of it, may be discerned in comparable transactions. However, to say that such a substantial amount had to necessarily be paid and that it was a co....