TaxTMI 
TaxTMI 
2016 (8) TMI 1351
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....ransactions : Paid (Rs.) Received (Rs.) a. Import of raw materials, spare parts and components 12,33,82,533 b. Purchase of office equipments 33,097 c. Export of components of Textile machinery. 20,89,409 d. Payment of Royalty 4,30,33,562 e. Management Services 99,06,990 f. Reimbursement of Expenses 3,47,291 The assessee has also paid royalty of Rs. 4,30,33,562 to its Associated Enterprises (AE) i.e. Luwa IP. The assessee has bench marked its international transactions on consolidated basis by considering the purchases, royalty payment, sales as composite international transactions by applying TNMM at enterprise level. The TPO segregated the royalty transaction as an independent international transaction and applied benefit test to question the justification of payment of royalty by the assessee to AE. The TPO was of the view that the assessee has failed to prove that it has obtained the benefit by receiving the alleged intangible/know how against the said payment of royalty. Finally the TPO held that the royalty payment cannot be allowed because the assessee has failed to demonstrate the r....
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.... transactions. 5. The learned CIT (Appeals) has erred in treating the payment of royalty at Arm's Length without appreciating the findings of the TPO that there was no benefit accrued to the assessee by way of payment to royalty to the AE. 6. The learned CIT (Appeals) has erred in holding that the assessee is eligible for a standard deduction of 5% from the ALP under the proviso to section 92C(2) of the IT Act, 1961. 7. The appellant craves leave to add, to alter, to amend or to delete any of the grounds that maybe urged at the time of hearing of appeal." 4. The only issue raised in the revenue's appeal is regarding the aggregation of all the international transactions including royalty for the purpose of determining the ALP. 5. We have heard the learned D.R. as well as learned A.R. and considered the relevant material on record. The learned Departmental Representative has pointed out that the assessee's other international transactions are only purchases from the AE and only insignificant amount of sale in comparison to the total purchase of the assessee which is more than Rs. 623 Crores. Therefore the royalty payment cannot be aggregated with the other international ....
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.... bench marking international transactions for payment of royalty is TNMM. He has further pointed out that in the subsequent assessment year, the TPO has accepted the bench marking of payment of royalty by applying TNMM as MAM. 6. We have considered the rival submissions as well as the relevant material on record. As far as the justification for payment of royalty and applying the benefit test, we find that the TPO was not justified to adopt such approach in determining the ALP of royalty payment when the assessee has produced the agreement between the assessee and the AE under which license was granted to the assessee to use technical know how belonging to the AE for the purpose of manufacturing activity. We find that as per the agreement, the AE has granted license to the assessee to use all its process, design, drawing and other technology involved in the manufacturing activity of the assessee. Therefore to this extent of the payment of royalty against the transfer of technical know how, we do not find any error or illegality in the order of the CIT (Appeals). The relevant record and evidence was duly produced by the assessee before the authorities below to establish that the ro....
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....and risks of the trading and manufacturing segments generally differ, however circumstances may warrant combining both of them. It is only in the specific facts of the case that the combining of both segments is advisable. In the instant case of the assessee, the sale of spare parts is triggered as a result of the manufacturing activities, including warranty commitments. Therefore, we are of the view that it would not be in the fitness of things for the sale of spare parts and components to be considered in isolation from the sale of manufactured vehicles. This view is supported by the OECD T.P. Guidelines, 2010, relied on by the assessee. This view is also buttressed by the fact that the comparable companies are also trading in spare parts and components. On a overall consideration, it can be concluded that trading in spare parts is closely inter-linked with the manufacturing segment of the assessee. We are of the view that no meaningful purpose would be served in segregating the trading and manufacturing segments, particularly when the assessee and the comparable companies are at par with regard to the nature and scale of combined activities. Needless to add that this finding / d....
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....hat royalty is an independent transaction and should not be aggregated with other international transactions and considering Comparable Uncontrolled Price ("CUP") method as the most appropriate method. The Revenue thereby erred in not accepting the order of the Commissioner of Income Tax - Appeals ["CIT(A)"] wherein the CIT(A) has considered Transactional Net Margin Method ("TNMM") at the entity level as the most appropriate method. 2. That the Revenue has erred by holding that no benefit has been accrued to the Respondent by way of payment of royalty. 3. That the contention of the Revenue is bad in law by holding that the CIT(A) erred in providing the benefit of 5% standard deduction to the Respondent." That the Respondent craves leave to add to and/or to alter, amend, rescind, modify the grounds herein above or produce further documents before or at the time of hearing of this Appeal. 8. As regards the application of TNMM as MAM, in view of our finding in the appeal of the revenue becomes infructuous. However, we direct the TPO to consider the adjustment only by considering the international transactions of the assessee and therefore the proportionate cost which includes ....
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....O') thereby accepting high margin companies namelyLakshmi Machine Works Ltd and LohiaStarlinger Ltd. 2. That the Ld. TPO/ Ld. CIT(A) erred in excluding Instrumentation Ltd as a comparableon the ground that it has consistently incurred losses for three years (i.e., Financial Year ('FY') 2004-05, FY 2005-06 and FY 2006- 07), whereas it has earned profit during the FY 2006-07. 3. That the Ld. TPO/ Ld. CIT(A) erred in including the non-operating income while arriving at the segmental margin of 18.17% in case of Nesco Ltd." 11. In the additional grounds, the assessee is seeking exclusion of two comparable companies included by the CIT (Appeals) in the list of comparables which were rejected by the TPO on turnover basis. 12. We have heard the learned Authorised Representative as well as learned Departmental Representative and considered the relevant material on record on the admissibility of the additional grounds. Ld. A.R. has relied upon various decisions including the decision of this Tribunal dt.23.11.2015 in the case of Flextronics Technologies India Pvt. Ltd. reported in 65 taxman.com 258 as well as the decision in the case of M/s. Online India Pvt. Ltd. Dt.18.3.2015 in IT(T....
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....al on record. As regards the objections raised by the assessee against the companies namely Lakshmi Machine Woprks Ltd., Lohia Starlinger Ltd., Instrumentation Ltd. and Nesco Ltd we find that this Tribunal in a series of decisions has examined the functional comparability of these companies and therefore once it has been held that these companies cannot be regarded as functionally comparable then even if these companies has been selected in the TP Study, the assessee cannot be precluded from raising an objection against these companies which are found to be not comparable. This view is supported by the decision of the Chandigarh Special Bench of this Tribunal in the case of DCIT Vs. Quark Systems Pvt. Ltd. 38 SOT 307 in paras 30 and 38 as under : "30. Learned special counsel for the Revenue Shri Kapila has vehemently argued that "Datamatics" was taken as one of the comparables by the taxpayer and no objection to its inclusion was raised before the TPO or before the learned CIT(A) in appeal. Therefore, the taxpayer should not be permitted to raise additional ground and ask for exclusion of the above enterprise in the determination of the average margins. We are unable to accept abo....
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.... the ALP after providing reasonable opportunity of being heard to the assessee. We order accordingly." Thus in view of the matter that the functional comparability has already been examined by this Tribunal, we admit the additional ground raised by the assessee regarding functional comparability of these companies for deciding the same on merits. Thus in the original grounds as well as the additional grounds, the assessee is seeking exclusion of two companies as under : (i) Laksmi Machine Works Ltd. and (ii) Lohia Starlinger Ltd. The assessee is also seeking the correct operating margin income in respect of one company i.e. Nesco Ltd. 15. The TPO while computing the ALP in respect of the international transactions of purchase of raw material and sales export to the AE selected 9 companies as under : Company Name Year Sales PBIT /Sales Lagan Engineering Co. Ltd. 2007-08 14.27 6.66 Sirdar Carbonic Gas Co. Ltd. 2007-08 5.1 24.90 Naval Technoplast Inds. Ltd. 2007-08 26.14 5.97 Lakshmi Automatic Loom Works Ltd. 2007-08 39.38 4.24 Bharat Bobbins Ltd. 2007-08 11.66 31.56 Veejay Lakshmi Engg. Works Ltd. 2007-08 90.45 11.50 Nesco Ltd. ....
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....ective consequence and results of such a standard slab applied in the case however, we are of the view that in case of manufacturing sector, the turnover is a relevant factor for functional comparability of the companies as the economies of scale, bargaining power, more skilled employees and higher risk capacities are attached to the high turnover and further the high fixed assets and fixed costs is spread over to the high turnover giving the benefit of economies of scale. Accordingly keeping in view of the turnover of the assessee at 86 Crores the company having Rs. 1745 Crores turnover cannot be considered as a good comparable. Hence we direct the TPO to exclude this company from the list of comparable. (ii) Lohia Starlinger Limited. 18.1 The turnover of this company is Rs. 309 Crores in comparison to the turnover of the assessee at Rs. 86 Crores though there is a difference in the turnover of the two companies however it is not possible to find out the comparable company with the identical turnover and therefore the tolerance range is to be applied for such criteria of turnover. 18.2 The learned Authorised Representative of the assessee has submitted that a three time multip....