TaxTMI 
TaxTMI 
2018 (8) TMI 378
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....Mr. Kumar Pranav. 3. The Ld. Sr.DR inviting attention to the TPO's order dated 21/01/2013 submitted that in the facts of the present case, the assessee was heard at length by the TPO and after considering the submissions, the TPO on going through the transfer pricing documentation carried out a FAR analysis and concluded that the assessee is paying royalty to its AE and after considering its business model noted that since the exports were also made to the associated companies thus in effect the assessee was paying royalty for exports made to its AEs. Considering the fact that the assessee was working as a contract manufacturer for the limited purposes of exports made to its AE's where the technology was taken from the AE's the raw material was purchased from the AEs the goods were also sold to its AE's and on such goods sold to its AE's royalty is also paid to the AEs. In the circumstances, the AO concluded that the transaction was not at arm's length. As a result of this the payment of royalty for exports to AEs was held to be 'nil' and the income of the assessee was directed to be enhanced to that extent. Heavy reliance was placed thereon. The relief granted by the CIT (A) in....
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....n as worked out at 2.02%. On the basis of the same, it was claimed that the transaction was at an arm's length. 4.4 TPO, however, did not accept the assessee's claim. Exercising the power vested in him vide Section 92B, he held that he was required to apply the appropriate method for each transaction and reliance was also placed upon the OECD guidelines, he held that the issue had to be decided on a transaction by transaction approach. He further took note of the fact that the said approval also had judicial sanction. Accordingly, he held that the payments for management services would have to be benchmarked separately. Reliance was placed on the decisions in the cases of (i) M/s Abhishek Auto Industries Ltd (2010-TII-54-iTAT-Del-TP) wherein it had been held that only International transactions are to be taken into account and not the enterprise level; (ii) M/s Ankit Diamonds (2010-TII-67-ITAT-Mum- TPJ wherein it had been held that under TNMM, ALP has to be determined on the profit realized from an International transaction and not at entity level; (iii) M/s Birla Soft (India) Ltd (2011-TII-41-ITAT-Del-TP) the ITAT wherein it had been held that segmental account, even if unaudit....
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....ires comparison of net margin realized from the international transaction and not enterprise level margin; (xv) M/s Technimount ICB Pvt Ltd (2011-TII-31-ITATMum- TP) wherein it had been held that segmental results are to be considered and not the profit at entity level; (xvi) M/s Twinkle Diamond (2010-TII-09-ITAT-Mum-TP) and M/s Tez Diam (2009-TII-02-ITAT-Mum-TP) wherein it had been held that TNMM does not permit comparison enterprise level profits and that it requires comparison of net profit margin realized from an international transaction or aggregate of class of international transactions; (xvii) M/s UCB India Pvt Ltd [317 ITR (AT) 292 (Mum)] wherein it had been held that Rule 10B(l)(e) refers to net profit realised from international transactions and not of enterprise as a whole. The assessee cannot justify its inability to evaluate its transaction on standalone basis on the ground that there is no statuary requirement to maintain segmental data. Entity level comparison not permissible when only 50% transactions were international transactions; ALP to be determined on segmental results only; (xviii) M/s UE Trade Corporation (India) (2011-TII-04-ITAT-Del-TP) wherein it had bee....
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....ve windshield, Defogger glass etc. It has three manufacturing plants located in Bawal in Haryana, Chennai and a recently commissioned plant in Roorkee. Additionally, it also has sub-assembly units/ warehouses at Halol in Gujarat, Pune, Taloja and Bangalore. Each of these catering to the OEMs situated in that location/region. The Auto Glass Division functions as an independent SBU responsible for managing its own market and profitability. Hence, its functions performed, transactions undertaken, assets employed and risks borne reflect the market-driven, entrepreneurial behavior of a normal business catering to its customers. Procurement The entire procurement function for the raw material and spares required by the Auto Glass Division is handled centrally by the procurement team. The raw material and spares required in the Auto Glass Division are float glass, PVB and other spares and consumables. The marketing department provides the sales plan based on its interactions with and the demand forecast of the OEM customers. This sales plan is input for the production team that decides on the production plan accordingly. Based on the estimated production, the ma....
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....by AIS - Float Glass Division Procurement AIS does not have access to any captive source of raw material and is entirely dependent on third party suppliers for supply of raw material as well as consumables and spares Quality Control AIS has put in place quality control measures to ensure that the float glass produced is free from any defects. Common quality defects in float glass include bubble formation and ripples. AIS uses various automated inspection modes to take corrective actions and also to steer its cutters around the flaws to minimize wastage. Marketing and Distribution The Float Glass Division produces float glass catering to the construction, interior decoration as well the automotive industries. AIS sells its products through dealers and stockists across India. Pricing The pricing of float glass is entirely driven by the market forces of demand and supply. It is more like a commodity product with low margins. Commission AIS also trades in certain types of float glass imported from its Group Companies. For these sales the Company utilizes its existing dealer network. In certain cases where ....
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.... 5. Please state the uniqueness of such intangibles and the life of such intangibles. 6. What is the life of the patent as per the law in the country of the licensor ? 7. Whether such intangibles or substitutes thereof are available in the open market ? 8. Please state as to how the rate or payment for Royalty/technical fee/ trademark fee has been determined at the time of entering in to the agreement? Please also furnish the basis thereof 9. Please state as to whether any cost benefit analysis was done while entering into the agreement for payment of royalty/technical fee/ trademark fee ? a. If so the details of such cost benefit analysis should be furnished. The cost benefit analysis should include the expected benefit from the use of technology vis a vis the payment made for the technology. b. Please specifically state as to whether any benchmarking analysis was done at the time of entering into the agreement so as to compare the payment of royalty/technical fee/ trademark fee to the AE vis a vis an independent party under similar circumstances. If so, the details thereof. 10. Please show with evidence as....
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....y the tested party, the details of the benefit, if any, derived by the tested party by /through such campaigns. Give the details as to how much and in what manner, the AE has compensated the tested party for the expenditure incurred towards the advertisement or marketing campaign, undertaken by it. If the above information is not furnished along with contemporaneous documentary evidences and separate benchmarking for these transactions is not done, the payment for Royalty would be treated as Rs. Nil by applying CUP method." 4.9 The assessee's reply on record has been also extracted. In the order, however, for the reasons set out hereunder, it was held to be not acceptable. Since relief has been granted by the CIT (A) on the basis of facts available on record before the TPO which remain unrebutted till date, it is appropriate to reproduce the assessee' submission before the TPO extracted in his order. The reply in pages 12 to 17 of the TPO's order are set out in para 5.1 and 5.2 and is reproduced hereunder for ready reference : "5.1 The assesses in its reply dated 16.10.2012 inter-alia stated as under : The assessee has paid royalty to Asahi Glass Co. Ltd., Japan ('A....
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....ever, the technology and know-how of float glass is only restricted to Asahi Glass, Saint Gobain and Guardian. Pilkington globally owns the technical know-how for float glass. All other manufacturers may be utilizing either variants of licensed technology of these 4 companies or using processes for which the patents have expired. ............................. .. ......... Thus, your goodself will appreciate that all the players in the float glass industry would be licensing the technology and know-how of their respective group companies for the production and sale of float glass in its region. Hence, it is evident that such licensing and technology agreements amongst group companies are a part of the strategic alliances made by all float glass manufacturers across the world. The assessee would wish to highlight that the Asahi brand and associated technology is quintessential for its continued existence and sustenance in the auto and float glass market. Since float glass constitute the base raw material for manufacture of auto-glass, the float glass technology would be crucial for the performance of its automotive division. Generally, the float division provides ab....
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....w models that are developed or brought into India. During the year, your Company gained new customers and deepened its relationship with existing ones. AIS Auto Glass has also been appreciated by its customers for its quality and delivery. Maruti Suzuki India Ltd. awarded AIS for 'Outstanding Overall Performance' and Mahindra & Mahindra Ltd. and Tata Motors Ltd. have separately certified your Company's quality excellence. Toyota Kirloskar Motors Ltd. has selected your Company as one of the seven Original Equipment (OE) vendors to set up a sub - assembly unit in their proposed supplier park for their upcoming small car project. Size, scale and presence across the entire value chain - from float glass to valueadded glass and overall glass solutions -are some of the fundamentals of AIS that is unmatched by any other player in India. The skills and knowledge base that your Company has developed over the years, especially for engineered glass products, is second to none. And, most importantly, it continues to deliver on the trust and confidence reposed by its customers. It maybe also noteworthy that significant portion of the sales revenue of the assessee r....
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....ment 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 do not approve this approach of the revenue authorities." (Emphasis supplied) 4.10 It is seen that the assessee also gave the following break up of royalty on sales to the TPO which has been extracted in Para 5.2 in his order and it is also reproduced hereunder :- 4.11. Considering the submissions, the TPO summed up the facts in the following manner :- "5.3 On analysis of the above facts, following points are noticed: 1. The assessee is paying royalty to Asahi Glass Company Ltd. 2. The exports are made to associate companies like AGC Flat Glass KILN LLC, Russia Federation. AGC Flat Glass Vostok LLC, Russia, AGC Philippines, Asahi Glass Company Japan, Bind AGC Automotive Europe SA Belgium. 3. The assessee, in a way is paying royalty to Asahi Glass Company Ltd. for the exports made to it and other AEs." ....
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....the assessee in the circumstances could not act like an entrepreneur. Therefore, both the risk and reward were like a contract manufacturer. No contract manufacturer would like to make this kind of transactions with an independent third party. 4.13 Relying upon the OECD guidelines in respect of exploitation of intangibles not only from the perspective of the transferor which would examine the pricing at which a comparable independent enterprise would be willing to transfer the property but also from the perspective of the transferee, he noticed that it has been considered necessary to examine the price from the perspective of the transferee and see if a comparable independent enterprise may or may not be prepared to pay such a price, depending on the value and usefulness of the intangible property to the transferee in its business. The payment of licence fee would depend on the benefit to independent company reasonably expects to get from the use of the intangibles having regard to other options realistically available. The decision taken since would necessitate in incurring cost by way of investments etc. which would be weighed keeping in mind the licence fee to be paid vis&agr....
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.... of the assessee company. It was also noticed by him that the assessee is a pioneer in automated glass selling industry and holds about 75% market share which is not relevant for deciding the present issue however the facts which persuaded the CIT(A) to grant relief and holding that the TPO has wrongly concluded the assessee to be a contract manufacturer for its AE. The CIT (A), it is seen, has in order to establish the said assertion relied upon the table extracted at page 15 of his order where, in a tabulated chart, he notes that it demonstrates that import of raw material consumed was sourced from the AE was minimal and was much more from non-AEs and the total consumption of raw material sourced from the AE was only 19%. Similarly, stores and spares were largely imported from non-AEs and only 10% of the total import were from AE. 6.1 It is appropriate to extract the claim of the assessee before the CIT (A) from the impugned order as under :- "The Ld. TPO while framing transfer pricing assessment alleged that payment of royalty to AE for exports is in nature of price reduction and in fact the assessee company is working as contract manufacturer. The TPO has d....
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....ly alleged that assessee performing on contract manufacturer for its AE, Facts of the issue. The Ld TPO has alleged that assessee has purchase technology from AE, assessee is purchasing raw material from AE and thereafter exporting it to AE. To reply to allegation of Ld. TPO its Important to understand the total purchase and sales, of the assessee with is submitted as under: Particular Indigenous Purchase Imported From Non AE Imported From AE Total Consumption % of import from AE to total consumption Raw Material consumed 14336 10773 5863 30972 19 Stores and Spares 7852 1843 1092 10787 10 Your Honor will appreciate out of total consumption of raw material consumption. of the assessee less than 20% is procured from AE and similarly the import of exports of Stores.' & Spares is only 10% or total consumption of assessee. For your reference Annual report of Asahi India Glass Limited is enclosed as annexure 5 The assessee purchase only a small portion of its requirement from AE and rest of the requirement is fulfilled from outside sources. Further the purc....
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....esence, the appellant also produce glass for some OEM like Ford, General Motors etc. for their production facilities outside India. The appellant has stated that the export of glass is also commercially viable to the appellant company as it earns better margins on exports. Since the AE of the appellant is the global leader in Automotive glass segment and is amongst top glass suppliers to Vehicle manufacturer m large volumes and tie ups with all leading automobile manufacturers globally. It is commercially better for the assessee to export through AE for better logistic and best payment terms. The appellant takes advantage of the reputation and business base of its AE to have exports on good commercial and price term with secured payment from AE. The appellant has stated that the TPO has wrongly treated the assessee as a contract manufacturer for its AE. The TPO has observed' that the appellant has purchased technology from AE, the appellant is purchasing raw material from AE arid thereafter exporting it to AE. In this regard the assessee has submitted the following chart in respect to the total purchase and sales of the appellant: Particular Indigenous Purchase Importe....
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....t by the AO and the assessee is less than 5% of the arm's length price shown by the assessee. Since the difference is more than 5%, the benefit is not available. Finally, the assessment order has been passed on 15. 10.2009 in accordance with the directions of the DRP by making an addition of Rs. 14,47,956/- to the total income returned by the assessee. 4. Before us, the ld. counsel for the assessee submitted that similar issue arose in the proceedings of assessment year 2004-05 in the case of the assessee. The ld. CIT (Appeals) has deleted the disallowance made by the AD. The Tribunal has upheld the order of the ld. CIT(A). On the other hand, the ld. DR has relied on the orders of the AD and the DRP. 5. We have considered the facts of the case and submissions made before us. It is seen that the main question is whether the royalty paid by the assessee @ 3% of the net sale price stands justified under CUP. The assessee has placed on record a copy of the letter dated 30.04.1993 written by the Reserve Bank of India, Exchange Control Department, to Sona Steering Systems Ltd., in which payment of royalty @ 3% on domestic sales was allowed to be paid for a period of....
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.... TPO were not correct. The CIT (A) appraising the facts noted that there were negligible purchases of raw material from the AE and the total sales to its AE were also negligible. In the facts of the present case, we note that it has not been disputed by the Revenue that the total export sales of the assessee to the AE was only 5% of its total sales and the assessee conducts sales to some OEM outside India through the AE to utilize its capacity. Some of these companies are Ford, General Motors, etc. for their production facilities outside India and since the AE of the assessee is a global leader in automotive glass segment, the assessee takes advantage of the AE's reputation and business base "to have exports on good commercial and price terms with secured payment from the AE for better logistic and best payment through the AE". In the facts of the present case, the goods produced by the assessee are directly supplied to the OEMs and in the circumstances, out of the total consumption of raw material consumed by the assessee which, it has been noticed, is less than 20% procured from the AE and import of stores and spares from the AE is also 10% of the total consumption. The allegatio....