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TaxTMI 
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TaxTMI 
2018 (8) TMI 378
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....ion 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 deleting the addition is assailed. It is seen that t....
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.... 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 unaudited, can be considered if the income or the expenses have been properly allocated; (iv) M/s Chiron Behring Vaccines Pvt....
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....chnimount 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 been held that the AO had made the adjustment by applying CUP method on transaction by transaction basis and the ITAT uph....
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....e. 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 material requirement and hence the procurement plans are made and the orders are placed with the vendors. The float glass supply for the Auto Glass Division is procur....
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....ity 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 the AEs have made any direct sale in the Indian market, AIS receives a commission income. Thus, AIS in its Float Glass Division acts in the capacity of an independent entrepreneurial company engaged manufacture of float glass to the market through its dealer network. It underta....
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....mined 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 to what tangible and direct benefit has been derived by you by use of such intangible. 11. Please state and quantify as to how the benefits derived by the use of technology commensurate with the payment made. Also please state the methodology use for quantification of the benefits. 12. What is the rate of royalty paid by other AEs to the company providing the intangible? If there is a difference in the rate....
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....ated 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 ('Asahi Japan'} towards use of patented technology under licensing arrangement for manufacturing of auto and float glass products. The royalty to Asahi Japan is based on fixed percentage on net sales. Similarly, the assessee has also paid royalty to Glaverbel towards use of patented technology under licensing arrangement for manufacturing of float glass. The royalty to Glaverbel is based on fixed rate on units manufactured. The assessee would like to refer to "License agreement on temp....
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....up 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 about 50% of the total raw material requirement of the automotive division. Thus, in the absence of the requisite know-how, the assessee would be compelled to rely on external suppliers which would result in a dip in its overall profits. Further, reliance on external suppliers may also disrupt the continuity and quality of production cycle. During FY 2008-09, the assessee commanded a market share of 80% of the automotive glass market including after-market and 34% of the float glass industry2. Your goodself would also appreciate that t....
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....roposed 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 represents sales made to global OEMs in India. These sales would not have been possible in absence of the technical and brand affiliation with the Asahi Group. Further, a mammoth portion of the benefit derived by the assessee includes retention of its customer base who may be lured by competitors unless the assessee constantly evolves its product portfolio. The direct benefit which assessee derives from the technology and technical knowhow arrangement with Asahi Group is the increase in the sales over the years with its ability to cater to the changing needs of its customer which can be see....
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....idering 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." 4.12 In view thereof, the explanation offered was not accepted by the TPO who was of the view that payment of royalty to the AE for the exports made to AEs is in the nature of price reduction for the products sold to AEs. The assessee company, he was of the view, was in fact worked as a contract manufacturer for the limited purpose of exports made to the AEs. The technology was taken from the AEs, the raw material was purchased from the AEs, the goods were sold to the AEs and on such sale of goods to AEs royalty is also paid to the AEs. The TPO, in this regard, it will be pertinent to mention that the position of the assessee company with re....
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....d 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 visà- vis the expected benefits from the additional investments etc. for an independent enterprise. Further, he also considered the possibility that the said intangibles may already stand included in the price of goods sold by the AE or purchased from the AE by the related party. These situation, it was noticed, had also been considered in the OECD guidelines. "6.17 The compensation for the use of intangible property may be included in the price charged for the sale of goods when, for example, one enterprise sells unfinished products to another and, at the same time, makes available its experience for further processing of these products. Wheth....
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....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 disregarded- the assessee claims that the total exports sales of the assessee is only 5.72% of its total sale. And assessee conducts sales to some OEM outside India through AE to utilize its capacity. 5.2 "Facts on exports sales by assessee to its AEs are at arm's length price of the international transaction The assessee is a. reputed manufacturer of Automotive Glass for automotive manufacturer segment in India selling and hold around 75% of market share in terms of sales. Total turnover of the assessee was around Rs. 1300 Crs out of which the export sale was Rs. 65 crs. which comes to 5% of the total turnover of the company The assessee sales its product to a....
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.... 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 purchase of raw material from AE does not only used to manufacture goods from AE butits used for manufacturing of goods to be sold to customers other than AE to. The assessee wish to remind that the export to AE is only 5% of the total turnover of assessee. Further the royalty paid on sales to for doing sale of 94% sales to non AE & 6% sale to AE. ...... Your Honor will appreciate that the operation of the assessee does not depends on the exports to AE. The assessee has shown incremental in sale every year in past 10 years but the export to AE has not increase in the same tune. In fact the business of the assessee has grown tremendously in the years when to export was made to AE. Your Honor should also consider that the export turnover to the assessee on the assessment year in app....
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.... 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 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 6.4 The appellant has submitted that the percentage of import form AE to total Consumption of Raw Material Consumed and Stores & Spares is 19% and 10% respectively. The appellant has stated that it purchases only a small portion of its requirement from AE and the rest of the requirement is fulfilled from non-AEs. The appellant has, stated that the business operation of the appellant is not dependent on the exports to AE. During the year the Exports to AE constitute only 2.63% of sale. In other years the sales made to AE are less than 2% of turn over. The appellant has argued that the appellant does exports....
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....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 five years. There are similar other correspondences which have been placed on record. The assessee has also placed on record a press note issued by the Government of India, Ministry of Commerce, and Industries, Department of Industrial Policy &. Promotion, issued in', 2003, under which royalty payment @ 8% on export sales and 5% on domestic sales have been referred to be reasonable for the purpose of processing approval of payments. On the other hand, the AD failed to bring any material on record that payment of royalty @ 3% was not at arm's length. Therefore, the payment stands justified under the CUP method. The second aspect is whether the assessee is a contract manufacturer for the AE. In this connection, it is seen from the order of the TPD itself that only a fraction of goods manufactured by the assessee have been sold to the AE. Bulk of sales are to uncontrolled parties. Thus, the ass....