AI OCR 
TaxTMI 
TaxTMI 
TaxTMI 
2014 (8) TMI 1153
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....nked transaction and hence was subsumed into the expenditure and accordingly already considered in the comparability exercise. 7.9 Not appreciating that once the net profit margin is tested on the touchstone of arms length price under TNMM, it pre-supposes that the various components of income and expenditure considered in the process of arriving at the net profit are also at arms length. 7.10 Doing separate evaluation of royalty by adopting CUP method without justifying how the same was most appropriate method. 7.11 Concluding that arm's length price of royalty transaction is NIL without considering any comparables. 7.12 Concluding that the taxpayer has not been able to show that it derived any economic benefit from the alleged know-how received from the associated enterprises. 3. The assessee a company engaged in manufacturing and selling passenger cars and multi utility vehicles filed their return for the impugned assessment year declaring income of Rs. 365,08,48,458/-. Assessee is a subsidiary of M/s Toyota Motor Corpn, Japan and during the relevant previous year was having international transaction with its holding company. For determining the Arm's Length Price (ALP)....
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.... given to it could not produce any evidence/documentation as to how the royalty rates were fixed. It also did not provide any evidence for royalty charged by third parties on similar technology and on similar services. As per learned TPO, assessee could not show any economic benefit having been derived from associated enterprises which warranted payment of the royalty. As per learned TPO the profit that accrued to the assessee did not arise from the technology, provided by the associated enterprises. He therefore, concluded that the ALP of the royalty payment under CUP method would be nil and recommended an adjustment of Rs. 97,82,11,238/- u/s 92CA of the IT Act, 1961. For taking the view that different classes of transaction required separate analysis, learned TPO relied on the decision of the Mumbai Bench in the case of UCB India Pvt.Ltd., Vs ACIT (121 ITD 13). 6. When draft orders on the above lines were put to the assessee, assessee moved the DRP objecting to the segregation of its activities and adjustment proposed in the pricing of its international transactions. As per the assessee when TNMM analysis was done royalty formed a part of the cost in computing the operating prof....
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....ut 3% of its revenues. As per learned DR assessee could not justify why and how it paid royalty of 3% of the revenues, when no economic benefits were received from the associated enterprises. 10. Ad libitum reply of the learned AR was that comparable entities considered by the TPO for analyzing the trading and manufacturing segments had substantial research and developmental expenditure, whereas assessee had not incurred any such expenditure. Research and development expenditure incurred by comparable entities as per the learned AR, came to 2.18% of their revenue against which the royalty payment of the assessee was 3%. Therefore, according to him, the quantum of payment of royalty was justified, even by the yardstick employed by the lower authorities. 11. We have perused the orders and heard the rival contentions. There is no dispute that in the impugned assessment year, the TPO had not disturbed the values of the international transactions with regard to the trading segment and manufacturing segment. After making his own analysis TPO came to the conclusion that the segmental results were within the +/= 5% of the mean arithmetical margin of comparables. Only adjustment that he c....
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....tent the conclusions of the TPO regarding determination of ALP by taking segmental results without looking into as to whether the two segments are interlinked or inter-related cannot be sustained. As to what would be the most appropriate method in such cases is again dependent on Rules 10B(2) and (3) of the Rules. 2. The OECD guidelines as well as the Australian Tax Officer (ATO) Taxation Rule 97/20 on International Transfer Pricing para.2.74(1) referred to by the assessee before the Revenue authorities which have been set out in the earlier part of this order seems to support 'combined transaction approach' where the transactions are closely linked or continuous that they cannot be evaluated adequately on an individual basis. In such a situation, rather than assessing the ALP of the transactions individually, the transactions could be evaluated together using the most appropriate method. 43. The above being the legal position, it becomes necessary to examine the international transactions carried out by the assessee with its AE during the previous year which have been categorized into 2 segments by the TPO in his order and find out if they are interlinked or interconnected so ....
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.... 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 / decision by its very nature has to be case-specific and year-specific as the decision is based on the facts and circumstances of this particular case and of this particular year and is not to be construed as laying down the principle in this regard. We, therefore, direct the Assessing Officer / TPO to compute the ALP at the entity / enterprise level by combining the trading and manufacturing segments." 45. It is no doubt true that the Tribunal has observed that the ruling given in that year is based on ....
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.... manufacturing segment of the Assessee are distinct and not inter related warranting combined transaction approach is not correct and that a combined transaction approach has to be adopted and that on the basis of combined transaction approach the price paid for the international transaction is at Arm's Length. We may also that legally the TPO should adopt the ALP as nil. On similar approach by TPO adopting ALP at Nil the ITAT, Bangalore Bench, in the case of M/s.Festo Controls Pvt. Ltd. vs. DCIT in ITA No.969/Bang/2011 (AY: 2007-08) dated 4-1-2013, the Tribunal examined the question as to whether the TPO can determine the ALP at nil on the ground that no services were rendered. The Tribunal, on the above issue followed the decision of the Mumbai Bench of the ITAT in the case of Castrol India Ltd. v. ACIT in ITA No.3938/MUM/2010 dated 14.09.2012 wherein it was held that it was incumbent upon the TPO to work out the ALP of the relevant transactions by following some authorized method and the entire cost borne by the assessee cannot be disallowed by taking the ALP at Nil. The Tribunal also referred to the decision of the Hon'ble Delhi High Court in the case of CIT v. EKL Appliances L....
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....curred by the assessee or that the assessee has not derived any benefits for the payment made by the assessee and therefore he cannot consider the ALP as NIL. We hold accordingly. 49. Besides the above, even on facts the determination of ALP at NIL in respect of royalty payments cannot be sustained. In this regard, it was brought to our notice by the ld. counsel for the assessee that similar payment made in A.Y. 2009-10, the DRP in its directions dated 19.11.2013 was pleased to hold that the payment of royalty was supported by the services rendered by the AE and was justified. The aforesaid order of the DRP was considered by the CIT(A), LTU, Bangalore in A.Y. 2005-06 and in her order dated 20.3.2014, the CIT(A) held as follows:- "10.3 The above mater had come up for adjudication before the DRP in the appeals for other years also. For AY 2006-07 I find that the DRP has confirmed the TPO's determination of ALP of royalty at 'nil' through order dt. 30.09.2010. In this order, however, at page 10 while recording its directions, the DRP mentions the TPO's admission that in view of the time barring situation he was unable to examine the objections raised by the assessee. After indepen....
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....this reason that the Tribunal held the exercise to be academic at para 48 of its order. However, on the other hand, for the impugned assessment year the TPO has not made any adjustment in the PLI of manufacturing segment nor trading segment, though he found that an adjustment of Rs. 97.82 Crores was required for royalty payments. Since the Co-ordinate Bench in its order for AY: 2007-08 has made a specific observation that analysis based on combined transactions alone could be adopted, it is necessary for us to have a look at the position for the impugned assessment year where segmental results in trading and manufacturing was considered by the TPO to be well within Arms Length. The segmental results as analyzed by the TPO for the trading and manufacturing read as under; Trdg.segment Manfg.segment Revenue from Operation 851.20 3292.77 Cost of goods sold 750.43 2562.43 Gross profit 100-77 730-74 G.P.on sales 11-84 22-19 Total cost 825.69 3116.13 Operating profit 25-51 176.64 Profit on sales 3% 5.36% The total revenue if both segments are considered together would come to Rs. 4.843.97 Crores and operating profit 202.1....