TaxTMI 
TaxTMI 
TaxTMI 
2019 (4) TMI 1505
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.... and Carraro International SA. Luxemburg (49%). The assessee is engaged in the business of designing, manufacturing and marketing mechanical and transmission systems for on-road and off-road vehicles and for stationary application, clutches, hydraulic lifts, axles for agricultural tractors, transmission for loaders and backhoe and planetary drives for construction equipments and other off-highway applications. The assessee reported certain international transactions in Form 3CEB. The AO referred the matter of determination of the arm's length price (ALP) of the international transactions to the TPO. One of the reported international transactions is payment of "Royalty" with transacted price at Rs. 1,01,87,033/-. The assessee applied Comparable Uncontrolled Price (CUP) method as the most appropriate method for demonstrating that the international transaction was at ALP. The TPO noticed that the assessee entered into an Agreement dated 15-12-2008 w.e.f. 01-07-2008 with Carraro SpA, Italy, in terms of which a sum of Rs. 75.41 lakh was paid as royalty @ 0.50% of sales. It was opined that there was no justification for making new additional claim of royalty when the earlier royalty ag....
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....name ; and Rs. 75,41,558/- pursuant to the agreement dated 01-07-2008 for use of name and logo of its foreign/associated enterprise @ 0.5%. On a reference made by the AO, the TPO determined Nil ALP in respect of Royalty payment of Rs. 75.41 lakh pursuant to agreement dated 01-07-2008. Impliedly, he accepted that payment of Royalty, namely, Rs. 26.39 lakh pursuant to the agreement dated 5.4.2001 was at ALP. When the matter came up before the AO for finalizing the assessment, he treated total amount of royalty paid by the assessee under both the agreements, as capital expenditure. After allowing depreciation @25%, he made an addition of Rs. 81,60,774/-. Thus, it is apparent that the AO deviated from the order passed by the TPO u/s. 92CA(3) of the Act. 6. The primary question which requires adjudication is as to whether the action of the AO in this regard can be treated as valid? Section 92CA(4), prior to its substitution by the Finance Act 2007 w.e.f. 1.6.2007, provided that on receipt of the order passed by the TPO, the AO shall proceed to compute the total income of the assessee having regard to the ALP determined by the TPO. The Finance Act, 2007 substituted the hitherto sub-sec....
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.... 2 304 Transmissions for 35 to 40 HP 05-04-2001 5% 3 Steering Axle & Accessories for 35 and 55 HP Tractors 05-04-2001 2% 4 Axle for 80HP Tractors and parts thereof 23-10-2003 2% 5 Name, Logo and Trademark Licence 01-07-2008 0.5% 9. The first agreement was entered into on 30-09-1997 under which the assessee was to pay royalty @ 5% on 506 transmissions for 45 to 75 HP, clutches and hydraulic lifts. Copy of this agreement is available on page 249 onwards of the paper book. This agreement provides that the assessee would obtain the design and trade mark license and would be supplied by designs, technology, know-how and technical assistance along with use of the licensed trade mark for a fee determined @ 5% of Net sales price. The term "Net sales price" has been defined to mean any sale made by the assessee in the territory of India. It is thus evident from the clauses of this agreement that the assessee was to pay royalty @ 5% in lieu of not only technical knowhow for specific products but also right to use licensed trade mark owned by Carraro SpA. The ld. AR stated that this agreement expired in an earlier year and was not relevant for the year under consideration. On....
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....e mark and brand name of the foreign collaborator without technology transfer". It is thus seen that payment for use of trade mark and brand name, under Press Note No.9 (2000 series), is allowed under automatic route at 1% for domestic sales. The case of the assessee is that it paid royalty @ 0.5% on sales made in India to certain persons other than OEMs and hence such payment should be construed at ALP. 10. Now the question is that when the rate of Royalty actually paid by the assessee for use of trade mark and brand name at 0.5% is less than 1% prescribed under automatic route as per Press Note No.9 (2000 series) issued by the Govt. of India, Ministry of Commerce and Industry, whether such payment can be considered as at ALP? In this regard, it is observed that the Hon'ble Delhi High Court in Sony Ericsson Mobile Communications India (P) Ltd. Vs. CIT (2015) 374 ITR 118 (Delhi) has held that Royalty as per Reserve Bank of India's automatic route is not per se at ALP. On the other hand, the ld. AR has invited our attention towards a judgment dated 18-11-2015 of Hon'ble Bombay High Court in CIT Vs. SGS India Pvt. Ltd. (Income Tax Appeal No.1807 of 2013), a copy placed on record, i....
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....gh Court, which applies in all fours to the facts of the extant case, we hold, in principle, that the payment of Royalty at 0.5% for use of name, logo and trade mark license is otherwise at ALP and does not require any Transfer Pricing adjustment. 12. It can be seen that the assessee paid royalty under agreement dated 05-04-2001 @ 2% in respect of steering axle and accessories for 35 and 55 HP tractors both towards use of technical knowhow and use of trade mark/brand name. It is further noticed that the assessee paid royalty of Rs. 75.41 lakh @ 0.5% on total sales for use of name, logo and trade mark. Payment of Rs. 75.41 lakh, as accepted by the ld. AR, is also in respect of sales made by the assessee of the products which were covered under agreement dated 05-04-2001, being, steering axle and accessories for 35 and 55 HP tractors. Thus, it is manifest that the assessee paid royalty for use of logo and trade mark in respect of steering, axle and accessories for 35 and 55 HP tractors, both under the agreement dated 05-04-2001 and once again under the new agreement dated 1.7.20008, which is plainly not permissible. Deduction can be allowed for payment of royalty for use of trade m....
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....he Tribunal for the A.Y. 2007-08. Following the order for earlier years, the Tribunal reiterated its view holding the payment of royalty as a revenue expenditure. Nothing has been brought on record to demonstrate that the view canvassed by the Tribunal on this issue for the preceding years has been either reversed or modified in any manner by the Hon'ble High Court. Respectfully following the precedent, we do not approve the action of the AO in treating royalty payment as a capital expenditure. Thus, the grounds taken by the Revenue in this regard, are dismissed. 15. To sum up, out of the total payment of royalty at Rs. 1,01,81,033/- in respect of two agreements, the only amount which is to be disallowed is a sum to be calculated afresh, representing duplicate payment in respect of royalty for use of trade mark towards steering, axle and accessories for 35 and 55 HP tractors, included in the sum of Rs. 75.41 lakh. The AO is directed to grant relief accordingly. 16. Another issue raised by the assessee in its appeal is against the transfer pricing addition of Rs. 4,35,34,908/-. Facts apropos this issue are that the assessee reported an international transaction of payment of Cor....
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....ved by the sustenance of such an addition. 17. We have heard both the sides and gone through the relevant material on record. It is seen from the assessee's TP study report that it employed "Cost plus" method as the most appropriate method for showing that the international transactions of receipt of management services was at ALP. The TPO discarded such method and applied the CUP method. However, Nil ALP was determined as the assessee, in the opinion of the TPO, did not avail any services. He further accentuated on the Nil ALP on the ground that the services, if any, did not provide any benefit to the assessee and these were in the nature of shareholder services. 18. The first question is whether the assessee availed any services from its AEs pursuant to the two Agreements? We have gone through the Agreements referred to herein above. Agreement with Carraro SpA, Italy, refers to a wide range of services to be provided to the assessee, which have been listed under the heads Advice on Finance, Administration, Legal and Controlling; Advice on Human Resources etc.; Advice on Technical Assistance and Support on IT systems; Advice on strategic planning and Group consulting for Busin....
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....t the allowability of such payment simply on the ground that no benefit was derived. It is not necessary that every incurring of expenditure must necessarily result in to some benefit. Had it been the situation, then no businessman would have ever incurred loss, which is a proposition far away from the stark reality. Once it is proved that the services were availed by the assessee, then his jurisdiction gets restricted to determining the ALP of the transaction. We have noticed above that the assessee did avail services from its AEs. In such a situation, it is held that the view point of the authorities that NIL ALP should be determined because the assessee did not get any benefit out of the services, is rejected. The next question is the determination of the ALP of such transaction. 21. It is seen that the assessee applied 'Cost plus method' in its transfer pricing documentation by taking foreign/Associated enterprise as a tested party and did not give any comparable uncontrolled transactions. This exercise got rejected at the hands of the TPO. In the remand proceedings, the assessee applied the TNMM again with the foreign/associated enterprise as a tested party. The ld. AR submi....
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....iate method. The mechanism for determining ALP under the TNMM has been enshrined in clause (e) of rule 10B(1), which reads as under : '(i) the net profit margin realised by the enterprise from an international transaction entered into with an associated enterprise is computed in relation to costs incurred or sales effected or assets employed or to be employed by the enterprise or having regard to any other relevant base ; (ii) the net profit margin realised by the enterprise or by an unrelated enterprise from a comparable uncontrolled transaction or a number of such transactions is 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 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....
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....enterprise from the international transaction, that is, a transaction between the associated enterprises. So, under the TNMM, it is the profit margin realized by the Indian assessee from the transaction with its foreign/AE, which is compared with that of the comparables. There can be no question of substituting the profit realized by the Indian enterprise with the profit realized by the foreign AE for the purposes of determining the ALP of the international transaction of the Indian enterprise with its foreign AE. Scope of transfer pricing addition under the Indian taxation law is limited to transaction between the assessee and its foreign/ AE. We fail to comprehend as to how the profit realized by the foreign/AE can be relevant, when the profit of the Indian enterprise is sought to be ensured at ALP. The underlying object of the transfer pricing provisions is, inter alia, to see that there is no profit shifting from the Indian taxation base by means of the foreign/AE charging more than that charged by comparable independent cases, which fact is ensured by determining the ALP of the international transaction. If foreign AE has, in fact, charged more, then its profit rate will shoot....
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....ancial Services Pvt. Ltd. Vs. Pr. CIT (ITA No.662/2016) dated 31-08-2016 to contend that foreign/associated enterprise can be a tested party. We have gone through a copy of the Tribunal order dated 08-07-2016 rendered in this case in ITA No.440/Del/2014, a copy of which has also been placed on record by the ld. AR. The assessee in that case adopted foreign/AE as a tested party and used certain foreign comparables. When the matter came up before the Tribunal, it held that the foreign/AE cannot be considered as a tested party. The matter was taken up by the assessee before the Hon'ble High Court, a copy of whose judgment has also been placed on record. In the judgment, the Hon'ble High Court observed that the issue was about the correctness of the Tribunal order in which it was held that Foreign/Associated Enterprises cannot be considered as a tested party. It further observed that the Tribunal remitted the matter to the file of AO/TPO for fresh determination of the ALP. The Hon'ble High Court held in the operative part of its judgment that : "This court notices that for reconsideration and determination of the appropriate method as well as appropriate comparables and the tested p....
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....Cost plus' method applied by the assessee in its original transfer pricing documentation, we find it as an admitted position that no comparable uncontrolled transaction was cited. Mechanism for determining the ALP under this method has been given in rule 10B(1)(c), which is as under : - (i) the direct and indirect costs of production incurred by the enterprise in respect of property transferred or services provided to an associated enterprise, are determined ; (ii) the amount of a normal gross profit mark-up to such costs (computed according to the same accounting norms) arising from the transfer or provision of the same or similar property or services by the enterprise, or by an unrelated enterprise, in a comparable uncontrolled transaction, or a number 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 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 referre....
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....nsactions to be at ALP. But it would show skewed picture. There may be more margin from one transaction to set off against the other, but that does not mean that the other transactions should be automatically presumed at ALP. Separate ALP should be determined of separate and independent international transactions. Consequence of the above observations is that cross-subsidization is impermissible. Their Lordships held that several transactions between two or more AEs can form a single composite transaction if they are closely linked transactions and the onus is always on the assessee to establish that such transactions are part of an international transaction pursuant to an understanding between various members of a group. The Hon'ble High Court observed that in case of a package deal where each item is not separately valued but all are given a composite price, these are one international transaction. It went on to hold that where a number of transactions are priced differently but on the understanding that the pricing was dependent upon the assessee accepting all of them together (i.e. either take all or leave all), then it is also an international transaction. But it will be on th....
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.... worldwide revenue break up amongst countries and concluded that India accounted for 1.4% thereof. On that basis, the ALP was determined and adjustment of Rs. 79.96 crore was proposed. The assessee contended before the Tribunal that since the TPO did not apply any of the recognized methods for determining the ALP, the addition should be deleted without any restoration for a fresh exercise, which got concurrence of the Tribunal. The Hon'ble High Court also upheld the view taken by the Tribunal. We do not find any application of the ratio of judgment laid down in the case of M/s. Kodak India Pvt. Ltd. (supra) to the facts under consideration. In that case, the TPO determined ALP based on the worldwide break up of revenue amongst countries and concluded that India accounted for 1.4% thereof and hence, the TP adjustment was proposed accordingly. On the contrary, the TPO in the instant case has categorically mentioned in Para No.8.6 of his order that he was applying the CUP method, under which the ALP was NIL. In our considered opinion, there is a vast difference between the two situations, viz., one in which a wrong method is applied and the second in which a correct method is applied ....