TaxTMI 
TaxTMI 
2019 (10) TMI 296
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....g grounds of appeal:- "1. Whether on the facts and circumstances of the case, the Hon'ble CIT(Appeals) was justified in holding that the TPO did not analyse the payment on account of royalty and technical know-how under TNMM or any other method, contrary to the fact that the TPO held that the tax payer failed the benefit test against payment of royalty for receiving the services and accordingly under CUP, Arm's Length Price is treated as nil. 2. The Ld. CIT(Appeals) has failed to appreciate that even though the tax payer was asked to justify the payment applying the benefit test, which the tax payer could not fulfill. 3. The Ld. CIT(Appeals) failed to appreciate that if the terms and conditions of the agreement are sacrosanct, then there would never be any adjustment to arm's length. The terms and conditions are to be tested between what independent parties would do in an arm's length situation. 4. Royalty payment cannot be aggregated with the other international transactions for the purpose of determining the ALP. 5. Royalty has been pad under a separate agreement and therefore has no relation with the other transactions....
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.... Operating revenue : 48.90 Operating costs : 41.68 Operating profit : 7.2 OP/OR : 14.76% OP/OC : 17.32% 4.3 The tax payer has conducted the transfer pricing study and searched for the comparables by using 'Prowess' data base in search of comparables applying various key words and after applying certain filters, the tax payer has short-listed around 10 comparables, whose arithmetic mean PLI (OP/Sales) was computed at 11.8% as against the margin of taxpayer of 14.76% and accordingly, the taxpayer held that the transactions are at Arm's Length Price and no adjustment was made. The taxpayer adopted TNMM (Transaction Net Margin Method) as most appropriate Method (MAM) at the entity level. 5. The Ld.TPO segregated the royalty payment and worked out the operating margin (OP/OR) of purchases and sales at 18.34% after excluding the Royalty payment and no adjustment was proposed on purchases and sales. The TPO also viewed that TNMM is MAM for determining the ALP for trading transaction. However, the TPO segregated the Royalty payment and determined the ALP of Royalty at Rs.NIL. The TPO was of the view that the transfer pricing study made by the assessee wi....
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....er could not demonstrate the tangible benefits that are derived from the so called purchase of technology from its AE. The uniqueness and usefulness of the so called technology is not demonstrated by the taxpayer. It is a well known fact that the technology becomes obsolete and redundant over a period of time. Therefore, the value of the technology gets eroded as the time lapses. The taxpayer cannot pay royalty indefinitely for the technology which is already gets absorbed over a period of time. In an arms length situation, no independent party pays royalty perpetually without deriving any additional benefits." 5.1 In this case, for the A.Y. 2008-09 the taxpayer has made the royalty payment of Rs. 1.75 crores to the AEs @5% on domestic sales and 8% on external sales. Since the TPO has determined the ALP at Rs.NIL, the Assessing Officer has completed the assessment u/sec. 143(3) r.w.s. 92CA(3) by making the addition of Rs. 1.75 crores representing the ALP of the royalty transaction as per the TPO's order. 6. Against the order of the Assessing Officer, the assessee went on appeal to the ld. CIT(A). The ld. CIT(A) after analysing and examining the complete details placed before ....
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....E and has benefits from such technical information provided by the AE remain substantiated. I find that the TPO without considering the e-mail correspondence has taken the view that the technical services provided in the agreement are general in nature, probably as the thrust of argument before the TPO was that as the royalty payment was approved by RBI, it would meet the requirements of ALP." 7. The ld. CIT(A) further held that it is mandatory to benchmark the international transactions as per the relevant TP provisions and the RBI approval for payment of Royalty would not be the criteria. The provisions of section 92C r.w.r. 10B are clear that the ALP in relation to international transactions shall be determined as per the methods prescribed in the Act and the approval of RBI given for remittance of impugned amount to the AE would not in any way fall within the methods prescribed under the act. Thus, the contention of the assessee justifying the payment made to the AE with the approval of RBI was rejected by the ld.CIT(A). The ld.CIT(A) further held that benchmark of royalty as a separate transaction is permissible as the royalty is a separate transaction. Further held that ag....
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....ssessee has computed its PLI at 9.9% and has selected 13 comparables and whose average mean of OP/OR was given at 6.42% and claimed that all its international transactions were at ALP. The TPO has selected two comparables taking into account, the current year data and applying appropriate filters, and the average mean of OP/Sales was worked out 10.45%. The TPO also computed the assessee's OP/Sales at 8.57%. The ld.CIT(A) held that the Assessing Officer/TPO may examine whether the assessee's claim that its PLI falls within the range of (+/-) 5% and accordingly determine whether the ALP requirements are met. If the assessee's PLI as determined by the TPO does not fall within the (+/-) 5% range, the ld. CIT(A) directed the Assessing Officer to make proportionate adjustment by way of determination of ALP. 9. For the A.Y. 2008-09, the assessee had conducted the TP study and benchmarked the arithmetic mean of 10 comparables, with PLI (OP/Sales) was given at 11.85% as against the assessee's PLI of 14.76% adopting TNMM as MAM. Considering the fact that the assessee's PLI is more than PLI of comparables, the ld. CIT(A) held that no adjustment is required. Accordingly, deleted the additio....
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.... the order of the ld. CIT(A) and allow the appeal of the revenue. 12. On the other hand, ld.AR argued that the TPO has determined the ALP of Royalty payment at Rs.NIL against the payment of Rs. 1.75 crores by the assessee which is unjustified and against the transfer pricing scheme and methods specified in Rule 10B of I.T Rules for determining the ALP. The Ld.A.R further submitted that the assessee had entered into an agreement for payment of Royalty with SPCM SA, France for using technology and getting technical information continuously and consistently. As per the agreement, the assessee shall make royalty @5% on domestic sales and 8% on external sales to its AE, SPCM SA. The technical information supplied by the AE is confidential in nature and it is necessary to the assessee to manufacture the products including transfer of formulation seeds, raw material specification in process quality control process testing and working instructions for making operations and the consequent sheets. The assessee's manufacturing activity is interlinked and interrelated with the continuously supplied technical information from the AE and without technical support from the AE the assessee w....
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....assessee is having the agreement for payment of royalty, the TPO cannot sit on the judgment for determination of ALP in the case of royalty. Similarly, by placing reliance on the decision of the Hon'ble Bombay High Court in the case of M/s. Johnson & Johnson Ltd., (supra) argued that the disallowance of payment on the basis of assumption that it is excessive, is an action completely dehors the provisions of transfer pricing adjustment. By placing reliance on the judgment of the Hon'ble Delhi High Court in the case of Frigoglass India Pvt. Ltd. (supra), ld.AR argued that the payment of royalty can be benchmarked using TNMM as the most appropriate method and that commercial expediency for payment of such royalty cannot be questioned. Accordingly, ld.AR argued that in the instant case applying the benefit test is not provided in sec. 92C of the Act and the Assessing Officer has to necessarily apply the method prescribed in rile 10B of the IT Rules for determination of ALP of international transaction. Thus, argued that having not followed any of the method by the TPO, the adjustments made by the TPO at Rs. NIL is unjustified. Similarly, by relying on the decision of the ....
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....nterlinked and interrelated with the manufacturing activity of the assessee, therefore, submitted that that the payment of royalty is a mandatory requirement to the assessee for carrying on manufacturing activity of the assessee company. The ld. CIT(A) has completely analysed the issue after giving opportunity to the TPO/Assessing Officer and held that the assessee got technical support from the AE in the manufacturing process and in manufacture of its products. Some of the suggestions given by the AE towards improving the quality of the product to overcome the performance of competitor product and accordingly given a finding that the assessee has received the technical support from the AE. During appeal hearing, ld.DR could not place any evidence to controvert the finding given by the Ld.CIT(A). The above observation made by the Ld.CIT(A) is based on the facts and after analysing the information placed before him therefore we, do not see any reason to differ with the finding of the ld. CIT(A) to hold that the assessee had received technical information from its AE and has benefited from such technical information provided by the AE. The ld.AR relied on the decision in the case of ....
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....pport is required for manufacturing the product and it is interrelated the payment of royalty cannot be segregated and the transactions required to be aggregated at the entity level and the ALP required to be determined on the whole transactions. Though the TPO held that the CUP is most appropriate method for determining the transfer pricing of the royalty but did not bring any comparables for determination of the royalty payment. Merely because of some mistakes in comparable cases, the TPO had rejected the comparables furnished by the taxpayer during the transfer pricing proceedings and rejecting the TNMM as most appropriate method which is not justified. The Ld.CIT(A) relied on the decision of Sony Ericson Mobile communications India (P) Ltd wherein the Hon'ble Delhi High court held that aggregation of transaction is desirable and not merely permissible, if the nature of transaction(s) taken as a whole is so interrelated that it will be more reliable means of determining the Arm's length consideration for the controlled transactions. In the instant case assessee has not availed similar technology from any other third party and the associated enterprise has not provided the techno....
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....ing how the technical know-how supplied by its AE was crucial to the running of its business. In CIT vs EKL Appliances 341 ITR 241 (Del), the Hon 'ble Delhi High Court had the occasion to consider an issue of disallowance of royalty by TPO because the assessee in that case had been suffering losses, the Hon'ble High Court while holding that so long as the expenditure or payment by assessee has been demonstrated to have been incurred or laid out for the purposes of business, it is no concern of the TPO to disallow the same on any extraneous reasoning...... .....Here, in the present appeal, what we see is the TPO sitting on judgment on the business and commercial expediency of the assessee which is erroneous as per the provisions of the Act as laid down clearly by the Hon 'ble Delhi High Court in EKL Appliances (supra). As far as the Department's reliance on the Hon 'ble Delhi High Court's judgment in Abhinandan Investments (supra) and on the decision of the co ordinate I Bench of the Delhi Tribunal in the case of Bombardier Transpiration India Pvt. Ltd. is concerned, these judgments were rendered on a different set of facts and hence the ratio as ....