TaxTMI 
TaxTMI 
2020 (3) TMI 1200
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....ficer has erred in making a reference to Transfer Pricing Officer for determining arm's length price without demonstrating as to why it was necessary and expedient to do so. 'Ihe Honorable DRP has erred in confirming the action of the Assessing officer. 3. The lower authorities have erred in: a. Making transfer pricing adjustment ofRs. 110,31,43,825/-. b. Passing the order without demonstrating that the Appellant had motive of tax evasion. c. Not appreciating that there is no amendment to the definition of "income" and the charging or computation provision relating to income under the head "Profits & Gains of Business or Profession" do not refer to or include the amounts computed under Chapter X and therefore addition made under Chapter X is bad in law. d. Not appreciating that there being no disallowance under section 40A(2) for royalty payment and advertisement expenses, adjustment under Chapter X ought not to be made. e. Passing the orders without considering all the submissions and/or without appreciating properly the facts and circumstances of the case and the law applicable. 4. Grounds relating to computation of ALP The lower authorities have erred in ....
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.... a. Rejecting external CUP transaction on unjustified grounds; b. Ignoring the fact that the ratio of R&D expenses of TMC was much higher than the effective royalty rate of the Appellant; c. Ignoring the fact that the Technical Assistance Agreements were approved by government authorities and therefore royalty payment should be considered as at arm's length; and d. Ignoring the fact that, the learned CIT(A) and DRP have accepted both factum as well as quantum of royalty as at arm's length for the preceding assessment years; 9. Without prejudice to above, the lower authorities have erred in: a. Adopting inconsistent denominator while calculating arm's length price; b. Adopting ratio of royalty and R&D expenditure to net sales in the case of comparables vis-å-vis that of royalty to Local Value Addition (LVA) instead of net sales in the case of the Appellant; c. Not appreciating that the Appellant was using LVA as base for paying royalty and not net sales; d. Not excluding Hindustan Motors from the list of comparable ignoring the fact that it is functionally different from the Appellant; e. Excluding Ashok Leyland and Tata Motors as comparables on u....
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..... The Appellant denies its liability to pay the excessive interest. Brief facts of the case are as under: 2. Assessee is a company and a subsidiary of Toyota Motor Corporation, Japan. It is in the business of manufacture and selling Multi Utility Vehicles under the model name Innova(tm), Fortune(tm) passenger car under the model name Corolla(tm). For year under consideration assessee filed its return of income on 29/11/2011, which was subsequently revised on 04/01/2013 declaring income of Rs. 2,48,57,41,829/-. In the course of assessment proceedings, Ld.AO noticed that, assessee entered into following international transaction with its associated enterprises during the year under consideration. Particulars Amount Purchase of parts and components 2692,69,04,302 Purchase of CBU 212,68,23,738 Sale of racks and other income 5,00,53,305 Sale of prototypes and trial parts 2,20,43,509 Sale of parts & components 433,42,86,791 Sale of manufactured CBU 1,97,56,687 Purchase of capital assets 398,19,62,065 Purchase of intangible fixed assets 111,73,34,804 Payment of royalty 179,98,19,708 Payment towards sales promotion, advertisement, travelling, software expenses, rese....
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....to AE, purchase of intangibles were at arm's length. Only disputed segment to which adjustments were proposed was Trading segment, Manufacturing segment and Payment of Royalty.Ld.TPO issued notice dated 20/08/2014 and 29/12/2014 to examine arm's length nature of royalty payment, wherein various details like copies of agreements nature and complete description of intangibles transferred or licensed to assessee etc were called for. 6. On the basis of various submissions made by assessee, it was held by Ld. TPO that, royalty rate of 5% paid by assessee was disproportionately high and not reasonable. Ld. TPO also observed that, royalty rate varied from 0.82% to 3.25% in case of comparables in automobile industry, as compared to royalty paid by assessee to its AE. Ld. TPO thus considered the royalty rate at 2% to be appropriate and proposed adjustment of Rs. 1,07,98,91,825/-. Aggrieved, by proposed adjustments made by Ld. TPO and observation of segregating Trading and Manufacturing transactions which were interlinked with each other, assessee raised objections before DRP. DRP summarily rejected objections of assessee by holding as under. "Objection relating to aggregation vs segmen....
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....ame. Assessee's claim that royalty paid by it should be treated at arm's length as the technical assistant agreements were approved by government authorities also does not carry any weight as approval by the governmental authorities does not prevent TPO from examining the ALP as per the provisions of the act. Considering all these aspects, the objections of assessee cannot be accepted." 7. As regards adjustment in respect of advertisements proposed by Ld. TPO, DRP upheld Ld. TPO's view by holding that assessee has not provided any evidence in support of advertisement expenses and therefore arm's length price was to be computed at 'nil'. On receipt of directions from DRP, Ld.AO computed the addition in hands of assessee's at Rs. 1,10,31,43,825/-. Aggrieved by final assessment order passed by Ld.AO, assessee is in appeal before us now. At the outset, Ld. AR submitted that, Ground No.1-3 are general in nature and therefore do not require any adjudication. Ground No.4-10 are in respect of transfer pricing addition made under royalty segment and advertisement segment. Assessee also alleges action of Ld. TPO segregating manufacturing and trading activity. 8. Ld.AR submitted that, ....
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....ensing or manufacturing know-how and the supply or vital components to an associated manufacturer,' it may be more reasonable to assess the arm's length terms {or the two items together rather than individually. Such transactions should be evaluated together using the most appropriate arm's length method or methods". (Emphasis supplied) 10. He submitted that, decisions relied upon by Ld. TPO in case of UCB India (P.) Ltd. (supra) are applicable only when activities clubbed are dissimilar or are not closely linked, which is not the case of assessee. On the other hand, Ld. DR relied upon orders passed by authorities below. We have perused submissions advanced by both sides in light of records placed before us. 11. Admittedly Ld.TPO has not made any adjustment upon segregating trading and manufacturing segment. However, Ld. AR vehemently submitted that, the two segments cannot be segregated, as they are interlinked and intertwined with each other and that assessee has determined the ALP by using TNMM at entity level. It is observed that, this issue has been considered by this Tribunal in assessee's own case for AY 2003-04, 2007-08, 2008-09 and 2010-11. In IT(TP)A No.6....
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....mputed adjustment in respect of royalty paid by assessee to its AE at 2%. 14. He submitted that, on the basis of comparables which was submitted before Ld.TPO and accepted order u/s 92 CA, payment made by assessee to its AE is at arm's length independently. He submitted that, average margin of comparables referred to in Ld.TPO's order is 1.92% whereas assessee has paid Royalty at 5%. It was submitted that, as assessee's margin is more than comparables the transaction is at arm's length. He also submitted that, there is no basis on which learnt TPO computed adjustment to royalty at 2%. 15. On the contrary Ld.CIT DR submitted that, issue may be set aside to learnt AO/TPO for determined in the arm's length price of the transaction in accordance with law as has been held by this Tribunal in assessee's own case in preceding assessment years (supra). We have perused submissions advanced by both sides in light of records placed before. 16. Assessee in transfer pricing study considered royalty as a part of operating expenses in TNMM as most appropriate method. The Ld.AR referring to page 981 of paper book, submitted that comparison of percentage of average royalty in respect of compara....