TaxTMI 
TaxTMI 
TaxTMI 
2018 (11) TMI 1782
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....Dispute Resolution Panel ("DRP") / AO / Transfer Pricing Officer ("TPO") erred in making a transfer pricing adjustment of Rs. 67,686,945 in respect of the international transactions relating to the payment of royalty and product development service fees paid by the Appellant to its Associated Enterprise CAE"). 3. That on the facts and circumstances of the case and in law, the DRP / AO / TPO while rejecting Appellant's determination of arm's length price for its international transactions have resorted to cherry picking and erred in including inappropriate comparable which is functionally not comparable to the Appellant 4. That on the facts and circumstances of the case and in law, the DRP / AO / TPO have erred in arbitrarily rejecting certain functionally comparable companies identified by the Appellant. 5. That on the facts and circumstances of the case and in law, the DRP / AO / TPO have erred in rejecting without providing any reason, the capacity utilization adjustment conducted by the Appellant in its transfer pricing documentation without taking cognizance of the fact that the Appellant was operating at different level of capacit....
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....omparables Total Value of Transaction Price/ Margin Arithmetic Mean Price/ Margin Purchase of traded goods TNMM using OP/ OR as PLI 160,175,793 13.8% 7.77% Purchase of raw material consumables & consumable tools TNMM using OP/OR as PLI 417,712,581 0.65% -3.16% Purchase of capital goods 113,015,356* Payment of royalty 16,931,154 Receipt of technical services 13,718,595 Sale of goods 725,136 Receipt of product development services 50,755,791 Reimbursement of expenses paid/ payable 26,943,379 Trade Payables 217,576,553 Trade receivables 326,575 Credit guarantee Other Method Nil NA *The fees paid for technical services includes INR 8,846,900 which has been capitalized during the FY 2012-13. 3. During the year under assessment, the taxpayer was engaged in trading, sales and manufacturing of brake and brake products and in order to benchmark its international transactions, the taxpayer selected 7 companies as comparable....
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....allowed but payment of royalty and product development fee has been disallowed. 9. Ld. TPO declining the contentions raised by the taxpayer that similar royalty payment has been made by the other group entities to Nissin Kogyo and brought on record evidence by way of supplementary analysis, available at pages 327 to 333 of the paper book, termed the royalty payment as common/duplicate in nature on the grounds inter alia that :- (a) The assessee has not answered whether similarly royalty is being paid by other worldwide entities to the same AE with evidence thereof; (b) The assessee has not explained the benefits that the assessee has availed on account of this royalty pay out with evidence; and (c) The assessee has not explained how royalty payment has helped the assessee in improving its manufacturing process with evidence. 10. However, we are of the considered view that when the taxpayer has come up with supplementary analysis for payment of royalty showing the royalty paid by the taxpayer vis-à-vis independent third party for use of similar intangibles, the royalty charge between third party licensor and licensee generate an average royalty of 7.20% of the sa....
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....evelopment services provided by the AE on the sales of product manufactured by the assessee, available at pages 969 of the paper book and request received from customers via email to modify the products. 14. The ld. AR for the taxpayer in support of his contentions relied upon the decision of Hon'ble Delhi High Court in CIT vs. EKL Appliances Ltd. - 341 ITR 241 (Del.) and also relied upon the decisions of DCIT vs. Air Liquid Engineering India Pvt. Ltd. - ITA No.1040/Hyd/211, Thyseenkrupp Industries India Pvt. Ltd. - ITA No.7032/Mum/2011 and Toyota Kirloskar Auto Parts Pvt. Ltd. vs. ACIT - IT(TP)A.No.1642/Bang/2012. 15. However, on the other hand, ld. DR for the Revenue contended that for determining the ALP of royalty and product development fee, best method is the CUP and not TNMM and relied upon the orders passed by the ld. TPO/DRP/AO. 16. Hon'ble Delhi High Court in case of CIT vs. EKL Appliances Ltd. (supra) has decided the issue as to payment of royalty and held that it is mandatory for the TPO to work out the relevant transactions by applying some authorized method and the entire cost borne by the taxpayer cannot be disallowed by taking the ALP at nil. ....
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....e how expenditure which is otherwise a proper expenditure can cease to be such merely because there is no receipt of income. Whatever is a proper outgoing by way of expenditure must be debited irrespective of whether there is receipt of income or not. That is the plain requirement of proper accounting and the interpretation of Section 57(iii) cannot be different. The deduction of the expenditure cannot, in the circumstances, be held to be conditional upon the making or earning of the income." It is noteworthy that the above observations were made in the context of Section 57(iii) of the Act where the language is somewhat narrower than the language employed in Section 37(1) of the Act. This fact is recognised in the judgment itself. The fact that the language employed in Section 37(1) of the Act is broader than Section 57(iii) of the Act makes the position stronger. 20. In the case of Sassoon J. David & Co. Pvt. Ltd. v. CIT, (1979) 118 ITR 261 (SC), the Supreme Court referred to the legislative history and noted that when the Income Tax Bill of 1961 was introduced, Section 37(1) required that the expenditure should have been incurred "wholly, necessarily and exclus....
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....e, particularly on the grounds which have been given by the TPO is not contemplated or authorised." 17. So, applying the law laid down by the Hon'ble Delhi High Court in CIT vs. EKL Appliances Ltd. (supra) and the fact that the Revenue has been applying TNMM approach on year to year basis in case of the taxpayer but, during the year under assessment, the TPO has abruptly applied the CUP method without assigning any reason, and the TPO has decided the issue by sitting on the armchair of the businessman/taxpayer by applying the benefit test which is not permissible, and the fact that payment of royalty and product development fee are intrinsically interlinked with the productions and sales and can only be decided under TNMM, this issue is required to be set aside to the TPO to decide afresh after providing an opportunity of being heard to the taxpayer. So Grounds No.2 & 6 are allowed for statistical purposes. GROUNDS NO.3 & 4 18. The taxpayer has also challenged the inclusion of Munjal Showa Ltd. and exclusion of Bosch Chasis Systems India Ltd. as comparable for benchmarking the international transactions. We would examine the suitability of Munjal Showa....
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....law laid down by Hon'ble Delhi High Court in Mckinsey Knowledge Centre case that a comparable cannot be rejected merely on the ground of having different financial year in case annual result can be reasonably extrapolated. Moreover, the ld. TPO was empowered enough to call for the complete data u/s 133 of the Act to reach at the logical conclusion. So, in these circumstances, we remand this issue to the TPO directing him to decide afresh to determine the suitability of Bosch Chasis Systems India Ltd. as a comparable after providing an opportunity of being heard to the taxpayer. Grounds No.3 & 4 are allowed for statistical purposes. GROUND NO.5 24. TPO/DRP/AO have denied the capacity utilization adjustment claimed by the taxpayer in its transfer pricing study. The taxpayer claimed transfer pricing adjustment on the grounds inter alia that the taxpayer is operating at different level of capacity i.e. unabsorbed fixed costs to sales as compared to vis-à-vis comparable companies; that the taxpayer commenced its commercial production in October 2008 whereas comparable companies have been in business of manufacturing of auto components from 17 years t....