TaxTMI 
TaxTMI 
2020 (11) TMI 476
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....ss of manufacture and sale of electronic components in India and abroad. These electronic components are primarily used in electronics industry. The assessee entered into the following international transactions with its associated enterprises during the previous year relevant to the assessment year 2005-06. Table No. 1 - International Transactions Sl. No. Nature of International Transactions Amount Rs. 1. Purchase of Raw Materials & Components 96,05,434 2. Sale of Finished Goods 65,60,50,486 3. Payment of Royalty 93,70,670 4. Receipt of Indenting Commission 2,95,50,194 5. Payment for Information Technology Support 3,11,86,169 6. Payment for Marketing Support 2,48,53,793 7. Payment for Sales Margin 4,35,28,375 8. Payment of interest on External Commercial Borrowing 1,87,00,616 9. Miscellaneous Payments 3,31,626 10. Reimbursement of Expenses 74,56,923 The assessee applied the Transactional Net Margin Method (TNMM) at the entity level which was not accepted by the Transfer Pricing Officer (TPO) in relation to the following international transactions: (i) purchase of raw materials (INR 96,05,434), (ii) payment of royalty (INR 93,70,670) and (iii) re....
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....ate and improper. The TPO has further examined the international transaction involving receipt of indenting commission by the assessee from its associated enterprise and held that the said international transaction is not related to manufacturing activity of the assessee and hence, the said transaction should not be evaluated on the combined approach basis. Findings of the ld. CIT(A) 4.3. The CIT(A)'s decision has documented his decision in this regard is in paragraph no. 7 / sub-paragraph no. 1 contained in page no. 34 of his order. The CIT(A) has noted that the international transactions involving purchase of raw materials and components (INR 96,05,434/-) and payment of royalty (INR 93,70,670/-) are closely linked transactions as the aforesaid transactions emanate from a common source i.e. manufacture and supply of electronic components by the assessee. He held that the assessee is justified in determining the arm's length nature of these international transactions under the TNMM at the entity level on aggregate basis. Under the TNMM, the profit level indicator of the assessee for the relevant previous year stood at 5.33%, whereas the arithmetic mean of the profit level indicat....
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....ents / GIT as those sold by them to the assessee as aforesaid, to the unrelated customers in India. * It is stated in paragraph no. 10 that during the relevant financial year, the assessee has not obtained technical know-how / assistance in relation to manufacture of goods having been comparable to that obtained by the assessee from EPCOS AG, Germany (as referred to in Appendix D to clause 9 of Form No. 3CEB), from any unrelated party incorporated in Germany and hence, has not paid royalty to any unrelated party incorporated in Germany. * It is stated in paragraph no. 11 that during the relevant financial year, EPCOS AG has not rendered technical know-how / assistance in relation to manufacture of goods having been comparable to that rendered by EPCOS AG to the Company (as referred to in Appendix D to clause 9 of Form No. 3CEB), to any unrelated party in India and hence, has not received royalty from any unrelated party in India. * It is stated in paragraph no. 12 that during the relevant financial year, the assessee has not rendered indenting service having been comparable to that rendered by the assessee to EPCOS AG, Germany (as referred to in Appendix E-2 to clause 10 of F....
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.... aforesaid transactions emanate from a common source i.e. manufacture and supply of electronic components by the assessee. The raw materials and components are consumed by the assessee for the purpose of manufacture of its finished products. The assessee pays royalty to EPCOS AG for acquiring know-how to manufacture DC capacitors and AC/DC stacked film capacitors in India. 4.5. That the international transaction involving receipt of indenting commission (INR 2,95,50,194) by the assessee from EPCOS AG, Germany, it is noted that EPCOS AG manufactures electronic components at its own manufacturing facility in Germany and the assessee provides marketing service to EPCOS AG in relation to the said products in India, Bangladesh, Bhutan, Nepal and Sri Lanka and receives indenting commission in return for the marketing services rendered in the aforesaid countries. The assessee submits that the aforesaid arrangement expands the product range offered by the assessee to the unrelated customers in India, Bangladesh, Bhutan, Nepal and Sri Lanka. The assessee now markets not only its own manufactured products but also the products manufactured by EPCOS AG. This enables the assessee to attract m....
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....1.1 Decision of the Hon'ble Pune Tribunal in the matter of DCIT vs. Tetra Park India (P) Ltd reported in [2017] 86 taxmann.com 257 (Pune - Trib.), wherein the Hon'ble Tribunal accepted application of the TNMM at the entity level in relation to (a) import of raw materials, spares and components, processing/distribution equipment and filling machines, (b) import of filling machines, processing equipments, spare parts etc. for resale, (c) import of capital goods, (d) export of finished goods and processing equipment, (e) sale of fixed assets, (f) technical service, design service and services in the nature of education & training etc. received by Tetra Park India, (g) commission received, (h) reimbursement of expenses to associated enterprises and (10) reimbursement of expenses from associated enterprises. 4.7. The assessee's contention is that the TPO has accepted entity level TNMM in the assessee's own case for different assessments years as mentioned hereinbelow. Table No. 1 - Status for prior assessment years and succeeding assessment years Assessment Years Purchase of raw materials & components from AEs Receipt of indenting commission from AE Payment of royalty to associate....
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....2-13 (bearing ITA No. 506/Kol/2017) set aside the transfer pricing adjustments made by the TPO with the direction to re-adjudicate only on the issues on which the TPO had found the assessee's international transactions not to have been at arm's length. The re-adjudication was directed to be done based on 27 additional evidences filed by the assessee before the Hon'ble Tribunal (which were required for the adoption of the 'transaction-by-transaction' approach) with the prayer to adopt 'transaction-by-transaction' approach in place of the 'entity level benchmarking' approach' (i.e. aggregation approach) adopted in the Transfer Pricing Study Reports filed by the assessee with the TPO. In this connection, it may please be noted that the TPO ordered transfer pricing adjustments only on the following international transactions: Table No. 2 - Transfer pricing issues involved in appeal for AY 2011-12 & AY 2012-13 AY 2011-12 AY 2012-13 (a) Payment for intra-group services (IT support and other services) (b) Sales Margin (c) Sale of ferrite (a) Payment for intra-group services (IT support and other services) (b) Sales Margin (c) Sale of ferrite (d) Non-compete fee, Management fee a....
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....ials & components by the assessee from associated enterprises at arm's length under the TNMM. Findings of the ld. TPO 6.2. The ld. TPO noted that the assessee purchases identical type of raw materials & components from EPCOS Brazil and EPCOS Electronic Components S.A. Malaga, Spain (associated enterprises) as well as from unrelated suppliers and the prices charged by the aforesaid associated enterprises to the assessee, in some cases, are higher than the prices charged by unrelated suppliers to the assessee for identical type of raw materials & components. For the purpose of undertaking benchmarking analysis on transaction by-transaction basis, the TPO compares the prices charged by EPCOS Brazil to the assessee with the prices charged by Beer & Blumenauer (Germany) and Bharat Products (India) to the assessee for identical types of raw materials & components. The TPO further compares the price charged by EPCOS Electronic Components S.A. Malaga, Spain to the assessee with the prices charged by Steiner (Germany), Sung Moon (Korea), Sun Polymers (India), Vishay (India), Hafner Josef (Germany), Electro Crimp (India), Seolin (Korea), Ujjwish Udyog (India), Shiba Container (India), Modi....
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....le (2) of rule 10B of the Income -tax Rules, 1962, which provides that for the purposes of sub-rule (1) of rule 10B, the comparability of an international transaction with an uncontrolled transaction shall be judged with reference to the conditions prevailing in the markets in which the respective parties to the transactions operate, including the geographical location and size of the markets, the laws and Government orders in force, costs of labour and capital in the markets, overall economic development and level of competition and whether the markets are wholesale or retail. 6.5. We now consider the case law on this issue i) the Hon'ble Mumbai Tribunal in the matter of Gharda Chemicals Ltd. v. Dy. CIT reported in [2010] 35 SOT 406 which inter alia reads as under: "15. The Internal CUP method envisages comparing the uncontrolled transactions of the assessee itself with other unrelated parties so as to determine the ALP with the AE. However, the External CUP method disregards the price charged or paid by the assessee to or from its unrelated parties and contemplates the comparison of the price so charged from or paid to its AE with some external independent reliable price data....
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....lia maybe at much variance with that charged from USA. In such a scenario no validcomparison can be made between the price charged by the assessee from othercountries with that from USA......." ii) The Hon'ble Kolkata Tribunal (Jurisdictional Tribunal) in the matter of NLC Nalco (India) Ltd vs. DCIT reported in [2016] 71 taxmann.com 57 (Kolkata - Trib.), wherein it is held that: "38. In view of the above decision, we find that apart from differences in quality, grade and quantity of materials, the difference in such factors like the geographic allocation of the parties, availability of raw material, demand and supply equation also play an important role in the application of the CUP Method." iii) The Hon'ble High Court of Bombay in the matter of Principal Commissioner of Income-tax-5, Pune vs. Amphenol Interconnect India (P.) Ltd. reported in [2018] 91 taxmann.com 441 (Bombay). The Hon'ble Bombay High Court confirmed the order of the Hon'ble Tribunal and held that: "We note that the impugned order of the Tribunal has analyzed the differences between sales commission paid to its AEs for clients identified by them and the sales commission paid to third party agents in respect....
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....e material." vi) The Hon'ble Kolkata Tribunal (Jurisdictional Tribunal) in the matter of NLC Nalco (India) Ltd vs. DCIT (supra) reported in [2016] 71 taxmann.com 57 (Kolkata - Trib.), wherein it is held that: "38. In view of the above decision, we find that apart from differences in quality, grade and quantity of materials, the difference in such factors like the geographical location of the parties, availability of raw material, demand and supply equation also play an important role in the application of the CUP Method." vii) The Hon'ble Pune Tribunal in the matter of Atlas Copco (India) Ltd vs. ACIT reported in [2019] 112 taxmann.com 120 (Pune - Trib.), wherein it is held that: "Adverting to the facts of the instant case, we find that though description of items sold by the assessee to its AE and non-AEs is similar, but there are several differences in the two, such as, location of the parties, quantities lifted and customization of products. Such differences have significant bearing on the price charged by the assessee. No adjustment has been allowed by the TPO on account of such differences. In the same manner, the ld. DR also could point out any mechanism for giving ad....
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....ed into 'Technical Assistance and Licence Agreement' (TALA) with EPCOS AG for obtaining technical know-how (technical knowledge and experience, technical documentation, assistance and training) in relation to manufacture of DC capacitors and AC/DC stacked film capacitors in India. The assessee has paid royalty to EPCOS AG at the rate of 3 percent of net sales price. As per the aforesaid agreement, the method of computation of royalty contained in TALA is as under: Table No. 3 - Method of royalty computation Invoiced selling price (A) xxx Less: Sales tax and customs duties (B) (xxx) Cost of insurance and transportation from the place of manufacture to the customer's premises or point of installation (C) (xxx) Cost of standard bought out components and the landed cost of imported components (including freight, insurance and customs duty) which are incorporated in final products (D) (xxx) Net Sales: (E)=(A)-(B)-(C)-(D) xxx Royalty payable by the assessee to EPCOS AG: 3% of (E) xxx During the relevant financial year, the assessee pays royalty to EPCOS AG for a sum of INR 93,70,670/-. 8.2. For the purpose of computation of royalty, the assessee has classified the....
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....pecification to suit automatic loading of the would elements. * Tin Copper Wire - Bi-metal wire made to Tin/Copper Alloy is used for spraying operation produced to EPCOS AG's specifications. * Plastic cans - Plastic cans are made out of injection moulds designed by EPCOS AG with appropriate polymer compound, dimensions to withstand filling of hot resin on a fully automated assembly line. * Terminal wire - Bi-metal wire made of copper and steel gets manufactured as per EPCOS AG's specification. 8.4. While computing the royalty, the assessee has deducted interalia the cost of standard items of raw materials / components from the net selling price as per the formula provided in the TALA. The cost of non-standard items which are manufactured by the suppliers as per the specifications received by the assessee from EPCOS AG and communicated to the suppliers, is not deducted from the net selling price. It is the contention of the assessee that as the royalty agreement is approved by the Secretariat for Industrial Approval (SIA) and the Reserve Bank of India (RBI) and the working of the calculation of royalty is regularly submitted to the RBI (through the authorised dealer) and ther....
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....e have considered rival submissions. 8.8. The assessee has classified the raw materials / components into two categories such as 'standard items' and 'non-standard items'. The raw materials / components categorized as 'non-standard' are the ones which the assessee specifically orders and gets them manufactured as per the specifications required by it. The non-standard items are aluminium foil, metalised film, masking tape, tin copper wire, plastic can and terminal wire. As explained, the assessee gets the aforesaid items manufactured by the suppliers as per the technical specification obtained by the assessee from EPCOS AG and thereafter communicated by the assessee to the suppliers. The raw materials / components categorized as standard items are the ones which are readily available in the market. The standard items are zinc wire, silicon oil, martinal, accelerator, silicon as mittel resin, resin, hardener, blue colour, white colour, pibiter, red link, black ink and other consumables. The assessee deducts the total value of standard items (INR 3,48,46,089/-) from invoiced selling price in order to arrive at net selling price to which the rate of 3% is applied in order to compute ....
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....980/-) made to Nalco Pacific @2% of net sales, having been the rate of consultancy charge approved by the RBI,are at arm's length price. Accordingly, we delete the addition and allow this issue of assessee's appeals." iii) the Hon'ble Mumbai Tribunal in the case of ThyssenKrupp Industries India Private Limited v Addl. Commissioner of Income-tax bearing ITA No. 6460/Mum/2012 reported in [2013] 33 taxmann.com 107 (Mumbai - Trib.), wherein the Hon'ble Tribunal has held that the automatic approval granted by RBI would be deemed to the approval granted by RBI. The relevant extract in the present context is as under: "14.3 After considering the rival submissions and perusing the relevant material on record, we find that the assessee entered into collaboration agreement with its AE for payment of 2% of contract value for manufacturing, drawing and engineering services and 5% of the selling price as royalty. The assessee applied to the RBI seeking approval in respect of payment of royalty and technical fee through Central Bank of India. A copy of letter addressed by the Central Bank of India to the RBI dated 26.03.2008 is available on page 240 of the paper book. Through this l....
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....ssessee to EPCOS AG as per the TALA (including the method of computation of royalty contained in 'Article 3 - Consideration' of the aforesaid agreement) which has been approved by the SIA and the RBI and in respect of which the working of the calculation of royalty is regularly submitted to the RBI (through the authorised dealer) and there have been no objections as regards, the calculation of royalty, is at arm's length as per the Indian transfer pricing law. 10. The ld. Counsel for the assessee further submits that the impugned international transaction is at arm's length under the TNMM undertaken by the assessee at the entity level. The ld. Counsel for the assessee relied on decision of the Hon'ble High Court of Karnataka in the matter of Kaypee Electronics & Associates (P.) Ltd vs. DCIT reported in [2018] 94 taxmann.com 251 (Karnataka), wherein it is held that in the event the royalty paid already forms part of the operating cost under the TNMM, there is no necessity of separately bench marking royalty. In the instant case, the operating cost of INR 1298689 Thousand computed by the assessee under the TNMM (kindly refer to paragraph no. 5.1.6 contained in the transfer pricing s....
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.... services to EPCOS AG. The assessee acts as an indenting agent for EPCOS AG products in India. The business is conducted as a direct business i.e. customers import directly from EPCOS AG. The marketing activities that the assessee undertakes for EPCOS AG products cannot be separated from its normal marketing activities. The sales division is involved in marketing in the local market for its own products as well as products of EPCOS AG. The assessee has earned a commission of approximately 6% on the aforesaid products of EPCOs AG during the year. 14.3. The assessee has received a commission of INR 2,95,50,194/- and for earning such commission, the cost incurred by the assessee is for INR 2,70,55,358/-. Thus, the net profit earned by the assessee for marketing the products of EPCOS AG in India stands at INR 24,94,835/- (=2,95,50,194 -2,70,55,358). Through the marketing services rendered by the assessee to EPCOS AG, EPCOS AG achieves sales for a sum of INR 50,64,18,000/-. Therefore, the profit out of the commission over sales of EPCOS AG works out to 0.492% (2494835/50,64,18,000 X 100). 14.4. As comparable uncontrolled transaction, the TPO has considered the profit attributable to m....
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.... (5.996%). In view of this, he has accepted the arm's length nature of the international transaction under consideration and directed the AO to delete the arm's length price adjustment of INR 2,78,73,247/-. 14.6. On consideration of arguments of both the sides, we find that the TPO has erroneously computed the financial indicator of the indenting segment of the assessee by way of dividing the profit of the assessee under this segment (INR 24,94,835/-) by the sales generated by the associated enterprise in India (INR 50,64,18,000/-). The sales generated by the associated enterprise in India (INR 50,64,18,000/-) does not pass through the books of account of the assessee in India. It has been mentioned in the TPO's order that the assessee acts as an indenting agent for EPCOS AG products in India and the customers import products directly from EPCOS AG. The sales generated by the associated enterprise in India is accounted for in the books of the associated enterprise in its country of residence. As mentioned in the TPO's order, the assessee earns profit of INR 24,94,835/- which is computed by way of deducting cost incurred by the assessee (INR 2,70,55,358/-) from the indenting commis....
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....sales effected or assetsemployed or to be employed by the enterprise or having regard to any other relevant base...." ii) The Hon'ble Delhi Tribunal in the matter of DCIT vs. Haworth (India) (P.) Ltd reported in [2013] 33 taxmann.com 111 (Pune - Trib.) held as under: "12. On the analysis of the agreement between the assessee and Associated Enterprises for the period from April, 2003 to December, 2003, the Transfer Pricing Officer observed that on the orders procured by Haworth India, a commission at85% of the difference between the price paid by Indian customers and price at which the products are procured by Haworth Singapore from its suppliers is payable to Haworth India. Further, on the orders procured by agents of Haworth Singapore, commission at 15% of the price at which the products are procured by Haworth Singapore from its suppliers is payable to Haworth India. Regarding period from January, 2004 to March, 2004, commission at 98.5% of the price paid by the Indian customer less the price at which the products are procured by Haworth Singapore from its suppliers is payable to Haworth India. Based on this, the Transfer Pricing Officer calculated the sales of Singapore ent....