TaxTMI 
TaxTMI 
2020 (11) TMI 476
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.... Indian company which is engaged in the business 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 intern....
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....by the assessee to its associated enterprise for use of intangible. He has held that the combined approach of benchmarking does not and cannot evaluate this aspect and therefore such evaluation is proved to be inadequate 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 transact....
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....espectively (as referred to in clause 8A to Appendix B of Form No. 3CEB), from unrelated suppliers in the countries in which the associated enterprises are incorporated and the aforementioned associated enterprises have not sold the same raw materials / components / 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 ....
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....or the assessee further pointed out by the CIT(A) in paragraph no. 7 / sub-paragraph no. 1 contained in page no. 34 of his order, 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 because the 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 submi....
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....export of components and spares of IC engines, (c) receipt of services such as access to customised part catalogue, international site licence etc., (d) receipt of IT support service, (e) payment of training fees, (f) rendering of service (warranty claims lodged with associated enterprises) and (g) provision of technical services. 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 t....
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....ction. No adjustment was directed by the TPO. AY 2008-09 to AY 2010-11 Method applied by the assessee: TNMM No adjustment was directed by the TPO. Method applied by the assessee: TNMM No adjustment was directed by the TPO. No transaction 4.8. That the Hon'ble Tribunal vide order dated 15/12/2017 for the assessment year 2011-12 (bearing ITA No. 278/Kol/2016 and ITA No. 322/Kol/2016) and AY 2012-13 (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 ....
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....terials/components and adopting TNMM on an entity level for determining arm's length price of the said transaction. Facts 6.1. The assessee has imported raw materials from four associated enterprises incorporated in Spain, Brazil, Hungary and Germany respectively (as referred to in clause 8A to Appendix B of Form No. 3CEB) during the relevant financial year for a sum of INR 96,05,434/-. It is the contention of the assessee that that the aforesaid international transaction involving purchase of raw materials & 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....
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....sis as provided in the Indian Transfer Pricing Regulation and various decisions of the Hon'ble Tribunals of our country in this regard. The CIT(A) has therefore rejected the CUP Method and accepted the entity level TNMM undertaken by the appellant in respect of this international transaction on aggregate basis. The CIT(A) has directed the Assessing Officer (AO) to delete the arm's length price adjustment of Rs. 5,98,693/-. 6.4. We have considered rival submissions on this issue. The provision of clause (d) of sub-rule (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....
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....to non-USA countries. The price on which a particular product is available in one country may largely vary from the price prevailing in other countries due to host of factors. The country which is producer of a particular commodity or its raw material may have lower sale price in comparison with thecountry which is short of such natural resources. Similarly, the price may vary fromone country to another depending upon climatic conditions and the demand andsupply factors. Thus the price charged by an Indian party from UK or Australia 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 import....
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....nder CUP method is to ensure that the price charged by the Indian Enterprise from its AE should be consistent with that charged from unrelated parties under similar circumstances. The importance of the "similar circumstances" cannot be lost sight of in this context because a round cannot be compared with a square and a rectangle with a triangle. In other words, the uncontrolled transactions which are contemplated for comparison should be alike, if not identical. Similarity between the two sets of transactions can be judged by the quality, grade and quantity of the 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 reporte....
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....applying the CUP Method on transaction-by-transaction basis. 8. Hence, we uphold the order of the ld. CIT(A) on this issue and dismiss Ground No. II of the revenue. Ground No. III 8. Ground no. III is directed against the action of the CIT(A), while computing the figure for value addition for royalty computation, in considering only the cost of standard materials without appreciating the fact that cost of non-standard materials should also be considered for the purpose of analysis as raw material means both standard and non-standard materials. Facts 8.1. The assessee has entered 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 dutie....
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....¢ Aluminium foil - This is used in winding the coil specially made as per the specifications given by EPCOS AG. • Metallised film - Metallisation is done in-house and the film is received as per the specifications defined by EPCOS AG. Only capacitor film grade (High Temperature / Low Temperature) BOPP film is used for capacitor manufacturing and this grade of BOPP films is used for capacitor manufacturing and this grade of BOPP films is not manufactured by packing grade BOPP film manufacturers. The metallization activity is done in-house by the assessee and as such, adds value to the produce. • Masking tape - This is used to facilitate spraying of Zinc/Tin/Copper solution on the end points of the would element on a fully automated spraying machine. The masking tape is tailor-made as per EPCOS AG's specification 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 fil....
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....e TPO, has submitted detailed list of 13 standard items and 6 non-standard items of materials used for the manufacture of DC capacitors. Th CIT(A) further observes that the TPO in his order has accepted that aluminium foil, metallised films, masking tape, tin copper wire, plastic can and terminal wire are non-standard items which are specifically designed to satisfy the requirement of the assessee. Accordingly, he has computed the royalty that would be allowed as deduction under the provision of Income-tax Act, 1961, for the previous year relevant to the assessment year 2005-06: Table No. 6 - Computation of royalty and ALP adjustment by the CIT(A) Particulars Amount (INR) FOB value of sales 318310190 Less: Cost of standard items 34846089 Net Sales 283464101 Royalty: 3% of INR 283464101/- 8503923 Less: Royalty paid by assessee to EPCOS AG 9370670 Arm's length price adjustment directed by CIT(A) 866747 8.7. We 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-....
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....alty payment on technical knowhow is not at arm'slength." ii) the Hon'ble Kolkata Tribunal in the matter of NLC Nalco India Ltd vs. DCIT reported in [2016] 71 taxmann.com 57 (Kolkata - Trib.), held that: "In the instant case also, we find in page no. 53 of the assessee's paper book that assessee made application dated 14th March, 2001 to the General Manager, Exchange Control Department, Reserve Bank of India. In the aforesaid application, assessee explained the scope of services receivable from Nalco Pacific under the aforesaid agreement, the benefits to be received by it from entering into the aforesaid agreement with Nalco Pacific and the maximum amounts to be remitted as consultancy charge to Nalco Pacific under the aforesaid agreement. In reply, theRBI intimated their "in-principle" approval for remittance of consultancy charge toNalco Pacific @ 2% of net sales for the calendar year 2001. In view of this, we areof the view that the aforesaid payment (Rs. 1,51,74,980/-) 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 i....
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....yalty rate was obtained the payment was considered to be held at arm's-length. It is also noted that various Tribunals such as Air Liquide Engg. India (P.) Ltd. (supra), Dy. CIT v. Sona Okegawa Precision Forgins Ltd. [2012] 17 taxmann.com 98/49 SOT 520 (Delhi), Hero Motocorp Ltd. v. Addl. CIT (IT Appeal No. 5130/Del/2010), ThyssenKrup Industries India Ltd v. Addl. CIT [2013] 33 taxmann.com 107 (Mum. - Trib.), Abhishek Auto Industries Ltd. v. Dy. CIT [2011] 9 taxmann.com 27 (Delhi) have taken a view that RBI approval of the Royalty rates itself implies that the payments are at Arm's Length and hence no further adjustment needs to be made viewed from this angle too." v) the Hon'ble Pune Tribunal in the matter of Kinetic Honda Motor Limited vs. JCIT reported in 77 ITD 393 (Pune) held that when one wing of the Government approves a transaction, another wing of the Government should not treat the payment as excessive. 9. In the light of the above decisions, the royalty for a sum of INR 93,70,670/- paid by the assessee to EPCOS AG as per the TALA (including the method of computation of royalty contained in 'Article 3 - Consideration' of the aforesaid agreement) which ....
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....ound no. IV is directed against the action of the CIT(A) in stating that the financial indicator for the indenting activity segment of the assessee has nothing to do with the sales revenue generated by associated enterprise in the Indian market without appreciating that the indenting activity is performed for promoting sales of AE in the Indian market. Facts 14.1. EPCOS AG has entered into 'Marketing and Service Agreement' with the assessee (kindly refer to page no. 292 of the paperbook) under which the assessee agrees to use its best effort to promote, solicit and mediate sale of specified products of EPCOS AG in India. The customers, however, import products directly from EPCOS AG. Thus, EPCOS AG has appointed the assessee as its indenting agent in India. In return for provision of indenting services, EPCOS AG paid indenting commission for a sum of INR 2,95,50,194/- to the respondent. Findings of the ld. TPO 14.2. The TPO noted that during the year under consideration, the assessee has received an amount of INR 2,95,50,1944/- for rendering indenting services to EPCOS AG. The assessee acts as an indenting agent for EPCOS AG products in India. The business is conducted ....
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....indenting commission, it is the observation of the CIT(A) that the TPO failed to appreciate that the profit earned by the assessee (INR 24,94,835/) represents return from the indenting activity performed by the assessee that enables the assessee to earn commission of INR 2,95,50,194/-. Thus, the financial indicator under this segment of activity would be 8.44% (i.e. Rs. 24,94,835 / Rs. 2,95,50,194). He held that the TPO failed to further appreciate that the aforesaid profit (Rs. 24,94,835/-) earned by the assessee has nothing to do with the sales revenue (Rs. 50,64,18,000/-) received by the associated enterprise from sale of its manufactured goods in India. Thus, the computation made by the TPO of the financial indicator for the indenting activity segment of the assessee with reference to the sales revenue generated by associated enterprise in Indian market at 0.492% has been erroneous. The CIT(A) has noted that the financial indicator of the indenting segment would be 8.44% (=24,94,835/2,95,50,194) which is higher than the financial indicator of the domestic sales segment (5.996%). In view of this, he has accepted the arm's length nature of the international transaction under cons....
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....adjusted to take into account the differences, if any, between the international transaction [or the specified domestic 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 clause (iii); (v) the net profit margin thus established is then taken into account to arrive at an arm's length price in relation to the international transaction [or the specified domestic transaction]; 14.8. Now we consider the case-law on this issue:- i) The Hon'ble Delhi Tribunal in the matter of DCIT vs. Agilent Technologies India (P.) Ltd reported in [2016] 67 taxmann.com 95 (Delhi - Trib.), held that: "A cursory glance at sub-clause (i) of Rule 10B(1)(e) transpires that the net operating profit margin realized by the enterprise from an international transaction is computed in relation to costs incurred or sales effected or assetsemployed or to be employed by....