AI OCR 
TaxTMI 
TaxTMI 
TaxTMI 
2022 (10) TMI 26
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....r Generating sets and Allied Equipments; and Providing Consulting Services in respect of Power Generation and utilization. The assessee filed return with total income of Rs.383.80 crore, declaring certain international transactions. The AO made a reference to the Transfer Pricing Officer (TPO) for determining the Arm's Length Price (ALP) of the international transactions. In the instant appeal, we are concerned only with the international transaction of `Payment of Royalty for use of technology' for which a sum of Rs.62,76,42,650/- was paid by the assessee to Cummins Inc., its foreign based Associated Enterprise (AE). The assessee benchmarked this transaction along with certain other international transactions under the overall "Manufacturing Segment". For doing so, it applied the Transactional Net Margin Method (TNMM) and demonstrated that all such transactions, including the royalty payment, were at ALP. The TPO came to the conclusion that the aggregation approach adopted by the assessee for determining the ALP of Royalty payment under the overall Manufacturing segment was not proper. He further observed that the assessee entered into Royalty Agreement on 16-09-2010, under which ....
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....2.75% (arm's length rate of royalty on gross value of exports). The assessee remained unsuccessful before the DRP, which has brought it before the Tribunal. 4. We have heard the rival submissions and perused the relevant material on record. The issue under consideration has two layers, viz., the justification of the TPO in segregating the international transaction of payment of Royalty from the other international transactions gathered by the assessee under the overall 'Manufacturing segment'; and segregation of royalty on domestic and export sales. 5. The first layer is the justiciability of segregation of Royalty payment by the TPO from the overall 'Manufacturing segment'. There is no gainsaying on the application of the TNMM as the most appropriate method by the assessee as well as the TPO. The assessee clubbed the international transaction of `Payment of royalty for use of technology' along with certain other transactions under the 'Manufacturing segment' and applied the TNMM. The TPO, however, separated Royalty for benchmarking it de hors the other transactions under the TNMM. The moot question is whether the aggregation approach adopted by the assessee in the present facts ....
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....tions is impermissible. It is overt from section 92(1) of the Act that if an international transaction is recorded showing a lower income than its ALP income, then the higher ALP income is considered for the purpose of computing total income. Section 92(3) of the Act manifests that the provisions of this section shall not apply in a case where the computation of income having regard to ALP has the effect of reducing income chargeable to tax. The net effect of section 92(3) is that if the transacted-value income from an international transaction is more than its arm's length income, then, the arm's length income should be discarded and the actual income should be considered. To sum up, it is the higher of actual income or the arm's length income from an international transaction, which is taken into consideration for computing the total income. It, thus, divulges that the actual more income from one international transaction (vis-a-vis its lower arm's length income) cannot be combined with the more arm's length income from another transaction (vis-à-vis its lower actual income), so as to set off the excess income (actual transacted income minus arm's length income) from the f....
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....ning the contention, the Hon'ble High Court held that: `Merely because the purchase of each item and the acceptance of each service is a component leading to the manufacture/production of the final product sold or service provided by the assessee, it does not follow that they are not independent transactions for the sale of goods or provision of services. The end product requires several inputs. The inputs may be acquired as part of a single composite transaction or by way of several independent transactions. In the latter case, the sale of certain goods and/or the provision of certain services from out of the total goods purchased or services availed of by an assessee together can form part of a separate independent international transaction. In such an event, the AO/TPO must value this group of sale or purchase of goods and/or provision of services as separate transactions.' 9. Adverting to the facts of the extant case, it is seen that the transaction of payment of Royalty for use of technical support provided by the AE and other international transactions under the Manufacturing segment are not under any package deal nor is there any such understanding or any inextricable link ....
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.... the TNMM only. 11. We note that the facts of the instant case are similar to those of Magneti Marelli (supra) in as much as the assessee therein also paid royalty to its AE for use of Technical support for the manufacture of its products, and the Hon'ble High Court did not approve clubbing of payment of technical fees with other transactions under the Manufacturing segment. In view of the foregoing discussion, it is held that the international transaction of payment of Royalty by the assessee for use of technical support cannot be clubbed with other international transactions under the Manufacturing segment. 12. The ld. AR heavily relied on the order passed by the Tribunal in the assessee's own case for the A.Y. 2006-07 and some of the later years in which the contention of the assessee for aggregation of payment of Royalty with other international transactions under the 'Manufacturing segment' came to be accepted. We have gone through the lead order passed for the A.Y. 2006-07 in which the Tribunal has accepted the assessee's contention of aggregation by observing "where the primary activity of the assessee was to manufacture and sell IC engines and components both for domestic....
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....ideration, the TPO has specifically taken recourse to this judgment in para 8.6 of his order, in addition to certain other Tribunal orders laying down similar proposition as in Knorr- Bremse case. There is hardly any need to emphasize that the lower wisdom has to make a space for the higher wisdom to prevail. The Tribunal, being, a lower authority cannot continue to follow the decision taken by its predecessor Bench when the same issue has been decided otherwise by the Hon'ble High Courts. Under such circumstances, we are constrained to make a departure from the view taken by the Tribunal in the assessee's own case for the earlier years as the same is not in consonance with that of the Hon'ble High Courts. As such, the view taken by the TPO on this score is countenanced and it is held that the international transaction of payment of Royalty needs to be separately benchmarked de hors other international transactions under the 'Manufacturing segment'. 15. Now we espouse the second layer of the issue, which involves the question of segregation within the transaction of Royalty payment. It is seen that the assessee paid Royalty to Cummins Inc. for certain existing as well as new produ....
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....is specific issue is set-aside and the matter is restored to the file of the DRP for limited purpose of disposing of the assessee's objection no.3. Needless to say, the assessee will be allowed reasonable opportunity of hearing in such fresh proceedings. 16. Ground No.7 taken by the assessee is against the disallowance of expenses u/s.14A of the Act. The assessee earned long term capital gain and dividend income amounting to Rs.178.46 crore which was claimed as exempt u/s.10(34), 10(35) and 10(38) of the Act. The assessee offered disallowance at Rs.84.57 lakh. The AO, in draft order, after discussing the issue at length and recording proper satisfaction, rejected the assesee's suo motu offer of disallowance and applied Rule 8D(2)(iii) for working out the disallowance at 0.50% of the average value of investments, at Rs.1,85,50,000/- Since the assessee had already offered disallowance at Rs.84.57 lakh, he made further addition of Rs.1,00,93,000/-. No relief was allowed by the DRP, which led to the making of the addition in the final assessment order. 17. Having heard the rival submissions and perused the relevant material on record, it is observed that similar issue came up for con....
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.... and report of the DVO was not received till then, the AO made the addition of Rs.3,50,41,050/- as the long term capital gain subject to rectification order on the receipt of DVO's report, if warranted. The assessee took up the issue before the DRP. In the meantime, the report of the DVO was received. The assessee raised certain objections before the DRP in respect of the valuation made by the DVO. The DRP, without dealing with the assessee's objections, upheld the addition. 21. Having heard both the sides and scanned through the relevant material on record, it is seen that there is, in fact, a difference between the full value of consideration declared by the assessee and the stamp value of the land sold by the assessee. Section 50C, in such circumstances, contemplates that such difference should be brought to tax. However, an option has been given to assessee to seek the valuation of the property from the DVO. The assessee did exercise this option and the DVO determined the valuation of the land, leading to addition of Rs.3.50 crore. It is seen that the objections raised by the assessee before the DVO, though considered by the DVO, but remained to be adjudicated by the DRP. It g....