AI Drafter 
TaxTMI 
TaxTMI 
2023 (5) TMI 109
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....pellant pertaining to Payment of royalty for receipt of technical know-how, Payment of engineering and manufacturing drawing fees, Payment of brand license fees and Reimbursement of expenses, do not comply with the arm's length principle as envisaged under Chapter X of the Income-tax Act, 1961 (the 'Act'). Ground 2: 2. On the facts and circumstances of the case, the Ld. AO, under the directions of the Hon'ble DRP, erred in confirming the action of the Learned Transfer Pricing Officer ('Ld. TPO') of making an addition to the Appellant's total income with respect to the international transaction of payment of royalty for receipt of technical know-how amounting to Rs. 1,82,63,136. In doing so, the Hon'ble DRP/ Ld. AO/ Ld. TPO have erred in: 2.1. Rejecting the benchmarking analysis conducted by the assessee using Comparable Uncontrolled Price ('CUP') to demonstrate the arm's length nature of the transaction of payment of technology royalty; 2.2. Not taking cognizance of the corroborative benchmarking analysis conducted by the assessee using the Transactional Net Margin Method ('TNMM') to demonstrate....
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....P have erred in: 4.1. Rejecting the benchmarking analysis conducted by the assessee using CUP to demonstrate the arm's length nature of the transaction of payment of brand license fees; 4.2. Not taking cognizance of the corroborative analysis using TNM method and contending that the assessee has incurred significant advertisement and marketing expenses despite the fact that the AMP incurred by the assessee is a meagre 0.06% of its total sales; 4.3. Failing to acknowledge the business efficacy of the said transaction and the benefits received by the assessee from the payment of brand license fees; and 4.4. In relying upon Ld. TPO's erroneous report on facts of the case for subsequent AY and erroneously concluding that facts of the case in the year under consideration (i.e.; AY 2012- 13) and subsequent AY 2013-14 are different. Ground 5: 5. On the facts and circumstances of the case, the Ld. AO, under the directions of the Hon'ble DRP, erred in confirming the action of the Ld. TPO of making an addition to the Appellant's total income with respect to the international transaction of reimbursement of expenses amounti....
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....d project engineering & manufacturing drawing (Rs. 112,716,302), payment for Interest on delayed payments (Rs. 32,359) - In this regard the assessee filed an appeal with ITAT, Order received on November 27, 2012 and the entire adjustment (except of Rs. 32,359 for interest on delayed payments) is deleted by Tribunal 2008-09 Import of spares and equipment / Sales of equipments/Components Entity level profitability (Rs. 6,72,06,437), Royalty (Rs. 4,29,03,966)- In this regard the assessee has filed appeal with ITAT. 2009-10 Purchases from AEs-Rs.95,58,200/- Sales of goods to AES- Rs.2,52,73,978/- Royalty- Rs.3,34,06,807/- Engineering & Manufacturing Drawing- Rs.2,59,52,119/- 2010-11 Royalty -Rs. 2,42,62,257/-, Engineering & Manufacturing Drawing-Rs. 63,82,293/- 2011-12 Royalty & Engineering & Manufacturing Drawing- Rs.4,86,33,139, Reimbursement of expenses- Rs.19,35,468/-, Payment of brand license fees 2012-13 Under Consideration 5. The details of international transactions entered into by the assessee during the year are follows. Sr. No Nature of transaction Amount Method 1 Purchase of raw materials (paid) 15,17,57,063 TNM....
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....ruction Ltd 10.03% 4 UB Engineering Ltd 10.71% 5 Gillianders Arbuthnot & Company Ltd Project segment 9.55% Arithmetic Mean 8.31% 4. Similarly the PLI was worked out based on the five comparables selected and margin of 7.21 referred at para 6.3 of the TPO order. 6.3 The assessee has submitted that the 5 comparables selected by it have earned a margin (op/sales) of 8.31% while the assessee has earned a margin of 7.21% the working of which is as under: Particulars Total (Rs. in millons) Sales 16589.00 OI 16589.00 Total Operating Cost (OC) 15392.99 Operating profit (OP) 1196.01 OP/OI 7.21% Further the TPO has called for the segment wise information and operating margin referred at 6.5 to 6.8 as under: 6.5 Further, in the TP report, the assessee has corroborated the arm's length nature of its international transactions by way of internal comparability analysis. Considering that the basic functional profile of AE Segment and Non AE Segment is same, they are considered to be comparable segments (page number 21 of TPSR). Financial statements of the company are bifurcated in two segmen....
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.... Further TPO observed that from the above it is evident that the assessee had been making payments through different mechanisms like royalty, fee for project engineering and manufacturing drawings in spite of the fact that it had already made a lump sum payment at the time of entering into the agreement. 7.5 In view of the above, and in line with the elaborate reasons discussed in the TPO order of AY.2008-09 and 2009-10 & 2010-11 as also A.Y 2011-12, the arm's length price of royalty of Rs.1,82,63,136/-, brand license of 5,65,11,397/- and also of project Engineering and Manufacturing drawings of Rs.43,54,921/- is treated as NIL respectively and the total amount of Rs.7,91,29,454/- is treated as a transfer pricing adjustment. 6. In respect of provision of engineering services, availing of inspection services, availing of insurance services, SAP license and email services. The TPO has considered the factual aspects and made the adjustments observed at Para 12.2 to 12.3 as under: 12.2 Based on the above and considering the group policy in place with respect to email transport services, the said payment is said to meet with the arm's length price. 12.3....
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.... & manufacturing drawing 7,91,29,454 Reimbursement of expenses 55,44,298 Total 8,46,73,752 8. Finally the TPO has passed the order u/s 92CA(3) of the Act dated 13.01.2016. Subsequently draft assessment order was passed with transfer pricing adjustment of Rs.8,46,73,752/- along with disallowance u/s 14A r.w.r 8D(2) and assessed the total income of Rs. 166,59,59,320/- and passed the order u/s 143(3) r.w.s 144C(1) of the Act dated 23.03.2016. 9. Aggrieved by the draft assessment order, the Assessee has filed objections with Form 35 with the DRP, whereas the DRP has considered the facts submissions and objections raised by the assessee and considering the information and submissions has issued directions u/s 144C(5) of the Act dated 23.12.2016. Subsequently the final assessment order was passed with assessed income of Rs. 166,59,59,320/- u/s 143(3) r.w.s 144C(13) dated 19.01.2017. Aggrieved by the final assessment order, the assessee has filed an appeal before the Hon'ble Tribunal. 10.. At the time of hearing, the Ld. AR has made submissions on the grounds of appeal. whereas the grounds of appeal Nos. 1 to 4 are connected and specifically ground no 2&3 are inter....
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....n respect of ALP of engineering and manufacturing drawing fees and trade mark licence report at page 155. Further for A.Y 2013-14 there is no such addition was made and refer to page 325 of the paper book. The Ld. AR demonstrated decision of the Hon'ble Tribunal in the assessee's own case for the A.Y 2008-09. Further Hon'ble High Court of Bombay in assessee's own case for A.Y 2007-08, [2016] 70 taxmann.com 329 has held as under 1. This Appeal under Section 260-A of the Income Tax Act, 1961 (the Act) challenges the order dated 27th November, 2011 passed by the Income Tax Appellate Tribunal (the Tribunal) for the Assessment Year 2007-08. 2. Mr. Kotangale, learned Counsel appearing for the Revenue urges the following re-framed questions of law for our consideration: "(a) Whether on the facts and the circumstance of the case and law, the Tribunal was justified in law in restricting the Transfer Pricing (TP) adjustment only to the transaction between the Associated Enterprises (AEs)? (b) Whether on the facts and circumstances of the case and in law, the Tribunal was justified in 8/21/2020 allowing the payment of royalty, project engineering and manufa....
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....e of tax requiring adjustment in the valuation in respect of transactions entered into with independent third parties. The adjustment as proposed by the Revenue if allowed would result in increasing the profit in respect of transactions entered into with non-AE. This adjustment is beyond the scope and ambit of Chapter X of the Act. 4. A similar view has been taken by this Court in Income Tax Appeal No. 1814 of 2013 (CIT v. Tara Jewels Exports (P) Ltd. [2016] 381 ITR 404 (Bom.) as well as by the Delhi High Court in CIT v. Keilin Panalfa Ltd. [IT Appeal No. 11 of 2015, decided on 9th September, 2015]. 5. In the above view, as the provisions of the Act in respect of transfer pricing are self evident, Question No.(a) as proposed does not give rise to any substantial question of law. Thus, not entertained. 6. Appeal admitted on Question Nos. (b) and (c). 7. Registry is directed to communicate copy of this order to the Tribunal. This would enable the Tribunal to keep papers and proceedings relating to the present appeal available, to be produced when sought for by the Court. 12. The Ld. AR also relied on the judicial decisions as under: 1. Thyssekru....
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....and treated ALP as Nil. We find the issues in the present appeal are identical to earlier year decided by the Hon'ble Tribunal in the assessee's case for the A.Y 2009-10 in ITA No. 2084/Mum/2014 dated 7-9-2020 observed at Page 4 Para 7 read as under: 7. In ground No.2 of the appeal, Revenue has assailed the findings of DRP in deleting the transfer pricing adjustment of Rs.5,93,58,926/- on account of payment of royalty, project engineering and manufacturing drawings. We find that the DRP has deleted the addition by placing reliance on the order of the Tribunal in assessee's own case for assessment year 2008-09. The Co-ordinate Bench of the Tribunal deleted the addition in respect of payment of royalty in the assessment year 2008-09. The relevant extract of the findings of the Tribunal on this issue are as under:- "14.1 The next issue is against the adjustment of Rs. 4,29,03,966 pertaining to payment of royalty. The facts concerning this issue as recorded in the order of the TPO are that the assessee obtained know-how and project engineering drawings from its Associated Enterprise vide collaboration agreement dated 23.07.1996. As per this agreement, the assessee ava....
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....yalty and technical fee to its AE. It is relevant to note that such payment has been approved or deemed to have been approved by the RBI. When a payment is made after obtaining due approval from the RBI, how its ALP can be computed at Rs. Nil, is anybody's guess. The fact of approval of the payment by the RBI has been succinctly recorded by the TPO in his order as well. He still chose to propose adjustment in respect of full payment. In our considered opinion, when the rate of royalty payment and fee for drawings etc. has been approved or deemed to have been approved by the RBI, then such payment has to be considered at ALP. We, therefore, direct to delete addition of Rs. 4.29 crore made by the A.O. in this regard." No material has been placed on record by the Revenue to show that the facts in assessment year under appeal are distinguishable or to controvert the decision of the Tribunal. We see no infirmity in the directions of DRP in deleting the addition. The ground No.2 of the appeal is without any merit, hence, the same is dismissed. 8. In the result, appeal of the Revenue is dismissed. We considering the facts, circumstances and the ratio of the judici....