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2023 (5) TMI 309
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....nel ('DRP') have erred in disregarding the transfer pricing ('TP') analysis conducted by the Appellant and making an addition of INR 7,93,23,969 with respect to international transaction of payment of royalty for the manufacturing activity. Prayer: The Appellant prays that the TP analysis with respect to the royalty transaction, conducted by the Appellant be accepted and consequently the addition of INR 7,93,23,969 made by Ld. AO and Hon'ble DRP be deleted. 1(a). The Ld. AO and Hon'ble DRP have erred in rejecting the aggregation approach adopted by the Appellant while benchmarking the payment made for royalty which is inextricably linked with the manufacturing activity. Prayer: The Appellant prays that approach for aggregating the transactions adopted by the Appellant be accepted. 1(b). The Ld. AO and Hon'ble DRP have erred in rejecting the Appellant's submission that royalty paid on exports to AEs have been recovered from the AEs on a cost-plus basis. Prayer: The Appellant prays that the Ld. AO and Hon'ble DRP be directed to accept the contention of the Appellant that it has recovered the cost of royalty i....
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....d in the case of the assessee for the A.Y. 2012-13, the AO held that the aggregation of the 'Manufacturing activity' with the 'Trading activity' was not acceptable. He, therefore, segregated the 'Manufacturing segment' and took up the same for consideration. More specifically, the TPO focussed only on Royalty payment of Rs.25,93,47,186/- paid by the assessee to its Associated Enterprise (AE) for technical knowhow. He segregated this transaction from the 'Manufacturing segment'. The ALP of the royalty-payment transaction was separately determined under 'Other method' as prescribed under Rule 10AB by adopting 3 comparables giving average profit rate on net sales at 4.56%. The TPO also computed the assessee's Royalty payment as a percentage of sales at 9.13%. Applying the Arm's length rate of 4.56%, he computed the transfer pricing adjustment amounting to Rs.12,98,02,785/-. The assessee remained unsuccessful before the Dispute Resolution Panel (DRP), which led the AO to pass the final assessment order with the equal amount of transfer pricing adjustment. Aggrieved thereby, the assessee has come up in appeal before the Tribunal. 4. We have heard the rival submissions and gone ....
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....e unrelated international transaction for determining their ALP in a unified manner when they are diverse in nature. 6. It is simple and plain that cross subsidization of international transactions 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 ....
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....w-how 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 between these transactions as one not surviving without the other, as has been spelt out in the case of Knorr- Bremse (supra). The assessee paid royalty for the use of technology as a separate independent transaction. Merely because payment of royalty for use of technical know-how leads to manufacture of final product, it does not follow that they both are dependent or closely-linked transactions. In such circumstances, the ALP of the international transaction of Payment of Royalty for use of technology cannot be aggregated with others. 9. The assessee in Magneti Marelli Powertrain India Pvt. Ltd. vs. DCIT (2016) 389 ITR 469 (Delhi), similar to the present case, entered into agreement with its A.E. for acquiring technology required for the purpose of manufacturing. It applied the TNMM to benchmark its international transactions of import of raw materials, sub-assemblies and components, payment of technical assistance fees, payment of royalty, payment of software and purchase of fixed assets....
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.... was difference in the nature of business in terms of Royalty Agreements and also territory of Royalty Agreement entered into by the assessee vis-a-vis comparables taken note of by the TPO. Relying on the mandate of Rule 10AB, the TPO rejected the assessee's contention by observing that the rule provides for considering "the same or similar uncontrolled transactions". Since the comparables chosen by him were similar to that of the assessee, the TPO repelled the assessee's contention. No further reprieve was provided by the DRP, which resulted in making the transfer pricing adjustment in the final assessment order. 13. At the outset, the ld. AR did not raise any serious objection to the applicability of the `Other method' as the most appropriate method for the processing of the royalty transaction. His objection was confined to the selection of comparables. In order to appreciate the rival contentions, it would be befitting to take note of the prescription of Rule 10AB containing the mechanism for determining the ALP under "other method", as under : "R. 10AB. Other method of determination of Arm's length price.-For the purposes of clause (f) of sub-section (1) of s....
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....ely different field vis-à-vis the assessee, which got the license from its AE for manufacturing Four-stroke diesel engines for marine and land-based power generation and for marine propulsion. The TPO has emphasized on the expression "similar" uncontrolled transaction used in Rule 10AB for considering these three companies as comparable despite the fact that the licensed products by them were quite different from that of the assessee. At this stage, we want to emphasize that Rule 10AB talks of considering the price paid or that would have been paid "for the same or similar uncontrolled transaction". The words "the same" appear in the language of the rule prior to the word "similar" joined by the words "uncontrolled transaction". It thus indicates that similar uncontrolled transactions are to be considered only if same uncontrolled transactions are not available. In other words, the preference in Rule 10AB has to be given to "same" uncontrolled transactions over "similar" uncontrolled transactions. As against the comparable uncontrolled transactions considered by the TPO, recognized as similar, the assessee brought on record "same" uncontrolled transactions, namely, the licen....
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....yment of Royalty is at ALP. The addition of Rs.12.98 crore and odd is, therefore, directed to be deleted. 15. The second dispute in this appeal is in respect of the transfer pricing adjustment in the segment of "Design Engineering Services". The facts anent to this issue are that the assessee rendered design engineering services to its AE for a consideration of Rs.31,57,01,539 and computed its Profit Level Indicator (PLI) at 12.12% under the TNMM, as against the weighted average Operating Profit/Total Cost (OP/OC) of 5 comparables at 11.19%. This is how, the assessee claimed that the international transaction of provision of Design Engineering Services was at ALP. The TPO altered the list of comparables. Adding 2 new companies to the one out of 5 chosen by the assessee, he computed the mean OP/OC of the 3 comparables at 16.64%. By treating the same as the Arm's length profit, the TPO proposed transfer pricing adjustment of Rs.1,48,05,266/-. No reprieve was provided by the DRP, which had the consequence of the making of the transfer pricing addition in the final assessment order. 16. The assessee in this segment is aggrieved only by the inclusion of Aabsys Informat....
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.... extracted at page 30 of his order. As opposed to this, the assessee is not rendering any Software services to its AE. The only services rendered by it are Engineering. It is further observed from the Annual report of this company that no segmental information is available, which could throw light on the operating costs in respect of the revenues of this company from Engineering services de hors Software services. Since the assessee is not providing any Software services and the software services of this company constitute around 78% of its revenue and further that no segmental information is available, we hold that this company cannot be treated as comparable. We, therefore, order to exclude it from the list of comparables. The impugned order on this issue is set-aside and the matter is remitted to the file of the AO/TPO for re-determining the ALP of the international transaction of `Design Engineering Services' by excluding Aabsys Information Technology Pvt. Ltd. from the list of comparables. Needless to say, the assessee will be allowed an adequate opportunity of hearing." 4. Both the parties are fair enough in not pinpointing any distinction on the relevant facts as well as ....