TaxTMI 
TaxTMI 
2023 (8) TMI 458
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....ppellate Tribunal has erred in law in passing the order dated 28th September 2022 directly contrary to the view taken by the Appellate Tribunal in Appellant's own case for earlier assessment years on identical facts and law without referring the issue to a Special (Full) Bench in the event that it wished to differ from the view taken by a co-ordinate Bench of the Tribunal ? (ii) Whether the order dated 28th September 2022 passed by the Appellate Tribunal is bad in law as the same is passed ignoring the fact that on the very same transaction the department has accepted the methodology applied by the Appellate for benchmarking the transactions for transfer pricing purposes in seven (7) earlier years in view of inter alia binding order of the Tribunal ? (iii) Whether in the facts and in the circumstances of the case and in law the Tribunal erred in passing the impugned order dated 28th September 2022 purporting to rely on decision of Delhi High Court in the case of Magneti Marelli Power Train India P. Ltd. Vs. Deputy Commissioner of Income-tax which ex-facie did not support and was in fact contrary to the view set out in the impugned order ?" 2. Assessee is engage....
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....the sale of the certain types of internal combustion (IC) engines covered by the technology so provided. Assessee also provided copies of agreements entered into with its Associated Enterprise and explained that the agreement that was in force for royalty, was an agreement dated 16th September 2010. Assessee also explained to the TPO that for bench marking of royalty transaction it has aggregated the royalty paid with other transactions relating to manufacturing of IC engines as these transactions are closely linked transactions. 4. TPO issued a notice under section 92C(3) of the Act wherein aggregation of royalty transactions with other transactions at the entity level was doubted and directed Assessee to show cause why the royalty rate used for domestic sales should not be used for benchmarking the royalty on export transactions as well. Assessee submitted its reply and even explained, inter alia to the TPO as under: (a) Assessee is relying on its Associated Enterprise for various kinds of technical knowledge and knowhow received from time to time in order to manufacture and sell the engines to its customers. (b) It had received technology updates and technic....
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....ment to the value of international transaction pertaining to payment of royalty on export sales. TPO had his own reasons for making this upward adjustment, some of which are as under: (a) for a related party transaction or the related party closely linked transactions to be benchmarked correctly, their value should form a substantial part of the transactions being analyzed together as a group. (b) In order to determine the most precise approximation of arm's length conditions, the arm's length principle should be applied on a transaction-by transaction basis unless the transactions are closely related. Transactions are said to be closely related when decision of price of one product service depends on the price of another product or service. In the case of Assessee, the royalty transactions do not in any manner impact or influence the pricing of the sale price or other transactions in the manufacturing segment. Therefore, aggregation of royalty in such situation would be incorrect. (c) The TPO also rejected the contention of Assessee that the royalty transaction should be aggregated with other transactions and benchmarked with the overall TNMM mar....
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....international transactions in the manufacturing segment; (b) the TPO, in the case of Assessee has, after rejecting Assessee's aggregation approach, resorted to the ALP determination of royalty payment transaction separately under the TNMM only; (c) the facts of the case of Assessee are similar to those in the case of Magneti Marelli Powertrain India (P.) Ltd. Vs. Deputy Commissioner of Income Tax (2016) 389 ITR 8 469 (delhi) and held that international transaction of payment of royalty by Assessee for use of technical support cannot be clubbed with other international transactions under the manufacturing segment; (d) rejected the reliance placed by Assessee on the order of the Appellate Tribunal in its own case for the Assessment Year 2006-2007 on the ground that the Appellate Tribunal had rendered its decision in context of an earlier agreement under which the royalty was paid; (e) the judgment in the case of Knorr-Bremse India (P.) Ltd. Vs. ACIT (2016) 380 ITR 307 (P & H) was delivered prior to the Appellate Tribunal order for the Assessment Year 2006-07, but it was not brought to the notice of the Bench. Aggrieved by this finding the prese....
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.... (e) The Tribunal was wrong in concluding that the agreement under which Assessee has paid the royalty is different from the agreement considered by the co-ordinate bench of the Tribunal in the Assessment Year 2006-07. The TPO or DRP has not even whispered or mentioned in their order(s) about the facts being different from the earlier years. Only during the hearing before the Tribunal, the DR raised a completely different and new argument and the Tribunal has accepted the same without even verifying the agreements available on record. (f) The royalty agreement for the year under consideration was identical to the earlier agreement. (g) The Tribunal failed to appreciate that the TPO himself has after the date of the new agreement, i.e., after 16th September 2010 and from the Assessment Year 2011-12 up to the Assessment Year 2014-15 accepted the benchmarking of the international transaction of payment of royalty under the aggregation approach along with transactions of the manufacturing segment. Hence, the Tribunal was not justified in taking a different view. (h) The Tribunal has distinguished its decision in the case of Assessee for the Assessment Year....
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....he applicability of one standard or criteria to judge an international transaction by each method is a package in itself, as it were, containing the necessary elements that are to be used as filters to judge the soundness of the international transaction in an ALP fixing exercise. (l) The TPO has accepted the transactions to be part of manufacturing activity and approved TNMM as the transfer price method but out of 14 only one item, payment of royalty for consideration of technology, was segregated which is not permissible. 9. Mr. Suresh Kumar submitted as under: (a) The TPO has not disputed the fact the Assessee has received technology. The TPO has also accepted and acknowledged that Assessee has used the TNMM method as the most appropriate method to benchmark its international transactions all under the manufacturing activity which included the royalty that it has paid on the export sales as well. But the transaction of royalty and other international transactions of Assessee are interlinked is not acceptable because the transaction of payment of royalty on exports is Rs. 46.16 crore which is only 2.7% of the total turnover of the company of Rs. 1654 crore wi....
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....port sales. With respect to the domestic sales, maximum sales are with respect to product on which rate of royalty is 1% (more than 90%) , whereas in case of exports maximum amount of sales are on royalty rate of 8% (nearly 99%). There is no difference in technology supplied by Cummins Inc. which is used for manufacturing the product meant for sale in domestic market and foreign market and, therefore, Assessee paid the royalty on goods meant for sale to its associate Enterprise at higher rate so as to reduce its income and consequential tax instances in India. Therefore, segregating the royalty on domestic sale and exports for the separate benchmarking by the TPO was correct. (g) Merely because payment of royalty for use of technical support 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. (h) In Magneti Marelli (supra), Delhi High Court accepted that royalty and technical assistance fee did not form part of a composite transaction and have to be treated a....
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....ate the need for payment of technical assistance fees to its foreign associate Enterprise and the TPO had observed that Assessee did not undertake any cost benefit analysis or any benchmarking exercise at the time of entering into the agreement. The court observed that the initial burden is upon Assessee to prove that the international transaction was at ALP but Assessee was unable to explain why he had paid technical assistance fee which did not form part of composite transaction. But in the case at hand, the assessing officer has accepted that Assessee had received technology from Cummins Inc. - Associate Enterprise and the rate of royalty payment was made on exports. The TPO has also accepted that Assessee has used the TNMM method as the most appropriate method to benchmark its international transactions under the manufacturing activity including royalty that it had paid on the export sales as well. The TPO has accepted the TNMM method as the most appropriate method to benchmark Assessee's international transactions under the manufacturing activity but decided to separately benchmark the royalty. This is what has been held not permissible (and we respectfully agree with this vie....
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....xing exercise. If this were to be disturbed, the end result would be distorted and within one ALP determination for a year, two or even five methods can be adopted. This would spell chaos and be detrimental to the interests of both Assessee and the revenue. 12. Further the Tribunal was totally incorrect in saying that accepting aggregation of royalty payment with other international transactions under the manufacturing segment for the Assessment Year 2006-2007 was in the context of an earlier agreement under which the royalty was paid. But Assessee having entered into a new agreement on 16th September 2010 with Cummins Inc. under which the technical support was received for which payment of royalty was made by Assessee for the year under consideration and hence they need not follow the earlier approach of the Tribunal. This is because the new agreement on which reliance has been placed by the Tribunal was dated 16th September 2010, and even after the said agreement was entered into, for the Assessment Year 2011-2012 to Assessment Year 2014-2015 the TPO himself had accepted the benchmark of the international transaction of payment of royalty under the aggregation approach along w....