TaxTMI 
TaxTMI 
2023 (7) TMI 1318
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.... 1.5 Holding that amount of royalty paid to AE should be restricted to 3%, i.e., Rs. 3,34,61,905 against the actual claim of 8% i.e. Rs. 5,35,39,048. 1.6 Applying the ALP rate for royalty @ 3% as held by Hon'ble Courts in certain case laws which is not a methodology prescribed by Rule 10B(1) & Rule 10C. 2. Ld. AO erred in charging interest u/s 234B and 234C under the facts & in law in the circumstances of the case. 3. Ld. AO erred by initiating the penalty proceedings u/s 271(1)(c)." 3. Grunder India Pvt. Ltd. is incorporated in October 2008 and started its operations in November 2009 and is engaged in manufacturing of Latching relays, Solenoids and Actuators specifically used in electrical meters. Gruner India is a joint venture of Gruner AG, Germany in India. The assessee enjoys the exclusive rights to manufacture the relays, actuators and solenoids in India. 4. The assessee applied aggregation approach under TNMM on entity level to justify the ALP of all the transactions including payment of Royalty/FTS alongwith the transaction for purchase of raw material and other transactions. Excerpts from the order of the ld. DRP: ....
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....ly fact dependent exercise to be viewed having regard to the nature of the transaction and the surrounding circumstances. The assessee contends that the amounts paid under the royalty license and technical support agreements had to be viewed along with all other expenses and, therefore, aggregated. The Revenue's contention, however, is to the contrary. 9. Recently in the judgment of this Court in Magneti Marelli Powertrain India (P) Ltd. v. Dy. CIT [2016] 389 ITR 469/75 taxmann.com 213, this Court had observed after noticing the judgment in Sony Ericsson Mobile Communication India (P.) Ltd. (supra) as well as in the CIT v. EKL Appliances Ltd [2012] 345 ITR 241/209 Taxman 200/24 taxmann.com 199 (Delhi), and observed as follows:- ".............14 The assessee/appellant during 2008-09 entered into four License & Technology Assistance Agreements (LTAAs) with its overseas AE for four products for obtaining ECU technology. In return for the technical know-how, the assessee agreed to compensate the AE through a fee amounting to US $ 2 million for each LTAA (total US$ 8 million equivalent to over Rs. 38 crores) on installment basis. .................... ....
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....PO was of the view that the taxpayer's individual national and controlled transactions or a group of such transactions should ideally be analyzed on a transaction by transaction basis for transfer pricing. The TPO also observed that royalty and technical services fees together amounted to 11.10% of the total operating expenses of the assessee, and therefore these action should be separately benchmarked. 1.2.2 The TPO further observed that payment of royalty is not required to be paid to the AE because it is not bringing any income to the assessee directly. With regard financial services fee payment, the TPO held that the assessee is endorsing the technology developed by the AE which is further adding to the reach of the AE, and payment of technical services fee is not justified as AE is charging itself. The TPO, thus applying CUP method, determined adjustment of Rs. 835,79,670/- which has been proposed enhancement in the draft assessment order. 1.2.3 The assessee has filed objections u/s 144C (2) before the DRP to the draft asstt. Order. Gruner India Private Limited (Gruner India" or taxpayer) was incorporated in October 2008 and started its operation....
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....ued in Magneti Marelli Powertrain India Pvt. Ltd. vs. DCTT [(2016) 389 ITR 469] and Sony Ericsson Mobile Communication India (P) Ltd. us. CIT [(2015) 374 ITR 118)] 6. Ld. TPO failed to apply CUP as directed by Hon'ble ITAT. DRP Directions 2.2.1. These grounds (3-6) relate to the segregated approach adopted by the TPO, treating royalty and FTS transactions as separate 'International Transaction' for the purposes of benchmarking the arm's length price. It is also alleged that the TPO failed to follow the directions of Hon'ble Delhi High Court in assessee's own case for AY 2011-12, as remanded by the Hon'ble ITAT and failed to apply CUP. 2.2.2. The assessee has contended that in the TP study, aggregated approach was adopted under TNMM method (OP/OC of 10.92% as PLI) at the entity level and the average PLI of 9 comparables stood at 4.56%. It is further contended that the TPO in original order dated 22.01.2016 had accepted all the transactions under the TNMM to be at arm's length price. In page 5 of the synopsis, Ld. AR of the assessee has referred to the Hon'ble ITAT decision (para 13 & 14) to contend that the TPO ....
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....High Court in assessee's case. The matter, in case of Magne Marelli, related to payment of technical assistance fee. Hon'ble Delhi High Court in case of Magneti Marelli (supra), also considered the decisions rendered by the Hon'ble High Court in case of EKL Appliances Ltd (2012) 345 ITR 241, Sony (2015) 374 ITR 118 and Denso India Ltd (2016) 240 Taxman 713. Upholding the ITAT decision in this case on the issue of payment of technical assistance fee Hon'ble High Court held that the payment to AE cannot be justified merely by explaining the necessity, relying on profits at entity level. Relevant paragraph of the Hon'ble High Court's order (in Magneti Marelli case) is as under: "15. The assesse's argument that the technology itself would not have been given to it, but for the substantial fee (paid over and above the royalty payable), in the opinion of this court, requires a closer scrutiny. The initial burden is always upon the assessee to prove that the international transaction was at Ami's Length. Its TP report necessarily bad to draw a comparison with other entities (maybe competitors) to show the general degree of profitability of the venture ....
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....lty has been paid on the tire sales of finished goods, 74% of which is to the unrelated parties. Import of raw materials, payment of royalty and FTS, and sale/export of finished goods are three significant yet separate and independent international transactions, in the present facts of the case, capable of being benchmarked in a segregated manner. There is a cates of judgments, which has held that payment of royalty and technical fees, should normally be benchmarked separately, irrespective of the growth in turnover for the years, or the profit earned at the entity level. We have referred to some of the decisions in the cases of (i) Abhishek Auto Industries Ltd. v. Dy. CIT [2011] 9 taxman.com 27 (Delhi) wherein it had been held that only International actions are to be taken into account and not the enterprise level; (ii) Dy. CIT A Diamonds (2011) 9 taxmann.com 37/43 SOT 523 (Mum.) wherein it had held that under TNMM ALP has to be determined on the profit realized from an International transaction and not at entity level: (iii) Birla Soft (India) Ltd. v. Dy. CIT (2011)9 taxmann.com 263/44 SOT 664 (Delhi) the ITAT wherein it had been held that segmental account, even if unaudi....
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....son at enterprise level profits, it requires comparison of net margin realized from an international transaction (Xix) xxxxxx Software Solutions (P.) Ltd. Vs. Asstt. CIT (2011) 11 Taxmann.com 264/46 SOT 48 (Mum.) wherein it had been held that TNMM required comparison of net margin realized from the international transaction and not enterprise level margin; (c) Technimount ICB (P) Ltd. [2011-TII-31ITAT-Mum-TP] wherein it had been held that segmental results are to be considered and not the profit at entity level; (xi) Twinkle Diamond (supra) and Addl. CIT v. Tej Diam [2010] 37 SOT 341 (Mum) wherein it had been held that TNMM does not permit comparison enterprise level profits and that it requires comparison of net profit margin realized from an international transaction or aggregate of class of international transactions; (xi) UCB India (P.) Ltd. v. Asstt. CIT [2009] 121 ITD 131 (Mum.) wherein it had been held that Rule 10B(1)(e) refers to net profit realised from international transactions and not of enterprise as a whole. The assessee cannot justify its inability to evaluate its transaction on stand-alone basis on the ground that there is no statuary requirement to maintain segmen....
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.... in respect of model 3DX has to be benchmarked by applying CUP as the most appropriate method." TPO action of applying CUP method for determining ALP of royalty is upheld. 7. La TPO has erred- 7.1. In disallowing the payment of Royalty & FTS on the ground that these payments are not required to be paid as these are not bringing any income to the assessee. 7.2. In determining the Arm's Length Price (ALP) of the Fee for Technical Services to be "NIL", without appreciating the fact that technical personnel of Gruner AG, Germany visited India from time to time to render technical services and support. 7.3. In disregarding the legally binding agreements entered between the appellant and Gruner AG, Germany pertaining to payment of royalty and Fees for Technical Services respectively without assigning any cogent reasons. DRP directions: 3. Having considered the submission of the assessee, we find that TPO's action of holding the arm's length price (ALP) of royalty and FTS, at NIL is within the scope of remand by the Hon'ble ITAT and the direction of the Hon'ble High Court in 's own case for AY ....
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....ary requirement. There are a catena of judgment on this issue. Further, the identity of products is not a valid criteria to exclude a comparable while benchmarking royalty. The basic product being transferred under the royalty license agreement is the technical knowhow to manufacture and the brand used for the final product. 3.3.3 We are of the considered view that internal CUP would have been the most appropriate method to benchmark charging of royalty by the AE, Gruner AG. The AE has similar venture in Serbia and Tunisia (as per the Gruner AG website), as that in India, and the assessee could have demonstrated that the rate of royalty payment by the assessee in India, was comparable with that by the Serbia and Tunisia units. In the absence of such information, being furnished by the assessee, one is compelled to seek external comparables within India in similar trade. Hon'ble Delhi Tribunal in case of Lumax Industries Ltd. vide ITA No.6212/Del/2013 order dated 22.04.2016 held as under: "22.............. Moreover, the following decisions are instances of the external CUP having been employed and this has not been disputed by the Department:-....
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.... in not in dispute, and settled. In the DRP original order 21.12.2016 (page 15-17) has referred to the rates payable by the assessee for the technical services, as per the agreement. The TPO has failed to search for comparable cases to determine the arm's length price of the services, which was required for benchmarking and subsequent adjustment if any. In view of the above, TPO's action cannot be upheld. The adjustment is directed to be deleted. DPO in law & on facts of the case: 7.4 by rejecting the aggregation approach under TNMM for benchmarking royalty and FTS at entity led on ground that aggregation approach can be accepted only if the volume of expenses is very small as compared to the operating expenses. 7.5. by failing to appreciate that application of aggregation approach is based on principle of close interrelation between the transaction and not upon volume of expenses." 5. Heard the arguments of both the parties and perused the material available on record. 6. Two issues have to be considered in this case. The first being whether the CUP is the MAM or TNMM is the MAM. Second is whether the ALP for royalty @ 3% is a correct metho....
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....nder sub-clause (iv) is taken to be an arm's length price in respect of the purchase of the property or obtaining of the services by the enterprise from the associated enterprise; (c) cost plus method, by which,- (i) the direct and indirect costs of production incurred by the enterprise in respect of property transferred or services provided to an associated enterprise, are determined; (ii) the amount of a normal gross profit mark-up to such costs (computed according to the same accounting norms) arising from the transfer or provision of the same or similar property or services by the enterprise, or by an unrelated enterprise, in a comparable uncontrolled transaction, or a number of such transactions, is determined; (iii) the normal gross profit mark-up referred to in sub-clause (ii) is adjusted to take into account the functional and other 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 such profit mark-up in the open market; (iv) the costs referred....
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....ther with the residual net profit apportioned to that enterprise on the basis of its relative contribution shall be taken to be the net profit arising to that enterprise from the international transaction [or the specified domestic transaction]; (e) transactional net margin method, by which,- (i) the net profit margin realised by the enterprise from an international transaction [or a specified domestic transaction] entered into with an associated enterprise is computed in relation to costs incurred or sales effected or assets employed or to be employed by the enterprise or having regard to any other relevant base; (ii) the net profit margin realised by the enterprise or by an unrelated enterprise from a comparable uncontrolled transaction or a number of such transactions is computed having regard to the same base; (iii) the net profit margin referred to in sub-clause (ii) arising in comparable uncontrolled transactions is 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 tra....