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2024 (2) TMI 386
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....ins of Business or Profession" do not refer to or include the amounts computed under Chapter X and therefore addition made under Chapter X is bad in law; b. Not appreciating that the provisions of section 40A(2) override the provisions of Chapter X and there being no action under section 40A(2) for royalty expenses, no adjustment under Chapter X can be made. c. Passing the order without demonstrating that the Appellant had any motive of tax evasion. 3. Ground No. 3 of the assessee's appeal reads as follows: "3. The learned CIT(A) and TPO have erred in: a. Not appreciating that the Appellant had adopted TNMM at the entity level, in which process, the royalty payment were considered as closely linked transaction and hence was subsumed into the expenditure; b. Not substantiating how the royalty payment were singled out of the many transactions to be tested on the basis of the ALP; c. Not appreciating that once the margin is tested on the touchstone of ALP, it pre-supposes that the various components of income and expenditure considered in the process of arriving at the margin are also at ALP; and d. Not appreciating tha....
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....dalone basis. The assessee had aggregated all the international transactions together for determining the arm's length price and evaluated these transactions by adopting TNMM as the most appropriate method. The salient arguments made by the assessee before the TPO are summarized below: • The assessee is a licensed manufacture of MUV, SUV and passenger cars. It has got the license to manufacture certain vehicles and other products from TMC. TMC also provided the assessee the necessary technical know-how that was required to manufacture licensed products. The Toyota Group also provides various components and services to the assessee. Considering the fact that external benchmarking is being done and there is lack of requisite data at each transaction level, computation of arm's length price or arm's length margin based on separate transaction approach is not possible. • The transactions between the assessee and its associated enterprises comprised both purchases, sale of parts and components and services. These transactions are linked and interdependent. • The various activities are intertwined and inter-related. The royalty payments ....
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....h nature of the Royalty transaction. Ideally transfer pricing analysis should be made on a transaction by transaction basis." 3.5 The TPO therefore proposed to benchmark royalty payments separately. The TNNM as MAM was not accepted by the TPO, who instead adopted the CUP method as the most appropriate method for benchmarking of royalty. 4.5.2.6 In response to the TPO's proposal, the assessee proposed that even if royalty needed to be benchmarked separately, the external CUT method should be used. The assessee submitted before the TPO that it had collected certain data based on a search in the public domain (i.e. Google, Wikipedia, etc.) wherein the details of royalty paid in uncontrolled comparable transactions was available. As per the agreements with its AEs, the assessee was paying 6% of local value addition (LVA) as royalty. The royalty paid by the assessee worked out to 3.62% of net sales. The assessee justified the ALP of its royalty payment, relying on the decision in the case of Maruti Suzuki vs Addl. CIT [2013] 38.taxmann.com 339 Delhi Trib.) wherein royalty payment below the rate of 5% was held to be at arm's length. The assessee also relied on the decision of ....
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....on. The assessee, on the other hand, has contended that if the margin of aggregated transactions is at arm's length, then it presupposes that the individual expenses including royalty are also at arm's length. He observed that the contention of the assessee cannot be accepted when one looks at the international transactions of the assessee in their entirety. From the details of the international transactions given in paragraph 3 of the TPO's order, it is seen that these include purchase of spares, purchase of OE parts, purchase of capital goods, sales promotion and dealer training expenses, communication expenses, travelling expenses, among others. Though the assessee has claimed that all its international transactions are interlinked, it is fairly evident from the description of these individual transactions that none of them could in any way be impacted by the transfer of technical know-how. Consequently, the payment on royalty has to be looked at as a separate transaction. The assessee has claimed that its manufacturing and trading activities are intertwined and therefore the payment on royalty gets subsumed within the expenses relating to both the segments. However,....
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....t that there are other aspects of the assessee's manufacturing process and other functions which are in no way connected to the technical know-how. When, for instance, there are components such as KD Parts and Non-Licensed Parts, that are also used by the assessee in its manufacturing operations, the benchmarking of royalty cannot be subsumed within entity-level benchmarking. The assessee has relied on the order of the Hon'ble ITAT, Bangalore 'B' Bench in its own case for the A.Y. 2013-14 to justify its stand that the combined transaction approach should be adopted and margins compared at the entity level. However, he observed that the order of the Tribunal for A.Y. 2013-14 has in turn relied on the order of the Tribunal in the assessee's case for the A.Y. 2007-08, There is a difference as far as the issues examined by the Tribunal in A.Y.2007-08 is concerned, in that decision, the Tribunal had held that the ALP for royalty could not be treated as 'nil' since services had been rendered by the AE to the assessee. In the order that is the subject matter of the present appeal, the TPO has not taken the ALP as nil. Further, the ITAT order for the A.Y. 2007-0....
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....ing royalty separately is upheld. 4.6 Having ruled that the separate benchmarking of royalty based on the facts of the present year is in order. Further, the ld. CIT(A) examined the arguments of the assessee against the benchmarking analysis undertaken by the TPO. The assessee has sought for inclusion of Tata Motors Pvt. Ltd. and Mahindra and Mahindra Ltd. It is noted that the assessee itself had rejected these companies in its TP study report on the ground that they failed the 25% RPT filter. In its submissions the assessee has urged that though these companies fail the RPT filter, they incur research and development expenses in-house and these expenses are not with related parties. The ld. CIT(A) found force in the same. When the assessee has itself rejected these companies on account of the RPT, there is no reason 1 to include them in the benchmarking analysis. The TPO's selection of comparables is upheld. 4.7 The ld. CIT(A) further observed that as discussed above, the royalty paid is with respect to the manufacturing operations of the assessee. The trading activities of the assessee and the comparables may or may not be in products manufactured using the technical kn....
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.... under consideration the assessee paid Rs. 6,43,05,921/- towards technical assistance obtained from TMC after withholding appropriate tax. • The Assessee entered into Production Preparation Support Agreement with TDEM under which TDEM renders certain training, assistance or support concerning the manufacturing facilities and Production preparation for the Products and pilot production of the products. 4.10 The assessee has submitted that the technical assistance fee does not fall within the meaning of royalty. The assessee submitted that the technical fees have been paid as part of general assistance to enable the assessee to carry on its manufacturing activity in India. These payments were capitalized in the books of account of the assessee. 4.11 Regarding the nature of R&D expenses, the assessee has given the following break-up: Nature of Expenses Nature of Expenditure Amount Homologation and Testing Charges Toyota Motor Corporation 32,37,77,269 Toyota Motor Asia Pacific Pte Ltd 47,00,419 Toyota Daihatsu Engineering and Manufacturing Co.Ltd. 1,00,39,264 Toyota Auto Body Co. Ltd. 1,12,23,112 Sub Total (A) 34,97....
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.... time designated by the Licensor. b) In the event of the preceding paragraph (a), the Licensee shall pay the Licensor all fees, and all costs and expenses incurred by the Licensor in developing and furnishing such know-how, information, documents and/or assistance. c) If the assistance rendered under paragraph (a) hereof is technical assistance or engineering assistance concerning the production preparation for the Licensed Products, such assistance will be provided in accordance with the procedure and conditions set forth in Appendix G attached hereto. 4.14 From the above Article, it is clear that the Technical Assistance Fee is paid for the know-how used in the manufacturing functions of the assessee. The details submitted by the assessee also confirm the same. This amount has rightly been included by the TPO. 4.15 With respect to the R&D expenses, it is observed that the homologation and testing charges are directly related to the manufacturing functions of the assessee. The assessee has given the following details of homologation and testing charges: • The assessee has entered into homologation testing service agreement with TMC and under wh....
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....d research and development expenses. The view taken by the Coordinate Bench of this Tribunal in assessee's own case for A.Y. 2007- 08 has been reproduced hereinabove wherein all these aspects have been considered. This Tribunal for A.Y. 2007-08 has deleted the adjustment made by the Ld.TPO in respect of royalty by separately bench marking the transactions. This has been fortified by the clarification given in a Miscellaneous Petition filed by the department which is also reproduced hereinabove. This view is also supported by various decisions of Coordinate Benches of this Tribunal as well as various High courts, Co-joint reading of these orders, we direct the Ld.AO/TPO to delete the adjustment proposed for royalty as a separate international transaction. Respectfully following the above view, we direct the Ld.AO/TPO to delete the adjustment proposed towards royalty as a separate international transaction. Accordingly, ground nos. 10 to 12 raised by assessee stands allowed. 13.1 The ld.DR relied on the order of the lower authorities and he submitted that since the assessee has adopted TNMM and the TPO has also accepted the methods for calculation ALP, the TPO has not ma....
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....eements were approved by Government authorities and therefore royalty payment should be considered as at arm's length; 6. Without prejudice to above, the learned CIT(A) has erred in confirming the action of the TPO in: a. Adopting a flawed methodology, inappropriate comparison and incorrect figures while arriving at ALP of royalty payment; b. Including technical knowhow fees and R&D expenses (testing charges) while determining royalty payment to net sales ratio in case of Appellant without appreciating that these expenses are not related to technical know-how for manufacturing. 7. Without prejudice to above, the learned CIT(A) has erred in confirming the action of the TPO in: a. Not considering Tata Motors Ltd and Mahindra and Mahindra Ltd as comparable for computation of arm's length price of royalty payment without appreciating the fact these companies incur R and D expenses with unrelated parties. b. Adopting single year data for analysis, without appreciating that the business, commercial and technological factors mandate adoption of multiyear data and. c. Not granting adjustment for superior quality of technology i....