TaxTMI 
TaxTMI 
TaxTMI 
2025 (2) TMI 1031
X X X X Extracts X X X X
X X X X Extracts X X X X
....e Appellant, JCB UK had licensed its proprietary technology to Appellant through various collaboration agreements. The Appellant had entered into Technology Transfer Agreements ('TTA') with its Associated Enterprises ('AEs') to receive requisite technology and know-how to enable it to manufacture technological advanced products of earthmoving and construction equipment. 3. During the Assessment year ("AY") 2013-14, the Appellant entered into various international transactions with its AEs. The summary of international transactions is as follows:- Segments/business activities Most Appropriate Method Net profit indicator JCB India's price/operating margin Comparables price/operating margin 1. Component Manufacturing Class I Import of raw material, components and spares Export of components rectification and rework Transactional Net Margin Method (TNMM) Operating Profit (OP)/Total Cost (TC) 8.29% 3.73% Class II Reimbursement and recovery of expenses Comparable Uncontrolled Price (CUP) Method On cost to cost basis 2. Equipment manufacturing A. Under contract manufacturing arrangement Class I Import of raw material, componen....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ndian TP Regulations. Accordingly, it was concluded by the assessee that the value of the international transaction pertaining to payment of royalty by Appellant at 5% is at arm's length. 3.3 Further, as a corroborative analysis, the transaction of payment of royalty has been benchmarked under TNMM in the TP documentation. The case of assessee is that given the payment of royalty is intrinsically linked with equipment licensed manufacturing segment of the Appellant, the international transactions under license manufacturing segment were benchmarked in aggregation under TNMM, including the transaction in the nature of payment of royalty. According to the assessee, under the corroborative analysis conducted by the Appellant, the average mean of OP/ Sales margin earned by the comparable companies is 6.16% as against the Appellant's margin of 11.57%. Therefore, based on the corroborative analysis also, it was concluded that the value of the international transaction pertaining to payment of royalty by Appellant is at arm's length price. 4. Ld. Counsel of assessee has pointed that in the first round of assessment proceedings the TPO in his order dated October 20, 2016, made TP adj....
X X X X Extracts X X X X
X X X X Extracts X X X X
....following grounds:- "That on the facts and circumstances of the case and in law, the AO/DRP/TPO have erred in law and in facts in assessing the total income of the Appellant at INR 7,60,09,47,685. 2. That on the facts and circumstances of the case and in law, the order passed by the AO is bad in law and void ab initio since the order passed dated July 29, 2022, is not accompanied with the notice of tax demand and tax computation sheet as required under section/s 156 read with section 143 of the Act, thus barred by limitation 3. That on the facts and circumstances of the case and in law, the AO/DRP/TPO have erred on facts and in law, in making a substantive transfer pricing adjustment on account of payment of royalty made to associated enterprise (AE') based in Germany (hereinafter referred to as "Non-UK AE"), even though the royalty paid to Non-UK AE had been accepted to be at arm's length in past AYs as well as subsequent AYs 4. That on the facts and circumstances of the case and in law, the AO / DRP / TPO have erred on facts and in law, in making a substantive adjustment of INR 1,52,33,105/- towards transfer pricing adjustment on the ro....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... in nature and parameters agreed in the MAP for UK based AEs can be used to determine the arm's length price for royalty payment made to Non-UK AE. 7. That on the facts and circumstances of the case and in law, the AO has erred in levying interest under sections 234A, 234B and 234C of the Act. 8. That on the facts and circumstances of the case and in law, the AO also erred in proposing to initiate penalty proceedings under section 271(1)(c) of the Act for furnishing inaccurate particulars of income. Each of the above grounds is independent and without prejudice to the other grounds of appeal preferred by the Appellant. The Appellant prays for leave to add, alter, vary, omit, substitute or amend the above grounds of appeal, at any time before or at, the time of hearing, of the appeal." 6. Taking into consideration the contentions of both the sides we find that grounds of appeal No. 1 & 2 are general and need no specific determination. The substantial grounds pressed are grounds No. 3 to 6 covering the issue of ALP bench marking of Royalty Payment to non-UK entities, JCB VibromaxGmBH. 6.1 Ld. Counsel has primarily relied a Advance Pricing Agreemen....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... the approach applied in case of the Appellant over the years:- S. No. Assessment Year Treatment in respect of UK entities for royalty payment of 5% Treatment in respect of German entities for royalty payment of 5% Treatment in respect of USA entities for royalty payment of 5% Royalty Rate agreed as per MAP Proceedings in respect of UK entities 1. 2010-11 Adjustment made only on 3DX model. (refer items 5-7 of the convenience compilation) No addition Not applicable as agreement entered into on 23 October 2013 5% 2. 2011-12 5% 3. 2012-13 5% 4. 2013-14 Impugned AY - Addition made for Germany entity. However, the royalty payment in respect of UK entities was covered under MAP. 4% 5. 2014-15 Adjustment made on 3DX model only (refer items 9-10 of the convenience compilation) No addition No addition 4% 6. 2015-16 3% 7. 2016-17 4% 8. 2017-18 Settled under MAP Pending before TPO (second round of proceedings) 4% 7.2 Ld. Counsel has pointed out that in the similar facts and circumstances for assessment years 2014-15 and 2015-16, the department had sought to make the adjustme....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... the CBDT in the later year agreed that such transfer pricing consideration in relation to US based transactions can be safely adopted for the purpose of the assessee's non- US based transactions...therefore, it would be wholly inappropriate to allow the revenue to argue to the contrary" 8.1 Reliance in this regard is also placed on the following: i. Concentrix Daksh Services India Pvt Ltd vs DCIT [2019] 102 taxmann.com 497 (Delhi - Trib.) ii. Fidelity Business Services India Pvt. Ltd. Vs DCIT: ITA Nos. 5872/Del/2011 iii. ACIT vs EIT Services India (P) Ltd.: [2022] 142 taxmann.com 175 (Bangalore - Trib.) 9. Then on the rejection of benchmarking approach adopted by Appellant with respect to payment of royalty it comes up that in the TP documentation maintained by the Appellant, the international transaction in the nature of payment of royalty was benchmarked under CUP method. The Appellant carried out search on RoyaltyStat's online database of royalty rates (www.royaltystat.com), wherein non-comparable agreements were eliminated and agreements were selected, which may be appropriate to provide a benchmark for the royalty payable by the Appellant ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....aid royalty of equivalent amount. Further, the Appellant would like to highlight that in the earthmoving and construction equipment industry, no single patent may be filed for the entire earthmoving and construction machine, indeed patents form only a relatively small part of the relevant IP base which extends to IP like such as designs, copyrights, know-how etc. The machine in itself contains numerous parts having separate technology for which patent applications are made. The numerous parts are later assembled to make the machine which is later sold as a product in the market. The AEs of the Appellant holds multiple patents in Germany, being the location of principal manufacturing company and in India for components and parts which are used to make earthmoving and construction equipment." 10. In this context it was pointed out that the TPO rejected the economic analysis performed by the Appellant and carried out a search using CUP with the India region. The TPO stated that the aforesaid search did not yield any comparable agreement and erroneously came to the conclusion that no independent entity in India is paying any royalty in respect of earthmoving and construc....
X X X X Extracts X X X X
X X X X Extracts X X X X
....egarded the submissions of the Appellant and went on to decide ALP of royalty rate at 2%. The TPO rejected the benchmarking of royalty transaction in aggregation under TNMM by giving reference to the Hon'ble ITAT's direction for AY 2006-07 to AY 2008-09 in the Appellant's own case. The rejection of bundled approach by Hon'ble ITAT was in view of Special Bench ruling in LG Electronics: [2013] 22 ITR(T) 1 (Delhi-Trib.) (SB) and not based on a factual analysis. It is submitted that the aggregation of royalty transaction rejected by the Hon'ble ITAT in view of Special Bench Ruling in LG Electronics (Supra) stands overruled as on date by judgement pronounced by Hon'ble Delhi High Court in the case of Sony Ericsson Mobile Communications India(P) Ltd. v. CIT: [2015] 374 ITR 118 (Delhi). 16. Revenue's case; This all is countered by the Ld. DR by first relying completely on the orders of ld. Tax authorities below. It was contended by him that Tribunal has already denied the benefit of MAP in first round observing that MAP is not applicable to non-UK entites. It was contended that APA was entered in 2019 but was not pleaded earlier. So same cannot be a legal ground. It was contended by hi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....oup and if for any licensed products developed and protected in non UK country, the said product is manufactured by assessee in India that also entitles the assessee to use the JCB brand and royalty flows to the group only. The specific clauses relating to trade marking and patents in the technology transfer agreement between assessee and two sets of countries quite apparently make out that both set of the licensors had exclusive ownership of not only the licensed product's patent etc., but also trade mark, to which they were respectively entitled to brand goodwill arising out of the production and selling of licensed products by the assessee. 18. There is nothing on record to show that the right to manufacture and marketing of licensed product received from UK AE 'excavator loader" or the licensed product of non UK AE, JCB, Germany of "soil compactor" require any different sets of technical capabilities to manufacture them or the research and development activity of the two set of licensed products is in any way so distinct that there should be different sets of principles for royalty compensation. Merely on an assumption of robust research and development facility of assessee ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....bstituting it by "other methods", we find that the "other method" was justified in assessee's own case for A.Y. 2006-07, 2007-08 and 2008-09 for the reason of product having local inputs. There is no such case this year. 23. We further find that, the learned TPO has tried to examine the ALP of the disputed transaction on the basis of one comparable licensor Samsung Heavy Industries Co. Ltd., dealing with industrial equipments and having territory of operation in Korea Republic, for which also the TPO was not much satisfied about and in para 17.10 the learned TPO has observed as follows: 17.10. Out of the above 12 agreements, there is only one comparables i.e. L22795 which may be said to be a good comparable. Although this is also not geographically similar, I propose to choose this as a comparable since this agreement pertains to Asia (Republic of Korea), and no other comparable agreement was found in India. Thus, the following agreement was found to be comparable to the assessee by applying "other method": S. No. Source Database Agreement ID/Reference Nol. % of royalty on sales 1 RoyaltyStat L22795 3 24. We find that thereupon, without any fi....