TaxTMI 
TaxTMI 
2025 (4) TMI 387
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..../f (-) 2,83,42,156/- Add Additions/disallowance as discussed supra Addition on a/c of TPO adjustment after giving effect to DRP's directions 6,39,04,550/- Addition on a/c of interest income 4,18,312/- Total addition 6,43,22,862/- Gross total income 3,59,80,706/- Brought forwarded losses of earlier years set off 3,51,36,946/- Total income assessed 8,43,760/- Details of brought forwarded losses including absorbed depreciation: A.Y. Losses for the year claimed by the assessee (Rs.) Amount of loss which is allowed to be c/f after scrutiny assessment (Rs.) Amount of loss adjusted with effect of this order Amount of loss which is allowed to be c/f after scrutiny assessment A B C 2010-11 8,58,56,154/- 4,04,82,096/ -* 3,51,36,946/- 53,45,150/- 2015-16 5,54,03,450/- 5,54,03,450/- Nil 5,54,03,450/- *This C/F loss is determined while passing order for A.Y. 2010-11 on 21.01.2019" First the Facts 5. The assessee company is engaged in business of manufacturing of Automobile components - carbure....
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.... parts 74,21,23,717/- 2. Mikuni Corporation Exports Sales 22,50,77,289/- 3. Mikuni Corporation Purchase of fixed assets 5,12,79,433/- 4. Mikuni Corporation License fee for use of know-how 2,25,65,500/- 5. Mikuni Corporation, Japan Payment of supervision fee 97,28,046/- 6. Mikuni Corporation, Japan Payment of royalty 6,08,80,707/- 7. Mikuni Corporation, Japan Reimbursement of expenses 4,70,51,927/- 8. Mikuni Corporation, Japan Interest on external commercial borrowings 29,64,911/- 9. Mikuni Corporation, Japan Fee for provision of guarantee 7,65,422/- 10. Mikuni Indonesia Recovery of expenses 24,97,312/- On receipt of reference, the Transfer Pricing Officer passed order dated 31.10.2019 u/s. 92CA (3) of the 1.T.Act, 1961 after analyzing the facts of the case in detail. The Transfer Pricing officer is stated to have discussed every issue in detail after giving adequate opportunities of being heard to the assessee company. Order was passed by the Dy. Commissioner of Income Tax, Transfer Pricing Officer-2(3) (2), New Delhi. International Transaction of purchase of raw ....
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.... 35^Th Percentile 3.33% 65^Th Percentile 7.85% Median 7.21% On the basis of arm's length median margin 7.21%, Ld. TPO proceeded to recalculate the Arm's length price of the said transactions. Calculation of adjustment as regards said international transactions, as available in TPO order dated 31.10.2019, reads as under :- Particulars Amount Operating Revenue(A) 229,58,89,647/- OP/Sales of comparables (B) 7.21% Arm's Length Margin C=A*B% 16,55,33,644/- Arm's Length Cost D=(A-C) 213,03,56,003/- Cost shown by the assessee(E) 225,06,98,359/- Difference F=(E-D) 12,03,42,356/- International transaction related to Purchase of Goods 74,21,23,717/- % of Cost of International transaction 32.97% Proportionate adjustment of difference 3,96,80,536/- Accordingly, TPO proposed an adjustment of Rs. 3, 96, 80,536/ -. International transactions-Payment of Royalty :- As regards said international transactions i.e. payment of royalty, TPO issued show-cause notice date....
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....ompany by way of objections. The objections find mentioned at page 1 to 3 of the directions issued by Ld. DRP u/s. 144C (5) of the Act. Ld. DRP considered the objections raised by the assessee company and directed the Assessing Officer to incorporate the findings of the said Panel in respect of various objections, in the final order. Giving effect to the directions of Ld. DRP :- In view of the directions issued by Ld. DRP, vide order dated 28.01.2021, the Assessing Officer made adjustment of the income of the assessee at Rs. 6,39,04,550/- revising the same from Rs. 7,74,26,574/- i.e. adjustment as per order u/s. 92CA of the Act. Present Appeal is filed All this led to the impugned assessment order, which is under challenge by way of present appeal. 13. hence, this appeal against the impugned order passed by the Assessing Officer. 14. Arguments heard. File perused. 15. As noticed above additions have been made vide impugned assessment order, as regards the following two types of international transactions; (i) Purchase of material from Associated Enterprise (in short 'AE') (ii) Payment of royalty to Associated Enterprise. Only the....
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....uring above said automobile components, and it started supply of said components to Indian consumers. The assessee company used to get plastic Intake manifold manufactured from Machino Plastics Ltd. an Indian company. The assessee company has its own manufacturing factory in Neemrana. As claimed by the assessee, its manufacturing operations commenced in November, 2009. 19. The assessee had furnished the audit report in form No. 3CEB as required u/s 92E of the Act. To ensure that following 'international transactions and specified domestic transaction' were at 'Arm's Length Price', the case was admittedly referred to Transfer Pricing Officer u/s 92CA of the Act, after obtaining necessary approval of the Pr. Commissioner of Income Tax, Alwar: S. No. Name of AEs Description of International Transaction Amount (Rs.) 1. Mikuni Corporation Purchase of Raw material, components and share parts 74,21,23,717 2. Mikuni Corporation Exports Sales 22,50,77,289 3. Mikuni Corporation Purchase of fixed assets 5,12,79,433 4. Mikuni Corporation License fee for use of know-how 2,25,65,500 5. Mikuni Corporati....
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....made by the Hon'ble Apex Court in the case of DIT (Int. Taxation) vs. Morgan Stanley (291 ITR 416) At page 16 of his order, ld. TPO recorded certain reasons for non application of CPM method to the case of the assessee. Relevant portion thereof is reproduced for ready reference: "Sec. 92C of the IT Act read with Rule 10B prescribes the different methods to be followed to determine ALP. Rule 10C further prescribes that any one of the 05 methods best suited to the facts and circumstances of the case shall be selected as the most appropriate method. In the TP study the taxpayer has selected CPM as the most appropriate method. The CPM is to be applied as under :- "10B. (1) For the purposes of sub-section (2) of section 92C, the arms length price in relation to an international transaction shall be determined by any of the following methods, being the most appropriate method, in the following manner, namely: (a)............................ (b)............................ (c) Cost plus method, by which, (i) The direct and indirect costs of production incurred by the enterprise in respect of property transferred or serv....
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....n making it). "2.39 Another important aspect of comparability is accounting consistency. Where the accounting practices differ in the controlled transaction and the uncontrolled transaction, appropriate adjustments should be made to the data used to ensure that the same type of costs are used in each case to ensure consistency. The gross profit mark ups must be measured consistently between the associated enterprise and the independent enterprise. In addition, there may be differences across enterprises in the treatment of costs that affect gross profit mark ups that would need to be accounted for in order to achieve reliable comparability. In some cases it may be necessary to take into account certain operating expenses in order to achieve consistency and comparability; in these circumstances the cost plus method starts to approach a net rather than gross margin. To the extent that the analysis takes into account operating expenses, the reliability of the analysis may be adversely affected, for the reasons set forth in paragraphs 3.29-3.32. Thus, the safeguards described in paragraphs 3.34-3.40 may be relevant in assessing the reliability of such analyses." "2.40....
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....it is apparent from details given above that the tax payer itself did not include all the direct and indirect costs while computing gross mark up. The details of expense excluded were simply not available Thus it is difficult to say whether the gross profit worked out in the case of the comparables is at the same level as that of the taxpayer. 4. The functional analysis as carried out by the taxpayer is not the only criteria in selecting the most appropriate method. When two enterprises are compared on a cost plus method, the direct and indirect costs of production in connection with such services have to be ascertained pie to pie. But, such information is not available in the public domain in the case of comparables selected either by the taxpayer or by the TPO. Also in the case of taxpayer's case, all costs are apportioned based on approximation. In such a scenario where the taxpayer decides the cost on approximation basis and where such information is not available in the case of comparable companies, Cost Plus Method would not be a reliable method as the results are based on approximations and assumptions. Instead, considering PBIT would be a more reliable measure ....
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....ailable then there is no need to go to CPM especially when the reliable data either in the taxpayer's case or in the comparable cases is not available for ascertaining the direct and indirect cost of production of services. The other methods such as CUP, Resale Price Method and Profit Split Method are also rejected due to non availability of data and non applicability in the facts and circumstances of the case. " Learned TPO was of the view that TNMM is the most appropriate method in the facts and circumstances of the taxpayer's case. In this regard, following observations were made by Learned TPO: "TNMM is described in Rule 10B (1) (e). The provisions of the rule are broadly based on the OECD guidelines in this regard which are reproduced below: "ii) Transactional net margin method a) In general 3.26 The transactional net margin method examines the net profit margin relative to an appropriate base (e.g. costs, sales, and assets) that a taxpayer realizes from a controlled transaction (or transactions that are appropriate to aggregate under the principles of Chapter 1). Thus, a transactional net margin method operates in a manner simila....
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....en all the above 4 methods cannot be applied, TNMM method can be applied as data on net margins is available in the public domain and also reliable as PBIT on Operating Cost is considered as the PLI (Profit Level Indicator). It is worthwhile to reproduce the observations of the Hon'ble Supreme Court in the case of DIT (Int Taxation) vs. Morgan Stanley (29ITR416), where the court held as under "The taxpayer is required to compute the arm's length price for a transaction(s) using one of the five methods stipulated in the Income tax Rules. Rule 10C (1) of the Income-tax Rules defines the most appropriate method as the method which is most suited to the facts and circumstances of each particular international transaction. As per rule 10C (2) the most appropriate method has to be selected having regard to a number of factors which are enumerated therein." The Apex Court has clearly given primacy to rule 10C (2) for purposes of selecting the most appropriate method, which is wider in scope than rule 108(2) The Hon'ble Court further observed as under: " ... the methods quoted above namely CUP, RPM, CPM, PSM, & TNMM are mentioned in ....
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....ged in provision of software development services to its AEs, in the nature of customization of condition monitoring software, to meet specific requirements of customers. Therein, certain companies were found to have accepted as functionally comparable with the appellant, but were disregarded only because of different financial years. Furthermore, therein out of 19 comparable companies selected by the assessee in its TP study, 18 were rejected by TPO as the comparables were mainly engaged in providing security services or travel related services etc., not at all comparable to the segments of the assessee, which was broadly an administrative service segment. It was observed that in the given situation, the TPO had no choice but to work out the ALP on the basis of fresh search. In Dy. C.IT v. Panasonic AVC Networks India Co. Ltd., ITA No.4620/Del/2011, decided on 21.2.2014, by ITAT, Delhi Bench, the assessee had used TNMM with net profit margin on sales as profit level indicator, and said method was accepted by TPO as well, but the TPO did not agree with the assessee on the point of adjustments for capacity utilization and the ground for rejection was that all the comparable....
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.... assessee was engaged in business of manufacturing and supply of control cable and catering only to four wheeler automobiles, especially car industry Hyundai Motors India, whereas the comparable company was in a diversified business and catering to the needs of not only to four wheeler industry but also to two-wheeler automobile industries, and the assessee was not doing sales to Hyundai Motors, whereas the comparable company used to cater to the needs of all the automobile manufacturers. Therein, segmental details were not available, as claimed by the assessee. The Co-ordinate Bench was of the view that comparable company could be having the segmental details, and as such the matter was remanded to TPO for reconsideration, and ultimately the Assessing Officer was to follow the procedure as laid down in section 144 C of the Act. One of the contentions raised on behalf of Ld. AR for the appellant is that reasons given by ld. TPO in rejecting CPM from being applied to the case of the assessee, and pointed out that in para 2, 7 & 8, ld. TPO referred to software services, market price of said services and price charged in case of software industries, but, the assessee company is ....
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.... "reasonably accurate"; and that as per the provisions of law the adjustments are to be carried out in the case of comparables and not in the financials of the tested party, but in absence of specific details of the abnormal factors in the case of comparables, no adjustment could be carried out. We uphold said reasoning recorded by Learned TPO in rejecting the contentions raised on behalf of the assessee on these aspects i.e. in rejecting CPM selected by the assessee and in preferring TNMM. 22. We have gone through the order passed by Learned DRP while dealing with the objections raised by the assessee against the draft assessment order. Learned DRP dealt with each objection raised by the assessee giving reasons. We do not find any merit in the contention raised on behalf of the appellant that Learned DRP ignored to record independent findings on the point of method selected and rejected by Learned TPO. It cannot be said that this aspect remained unadjudicated. 23. In the given facts and circumstances of the appeal at hand, the decisions cited on behalf of the appellant do not come to its aid so as to say that the observations made and the conclusions arrived at by Learned....
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....e to the agreement entered into by the assessee. Accordingly, the following agreements are proposed to be used to benchmark 'Payment of Royalty transaction: S. No. Ref. Licensor Licensee Royalty Rate 1 L30729 Axion Power International, Inc. LCB International, Inc. 2% 2 L8517 Newgen Technologies Inc. Newgen Fuel Technologies Ltd. 0.12% 3 L4054 Littelfuse, Inc. Pacific Engineering Co., Ltd. 2.50% Average 1.54% 2.2 Since, assessee has paid royalty at the rate of 5 percent of the Net sales of the products or parts however comparables average royalty rate is only 1.53% which is much lower than royalty rate paid by the assessee. Therefore, it is proposed that the AP of the royalty payment will be benchmarked at the rate of 1.53% and adjustment will be made accordingly as per the available details." 26. In its reply to the above said show-cause notice, main claim of the assessee was that transactions of payment of royalty should be benchmarked as a part of activity of the assessee, and not as a separate transaction, the reason being that the same is intrinsically linked to the manufacturing activities. Ld. T....
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....ransaction or class of associated persons or functions performed by such persons or such other relevant factors, as prescribed by CBDT, may be taken into consideration. Aggregation or Segregation approach? For a transaction to be benchmarked at aggregate level, essential condition is that the transaction is so interlinked with other transaction that same cannot be benchmarked separately. Discussion Royalty means payment of any kind received as consideration for the use of or right to use any intangible property like copyright, design or model, secret formula or process, trademark, trade name or for information concerning industrial and commercial experience. Determination of arm's length price in case of royalty payment for transfer of intangible property is not an easy exercise. Provisions pertaining to arm's length price have been enacted to prevent tax evasion and also to ensure that intercompany or intra group transactions are conducted at fair market value. As observed in Sony Ericsson'sMobile Commission India (P) Ltd. v. CIT 55 taxmann.com 240 (Delhi) case, the core object and purpose for undertaking the exercise of transfer pricing analysis i....
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....d for all the services, collectively, the TPO applied TNM method except as regards payments made by way of fee for technical assistance, but worked out arm's length price for said fee on an entirely different method-CUP method. In the given facts and circumstances, it was held that once the TPO had applied TNM method as the most appropriate method, it was not open to the TPO to determine arm's length price in respect of the sole element i.e. payment of fee for technical assistance on CUP method. 28. Admittedly, during the year under consideration, the assessee paid running royalty of Rs. 60,880,707/- to its AE i.e. Mikuni Corporation, Japan, at the rate of 5 percent of the Net sales. As claimed by the assessee itself, it paid royalty to its AE for availing of license to manufacture and sell products in India. As further claimed by the assessee, it clubbed the transaction of payment of royalty with other international transactions pertaining to manufacturing segment of the assessee to benchmark the same on an aggregate basis using CPM. It is also admitted that the assessee has used CPM as the most appropriate method and clubbed with other international transactions ....
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....establish that same could be evaluated on a combined or aggregate basis. Having regard to the material available on record, it can safely be said that said transaction of payment of royalty is a separate class of transaction. Comparable Agreements-Whether same could actually be termed as such? 29. It may be mentioned that in reply to the show cause notice, as regards said transactions of payment of royalty, the assessee had objected to the selection of comparable agreement. Thereupon, ld. TPO examined all the agreements and dealt with said objection by observing in the manner as. S.No. Name of Licensor Name of Licensee Assessee's comment TPO's Comments 1. Axion Power International, Inc. LCB International, Inc. * Agreement not similar This agreement has been examined by this office and it is observed that product defined in agreement is not similar to assessee as Axion Power International, Inc.is the owner of certain technology related to manufacturing of automotive Parts. Accordingly, it be considered as comparable agreement. 1. Newgen Technologies Inc. Newgen Fuel Technologies Ltd. * Agreement not similar Argument of th....
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....censor is owner of Light Valve Architectural Window Product, Light Valve Transportation Vehicle Window Product, Light Valve Appliance Window Product, Light Valve Sunvisor Product, or a Light Valve Automotive Mirror Product incorporating a Light Valve Accordingly, it cannot be considered as comparable agreement. 1. Edmond B. Cicotte of 11086 Hedgeway, Utica, Michigan Williams Controls, Inc., a Delaware Corporation, and Proactive Acquisition Corporation, a Michigan Corporation * Agreement similar This agreement has been examined by this office and it is observed that product defined in agreement is not similar to assessee as the the Licensor act as the consultant for manufacture of automotive brake, clutch and/or accelerator pedals and related technology. Accordingly, it cannot be considered as comparable agreement. This is duplicate agreement and similar to the above agreement. 1. FEULING ADVANCED TECHNOLOGIES, INC. KLEIN ENGINEERED COMPETITION COMPONENTS, INC * Agreement similar This agreement has been examined by this office and it is observed that product defined in agreement is not similar to assessee as the Licensor is owner of trademark and patent....
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....ate of 3% and 5% respectively be considered in computation of the TP adjustments. 34. Ld. DRP reproduced relevant data regarding payment of royalty by assessee to its AE on net sales of its products, in a tabulated form. Said table when reproduced reads as: Products Net sales Royalty rate 3% Royalty rate 5% Throttle Body 8,82,34,439 3,98,50,428 Plastic Intake Mainfold - 13,93,97,974 Carburator Assy, 30,63,55,230 65,28,54,106 Electric Throttle Valve - 9,91,40,053 Intake Assembly - 4,86,08,608 Total Sales 39,45,89,669 97,98,51,169 Total Royalty paid 1,18,47,260 4,90,33,446 35. Accordingly, ld. DRP directed ld. TPO to verify the computation and take necessary action as required, in case said contention was found to be correct. 36. However, while dealing with ground No. 1 relating to the action taken by ld. TPO in considering non comparable royalty agreements, ld. DRP did not find any merit in the distinctive features pointed out by assessee, and observed as under: "3.9.1 it is submitted that the TPO selected following agreements as comparable to the assessee's royalty agreement: 3....
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.... has considered the submission and finds no merit in it. Neither the licensed product nor the technology involved is similar in this case. The TPO, therefore, is right in rejecting this set of comparables. 3.10.2 Feuling Advanced Technologies, Inc. /Klein Engineered Competition Components, Inc. The TPO has stated that the licensed product is not similar to the product of the assessee and also involves technology for manufacture of centre fire two valves cylinder head kits and assemblies for Chevrolet engines. The assessee, on the other hand, states that the license in this case involves license to manufacture and sell center fire two valve cylinder head kits and accessories for Chevrolet big block engines. According to it, the license agreement is related to manufacture of auto components. 3.10.2.1 The Panel has considered the submission. In view of the stark dissimilarity in the product as well as technology, this agreement cannot be included. The Panel, therefore, confirms the exclusion of this comparable by the TPO. The objection, accordingly, stands rejected. " In Dy. CIT v. Magneti Mareli Powertrain India's case, cited on behalf of the appella....