TaxTMI 
TaxTMI 
2026 (3) TMI 1262
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....eedings were initiated in the case of assessee by issue of notice u/s 153A of the Act on 08.06.2015. In response, assessee filed return of income on 28.06.2015, declaring NIL income. The AO after considering the submissions made, passed the assessment order dated 30.06.2016 at NIL income i.e. income declared by the assessee was accepted. Thereafter, ld. Principal Commissioner of Income Tax (PCIT) initiated the revision proceedings and passed the order u/s 263 of the Act wherein it is held that the assessee has entered into international transactions with its Associated Enterprises ("AEs") however, the AO has passed the assessment order without waiting for the order of Transfer Pricing Officer (TPO) and therefore, accordingly set aside the assessment order being erroneous and pre-judicial to the interest of the Revenue and direct the AO to pass a fresh order after considering the order of TPO. In compliance, the AO proceeded with the directions given by Ld. PCIT and considered the order of TPO passed u/s 92CA dated 28.10.2016 wherein adjustments of INR 23.23 crores were made on account of Arm's Length Price (ALP) of international transactions carried out by assessee with its Associa....
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....A) erred on the facts and in law in rejecting certain comparable companies which are functionally comparable to the appellant. 6. On the facts and circumstances of the case and in law the Ld. CIT(A) erred on the facts and in law in not considering the correct operating profit margins of the final comparable companies. 7. On the facts and circumstances of the case and in law the Ld. CIT (A) erred in not allowing the working capital adjustment allegedly holding that a specific claim for claiming the said adjustment has not been made by the appellant. That the appellant craves the leave to add, modify, amend or delete any of the grounds of appeal at the time of hearing and all the above grounds are without prejudice to each other." ITA No.728/Del/2019[Assessment Year : 2011-12] [Revenue's appeal] 1. "Whether on the facts and circumstance of the case and in law the Ld. CIT(A) was justified in deleting the addition on account of royalty' when there was payment made for technical 'know how' over and above 'royalty for the same technology, leading to shifting of profit out of India circumstance of the case and in law the Ld. CIT(A)....
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....e lamps, wash basins fabricated out of 'Perspex' (acrylic) sheets etc. which function is altogether different with of the assessee. 10. Ld.AR drew our attention to page 10 to 12 of the CIT(A)'s order wherein submission of assessee is reproduced according to which the assessee has tried to demonstrate that one of the products and services provided by Bright Brother Ltd. includes automative parts and system automative parts such as front and rear bumper system, headlight cover, green house system, Green House system as exterior system of automotive and cockpit system, Overhead system and side wall system as part of interior system of the automotive. Ld. AR further submits that it is settled preposition that under TNMM, broad functional comparability is to be seen and not the product similarity. Since one of the function of Bright Brothers Ltd. is similar to the function carried out by the assessee therefore the same cannot be excluded. The AO/TP has excluded the said company merely because it is engaged in other products also more particularly when the said company qualifies all the filters applied by AO/TPO as well as by the assessee. It is further submitted by ld. AR that ld. CI....
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....d. AR submits TPO has included five new comparables which are includes PMP Auto Components Pvt. Ltd. having OP/OR of 13.69% and REIL Electricals India Ltd. having OP/OR of 15.69%. Ld.AR submits that these two comparables are incorrectly selected by the TPO. With respect to PMP Auto Components Pvt. Ltd., ld. AR submits that data for this company for FY 2010-11 are not available therefore, it had not qualified one of the filters of current year data and therefore, it should be excluded from the final set of comparable. Ld. AR submits that ld. CIT(A) though in its order at page 54 in para (vi) has observed that if the data of FY 2010-11 is not available in the domain, the same should be excluded however, no specific finding is given. 15. Regarding REIL Electricals India Ltd., Ld.AR submits that this company is having turnover which is not comparable with the turnover of the assessee and therefore, it is to be excluded. He therefore, requested for the exclusion of these two comparable included by AO/TPO. 16. On the other hand, Ld. CIT DR supported the orders of AO/TPO and submits that the TPO at page 12 of the order has given the reasons as to why these two comparables should be ....
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....respect to deletion of TP adjustment on account of payment of Royalty, technical knowhow and payment for technical services. 24. Heard the contentions of both parties at length and perused the material available on record. The claim of the Revenue is that assessee has paid Royalty fee for technical services and technical knowhow which were benchmarked by taking CUP method however, AO/TPO has rejected the claim of the assessee and value shown by the assessee at INR 10.30 crores has been taken as ALP adjustment. Ld. CIT(A) after considering the submissions of the assessee, deleted such adjustment by observing as under:- D. "In ground 4 the appellant has challenged the action of the AO/TPO in disallowing the payment of royalty, technical know-how fees and charges for technical services cumulatively amounting to Rs. 10,30,16,871 paid by the appellant to its associated enterprises. i. It has been submitted by appellant that Nippon Seiki Company Limited (Nippon Seiki) has entered into a Technical Assistance Agreement with JNS Instruments Limited (JNS) dated 25 September 1998 for manufacture of contracted products i.e. Instrument Clusters and their component parts for....
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....ayment of royalty, technical know-how fees and technical charges is a separate class of transaction and needs to be benchmarked separately. TPΟ proceeded to benchmark said transaction by applying CUP method and held that since no benefit has been passed on to the appellant from such payment, the arm's length price of such transaction shall be NIL. iii. It has been submitted that appellant do not possess any technical know-how in creating designs, diagrams & drawings for manufacturing of said automotive components. The appellant cannot commence the production of the said automotive products until the designing, drawing and documentation of the product is completed and for accomplishing this purpose, the appellant entered into Technical Assistance Agreement dated 25 July 1998 with Nippon Seiki since Nippon Seiki has acquired specialization in designing of automotive products over which it owns and maintains Industrial Rights and Know-how in many countries. Accordingly, Nippon Seiki has agreed to provide JNS the technical information in relation to the products contracted in the agreement. It has been submitted that only after receiving the aforesaid technical inf....
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....e supplementary agreement dated 12/06/2009 for providing technical information in respect of instruments clusters for YY4 model (which is known as SX4 model manufactured by Maruti Suzuki India Ltd) and drawings for finished products and its components parts and as per the supplementary agreement dated 16/12/2009 for providing technical information in respect of instruments clusters for Honda City and Similar Models of Honda Seil Cars India Ltd categorized into instruments clusters for four wheelers and drawings for finished products and its components parts. It has been submitted that appellant received requirement from Maruti Suzuki India Ltd and Honda Seil Cars India Ltd for the drawings and design and on receiving the said requirement the appellant approached Nippon Seiki. Nippon Seiki worked on the requirement received from Maruti Suzuki India Ltd and Honda Seil Cars India Ltd and various correspondences and exchange of technical information takes place to finalize the said design and drawing which was suitable to Maruti Suzuki India Ltd and Honda Seil Cars India Ltd and the copy of various correspondence in this regard have been submitted. The payment made under the head Techn....
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....nd drawings along with the various designs, drawings technical information in relation to that, request for technicians for onsite assistance in relation to technology, design, testing etc and the copy of emails exchanged between the appellant and Nippon Seiki along with the various designs, drawings have been furnished. As such Technical Assistance Agreement with Nippon Seiki, the learned TPO was duly provided with the data, documentation, drawings and specifications relating to products requested by the appellant. As such entire business model of the appellant is largely dependent upon the technical support provided by the associated enterprise which possesses the necessary expertise in manufacturing the automotive and related products and components. As such technical know-how used in the appellant's business is the essence or the heart of the appellant's manufacturing process. In absence of the technical know-how provided by Nippon Seiki, the entire business operations of the appellant would come to a halt. As the appellant is operating in the Indian automotive and products market which is extremely competitive and wherein new and improved models of every products are l....
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....ppellant has been 3.83%. The Appellant maintains a profit level which is within the arm's length range vis a vis comparable companies. It has been submitted that once a most appropriate method has been applied i.e. TNMM and all the international transactions entered into by the assessee have been aggregated for the purposes of benchmarking; segregation of transaction is not in accordance with the provisions of the law. The TNMM examines the net profit margin relative to an appropriate base (e.g. cost, sales, and assets) that a taxpayer realizes from a controlled transaction (or transactions that are appropriate to aggregate under the transfer pricing principles). TNMM determines an arm's length price for the transfer of tangible property by reference to an objective measure of profitability of an uncontrolled party, or comparable, that engages in similar transactions or operates under similar circumstances. The method compares the profitability of either the controlled party buyer or seller to the profitability of the comparable. It has also been submitted that the transaction of royalty, technical know-how and technical assistance fee is closely linked with the overall ope....
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.... TPO was not correct in selecting CUP as the MAM based on the facts of the case under consideration. The perusal of material on record clearly shows the benefits accruing to appellant on account of the agreement. The appellant clears the benefit test as is seen on the facts of the case basis payment of royalty, technical know-how and technical assistance fees. The benefit test for determination of Arm's length Price is to be viewed from the perspective of the recipient of the services/ facilities. vii. It was also pointed out that the AO/TPO had accepted the transaction at arm's length for earlier and subsequent periods on same set of agreements. This shall bind the AO/TPO with res Judicata, as the factual matrix has remained same. Further, the appellant has amply demonstrated passing benefit test in this regard. viii. In view of the above addition made of INR 10.3 crores being difference in the arm's length price of the international transaction of payment of royalty, technical know-how fees and technical charges is hereby deleted." 25. It is further observed that assessments for Assessment years 2008-09 to 2010-11 were completed u/s 143(3) r.w.s 1....