TaxTMI 
TaxTMI 
2025 (5) TMI 2270
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....ssee had engaged into international transactions which were in the nature of purchase and sale of finished goods, purchase of fixed assets, royalty and technical fee. Majority of the international transactions were aggregated and benchmarked by the assessee using Transactional Net Margin Method. The appellant assessee had disclosed a margin of 2.10% (after claiming custom duty and working capital adjustment) Vis-a-Vis 7 comparable companies range of 1.16% to 3.95%. In course of proceedings before the lower authorities, the Ld. TPO vide his order dated 26.10.2023 has denied the custom duty adjustment and working capital adjustment and also undertook a fresh search and introduced 6 new comparable. Accordingly the Ld. TPO reworked the margins of Assessee at 1.08% vis a vis 13 comparable companies at 3.69% to 5.35% with a median of 4.44% and proposed an upward adjustment of Rs. 7,38,11,168/-. Apart from the impugned primary adjustment, the Ld. TPO proceeded to disallow Royalty of Rs. 7,48,18,848/- and Technical Fee of Rs. 48,07,002/- holding that these two transactions cannot be aggregated and tested under TNMM but it should be excluded and tested on a standalone basis under "Other met....
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....ecessary for the present year as directed by this tribunal in its decision in ITA No. 3061/Chny/2017 supra. 5.0 We have heard the rival submissions in the light of the material available on record. As far as the controversy as to whether the adjustment of custom duty is allowable or not is no longer res integra as the said issue is already decided in favor of the Assessee in its own case by this Hon'ble Tribunal in ITA No 3061/Chny/2017 vide order dated 23.11.2021 wherein it is held as under: "4. We have heard both the sides, perused the materials available on record and gone through the orders of authorities below including case law and paper books filed by the assessee. Similar grounds was subject matter before the Tribunal and vide order dated 18.08.2017 in I.T.A. No. 2560/Mds/2016 relevant to the assessment year 2011-12, wherein, decision of the Coordinate Benches of the Tribunal in assessee's own case for the assessment year 2011-12 in I.T.A. No. 692/Mds/2016 dated 25.01.2017 has been followed while adjudicating the above ground. The relevant findings of the Tribunal order relevant to the assessment year 2011-12 are extracted as under: "5. We heard....
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....opinion and in principle, the assessee should win on this ground too. One such decision relied upon by the assessee 's counsel supports our finding relates to the decision of this bench of the Tribunal in the case of Skoda Auto India p Ltd 122 TTJ 699 (Pune) dated March 2009 wherein, it is held (in para 19 of the order) that, "No doubt, a higher import content of raw material by itself does not warrant an adjustment in operating margins, as was held in Sony India (P) Ltd. 's case (supra), but what is to be really seen is whether this high import content was necessitated by the extraordinary circumstances beyond assessee 's control. As was observed by a Co-ordinate Bench of this Tribunal in the case of EGain Communication (P) Ltd. (supra) "the differences which are likely to materially affect the price, cost charged or paid in, or the profit in the pen market are to be taken into consideration with the idea to make reasonable and accurate adjustment to eliminate the differences having material effect". We do not agree with the AO that every time the assessee pays the higher import duty, it must be passed on to the customers or it must be adjusted for in negotiating the p....
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....fair for us to adjudicate on this factual aspect without allowing the TPO to examine all the related relevant facts. We, therefore, deem it fit and proper to remit this matter to the file of the TPO for fresh adjudication in the light of our above observations." 38. The perusal of the impugned orders shows that the above cited guidelines by way of decision of this bench of the Tribunal in the case of Skoda Auto India p Ltd (supra) were not available to the revenue authorities. Therefore, we are of the opinion, the issue should be set aside to the files of the TPO with direction to examine the claim of the assessee relating to the import cost factor and eliminate the difference if any. However, the TPO/AO/DRP shall see to it that the difference in question is 'likely to materially affect' the price/profit in the open market as envisaged in sub rule (3) of Rule 1 OB of the Income tax Rules, 1962. Accordingly, ground 4(b) is allowed pro tanto. " Accordingly, we direct the A.O. to give suitable adjustment against the custom duty component while determining the ALP. Considering the custom duty adjustment and co-ordinate bench decision, we remit the dis....
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....lines and therefore the same cannot be faulted. The Ld. Counsel for the assessee placed on record a copy of the order of the Ld. TPO for AY 2013-14 dated 01.03.2022 giving effect to the order of the ITAT, whereby the TPO had examined and allowed working capital adjustment for the assessment years 2013-14. In support of its contentions, the Ld. AR invited reference to evidences and records placed in its paper book. 8.0 Per contra, the Id. DR supported the order of lower authorities. 9.0 We have heard rival submissions in the light of material available on records. We have noted that an Hon'ble Coordinate Bench of this tribunal has considered similar issue, of working capital adjustment, in the assessment year 2013-14 and vide its order ITA No. 3061/Chny/2017 vide order dated 23.11.2021 as held as under: "5.2 We have heard the rival contentions. With regard to the allowability of working capital adjustment, the Tribunal has considered similar issue in the assessment year 2011-12 and vide its order in I.T.A. No. 692/Mds/2016, the Tribunal has observed and held as under: "7. The Ld. AR argued that the Assessing Officer/DRP has confirmed the action of the TPO....
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....he Ld. TPO had excluded the miscellaneous expenses claimed by the assessee while computing the margins of comparable companies on the premise that assessee has not furnished bifurcation of such expense. The Ld. DRP sustained the order of the Ld. TPO holding that these expenses are additional cost not related to core business. The ld. AR pointed out that Rule 10TA does not specifically exclude Miscellaneous Expenses from the definition of operating expenses. It was argued that Rule 10TA excludes only such expenses which are not incurred in the normal course of business of the Assessee. The Ld. AR vehemently argued that every company in its ordinary course of business does incur miscellaneous expense. The ld. AR argued that treatment of an item of expenditure as operating or non- operating is dependent on nature of said item of expense and mere exclusion of the same from operating expenses on account of non- availability of detailed break-down may not be a right approach. The Ld. AR submitted that many times on account of the multitude of expenses and their small values such items are grouped together and disclosed under the head miscellaneous expense. Such a grouping would not mean ....
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....rrive at reasonable conclusions which would not materially affect the profit margins. Therefore, we do not find any reason to interfere with the finding of ld. CIT(A) on this count. In the result ground no. 6 is dismissed". 14.0 We have noted the facts of the present case are akin to those available in judicial precedence discussed herein above and no distinguishment could be made. Accordingly, in respectful compliance to the same, we are of the considered view that miscellaneous expense ought to be considered as part of "operating expense" of comparable companies. The impugned allowance is also permissible in view of its treatment in earlier years in conformity with principles of consistency. Accordingly, we remit the matter to the Ld. TPO with the direction to redetermine the margin of the comparable companies after including the same. Accordingly, the grounds of appeal Nos. 2.16 to 2.17 are allowed for statistical purposes. 15.0 The next issue raised by the assessee vide grounds of appeal nos. 2.24 to 2.31 relates to Royalty payment. The Ld. Counsel for the assessee submitted that Royalty payment should not have been separately benchmarked as it was already benchmarked und....
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....d agreement, the controversy was unnecessary since the Korean version of the amendment to the agreement was signed. It was submitted that though one unsigned copy of the English version was provided yet there was one more copy of the same amendment to the agreement furnished as Annexure 2 to submissions in tabular format which was actually signed. The Ld AR submitted that the parties to the agreement have acted upon the agreement and the Ld TPO has not disputed the same which alludes that the Ld. TPO did not doubt the transaction per se. Mere fact that one copy of the amendment was not signed although the second copy of the English version and even the Korean version was signed would not render the agreement unacceptable. On the issue of non-submission of attachment of the report to the invoice, it was argued that the report was prepared for every six months as per calendar year instead of financial year format. For the purposes of transfer pricing reporting and disclosure, the assessee represented the said data and therefore non-submission was not the case. As regards, differences between actual payment and the amounts reported in Form-3CEB, the Ld.AR argued that the amounts refle....
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.... the considered view that the assessee has adequately explained all the questions of the lower authorities, we are therefore convinced that the reasoning of lower authorities to disallow the payment of royalty cannot be sustained. Having decided that the assessee is in actual receipt of technology for which royalty payments were made, it is imperative to decide whether the payment for the same is at arm's length or not. In this regard, the assessee has aggregated this transaction with the manufacturing transaction and benchmarked the same under TNMM. The Ld AR emphatically argued that since the appellant is dependent on the technology for manufacturing the said transaction (i.e. running royalty payment) is inextricably connected with core business operation and as such it cannot be segregated and benchmarked independently. For this proposition the Ld AR has relied on decision of this Tribunal in the case of Siemens Gamesa Renewable Power (P.) Ltd v. DCIT 155 taxmann.com 406 holding as under: "9. The second issue raised by Ld. AR is against royalty adjustment on turnover pertaining to development of land, substation development and erection and commissioning. We find th....
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....s a package in itself, as it were, containing the necessary elements that are to be used as filters to judge the soundness of the international transaction in an ALP fixing exercise. If this were to be disturbed, the end result would be distorted and within one ALP determination for a year, two or even five methods can be adopted. This would spell chaos and be detrimental to the interests of both the assessee and the revenue. The second question is, therefore, answered in favour of the assessee; the TNMM had to be applied by the TPO/AO in respect of the technical fee payment too. 11.3 A similar view was taken by Co-ordinate Bench of Hyderabad in the case of Air Liquid Engg. India (P.) Ltd. (supra) wherein held that :- '20. Furthermore, we are of the opinion that once TNMM has been applied to the assessee company's transaction, it covers under its ambit the Royalty transactions in question too and hence separate analysis and consequent deletion of the Royalty payments by the TPO in the instant case seems erroneous. We draw support from the Hon'ble Mumbai ITAT decision, Cadbury India Ltd. v. ACIT (ITA No. 7408/Mum/2010 and ITA No. 7641/Mum/2010 dated 13-....
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....length. The Technical Collaboration Agreement stands approved by the Government of India. The royalty payment has been accepted by the department as having been made by the assessee wholly and exclusively for its business purposes. For Assessment Years 2004-05 and 2005-06, such payment of royalty has been allowed by the CIT (A). As per the FEMA Regulations, royalty can be paid on net sales @ 5% on domestic sales and @ 8% on export sales. The royalty payment by the assessee falls within these limits, it also falls within the limits of payment of royalty in the automobile sector, as per the market trend. This payment of royalty is at the same percentage as that paid by other auto ancillaries in the automotive industry. Then, in 'Ekla Appliances' (supra) and in 'Ericsson India Pvt. Ltd. v. DCIT', 2012-TII-48- ITAT-Del-TP, it has been held that royalty payment cannot be disallowed on the basis of the so-called benefit test and the domain of the TPO is only to examine as to whether the payment based on the agreement adheres to the arm's length principle or not. That being so, the action of the TPO in the present case, to make the disallowance mainly on the ground of ....
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....can be adopted. This would spell chaos and be detrimental to the interests of both the assessee" 19.1 In CIT v. Benetton India (P.) Ltd. 171 taxmann.com 536 it was held that :- "61. Apart from acquiring technical know-how, there may have several other elements of costs such as cost for utilities, cost of labour etc. The fact that an assessee may incur a loss in its business, does not necessarily mean that the value of the utilities availed by it or the value of the labour employed is Nil. As noted here in before, the arms' length analysis is not concerned with the commercial expediency of incurring costs. Itis merely confined to determining the ALP of the material or the services used. 62. In the present case, the Assessee had in its commercial wisdom decided to acquire technical know-how for carrying on its business activities. This decision is not subject of a review on merits by the learned TPO. The learned TPO is to merely examine whether the amount paid by the Assessee for acquiring the technical know-how was on arms' length basis. In other words, what would be the costs an assessee would require to pay if it had acquired the technical know- how fr....
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....toms duty adjustment, working capital adjustment and treating miscellaneous expenses as operating in nature for the assessee and the comparable companies. In case the assessee's margin is at arm's length then there would perhaps be no requirement to make separate adjustment for Royalty payments. Accordingly, we remit this issue to the Ld. TPO to redetermine the arm's length price as per our observations herein above. The grounds of appeal Nos. 2.24 to 2.31 are therefore allowed for statistical purposes. 21.0 The next issue raised by the assessee through grounds of appeal nos. 2.32 to 2.39 is regarding the issue of Technical fee payment. The Ld. Counsel for the assessee submitted that the, Ld. TPO has disallowed the technical fee payment on the ground that the assessee has not substantiated the need and benefit of technical services and as such the TPO segregated this transaction and benchmarked it under "other method". The appellant assessee is of the view that technical fee payment should not separately benchmarked as it is already benchmarked under TNMM. The Ld. Counsel submitted that after providing Customs duty adjustment, working capital adjustment and treating ....