TaxTMI 
TaxTMI 
2023 (9) TMI 1785
X X X X Extracts X X X X
X X X X Extracts X X X X
....10-2016. The Ld. TPO proposed certain Transfer Pricing Adjustments which were incorporated in draft assessment order dated 30-12-2016 and this order was subjected to assessee's objection before Ld. DRP. Considering these directions, Ld. TPO modified its order on 30-10-2017 and on the same date, final assessment order was passed against which the assessee is in further appeal before us. 2. The assessee has filed concise grounds of appeal on 17-03-2023 which read as under :- "For that the order of the Learned Assessing Officer u/s. 143(3) r.w.s.144C(13) of the Income Tax Act, 1961 is opposed to law/facts and circumstances of the case. Issue No 1: Transfer Pricing Adjustments in respect of Royalty: 2.For that the Learned Assessing Officer, based on the directions issued by the Dispute Resolution Panel ("DRP") erred in making the downward adjustment to the tune of Rs.8,62,92,000/- on payment of Royalty to Associated Enterprise ("AE") for use of Technical Know-how for manufacture of Wind operated Electric Generator as suggested by the Transfer Pricing Officer, ("TPO") stating that the same pertains to the bought-out components. 3.For that the L....
X X X X Extracts X X X X
X X X X Extracts X X X X
....16,000/- wherein the Operating Cost includes the amount of downward adjustment made in respect of Royalty and Management Service fee and thereby failed to consider the entity level adjustment on Parity Basis as against the observation made in the TPO Order." As is evident, the assessee is aggrieved by confirmation of certain Transfer Pricing (TP) Adjustments on account of royalty, management fees and entity level TP adjustments. The assessee is also aggrieved by confirmation of disallowance u/s 36(1)(va) as well as confirmation of disallowance u/s 14A. 3. The Ld. AR placed on record issue wise charts and assailed the impugned additions. Our attention has been drawn to earlier orders of Tribunal in assessee's own case. The Ld. CIT-DR controverted the submissions of Ld. AR and supported the final assessment order. Having heard rival submissions and upon perusal of case records, our adjudication would be as under. The assessee being resident corporate assessee is stated to be engaged in manufacturing of wind turbines. The assessee also provides operation and maintenance service for wind turbine generators (WTG). The assessee is an Indian Subsidiary of Gamesa Spain. 4. Tra....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... also considered as non- operating in nature. 4.3 The assessee claimed certain costs to be non-operating in nature which are listed in para-9 of TPO's order. The Ld. TPO held that bank charges and provision for impairment of fixed assets would form part of operating cost. The assessee claimed depreciation adjustment for unutilized capacity on the ground that it operated at 48% of installed capacity whereas the comparabale did not suffer any capacity underutilization. However, the same was rejected by Ld. TPO. The assessee also claimed depreciation impact on new factory installations on the ground that the new factory did not commence its operations. However, in the absence of any satisfactory evidences, this plea was rejected. The plea to exclude obsolete material was also rejected. The assessee claimed custom duty adjustment. However, the same was rejected in the absence of any satisfactory evidences. The assessee claimed underutilization adjustment which was also rejected. 4.4 The assessee further claimed that forex cost would not be operating in nature. However, Ld. TPO observed that the forex risk was to be borne by the assessee and the transactions were denominated i....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... absence of clear proof of application of technology, the revenue arising out of erection and commission charges and development revenue do not qualify for payment of royally. The other issue would be quantification of turnover from sale of WTG. This requires to be adjusted for the value of bought out components from AE as there would be already technology embedded therein and on which AE would have recovered cost together with mark-up. The aggregate royalty paid by the assessee aggregated to Rs.3984.69 Lacs. The Ld. TPO also noted that the assessee imported material from its AE for Rs. 19176.43 Lacs which has been detailed in the order. The Ld. TPO proposed adjustment of royalty on account of standard bought out components, royalty on development revenue and royalty on erection and commissioning and held an opinion that royalty would not be payable on these components. 6.2 The assessee submitted that royalty paid as percentage of sales was just measure for payment of royalty for technology received by them. The technology was used for manufacture and supply of WTG, erection and installation of WTG etc. However, rejecting the same, Ld. AO held that ALP of royalty on bought out c....
X X X X Extracts X X X X
X X X X Extracts X X X X
....so pleaded for inclusion of one entity i.e., M/s Global Wind Power Ltd. which was rejected since financial data could not be furnished by the assessee. The assessee's objection that ALP of royalty and management fees could not be determined separately by Ld. TPO since aggregation approach was accepted by Ld. TPO, was also rejected. Regarding royalty payment, it was observed by Ld. DRP that royalty was to be calculated by the assessee on the basis of net ex- factory sale price of the product exclusive of excise duties minus the cost of standard bought out components and landed cost of components, irrespective of the source of procurement, including ocean freight insurance, customs duties etc. However, the assessee had not done so. Therefore, plea regarding royalty on bought out components was rejected. The findings of Ld. TPO that royalty was not to be paid on revenue from erection and commissioning and development of land was also confirmed since the assessee could not show as to how the transfer of technology was linked to sale of products and how the same has been used for sale of its products. Similarly, how separate technology for O & M activities is required when the asses....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... The bench in, para 6.6 to 6.8 adjudicated this issue as under: - 6.7 Further, it is to be noted that there cannot be any restriction on payment of royalty on bought out components which were subject to further processing by the assessee and which was not sold on as is basis to end customers. This view of ours is fortified by the decision of the Tribunal in the case of Akzo Nobel Chemicals (India) Ltd. (supra) wherein held in para -23 that what is liable to be considered as standard bought out components are such material on which no further processing is required and are directly fitted into the final product; and, cost of such material only needs to be deducted from the sale price to compute the royalty payable. Applying the said clarification to the present situation, considering the manufacturing process explained, it cannot be construed that the so-called constituent material are merely fitted into the final product; on the contrary, it is a case where such material also undergoes a chemical reaction in the process of producing the final product and the same are irretrievable once the finished product is manufactured. For the said reason also, in our considered opinio....
X X X X Extracts X X X X
X X X X Extracts X X X X
....onsidered in the context of the OECD guidelines which have been exhaustively referred by the Hon'ble Delhi High Court in the case of EKL Appliances Ltd. (supra), the impugned situation does not fit into the two exceptions. Firstly, neither the Revenue has alleged and nor is there any material on record to suggest that the economic substance of the impugned transaction differs from its form. Secondly, there is no material on record to suggest that there is an arrangement between assessee and the AE made in relation to the impugned transaction which would differ from those which would have been adopted by independent enterprises behaving in a commercially rational manner. We say so for the reason that the entire gamut of royalty payment by the assessee to the AE is in terms of the Foreign Technology Collaboration agreement, which is duly approved by Govt. of India in terms of its Policy, which is applicable across the spectrum. Moreover, it is not the case of the TPO or even of the Revenue before us that the royalty remitted by the assessee to the AE has been found to be inconsistent or violative of the respective Government or RBI guidelines or any other authority in law. Furthe....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ld that :- 17. As far as the second question is concerned, the TPO accepted TNMM applied by the assessee, as the most appropriate method in respect of all the international transactions including payment of royalty. The TPO, however, disputed application of TNMM as the most appropriate method for the payment of technical assistance fee of Rs. 38,58,80,000 only for which Comparable Uncontrolled Price ("CUP") method was sought to be applied. Here, this court concurs with the assessee that having accepted the TNMM as the most appropriate, it was not open to the TPO to subject only one element, i.e payment of technical assistance fee, to an entirely different (CUP) method. The adoption of a method as the most appropriate one assures the applicability of one standard or criteria to judge an international transaction by. Each method is 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 c....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ibunal in 'Ekla Appliances', 2012- TH-01-HCDel- TP, has been sought to be distinguished by the TPO, observing that the facts in that case are not in pari materia with those of the assessee's case. However, therein also, the benefit test had been applied by the TPO, as in the present case. The matter was carried in appeal before the Hon'ble High Court. The Hon'ble Delhi High Court has held that the so-called benefit test cannot be applied to determine the ALP of royalty payment at nil and that the TPO could apply only one of the methods prescribed under the law. A similar view has been taken in 'Sona Okegawa Precision Forgings Ltd.' case (supra) and in 'KHS Machinery Pvt. Ltd. v. ITO' 53 SOT 100 (Ahm) (URO). 35. It is, thus, seen that the royalty payment @ 3% by the assessee is at arm's 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, roya....
X X X X Extracts X X X X
X X X X Extracts X X X X
....aken of these documents submitted after the hearing were completed. Regarding copy of correspondence with the AE for allocation of cost, it was observed by the DRP that no such document was furnished by the assessee. However, before us the assessee filed additional evidences for the A. Y 2012-13 as discussed in earlier para elsewhere in the order and we are in-principle agree with the contention of the assessee regarding the allowability of management fees and there is no requirement of transfer pricing adjustment on this issue, subject to verification of availing of actual services and allocation of its cost to the assessee. For the A.Y 2011-12, it was stated that all the relevant evidences were already available with the Assessing Officer/TPO and on that basis; it is required to be verified with regard to availing actual services and its allocation of cost to the assessee. Accordingly, this ground relating to Management fees is remitted to the file of ld. Assessing Officer for fresh consideration for both the assessment years and the Assessing Officer after going through the evidences filed by the assessee decide the issue fresh as indicated above. This ground is partly allowed f....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s 14A. The Ld. AO, applying Rule 8D, computed aggregate disallowance of Rs.50.24 Lacs which was interest disallowance u/r 8D(2)(ii) for Rs.44.11 Lacs and indirect expense disallowance u/r 8D(2)(iii) for Rs.6.13 Lacs. The same was added under normal provisions as well as while computing Book Profits u/s 115JB. The Ld. DRP confirmed the same against which the assessee is in further appeal before us. 14.2 The Ld. AR has submitted that the assessee has not earned any exempt income during the year and therefore no such disallowance could have been made as per the decision of Hon'ble High Court of Madras in the case of Chettinad Logistics Pvt. Ltd. (248 Taxman 55). The SLP against the same has already been dismissed by Hon'ble Apex Court which is reported as 95 Taxmann.com 250. Another plea is that the assessee has sufficient interest free funds to make investment and therefore, a presumption would arise that the investments were sourced out of interest free funds available with the assessee. Regarding adjustment thereof u/s 115JB, the Ld. AR submitted that this issue is covered in assessee's favor by the earlier decision of Tribunal for AYs 2011-12 and 2012-13. 14.3....