TMI Blog2019 (3) TMI 1539X X X X Extracts X X X X X X X X Extracts X X X X ..... spect to the above ground based on the above limited remand. Therefore, at the request of the parties we also agree to give similar directions for all these years. The transfer pricing study document prepared by the assessee for benchmarking the royalty payment does not inspire any confidence but merely eyewash. Therefore, in view of a) the inadequate facts about the product comparability for technology for which trademark fees is paid as Royalty b) Absence of availability of agreement between two foreign parties, as well as terms , economic indicators, risk etc c) No adjustment on account of geographical difference between two prices d) Use of database PowerK without justification and not using other specific databases e) Use of inappropriate filters Therefore, for all these years, i.e. A Y 2009-10 to 2012 – 13, We direct limited remand to the ld TPO to examine the comparability analysis for determination of the arm’s-length price of the royalty fees paid by the assessee. For the examination of the learned transfer pricing officer we direct the assessee to submit a fresh comparability analysis before the learned transfer pricing officer justifying the use o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nditions specified in the agreement. According to the agreement, assessee is not required to pay any royalty fee up to 31/05/2008. However, after that date assessee was required to pay royalty fee of 0.15 percentage of net service revenue for the period from 01/06/2008 to 31/03/2009. According to the agreement, review of the terms will take place every 3 years commencing on April 1, 2012. The fees was payable in the US dollars exclusive of service tax and VAT in monthly installments. 4. Identical agreement containing identical terms, effective from the same date, for use of Vodafone name and order full Mark, the assessee entered into an agreement with Vodafone Ireland marketing Ltd for payment of royalty at the rate of 0.30 percentage payable in Euro. 5. Assessee in its T P Study Document at para number 5.1.1 of the transfer pricing report stated that transaction of royalty has been benchmarked using CUP as the most appropriate method. Assessee used PowerK database and selected only comparable where Royalty payment at the rate of 7% of net sales by Forward Industries Incorporation, USA to Motorola incorporation USA for trademark license for use of Motorola signature and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arks, viz., Vodafone and Essar. Both the companies agreed not to charge any royalty till 31.05.2008. After 31.05.2008, the assessee was required to pay royalty @ 0.15% of net service revenue to Rising Group Ltd. for use of brand name Essar and @ 0.30% to Vodafone Ireland for use of brand name Vodafone. The assessee adopted a comparable instance of payment of royalty @ 7% of net sale of Forward Industries Inc., USA to Motorola Inc., USA, for trade mark licence for use of Motorola signature and logo. The assessee claimed that since the payment @ 0.15% and 0.30% for use of brand names, Essar and Vodafone, was lower than 7% paid by Forward Industries Inc., USA to Motorola Inc., USA, its international transactions were at ALP. 60. The TPO accepted the use of the CUP, as was also employed by the assessee, as the most appropriate method. He, however, did not treat payment of royalty @7% of the net sales of Forward Industries Inc., USA to Motorola Inc., USA, as comparable because of the functional dissimilarity. Considering the fact that the assessee was not earlier paying royalty for use of Essar and Vodafone trademarks up to 31.05.2008, the TPO determined Nil ALP of the interna ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0 ITR 307 (P H) has held that the question whether a transaction is at an arm's length price or not is not dependent on whether the transaction results in an increase in the assessee's profit. A view to the contrary would then raise a question as to the extent of profitability necessary for an assessee to establish that the transaction was at an arm's length price. A further question that may arise is whether the arm's length price is to be determined in proportion to the extent of profit. Thus, while profit may reflect upon the genuineness of an assessee's claim, it is not determinative of the same. It went on to hold that business decisions are at times good and profitable and at times bad and unprofitable. Business decisions may and, in fact, often do result in a loss. The question whether the decision was commercially sound or not is not relevant. The only question is whether the transaction was entered into bona fide or not or whether it was sham and only for the purpose of diverting the profits. 64. Reverting to the facts of the extant case, it is established beyond doubt that brand names of Essar and Vodafone have in fact been used by the assessee, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the assessee and then the AO making addition simply on the basis of recommendation of the TPO, is not in accordance with the judgment of the Hon'ble jurisdictional High Court in CIT v. Cushman Wakefield (India) (P.) Ltd. (2014) 367 ITR 730 (Del), in which it has been held that the authority of the TPO is limited to conducting transfer pricing analysis for determining the ALP of an international transaction and not to decide if such service exists or benefits did accrue to the assessee. Such later aspects have been held to be falling in the exclusive domain of the AO. In that case, it was observed that the e-mails considered by tribunal from Mr. Braganza and Mr. Choudhary dealt with specific interaction and related to benefits obtained by assessee, providing a sufficient basis to hold that benefit accrued to assessee. As the details of specific activities for which cost was incurred by both AEs (for activities of Mr. Braganza and Mr. Choudhary), and attendant benefits to assessee were not considered, the Hon'ble High Court remanded the matter to file of concerned AO for an ALP assessment by TPO, followed by AO's assessment order in accordance with law considering th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... observed that the benchmarking of international transactions pertaining to payment of royalty and not be done by using comparable is with transactions entered into between two foreign parties. This observation in the opinion of the court is not warranted to. Having regard to the fact that all materials were available with it, the ITAT is directed to consider the transactions involving AMP expenditure as well as the issue of royalty. In this regard its observation with respect to the comparables used by the assessee viz a viz the two foreign parties shall not be treated conclusive. The ITAT shall carry out necessary enquiry if need be by resorting to a limited remanded to the TPO or DRP as the case may be having regard to the overall facts and circumstances and decide whether AMP expenses required in the present case involved international transaction, if so, to what extent. 10. With respect to the transaction of determination of ALP of royalty payment, the issue has been remitted back to the ITAT. 11. Adverting on this issue the learned authorised representative, Shri Deepak Chopra, advocate referred to the brief history of the payment of the royalty by the assessee. He r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... comparability analysis for the intangible property and benchmarking is to be applied accordingly. He further stated that functional similarity has no role to play in CUP at all. He further referred to the accept/ reject matrix placed at page number 43 of the transfer pricing study report. In view of this, he submitted that the benchmarking conducted by the assessee should be accepted and the transaction of the assessee is at arm slength. He therefore submitted that the order of the learned transfer pricing officer/dispute resolution panel with respect to the above is not sustainable. 12. The learned departmental representative vehemently supported the order of the learned transfer-pricing officer with respect to the other contentions. He submitted that CUP method is not accepted by TPO, he referred to para no 4.6 of his order. He further submitted that the benchmarking analysis made by the assessee for the comparability analysis is only selecting one comparable transaction and that too from the software, which only has the companies listed at Security exchange commission of the United States of America. Further stated that there is no geographical adjustment made by the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on] j) FACTIVA [32000 companies over 200 countries] (iii) Royalty payment Specific Software a) RoyaltyStat b) RoyaltySOurce c) ktMINE Many databases as sated above are specific to transactions of Royalty. These were not used by the assessee , but it used powerK databases without properly justifying it. We did not find any justification 4 using the above database over preference to other databases in the transfer pricing documentation prepared by the assessee, before the assessing officer or DRP or before the coordinate bench in the original proceedings and even before us now. In view of these , selection of database itself is devoid of any merit. 17. Tainted qualitative Filters In spite of our observation with selection of database , we proceed to examine the search methodology adopted by assessee. Search process is mentioned at page no 20 , para no 20 of the TP study report. (i) The first filter adopted by the assessee of identifying agreements in database involving the transfer of technology intangibles and / or network intangibles with at least one of the parties to the agreement categorized under NORTH AMERICAN INDUSTRIAL CLASSIFICATION CODE [NAIC] ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ilter resulted into the rejection of nine agreements out of 25. b. The assessee also applied a filter of comparable agreement on related products, which resulted into rejection of 10 agreements. c. The assessee also applied a filter that the comparable agreement should specify the payment terms. On adoption of this filter, two agreements were rejected. d. Assessee also applied a filter that the comparable agreement should not be between related parties, which resulted into rejection of one agreement. e. The assessee also applied a filter that agreements that are superseded by another agreement should be excluded, which resulted in rejection of further two agreements. 18. On careful analysis of the 1st filter applied by the assessee that the comparable agreement should be in force during the financial year 2008 09 are up to 2 years prior does not fit into the comparability analysis of the assessee because in the assessee s own case for both the years and for both the agreements the assessee also did not pay any royalty. This is the 1st year of the payment of Royalty in case of the assessee itself. Therefore for what reasons this filters are applied where it was made ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , and further narrowing down it by applying percentage of net sales as payment of Royalty and percentage of gross sales both, surprisingly the assessee could filter out only 25 comparable agreements out of the whole lot of 13,000 uncontrolled agreements stated to be in the database. On application of further filters out of 25 agreements, the assessee weeded out 24 comparable agreements. Therefore, in the end only one agreement was found comparable to the agreement of the assessee. This itself shows how assessee has narrowed down the comparability analysis to reach at a single agreement in the whole world of trademark license fees comparable with the transaction entered into by the assessee. According to us, it is an innovation by the assessee but even not a discovery of the business model of paying the trademark license fees. 25. Now coming to the single agreement which was found to be comparable by the assessee, This agreement was where the licensor is Motorola incorporation USA and the licensee is forward industries incorporation USA, the period of the agreement was January 2008 to March 2009 and services were trademark license fees for the use of Motorola signature and th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... evaluated considering all factors that could affect prices or profits in arm's length dealings (comparability factors). While a specific comparability factor may be of particular importance in applying a method, each method requires analysis of all of the factors that affect comparability under that method. Such factors include the following -- (i) Functions; (ii) Contractual terms; (iii) Risks; (iv) Economic conditions; and (v) Property or services. Therefore, even otherwise it needs to be established by the assessee that underlying trademark fees is also related with similar products. Even otherwise, the finding of the coordinate bench has not been upset by honourable High court, hence we reject this argument of the ld AR. 27. As the Honourable High court has directed ITAT to determine the ALP of the Royalty ( Trademark License fees) payment and only comparable was stated to be payments by Forward Industries Inc to Motorola inc, and further as assessee did not provide any details about the agreement between Motorola and forward incorporation, we are duty-bound to make our own research on the issue. 28. We looked at the functional profile of the Forward Industries ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... all appeals listed before us of this assessee the above issue is common and therefore he requested that if the benchmarking methodology of determination of the arm s-length price of the royalty payment is decided once and for all, the dispute of the assessee on this aspect would be settled for all the years. 32. Though the honourable High Court has directed us to determine the arm slength price of the royalty payment, however very kindly looking at the complexity of the issue, honourable High Court was also pleased to authorize the coordinate bench to carry out necessary enquiries and if need be to resort to a limited remand to the learned transfer pricing officer or dispute resolution panel. 33. During the course of hearing both the parties also submitted that identical issue is involved with respect to the determination of the arm s-length price of the international transaction of the payment of royalty to associated enterprises in all those years from assessment year 2009 10 to 2012 13. Therefore, it was requested that if the issues remanded to the learned transfer-pricing officer then similar direction to both the parties may be given for all those years and all thos ..... X X X X Extracts X X X X X X X X Extracts X X X X
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