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2014 (12) TMI 802 - AT - Income TaxTransfer pricing adjustment - Payment of royalty is for the use of technical know-how by the assessee which is owned by the AEs - Whether the transfer pricing analysis is required to be carried out with respect to tax-payer’s individual international controlled transaction or a group of international controlled transaction having close economic nexus – Held that:- The assessee has aggregated all the international transactions entered into by the assessee with its AE to compute the ALP - assessee contended that all the transactions are interlinked and therefore the same are aggregated under TNMM - the assessee has entered into various transactions which include purchase of raw-material, components and consumables, capital assets and payment towards royalty, technical assistance, IT support fee, payment of warranty claims, training fee, reimbursement of expenses etc. - the payment of royalty is not part of a composite contract/agreement but is on account of a separate Technical Assistance Agreement entered into by the assessee with its AE - The assessee is required to pay the royalty under the Technical Assistance Agreement for use of certain Technical and manufacturing know-how proprietary to Toyota Motor Corporation/Aisin Takaoka Company which is developed by them by virtue of their investment in research and development. The payment of royalty is independent of the purchase of raw materials, components, tools, packing materials, fixed assets etc. - The royalty is exclusively towards the use of know-how in the manufacturing process undertaken by the assessee and is therefore not in any way interlinked or inter-connected with other transactions and it would not lead to inaccurate result if it is analyzed separately - the contract of payment of royalty can be analyzed separately and the ALP of such a payment can be determined independently – in The ‘L’ bench of the Tribunal at Mumbai, in the case of UCB India(P) Ltd. vs. Ass. CIT [2009 (2) TMI 237 - ITAT BOMBAY-L] it has been held that when in an enterprise, only similar transactions are undertaken, i.e. all the transactions are of the same type, same class and of similar variety, and the enterprise does not have any other transaction which is not similar, in such a situation, the operating margins of the enterprise would be the TNMM of a class of transactions. Most appropriate method for determining the ALP of the royalty - Transfer of intangibles - Held that:- The assessee was engaged in the activity of manufacture itself proves the use of technical know-how by the assessee and following the decision in CIT Versus EKL APPLIANCES LTD [2012 (4) TMI 346 - DELHI HIGH COURT] wherein it has been held that it is not necessary for the assessee to show that any legitimate expenditure incurred by him was also incurred out of necessity and also that it is not necessary for the assessee to show that any expenditure incurred by him for the purpose of business carried on by him has actually resulted in profit or income either in the same year or in any of the subsequent years - the only condition is that the expenditure should have been incurred wholly and exclusively for the purpose of business and nothing more and the quantum of expenditure can no doubt be examined by the TPO as per law in allowing as business expenditure but he has no authority to disallow the entire expenditure or part thereof on the ground that the assessee has suffered continuous losses - so long as expenditure payment has been demonstrated to have been incurred or laid out for the purpose of business, it is no concern of the TPO to disallow the same on any extraneous reasoning and as provided in the OECD guidelines, he is expected to examine the international transaction as he actually finds the same and then make suitable adjustment but wholesale disallowance of the expenditure is not contemplated or authorized – the order of the TPO is set aside and the matter is remitted back to the AO/TPO for determination of ALP of royalty by adopting TNMM – Decided in favour of assessee. Provision for slow/non-moving inventories disallowed – Held that:- Assessee contended that the inventory consists of not the spare parts but the items which are used to manufacture the spare parts of Qualis – assessee rightly pointed that if the vehicle itself is not being manufactured then there would not be any requirement to manufacture the spare parts of such a vehicle and in such an event, stock would be redundant or obsolete – assessee contended that the stock does not relate to the spare parts, but relates to various components of spare parts - This fact needs verification – thus, the matter is remitted back to the AO for fresh consideration – Decided in favour of assessee.
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