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2019 (12) TMI 1206 - AT - Income TaxTP Adjustment - international transaction of ‘Allocation of shared service charges’ - whether the transaction of Payment of shared service charges on one hand and Import of raw material and Export of finished goods on the other, namely, the manufacturing activity, can be construed as ‘closely linked transactions’? - HELD THAT:- We are dealing with a situation in which the assessee is trying to club the transaction of Payment of shared service charges with the transactions of manufacturing activity, which is a step further away from the technical know-how in the process of manufacturing. In view of the foregoing discussion, it is held that the instant transaction of payment of shared service charges cannot be aggregated with the international transactions concerned with the manufacturing activity. We, therefore, reject the aggregation approach as put forth on behalf of the assessee and ex consequenti, the additional ground is hereby dismissed. We find that the question of aggregation or segregation of the transactions can arise only when it is proved that the assessee actually availed the services for which it made the payment. We have noted supra that the assessee has admittedly not proved the receipt of the services. It has further been admitted by the ld. AR that the assessee has no evidence to prove the receipt of services through correspondence or e-mails or visits of the personnel of the AEs. Once the addition is sustained on the ground that the assessee failed to prove the receipt of services at the very outset, there can be no question of any aggregation. It is held that neither the aggregation of the transaction of allocation of shared service charges is permissible with the other reported transactions under the TNMM in the facts as are instantly obtaining nor the assessee could adduce any evidence either for the cost sharing arrangement without any mark up or the actual receipt of services. We, therefore, uphold the disallowance. Addition in respect of the international transaction of ‘Payment of Trademark charges’ - HELD THAT:- Once it was found that the assessee actually paid royalty at total of 4.5% under the international transaction, then the course open to the TPO should have been to determine the ALP of the international transaction of payment of royalty including use of Contractual Trademarks by considering total payment at 4.5%, instead of shutting the door by holding that there was no need to pay further 0.5% of Net Sales Volume when the assessee was already paying 4% towards royalty. The fact that the assessee did pay royalty at 4.5% clearly demonstrates that the payment of further 0.5% ought to have been considered as increase in the rate of royalty from 4% to 4.5%, being the international transaction to be benchmarked by considering total payment of royalty at 4.5%. As the authorities below have proceeded with the disallowance of 0.5% translating into an addition of ₹ 19,96,178/-, we set-aside the impugned order on this score and remit the matter to the file of AO/TPO for determining afresh the ALP of the international transaction of payment of royalty including towards use of Contractual Trademarks by considering the transacted value of the transaction at a combined rate of 4.5%, consisting of Payment of royalty at ₹ 1,99,62,183/- and Payment of Trademark charges at ₹ 19,96,178/-. If in such a fresh processing of the total royalty transaction under the transfer pricing provisions, some adjustment is called for, the same be made. Needless to say, the assessee will be allowed a reasonable opportunity of hearing.
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