TMI Blog2014 (12) TMI 802X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion – thus, the matter is remitted back to the AO for fresh consideration – Decided in favour of assessee. - IT(TP)A No.1356/Bang/2011 - - - Dated:- 22-10-2014 - SMT. P. MADHAVI DEVI AND SHRI JASON P.BOAZ, JJ. For The Appellant : Shri K.R.Vasudevan, Advocate For The Respondent : Shri C.H.Sundar Rao, CIT(DR). ORDER Per Smt. P.MADHAVI DEVI, JM: This appeal is filed by the assessee. The relevant assessment year is 2007-08. This appeal is filed against the order of the assessing authority u/s 143(3) r.w.s 144 of the Income-tax Act, 1961[hereinafter referred to as 'the Act'] in compliance with the directions of the DRP u/s 144C of the Act. 2. The assessee has raised grounds of appeal against the (a) Transfer Pricing Adjustment; and also against the disallowances (b) of expenditure incurred on software; (c) of provision for slow and non-moving inventory; and (d) of depreciation on assets purchased on slump sale. 3. At the time of hearing, the learned counsel for the assessee has filed a letter dated 14/5/2014 stating that the assessee does not wish to press the grounds against the disallowance of depreciation on assets purchased on slum ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e TPO u/s 92CA of the Act. The TPO, vide orders dated 25/3/2010, accepted the TNMM as the Most Appropriate Method at the enterprise level for all the international transactions of the assessee except for the payment of royalty. He observed that the assessee has paid royalty of ₹ 27,23,09,000/- to its AEs Toyota Motor Corporation and Aisin Takaoka Company and that the assessee has justified the payment of royalty by aggregating this transaction with all other international transactions with a single analysis based on TNM method. He observed that as the assessee is mainly into manufacturing of auto components, the net margins earned by the assessee are relevant as far as the pricing of goods imported from the AE is concerned. He also observed that as per the Act, each class of transactions has to be examined having regard to the Arm s length principle and as payment made in the form of royalty is a class of its own, it requires separate analysis. Thereafter, he held that for TP study of royalty payment, the transactions are to be analyzed under CUP method using the benefit test. He observed that universally, the royalty payments are being treated at arm s length only when it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er against which the assessee is in appeal before us. 6. The learned counsel for the assessee submitted that the assessee had entered into a commercial agreement with its AE for supply of technical knowhow, technical assistance, training of personnel etc., which cannot be disregarded without any reason. He submitted that the AE has invested substantial funds in research and development activities and that the assessee neither undertook any significant research and development activity of its own nor can it procure the technology in the open market due to non-availability of the same in domestic market and is thus totally dependent on the AE for the technology. He also submitted that the technologies invented by the AE are patented by the AE and cannot be used by others including the assessee without the permission of the AE and the assessee has regularly accessed the technologies of the AE for use in its local development and manufacturing processes of the products. He submitted that the royalty rate for other affiliates of the AE is 6% whereas the royalty rate of the assessee is at 5% for DTA parts and 6% for EOU parts. He submitted that the assessee has benefited substantially ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reliably. 9. As regards facts of the case before us, the learned counsel for the assessee submitted that the assessee s transactions with respect to import of raw materials, payment of technical assistance fee and royalty payments are interlinked as the same are related to manufacturing functions undertaken by the assessee and all the above directly aid and assist the assessee to manufacture finished goods in accordance with stipulated quality and industry standards. Without prejudice to these arguments, the learned counsel for the assessee has also performed an external Comparable Uncontrolled Transaction (CUT) search for the payment of royalty and identified 5 companies as comparables to the assessee. The arithmetic mean of royalty rates of these companies was 7.20% as against 6% of sales for EOU and 5% for DTA sales of the assessee. On the basis of such analysis, he submitted that the royalty payment of the assessee to its AE is at ALP even if CUP method is adopted as the most appropriate method. It was further submitted that without prejudice to all the above contentions, even after taking the comparables of the TPO, whose average margin is 8.29%, the assessee s margin bein ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is the most appropriate method in the case of payment of royalty? 5) Whether the TPO is required to conduct FAR Analysis/TP Analysis for determining the ALP even under CUP method? 6) Whether payment of the royalty by the assessee to its AE is at ALP as compared to the external CUT analysis of the assessee? 12. Having regard to the contentions of both the parties and the material on record, we find that the assessee has aggregated all the international transactions entered into by the assessee with its AE to compute the ALP. The contention of the assessee is that the all the transactions are interlinked and therefore the same are aggregated under TNMM. The TPO has, however, held that each transaction has to be analyzed separately and the ALP of the royalty, technical assistance fee and intra-group services are to be computed separately. In the light of the above, the important aspect to be considered is 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? 13. As per the Indian Income-Tax Act, ideally, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... how proprietary to Toyota Motor Corporation/Aisin Takaoka Company which is developed by them by virtue of their investment in research and development. The Intangible property in the nature of technical and manufacturing know-how consists of the following: Local content List; Production Drawings; CAD data; Engineering change instructions; Toyota Engineering Standards; Sample Parts; Quality Standards; Inspection Standards; (completed products, raw material and work-in-progress); Contents of Part List; KD Components Part List; Disassembled form Drawings; Welding Painting Manual; and Jig arrangement instructions, guage arrangement manual, cutting tool layout drawing, operation drawing and accuracy and precision list. From the above details, it is seen that 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 resu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... transaction thus involves transfer of intangibles. Such transfers of given intangibles would generally occur between group entities only. Further, each intangible property is unique and not comparable. For these reasons, the comparable transactions between independent enterprises for similar intangible may be just non-existent or where available, establishing comparability may pose exceptional difficulties in the absence of availability of all relevant information in public domain. This is more so, because comparability in the transactions of intangibles depend on variety of factors such as a. Use of intangible in connection with similar product or process within the same general industry or market; b. Similarity in the profit potentials of the intangible. c. Terms of the transfer. d. Stage of development or commercialization of intangibles. e. Rights to receive updates. f. Cross licensing of improvements in intangibles. g. Uniqueness of concerned intangible. h. Duration of license. i. Arrangements for sharing of economic and product liability risks j. Existence of other relationship between parties to the transaction k. Type and nature of functi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... how was the essence or the heart of the manufacturing process. The fact that the assessee was engaged in the activity of manufacture itself proves the use of technical know-how by the assessee and therefore, as held by the Hon ble Delhi High Court in the case of EKL Appliances (cited supra), the AO or the TPO cannot question the commercial expediency of the assessee or the quantum of benefit the assessee derived while making the payment. We agree with this contention of the assessee. The Hon ble Delhi High Court, in the case of EKL Appliances (cited supra), has clearly 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 Hon ble Delhi High Court further held that 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessment years and hence the treatment of stock of spares as dead stock appears to be premature. He, therefore, held that the provision of slow moving inventory written off by the assessee amounting to ₹ 2,74,49,000/- is to be added back to the income of the assessee and he accordingly made the addition. This disallowance was confirmed by the DRP and the assessee is in appeal before us. 18. The learned counsel for the assessee reiterated the assessee s submissions whereas the learned departmental representative supported the orders of the authorities below. 19. Having regard to the rival contentions and the material on record, we find that the contention of the assessee is that the inventory consists of not the spare parts but the items which are used to manufacture the spare parts of Qualis. So, as rightly pointed out by the learned counsel for the assessee, 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. However, it is the contention of the assessee that the stock does not relate to the spare parts, but relates to vari ..... X X X X Extracts X X X X X X X X Extracts X X X X
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