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2015 (1) TMI 921

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....ce of depreciation on assets purchased on slump sale, the assessee has filed a letter dated 12/08/2014 stating that this issue emanates from the orders passed by the AO for the assessment year 2003-04 and being depreciation issue, it has consequential impact in the subsequent year including the assessment year 2008-09 and as the issue is before the Tribunal for the assessment year 2003-04, the outcome of which would influence the decision of this Tribunal for the relevant assessment year, the assessee, at this stage, wishes not to press the same with a liberty to approach the Tribunal on this issue later on based on the outcome of the appeal filed by the assessee for the assessment year 2003-04. Taking the said letter into consideration, we reject this ground of appeal also as withdrawn with liberty to the assessee to approach this Tribunal based on the outcome of the appeal filed by the assessee for the assessment year 2003-04. 4. As regards the ground Nos.4 and 5 are concerned, we find that they are with regard to levy of interest u/s 234B and 234D and they, being consequential in nature, we set aside this issue to the file of the Assessing Officer to grant consequential relief,....

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.... has filed a copy of the said order before us. The learned Departmental Representative, however, supported the orders of the authorities below but fairly admitted that the very same issue had also arisen in the assessee's own case for assessment year 2007-08 and the Tribunal has remanded the issue to the file of the TPO for re-determination of the ALP. 7. Having regard to the rival contentions and the material on record, we find that the issue is covered in favour of the assessee by the order of this Tribunal to which one of us i.e. the Judicial Member is the signatory. We hereby reproduce hereunder the relevant portion of the order for easy reference: "4. Coming to the Transfer Pricing Adjustment made by the AO, brief facts of the case are that the assessee company is engaged in the business of manufacture of automobile parts like automotive front axle, rear axle and propeller shafts for sale of these components to its group company Toyoto Kirloskar Motor Ltd., for its erstwhile vehicle Qualis and axles and propeller shafts for the Innova. It filed its return of income for the assessment year 2007-08 on 6/11/2007 declaring 'Nil' income. During the assessment proceedings u/s 143....

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....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 is proved substantially by the tax payer that such intangibles were actually received and further proving that such intangibles have benefited it. He, therefore, set out various parameters to be considered for the determination of the ALP of the royalty payment and thereafter issued a notice dated 15/2/2010 to the assessee asking the assessee to furnish the details as required under the notice. The assessee furnished its reply vide letter dated 12/3/2010 stating that the royalty transaction is closely linked with other transactions and, therefore, same are aggregated under TNMM and therefore the royalty transaction is also considered to be at arm's length. However, the TPO held that the royalty transaction is a different type of transaction and is to be analyzed separately under CUP method. Thereafter, he held that the tax payer did not produce any primary evidence/documentation on how the royalty rate is fixed or the benefit received by the assessee for fixing the royalty as under: i) Domest....

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....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 by the use of the technology and technical knowhow supplied to it by the AE as its sales grew at a CAGR of 208.94% for the financial year 2002-03 to 2006-07. He further submitted that the assessee, though a late entrant in the industry, has attained a strong position in India within a period of 5 years which can directly be attributed to the technology acquired from the AE. Thus according to him, the finding of the TPO as well as the DRP that the assessee has not derived any benefit from use of the technology is not correct. 7. As regards TNMM being the most appropriate method for arriving at the ALP of the payment of royalty, he submitted that the technology forms integral part of the manufacturing process and the said transaction cannot be tested in isolation as the technology to manufacture is interlinked to the manufacturing process and therefore is required to be tested under TNMM. He submitted that the TPO has not provided any independent transactions which are similar or identical in nature that ref....

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....ther 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 being 6.70% is at arm's length falling within +/-5% range of ALP. The learned counsel for the assessee has placed reliance upon the following decisions in support of the contentions raised above: TNMM ought to be considered the most appropriate method: i) Lumax Industries Ltd. (ITA No.4456/De/2012) ii) Cadbury India Ltd. vs. ACIT (ITA No.7408/Mum/2010 and ITA No.7641/Mum/2010 iii) Air Liquide Engineering India P. Ltd. (ITA No.1040/ Hyd/2011) Arm's length price of royalty payment cannot be held 'Nil' i) EKL Appliances Ltd. (ITA Nos.1068/2011 & 1070/2011) ii) M/s.Air Liquide Engineering India P. Ltd. Hyderabad (ITA No.1040/Hyd/2011) iii) Abhishek Auto Industries Ltd. (ITA no.1433/Del/2009) iv) Thyssen Krupp Industries India Pvt. Ltd. (ITA No.7032/Mum/2011) Tax Authorities cannot determine the business needs i) Dresser Rand India Pvt. Ltd. vs. Addl. CIT (ITA No.8753/Mum/ 2010) ii) SC Enviro Agro India Ltd. vs. DCIT (ITA No.2057 & 2058/Mum/ 2009) 10. The learned DR, on the other hand, supported the orders of ....

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....or a group of international controlled transaction having close economic nexus? 13. As per the Indian Income-Tax Act, ideally, the transfer pricing is to be made on a transaction by transaction basis. However, Rule 10A(d) provides that the term 'transaction' includes a number of closely linked transactions. Thus, in cases where separate transactions are so closely linked or are closely inter-related or continuous and where application of the arm's length principle on a transaction by transaction basis becomes cumbersome for all involved and would not lead to an accurate result, recourse is often had to evaluate transactions following an 'aggregation' principle. Due to increasing presence of composite contracts and 'package deals' in an MNE group, the aggregation of transactions become necessary as a composite contract may contain a number of elements including royalties, leases, sale and licenses all packaged into one deal. One would usually want to consider the deal in its totality to understand how various elements relate to each other, but the components of the composite package deal may or may not, depending on the facts and circumstances of each case, need to be evaluated sep....

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....ore not in any way interlinked or inter-connected with other transactions and it would not lead to inaccurate result if it is analyzed separately. In such a situation, we are of the opinion that the contract of payment of royalty can be analyzed separately and the ALP of such a payment can be determined independently. The 'L' bench of the Tribunal at Mumbai, in the case of UCB India(P) Ltd. vs. Ass.CIT, reported in (2009) 121 ITD 131(Mum), 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. In view of the same, we do not see any reason to take a different stand from that of the AO on this issue. 15. As regards the most appropriate method for determining the ALP of the royalty is concerned, we find that the AO has adopted the CUP method whereas the assessee has adopted the TNM Method. Now, between the two, which is the most appropriate method? Each TP method is suitable only for certain transacti....

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....nce of other relationship between parties to the transaction k. Type and nature of functions to be performed by parties l. Licensed territory or geography. Where the asset transferred is an intangible, i.e. it cannot be easily defined, formulated or grossed, it is different from others and therefore finding exactly similar asset and thereby establishing arm's length price or royalty rate is extremely difficult. Where a MNE group also licenses or transfers the same or a similar intangible to independent enterprises, establishing arm's length price or royalty rates may not pose many difficulties because CUP method could be applied with appropriate adjustment to account for material differences, if any. However, where comparable uncontrolled transactions are not available, establishing arm's length price or royalty rate may not be a straight forward exercise and may require a flexible approach that need not be strictly based on specified transfer pricing methods. Therefore, in such a situation, the perfect approach for indirectly bench marking royalty payments is to bench mark the profit margin left in the tested party, after payment of lump sum fee or royalty with the profit margi....