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Dy. Commissioner of Income Tax, Large Tax Payer Unit. Mumbai Versus SI Group India Limited and Vica-Versa

2016 (5) TMI 343 - ITAT MUMBAI

Transfer pricing adjustment - addition relating to payment of royalty u/s.92CA(3) - Held that:- adjustments are made by the Transfer Pricing Officer without giving any detailed reasons in his order. He has merely stated the fact of the impugned adjustment and left at that. When assessee raised the grievance before the DRP, the DRP observed that the TNMM was rejected as the TPO was able to find internal CUP but does not give any further details. It is difficult to even understand, much less exami .....

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tatistical purposes. - I.T.A. No.813/Mum/2013, I.T.A. No.1009/Mum/2013, C.O. No.192/Mum/2013 - Dated:- 31-3-2016 - Pramod Kumar AM and Pawan Singh JM For The Assessee : Karishma R. Phatarphekar, Divyesh I. Shah, Harsh Shah, Pratik Poddar For The Assessing Officer : N.K. Chand ORDER Per Pramod Kumar, AM: These cross appeals, and the cross objection, are directed against the order dated 5th November, 2012, passed by the leaned CIT(A), in the matter of assessment under section 143(3) of the Income .....

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onnected cross objection, filed by the assessee against the same order, the assesse has raised the following grievance:- On the facts and in the circumstances of the case and in law, the learned Transfer Pricing Officer and the Hon ble Commissioner of Income Tax (Appeals) erred in rejecting the appellant s contention that as the payments of Royalty were approved by the Reserve Bank of India the same was at arm s length. 4. The relevant material facts are as follows. The assesse before us is a su .....

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he royalty at NIL on the basis of following reasoning:- 3. Payment of Royalty In the form 3CEB, the assessee has reported payment of Royalty of ₹ 3,39,67,540 /- to SI Group Inc. In the form 3CEB, a note was appended that RBI approval has been obtained for payment of royalty and hence it is at ALP. The assessee was asked to give the economic justification & evidence that it is at ALP. The assessee vide letter dated 10 March 2010 had given a detailed reply. It was submitted that the roya .....

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he payment of technical fee. The assessee had also given details of royalty paid by other SI Group entities which was in the range of 2% to 3%. It was further contended that as the AE is located in a high tax jurisdiction there is no incentive to shift profits to overseas jurisdiction. It was seen that the License & Technical Assistance Agreement was entered on 15 May 2004 between the assessee and SI Group Inc. The RBI approval provides that, "our approval is only towards technology tra .....

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of payment of royalty. The important information is tabulated as follows;- (Amount in Crores) Particulars 31-3-05 (15 month) 31-3-06 31-3-07 Net Sales 709.60 516.81 607.34 Profit Before Tax 31.70 6.85 -2.43 Basic Chemicals (Sales) 470.96 300.96 382.72 Industrial Solvents (Sales) 188.30 147.07 131.21 Performance Resins (Sales) 11.13 17.22 27.36 Further as per the annual report of the assessee there was no mention of new technology utilized under the agreement which enhanced the sales or producti .....

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benchmark that the payment was at ALP. That other AEs have paid at similar rates would not benchmark the transaction, as all were controlled transactions. In view of this an adjustment of ₹ 3,39,67,540/- is to be made as assessee failed to give economic justification for the payment of royalty. 5. Aggrieved, assessee carried the matter in appeal before the leaned CIT(A) who deleted the said adjustment by observing, inter alia, as follows: 6.5 I have considered the facts of the case, submis .....

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the appellant has not demonstrated with any evidence, the specific benefits obtained under the agreement which would justify the payment of royalty. The TPO has further, tabulated the net sales, profit before the tax and sales of individual group of chemicals for the period ending 31.03.2005 (15 months), 31.03.2006 and 31.03.2007 and has observed that the assessee has not derived any incremental benefits on account of payment of royalty. The TPO has further, reproduced a portion of the annual r .....

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made by the TPO. iii. The appellant in its submission has given details in respect of commercial rights that the appellant has obtained by virtue of the agreement. The appellant has further submitted the details in respect of receipt of latest technology and technical assistance from AE on continuous basis under the sub-headings as under :- Technical support for continuously customizing Standard Operating Procedures. - Technical support for assistance in production process and trouble shooting. .....

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chnical support on continuous basis. iv. The TPO in his order has also not brought any fact to the contrary to such submission of the appellant. v. The appellant has contended regarding the observations of the TPO that approval of RBI cannot be considered for determination of arm's length price. The appellant has relied on Rule 10B(2)(d) and on the various decisions in this regard. In respect of such contentions of the appellant, it is mentioned that the approval of the RBI for the payment o .....

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e clearly observed that the approval of RBI would not be determinative factor from the perspective of transfer pricing regulations. Accordingly, such contention of the appellant that the approval of the RBI should be considered as determination of arm's length price is not found to be acceptable. vi. The appellant in its submission has given details in respect of benefits obtained by the appellant from availing technical assistance from AEs, has indicated that there has been increase in the .....

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and relied on various decisions in this regard. It is mentioned that the payment of royalty may have been made by the appellant for the business purposes. But what is important from the transfer pricing perspective is the determination of arm's length price of such payment of royalty by the appellant. viii. The appellant in its submission has contended that the TPO has not applied any method for benchmarking the royalty payment and simply disallowed the same. In this regard, it is stated th .....

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roup entities paying royalty between 2 to 3%. The same has been rejected by the TPO being controlled transactions. In this regard, it is mentioned that such observation of the TPO that the transactions are controlled in nature is valid but at the same time such details do indicate that the other entities of the S.I. Group are paying royalty on net sale price ranging from 2 to 3%. In that perspective royalty paid @2% of the net sales by the appellant is in order and is conforming intra-group tran .....

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eport vide his letter No. Addl. CIT/TP-II(4)/ Addl. Evidence/12-13 dated 26.9.2012. The contents of the report of the TPO has been reproduced as sub-para 6.3 above. It is seen from the report of the TPO that he has not specifically disputed the benchmarking analysis conducted by the appellant and has mentioned that the calculation of arm's length price rate of royalty payments answers only secondary reasons for the disallowance of royalty by the TPO, the primary ground being the economic jus .....

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that the appellant has made payment of royalty @2% of the net sales whereas the arithmetic mean of royalty rate as a percentage of turnover of broadly comparable companies has been determined @ 4.31%. This demonstrates the rate of royalty paid by the appellant being lower compared to the arithmetic mean of the payment of royalty by the broadly comparable companies. Under such circumstances, the rate of royalty @2% of the net sales will have to be considered to be confirming the to the arm's .....

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s not found to be acceptable. xiv. It is seen from the order of the TPO that he has overwhelming relied on the mention in the annual report in respect of technology absorption by the company. Such mention in the annual report cannot be determinative of the fact that there was no continuous technological support and assistance received by the appellant company. xv. In view of the facts of the case and discussion herein above, the disallowance made by the TPO by arriving at the arm's length pr .....

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8. We find that the issue is covered, by our order of even date in assessee s own case for the assessment year 2006-07, wherein we have held as follows :- 7. We have heard the rival submissions, perused the material on record and duly considered facts of the case in the light of the applicable legal position. We find that the Transfer Pricing Officer did note, and was apparently swayed by the fact of assessee s making losses. It was for this reason that the payment of royalty was held to be not .....

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ment. It is not, however, clear as to under which method of ascertaining the arm s length price, the value of royalty has been determined as NIL . There cannot be an adhoc adjustment in the course of ascertaining the arm s length price. If the Transfer Pricing Officer was to reject the assessee s benchmarking on the basis of Reserve Bank of India s approval under CUP method, the Transfer Pricing Officer was required to decide the correct mechanism of deciding the arm s length price and compute t .....

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such as in the case of DCIT vs. Owens Corning Industries (India) Pvt. Ltd., and vice versa (ITA Nos.549 & 595/Hyd/2014). We consider it appropriate to uphold the grievance of the assessee, and delete the impugned adjustment of ₹ 2,71,11,495/-. The assessee gets the relief accordingly. 9. As regards Hon ble Punjab & Haryana High Court s judgment in the case of Coca Cola India Inc. vs. ACIT [(2009) 221 CTR 225 (P&H)] relied upon by the learned CIT(A) holding that RBI approval wi .....

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IT(A). In view of these discussions, as also bearing in mind entirety of the case, we approve the conclusions arrived at by the learned CIT(A) and decline to interfere in the matter. As for the issue raised in the Cross Objection, though academic, it has been held to be in favour of the assessee for the assessment year 2006-07 and we see no reasons to take any other view of the matter now as well. Leaned CIT(A) s conclusions are approved for this reason as well. 11. In the result, the appeal fil .....

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85. 2.1 On the facts and in the circumstances of the case and in law, the Learned CIT(A) has erred in confirming the addition made by AO/TPO relating to import of the product 2, 4 DTBP, to the extent of ₹ 16,34,685 under Section 92CA(3) of the Act by not appreciating the submissions made by the Appellant. 2.2 The Appellant prays that the Transfer Pricing adjustment made under Section 92CA(3) of the Act in relation to import of product 2, 4 DTBP is erroneous, unwarranted and be deleted. Gro .....

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ted and the detailed submissions and the documentary evidence supplied by the Appellant. 3.2 The Appellant prays that the Transfer Pricing adjustment made under Section 92CA(3) of the Act in relation to export of the product DPO is erroneous, unwarranted and be deleted. Ground No. 4 - Addition under Section 92CA(3) of the Act in respect of export of the product PTBP to the associated enterprise, amounting to ₹ 16,98,298. 4.1 On the facts and in the circumstances of the case and in law, the .....

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