TMI Blog2016 (6) TMI 1005X X X X Extracts X X X X X X X X Extracts X X X X ..... Thus the TPO was justified in segregating the international transactions of payment of royalty and fees for technical services from other international transactions as these are not linked with import of raw material etc. from its AE. The assessee’s contention in this regard is, ergo, repelled. Selection of the most appropriate method - Held that:- As fairly settled through a catena of decisions that the CUP is the most appropriate method to determine the ALP of an international transaction because it seeks to compare the price charged or paid for property transferred or services rendered provided proper comparables are available. It is under this method alone that the price charged or paid is directly compared with the price charged or paid in an uncontrolled comparable transaction. Rest of the four specific methods seek to make comparison of the price charged or paid indirectly through the medium of normal profit arising in a comparable uncontrolled transaction. Further, the CUP method is a transaction specific method which strives to determine the ALP of an international transaction on a micro level, thereby lending more credibility to the ALP of a transaction. As such, we ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d fees for technical services as separate from the others, cannot give a licence to the assessee to claim that the same wrong approach be repeated in the subsequent years as well. In an earlier part of this order, we have approved the action of the TPO in segregating these two international transactions from the remaining transactions and determining their ALP separately. Under such circumstances, the assessee cannot seek deletion of addition on the principle of consistency because of a completely changed scenario in the instant year. Such a rule of consistency, if at all, could have been pleaded if the TPO in the preceding year had also segregated such two transactions and benchmarked them same separately under the CUP method, which the DRP would have overturned. Since no such exercise was done by the TPO in the preceding year when the proceedings went on an altogether different line, we cannot approve the argument of the ld. AR for accepting these two international transactions at ALP. Thus we set aside the impugned order and remit the matter to the file of AO/TPO for a fresh determination of the ALP of the international transaction of payment of royalty and fees for technical ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... out of the assessee s list of comparables given under the TNMM. He found out the ratio of expenses of Royalty and Technical know-how fees to Total sales of these two companies at 1.08% and 0.03%, respectively, with the average rate of 0.56%. The TPO worked out similar ratio in case of the assessee at 16.26%. Thus, it was held that the transactions of payment of these two expenses were not at arm s length price. By applying the benchmark of 0.56%, the TPO recommended transfer pricing adjustment amounting to ₹ 7,78,95,037. The assessee remained unsuccessful before the Dispute Resolution Panel (DRP). That is how, an addition of ₹ 7.78 crore came to be made in the final assessment order, against which the assessee has come up in appeal before us. 4. We have heard the rival submissions and perused the relevant material on record. It is manifest from the above discussion that the assessee demonstrated all the eight international transactions at ALP on a combined basis under the TNMM. The TPO has disputed only the transactions of payment of Royalty and Fees for technical services, whose ALP has been determined under the CUP method, thereby impliedly accepting the remaining ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... should be chosen. It still further held in paras 100, 121, and 194 (iii), (vi) and (xi) that if adjustment is not possible or comparables are not available, then, TNMM on entity level should not be applied and the international transaction of AMP should be viewed in a debundled or a segregated manner. In separately determining the ALP of the AMP expenses, the Hon ble High Court held that the TPO is free to choose any other suitable method and in making TP adjustment on account of AMP expenses, appropriate set off/purchase price adjustment should be allowed from the other transaction of distribution of the products. The Hon ble High Court also held in page 92 of its judgment that it would not be proper and appropriate to apply the TNMM method in case the Indian assessed is engaged in manufacturing activities and distribution and marketing of imported and manufactured products as interconnected transactions. Import of raw material for manufacture would possibly be an independent transaction viz., marketing and distribution activities or functions . A careful perusal of the judgment of the Hon ble jurisdictional High Court divulges that though a number of closely linked transaction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... etermine whether certain transactions be considered as one international transaction or not is to see if such transactions were entered into a package deal or were intended to be simultaneously accepted or these are so closely linked that one cannot at all stand without the other. If the above criteria is satisfied, then, two or more related transactions can be considered as one international transaction for the purpose of determining their ALP. On the contrary, if the above criteria is not satisfied, then, these transactions are to be viewed separate from each other and, accordingly, their ALP should also be determined in a distinct manner as if these are two separate independent transactions. The mere fact that both the intra-group services and goods are utilized by the assessee for the manufacture of the final product, cannot be treated decisive to consider such separate transactions as a single transaction. 5.7. Adverting to the facts of the instant case, we find that that the assessee entered into an Agreement with its AE, namely, Gruner AG, a German company, on 6th of March, 2009, a copy of which has been placed on pages 167 onwards of the paper book. Under this Agreement, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsumables. We are afraid that this contention is not correct. We have discussed hereinabove that the Agreement dated 6.3.2009 provides for payment of royalty and fees for technical services: calculated on the basis of the net ex-factory sale price of the product, exclusive of excise duty minus the cost of the standard bought out components and the landed cost of imported components, irrespective of the source of procurement, including ocean freight, insurance, custom duties, etc. Thus, it is manifest that royalty and fees for technical services is payable by the assessee on sale price net of excise duty and import of raw material, etc. To put it simply, such payment of royalty and fees for technical services @ 8% is only on `value addition . There may be total import of goods worth ₹ 100/-. However, royalty and fees for technical services will be paid only on the sale price of goods as reduced, inter alia , by import of the corresponding raw materials, etc. If, during a particular year, raw material, etc., are consumed worth ₹ 60/-, the remaining ₹ 40/- will be in stock. In such a situation, royalty and fees for technical services will be paid with reference to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ising from one international transaction may be usurped by the income from the other international transaction giving higher income on transacted value. That is the reason for which the legislature has provided for determining the ALP of each international transaction separately from the others. As the international transactions of payment of royalty and fees for technical services are separate transactions and not closely linked with the other transactions with which the assessee has merged them, we cannot permit such merger or aggregation for the purpose of the determining their ALP on entity level under TNMM. We, therefore, reject this contention raised on behalf of the assessee. 5.9. Under these circumstances, we are of the considered opinion that the TPO was justified in segregating the international transactions of payment of royalty and fees for technical services from other international transactions as these are not linked with import of raw material etc. from its AE. The assessee s contention in this regard is, ergo, repelled. II. Selection of the most appropriate method. 6.1. Having held that the international transactions of payment of royalty and fees for te ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... valuate the stand point of the TPO, it is relevant to consider the mandate of Rule 10B(1)(a) which deals with the determination of ALP under the CUP method, as under :- (a) comparable uncontrolled price method, by which,- (i) the price charged or paid for property transferred or services provided in a comparable uncontrolled transaction, or a number of such transactions, is identified ; (ii) such price is adjusted to account for differences, if any, between the international transaction and the comparable uncontrolled transactions or between the enterprises entering into such transactions, which could materially affect the price in the open market ; (iii) the adjusted price arrived at under sub-clause (ii) is taken to be an arm s length price in respect of the property transferred or services provided in the international transaction ; 7.2. A careful perusal of the mechanism provided under Rule 10B(1)(a) for determining the ALP of an international transaction divulges that under sub-clause (i), the price charged or paid for services provided in a comparable uncontrolled transaction is identified. Under sub-clause (ii), the price so determined under sub-clause ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the ratio of these expenses to sales of comparables with the ratio of these expenses to the sales of the assessee is totally unwarranted, because these expenses have been paid by the assessee as a percentage of `value addition made by it and not on the sale price. Thus it is patent that the TPO not only applied CUP method in a wrong manner but also went wrong in determining ALP in such wrong application. 7.5. It is still further observed that the TPO has selected two companies as comparables, namely, Havels India Ltd. and Autometers Alliance Ltd., out of the assessee s list of nine comparables given under the TNMM. The assessee s contention made before the TPO as well as the DRP that Havels India Ltd. paid royalty to a related entity and Autometers Alliance Ltd. owns R D department and incurred high R D cost which might not require it to obtain technology from any other AE, have not been dealt with. The ld. AR contended that these two companies were chosen as comparable out of a whole lot of nine companies which was, again, not proper. We are in agreement with such a contention. Not only the assessee s objections should have been dealt with but also an opportunity should hav ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... siveness. We want to make it clear that this judgment in the case of Nestle India (supra) was rendered for the assessment years 1997-98 and 1998-99. Chapter-X of the Act containing the transfer pricing provisions came into force only w.e.f. assessment year 2002-03. However, the fact remains that the question before the Hon ble High Court was to consider the reasonableness of the royalty amount paid by that assessee to its associated concern under the provisions of section 40A(2). The nittygritty of section 40A(2) is to disallow any excessive and unreasonable payment made to the closely related persons as referred to in clause (b) of section 40A(2). Similarly, the purpose of Chapter-X of the Act is also to ensure that income from international transactions is computed having regard to the arm s length price. In this way, any excess payment made to associated enterprises in an international transaction is recomputed to bring it in line with what an independent party would charge from another unrelated party. The essence of both the provisions is same in so far as the payment of expenses to related parties is concerned. 8.3. It is significant to note that the RBI provides for max ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble for deduction under section 80IC, becomes tax neutral irrespective of its quantum. He, therefore, urged that either the international transaction should not be processed in terms of Chapter-X of the Act or higher amount of deduction should be allowed corresponding to the amount of addition on account of transfer pricing adjustment. This was forcefully contested by the ld. DR. 9.2. Having heard the rival submissions and perused the relevant material, we find ourselves unable to accept both the submissions advanced by the ld. AR on this aspect of the matter. In so far as the first submission for not carrying out any transfer pricing adjustment in view of the benefit enjoyed by it u/s 80IC of the Act is concerned, we find that no exception has been carved out by the statute for nondetermination of the ALP of an international transaction of an assessee who is eligible for the benefit of deduction section 10A/10B or any other section of Chapter-VIA of the Act. Section 92(1) clearly provides that any income arising from an international transaction is required to be computed having regard to its arm s length price. There is no provision exempting the computation of total income ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion. If one was to presume that no addition towards transfer pricing adjustment is comprehensible in the case of an assessee enjoying the benefit of deduction u/s 80IC, then there was no need to enshrine an express provision forbidding the grant of deduction under this section in respect of enhancement of income due to transfer pricing adjustment. Once the legislature has engrafted an unambiguous provision explicitly spelling out the non-granting of deduction u/s 80IC on the enhanced income due to transfer pricing addition, we are afraid to accept the assessee s contention, which runs diagonally opposite to the unequivocal language of proviso to section 92C(4). This contention, if taken to a logical conclusion, would amount to obliterating the provisio itself, which is patently incorrect. 9.4. Our view is fortified by the Special Bench order in the case of Aztech Software and Technology Services Ltd. vs. ACIT (2007) 107 ITD 141 (SB) (Bangalore) in which similar issue has been decided by the Special Bench by holding that availability of exemption u/s 10A to the assessee is no bar to applicability of sections 92C and 92CA. Similar view has been taken by Pune Bench of the Tribuna ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e to be deleted by the DRP and no further appeal was filed by the Revenue. Relying on the principle of consistency, it was contended that similar view ought to have been taken for the year under consideration as well. 10.2. We do not find any substance in the contention made on behalf of the assessee. Despite the fact that there is no res judicata in income tax proceedings, it can be seen that the TPO for the assessment year 2010-11 did not segregate payment of royalty and fees for technical services from the overall international transactions under the TNMM. Transfer pricing adjustment was made by taking all the international transactions on a combined basis under the TNMM, which issue stood decided in favour of the assessee by the DRP. Au contraire, we find that for the year under consideration, the TPO has separated the international transactions of payment of royalty and fees for technical services from other international transactions by treating the remaining at ALP under the TNMM. There is a sea change in the approach adopted by the authorities in the preceding year vis- -vis the current year. The fact that the TPO proceeded on a wrong premise in the preceding year ..... X X X X Extracts X X X X X X X X Extracts X X X X
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