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2016 (6) TMI 1005 - ITAT DELHI

2016 (6) TMI 1005 - ITAT DELHI - TMI - Transfer pricing adjustment - whether the segregation of these two transactions of payment of Royalty and Fees for technical services from the other international transactions, is justified? - Held that:- When we consider more than one separate transaction under the combined umbrella of TNMM on an entity level, it is quite possible that a probable addition on account of transfer pricing adjustment arising from one international transaction may be usurped by .....

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pose of the determining their ALP on entity level under TNMM. We, therefore, reject this contention raised on behalf of the assessee. - 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 .....

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f 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 hold that the CUP is the most appropriate method for determining the ALP of these transactions under the present circumstances and the TPO was justified in app .....

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is to find out a comparable case engaged in the same line of business. The rate of royalty for use of technical know-how of industrial equipments cannot be considered as comparable with that of electronic goods. Even within the overall electronic goods segment, there can be different products or components and the technical know-how required for components cannot be compared with the electronic goods on the whole. In our considered opinion, at best, the rate of royalty approved by the RBI has a .....

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s a bar on determining the ALP of international transaction undertaken by it and further the enhancement of income due to such transfer pricing addition cannot be considered for allowing the benefit of deduction under this section. - Rule of Consistency - Held 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. .....

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e 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 .....

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9-4-2016 - SHRI R.S. SYAL, AM & SHRI KULDIP SINGH, JM For The Assessee : Shri Alok Gupta, FCA, Shri Pancham Sethi, FCA and Shri Arprit Mittal, CA For The Department : Shri A.M. Govil, CIT, DR ORDER PER R.S. SYAL, AM: This appeal filed by the assessee is directed against the final assessment order passed by the Assessing Officer (AO) u/s 143(3) read with section 144C of the Income-tax Act, 1961 (hereinafter also called the Act ) on 30.11.2015 in relation to the assessment year 2011-12. 2. The .....

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ccompanied by Form No. 3CEB declaring eight international transactions. On a reference made by the AO for determining the arm s length price (ALP) of the reported international transactions, the Transfer Pricing Officer (TPO) observed that all the eight international transactions were shown at ALP in an aggregated manner by following the transactional net margin method (TNMM) as the most appropriate method on entity level. The TPO observed that the assessee also exports some of the finished good .....

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under the combined TNMM approach and accordingly proceeded to determine the ALP of such two transactions under the Comparable uncontrolled price (CUP) method. The ALP of these two transactions was determined by the TPO by choosing two companies as comparable, namely, Havels India Ltd. and Autometers Alliance Ltd., 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 .....

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nal 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 .....

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lying on certain Tribunal orders, it was argued that the authorities below were not justified in segregating these two transactions for determining their ALP under CUP method. This contention was strongly opposed by the ld. DR who submitted that there was no relation between payment of royalty and fees for technical services and other international transactions of import of raw materials, export of finished goods, lease of machine/tools, purchase of plant and machinery, dividend paid and testing .....

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el), has dealt with the circumstances in which aggregation can be done in the context of AMP expenses. The principles laid down in this case are universally applicable and are not confined to the peculiar facts of that case alone. It has been held that transaction includes the number of closely linked transactions. Dealing with AMP expenses, it held vide paras 80 and 81 that inter-connected international transactions can be aggregated and section 92(3) does not prohibit the set off. Further, in .....

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nt 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 distributio .....

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on ble jurisdictional High Court divulges that though a number of closely linked transactions can be aggregated, but, the transactions which are not closely related to each other would require determination in a segregated manner. 5.4. The Hon ble Punjab & Haryana High Court in Knorr Bremse India P. Ltd. vs. ACIT (2016) 380 ITR 307 (P&H), has held that in case of a package deal where each item is not separately valued, but, all are given a composite price, this should be considered as on .....

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ced separately, but, they were provided under one common understanding. It further laid down emphatically that : the contention that as the services and goods are utilized by the assessee for the manufacture of the final product they must be aggregated and considered to be a single transaction and the value thereof ought to be computed by the TNMM is not acceptable. Merely because the purchase of each item and the acceptance of each service is a component leading to the manufacture/production of .....

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can form part of a separate independent international transaction. In such an event, the AO/TPO must value this group of sale or purchase of goods and/or provision of services as separate transactions. 5.5. When we consider the ratio decidendi of the above referred two judgments, the picture which emerges is that although closely related transactions can be aggregated, but, unrelated transactions cannot be clubbed for determining ALP on a combined basis. The relevant criteria to determine whethe .....

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ese 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 in .....

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II to this Agreement. This Schedule provides for payment of royalty and fees for technical services each @ 8% 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. Apart from this Agreement, the assessee also entered into another Agreement dated 25.6.2009 with .....

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nds at ₹ 3.24 crore. Thus it is palpable that the assessee paid royalty and fees for technical services to its AE pursuant to the Agreements which are solely for this purpose. There is no reference or mention whatsoever of any other international transactions undertaken by the assessee during the year in these Agreements. It is further found that the international transactions of import of raw material and export of finished goods along with lease of machine/tools and purchase of plant and .....

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other international transactions including import of raw materials, spares and consumables. 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 pr .....

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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 the amount of sale price as reduced, inter alia, by ₹ 60/-. The essence of the matter is that royalty and fees for technical services is required to be calculated on the basis of ex factory sale price of the goods as .....

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of raw materials from its AE alone. 5.8. It is simple and plain that cross subsidization of the international transactions in a combined approach is impermissible. It is clear from section 92(1) that if an international transaction is recorded showing a lower income than its ALP income, then it is the higher ALP income, which should be considered for the purpose of computation of the total income. Section 92(3) of the Act manifests that the provisions of this section shall not apply in a case w .....

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income. It does not mean that the actual more income from one international transaction vis-a-vis its ALP income should be combined with another unrelated transaction which gives actual income less than the ALP income and then both be processed together under this Chapter so as to set off the income (Transacted income minus ALP income) from the first transaction with the potential income arising from the second transaction (ALP income minus transacted value income). When we consider more than o .....

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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 .....

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ur consideration is the determination of the most appropriate method. 6.2. Section 92C(1) provides that the ALP in relation to an international transaction shall be determined by any of the methods given in this provision, being, the most appropriate method having regard to the nature of transaction or class of transaction, etc. The methods so specifically given in this provision, inter alia, include CUP, TNMM and Cost Plus Method. 6.3. We have rejected the assessee s point of view of combining .....

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od 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 .....

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Autometers Alliance Ltd. with the numerator of total of royalties and fees for technical services and denominator of Sales. It is this 0.56% which has been considered for making transfer pricing adjustment of ₹ 7.78 crore. In order to evaluate 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 pr .....

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spect 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 (i) is adjusted to account for differences, if any, between international transa .....

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ich constitutes the benchmark for comparison with the price paid for availing of any services in an international transaction. Corollary of the above is that the price paid for availing of services in a comparable uncontrolled transaction is compared with the price paid in an international transaction. The emphasis under the CUP method is on the comparison of price paid for availing services. 7.3. When we advert to the facts of the instant case, we find that the TPO has simply computed ratio of .....

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paid under a comparable uncontrolled situation. 7.4. There is a further fallacy in the calculation made by the TPO inasmuch as he computed the ratio of expenses of royalty and technical know-how to sales at 0.56% of comparables and applied such percentage on the figure of the assessee s sales for recommending the transfer pricing adjustment. We have noticed above that the assessee paid royalty/fees for technical services only on the value addition made by it in respect of sales effected inasmuc .....

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ntage 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 Ind .....

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been given for the consideration or exclusion of other companies. Under such circumstances, albeit, we approve the application of the CUP as the most appropriate method in the given circumstances for determining the ALP of the international transaction of royalty and fees for technical services, but, the manner of selection of comparables also cannot be upheld. IV. Whether rate of Royalty/FTS approved by RBI is always at ALP ? 8.1. The ld. AR contended that the royalty and fees for technical ser .....

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n ble jurisdictional High Court in CIT vs. Nestle India (2011) 337 ITR 103 (Del) has answered this question by considering the provisions of section 40A(2) along with section 92, etc., of the Act. In that case, the Tribunal deleted the disallowance u/s 40A(2), being the excessive and unreasonable payment of royalty to the associated concern, by holding that since the permission was given by the RBI, its reasonableness could not have been gone into by the AO. Setting aside the Tribunal order on t .....

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mind the provisions of the IT Act and that is the function of the IT authorities and, therefore, they can validly go into such an issue . It is explicitly clear from the enunciation of law by the Hon ble Delhi High Court that the grant of permission by the RBI to payment of royalty is not sacrosanct for the purposes of the Act and, can be examined by the AO to ascertain its excessiveness. We want to make it clear that this judgment in the case of Nestle India (supra) was rendered for the assessm .....

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ed 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 parti .....

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universal upper rate of royalty etc. so that the parties may negotiate the actual rate depending upon complexity of the technical know-how required for the concerned product. With the given maximum common rate of 5%, the actual rate may be anything 5% or 4% or 3% or 2% or 1% etc., depending upon the intricacy of the know-how required for the concerned product along with other relevant factors. Such a rate fluctuating from 0% to 5% can never constitute a benchmark for all the businesses for which .....

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ole. In our considered opinion, at best, the rate of royalty approved by the RBI has a persuasive value in the process of determination of ALP of Royalty for a particular case and cannot be considered as conclusive. Similar view has been taken by the Delhi Bench of the Tribunal in LG Electronics India Pvt. Ltd. vs. ACIT (2015) 167 TTJ 417 (Del). We, therefore, refuse to accept the payment of royalty and fees for technical services at ALP simply on the ground that it was paid at the maximum rate .....

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0IC, 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. .....

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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 arising from an international transaction having regard to its ALP, in the case of an assessee entitled to deduction u/s 80IC or any other such relevant provision. Section 92C dealing with computation of ALP clearly provides that the ALP in relation to an international transaction shall be determined by one of the methods given in this .....

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ard to its ALP without any exception. Thus, the ld. AR s argument that since its income is subject to deduction u/s 80IC, the provisions of the Chapter-X of the Act should not be applied, in our considered opinion, has no force in view of the clear statutory mandate contained in proviso to section 92C(4), which reads as under:- Provided that no deduction under section 10A or section 10AA or section 10B or under Chapter VI-A shall be allowed in respect of the amount of income by which the total i .....

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been enhanced after computation of income determined on the basis of the ALP of an international transaction. The legislature has unconditionally provided for not allowing the benefit of deduction under any section in respect of the addition made on account of transfer pricing adjustment. Not allowing of any benefit u/s 80IC in respect of an addition on account of transfer pricing adjustment pre-supposes the existence of transfer pricing addition in the first instance to an assessee who is other .....

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ranting 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 ( .....

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) dated 4.11.2015, in our considered opinion is misconceived, because, in that case, the Tribunal primarily found that the AO erred in not himself examining the issue of TP and failed to apply his mind to the TP report filed by the assessee. The last sentence in para 54 of the order upholding the assessee s contention that no TP adjustment can be made where the assessee enjoys benefit of deduction u/s 10A or 80HHE, etc., is only obiter dicta inasmuch as the addition was found to be not sustainab .....

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tware (supra) which supports the making of transfer pricing adjustment notwithstanding the availability of deduction under such sections to the assessee, apart from clear statutory mandate contained in proviso to section 92C(4), we are more inclined to go with the view of the Special Bench. 9.5. It is, therefore, held that the eligibility of the assessee to deduction u/s 80IC of the Act does not operate as a bar on determining the ALP of international transaction undertaken by it and further the .....

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assessee for the reason that similar adjustment made by him for the immediately preceding assessment year, namely, 2010-11, came 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 proceedin .....

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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-à-vis the current year. The fact that the TPO proceeded on a wrong premise in the preceding year without considering the international transactions of royalty and fees for technical services as separate from the others, cannot give a licence to the assessee to claim that .....

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