TMI Blog2016 (9) TMI 393X X X X Extracts X X X X X X X X Extracts X X X X ..... INTURI RAMA RAO, AM : This is an appeal filed by the assessee directed against the order of assessment order passed u/s 143(3) r.w.s. 144C(13) of the Income-tax Act,1961 [ the Act for short] dated 04/11/2011 for the assessment year 2007-08. 2. The assessee raised the following grounds of appeal: I. Transfer Pricing Adjustment 1. The Honourable DRP, the Ld. AO and the Ld. TPO have erred in determining the Arm's Length Price [ALP] of the royalty payment to be NIL, and thereby making the transfer pricing adjustment of ₹ 32,918,381. 2. In determining the ALP of royalty payment at Nil , the Honourable DRP, the Ld. AO and the Ld. TPO have grossly erred in: a. Not analysing or providing any Comparable Uncontrolled Price [CUP] contracts for the application of CUP method; b. In rejecting the analysis of aggregation under Transactional Net Margin Method [TNMM] conducted by the Appellant in the transfer pricing report without providing any cogent reasons for such rejections; c. In disregarding the external comparable uncontrolled transaction (External CUT) search performed by the appellant and provided as a supplementary analysis to justify the arm&# ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the appellant in using the global brand name of its Parent i.e. Praxair to bid for contracts, avail loans from the banks, increase the presence in domestic market, etc. 5. The appellant craves leave to add, to alter or amend all or any of the afore-stated grounds of appeal. II. Corporate Tax 1. Brought forward unabsorbed depreciation The learned Assessing Officer and the Honourable DRP have erred in setting off brought forward unabsorbed depreciation pertaining to Assessment Year 1997-98 amounting to ₹ 33,060,114 instead of the eligible sum of ₹ 36,834,436. 2. Carry forward of unabsorbed depreciation The learned Assessing Officer and the Honourable DRP have erred in computing the amount of unabsorbed depreciation to be carried forward to future assessment years at Rs.,17 1,544,189,037 instead of ₹ 1,919,416,420 claimed in the return of income. 3. Briefly, facts of the case are that the assessee is a company incorporated under the provisions of the Companies Act, 1956. It is wholly owned subsidiary of M/s.Praxair Pacific Ltd., Mautitius. It is engaged in the business of manufacture of industrial gases. The assessee-company filed r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot any tangible commercial benefit in terms of improved probability even after paying technical knowhow and therefore, he inferred that payments are only made to siphon off profits from India with minimum incidence of tax. He finally concluded as follows: 5.5 Summary To sum up, the ALP of the royalty payments by the taxpayer for use of know how is determined at nil because: 1. The taxpayer did not produce any evidence / documentation on how the royalty rate fixed. At an arm's length, party receiving technology would like to see the profitability from future revenue streams before fixing a royalty rate. 2. The taxpayer did not produce any cash flow study at the time of entering into technical assistance agreement with its AE showing that the royalty rate is not fixed based on expected benefit. 3. There is no proof that the other group concerns or third parties are also charged identical royalty. 4. The taxpayer has also not been able to show that it derived any economic benefit from the alleged know how received the AE. 5. The profit that accrues to the licensee may not arise solely through the engine of the technology. There are return ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any in the same business of 13.42%. In any event, he submitted that in view of the decision of the Hon ble Delhi High Court in the case of EKL Appliances (24 taxmann.com 199) the criteria of benefit test is no longer relevant to decide the ALP of transaction and it is no longer necessary to establish that expenditure has resulted in profit or income either in the same year or in any of the subsequent years. In support of this proposition, he relied on the following judgments: i. CIT vs. EKL Appliances (24 taxmnn.199); ii. DCIT vs. Air Liquide Engg. India Pvt.Ltd.(2014) 52 taxmann.171 (Hyd); and iii. SC Enviro Agro India Pvt. Ltd. Vs. DCIT (2013) 33 taxmann.com 261 (Mum) Learned counsel for assessee also filed copies of agreements in support of royalty payment. He further submitted that royalty paid is less than 5% of the sale which is also approved by the Reserve Bank of India. Therefore, he submitted that payment of royalty to its AEs is at arm s length and does not require any adjustment. 5.2 On the other hand, ld.CIT(DR) relied on the orders of the lower authorities. 5.3 We heard rival submissions and perused material on record. First we deal with the contentio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 5.6 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, the assessee was granted a licence permitting use of technology and technical know-how in the field of electro mechanical components and also the brand name of its foreign AE. In lieu of such use of technical know-how and brand name, the assessee became liable to pay a licence fees and royalty as stated in Schedule II to this Agreement. This Schedule provides for payment of royalty and fees for technical services each @ 8% calculated on the bas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 reduced by the expenses and not on import of raw materials. It is further pertinent to note that the assessee is not obliged to make 100% purchases and sale to its AEs alone. The assessee is free to purchase ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inked 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. The above decision is squarely applicable in the facts of the present case . Accordingly, we hold that international transaction of payment of royalty is a separate transaction and therefore should be bench marked separately. 5.5 Having held that royalty payment is a separate international transaction, same requires to be bench marked under CUP method. Though royalty cannot be determined at nil by holding that no benefit had accrued to the assessee-company on account of payment of royalty following decision of the Hon ble Delhi High Court in the case of EKL Appliances (supra) the burden is on the assessee prove that technical services are actually rendered by the AE to the assessee. In identical circumstances, in the case of 3M India Ltd. vs. ACIT, LTU , in ITA Nos.725 727/Bang/2011 dated 13/05/2016 it was held by us as under: The co-ordinate bench of the Tribunal, to which one of us i.e. the Accountant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 12. Similarly, the Hon ble Delhi High Court in the case of Schneider Electric (Ind.) Ltd Vs CIT (21008) 304 ITR 360 (Del.) held that in the absence of material on record suggesting that the commission agents had procured the sale orders, no commission should be allowed. The relevant para of the judgment is reproduced below; 13. We agree with the Tribunal that there is absolutely no material on record to suggest that M/s Ram Agencies had procured any sale orders for the assessee. The production of a few bills or payment having been made by account payee cheques cannot by itself show that M/s Ram Agencies had procured sale orders for the assessee. Apart from an internal note, there is no evidence of any correspondence or any personal; meetings etc. between the assessee and M/s Ram Agencies to suggest that the was any relationship on the basis of which M/s Ram Agencies procured some orders for the assessee for which it was entitled to receive commission. Moreover, we find that the understanding between the parties was an oral understanding and it appears to be doubtful that such an oral understanding can be arrived at without any long standing relationship having been establish ..... X X X X Extracts X X X X X X X X Extracts X X X X
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