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M/s. Praxair (I) Pvt. Ltd. Versus Asst. Commissioner of Income-tax, LTU, Bangalore

Transfer pricing adjustment - Held that:- We hold that international transaction of payment of royalty is a separate transaction and therefore should be bench marked separately. - The condition to prove that technical service was actually rendered by the AE to assessee-company is a condition precedent for allowance of the same. The TPO had no occasion to examine this aspect, as the assessee-company had not produced any evidence in support of the technical services rendered. Before us, the as .....

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ent : Shri P.Chandrashekar. CIT(DR). ORDER Per 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 p .....

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viding 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's length nature of the international transaction pertaining to payment of royalty; d. In disregarding the internal comparable uncontrolled transaction (Internal CUT) search performed by the appellant and provided as a supplementary analysis to justify the arm's length .....

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t and its AEs pertaining to payment of royalty without assigning any cogent reasons; b. Concluding that no economic value was derived and that no tangible and commercial benefit was received by the assessee on the payment of Royalty; c. Ignoring the fact that the economic value derived is also relation to in the nature of increased visibility in the market, increased demand for the products of the appellant in India, and attaining stability and reliability in the market; d. In not taking into co .....

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facturing technology [i.e. supply system technologies and applications technologies to manufacture and sell the industrial gases] and related support is indispensable for the manufacturing process of the assessee and this technology and related support facilities and resources is only available with the associated enterprise [AE]; c. The "benefit test" documentation proof as provided by the assessee, in support of benefit received from the AE in the form of technical, operational, main .....

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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 .....

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rocessing the return of income u/s 143(1) of the Incometax Act, 1961 [hereinafter referred to as 'the Act' for short] the case was taken up for scrutiny assessment. During the course of assessment proceedings, the Assessing Officer (AO) noticed that the assessee-company had reported the following transactions as international transactions within the meaning of the provisions of sec.92B of the Act in Form 3CD report along with transfer pricing (TP) study report: Sl. No. Description Amount .....

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O made a reference u/s 92CA to the Transfer Pricing Officer (TPO) for determination of arms length price (ALP) in respect of above reported international transactions. The TPO had accepted that above international transactions except royalty payment of ₹ 3,29,18,381/- paid to its AE Praxair Technology Inc., USA are at arm s length and after analyzing the terms of royalty agreement, the TPO concluded that the transactions of royalty should be analyzed separately. After calling for informati .....

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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 .....

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data provided by the taxpayer, it is impossible to know what percentage of profits the licensee would like to share at an arm s length after removing the returns from assets employed and other economic factors which may not arise solely through the engine of the technology. 6. The taxpayer did not give the details of royalty rates in the industry. Thus the arm's length price of royalty is determined at Rs. Nil. a. Payment of Royalty ₹ 3,29,18,381/ b. Arm s length price under CUP Rs. NI .....

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ngly, he suggested adjustment u/s 92CA of ₹ 3,29,18,381/-. The AO has passed the draft assessment order dated 28/12/2010 after making TP adjustment as suggested by the TPO of ₹ 3,29,18,381/-. 4. Being aggrieved, assessee-company filed objections before the DRP who, vide order dated 28/9/2011 had confirmed the finding of the TPO that the transaction of royalty cannot be aggregated with total manufacturing cost and also confirmed the TP adjustment in respect of royalty. The AO passed t .....

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ted 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. Indi .....

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s of the lower authorities. 5.3 We heard rival submissions and perused material on record. First we deal with the contention of the assessee that transaction payment of royalty should be aggregated with all international transaction and should be computed by following TNMM. The principle of aggregation are laid down in rule 10A(d) of the IT Rules. The circumstances in which transaction should be aggregated are laid down in rule 10A(d) of the IT Rules which are as follows: 10A. For the purposes o .....

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e of L.G.Electronics India (P) Ltd. vs. ACIT (153 ITD 591) vide para.8.3 held that international transaction of royalty payment is a separate transaction and not closely linked with other transactions. Therefore, cannot be mixed with other transactions for the purpose of determination of ALP at the entity level under TNMM cannot be allowed. Even the Hon ble Delhi High Court in the case of Sony Ericson Mobile Communication India (P) Ltd. Vs. CIT (374 ITR 118) held that only closely linked transac .....

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is. The relevant criteria to determine 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 .....

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e, 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 lic .....

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into another Agreement dated 25.6.2009 with Gruner AG, Germany, for availing certain Management services. A copy of such Agreement is available on page 107 onwards of the paper book. Under this Agreement, the assessee agreed to pay at the hourly rates. It is the payment pursuant to the Agreement dated 25.6.2009 and 8% fees for technical services under the Agreement dated 6.3.2009, that the assessee paid total fees for technical services at ₹ 4.72 crore. Royalty payment @ 8% made to Gruner .....

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e of machine/tools and purchase of plant and machinery, etc., have no link with payment of royalty and payment of fees for technical services. The two international transactions of payment of royalty and fees for technical services are altogether independent from the international transactions of import of raw materials, etc. The ld. AR vehemently harped on the fact that royalty and fees for technical services was paid by the assessee on the basis of import of raw material and, hence, these tran .....

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rted 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 .....

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alculated 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 raw materials and other components from and also sell its goods to its non-related parties as well. This explicitly proves that the payment of royalty and fees for technical services has relation with the total sales made by the .....

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hat the provisions of this section shall not apply in a case where the computation of income having regard to ALP has the effect of reducing income chargeable to tax. The net effect of section 92(3) is that if transacted value income from an international transaction is more than its arm's length price income, then, the ALP income should be discarded and the actual income should be considered. To sum up, it is the higher of actual income or the ALP income from an international transaction, w .....

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ncome minus transacted value income). 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 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 transac .....

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se . 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 Applianc .....

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....Thus, the assessee failed to discharge the burden of proving that the expenditure laid out were incurred wholly and exclusively for the purpose of business. We may further add that the Hon ble Supreme Court in the case of CIT Vs Imperial Chemical Industries (Ind.) Pvt. Ltd (1969) 74 ITR 17 has unequivocally held that the burden of proving that a particular expenditure had been aid out or incurred wholly and exclusively for the purpose of business entirely lies on the assessee. The discharge .....

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the assessee failed to demonstrate the services rendered by the commission agent, the commission was disallowed. The relevant paras of the judgment are reproduced below; 22. Thus the assessee as utterly failed to demonstrate the nature and extent of service rendered by the agent and availed of by the assessee for its business of modular kitchen. In this scenario what appears on record is merely book entries coupled with TDS the amount which will be claimed as a refund by the recipient being a lo .....

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section 143(1) and for the assessment year 2010-11 there is no mention of the commission at all. Therefore, we are unable to give evidenced to the facts whose record is not before us and not referred to before the lower authorities . 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 all .....

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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 established between the assessee and M/s Ram Agencies. It seems a bit out of plac .....

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