TMI Blog2016 (9) TMI 1304X X X X Extracts X X X X X X X X Extracts X X X X ..... omestic sales is allowed under automatic route on use of trademarks and brand name of the foreign collaborator without technology transfer and therefore the bench marking of royalty payable by the assessee to its parent company has to be lower than 3% for the purposes of arriving at the ALP. However when it was pointed out that the case of the said assessee was covered under clause IV of the said circular, the counsel for the revenue on instructions of the Department, stated that the assessee was covered by clause IV of the Press Note 9 (2000 series) dated 8 September 2000 vide which royalty Royalty upto 8% is admissible on export sales by wholly owned subsidiaries to its offshore parent companies. The Hon’ble Bombay High Court thus considered the issue and held that the case of the assessee was covered under the Govt. Instructions. Having taken a specific stand before the Hon’ble Bombay High Court relying upon the FIPB circular in the case of another assessee, now the department is estopped from its own act and conduct to agitate in the case of the present assessee that the FIPB circular can not be applied. The Department is supposed to adopt uniform policy in cases of all the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1961 (hereinafter referred to as the 'Act'), in pursuance of the directions issued by the Hon'ble Dispute Resolution Panel-I, (hereinafter referred to as the 'Hon'ble DRP') on the following grounds, each of which are without prejudice to one another. On the facts and in the circumstances of the case and in law, the learned AO/ Transfer Pricing Officer 1(1)(1) ('TPO') has: General 1. erred in assessing the total income at ₹ 3,28,42,910 as against income of ₹ 1,35,88,741 computed by the Appellant; Transfer Pricing Grounds Adjustment on account of payment of Royalty of ₹ 1,76,02,005 2. erred in determining the arm's length price for royalty payment as Nil (without undertaking economic analysis) and disallowing the entire royalty payment amounting to ₹ 1,76,02,005; 3 erred in holding that the appellant has failed to discharge the initial onus of applying one of the prescribed method for benchmarking royalty payment; 4 erred in rejecting the transfer pricing analysis undertaken by the appellant by considering the FIPB approval as comparable uncontrolled price ('CUP'); 5. erred in n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee pays royalty @ 3% on sale value of the product (net of taxes duties). This transaction was bench marked using CUP (Comparable Uncontrolled Price) method. The royalty agreement along with transfer pricing study report was furnished to the AO. It was submitted that the royalty payment of these transactions were at rates approved by various Government authorities. In the course of TP proceedings, the TPO noted that the transaction relating to Royalty had not been benchmarked by the assessee. It was, however, submitted on behalf of the assessee that the royalty was paid in respect of right to use the trademark owned by the AE. The assessee paid royalty @ 3% on the total sale value, excluding AE sales, and sale of nonbranded products. The assessee claimed that the transaction of royalty was at arm's length under CUP method by contending that the same was covered by the approval received from the Government of India, Ministry of Industries, Department of Industrial Policy and Promotions, Secretariat for Industrial Approvals. It was contended that though the approved rate for royalty payment by the Govt. was upto 8% on exports and 5% on domestic sales, yet the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any fresh comparability analysis to benchmark its international transaction relating to royalty. Further that the TPO had referred to Profit Split Method, being an appropriate method in this case. However, the relevant material to apply this method was neither available on record nor has the assessee made the same available before the DRP. On the contrary the assessee submitted that Profit Split Method also could not be applied in its case. The TNMM has already been rejected by the ITAT. CUP PSM were the only alternatives available. Regarding CUP method, the assessee had submitted that comparable data of similar transaction was not available. The assessee had also rejected Profit Split Method. The assessee therefore had rejected all the methods to benchmark the royalty transaction. The DRP observed that the only justification of the assessee in its reply dated 30.12.2015 that as the trade mark belonged to the AE, in the absence of royalty, the AE may terminate the license, did not serve the purpose of determination of ALP. The Ld. DRP, therefore, while relying upon on the Special Bench decision of the ITAT in case of Aztec Software (2007) 109 TTJ 0892, held that the onus to mai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt and cannot be equated with the arm's length principle. In this respect, the Ld. D.R. has relied upon the following decisions: 1. SKOL Brewaries Ltd., (29 taxmann.com 111) (Mumbai) 2. Perot System TSI (India) Ltd., 37 SOT 358 (Del) 3. Tata Autocomp Systems Ltd., (21 taxmann.com 48) dt. 30/04/2012 (Mumbai ITAT) 4. Tata Autocomp Systems Ltd., ITA No. 1320 of 2012 dt. 3/2/2015 (Bombay High Court) 5. Tata Autocomp Systems Ltd., ITA No. 774 1508/M/ 2014 dt.18/11/2015. The D.R. has further submitted that the decision of the Hon ble Bombay High Court in the case of SGS India Pvt. Ltd. (supra) does not hold binding precedent as in the said decision the Hon ble Bombay High Court has dismissed the appeal of the Revenue holding that no substantial question of law arises. The Ld. A.R., on the other hand, has stated that the Hon ble Bombay High Court has thoroughly examined the issue and after giving thoughtful consideration has held that the benchmarking of royalty paid at 3% by the assessee to arrive at the ALP was much below the royalty for trademark/brand name which was allowed to be paid by fully owned subsidiary to its offshore parent company as per clause I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the facts concluded that the Royalty between the range of 5% to 8% if taken, could not be faulted as it was covered by FIPB instructions. Besides, the Tribunal records the fact that Transfer Pricing study indentified the uncontrolled transaction of royalty at 10%, whereas the respondent-assessee makes only a payment at 3% to its Associated Enterprises. Thus, the Tribunal accepted the contention of the respondent that bench marking at 3% to arrive at ALP of payment made to parent company as Royalty for use of Trade Mark. 7. The Revenue before us contends that Press Note No.9 (2000 series) issued by Ministry of Commerce, Government of India in clause III thereof provides as under:- Payment of royalty upto 2% for exports and 1% for domestic sales is allowed under automatic route on use of trademarks and brand name of the foreign collaborator without technology transfer . Thus, it is submitted that the bench marking of royalty payable by the respondent to its parent company has to be lower than 3% for the purposes of arriving at the ALP. 8. As against the above, the respondent-assessee pointed out that the Press Note No.9 (2000 series) being relied upon by the Revenue, ev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e No.9 issued by Ministry of Commerce stating that payment of 1% on domestic sale and 2% on export was permitted for use of trade mark and brand name on foreign collaboration. The Tribunal on consideration of all the facts had concluded that the Royalty @ 3% could not be faulted as it was covered by FIPB instructions. Besides, that the Tribunal has recorded the fact that Transfer Pricing study indentified the uncontrolled transaction of royalty at 10%, whereas the respondent-assessee had made only a payment at 3% to its Associated Enterprises. It is the Department who took the stand that as per as per clause III of the Press Note No.9 (2000 series) issued by Ministry of Commerce, Government of India the payment of royalty up to 2% for exports and 1% for domestic sales is allowed under automatic route on use of trademarks and brand name of the foreign collaborator without technology transfer and therefore the bench marking of royalty payable by the assessee to its parent company has to be lower than 3% for the purposes of arriving at the ALP. However when it was pointed out that the case of the said assessee was covered under clause IV of the said circular, the counsel for the re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Hon'ble High Court related to payment of royalty by a wholly owned subsidiary to its offshore parent company, but similar treatment has been extended even to other entities also vide A.P.(DIR Series) Circular No.5 dated 21/7/2003 issued by Reserve Bank of India, Exchange Control Department, Central Office, Mumbai, a copy of which has been placed on record. The Ld. Representative for the assessee pointed out that before the Hon'ble High Court, Revenue stated the Press Note No.9 (2000 series) dated 8/9/2000 was applicable to examine the reasonableness of the royalty paid while computing the arm's length price. 7.3 On the basis of aforesaid it is canvassed that the royalties paid by the assessee are in terms of the approval granted by SIA as also in terms of Circular No.5 dated 21/7/2003(supra) of the Reserve Bank of India and, therefore, the royalties paid @ 8% on export and 5% on domestic sales are to be considered at arm's length rate. 7.4 Although the Ld. Departmental Representative did not dispute the factual matrix, but he has merely relied upon the order of the TPO in support of the case of the Revenue. 7.5 In our considered opinion, following the j ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ated that the payment of employees contribution towards provident fund ESIC was made by the assessee before due date of filing of return of income for the year under consideration. He, therefore, has stated that the issue is squarely covered by the decision of the Hon ble Supreme Court in the case of CIT vs. Alom Extrusions Ltd. reported in (2009) 319 ITR 306 (SC) wherein the Hon ble Supreme Court inter alia has held that the amendment to section 43B vide Finance Act, 2003 w.e.f. 01.04.2004, whereby, the second proviso to section 43B has been deleted and further amendment to 1st proviso has been made, whereby, it has been provided that nothing contained in the said section shall apply in relation to any sum which is actually paid by the assessee on or before the due date applicable for furnishing the return of income, is retrospective in nature and would operate from 01.04.1988. The Hon ble Bombay High Court has in the case of CIT vs. Hindustan Organics Chemicals Ltd. in ITA No.399 of 2012 vide order dated 11.07.14 has held that the Employees Contribution to PF is covered by the said decision and that the applicable date will be on or before the due date of filing of retu ..... X X X X Extracts X X X X X X X X Extracts X X X X
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