TMI Blog2018 (3) TMI 954X X X X Extracts X X X X X X X X Extracts X X X X ..... ven by the RBI, which are quite often fluctuating, cannot constitute a comparable data for external CUP, as it merely gives the range of the royalty rate for the money which can be remitted to a Foreign Entity. Thus, we are of the opinion that rate prescribed by RBI under FEMA regulation cannot be reckoned as an external CUP for the purpose of benchmarking. Here in this case neither the assessee nor the AO has searched for any external CUP; and therefore, we deem fit that the issue of benchmarking of ‘royalty’ payment should be remanded back to the file of the AO/TPO to benchmark ‘royalty’ payment separately by using external CUP. The data from “Royalty Stat” available for automotive industry can be used for search of external comparables and the payment of ‘royalty’ paid for use of technical knowhow for manufacturing of automotive components can be used for the purpose of benchmarking. The onus would be on the assessee to carry out the fresh search process and after selecting external comparables and carrying out comparability analysis may present the same to the TPO, who shall analyse the external comparables and benchmark the royalty payment of the assessee. With this directi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing at net profit margin. Accordingly, we hold that no separate addition should be made on ‘cost sharing charges’. Thus, in view of our finding given above, TPO is directed to give effect and determine the arm’s length price accordingly. In the result appeal of the assessee as well as of the department for assessment year 2007- 08 is partly allowed for statistical purposes. Server charges is definitely inextricably linked with the business activities and is an operating cost of the assessee, therefore, no separate benchmarking is required as the same will be aggregated under TNMM. Accordingly, no separate addition or adjustment is warranted. Thus, appeal for the assessment year 2008-09 and 2009- 10 are treated as partly allowed. Sales tax subsidy to be treated as capital receipt not chargeable to tax. - ITA Nos.:-1817/Del 2014; 2493/Del/2014; And 3755/Del/2015, ITA Nos. 2072/Del/2014; 2710/Del/2014; And 3890/Del/2015 - - - Dated:- 16-3-2018 - SHRI AMIT SHUKLA, JUDICIAL MEMBER AND SHRI O.P. KANT, ACCOUNTANT MEMBER For The Assessee : Shri Vikas Srivastava, Advovate Shri Sumit Mangal, Advocate Shri Saksham Singhal, CA For The Department : Shri Sansay Kumar Yadav, Sr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fine chemicals. The assessee company, Johnson Matthey India Pvt. Ltd. is engaged in manufacturing of Auto exhaust catalyst with its manufacturing facilities located at Manesar in Haryana using technology and knowhow provided by Johnson Matthey UK (AE). The assessee has classified itself as a contract manufacturer . The Johnson Matthey group is mainly involved in manufacturing of products like: Auto catalysts and pollution control system, Catalysts and components for fuel cells, Pharmaceutical compounds, Process catalysts and specialty chemicals; Colours and coating for the ceramic for the ceramic, glass, paint and plastics industries. The assessee in Form 3CEB has reported following international transactions with its AEs:- S. No. Description of transaction Method Value (in Rs.) 1. Exports of goods to AE TNMM 1,22,42,185 2. Import of Raw Material TNMM 1,26,09,54,934 3. Purchase of finished goods from AE TNMM ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1. Sales (Excluding other income) : ₹ 162,76,20,000 2. Total Cost (excluding Finance cost) : ₹ 147,11,66,000 3. Operating Profit : ₹ 15,64,54,000 4. OP/TC : 10.63% 5. OP/Sales : 9.61% 6. The Ld. TPO thereafter proceeded to analyse the payment of royalty and other intra group payments separately for the purpose of ascertaining the ALP of these transactions. He noted that assessee company has paid royalty of ₹ 2,45,57,629/- to its AE, JM-UK for use of technology, trade mark and patents at the rate of 8% of the net sales value. The TPO issued a detailed show-cause notice to the assessee to substantiate the payment of royalty made to its AE and what tangible and direct benefit had accrued to the assessee by way of such payment. Assessee s detailed reply in response to the point wise query raised and also the observation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... red by the TPO. 6. The profit that accrues to the licensee may not arise solely through the engine of the technology. There are returns from the mix of assets it employs such as fixed and working capital and the returns from intangible assets such as distribution system, trained workforce, etc. Allowances need to be made for them. In the absence of any 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. 7. The taxpayer did not give the details of royalty in the industry. Thus the arm s length price of royalty is determined at Rs. Nil. a. Payment of Royalty ₹ 2,45,57,629/- b. Arm s length price under CUP Rs. Nil c. Adjustment u/s 92CA ₹ 2,45,57,629/- The above amount of ₹ 2,45,57,629/- is treated as adjustments u/s 92CA as the value ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in accordance with the latest emission norms prescribed in the relevant country; ii) Automatic right to receive updates relating to the technology of manufacture and related processes for auto-catalysts business; iii) Training of employees of the appellant in relation to the use of equipment and technology provided by JMUK; iv) Right to use the world renowned and established brand name Johnson Matthey in order to sell its products; It was submitted that entire business of the assessee was dependent upon its collaboration with JM UK due to supply of technology, knowhow, brand name, etc. The payment by way of royalty was at the following rates:- a) 5% of net sales value; b) 3% of net sales value subject to a maximum of ₹ 633 lacs. Accordingly, royalty was paid @ 8% of its net sales. It was further submitted that the rate of 5% to 8% on net sales is a reasonable payment of royalty for use of technology, know how, brand name etc. and in support decision of Tribunal in the case of Lumax Industries Ltd. was cited. Apart from that it was also submitted that RBI/FIPB approval is an important factor for determining the arm s length price and since there is a RB ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Intra Group Services received by the appellant from its associated enterprises is provided hereunder:- Payment of Sales Commission ₹ 1,08,48,310/-: The appellant had entered into an agreement dated March 16, 2004, with its associated enterprise (viz. JMJ)) a copy of which is enclosed herewith as Annexure 10. In accordance with the terms of the said agreement, JMJ is required to provide following services to the appellant: Marketing and liaison services with Japanese customers in respect of sales by the appellant to all Japanese customers; Feedback on organizational and personnel changes In Japanese customers, in relation to business of the appellant; Inputs on design and model changes based on Japanese customers requirements and plans for all Japanese customers; Feedback on other aspects of the activities of Japanese customers that have impact on the business of appellant in India In respect of the agreement between the appellant and JMJ, it is pertinent to note that major customer of the appellant is Maruti Suzuki India Limited, the holding company of which is Suzuki Motor Corporation. Therefore, the appellant require ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oup companies located in Asia region i.e. India, Japan, China and Malaysia. The basis for allocation of the expenses incurred to manage Asia region is the net revenue of respective countries located in Asia region i.e. the allocation of expense is based on the ratio of figures arrived at after reducing from the turnover of each country the cost of the raw material imported. With respect to the above mentioned cost allocation arrangement, it is submitted that such arrangements are required in order to have the benefit of expert guidance for the appellant with minimum costs. In the absence of such an arrangement, either the appellant would have to employ such experts or will have to engage outside consultants. However, that arrangement may not be cost efficient as compared to the present arrangement where expert guidance is available to the appellant with only some proportion of the total expenses being borne by the appellant. Payment of SAP Maintenance Charges ₹ 27,12,007/-: During the year under consideration, the appellant reported an amount of ₹ 27,12,007 (USD 61,292.67) to its associated enterprise (viz. JMM) for SAP Maintenance. The Asi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ld. TPO, copies of the agreements between the appellant and its associated enterprises along with copies of Invoices / debit notes raised by the associated enterprises in respect of such services. Therefore, considering the nature of services provided by the associated enterprises, the supporting documents submitted before the Ld. TPO should constitute sufficient evidence of receipt of such services by the appellant. Thus, considering the facts and circumstances of the case, the argument of the Ld. TPO that the appellant has not submitted proof of receipt of such Intra Group Services is unreasonable and untenable. 11. Ld. CIT (A), rejected the assessee s contention and held that the TPO s action in treating the said payment at NIL is correct on facts his relevant observation and the finding are as under:- As regards the Payment of Sales Commission, the appellant had entered into an agreement dated March 16, 2004, with its associated enterprise (viz. JMJ), In accordance with the terms of the said agreement, JMJ is required to provide various services to the appellant. During the relevant period the appellant paid ₹ 1,08,48,310 (USD 239,174.80 i.e. 5,97,937 un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... far as the transfer pricing adjustment is concerned, the Ld. CIT (A) deleted the adjustment made on account of royalty but confirmed the adjustment on account of intra group services. 14. Now coming to the issue of treating the sales tax subsidy of ₹ 2,41,93,000/- as revenue receipt taxable u/s 28(4) of the Act, the AO noted that sales tax subsidy was granted by the Haryana Government for the purpose of promoting investment in certain areas in Haryana and during the year assessee has claimed deduction of ₹ 2,41,93,000/-. After analysing the Haryana General Sales Tax rules, the AO noted following facts:- ( a) In the above quoted case, the subsidy scheme was formulated in view of the recommendations of the committee which was specifically looking into the problems being faced in setting up new sugar factory. In case of the assessee, the subsidy's scheme of Haryana Government is not sector specific. ( b) On the identification of the fact that the Financial Institutions did not come forward to advance loans to the entrepreneurs of new sugar factory, it was specific condition in the subsidy scheme that the benefit of the scheme had to be utilized only for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8) 306 ITR 392 (SC). 16. The Ld. CIT(A), relying upon the judgment of Hon ble P H High Court in the case of CIT vs. Abhishek Industries Ltd. (2006) 156 taxman 257, upheld the action of the AO and held that subsidy has rightly been treated as revenue receipt. 17. Before us Ld. Counsel for the assessee, first of all submitted that so far as the issue of sales tax subsidy is concerned, whether it is revenue receipt of capital in nature, same has already been decided in favour of the assessee by the Tribunal and also by the Hon ble Delhi High Court in the assessment year 2006-07, wherein the Hon ble High Court has held that sales tax subsidy received by the assessee under the sales tax subsidy of Haryana State is a capital receipt not chargeable to tax. He further pointed out the judgment of Hon ble High Court has not been challenged by the revenue before the Hon ble Supreme Court. Thus, when the same subsidy and under the same scheme has been treated as capital receipt in the earlier year and also in this year, then same has to be treated at par and the matter should decide in favour of the assessee following the binding judicial precedence. Highlighting the main purpose of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the rejoinder, the Ld. Counsel for the assessee pointed out that, now the Hon ble Supreme Court has stayed the operation of the order of the Hon ble Delhi High Court in the case of Bhushan Steel in SLP No. 307832/2017, vide Oder dated 20.11.2017 and therefore, the said judgment does not have any binding precedent. When in assessee s own case in the immediate preceding assessment year there is a judgment of Hon ble Delhi High Court in the case of the same subsidy which has attained finality, then same needs to be followed and not the judgments which are, firstly, based on different scheme of State of UP; and secondly, the when the order of the High Court as relied heavily by this Tribunal in Maruti Suzuki case has been stayed by the Hon ble Supreme Court, then it loses its binding precedence. 20. On the issue of transfer pricing adjustment on account of royalty and intra group services , Ld. Counsel at the outset submitted that appellant has been undertaking international transactions with its AEs since the commencement of commercial production in the A.Y. 2002-03 and has been benchmarking all the transaction under TNMM. This method has been accepted in the earlier years and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 15) 374 ITR 118; and CIT vs. Cushman and Wakefield (India) (P.) Ltd. (2014) 46 taxmann.com 317 and other decisions. 23. On the issue of various components of intra group payments, assessee has given following submissions and reference to corresponding documents to substantiate the payment:- S. No. Payment Nature of payments Benefits derived by the appellant Relevant Documents a. Sales commission JAPAN Paid to Johnson Matthey Japan ( JM Japan ) for liaison and marketing activities undertaken by it in Japan with Suzuki due to which the appellant secured orders from Maruti Suzuki in India. UK Paid to JM UK (only in AY 2009-10) for liaison and marketing activities undertaken by it for potential customers in Iran. Iran business was newly added. The sales commission paid to JM UK in respect of sales to customers in Iran was similar to the commission paid to an independent third party agent which was appointed by the appellant in subsequent year. JAPAN The appellant derived significant benefits in the form of bus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n Matthey Hong Kong in respect of server charges pg. 567 of the paper book for AY 2008-09 (Vol. II) c. SAP Maintenance charges (only for AY 2007-08) Paid to JM Malaysia ( JMM ) for costs on SAP Program for the Asia region. An independent third party was appointed for this purpose and copies of invoices raised by such independent party were submitted before lower authorities. Cost was allocated among JM Asia entities, and such arrangement was more cost effective. The Asian region head quarter of the Johnson Matthey Group located in Malaysia implemented the SAP Program for the Asian Region. For this purpose, a server owned by an independent vendor was set up in Chennai. The cost of operating and maintaining the server was incurred by JMM which was subsequently recovered from group entities located in the region i.e. India, Japan, China and Malaysia equally. Copy of debit notes raised by JMM on the appellant for allocated costs along with third party vendor invoices for the full cost Pg. 477 to 510 of the paper book for AY 2007- 08 (Vol. II) d. Cost sharing char ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . CIT (DR) on the both the issue of royalty and intra group services , submitted that the arguments of the Ld. Counsel that both cannot be analysed in isolation but same have to be aggregated, cannot be accepted in view of the decision of the Tribunal in the case of Gruner India (P.) Ltd. vs. DIT (2017) 77 taxmann.com 311 (Delhi), wherein the Tribunal after detailed discussion of the various provision of the law and also the judgment of Hon ble jurisdictional High Court in the case of Sony Ericsson Mobile Communication India (P) Ltd. and other judgments have laid down that segregation of international transaction of payment of royalty and fees for technical services is justified as these are not linked with import of raw material etc. Thus, he submitted that royalty cannot be aggregated with other transactions because it is a separate and distinct transaction having a separate agreement for which assessee is required to pay on the net sales. He also pointed out that the judgment of Gruner India (P.) Ltd. has been upheld by the Hon ble Delhi High Court. 25. On the issue of intra group services, he made following submissions:- Sales Commission : Sales commission paid to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... known Iranian customers to whom the auto catalyst were exported the same is liable to be disallowed. b. Server Charges: Paid to JM Hong Kong for maintaining a centralized server for the Asia region which serves as a common email and communication platform. Cost was allocated among JM Asia entities and such arrange are more cost effective. This too is liable to be disallowed as the assessee has failed to show that any service has actually been passed to it. c. SAP Maintenance: Paid to JM Malaysia for cost on SAP Program for Asia region. An independent third party was appointed for this purpose. For this purpose a server owned by an independent vendor was set up in Chennai. The cost of operating and maintaining the server was incurred by JM Malaysia which was subsequently recovered from group entities located in the region. The assessee has not explained the business rational behind setting up another server in Chennai for the Asia Region for SAP implementation when it already has a server in Hong Kong doing pretty much the same function. It seems to be a duplication of function performed when there is already a server in Hong Kong carrying on the same function for the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and Malaysia indicates these activities being performed in capacity as shareholder. In this regard reference is made to the OECD Guidelines 2010 Chapter VII para 7.9 7.9 A more complex analysis is necessary where an associated enterprise undertakes activities that relate to more than one member of the group or to the group as a whole. In a narrow range of such cases, an intragroup activity may be performed relating to group members even though those group members do not need the activity (and would not be willing to pay for it were they independent enterprises). Such an activity would be one that a group member (usually the parent company or a regional holding company) performs solely because of its ownership interest in one or more other group members, i.e. in its capacity as shareholder. This type of activity would not justify a charge to the recipient companies. It may be referred to as a shareholder activity , distinguishable from the broader term stewardship activity used in the 1979 Report. Stewardship activities covered a range of activities by a shareholder that may include the provision of services to other group members/ for example services that would be provide ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as been affirmed by the Hon ble Delhi High Court in Revenue s appeal in a very elaborate and speaking order, vide judgment dated 13.3.2015, wherein the Hon ble High Court after relying upon the judgment of Hon ble Supreme Court in the case of CIT vs. Ponni Sugar and Chemicals (306 ITR 392) had held that the amount of subsidy is a capital receipt and thus, issue stands settled in favour of the assessee. Thus, on same sales tax subsidy which is a subject matter of issue in this year also, no different view can be taken. On the other hand the case of the Ld. CIT (DR) is that, post the judgment of the Hon ble High Court in the case of the assessee, there is another decision of Hon ble Delhi High Court in the case of CIT vs. Bhushan Steels (supra) wherein the Hon ble High Court on similar type of scheme of UP Government had decided in favour of the Department holding it to be revenue receipt. Further this Tribunal in the case of Maruti Suzuki India Ltd. on same Haryana Govt. scheme of subsidy has followed the judgment of Bhushan Steels and held that sales tax subsidy is to be taxed as revenue, therefore, the earlier judgment of the Hon ble High Court in the case of the assessee should n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecision of the Punjab and Haryana High Court dated 27.11.2007 in CWP 12075/2007 Johnson Matthey India Pvt. Ltd v. State of Haryana and Ors. where even while holding that the withdrawal of subsidy was justified, the State of Haryana was directed to reconsider the matter. Urging that this decision stands even though the Supreme Court subsequently remitted the matter to the High Court which in turn confirmed its previous opinion and required consideration of the matter by the State Government, the Revenue urges that in the present case, the sales tax subsidy independently too cannot be treated as capital receipt but should be brought to tax as proposed by the AO. Learned counsel heavily relied upon Sahney Steel (supra), particularly the observations and judgment, referring to certain High Court decisions where subsidy schemes of different State governments to reimburse or finance particular projects was discussed. This Court has considered the submissions and is of the opinion that the ITAT's impugned order has noted the relevant law. Crucially, Ponni Sugars (supra) is a later decision of the Supreme Court which had gone to deal with various authorities, including Sahn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee itself against which no SLP has been filed and that judgment has attained finality. Thus, without entering into the semantics as to whether the subsequent order of the Tribunal in the case of Maruti Suzuki (supra) which in turn has relied upon the ratio laid down by the Hon ble jurisdictional High Court in the case of Bhushan Steel will have pervasive value, we hold that the binding precedent of judgment of Hon ble High Court in the case of assessee will hold; and accordingly, the sales tax subsidy amounting to ₹ 2,41,93,000/- is to be treated as capital receipt not chargeable to tax. Thus, ground No. 6 raised by the assessee is allowed. 29. Now coming to the issue whether the payment of royalty should be benchmarked separately or the said transaction should be aggregated at entity level under TNMM and get subsumed in the PLI / overall profit margin. As discussed above, the assessee company is engaged in manufacturing of auto catalysts using technology provided by JM-UK. Various international transactions undertaken by the assessee with its AE have been highlighted in the earlier part of the order and one such transaction is an account of payment of royalt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt of import of raw material, nor with the intra group services or export of goods to AE or any other transactions highlighted above. The transaction of royalty is exclusive of any other transactions. The question of aggregation of all the transactions are only desirable if the nature of transactions taken as a whole are so interrelated and interconnected that each transaction loses his character of being separately benchmarked so as to give proper arm s length price for the controlled transactions. When separate transactions are so intertwined and linked that it is impossible to evaluate on separate basis, then aggregation will get the desired result of ALP consideration. On the other hand, if the transactions are clubbed which by themselves are separate and distinct, then determining the arm s length price for the transactions will defeat the entire purpose of transfer pricing. Hon ble Delhi High Court in the case of Sony Ericson Mobile Communication India (P.) Ltd. (2015) 374 ITR 118, has discussed this issue of aggregation of various transactions in a very detailed manner and opined that though the number of closely linked transactions can be aggregated but the transactions w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Lordships was as under:- 1. Whether the Income Tax Appellate Tribunal was right in holding that royalty and technical assistance fee did not form part of a composite transaction and have to be treated as two separate transactions for the purpose of benchmarking and computing arm s length price? The Hon ble Court after referring to the judgment of Sony Ericsson Mobile Communications India (P) Ltd. and judgment of Denso India Ltd. vs. CIT (2016) 240 taxman 713, answered the question against the assessee. Though while answering the second question which was that, whether Tribunal was justified in holding that TNMM should be applied for benchmarking the transaction relating to technical assistance fee, the Hon ble Court held that if the TPO had accepted TNMM as a most appropriate method then for one element payment of technical assistance fee should not be benchmarked by applying different ((CUP) method. However, one of the ratio as culled out from the said judgment is that the aggregation or segregation of a transaction depends upon the fact of the each case and if the transaction itself like technical assistance fee is inter linked with other transaction which has been ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... om such a payment of royalty to its AE. The assessee company is into manufacturing of specialised catalysts using technology provided by its AE which are used in automotive industry. One of the key drivers in such specialised automotive components industry is quality and technology brand name etc. Assessee has shown total turnover of ₹ 189.2 crores from sale of said components. The entire component has been manufactured by the assessee after using the trade name and patent of its AE and license to produce the patented products and host of other technical information. If assessee has used a trade name, licences and technical information for carrying out its manufacturing unit, at the outset it cannot be held that no benefit has derived to the assessee by entering into TCA with AE. In fact the entire existence of assessee s business is dependent upon its collaboration with AE and the supply of technology, know how, brand name etc. The TPO cannot brush aside the royalty payment of use of such technology know how brand name etc. on the ground that assessee has to give cost benefit analysis and whether any profit has been derived by it. Though he has applied CUP, however he determ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pose of business and nothing more. It is this principle that inter alia finds expression in the OECD guidelines, in the paragraphs which we have quoted above. 22. Even Rule 10B (1) (a) does not authorise disallowance of any expenditure on the ground that it was not necessary or prudent for the assessee to have incurred the same or that In the view of the Revenue the expenditure was un-remunerative or that In view of the continued losses suffered by the assessee In his business, he could have fared better had he not incurred such expenditure. These are irrelevant considerations for the purpose of Rule 10B. Whether or not to enter into the transaction is for the assessee to decide. The quantum of expenditure can no doubt be examined by the TPO as per law but in judging the allowability thereof as business expenditure, he has no authority to disallow the entire expenditure or a part thereof on the ground that the assessee has suffered continuous losses. The financial health of assessee can never be a criterion to judge allowability of an expense; there is certainly no authority for that. What the TPO has done in the present case is to hold that the assessee ought not to have ent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... approval on the rate fixed by the RBI in the case of royalty should be taken for the purpose of arm s length analysis, because, it has huge pervasive value and for coming to this conclusion, he again referred to certain decisions, cited in his order. 38. Under the Transfer Pricing regulations as appearing in Chapter X under the Income Tax Act as well as in Rule 10B, it is imperative that an international transaction has to be benchmarked by using appropriate method as prescribed under the rules. A judgment or the decision of a Tribunal rendered on particular facts of the case, whereby a certain broad range of ALP has been given, then same cannot be followed in a blanket manner in all the cases, as benchmarking has to be done for the relevant financial year using a data for identifying comparable entities available in public domain. Further the quote given by RBI or rates approved by RBI under automatic route is meant for the purpose of regulating the flow of foreign exchange under the FEMA and does not lay down any arm s length price for a particular international transaction. The RBI at the time of giving permission for quoting a rate neither take into consideration the trans ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... led transaction and its adjusted price paid for availing services which constitutes the benchmark for comparison with price paid for availing of any services in an international transaction. If the price paid for availing the service in a comparable uncontrolled transaction is compared with price paid in an international transaction, then it is reckoned to be at ALP. Since, there is no internal CUP, i.e., there is no similar payment of royalty to an independent third party, therefore, it would be desirable that external CUP is to be applied. Here in this case neither the assessee nor the AO has searched for any external CUP; and therefore, we deem fit that the issue of benchmarking of royalty payment should be remanded back to the file of the AO/TPO to benchmark royalty payment separately by using external CUP. The data from Royalty Stat available for automotive industry can be used for search of external comparables and the payment of royalty paid for use of technical knowhow for manufacturing of automotive components can be used for the purpose of benchmarking. The onus would be on the assessee to carry out the fresh search process and after selecting external comparabl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, the relevant documents for these services, has already been summarised and incorporated above. 43. To examine the intra group services under the arm s length principle, it has to be seen vis- -vis the activity provided by the respective group member with economic and commercial value to enhance its commercial position; and whether an independent enterprise in a comparable uncontrolled circumstances would have been willing to pay for the activities to perform by any independent enterprise or would have perform the activity by itself. If such an independent enterprise is not willing to perform for by itself or for the others, then such an activity ordinarily should not be considered as intra group services under the arm s length principle. One needs to identify the arrangements between the related parties and whether any tangible services have been provided which can be easily identified. Often cost allocation and apportionment methods which has some degree of remote approximation can be taken as a basis for calculating arm s length charge which can be benchmarked under indirect charge method, for example, under the TNMM the relevant consideration should be the value of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rvices, assessee has to pay JM Japan, fee @ 40% per month by the assessee to its Japanese customers. During the course of hearing, we specifically require the Ld. Counsel to show as to whether any service has been rendered by the AE JM Japan to any Japanese customer or there is any kind of evidence to show that these services have been rendered for any customer in Japan. However, neither before us nor before the authorities below any such evidence has been filed. Except for the agreement nothing is borne out from the records that AE Japan has carried out any such services to assessee or has assisted or benefited assessee in getting the orders for any customer in Japan and the basis for which the fee has been calculated. The Ld. Counsel also could not brought on record as to when the product manufactured by the assessee in India have been sold to any independent customers in Japan for which it has to carry out any marketing and liaisioning services and other inputs required from Japanese customers. In absence of any such details it can be presumed that no products have been sold to any Japanese customers. The sales commission for sale of products in India to MISL has been separately ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rtion. In support the assessee has placed copies of invoices and debit notes raised by the JMM by independent vendor in respect of SAP maintenance charges. A detailed explanation has been given by the assessee in this regard which we have already incorporated in the earlier part of the order. There is no rebuttal by the Revenue or anything contrary has been brought on record that payment of SAP maintenance charges have not been equally allocated to various group entities and the assessee has been allocated/ loaded with extra expenses or the invoices and debit notes are non-genuine. Such SAP maintenance charges is linked with carrying out the business activities in a smooth and efficient manner and also to maintain quality standard uniformly all across the JM Group for uniform use of system of accounting, administration, marketing, sales, etc. Thus, this payment being a part of the operating cost has to be aggregated under the TNMM. Here in this case it is not in dispute that, assessee s profit margin vis- -vis the comparables under TNMM is higher and therefore, no separate adjustment is required on this expense. 46. Similarly for the cost sharing charge , the assessee has state ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 18,10,000 2,76,88,088 Addition deleted in all years JMIPL found to have derived significant benefits Revenue has challenged this before ITAT for all three years 2. Payment for intra group services a. Testing charges TPO accepted payment to be at ALP no addition 15,58,390 6,56,878 Addition deleted in both the years JMIPL found to have derived significant benefits Revenue has NOT challenged this before ITAT b. Sales commission 1,08,48,310 (To JM Japan) No payment to JMUK 1,34,90,396 (To JM Japan) No payment to JMUK 1,46,66,704 (To JM Japan) 52,78,522 (To JM UK) Addition sustained Addition sustained JMIPL has challenged this before ITAT c. Server charges TPO accepted payment to be at ALP no addition 8,28,530 8,44,175 Addition sustained JMIPL has chall ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
