TMI Blog2019 (3) TMI 1353X X X X Extracts X X X X X X X X Extracts X X X X ..... and be detrimental to the interests of both the assessee and the revenue. We also find it appropriate to mention that the TPO, in the subsequent years, has accepted the aggregate approach and the TNMM method as against the approach of the TPO in this year to benchmark the transaction separately. The TPO has arbitrarily applied CUP, which is not supported by the approach of the TPO in the subsequent years. The view of the lower authorities that the benchmarking done by the Assessee is incorrect and the approach of the TPO, as has been upheld by the CIT (A), is not sustainable. Our view is also supported by comparison of margins of the Assessee with the margin of the comparable companies. As stated elsewhere in the order, the Assessee has earned the margin of 9.25% with respect to manufacturing activities as against the margin of 11.98% earned by the comparable companies. Thus, the Assessee’s margin is within the (+/-) 5% range. Therefore, the approach of the Assessee is correct in so far as it relates to the payment of Royalty and Fee for Technical know-how and the adjustment in relation to international transactions pertaining to payments for royalty and technical know-ho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions of royalty and technical know-how fees of the Appellant as nil by: 4.1 by not taking cognizance of the business operations of the Appellant along with its functional and risk profile and thereby treating the payment for royalty and technical know-how as unjustified without considering the benefits derived from the technical assistance received and underlying evidence thereof and hence challenging the commercial wisdom of the Appellant s business operations; 4.2 by not appreciating that the transactions are closely linked and intrinsic to the business operations of the appellant and arbitrarily rejecting the application of Transactional Net Margin Method as the most appropriate method of benchmarking the impugned transactions; 4.3 by erroneous application of Comparable Uncontrolled Price method without furnishing details of price charged in any comparable uncontrolled transaction which is in contravention of the provisions of Rule 10B of the Rules. 5. That the adverse findings given by the Ld. AO/ Ld. TPO/ Ld. CIT-(A) are contrary to the evidence on record and their conclusions are based on surmises. 6. That on the facts and circumstances of the case an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that during the year under consideration, the assessee had obtained technical know-how and expertise for manufacturing a new product, i.e, 18 mm Alco Fuel Pump. It was submitted that as consideration for the supply of technical know-how received, the assessee paid a lump sum fee amounting to ₹ 3,39,34,585/- to its AEs. As a further consideration for the supply of technical know-how and for other rights granted by the AEs, the assessee also paid royalty amounting to ₹ 58,70,947/-. It was further submitted by the Ld. AR that as per the agreement dated 27.3.2008, along with the amended agreement dated 30.03.2008, between the assessee and its AEs (placed at paper book Page 321 to 334), the assessee paid Royalty at the rate of 5% of the net exfactory sales price of the products manufactured and sold in India and at the rate of 8 percent of the net ex-factory sales price of the products manufactured and sold outside India. It was further submitted that effectively, the actual pay-out towards royalty for the impugned year was 1.73% (i.e., royalty paid during Financial Year 2008-09 ₹ 58,70,947/- Manufacturing segment sales ₹ 33,94,64,391/- ). 3.2 The Ld. AR subm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee furnished a letter by the Indian Railways before the lower authorities wherein such part was sought from Woodward India ( page 153 of paper book volume I). 3.6 It was also submitted that the growth of Woodward India s sales was in a large way dependent on the Indian Railways as during this year, the assessee was primarily selling only to the Indian Railways and, therefore, the assessee company had no option but to comply with the demand in the market in order to function competitively. It was vehemently argued by the Ld. AR that in this case: a) technical know- how was received; b) technical know- how was utilised by the assessee to make sales; c) sales were made to the customer that necessitated the acquisition of the technical know-how. It was reiterated that all the aspects of receipt, benefit as well as commercial requirements of entering into this inter-company agreement are evidenced in the present case. 3.7 It was further submitted by the Ld. AR that to enable the manufacturing of the new product, the assessee received from its AE (as per the Agreement), technical know-how like documents in the nature of drawings, specifications for manufacture, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ting of the pump before and after assembly of the same (pages 130-144 of paper book volume I). V. Technical manual: The technical manual consists of a maintenance manual and a service instruction manual which provides guidance about the practical aspects of Fuel Injection Equipment operation and service (pages 167-214 of paper book volume I). VI. Bill of Material and Drawings: The Bill of Materials and drawings which is required for the successful assembly of the fuel injection pump. The drawing and specifications of each of the spare part mentioned in the bill of material were also provided for guidance and support (pages 215-266 of paper book volume I). VII. Testing Procedures: In Process Inspection Check Sheet and Finished Product Inspection Test Specification were also submitted, which proves that AE has also helped with the testing procedures which were absolutely necessary for the success of the new product (pages 267-298 of paper book volume I). 3.9 It was, thus, vehemently argued by the Ld. AR that the allegation of the TPO that no tangible benefits have been received by the assessee and as upheld by the Ld. CIT (A) was incorrect. 3.10 To further buttress h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Amount In % terms Amount In % terms Amount In % terms Manufactured goods sales PGEV Governors 92,993,129 27.41% 68,382,020 20.04% - 0% Governors/Controls for other diesel engines 3,093,453 0.91% NA NA NA NA Steam Turbine control systems 156,192,099 46.04% 139,313,647 40.82% 145,876,256 44.85% Others 84,144,193 24.80% 102,593,313 30.06% 120,478,142 37.04% Fuel Pump 2,849,891 0.84% 30,979,781 9.08% 58,908,364 18.11% 3.14 It was further submitted by the Ld AR that the assessee company has made sales f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (SC); Frigoglas India (P) Ltd vs. DCIT [2016] 68 taxmann.com 370 (Del-Trib.), upheld by the Hon ble Delhi High Court vide order dated March 3, 2017 (ITA 123/2017). SLP filed by the Revenue authorities has been dismissed by the Hon ble Supreme Court vide order dated January 19, 2018 (SLP (civil) No. 41702/2017); Cummins India Limited vs. Addl. CIT [2015] 68 SOT 14 (Pune Tribunal.); 3.18 Further reliance was also placed on the following decisions wherein it has been held that the TPO is to conduct a transfer pricing analysis and determine ALP in accordance with law and that the TPO cannot determine whether there is a service from which the assessee benefits or not and, therefore, the TPO cannot determine the ALP of payments made by an assessee to its AE as NIL taking a view that no benefit was derived: Frigoglas India (P) Ltd vs. DCIT [2016] 68 taxmann.com 370 (Del-Trib.), upheld by the Hon ble Delhi High Court vide order dated March 3, 2017 (ITA 123/2017). SLP filed by the Reenue authorities has been dismissed by the Hon ble Supreme Court vide order dated January 19, 2018 (SLP (civil) No. 41702/2017) CIT vs. EKL Appliances Ltd. [2012] 345 ITR 241 (Delhi) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... view of the above, it was prayed by the Ld. Counsel that the disallowance of payments made for royalty and technical know-how received was unwarranted and deserved to be deleted. 4.0 The Ld. Department Representative ( CIT DR ) strongly countered the submissions of the Ld. AR. The Ld. CIT DR submitted that the TPO has rightly computed the ALP as Nil of the payments made in relation to royalty and technical knowhow by applying the CUP method. It was submitted that the Assessee has not been able to substantiate the benefits received out of such payments made. The Ld CIT DR placed reliance on the orders of the lower authorities and prayed that the same deserves to be upheld. 5.0 We have heard rival submissions and perused the material on record. 5.1 Ground Nos. 1 to 3 are general and do not require any specific adjudication. 5.2 As far as Ground Nos. 4 and 5 are concerned, the case of the Assessee is that it has made a payment to the tune of ₹ 3,98,05,532/- in relation to royalty and technical know-how for the new product, i.e. 18 mm Alco Fuel Pump required by Indian Railways as per specific demand for the customer. Our attention was drawn to the letter received from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , which is not supported by the approach of the TPO in the subsequent years. 5.5 In our considered opinion, the view of the lower authorities that the benchmarking done by the Assessee is incorrect and the approach of the TPO, as has been upheld by the Ld. CIT (A), is not sustainable. Our view is also supported by comparison of margins of the Assessee with the margin of the comparable companies. As stated elsewhere in the order, the Assessee has earned the margin of 9.25% with respect to manufacturing activities as against the margin of 11.98% earned by the comparable companies. Thus, the Assessee s margin is within the (+/-) 5% range. 5.6 Therefore, looking from any angle, the approach of the Assessee is correct in so far as it relates to the payment of Royalty and Fee for Technical know-how and the adjustment amounting to ₹ 3,98,05,532/- in relation to international transactions pertaining to payments for royalty and technical know-how deserve to be deleted. It is so ordered accordingly. 5.7 Ground No. 6 has not pressed by the Ld. AR. The same is dismissed as not pressed. 5.8 Ground Nos. 7 and 8 are consequential and require action at the end of the AO while giv ..... X X X X Extracts X X X X X X X X Extracts X X X X
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