TMI Blog2019 (4) TMI 1505X X X X Extracts X X X X X X X X Extracts X X X X ..... 2013 (2) TMI 877 - ITAT PUNE] has been either reversed or modified in any manner by the Hon ble High Court. Respectfully following the precedent, we do not approve the action of the AO in treating royalty payment as a capital expenditure. To sum up, out of the total payment of royalty at ₹ 1,01,81,033/- in respect of two agreements, the only amount which is to be disallowed is a sum to be calculated afresh, representing duplicate payment in respect of royalty for use of trade mark towards steering, axle and accessories for 35 and 55 HP tractors, included in the sum of ₹ 75.41 lakh. The AO is directed to grant relief accordingly. TP adjustment - Corporate/Management services fee - The assessee applied Cost plus method in the transfer pricing documentation for showing that the international transactions was at ALP - whether the assessee availed any services from its AEs pursuant to the two Agreements? - HELD THAT:- It is for the assessee to decide the way in which it has to carry on its business. If it feels that services are required to be availed, the TPO cannot reject the allowability of such payment simply on the ground that no benefit was derived. It is not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... determine the most appropriate method and then find out the ALP of the international transaction in accordance with our above observations and directions. - ITA No.1260/PUN/2018 And ITA No.1308/PUN/2018 - - - Dated:- 27-2-2019 - SHRI R.S. SYAL, VICE PRESIDENT AND SHRI VIKAS AWASTHY, JUDICIAL MEMBER For The Assessee : Shri M.P. Lohia And Shri Rajendra Agiwal For The Revenue : Shri Sanjeev Ghei ORDER PER R.S.SYAL, VP : These are two cross appeals - one by the assessee and the other by the Revenue - arise out of a common order of CIT(A)-13, Pune passed on 27-04-2018, inter alia, for the assessment year 2009-10. 2. The first issue raised by the assessee in its appeal is against the confirmation of addition of ₹ 75,41,558/- made by the Assessing Officer (AO) on account of transfer pricing adjustment recommended by the Transfer Pricing Officer (TPO). The Revenue in its appeal is aggrieved by the direction of the ld. CIT(A) to treat the entire amount of royalty as a revenue expense as against capital expenditure taken by the AO. 3. Briefly stated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... correct amount of total royalty paid by the assessee during the year at ₹ 1,01,81,033/-), he allowed depreciation of ₹ 27,20,258/- and made addition for the remaining sum of ₹ 81,60,774/-. 4. The ld. CIT(A) noticed that there were two aspects of this issue. The first, being, determination of ALP on brand royalty by the TPO at NIL and second, being, the action of the AO in holding that the brand royalty was a capital expenditure. Relying on the Tribunal order in the case of the assessee for the A.Yrs. 2003-04 to 2008-09, the ld. CIT(A) held that the brand royalty could not be considered as a capital expenditure. On the other aspect, he upheld the action of the TPO in determining the NIL ALP of the international transaction. Whereas the Revenue is aggrieved by the direction given by the ld. CIT(A) in treating the royalty payment as revenue expenditure, the assessee is aggrieved by the upholding of the determination of Nil ALP of the international transaction of payment of royalty to the tune of ₹ 75,41,558/- by the TPO. 5. We have heard both the sides and gone through the relevant material on record. It is noted above that the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in conformity with the ALP determined by the TPO. 7. Adverting to the facts of the instant case, it is seen that the TPO, vide his order dated 24.1.2013, accepted payment of Royalty of ₹ 26.39 lakh, pursuant to the earlier agreement, at ALP, but proposed transfer pricing adjustment at full for the remaining amount of ₹ 75.41 lakh paid pursuant to the new agreement. The AO, vide his final assessment order dated 29.4.2013, treated the entire royalty payment made by the assessee pursuant to both the agreements, as capital expenditure. The view so adopted by the AO, in our considered opinion, is not in accordance with law. The AO ought to have made a transfer pricing addition of ₹ 75.41 lakh pursuant to the second agreement only. As the AO proceeded to treat the entire amount as capital expenditure, including the one in respect of which the TPO did not propose any TP adjustment to the tune of ₹ 26.39 lakh, we cannot countenance the view of the AO pro tanto . 8. It can be seen from page 4 of the final assessment order that the assessee paid a sum of ₹ 1,01,81,033 (sic ₹ 1,08,81,033) to Carraro SpA, Italy, on account ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to 40 HP. Copy of this agreement is available at page 311 onwards of the paper book. As per the terms of this agreement, the assessee was supposed to pay royalty @ 5%. This agreement was also stated to have become redundant during the year as its term expired in an earlier year. Agreement at Sl. no.4 dated 23-10-2003 for use of technology and trade mark in respect of axle for 80 HP tractors and parts thereof, was stated to have never been implemented and no payment was ever made in pursuance of this agreement. Agreement at Sl.No.3 was entered into on 05-04-2001. Under this agreement, the assessee was to pay royalty @ 2% for use of technical knowhow and trade mark in respect of steering axle and accessories for 35 and 55 HP tractors. Pursuant to this agreement, the assessee paid a sum of ₹ 26,39,475/- during the year under consideration. The ld. AR stated that this Agreement remained operative till 30.6.2008, which was discontinued from 1.7.2008. In addition to that, the assessee paid a further sum of ₹ 75,41,558/- in terms of the agreement dated 01-07-2008 for use of name, logo and trade mark, license. A copy of this agreement is available at page 219 onwards of the pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nistry of Commerce and Industry, was held to be at ALP on that score alone. In that case, the respondent-assessee used trade mark of its parent company and paid Royalty for the same ranging between 2.5% to 4% of the revenue generated. For the purpose of transfer pricing, the assessee contented that 3% of the revenue generated should be considered as reasonable for use of trade mark provided by its parent company. In support of such benchmark, that assessee relied on the approval granted by the Foreign Investment Promotion Board (FIPB) dated 25-09-2000. The TPO did not accept the same and placed reliance on the Press Note No.9 (2000 series) issued by Ministry of Commerce and Industry, Govt. of India, wherein royalty was allowed at 1% of domestic sales and 2% of exports for use of trade mark/brand name of a foreign collaborator. The TPO reduced the benchmark to less than 3% for determination of the ALP. When the matter finally came up for consideration before the Tribunal, it observed that as per FIPB directive, the assessee could pay royalty between 5% to 8%. The assessee contended before the Hon ble High Court that Press Note No.9 (2000 series) as relied by the Revenue, if properly ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e in respect of steering axle and accessories for 35 and 55 HP tractors is covered within the payment of ₹ 26.39 lakh, whose ALP has been determined by the TPO, at the transacted value, the amount of royalty paid by the assessee for use of trade mark license once again under the second agreement for which the TPO proposed TP adjustment of the full amount of ₹ 75.41 lakh, cannot be allowed once again. Thus, royalty paid for use of trade mark license pertaining to steering axle and accessories for 35 and 55 HP tractors, included in the amount of ₹ 75.41 lakh is required to be disallowed as a duplicate payment. The ld. AR was fair enough to concede this position. He submitted certain details, as per which a sum of ₹ 4,95,166/- has been calculated as duplicate amount of royalty that could be disallowed. While making such a calculation, the ld. AR made a departure from the submission made on the earlier date as per which royalty paid at the rate of 2% for use of technical know-how and trade-mark was discontinued w.e.f. 30.6.2008. It was now stated that only royalty for use of brand name was discontinued w.e.f. 1.7.2008, but royalty for use of technical know-how c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt of Corporate/Management services fee with transacted value of ₹ 4,35,34,910/-. The assessee applied Cost plus method in the transfer pricing documentation for showing that the international transactions was at ALP. The TPO observed that the assessee entered into two agreements with Carraro SpA, Italy and Carraro Drivetech SpA, Italy during this year, both dated 15-12-2008 effective from 01-07-2008. The assessee paid a sum of ₹ 2,87,45,505/- pursuant to agreement with Carraro Drivetech SpA, Italy, for availing Finance, Human Resource, Legal, IT, Business Development and Marketing services and also a sum of ₹ 1,47,89,403/- to Carraro SpA, Italy for availing services of Global Sourcing, Quality Control, Supply Chain management and Measuring strategy etc. The TPO observed that no agreement was existing in the past for such services and it was for the first year that the assessee paid a sum of ₹ 4,35,34,908/- on this account. On being called upon to substantiate the receipt of services, the assessee failed to provide any evidence of such services. Since the assessee used its Foreign/AE as a tested party under the Cost plus method and further did not give a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ; Advice on strategic planning and Group consulting for Business consulting and Development activities; Advice on Business Development and Market Coordination etc. have been mentioned. Annexure-B to the agreement gives different mark-ups on cost, namely, 2, 5% on Human Resources, 10% on Finance and Controlling, 4,7% on IT, 6,3% on Strategic Department, 6,3% on Engineering and 3,10% on Business Development and sales carrying. Similarly the second agreement with Carraro Drivetech SpA, Italy, refers to the services in the nature of Advice on DLEs, Commercial activities; Advice on Cost Planning; Advice and Services of Global Securing; Advice and services of Quality Department; Advice on Manufacturing strategy; and Advice on Supply chain. Mark-ups on such services have been given in Annexure-B, namely, Sales Coordination 3,1%; Cost Planning 3,1%; Global Sourcing 4%; Quality Department 4%; Manufacturing Strategy 6, 3%; and Supply Chain 6, 3%. 19. The ld. AR has drawn our attention towards voluminous documents including e-mails between the assessee company and AEs on wide spectrum of the matters to establish that the services were actually availed. We have gone through som ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee applied the TNMM again with the foreign/associated enterprise as a tested party. The ld. AR submitted that it put forth one more calculation of the ALP determination under the TNMM with itself as the tested party. Since the foreign/associated enterprise has been taken as the tested party not only in the original transfer pricing documentation, but also during the remand proceedings, we need to decide if the assessee was justified in doing so. 22. For this purpose, we need to visit the provisions of the Chapter X of the Act with the caption Special Provisions Relating to Avoidance of Tax dealing with the computation of income from international transactions having regard to ALP. Section 92(1) of the Act provides that : 'Any income arising from an international transaction shall be computed having regard to the arm's length price'. Thus, this provision applies to income of an enterprise from an international transaction, which is chargeable to tax under the Act. The term international transaction has been defined in section 92B to mean 'a transaction between two or more associated enterprises, either or both of whom are non-residents, in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... et profit margin in the open market ; ( iv) the net profit margin realised by the enterprise and referred to in sub-clause (i) is established to be the same as the net profit margin referred to in sub-clause (iii) ; ( v) the net profit margin thus established is then taken into account to arrive at an arm's length price in relation to the international transaction.' 23. A cursory reading of the above provisions indicates that firstly, a transaction between two or more associated enterprises is called an international transaction; secondly, any income from such an international transaction is required to be determined at ALP; thirdly, the ALP in respect of such an international transaction should be determined by one of the prescribed methods, which also includes the TNMM. Under this method, the net profit margin realized by the enterprise from an international transaction entered into with an associated enterprise is computed in relation to costs incurred or sales effected or assets employed or to be employed by the enterprise or having regard to any other relevant base, which is then compared with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Indian taxation base by means of the foreign/AE charging more than that charged by comparable independent cases, which fact is ensured by determining the ALP of the international transaction. If foreign AE has, in fact, charged more, then its profit rate will shoot up and the corresponding profit of the Indian enterprise will be squeezed. In that scenario, a comparison of the profit rate of the foreign/AE will run contrary to the mandate of the provisions. Whereas, we were required to determine if the profit charged by the foreign AE is not more than that charged by uncontrolled comparables by seeing the profit rate of the Indian enterprise, we will end up doing a futile exercise of rather viewing the profit rate of the foreign/AE. Suppose the foreign/AE has charged more, then its profit rate will turn out to be higher, which when compared with the lower rate of profit margin of foreign comparables, will show the transaction at ALP, calling for no transfer pricing adjustment. This exercise is not only off the mark, but also runs counter to the rule and spirit of the transfer pricing provisions. Essence of the matter is that it is the profit margin of the Indian enterprise and not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e matter to the file of AO/TPO for fresh determination of the ALP. The Hon ble High Court held in the operative part of its judgment that : This court notices that for reconsideration and determination of the appropriate method as well as appropriate comparables and the tested party, it would be convenient and appropriate for the TPO to consider the question which the assessee urges in the present case. The TPO is therefore directed to overlook and not feel bound by the observations of the Tribunal and render findings on the merit of the issue . Having said so, the Hon ble High Court held that the court is of the opinion that no question of law arises since the matter stands remitted, to the TPO . We are unable to find anything from the operative part of the judgment, which has the effect of setting aside of the Tribunal order holding that the Foreign/associated enterprise cannot be considered as a tested party. In fact, the Hon ble High Court has simply remitted the matter to the TPO for reconsideration and determination, inter alia, of the tested party . The TPO was directed to decide this issue independently de hors the finding rendered by the Tribun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ( iii) the normal gross profit mark-up referred to in sub-clause (ii) is adjusted to take into account the functional and other differences, if any, between the international transaction and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect such profit mark-up in the open market ; ( iv) the costs referred to in sub-clause (i) are increased by the adjusted profit mark-up arrived at under sub-clause (iii) ; ( v) the sum so arrived at is taken to be an arm s length price in relation to the supply of the property or provision of services by the enterprise ; 26. It can be seen from the mandate of the rule that the adjusted normal gross profit rate of comparable uncontrolled transactions is applied to the direct and indirect costs incurred by the assessee to find out the ALP of the international transaction. In the absence of the availability of adjusted gross profit rate in comparables uncontrolled transactions, there can be no determination of the ALP. As the assessee has not given any comparable uncontrolled transaction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... standing between various members of a group. The Hon ble High Court observed that in case of a package deal where each item is not separately valued but all are given a composite price, these are one international transaction. It went on to hold that where a number of transactions are priced differently but on the understanding that the pricing was dependent upon the assessee accepting all of them together (i.e. either take all or leave all), then it is also an international transaction. But it will be on the assessee to prove that although each is priced separately, but they are provided under one composite agreement. It still further held that each component may be priced differently also, but it will have to be shown that they are inextricably linked that one cannot survive without other. Merely because purchase of goods and acceptance of services lead to manufacture of final product, it does not follow that they are dependent transactions. It is apparent that the case of the assessee does not fall in any of the above three situations. 30. The Hon ble Delhi High Court in Magneti Marelli Power Train India Pvt. Ltd. Vs. DCIT (2016) 289 ITR 469 (Delhi) has held th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the facts under consideration. In that case, the TPO determined ALP based on the worldwide break up of revenue amongst countries and concluded that India accounted for 1.4% thereof and hence, the TP adjustment was proposed accordingly. On the contrary, the TPO in the instant case has categorically mentioned in Para No.8.6 of his order that he was applying the CUP method, under which the ALP was NIL. In our considered opinion, there is a vast difference between the two situations, viz., one in which a wrong method is applied and the second in which a correct method is applied but some mistake is committed in application of such a method. Whereas the case of M/s. Kodak India Pvt. Ltd. falls in the first category, the extant case falls in the second category, in which the TPO applied one of the recognized methods, namely, CUP for determining the ALP of the international transaction. It is a secondary thing that the determination under the CUP method was not proper because he took NIL ALP on the ground that the assessee did not avail any services and further no benefit was received. In such a scenario, we are unable to countenance the contention of the ld. AR that the transfer prici ..... X X X X Extracts X X X X X X X X Extracts X X X X
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