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2019 (10) TMI 296

..... ispute that the assessee has derived the benefit from the technical information given by the AE. There was an agreement reduced in writing between the assessee and the AE for payment of royalty and for extending necessary technical support to the assessee for manufacturing product continuously and consistently. CIT(A) has given a finding that the technical information on the manufacturing the activity was received and benefitted by the assessee. AR submitted that the manufacturing activity of company and the continuous technical support for which the royalty is paid are independent and interrelated and as held in the case of M/s. Johanson & Johnson [2017 (3) TMI 1520 - BOMBAY HIGH COURT] the TPO obliged to follow any one of the methods prescribed in section 92C of the Act. Instead, the ld.TPO adopted the benefit test which is not one of the prescribed methods. Thus, the order of the TPO is defective in not following the methods prescribed under the Act. Commercial expediency is the business decision of the tax payer and the AO cannot sit and judge the business expediency as decided by the Hon'ble Delhi High Court. The coordinate bench of ITAT, Delhi also held that TNMM is t .....

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..... t against payment of royalty for receiving the services and accordingly under CUP, Arm's Length Price is treated as nil. 2. The Ld. CIT(Appeals) has failed to appreciate that even though the tax payer was asked to justify the payment applying the benefit test, which the tax payer could not fulfill. 3. The Ld. CIT(Appeals) failed to appreciate that if the terms and conditions of the agreement are sacrosanct, then there would never be any adjustment to arm's length. The terms and conditions are to be tested between what independent parties would do in an arm's length situation. 4. Royalty payment cannot be aggregated with the other international transactions for the purpose of determining the ALP. 5. Royalty has been pad under a separate agreement and therefore has no relation with the other transactions of the assessee with its AE. 6. Payment of royalty and the other transactions with the AE are not closely related transactions but are separate and independent international transaction and therefore these cannot be treated as closely linked transaction for the purpose of transfer pricing adjustment. 7. The Ld. CIT(A) ought to have noticed that the profit margins shown by .....

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..... are at Arm s Length Price and no adjustment was made. The taxpayer adopted TNMM (Transaction Net Margin Method) as most appropriate Method (MAM) at the entity level. 5. The Ld.TPO segregated the royalty payment and worked out the operating margin (OP/OR) of purchases and sales at 18.34% after excluding the Royalty payment and no adjustment was proposed on purchases and sales. The TPO also viewed that TNMM is MAM for determining the ALP for trading transaction. However, the TPO segregated the Royalty payment and determined the ALP of Royalty at Rs.NIL. The TPO was of the view that the transfer pricing study made by the assessee with regard to payment of royalty was unacceptable, since, the assessee had aggregated the payment of royalty with other transactions. The TPO separated the payment of royalty from trading transactions and proceeded to benchmark and same using CUP method as the transaction is in the nature of intangible which in the opinion of the TPO has to be analysed separately. The TPO referred the decision of ITAT, Mumbai Bench in the case of UCB India Pvt. Ltd., [317 ITR 292 (AT) (Mumbai)] and held that each class of transaction has to be analysed separately. Therefore, .....

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..... t deriving any additional benefits. 5.1 In this case, for the A.Y. 2008-09 the taxpayer has made the royalty payment of ₹ 1.75 crores to the AEs @5% on domestic sales and 8% on external sales. Since the TPO has determined the ALP at Rs.NIL, the Assessing Officer has completed the assessment u/sec. 143(3) r.w.s. 92CA(3) by making the addition of ₹ 1.75 crores representing the ALP of the royalty transaction as per the TPO s order. 6. Against the order of the Assessing Officer, the assessee went on appeal to the ld. CIT(A). The ld. CIT(A) after analysing and examining the complete details placed before him found that as per the correspondence and evidence, the assessee s plea that it had received technical information from its AE and such technical information provided by the AE was established. The ld.CIT(A) further held that the TPO without considering the e-mail correspondence, has taken a view that the technical services provided in the agreement are general in nature in paragraph No. 16.4 of the ld. CIT(A) s order. For the benefit of understanding and clarity we extract para 16.4 of the ld. CIT(A) s order is as follows:- 16.4 Thus, the perusal of the e-mail correspond .....

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..... ns of section 92C r.w.r. 10B are clear that the ALP in relation to international transactions shall be determined as per the methods prescribed in the Act and the approval of RBI given for remittance of impugned amount to the AE would not in any way fall within the methods prescribed under the act. Thus, the contention of the assessee justifying the payment made to the AE with the approval of RBI was rejected by the ld.CIT(A). The ld.CIT(A) further held that benchmark of royalty as a separate transaction is permissible as the royalty is a separate transaction. Further held that aggregation for transactions for benchmarking and the selection of the most appropriate method depends on the facts and circumstances of the case such as the nature of transitions to be aggregated taking into account the entire activities and functions of the enterprise, the availability of comparable data etc. and relied on Rule 10C(2) which reads as under:- 10C. (1) x x x x (2) In selecting the most appropriate method as specified in sub-rule (1), the following factors shall be taken into account, namely:- (a) the nature and class of the international transaction [or the specified domestic transaction]; (b .....

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..... -) 5% range, the ld. CIT(A) directed the Assessing Officer to make proportionate adjustment by way of determination of ALP. 9. For the A.Y. 2008-09, the assessee had conducted the TP study and benchmarked the arithmetic mean of 10 comparables, with PLI (OP/Sales) was given at 11.85% as against the assessee s PLI of 14.76% adopting TNMM as MAM. Considering the fact that the assessee s PLI is more than PLI of comparables, the ld. CIT(A) held that no adjustment is required. Accordingly, deleted the addition made by the Assessing Officer to the extent of 1.75 crores for the A.Y. 2008-09. 10. Against the order of the ld. CIT(A), the Revenue is in appeals and the assessee filed the cross objections before this Tribunal. 11. During the appeal hearing, ld.DR argued that the assessee has not established before the TPO that it had derived any benefit from intangibles. The TPO has directed the assessee to demonstrate the benefits derived by the tax payer with evidence and the assessee failed to demonstrate that the assessee-company had derived any benefit by payment of royalty to the AE. Therefore, the assessee has not passed through the benefit test for payment of royalty. Though there is no .....

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..... ation supplied by the AE is confidential in nature and it is necessary to the assessee to manufacture the products including transfer of formulation seeds, raw material specification in process quality control process testing and working instructions for making operations and the consequent sheets. The assessee s manufacturing activity is interlinked and interrelated with the continuously supplied technical information from the AE and without technical support from the AE the assessee would not be in a position to undertake the manufacturing operations. The existence of the assessee-company is based on technical assistance provided by the holding company and argued that this assistance is a big benefit to the assessee company as the company is able to coordinate its operations due to technical assistance provided by the AE. Though, the TPO has given finding in Transfer pricing order that the assessee did not derive any benefit out of the payment of the royalty, the ld. CIT(A) after verifying the additional evidence and the information submitted by the assessee during appeal hearing, given a finding that the assessee s claim that it had derived the benefit from technical information .....

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..... ment of such royalty cannot be questioned. Accordingly, ld.AR argued that in the instant case applying the benefit test is not provided in sec. 92C of the Act and the Assessing Officer has to necessarily apply the method prescribed in rile 10B of the IT Rules for determination of ALP of international transaction. Thus, argued that having not followed any of the method by the TPO, the adjustments made by the TPO at Rs. NIL is unjustified. Similarly, by relying on the decision of the Hon'ble High Court of Telangana & Andhra Pradesh in the case of R.A.K. Ceramics India Pvt. Ltd. (supra) the ld.AR argued that the transfer pricing adjustments made by the Assessing Officer required to be deleted and requested to uphold the order of the ld. CIT(A). 13. We have heard both the sides and perused the material placed on record. 14. In the instant case, for the A.Y. 2007-08, the assessee has made the payment of royalty to its AE i.e. SPCM SA, France for ₹ 1.10 crores and for the A.Y. 2008-09 the amount of royalty payment was ₹ 1.75 crores. The taxpayer has conducted the transfer pricing study and held that TNMM is most appropriate method at the entity level and on study of t .....

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..... peal hearing, ld.DR could not place any evidence to controvert the finding given by the Ld.CIT(A). The above observation made by the Ld.CIT(A) is based on the facts and after analysing the information placed before him therefore we, do not see any reason to differ with the finding of the ld. CIT(A) to hold that the assessee had received technical information from its AE and has benefited from such technical information provided by the AE. The ld.AR relied on the decision in the case of M/s. Johnson & Johnson Ltd. (supra) wherein the Hon'ble High Court of Bombay has held that the TPO is obliged to follow any one of the prescribed methods to determine the ALP as detailed in section 92C(1) of the Act. For the sake of convenience, we extract the relevant portion of the order which is extracted as under:- (ii) The TPO is obliged under the law to determine the ALP by following any one of the prescribed methods of determining the ALP as detailed in Section 92C(1) of the Act. In this case, there is nothing on record to indicate that the TPO had applied any one of the prescribed methods in Section 92C(1) of the Act to determine the ALP before disallowing the payment of ₹ 200.8 .....

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..... unications India (P) Ltd wherein the Hon ble Delhi High court held that aggregation of transaction is desirable and not merely permissible, if the nature of transaction(s) taken as a whole is so interrelated that it will be more reliable means of determining the Arm s length consideration for the controlled transactions. In the instant case assessee has not availed similar technology from any other third party and the associated enterprise has not provided the technology to any other third party. The Ld.TPO has not brought any comparable cases under CUP method for determination of ALP. Therefore taking in to consideration the entire facts and the materials placed before us we, agree with the Ld.CIT(A) that the TNMM is most appropriate method to determine the ALP at entity level. Having held that TNMM is most appropriate method we refer to the decision of the Hon'ble High Court of Telangana & A.P. in the case of R.A.K. Ceramics India Pvt. Ltd. relied upon by the ld.AR wherein the Hon'ble High Court has held as under:- ........... once it is admitted by the Revenue that the assessee entered into a royalty agreement with the AE and the assessee claimed benefit from such ag .....

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..... Act as laid down clearly by the Hon 'ble Delhi High Court in EKL Appliances (supra). As far as the Department's reliance on the Hon 'ble Delhi High Court's judgment in Abhinandan Investments (supra) and on the decision of the co ordinate I Bench of the Delhi Tribunal in the case of Bombardier Transpiration India Pvt. Ltd. is concerned, these judgments were rendered on a different set of facts and hence the ratio as 'laid down by these are not applicable to the facts of the present appeal. Furthermore, we are of the opinion that once TNMM has been applied to the assessee company's transaction, it covers within its ambit the royalty transactions in question too and hence the Department's contention for applying the CUP method is erroneous. Hence, following the ratio of the Hon 'ble Delhi High Court in CIT vs EKL Appliances (supra), we hold that the addition made by the TPO and upheld by the DRP is unsustainable and is liable to be deleted...... 18. In the instant case, there is no dispute that the assessee has derived the benefit from the technical information given by the AE. There was an agreement reduced in writing between the assessee and the AE f .....

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