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TMI Blog2019 (12) TMI 1206X X X X Extracts X X X X X X X X Extracts X X X X ..... fer pricing addition of Rs. 2,13,97,960/- in the international transaction of 'Allocation of shared service charges'. 4. Briefly, stated, the facts of the case are that the assessee is a company engaged in the business of Commercial Vehicles Systems and a part of Knorr Bremse group. The assessee filed its return accompanied by the Audit Report in Form No. 3CEB detailing certain international transactions. The Assessing Officer (AO) made a reference to the Transfer Pricing Officer (TPO) for computing the Arm's Length Price (ALP) of the international transactions. The international transaction of 'Allocation of Shared service charges' at Rs. 2,13,97,960/- was not benchmarked by the assessee on the premise that it was a `Cost allocation arrangement'. The TPO observed that the assessee paid this amount to its Associated Enterprise (AE), Knorr Bremse Asia Pacific (Holding) Ltd., Hong Kong (hereinafter called 'KBAP'). He called upon the assessee to provide the evidence of availing of the services. The assessee, referring to the Service Agreement entered on 01-01-2010 with KBAP, submitted that the agreement provided for provision of Business Development, Marketing, Project Management ser ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent from the relevant clause that the KBAP was to render the services through correspondence, fax, telephone and visits of its personnel etc. The assessee has not placed on record copies of such correspondence or fax or emails or evidence of the visits by personnel of AE to demonstrate that any such services were actually provided by the AE. 7. Now let us examine the nature of the services claimed to have been received from the AE. In so far as the Business Development, Marketing and Project Management services are concerned, for which the assessee paid 2563 Euros, the TPO observed that 90% of the assessee's sales were to single customer, namely, Tata Motors and further as per the assessee's functional analysis in its Transfer Pricing study report, it had its own Marketing and Distribution network. The relevant portion of such analysis, which has been reproduced on page 7 of the TPO's order, is extracted here as under : "KB India has its own marketing and distribution network for distributing the manufactured products. It monitors the market conditions and plans the distribution schedules. The major customer of KB India is Tata Motors. Presentations are made by the marketing d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h services to the assessee. Thus, it is clear that the authorities below were right in not allowing deduction for this sum. 12. The assessee has also raised an additional ground urging to adopt the 'Combined Transaction approach under the Transactional Net Marginal Method (TNMM)' for benchmarking the international transaction pertaining to payment of shared service charges as closely linked to its manufacturing activity. 13. Since this ground involves a pure question of law and does not require any fresh examination of facts, we, therefore, admit the same in the hue of the judgment of Hon'ble Supreme Court in National Thermal Power Company Ltd. Vs. CIT (1998) 229 ITR 383 (SC). 14. On merits, it is found from the international transactions reported by the assessee, as reproduced at pages 2 and 3 of the TPO's order, that the assessee applied TNMM in respect of the transactions reported at Sl. nos. 1 to 8. For international transaction at Sl. no. 9, the assessee applied the Comparable Uncontrolled Price (CUP) method. For the instant transaction, given at Sl. no. 11, the assessee did not carry out any benchmarking by mentioning that it was only a `Cost Allocation Arrangement'. Thus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... osely linked transactions'? At the cost of repetition, it is mentioned that whereas the Payment of shared service charges is a claim for receipt of certain services and other international transactions covered under the TNMM are in the nature of purchase of raw material and sale of finished goods from/to the AEs etc. In our considered opinion, the two sets of the transactions, can by no stretch of imagination, be considered as 'closely linked transactions'. The mere fact that the assessee claimed to have availed certain services and utilised the same in the overall business would not make them as 'closely linked transactions', so as to come up for consideration in an aggregate manner. 18. In one sense, closely linked transactions mean similar or alike transactions of purchase or sale etc. of goods or services. To put it simply, if there are several international transactions of, say, purchase of similar goods or with minor variations, then instead of finding the ALP of such international transactions separately, if these are combined and benchmarked in an aggregate manner, it satisfies the prescription of closely linked transactions. 19. The Hon'ble Punjab & Haryana High Court i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... entity level approach applied to benchmark the international transactions including Technical assistance fees and proceeded to determine the ALP of the Technical assistance fees separately. The Tribunal approved the TPO's stand on segregation of payment of Technical assistance fee. The Hon'ble Delhi High Court admitted the question in this regard - `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 arms length price?' Answering this question against the assessee, the Hon'ble High Court countenanced the view of the Tribunal that aggregation of the transaction of payment of Technical fees with other international transactions under the common TNMM, was not correct. Restoring the matter to the TPO/AO, it held that the TNMM should be separately applied for determining the ALP of the international transaction of payment of Technical fee. The SLP filed against this judgment has since been dismissed vide DCIT vs. Magneti Marelli Powertain India (P) Ltd. (2018) 252 Taxman 385 (SC). 22. We note ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... emse' and 'k encircled' for its business operations and for all the products manufactured and sold by it. In consideration, the assessee agreed to pay Trademark fees of 0.5% on all third party gross sales worldwide. During the year under consideration, the trademark charges paid/payable to KB-SfN under this agreement amounted to Rs. 19,96,178/-. The TPO, on a perusal of the earlier 'Technical Transfer Agreement' (TTA) entered into between KB-SfN GmbH and the assessee on 06-12-2003, noted that KB-SfN GmbH was already charging royalty from the assessee, which included consideration for use of `Contractual Trademarks' in the manufacture and sale of Contractual Products. The assessee was asked to explain the reasons for paying Trademark charges once again vide the later Agreement effective from 1.1.2011, when payment for such trademark charges was already being made under the TTA dated 6.12.2003. In the absence of the assessee furnishing any plausible explanation, the TPO proposed the transfer pricing adjustment of Rs. 19,96,178/-. The AO made the addition, which came to be echoed in the impugned order. 27. The assessee has set up a case that it was due to inadvertence that the TTA pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l Trademarks to the Contractual Products ..........'. Article 12, which is equally crucial for our purpose, deals with 'Compensation'. Para 1 of Article 12 reads as under: "For the right to use the Intellectual Property Rights and Know-how according to Article 2, the transfer of knowhow and Technical Documentation according to Article 3, the provision of training according to Article 6, the consultation according to Article 7 of this Agreement, and the right to use the Contractual Trademarks according to Article 9 the JVC shall pay to KB-SfN. In addition to the costs separately invoiced hereunder, a running royalty amounting to 4% (four percent) of the Net Sales Volume of the JVC. However, such royalty shall not exceed 3% (three percent) of the net ex-factory sales price of the Contractual Products exclusive of excise duties." 29. A cursory look at the contents of Article 12.1 makes it abundantly clear that the assessee agreed to pay running royalty at 4% of Net Sales Volume as a quid pro quo for the right to use the Contractual Trademarks as per Article 9 in addition to the right to use Intellectual Property Rights and know-how etc. Thus, it is overt that the assessee paid roy ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nderstanding was arrived at between the assessee and KB-SfN as per which it agreed to pay 0.5% for use of Trademark. The authorities below have disallowed 0.5% by holding that the assessee was earlier paying for use of Contractual Trademarks and there was no need to pay a further amount for use of the Trademarks. In our considered opinion, such an approach is erroneous. One way of looking at the scenario is that the assessee was already paying 4% royalty pursuant to the TTA and it agreed to pay further 0.5% under the TLA, thereby raising the rate of royalty to 4.5% for use of technical know-how etc. including the use of Contractual Trademarks. Once it was found that the assessee actually paid royalty at total of 4.5% under the international transaction, then the course open to the TPO should have been to determine the ALP of the international transaction of payment of royalty including use of Contractual Trademarks by considering total payment at 4.5%, instead of shutting the door by holding that there was no need to pay further 0.5% of Net Sales Volume when the assessee was already paying 4% towards royalty. The fact that the assessee did pay royalty at 4.5% clearly demonstrates t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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