TMI Blog2019 (12) TMI 1206X X X X Extracts X X X X X X X X Extracts X X X X ..... se only when it is proved that the assessee actually availed the services for which it made the payment. We have noted supra that the assessee has admittedly not proved the receipt of the services. It has further been admitted by the ld. AR that the assessee has no evidence to prove the receipt of services through correspondence or e-mails or visits of the personnel of the AEs. Once the addition is sustained on the ground that the assessee failed to prove the receipt of services at the very outset, there can be no question of any aggregation. It is held that neither the aggregation of the transaction of allocation of shared service charges is permissible with the other reported transactions under the TNMM in the facts as are instantly obtaining nor the assessee could adduce any evidence either for the cost sharing arrangement without any mark up or the actual receipt of services. We, therefore, uphold the disallowance. Addition in respect of the international transaction of Payment of Trademark charges - HELD THAT:- 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... grounds were also not pressed, which are hereby dismissed. 3. The first issue which survives in this appeal is against the confirmation of the transfer pricing addition of ₹ 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 ₹ 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it has been provided that: KBAP will provide the relevant services through correspondence, telephone, telefax, periodic visits of personnel and other means agreed on from time to time with the receiving party. Thus, it is evident 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 : ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g of an Agreement for receipt of services, and that too with its AE, is not sufficient. The factum of receipt of services needs to be necessarily established before claiming any deduction. On a pertinent query, the ld. AR fairly conceded that, as on date also, he has no evidence in the shape of correspondence, e-mails, fax or visits of the personnel of the AE to prove that the AE rendered such 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 rep ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... caveat is that in order to be covered within the term transaction under Rule 10A(d), it is sine qua non that such number of transactions must be closely linked. If they are not closely linked transactions, then there can be no aggregation for determination of the ALP under the IT Rules. 17. The moot question is whether the transaction of Payment of shared service charges on one hand and Import of raw material and Export of finished goods on the other, namely, the manufacturing activity, can be construed as closely 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rvive without other. 21. The assessee in Magneti Marelli Powertrain India Pvt. Ltd. vs. DCIT (2016) 389 ITR 469 (Delhi) entered into agreement with its A.E. for acquiring technology required for the purpose of manufacturing. It applied the TNMM to benchmark its international transactions of import of raw materials, sub-assemblies and components, payment of technical assistance fees, payment of royalty, payment of software and purchase of fixed assets. All these were categorized under one broad head, that is, Manufacturing of automotive components and shown to be at ALP. The TPO rejected the assessee s 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... harges is permissible with the other reported transactions under the TNMM in the facts as are instantly obtaining nor the assessee could adduce any evidence either for the cost sharing arrangement without any mark up or the actual receipt of services. We, therefore, uphold the disallowance. 25. The next issue raised in this appeal is against the confirmation of addition of ₹ 19,96,178/- in respect of the international transaction of Payment of Trademark charges . 26. Succinctly, the facts of this ground are that the assessee entered into an Agreement with KB-SfN effective from 01-01- 2011 under which KB-SfN granted the assessee a right to use Contractual Trademarks, i.e. Registered Trademark Knorr Bremse 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 ₹ 19,96,178/-. The TPO, on a perusal of the earlier Technical Transfer Agreement (TTA) entered into between KB ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 3.2 to 3.4 below . The later paras of the Article deal with the provision to the JVC of a complete set of product related Technical Documentation etc. Article 6 of the TTA provides for the provision of training to the personnel of the JVC by KBSfN. Similarly, Article 7 deals with the Consultation to be provided by KB-SfN to the assessee in the fields of Production, Engineering, Purchasing and Manufacturing. Article 9, which is significant in the present context, has the heading Trademarks, Type and Identification Numbers . Para 1 of Article 9 provides that: KB-SfN grants to the JVC, the non-exclusive right to use the Contractual Trademarks in the manufacture, use and sale of the Contractual Products . Para 2 of the Article 9 further provides that JVC shall affix the Contractual 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 A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... consideration amounting to ₹ 19,96,178/-, which became subject matter of disallowance by the authorities below on the premise that: `...considering the fact that the fees for use of trademark is already a component of Royalty charges paid by the assessee, an adjustment of ₹ 19,96,178/- is made to the international transaction pertaining to payment of Trademark charges. 31. It can be seen that the raison d etre for the disallowance is that the assessee was already paying royalty/fees for the use of Trademarks, which is embedded in 4% under the TTA and hence further payment of 0.5% under the TLA was not warranted. On considering the position in entirety, what transpires is that the assessee was already paying royalty at 4% towards use, inter alia, of the Contractual Trademarks and after the acquisition of the share of other Joint Venture partner, a fresh understanding 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... those raised in the appeal for the A.Y. 2011-12. We, therefore, setaside the impugned order on this issue and remit the matter to the file of the AO/TPO for a fresh determination of the ALP of the international transaction of payment of royalty including towards use of Contractual Trademarks in conformity with the directions given hereinabove. 35. In the result, the appeal is allowed for statistical purposes. A.Y. 2013-14 : 36. The first issue raised in this appeal is against the making of the transfer pricing addition of ₹ 16,38,962/- at 0.5% of payment made by the assessee towards use of Contractual Trademarks under the TLA. 37. Here again, both the sides are in agreement that the facts and circumstances of this issue are mutatis mutandis similar to the ground raised in appeal for the earlier years. Following the view taken hereinabove, we set-aside the impugned order and remit the issue to the file of AO/TPO for determining the ALP afresh of the international transaction. 38. The second issue raised in this appeal is against the addition of ₹ 26,22,597/- being payment of Shared ..... X X X X Extracts X X X X X X X X Extracts X X X X
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