TMI Blog2020 (3) TMI 1200X X X X Extracts X X X X X X X X Extracts X X X X ..... sment year. We therefore do not find any reason to deviate from the same. Further Ld. TPO has held Trading and Manufacturing segments independently to be at arm s length. On the basis of above discussions, respectfully following earlier orders of this Tribunal, we direct Ld.AO/TPO to compute ALP by considering trading and manufacturing segments as interlinked with each other and as a combined transaction. Addition made to royalty - Assessee in transfer pricing study considered royalty as a part of operating expenses in TNMM as most appropriate method. AR submitted that comparison of percentage of average royalty in respect of comparables was submitted which comes to 3% and 2.27%. Whereas assessee has paid royalty to its AE at 5%. He submitted that, since average percentage of royalty expenditure on net sales of assessee is much lower than percentage of royalty and R D expenditure on net sales of proposed comparables, the transaction of royalty payments to AE has to be treated at arm s length. It is also been submitted that, most of the auto parts companies are paying royalty of 3% to 5% and assessee is being royalty at 3% on part sales. He thus submitted that, even if royalty ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r authorities have erred in: a. Making transfer pricing adjustment of₹ 110,31,43,825/-. b. Passing the order without demonstrating that the Appellant had motive of tax evasion. c. Not appreciating that there is no amendment to the definition of income and the charging or computation provision relating to income under the head Profits Gains of Business or Profession do not refer to or include the amounts computed under Chapter X and therefore addition made under Chapter X is bad in law. d. Not appreciating that there being no disallowance under section 40A(2) for royalty payment and advertisement expenses, adjustment under Chapter X ought not to be made. e. Passing the orders without considering all the submissions and/or without appreciating properly the facts and circumstances of the case and the law applicable. 4. Grounds relating to computation of ALP The lower authorities have erred in : a. Adopting a flawed methodology and process in arriving at the ALP; b. Not appreciating that the trading and manufacturing segments are intertwined and inter-related warranting a Combined Transaction Approach at the entity level in arriving at the arm&# ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reements were approved by government authorities and therefore royalty payment should be considered as at arm's length; and d. Ignoring the fact that, the learned CIT(A) and DRP have accepted both factum as well as quantum of royalty as at arm's length for the preceding assessment years; 9. Without prejudice to above, the lower authorities have erred in: a. Adopting inconsistent denominator while calculating arm's length price; b. Adopting ratio of royalty and R D expenditure to net sales in the case of comparables vis- -vis that of royalty to Local Value Addition (LVA) instead of net sales in the case of the Appellant; c. Not appreciating that the Appellant was using LVA as base for paying royalty and not net sales; d. Not excluding Hindustan Motors from the list of comparable ignoring the fact that it is functionally different from the Appellant; e. Excluding Ashok Leyland and Tata Motors as comparables on unjustified grounds; f. Adopting data of FY 10-11 only for analysis, without appreciating that the business, commercial, economic and technological factors require consideration of multi-year data; and g. Not granting adjustment for superi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of manufacture and selling Multi Utility Vehicles under the model name Innova , Fortune passenger car under the model name Corolla . For year under consideration assessee filed its return of income on 29/11/2011, which was subsequently revised on 04/01/2013 declaring income of ₹ 2,48,57,41,829/-. In the course of assessment proceedings, Ld.AO noticed that, assessee entered into following international transaction with its associated enterprises during the year under consideration. Particulars Amount Purchase of parts and components 2692,69,04,302 Purchase of CBU 212,68,23,738 Sale of racks and other income 5,00,53,305 Sale of prototypes and trial parts 2,20,43,509 Sale of parts components 433,42,86,791 Sale of manufactured CBU 1,97,56,687 Purchase of capital assets 398,19,62,065 Purchase of intangible fixed assets 111,73,34,804 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ved that, expenses that could not be allocated to any of the segments, were allocated to general administration expenses. Ld. TPO separated transfer pricing analysis for trading and manufacturing segment as mandated by Rule 10 B (2) (a) as under: Payment of Intra group services-CUP method Payment of royalty and technical service fees-CUP method/TNMM Payment towards sales promotion, advertisement, travelling, software expenses, research and development, training and business promotion-CU P/TNMM as per the reply received from track taxpayer Reimbursement of expenses received-aggregated at the segmental level under TNMM Manufacturing-TNMM at the segmental level Trading-TNMM at the segmental level 5. On segregating transactions into various segments, Ld.TPO observed that, transactions pertaining to purchase of spare parts and components and sale of parts and components in manufacturing segment, technical support fee paid to AE, purchase of intangibles were at arm s length. Only disputed segment to which adjustments were proposed was Trading segment, Manufacturing segment and Payment of Royalty.Ld.TPO issued notice dated 20/08/2014 and 29/12/2014 to exam ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... O has given reasons for the same example in case of Ashok Leyland it is not in business of manufacture of passenger car or MUP, Tata motors failed the RPT filter etc. Assessee is objection regarding rejection of multi-year Data has already been dealt elsewhere in this order. Assessee has claimed superior technology but there is nothing to substantiate the said claim. So, no credence can be given to the same. Assessee has claimed that CIT (A) and DRP have accepted both fact as well as quantum of royalty as at arm s length for the preceding assessment years. However, this claim is also not correct. For AY 2005-06 the CIT (A) had directed TPO to determined ALP of royalty payments asked TPO had failed to do so. For AY 2008-09 and AY 2009- 10 DRP decided in favour of assessee as the TPO had failed to determined ALP of royalty payment in case of assessee as per provisions of the act and simply adopted ALP at nil by holding that assessee had not got any economic benefit by paying the same. Assessee s claim that royalty paid by it should be treated at arm s length as the technical assistant agreements were approved by government authorities also does not carry any weight as approval by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pproach). He submitted that, however OECD Guidelines also provide that a Combined Transaction Approach can be adopted in case transactions are closed linked or continuous and they cannot be evaluated adequately on an individual basis. It has been submitted by Ld.AR that, in such a situation, rather than assessing arm's length price of transactions individually, these transactions could be evaluated together using the most appropriate method. The relevant observations relied by Ld.AR are extracted herein below: However, there are often situations where separate transactions are so closely linked or continuous that they cannot be evaluated adequately on a separate basis. Examples may include 1. some long-term contracts for the supply of commodities or services, 2. rights to use intangible property, and 3. pricing a range of closely-linked products (e.g. in a product line) when it is impractical to determine pricing for each individual product or transaction. Another example would be the licensing or manufacturing know-how and the supply or vital components to an associated manufacturer,' it may be more reasonable to assess the arm's length terms {or the two items t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessment year. We therefore do not find any reason to deviate from the same. Further Ld. TPO has held Trading and Manufacturing segments independently to be at arm s length. On the basis of above discussions, respectfully following earlier orders of this Tribunal, we direct Ld.AO/TPO to compute ALP by considering trading and manufacturing segments as interlinked with each other and as a combined transaction. 13. In respect of addition made to royalty, it is observed that, this transaction was also considered to be interlinked with trading and manufacturing segment. However, Ld.AR do not object to it being considered separately in view of observations by this Tribunal in assessee s own case in preceding assessment years (supra). The Ld. AR submitted that, in preceding assessment years, Ld.TPO considered ALP of transaction to be at nil , whereas there is a slight departure in the method of computing ALP, for year under consideration. He submitted that, during the year under consideration, Ld.TPO on an ad hoc basis computed adjustment in respect of royalty paid by assessee to its AE at 2%. 14. He submitted that, on the basis of comparables which was submitted before Ld.TPO and ..... X X X X Extracts X X X X X X X X Extracts X X X X
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