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TMI Blog2019 (2) TMI 1962X X X X Extracts X X X X X X X X Extracts X X X X ..... of technical knowhow. During the assessment year 2006-07, the assesse paid royalty of Rs. 282,45,25,323/- to its AE and the ratio of royalty to the sales was 3.64% and it has not made any lumpsum payment of technical knowhow. In its TP document, the assessee has aggregated the royalty transaction along with all other international transactions adopting TNMM. The TPO accepted the operating margins of the assesse, after payment of royalty, to be at arm's length. However, in the TP order, the TPO held that the assessee's royalty is excessive and hence made an adhoc disallowance of 10% of royalty at Rs. 28.24 crores. Aggrieved, the assesse filed objection before the DRP . After hearing the assesse, the DRP has called for a remand report from the TPO with a specific direction to adopt CUP method to benchmark the royalty payment. Pursuantly, the TPO conducted a benchmark search in "Royaltystat" database . However, the TPO was unable to obtain any result and hence he requested the assesse toconduct benchmark study. The assesse also did not get any direct functionally comparable companies. However, the assessee furnished search results in respect of companies engaged in automobile componen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is Hon'ble ITAT in the assessee's own case in ITA No.2157/Mds/2011 for AY 2007-08 held that it is not appropriate to make addition on account of ALP of royalty payment. The Ld AR submitted that the average Royalty paid by the appellant during AY 2006-07 was only 3.64% which is much lower than the mean royalty payable by the automotive companies i.e., 4.7%. The royalty agreement entered by the appellant with its AEs are valid for a period of 10 years and not entered on a year-on-year basis. When the TPO having held that the royalty payment are at arm's length for AY 2007-08 i.e., one of the years within the 10 years bracket, in principle it does not necessitate a revisit in each of the year within the 10 years period. In this regard, the Ld AR submitted that this issue is also covered in favour of the assessee by Mumbai ITAT decision in SC Enviro Agro India (P.) Ltd Vs. DCIT in ITA No. 704 (Mum) of 2012 dt. 04.04.2013 wherein the Royalty adjustment has been deleted as the facts of the case relating to payment of royalty based on the same agreement as in the earlier year were similar in page 4 para 5. With regard to the plea that the TPO/DRP exceeded their jurisdiction, the Ld AR sub ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pted the contention of the Ld. TPO that separate bench marking analysis is necessary for determining ALP of royalty payment by not accepting the argument of the assessee that the percentage of royalty payment made to the assessee's Holding Company is justified since RBI has approved the transaction. However, the Ld. Members of the DRP rejected the comparables viz. General Motors Pvt Ltd & Ford India Pvt Ltd., because while selecting the comparables the Related Party Transactions (RPT) were more than 25% and accordingly directed the Ld.TPO to rework the adjustment after removing these two companies from the comparables. Thus, the addition was restricted to Rs. 104.27 crores as against 165.05 crores. 6.2. Ld. AR argued before us by stating as follows:- (i) The Ld.TPO /DRP were not justified in holding that the royalty payment should be bench marked separately. It was contended that the appellants "whole entity" approach of bench marking royalty payments along with all other transactions by adopting TNM method at the entity level is justifiable. (ii) Since the operating margin of the appellant company was 7.61% which is higher than the comparable companies selected in the TP ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... - (d) conditions prevailing in the markets in which the respective parties to the transactions operate, including the geographical location and size of the markets, the laws and Government orders in force, costs of labour and capital in the markets, overall economic development and level of competition and whether the markets are wholesale or retail. 6.5 Further perusing the order of the Ld. TPO in page 40 in para Nos.25 & 26 the Ld. TPO herself observed that in respect of royalty payment in automotive sector from the study of 35 licenses, the average works out to 4.7% and the median works out to 4% which is higher than the appellant's average rate of royalty payment of 4.22%. Further the Ld. TPO has observed that the assessee company has been bestowed with the latest technology by its Holding Company and it cannot be said that old technology has been dumped in the Indian market (para 27 of the TPO's order). The relevant portion of the Ld. TPO's order is extracted herein below for reference:- "26 In the table given above it is seen that in automotive sector on study of 35 licenses in respect to royalty payment minimum royalty payment was 1% maximum was 15% royalty payment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Company and also after details study of 35 licenses arrived at a conclusion that the royalty payment of 4.7% is prevalent in the automotive sector. Therefore from these circumstances, we do not find it appropriate on the part of the Revenue to make addition on account of ALP of royalty payment. Therefore, we hereby delete the addition of Rs. 104,27,36,417/- made by the Ld. TPO while passing his order following the direction of Ld. Members of the DRP." Thus, we find merit in the submissions made by the Ld AR. Following the coordinate bench decision, supra, we hold that the average royalty payment up to the rate of 4.7% on the sales is justified. Since the assesse claims that the average royalty paid is 3.64% , we hold that the Revenue is not justified in making the impugned adjustments and hence direct to delete the additions. The corresponding grounds of appeal are treated as allowed. 5. With regard to the issue on capital subsidy, the Ld AR submitted that this issue was subject matter before the CIT(A) for AY 2003-04and he remitted the issue to the AO. Inviting our attention to the copy of the order giving effect to the order of the CIT(A) dt 17.3.2017 passed by the DCIT, LTU ..... X X X X Extracts X X X X X X X X Extracts X X X X
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