TMI Blog2023 (1) TMI 1029X X X X Extracts X X X X X X X X Extracts X X X X ..... oducts by them were quite different from that of the assessee. At this stage, we want to emphasize that Rule 10AB talks of considering the price paid or that would have been paid for the same or similar uncontrolled transaction . The words the same appear in the language of the rule prior to the word similar joined by the words uncontrolled transaction . It thus indicates that similar uncontrolled transactions are to be considered only if same uncontrolled transactions are not available. Preference in Rule 10AB has to be given to same uncontrolled transactions over similar uncontrolled transactions. As against the comparable uncontrolled transactions considered by the TPO, recognized as similar, the assessee brought on record same uncontrolled transactions, namely, the licensing of technical know-how by the assessee's same AE to two independent entities in Korea and China for the manufacture of same Diesel engines. Not only the assessee placed on record invoices issued by the assessee's AE to these independent entities in China and Korea, but Agreement for licensing of technical know-how to Korean party has also been produced. This Agreement, a copy placed at ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s company include Database Services with Data processing and Tabulation Services, Online Information and Data Retrieval Services, Electronic Data Interchange Services, Web search Portal Content Services, Code and Protocol Conversion Services etc. Total revenue of this company, as appearing in its Profit and loss account, is Rs. 11,12,78,745/-, whose break up is given in Note No. 15 as consisting of 'GIS/CAD and Software Services'. As opposed to this, the assessee is not rendering any Software services to its AE. The only services rendered by it are Engineering. It is further observed from the Annual report of this company that no segmental information is available, which could throw light on the operating costs in respect of the revenues of this company from Engineering services de hors Software services. Since the assessee is not providing any Software services and the software services of this company constitute around 78% of its revenue and further that no segmental information is available, we hold that this company cannot be treated as comparable. We, therefore, order to exclude it from the list of comparables. The impugned order on this issue is set-aside and the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... comparables giving average profit rate on net sales at 4.56%. The TPO also computed the assessee's Royalty payment as a percentage of sales at 9.13%. Applying the arm's length rate of 4.56%, he computed the transfer pricing adjustment amounting to Rs. 12,98,02,785/-. The assessee remained unsuccessful before the Dispute Resolution Panel (DRP), which led the AO to pass the final assessment order with the equal amount of transfer pricing adjustment. Aggrieved thereby, the assessee has come up in appeal before the Tribunal. 4. We have heard the rival submissions and gone through the relevant material on record. The ld. AR did not dispute segregation of 'Manufacturing segment' from the 'Trading segment'. He focussed on the segregation of Royalty transaction from the 'Manufacturing segment'. 5. Section 92(1) of the Act provides that: 'Any income arising from an international transaction shall be computed having regard to the arm's length price.' The procedure for computation of arm's length price has been set out in section 92C. Sub-section (1) of section 92C provides that: 'The arm's length price in relation to an internati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns of this section shall not apply in a case where the computation of income having regard to ALP has the effect of reducing income chargeable to tax. The net effect of section 92(3) is that if the transacted-value income from an international transaction is more than its arm's length income, then, the arm's length income should be discarded and the actual income should be considered. To sum up, it is the higher of actual income or the arm's length income from an international transaction, which is taken into consideration for computing the total income. It, thus, divulges that the actual more income from one international transaction (vis- -vis its lower arm's length income) cannot be combined with the more arm's length income from another transaction (vis- -vis its lower actual income), so as to set off the excess income (actual transacted income minus arm's length income) from the first transaction with the income (arm's length income minus actual transacted income) arising from the second transaction. When we consider more than one unrelated transaction under the combined umbrella of the TNMM, it is quite possible that a probable addition on account ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nufacture of final product, it does not follow that they both are dependent or closely-linked transactions. In such circumstances, the ALP of the international transaction of Payment of Royalty for use of technology cannot be aggregated with others. 9. The assessee in Magneti Marelli Powertrain India Pvt. Ltd. vs. DCIT (2016) 389 ITR 469 (Delhi), similar to the present case, 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 transactions were categorized under one broad head, that is, Manufacturing of automotive components and shown to be at ALP. The TPO rejected the assessee's aggregation approach of also 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 regar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty Agreement entered into by the assessee vis- -vis comparables taken note of by the TPO. Relying on the mandate of Rule 10AB, the TPO rejected the assessee's contention by observing that the rule provides for considering the same or similar uncontrolled transactions . Since the comparables chosen by him were similar to that of the assessee, the TPO repelled the assessee's contention. No further reprieve was provided by the DRP, which resulted in making the transfer pricing adjustment in the final assessment order. 13. At the outset, the ld. AR did not raise any serious objection to the applicability of the 'Other method' as the most appropriate method for the processing of the royalty transaction. His objection was confined to the selection of comparables. In order to appreciate the rival contentions, it would be befitting to take note of the prescription of Rule 10AB containing the mechanism for determining the ALP under other method , as under: R. 10AB. Other method of determination of arm's length price.-For the purposes of clause (f) of sub-section (1) of section 92C, the other method for determination of the arms' length price in relation to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nufacturing Four-stroke diesel engines for marine and land-based power generation and for marine propulsion. The TPO has emphasized on the expression similar uncontrolled transaction used in Rule 10AB for considering these three companies as comparable despite the fact that the licensed products by them were quite different from that of the assessee. At this stage, we want to emphasize that Rule 10AB talks of considering the price paid or that would have been paid for the same or similar uncontrolled transaction . The words the same appear in the language of the rule prior to the word similar joined by the words uncontrolled transaction . It thus indicates that similar uncontrolled transactions are to be considered only if same uncontrolled transactions are not available. In other words, the preference in Rule 10AB has to be given to same uncontrolled transactions over similar uncontrolled transactions. As against the comparable uncontrolled transactions considered by the TPO, recognized as similar, the assessee brought on record same uncontrolled transactions, namely, the licensing of technical know-how by the assessee's same AE to two independent entities in Kor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2.98 crore and odd is, therefore, directed to be deleted. 15. The second dispute in this appeal is in respect of the transfer pricing adjustment in the segment of Design Engineering Services . The facts anent to this issue are that the assessee rendered design engineering services to its AE for a consideration of Rs. 31,57,01,539 and computed its Profit Level Indicator (PLI) at 12.12% under the TNMM, as against the weighted average Operating Profit/Total Cost (OP/OC) of 5 comparables at 11.19%. This is how, the assessee claimed that the international transaction of provision of Design Engineering Services was at ALP. The TPO altered the list of comparables. Adding 2 new companies to the one out of 5 chosen by the assessee, he computed the mean OP/OC of the 3 comparables at 16.64%. By treating the same as the arm's length profit, the TPO proposed transfer pricing adjustment of Rs. 1,48,05,266/-. No reprieve was provided by the DRP, which had the consequence of the making of the transfer pricing addition in the final assessment order. 16. The assessee in this segment is aggrieved only by the inclusion of Aabsys Information Technology Pvt. Ltd. in the list of comparables by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... osed to this, the assessee is not rendering any Software services to its AE. The only services rendered by it are Engineering. It is further observed from the Annual report of this company that no segmental information is available, which could throw light on the operating costs in respect of the revenues of this company from Engineering services de hors Software services. Since the assessee is not providing any Software services and the software services of this company constitute around 78% of its revenue and further that no segmental information is available, we hold that this company cannot be treated as comparable. We, therefore, order to exclude it from the list of comparables. The impugned order on this issue is set-aside and the matter is remitted to the file of the AO/TPO for re-determining the ALP of the international transaction of 'Design Engineering Services' by excluding Aabsys Information Technology Pvt. Ltd. from the list of comparables. Needless to say, the assessee will be allowed an adequate opportunity of hearing. 18. In the result, the appeal is partly allowed. Order pronounced in the Open Court on 13 January, 2023. - - TaxTMI - TMITax - Inco ..... X X X X Extracts X X X X X X X X Extracts X X X X
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