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2023 (5) TMI 109

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..... chnical know-how, Payment of engineering and manufacturing drawing fees, Payment of brand license fees and Reimbursement of expenses, do not comply with the arm's length principle as envisaged under Chapter X of the Income-tax Act, 1961 (the 'Act'). Ground 2: 2. On the facts and circumstances of the case, the Ld. AO, under the directions of the Hon'ble DRP, erred in confirming the action of the Learned Transfer Pricing Officer ('Ld. TPO') of making an addition to the Appellant's total income with respect to the international transaction of payment of royalty for receipt of technical know-how amounting to Rs. 1,82,63,136. In doing so, the Hon'ble DRP/ Ld. AO/ Ld. TPO have erred in: 2.1. Rejecting the benchmarking analysis conducted by the assessee using Comparable Uncontrolled Price ('CUP') to demonstrate the arm's length nature of the transaction of payment of technology royalty; 2.2. Not taking cognizance of the corroborative benchmarking analysis conducted by the assessee using the Transactional Net Margin Method ('TNMM') to demonstrate the arm's length nature of the transaction of payment of technology royalty; 2 .....

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..... payment of brand license fees; 4.2. Not taking cognizance of the corroborative analysis using TNM method and contending that the assessee has incurred significant advertisement and marketing expenses despite the fact that the AMP incurred by the assessee is a meagre 0.06% of its total sales; 4.3. Failing to acknowledge the business efficacy of the said transaction and the benefits received by the assessee from the payment of brand license fees; and 4.4. In relying upon Ld. TPO's erroneous report on facts of the case for subsequent AY and erroneously concluding that facts of the case in the year under consideration (i.e.; AY 2012- 13) and subsequent AY 2013-14 are different. Ground 5: 5. On the facts and circumstances of the case, the Ld. AO, under the directions of the Hon'ble DRP, erred in confirming the action of the Ld. TPO of making an addition to the Appellant's total income with respect to the international transaction of reimbursement of expenses amounting to Rs. 55,44,298. In doing so, the Ld. AO/Hon'ble DRP have erred in: 5.1. Disregarding the submission of the Appellant that the correct amount of reimbursement of expenses is Rs. 30 lakhs; where .....

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..... nterest on delayed payments) is deleted by Tribunal 2008-09 Import of spares and equipment / Sales of equipments/Components Entity level profitability (Rs. 6,72,06,437), Royalty (Rs. 4,29,03,966)- In this regard the assessee has filed appeal with ITAT. 2009-10 Purchases from AEs-Rs.95,58,200/- Sales of goods to AES- Rs.2,52,73,978/- Royalty- Rs.3,34,06,807/- Engineering & Manufacturing Drawing- Rs.2,59,52,119/- 2010-11 Royalty -Rs. 2,42,62,257/-, Engineering & Manufacturing Drawing-Rs. 63,82,293/- 2011-12 Royalty & Engineering & Manufacturing Drawing- Rs.4,86,33,139, Reimbursement of expenses- Rs.19,35,468/-, Payment of brand license fees 2012-13 Under Consideration 5. The details of international transactions entered into by the assessee during the year are follows. Sr. No Nature of transaction Amount Method 1 Purchase of raw materials (paid) 15,17,57,063 TNMM 2 Sale of finished goods received (received) 66,34,939 TNMM 3 Payment of technology royalty (paid) 1,82,63,136 CUP 4 Fees for project engineering (paid) 43,54,921 CUP 5 Payment of brand license fees (paid) 5,65,11,397 CUP 6 Provision of engineering services (recei .....

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..... (op/sales) of 8.31% while the assessee has earned a margin of 7.21% the working of which is as under: Particulars Total (Rs. in millons) Sales 16589.00 OI 16589.00 Total Operating Cost (OC) 15392.99 Operating profit (OP) 1196.01 OP/OI 7.21% Further the TPO has called for the segment wise information and operating margin referred at 6.5 to 6.8 as under: 6.5 Further, in the TP report, the assessee has corroborated the arm's length nature of its international transactions by way of internal comparability analysis. Considering that the basic functional profile of AE Segment and Non AE Segment is same, they are considered to be comparable segments (page number 21 of TPSR). Financial statements of the company are bifurcated in two segments - AE Segment and Non AE Segment. The result of the same is as under: Particulars AE Non AE Total    (A) (B) (A+B) Sales 8902.571 7686.431 16589.002 Operating cost 8118.522 7274.464 15392.986 Operating profit 784.049 411.966 1196.015 OP/Sales 8.81 5.36% 7.21% 6.6 From the above it is noted that the assessee has earned profit of 8.81% (on sales) from AE segment as against 5.36 .....

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..... /- and also of project Engineering and Manufacturing drawings of Rs.43,54,921/- is treated as NIL respectively and the total amount of Rs.7,91,29,454/- is treated as a transfer pricing adjustment. 6. In respect of provision of engineering services, availing of inspection services, availing of insurance services, SAP license and email services. The TPO has considered the factual aspects and made the adjustments observed at Para 12.2 to 12.3 as under: 12.2 Based on the above and considering the group policy in place with respect to email transport services, the said payment is said to meet with the arm's length price. 12.3 For A.Y 2010-11 & 2011-12 this transaction was accepted to be at arm's length. In view of the above, no adjustment is proposed to the value of this transaction. 7. Further in respect of the reimbursement of expenses to and from AE. The assessee has reimbursement certain expenses to AE on account of travelling expenses, insurance and actual cost without any markup and the assessee has recovered from its AE on account of reimbursement of traveling, hotel charges on actual cost without any markup. The TPO is of the view that the assessee has not submitted the do .....

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..... issions and objections raised by the assessee and considering the information and submissions has issued directions u/s 144C(5) of the Act dated 23.12.2016. Subsequently the final assessment order was passed with assessed income of Rs. 166,59,59,320/- u/s 143(3) r.w.s 144C(13) dated 19.01.2017. Aggrieved by the final assessment order, the assessee has filed an appeal before the Hon'ble Tribunal. 10.. At the time of hearing, the Ld. AR has made submissions on the grounds of appeal. whereas the grounds of appeal Nos. 1 to 4 are connected and specifically ground no 2&3 are inter related and highlighted the percentage fee paid . The Ld.AR submitted that the TPO has not considered the various facts, information and decisions of the Hon'ble Tribunal in the assessee own case and unilaterally has treated ALP as NIL and ignored the brand licence fee agreement of year 1999. The Ld. AR further emphasized on the provisions and the contracts, and the reimbursement of expenses are supported with the details and evidences and 8% markup has been charged. The Ld.AR substantiated the submissions with Hon'ble Tribunal decisions in the assessee own case, factual paper book, judicial decisions and pra .....

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..... e Assessment Year 2007-08. 2. Mr. Kotangale, learned Counsel appearing for the Revenue urges the following re-framed questions of law for our consideration: "(a) Whether on the facts and the circumstance of the case and law, the Tribunal was justified in law in restricting the Transfer Pricing (TP) adjustment only to the transaction between the Associated Enterprises (AEs)? (b) Whether on the facts and circumstances of the case and in law, the Tribunal was justified in 8/21/2020 allowing the payment of royalty, project engineering and manufacturing drawing fees of Rs.11,27,16,302/- disallowed by the Transfer Pricing Officer (TPO).? (c) Whether on the facts and circumstances of the case and in law, the Tribunal was justified in allowing the payment of liquidated damages of Rs. 2,70,38,000/- disallowed by the TPO?". 3. Re:- Question (a) (a) The Respondent is in the business of execution of turnkey contracts involving design, manufacture, supply. erection and commissioning of sugar plants, cement plants, etc. During the subject Assessment Year, the Respondent-Assessee had International Transaction with its Associated Enterprises (AE) in respect of import of spares and equi .....

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..... ing are self evident, Question No.(a) as proposed does not give rise to any substantial question of law. Thus, not entertained. 6. Appeal admitted on Question Nos. (b) and (c). 7. Registry is directed to communicate copy of this order to the Tribunal. This would enable the Tribunal to keep papers and proceedings relating to the present appeal available, to be produced when sought for by the Court. 12. The Ld. AR also relied on the judicial decisions as under: 1. Thyssekrupp Industries India Pvt Ltd Vs. ACIT, IT No. 7032/Mum/2011. 2. CIT Vs. Thyssenkrupp Industries India Pvt Ltd. [2016] 70 taxmann.com 329 3. Thyssenkrup Industries India Pvt ltd, ACIT, [2013] 33 taxmann.com 107 4. CIT Vs. ThyssenKrupp Industries India Pvt Ltd., [2016] 68 taxmann.com 248 5. DCIT VS. ThyssenKrupp Industries Ltd, ITA No. 2084/Mum/2014 6. ThyssenKrupp Industries India Pvt Ltd, ITA No. 7032/Mum/2021 7. CIT Vs. SI Group-India Ltd, [2019] 107 taxmann.com 314 8. CIT Vs. Merck Ltd, [2016] 389 ITR 70 (Bom) 9. CIT Vs. Johson & Johson Ltd, [2017] 80 taxmann.com 337 10. CIT Vs.Lever India Exports Ltd, [2017] 78 taxmann.com 88 11. ACIT Vs. Netafim Irrigation Ind (P.) Ltd [2019] 106 taxmann .....

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..... g to payment of royalty. The facts concerning this issue as recorded in the order of the TPO are that the assessee obtained know-how and project engineering drawings from its Associated Enterprise vide collaboration agreement dated 23.07.1996. As per this agreement, the assessee availed technical and engineering support for cement plant equipment and machinery. For availing the said manufacturing drawings and project engineering services, the assessee paid 2% of contract value to its AE and for know-how. It also paid royalty at 5% of the selling price to its AE. Royalty agreement between the assessee and Krupp Polysius AG was approved by Reserve Bank of India and FIPB. The assessee selected itself as the tested party and TNMM as the most appropriate method for benchmarking this transaction. The TPO noted that similar issue was involved in assessee's case for the assessment year 2007-2008. Following the view taken by him in earlier year, the TPO determined ALP at Rs. Nil thereby proposing adjustment of Rs. 4.29 crore. The DRP also, following the view taken by it in the earlier year, declined to interfere with the order of the AO/TPO in respect of royalty payment. 14.2 The lear .....

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..... he directions of DRP in deleting the addition. The ground No.2 of the appeal is without any merit, hence, the same is dismissed. 8. In the result, appeal of the Revenue is dismissed. We considering the facts, circumstances and the ratio of the judicial decision discussed above are of the opinion that the payments are to be considered at ALP and accordingly direct the assessing officer to delete the addition and allow the grounds of appeal. 14. The last ground of appeal is in respect of reimbursement of expenditure, the Ld. AR submitted that the assessee has filed the details and evidences in particular at Para 7 at Page 143 and there is markup and demonstrated page 143 and 144 of the paper book and complete details were filed before the AO and there are debit notes. The Ld. AR also referred to the finding of the TPO and DRP and the reimbursement expenses are pertaining to employees who have been guaranteed the payments and for A.Y.2013-14 the expenses are allowed The Contentions raised by the Ld. DR on this issue that no information was filed and the benefit has been obtained by the assessee and these facts were never brought on record before A.O/DRP. Accordingly, to meet the e .....

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