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TMI Blog2023 (6) TMI 338X X X X Extracts X X X X X X X X Extracts X X X X ..... books of the assessee and depreciation on the same was claimed. The assessee aggregated all the international transactions on grounds of being inextricably and closely linked to each other, for the purposes of computation of Arm's Length Price (ALP) and benchmarked them at entity level. The assessee considered Transaction Net Margin Method (TNMM) as the most appropriate method with Operating Profit (`OP' )/Operating Cost ('OC') as the profit level indicator. The assessee had earned a net margin (OP/OC) of 12.34% which was higher than the net margin of comparable companies of 9.23% as determined by it in its TP study. The computation of assessee's margin of 12.34% included depreciation as part of its operating cost. 3. During the course of assessment, the TPO upon considering the benchmarking analysis of the assessee, accepted the same for all international transactions except for the payment of technical know-how. The TPO thereafter concluded that the technical know-how fees should not have been paid by the assessee to its AE. Thus, by treating the ALP of such payment at NIL, the TPO made an adjustment of Rs. 9,07,39,440 in his order under section 92CA(3) passed on 15 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... IT(A) failed to appreciate that the payment made towards technical know-how is approved by the FIPB and within the limits prescribed under the exchange control regulations. 9. On the facts and circumstances of the case, the learned CIT(A) failed to appreciate the fact that the technical know-how fee has been capitalized and the adjustment, if any shall be limited to the depreciation claimed. 10. On the facts and circumstances of the case, the learned CIT(A) erred in concluding that taxes at sources have not been deducted on royalty payments and erred in not considering the declaration/affidavit submitted by the Appellant. 11. That the learned AO erred in levying interest under section 234B of the Act, the same being consequential in nature. 6. The assessee has also raised additional grounds vide its application dated 24.03.2023. The additional grounds raised read as follows: 12. On the facts and in the circumstances of the case and in law, the assessment order dated 28 December 2006, passed by the Addl. Commissioner of Income-tax, Range-7(3), Mumbai (Addl. Commissioner') under section 143(3) of the Income-tax Act, 1961 (Ace), is illegal, bad in law and without juri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 343 (Bang-Trib). 8. On the other hand, the learned DR relied on the order of the CIT(A) and of the TPO to support his contentions. 9. We have heard the rival submissions and perused the material on record. The technical know-how is integral and inseparable to business segment of the assessee. All the documents explaining the need and benefit for payment of technical know-how was submitted by assessee to the TPO and is on record. On facts of the present case, it would be impractical and also inappropriate to evaluate payment of technical know-how fee on an individual or on a stand-alone basis (dehors the segment to which a benefit from such services accrues). For the year under consideration, the net profit margin of the assessee is 12.34% which is higher than the net profit margin of the comparable companies arrived at 9.23%. It is undisputed that the TPO had accepted the benchmarking analysis of the assessee for all transactions except for the payment of technical know-how fee to AE. This in our view would mean that the TPO has accepted the entity level margins earned by the assessee but proceeded to make TP adjustment on payment towards technical know-how. The Hon'ble Delh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Considering the fact that no adverse inference is drawn by the TPO in respect of the Trading segment which means that the TPO has accepted the overall margins of the said segment and respectfully following decision of the Hon'ble Delhi Court in the case of Sony Ericsson (supra) and the ratio laid down by the coordinate bench in assessee's own case, we direct the TPO to delete the adjustment made towards the trading segment." 11. Further, Bangalore Bench of ITAT in the case of Toyota Kirloskar Motors (P) Ltd., Vs. ACIT [2023] 147 taxmann.com 558 (Bang. - Tribunal) on similar set of facts has adjudicated the issue in favour of assessee. The relevant findings of the ITAT reads as follows: "13. Ground Nos. 8 to 15 Relating to royalty adjustments: In addition to the written synopsis the ld.AR submitted the assessee adopted TNMM at the entity level, in which process the royalty has been considered as a closely linked transaction as a part of operating cost. Therefore a separate adjustment for royalty is not required. The AR of the assessee relied on the judgments of assessee's own case Toyota Kirloskar Motors (P.) Ltd. v. Addl. C1T [2022] 138 taxmann.com 107 (Bang. - T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ould be impractical and also inappropriate to evaluate such payments on an individual and stand-alone basis, de hors the segment to which a benefit from such services accrues. He reiterated that the Ld.TPO in the TP Order held the profits so determined to be satisfying the arm's length test. This aspect has not been disputed. He thus submitted that once the net profit margin is demonstrated to be at arm's length, it pre-supposes that the various components of income and expenditure, including the international transactions that have been considered in the process of arriving at the Net Profit are also at arm's length, and under such circumstances, it is impermissible to select another method to examine an individual transaction of a segment already considered and evaluated. 9. In support of this contention the Ld.AR relied on the judgment of the Hon'ble Delhi High Court in the case of Sony Ericsson Mobile Communications India (P.) Ltd. v CIT reported in [2015] 55 taxmann.com 240 (Delhi) which explains the terms "closely linked transaction" and under what circumstances a "bundled approach" can be adopted. The judgment also overrules ITAT Special Bench decision in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d transaction approach is not correct and that a IT(TP)A No. 1315/Bang/2011 combined transaction approach has to be adopted and that on the basis of combined transaction approach the price paid for the international transaction is at Arm's Length. We may also that legally the TPO should adopt the ALP as nil. On similar approach by TPO adopting ALP at Nil the ITAT, Bangalore Bench, in the case of M/s.Festo Controls Pvt. Ltd. v. DCIT in ITA No. 969/Bang/2011 (AY: 2007-08) dated 4-1-2013, the Tribunal examined the question as to whether the TPO can determine the ALP at nil on the ground that no services Page 15 of 23 IT(TP)A Nos. 350/Bang/20 I 4 & 836/Bang/2014 were rendered. The Tribunal. on the above issue followed the decision of the Mumbai Bench of the ITAT in the case of Castrol India Ltd. v. ACIT in ITA No. 3938/MUM/2010 dated 14- 9-2012 wherein it was held that it was incumbent upon the TPO to work out the ALP of the relevant transactions by following some authorized method and the entire cost borne by the assessee cannot be disallowed by taking the ALP at Nil. The Tribunal also referred to the decision of the Hon'ble Delhi High Court in the case of CIT v. EKL Appliance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xpenditure in question has not been incurred by the assessee or that the assessee has not derived any benefits for the payment made by the assessee and therefore he cannot consider the ALP as NIL. We hold accordingly." 11. We note that post ITAT order, the department filed MP for Assessment Year 2007-08 before the Hon'ble Tribunal seeking clarification as to whether the TPO can compute ALP of the royalty payment. In M.P. No. 7/Bang/2015 [TS-70-ITAT2015(Bang)], the Tribunal further clarified that when margins at entity level were accepted, the matter of dwelling into ALP at transaction level was irrelevant. "21. In this M.P., the Revenue after referring to paras 50, 51 and 48 has submitted as follows:- "5. The above para reads to mean that the TPO is to recomputed the ALP in accordance with the methods laid down in the Act and also sates that the Assessee's stand is accepted opening it to a reading that the appeal has been allowed in favour of the Assessee as well as that of it being set aside for the TPO to do it in accordance with the methods recognized under the Act. 6. The Tribunal was also pleased to set aside the matter to the file of the TPO for AY 2008-09 wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... omparables, the royalty, margins are computed after including royalty and research and development expenses. The view taken by the Coordinate Bench of this Tribunal in assessee's own case for A.Y. 2007- 08 has been reproduced hereinabove wherein all these aspects have been considered. This Tribunal for A.Y. 2007-08 has deleted the adjustment made by the Ld.TPO in respect of royalty by separately bench marking the transactions. This has been fortified by the clarification given in a Miscellaneous Petition filed by the department which is also reproduced hereinabove. This view is also supported by various decisions of Coordinate Benches of this Tribunal as well as various High courts, Cojoint reading of these orders, we direct the Ld.AO/TPO to delete the adjustment proposed for royalty as a separate international transaction. Respectfully following the above view, we direct the Ld.AO/TPO to delete the adjustment proposed towards royalty as a separate international transaction. Accordingly, ground nos. 10 to 12 raised by assessee stands allowed." 13.1 The ld.DR relied on the order of the lower authorities and he submitted that since the assessee has adopted TNMM and the TPO has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... "10. Thus, from close scrutiny of Section 40(a)(i) of the Act, it is axiomatic that an amount payable towards interest, royalty, fee for technical services or other sums chargeable under this Act shall not be deducted while computing the income under the head profit and gain of business or profession on which tax is deductible at source; but such tax has not been deducted. The expression 'amount payable' which is otherwise an allowable deduction refers to the expenditure incurred for the purpose of business of the assessee and therefore, the said expenditure is a deductible claim. Thus, Section 40 refers to the outgoing amount chargeable under this At and subject to TDS under Chapter XVII-B. The deduction under Section 32 is not in respect of the amount paid or payable which is subjected to TDS; but is a statutory deduction on an asset which is otherwise eligible for deduction of depreciation. Section 40(a)(i) and (ia) of the Act provides for disallowance only in respect of expenditure, which is revenue in nature, therefore, the provision does not apply to a case of the assessee whose claim is for depreciation, which is not in the nature of expenditure but an allowance. The depre ..... X X X X Extracts X X X X X X X X Extracts X X X X
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