TMI Blog2023 (8) TMI 458X X X X Extracts X X X X X X X X Extracts X X X X ..... .e, payment of royalty, to an entirely different CUP method. The adoption of a method as the most appropriate one assures the applicability of one standard or criteria to judge an international transaction. Each method is a package in itself, as it were, containing the necessary elements that are to be used as filters to judge the soundness of the international transaction in an ALP fixing exercise. If this were to be disturbed, the end result would be distorted and within one ALP determination for a year, two or even five methods can be adopted. This would spell chaos and be detrimental to the interests of both Assessee and the revenue. Tribunal was totally incorrect in saying that accepting aggregation of royalty payment with other international transactions under the manufacturing segment for the Assessment Year 2006-2007 was in the context of an earlier agreement under which the royalty was paid. TPO himself had accepted the benchmark of the international transaction of payment of royalty under the aggregation approach along with transactions of the manufacturing segment. Tribunal failed to recognize that the royalty agreement for the years under consideration was t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the very same transaction the department has accepted the methodology applied by the Appellate for benchmarking the transactions for transfer pricing purposes in seven (7) earlier years in view of inter alia binding order of the Tribunal ? (iii) Whether in the facts and in the circumstances of the case and in law the Tribunal erred in passing the impugned order dated 28th September 2022 purporting to rely on decision of Delhi High Court in the case of Magneti Marelli Power Train India P. Ltd. Vs. Deputy Commissioner of Income-tax which ex-facie did not support and was in fact contrary to the view set out in the impugned order ? 2. Assessee is engaged in the business of manufacture and sale of Internal Combustion Engines, Spares, Components (including Bought-Outs) thereof Generating Sets, service of Engines Gensets / Generating Sets Allied Equipment, etc. Assessee also has a 100% Export Oriented Unit at Pirangut which is engaged in manufacture and exports of internal combustion engines and its accessories and generating sets and accessories. The returns filed by Assessee was selected for scrutiny assessment by issuing statutory notices under section 143(2) and se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tions. 4. TPO issued a notice under section 92C(3) of the Act wherein aggregation of royalty transactions with other transactions at the entity level was doubted and directed Assessee to show cause why the royalty rate used for domestic sales should not be used for benchmarking the royalty on export transactions as well. Assessee submitted its reply and even explained, inter alia to the TPO as under: (a) Assessee is relying on its Associated Enterprise for various kinds of technical knowledge and knowhow received from time to time in order to manufacture and sell the engines to its customers. (b) It had received technology updates and technical assistance in earlier years as well as in the relevant assessment year. (c) For the purposes of benchmarking, it had aggregated the payment of royalty along with other international transactions of manufacturing activity. As the use of technology and consequential payment of royalties are closely linked to the manufacturing activity of Assessee, it was aggregated for the purposes of benchmarking. The manufacturing segment benchmarked using the Transactional Net Margin Method [the TNMM] and selecting external comparable com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... transaction-by transaction basis unless the transactions are closely related. Transactions are said to be closely related when decision of price of one product service depends on the price of another product or service. In the case of Assessee, the royalty transactions do not in any manner impact or influence the pricing of the sale price or other transactions in the manufacturing segment. Therefore, aggregation of royalty in such situation would be incorrect. (c) The TPO also rejected the contention of Assessee that the royalty transaction should be aggregated with other transactions and benchmarked with the overall TNMM margin and proposed separate benchmarking of the same. While doing so, the TPO referred to various decisions of the Courts and the Appellate Tribunal as set out in his order. (d) The TPO refused to follow the order passed by the Appellate Tribunal in earlier years allowing the aggregation of various transactions by observing that on perusal of the said Appellate Tribunal orders, it is observed that Appellate Tribunal has opined on aggregation of Associated Enterprise and Non-Associated Enterprise segment for the manufacturing activity in those particul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... other international transactions under the manufacturing segment; (d) rejected the reliance placed by Assessee on the order of the Appellate Tribunal in its own case for the Assessment Year 2006-2007 on the ground that the Appellate Tribunal had rendered its decision in context of an earlier agreement under which the royalty was paid; (e) the judgment in the case of Knorr-Bremse India (P.) Ltd. Vs. ACIT (2016) 380 ITR 307 (P H) was delivered prior to the Appellate Tribunal order for the Assessment Year 2006-07, but it was not brought to the notice of the Bench. Aggrieved by this finding the present appeals have been filed. 8. Mr. Mistri submitted as under: (a) The Tribunal was not justified in rejecting the contention of Assessee with respect to aggregation approach of royalty payment with other international transaction in the manufacturing segment for determining the ALP activity carried on by Assessee. (b) Assessee had paid royalty to its Associated Enterprise in its earlier Assessment Year 2006-07 under an identical agreement. The Tribunal vide its order dated 3rd March 2017 for Assessment Year 2006-07 has held that the transaction of payment of royal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... identical to the earlier agreement. (g) The Tribunal failed to appreciate that the TPO himself has after the date of the new agreement, i.e., after 16th September 2010 and from the Assessment Year 2011-12 up to the Assessment Year 2014-15 accepted the benchmarking of the international transaction of payment of royalty under the aggregation approach along with transactions of the manufacturing segment. Hence, the Tribunal was not justified in taking a different view. (h) The Tribunal has distinguished its decision in the case of Assessee for the Assessment Year 2006-07 seeking to rely on the decision of the Punjab Haryana High Court in the case of Knorr-Bremse India (P.) Ltd. (supra). While doing so the Tribunal has ignored the test laid down by the Delhi High Court on the subject vis- -vis the principles of aggregation applied by the co-ordinate Bench of the Tribunal in Assessee s own case for the earlier Assessment Years and the Tribunal has reached a conclusion that the transaction of payment of royalty is closely linked to the other international transactions under the manufacturing segment. (i) The Tribunal has wrongly applied the decision of the Delhi High Court in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y. The TPO has also accepted and acknowledged that Assessee has used the TNMM method as the most appropriate method to benchmark its international transactions all under the manufacturing activity which included the royalty that it has paid on the export sales as well. But the transaction of royalty and other international transactions of Assessee are interlinked is not acceptable because the transaction of payment of royalty on exports is Rs. 46.16 crore which is only 2.7% of the total turnover of the company of Rs. 1654 crore with which it has been aggregated and then benchmarked. (b) For a related party transaction or the related party closely linked transactions to be benchmarked correctly, their value should form a substantial part of the transactions being analyzed together as a group. In absence of the same, profitability from other unrelated transactions subsumes the profit/ loss from the related party transactions being analyzed and examination of the profit at a very broad level masks the ALP of the related party transaction and does not lead to correct determination of its ALP. (c) Hence, in order to determine the most precise approximation of arm's length cond ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rely because payment of royalty for use of technical support leads to manufacture 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. (h) In Magneti Marelli (supra), Delhi High Court accepted that royalty and technical assistance fee did not form part of a composite transaction and have to be treated as two separate transactions for the purpose of benchmarking and computing the ALP and answered against Assessee. The court had affirmed the view of the Tribunal that aggregation of transaction of payment of technical fees with other international transactions under the common TNMM was not correct. (i) Even in Magneti Marelli (Supra) the court did not approve clubbing payment of technical fees with other transactions under the manufacturing segment. (j) Though the Tribunal in Assessee s own case for Assessment Year 2006-2007 and some of the later years in which the contention of the asseessee for aggregation of payment of royalty with other international transactions under the manufacturing s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee has used the TNMM method as the most appropriate method to benchmark its international transactions under the manufacturing activity including royalty that it had paid on the export sales as well. The TPO has accepted the TNMM method as the most appropriate method to benchmark Assessee s international transactions under the manufacturing activity but decided to separately benchmark the royalty. This is what has been held not permissible (and we respectfully agree with this view) in Magneti Marelli (supra), where paragraph 16 reads as under: 16. As far as the second question is concerned, the TPO accepted TNMM applied by the assessee, as the most appropriate method in respect of all the international transactions including payment of royalty. The TPO, however, disputed application of TNMM as the most appropriate method for the payment of technical assistance fee of Rs. 38,58,80,000 only for which Comparable Uncontrolled Price ( CUP ) method was sought to be applied. Here, this court concurs with the assessee that having accepted the TNMM as the most appropriate, it was not open to the TPO to subject only one element, i.e payment of technical assistance fee, to an entirely ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by Assessee for the year under consideration and hence they need not follow the earlier approach of the Tribunal. This is because the new agreement on which reliance has been placed by the Tribunal was dated 16th September 2010, and even after the said agreement was entered into, for the Assessment Year 2011-2012 to Assessment Year 2014-2015 the TPO himself had accepted the benchmark of the international transaction of payment of royalty under the aggregation approach along with transactions of the manufacturing segment. The Tribunal failed to recognize that the royalty agreement for the years under consideration was the same agreement. We have to notice that neither the TPO nor the DRP had even whispered or mentioned in their orders about any facts being different from the earlier orders. In such situation, the Tribunal was not justified in taking a different view for these three assessment orders. The Apex Court in Radhasoami Satsang Vs. CIT (1992) 193 ITR 321 (SC) has held that in the absence of change in material facts, the department is bound by the previous decision. 13. Once the Tribunal in its earlier orders has held that the transaction of payment of royalty for us ..... X X X X Extracts X X X X X X X X Extracts X X X X
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