TMI Blog2023 (7) TMI 1318X X X X Extracts X X X X X X X X Extracts X X X X ..... of ALP at Nil is incorrect. The Hon ble High Court of Delhi in Magneti Marelli [ 2016 (11) TMI 123 - DELHI HIGH COURT] held that if segregation approach is permissible, TNMM shall apply. Owing to these facts, the appeal of the assessee is hereby allowed. - Dr. B. R. R. Kumar, Accountant Member and Sh. Yogesh Kumar US, Judicial Member For the Assessee : Sh. Pancham Sethi, CA For the Revenue : Sh. Mrinal Kumar Das, Sr. DR ORDER Per Dr. B. R. R. Kumar, Accountant Member : The present appeal has been filed by the assessee against the order dated xx.02.2019 passed by the AO u/s 254/143(3) r.w.s. 144C of the Income Tax Act, 1961. 2. Following grounds have been raised by the assessee: 1.1 Confirming addition of Rs.3,34,61,905/- made to the income of the assessee u/s 92CA(3). 1.2 Rejecting aggregation-approach under TNMM for benchmarking international transaction at entity level. 1.3 Confirming to benchmark under CUP Method the transaction of Royalty payment even when this is justified under TNMM. 1.4 Failing to appreciate that when CUP cannot be applied due to absence of comparables then ALP shall be determined under other s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2.2016, the issue was remanded back to the file of the TPO and the direction was given to apply the TNMM at the entity level. The Hon'ble Jurisdictional High Court in the aforesaid order 20.12.2016 by following the judgment in the case of Magneti Marelli Powertrain India Pvt. Ltd. Vs DCIT (2016) 290 CTR 60 (DEL) remitted the issue back to the file of the TPO for reconsideration. The relevant findings have been given in paras 8 to 12 of the said order which reach as under: 8. So far as the question of aggregation or desegregation, as the case may be concerned, we notice that there can be no strait jacket or inviolable rule in this regard. The recent judgment of this Court in Sony Ericsson Mobile Communication India (P) Ltd v. CIT [2015] 374 ITR 118/231 Taxman 113/55 taxmann.com 240 stated that aggregation of such transaction is permissible and relied upon the OECD Commentary in this regard. At the same time the observations are not in fact determinative or conclusive. The Court was careful to leave the issue open for examination having regard to the facts of each case. In other words, as to whether the assessee's claim that aggregation is essential in a given case is a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... clarify that in the event it is held that aggregation is permissible in de fits of this case, the findings of the Revenue authorities and the Tribunal than the TNMM method was warranted, would not be disturbed. 12. In the light of the above findings, the appeal is partly allowed. The matter is remitted for re-consideration by the concerned TPO, who shall hear counsel for the parties and render findings on both aspects . 14. Since the facts, for under considerations are similar to the facts involved in the preceding assessment year 2011-12. We, therefore, by respectfully following the aforesaid referred to order, remand this issue back to the file of the AO/TPO to be decided as has been directed in ITA 708/2016 vide order dated 20.12.2016 by the Hon'ble Jurisdictional High Court. 1.2 The TPO considered the submission of the assessee vide letter dated 27.2008 in response to the show-cause notice, however rejected the assessee's contention of following the aggregated approach and applying TNMM at the entity love to justify payment of royalty and technical fee to the AE. Referring to the UN manual on transfer pricing, TPO was of the view that the taxpayer' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Dividend Paid 1,17,60,000 Reimbursement of travelling expenses 60,33,570 Total 65,17,08,486 1.4. The impugned transactions considered by the TPO for adjustment is royalty payment and FTS payment (shown in Bold letters in the table above) aggregating to Rs. 928,85,971/-. 2. Objection wise directions of the panel are as below: 2.1 Ground No. 1 2: 1. Draft Assessment Order passed u/s 254/143(3) r.w.s. 144C r.w.s. 92CA(3) under the set aside directions of Hon'ble Delhi ITAT is bad in law and needs to be quashed. 2. Ld. TPO has erred in law and on facts of the case by proposing to add Rs. 8,35,79,670/- to the income of the assessee u/s 92CA(3). DRP's Directions 2.1.1 These grounds are general which does not require separate adjudication . 2.2 Ground Nos. 3-6: 3. Ld. TPO has erred by benchmarking the transactions of Royalty and FTS payments using CUP Method even when these are justified under TNMM. 4. Ld. TPO erred in failing to appreciate that when CUP cannot be applied due to absence of comparables then ALP shall ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ught to be given at this stage. As to whether in the event of de-segregation the CUP method is the most appropriate rather than TNM method should in our opinion be left open for consideration depending on the determination of the issue of aggregation/de-segregation itself. In other words, that whether in the event of de-segregation, which would be the appropriate method, should be left to the TPO to decide, after hearing counsel for the parties. However, we clarify that in the event it is held that aggregation is permissible in the facts of this case, the findings of the revenue authorities and the Tribunal that the TNMM method was warranted, would not be disturbed. 2.2.3.2 It is clear that application of CUP was left open by the Hon'ble High Court to the TPO, depending on the determination of the issue of aggregation/ segregation itself. It is only in the event when it is found that aggregation is most appropriate approach in the facts of the case, that the TNMM method could not be disturbed. There is no dispute that in the event of considering the aggregated approach at the entity level, TNMM method would be the most appropriate method holding the assessee as the tested ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this may also be a general pattern of expenditure which AEs may insist to part with technology, further, similarly, other models of payment deferred or lump sum, along with royalty or inclusive of it, may be discerned in comparable transactions. However, to say that such a substantial amount had to necessarily be paid and that it was a commercial decision, dictated by need for the technology, in the light of a specific query, it could not be said by the assessee that later profits justified it, or that has essentiality precluded the scrutiny. 16. In the light of the above discussion, this court holds that the explanation by the assessee that the payment of Rs. 38.58 crores in the circumstances was correctly not accepted. The first question is answered against the assessee. The remit directed by the impugned order is therefore, upheld. 2.2.4 Having considered the decisions above, we are of the view that the enquiry into international transactions relating to payment of royalty and technical services fee to the AE by the assessee cannot be subsumed in the profits earned from the sale of manufactured goods at the entity level, per se. The assessee's turnover of finish ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) (Mum.) etc. the ITAT, Mumbai in the case of Asstt. CIT v. Golawala Diamonds [2011] 44 SOT 645 wherein it had been held that net margin realized from the transaction or class of transactions is to be compared and not entity level margin; (viii) Marubeni India (P) Ltd. [20011-THI-36-ITAT-DelTP] wherein it had been held that the profit of a particular operation cannot be clubbed with the earning of any other revenue stream; (ix) Ranbaxy Laboratories Ltd. v. Addl. CIT [2008] 167 Taxman 30/110 ITD 428 (Delhi) wherein it had been held that ideally ALP should be determined transaction by transaction; (x) SAB Labs India (P) Ltd. [2010-TII-44-ITAT- Bang-TP wherein it had been held that comparable with no segmental break/up/information is not to be considered; (xi) Star Diamond Group v. Dy. DIT (International Taxation) [2011] 9 taxmann.com 311/44 SOT 532 (Mum.) wherein it had been held that ALP of the International transaction is only to be determined. Entity level profit margin cannot be taken; (xii) ACIT v. Star India (P.) Ltd. [TT Appeal No. 3846(M) of 2006, dated 28-52008] wherein it had been held that each international transaction is to be examined separately and ALP should be determ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot be accepted. The objections are therefore not sustainable. In a plethora of decisions including those referred in para 2.24 above, CUP has been upheld to be the appropriate method to benchmark the payment of royalty and FTS payment to AEs. In case of JCB India Ltd [2016] 69 taxmann.com 383 (Delhi - Trib.), it was held as under: 7.7 On going through the facts and ratio of the decisions in Sony Ericsson Mobile Communication India (P) Ltd's case (supra) and Knorr-Bremse (supra), it is manifest that the contention of the ld. AR for aggregating all the international transactions including Payment of royalty, and then applying TNMM on entity level, cannot be upheld because the international transaction of Payment of royalty is independent of other transactions. The tribunal in assessee's own case has also jettisoned such argument advanced on behalf of the assessee for earlier years and has rightly held that the ALP of the international transaction of Payment of royalty' should be done separately on a transaction by transaction approach, which has been rightly interpreted by the assessee as a CUP method, that was employed by the assessee in its transfer pricing study ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that payment was for the use of patents owned by Gruner AG and the intangibles in the form of knowhow, design and models used for the production of goods. It is also argued that the technology transferred is unique and only the employees of Grunner AG are familiar and with the expertise to support the assessee's production activities. Without furnishing specific details of functions performed by the technical personnel paged for the services, or the comparable rate for the payment of services, the argued that FIS should be benchmarked alongwith the purchase of raw material, at the aggregate level (TNMM). Reliance was placed on the ITAT Delhi decision in case of Lumax Industries (ITA No.4456/Del/2012) 3.3 We are of the view that ALP of royalty payment could not be taken as NIL and benefit test could not be applied. Hon'ble Delhi High Court decision CIT Vs. Cushman Wakefield (India) (P) Ltd. [2014] 367 ITR 730 is squarely on this issue. 3.3.2 In so far as the assessee's contention that UCAL could not be taken as comic we do not find the arguments acceptable. Both the assessee and the TPO haw failed to find a comparable using Royalstat data, which has paid ro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... upra). In Federal Mogul (supra), payment of royalty @ 3% on the sale price on transfer of technical knowledge and information was accepted. 28. All the above companies, like the assessee, were in the auto ancillary industry. 29. In Praga Tools Ltd. (supra), which was also in an auto ancillary industry, payment of royalty @5% on the sale price, on transfer of technical knowhow and assistance was accepted 30. The royalty payment by the above companies is directly comparable with that de by the assessee company. The assessee, as observed, is also an auto ancillary manufacturing automotive parts for OEMs. In all these cases, as in that of the payment of royalty was related to transfer of technical assistance and Show in the automotive industry. That being so, the CUP method is available mps the issue of arm's length price qua the payment of royalty. 3.3.3. In view of the above, TPO is directed to adopt royalty rate of 3% for benchmarking the royalty payment. 3.3.4 With regard to the payment of technical services / assistance fee, the TPO has failed to apply CUP correctly as directed by the Hon'ble ITAT. The ALP could not be taken as NIL by app ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or the specified domestic transaction] ; (b) resale price method, by which, (i) the price at which property purchased or services obtained by the enterprise from an associated enterprise is resold or are provided to an unrelated enterprise, is identified; (ii) such resale price is reduced by the amount of a normal gross profit margin accruing to the enterprise or to an unrelated enterprise from the purchase and resale of the same or similar property or from obtaining and providing the same or similar services, in a comparable uncontrolled transaction, or a number of such transactions; (iii) the price so arrived at is further reduced by the expenses incurred by the enterprise in connection with the purchase of property or obtaining of services; (iv) the price so arrived at is adjusted to take into account the functional and other differences, including differences in accounting practices, if any, between the international transaction [or the specified domestic transaction] and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect the amount of gross profit margin in the open ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h indicates how such contribution would be evaluated by unrelated enterprises performing comparable functions in similar circumstances; (iii) the combined net profit is then split amongst the enterprises in proportion to their relative contributions, as evaluated under subclause (ii); (iv) the profit thus apportioned to the assessee is taken into account to arrive at an arm's length price in relation to the international transaction [or the specified domestic transaction]: Provided that the combined net profit referred to in sub-clause (i) may, in the first instance, be partially allocated to each enterprise so as to provide it with a basic return appropriate for the type of international transaction [or specified domestic transaction] in which it is engaged, with reference to market returns achieved for similar types of transactions by independent enterprises, and thereafter, the residual net profit remaining after such allocation may be split amongst the enterprises in proportion to their relative contribution in the manner specified under sub-clauses (ii) and (iii), and in such a case the aggregate of the net profit allocated to the enterprise in the first ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion [or the specified domestic transaction]; (b) the class or classes of associated enterprises entering into the transaction and the functions performed by them taking into account assets employed or to be employed and risks assumed by such enterprises; (c) the availability, coverage and reliability of data necessary for application of the method; (d) the degree of comparability existing between the international transaction [or the specified domestic transaction] and the uncontrolled transaction and between the enterprises entering into such transactions; (e) the extent to which reliable and accurate adjustments can be made to account for differences, if any, between the international transaction [or the specified domestic transaction] and the comparable uncontrolled transaction or between the enterprises entering into such transactions; (f) the nature, extent and reliability of assumptions required to be made in application of a method. 9. In the light of the above, we have gone through the history of the case. The similar issue in the case of the assessee has been a subject matter of adjudication by the order of the Hon ble High Court of Del ..... X X X X Extracts X X X X X X X X Extracts X X X X
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