9911796707
TMI Blog2023 (12) TMI 1182X X X X Extracts X X X X X X X X Extracts X X X X ..... imately manufacture PET bottles. ASB Japan is amongst the world's leading manufacturers of such machines, and similarly, the assessee is the lender in its segment in India. ASB India's market share in India for one-step machine is nearly 90% of the total market, which constitute nearly 80% of its total sales in the Indian market of around 40% approximately. 4. The assessee has three plants operating in India. The operations can be segregated into two segments; AE segment and non-AE segment. In the AE segment, the assessee manufactures machines to sell it exclusively to ASB Japan. In other words, it is a contract manufacturer, manufacturing machines as per the directions of its AE, which makes guaranteed purchases of the machines. The contractual arrangement of the AE segment is governed by a Sales & Purchase Agreement ("SPA'). In the Non-AE segment, the assessee manufactures machines and sells it in India to unrelated parties. Under this segment, the assessee uses intangibles namely know-how and trademark licensed by ASB Japan vide Technical License Agreement w.e.f 1.10.2010 (TLA') upon payment of royalty at 12% of domestic sales of complete machines & molds made b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... detailed reasons which have been discussed in detail by the ld. DRP. The ld. DRP has also sought for remand report of the ld. TPO which too has been discussed by the ld. DRP. The ld. DRP rejected the working of the "other method" by the assessee and held that CUP is the most appropriate method. 9. Before the ld. DRP assessee has claimed that the operations of the assessee is segregated into two segments, one manufacturing the machines to be sold to the AE and second manufacturing the machines to be sold domestically in India to the unrelated customers. Thus, for the first segment it was engaged as contract manufacturing and hence, there is no transfer of intangibles from AE to the assessee. It was only in the second segment where it manufactures and sells in India that it receives technological as well as marketing intangibles from its AE. One of the main contentions of the assessee was that there are five main intangibles and there is no reliable comparable uncontrolled transaction and therefore, CUP is not applicable and under these circumstances only "other method" can be applied. The assessee has provided the benchmarking analysis "other method" which was rejected by the ld. D ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed goods, since TLA refers to the licensed products as including complete or semi-complete unit and therefore, there is no indication that the sales made to the AE was only with regard to semi-finished goods. Further, no exports invoices have been produced substantiating that machines exported to AE were semi-finished. 11. One another important observation which has been made that assessee does not maintain separate books of account for its AE and non-AE activities and the cost allocation of key of labour man-hours has no basis in the absence of technical specification of each and every product manufactured / sold by the assessee. The ld. DRP held that the "other method" is only variant of internal TNMM which cannot be expected. Finally, the ld. DRP came out with two comparables chosen by the assessee which were rejected by the ld. TPO, i.e., Optikos Corporation and DynEco Corporation and accordingly, directed ld. TPO to conclude the ALP of the technology know-how royalty as the average of royalty payment of these two comparable agreements and accordingly, the ld. TP adjustment was reduced to Rs. 7.51 Crores and the ALP of the royalty was computed at 5.5%. 12. We have heard both ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tary. Thus, it has been contended that - * ASB Japan is the sole developer and manager of the technology intangibles and know-how and has been the only pioneer in establishing the brand of ASB' in PET Industry Technical know- how existing with ASB Japan is the result of strenuous and dedicated research for over 40 years. Further, this technical know-how is still evolving due to painstaking effort by AE. * The assessee neither has any research and development facility of its own nor it owns any intangibles. It relies entirely on the knowledge repertoire cumulated by ASB Japan. * The intangibles created and developed by ASB Japan are unique, one of its kind and not routine. Further, their uniqueness and peculiar nature makes them highly valuable for the assessee because devoid the intangibles Assessee's business will not survive. 14. Before us ld. Counsel submitted that the intangibles involved in this transaction are one of their kind. Such intangibles are difficult to find which consequentially creates a dearth of comparables. Hence, the CUP method in the case of the Assessee is highly ill-suited due to the simple fact that there are no accurate comparables (the roya ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... intellectual property of Optikos" (ii) DynEco Corporation is engaged in mechanical or industrial engineering solutions and the technology in the agreement (enclosed at Page 437 of the Paperbook) is of air compressors and hydrogen circulators for fuel cell air management systems. The relevant definition is reproduced below:- "1.1 Licensed Products: Shall mean air compressors and hydrogen circulators, including but not limited to the products identified on Exhibit A hereto. The products covered by the term & quot; Licensed Products & quot; may be updated or modified by mutual written agreement between the parties. 16. Accordingly, ld. Counsel submitted that since two parties as finally directed by the ld. DRP are for different products wherein technical know-how and R & D costs would be significantly different than the products manufactured by ASB India and therefore, same cannot be compared in the facts of the assessee's case. Thus, accordingly, he submitted that the only appropriate method would be "other method" as per Rule 10AB. 17. Ld. Counsel has also provided a formula to arrive at arm's length royalty as per "other method" in the following manner:- The formula to arr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd agreements. It has been stated at length before us that, the intangibles involved in the transactions are very unique and therefore, it was for this reason it was very difficult to find a suitable comparable even under the Royalty STAT and this is the reason why both ld. TPO and ld. DRP found it difficult to find a suitable comparable. Even the two comparables which have been selected by the ld. DRP, i.e., Optikos Corporation and DynEco Corporation as noted above, are entirely different from the agreement of the assessee with its AE. The technical knowhow and R & D cost would be different than the products which are subject to comparability under CUP. In a scenario where it is difficult to identify the comparables under CUP method and the search in Royalty STAT data has not thrown appropriate comparables and looking to the unique and valuable intangibles which has been licensed to the assessee, we are unable to uphold that the CUP could be the most appropriate method in the case of the assessee. 20. In so far as other methods are concerned, i.e. RPM, CPM and PSM, the same are ostensibly are not applicable which has been admitted by both the parties. Even the TNMM also as agreed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ich are unique and hard to value. 23. It is also relevant to mention here another qualitative aspect relating to the application of the "other method" in the present case. The "other method" reflects commercial pricing in the way it actually is determined after due negotiations between parties. In other words, the 'other method" as is explained above suitably builds upon the perspectives of parties which transact with each other and determine pricing in an uncontrolled, unrelated manner. This party perspective is visible in the approach explained above since the pricing method identifies various functions performed by parties and settles the transaction price accordingly. The party perspective also appreciates the fact that the AE segment of the Assessee only carries out contract manufacturing and that the principal, i.e., ASB Japan, being the owner of intangibles, would command a considerable amount of royalty given that the business is critically dependent on research and development and the quality of intangibles, which is entirely the responsibility of ASB Japan. Compared to other methods such as CUP and TNMM, the "other method" is more suitable, because the former methods ..... X X X X Extracts X X X X X X X X Extracts X X X X
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