2023 (7) TMI 1318 - AT - Income Tax

TP Adjustment - MAM selection - CUP or TNMM - ALP for royalty @ 3% determined by the ld. DRP - HELD THAT - We find that the turnover of finished goods is Rs.92 Cr. and export sales to AE was Rs.24 Cr. The import of raw material was Rs.28 Cr. Royalty has been paid on the total sales. In the specific facts of this case and export of goods to AE the TNMM is the MAM. The ld. DRP has determined royalty payment @ 3% instead of 8% considered by the assessee taking into consideration the royalty payment of Federal Mogul TPR India Ltd. Climate Systems India Ltd. and Eicher Motors Ltd. The moot argument of the ld. AR was that the FAR of these companies is different. Having gone through the entire facts and circumstances of the case we find that the arbitrary selection of royalty rate of 3% by the ld. DRP is without brining any correct comparables on record. With regard to payment of FTS in A.Y. 2012-13 the ld. DRP agreed that the TPO failed to apply CUP correctly and is determination 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.

Summary

Issues Involved:
1. Addition to income under Section 92CA(3).
2. Rejection of aggregation approach under TNMM.
3. Benchmarking of Royalty payment under CUP Method.
4. Determination of ALP for Royalty and Technical Services Fee (FTS).
5. Charging of interest under Sections 234B and 234C.
6. Initiation of penalty proceedings under Section 271(1)(c).

Comprehensive Summary:

1. Addition to Income under Section 92CA(3):
The assessee contested the addition of Rs. 3,34,61,905 to its income under Section 92CA(3). The Tribunal noted that the TPO had rejected the assessee's aggregation approach under TNMM and instead applied the CUP method for benchmarking the Royalty and FTS transactions. The Tribunal found that the TPO's action of determining an adjustment of Rs. 8,35,79,670 was proposed in the draft assessment order.

2. Rejection of Aggregation Approach under TNMM:
The TPO rejected the assessee's contention of applying TNMM at the entity level to justify the payment of royalty and technical fee to the AE. The Tribunal observed that the TPO, referring to the UN manual on transfer pricing, held that transactions should ideally be analyzed on a transaction-by-transaction basis. The TPO also noted that the royalty and technical services fees together amounted to 11.10% of the total operating expenses and should be separately benchmarked.

3. Benchmarking of Royalty Payment under CUP Method:
The TPO applied the CUP method for benchmarking the Royalty payment, determining an ALP adjustment. The Tribunal noted that the Hon'ble Delhi High Court had remanded the issue back to the TPO for reconsideration, with directions to apply the TNMM at the entity level if aggregation was permissible. The Tribunal found that the TPO failed to follow the directions of the Hon'ble Delhi High Court and instead benchmarked the transactions using the CUP method.

4. Determination of ALP for Royalty and Technical Services Fee (FTS):
The Tribunal found that the TPO's action of holding the ALP of royalty and FTS at NIL was within the scope of remand by the Hon'ble ITAT and the directions of the Hon'ble High Court. The Tribunal noted that the TPO failed to search for comparable cases to determine the ALP for technical services, which was required for benchmarking. The Tribunal directed the TPO to adopt a royalty rate of 3% for benchmarking the royalty payment and deleted the adjustment for technical services fee.

5. Charging of Interest under Sections 234B and 234C:
The assessee contended that the AO erred in charging interest under Sections 234B and 234C. The Tribunal did not provide separate adjudication for this ground as it was considered general.

6. Initiation of Penalty Proceedings under Section 271(1)(c):
The assessee argued that the AO erred by initiating penalty proceedings under Section 271(1)(c). The Tribunal did not provide separate adjudication for this ground as it was considered general.

Conclusion:
The Tribunal allowed the appeal of the assessee, finding that the TPO's arbitrary selection of a 3% royalty rate was without correct comparables and that the determination of ALP at NIL for FTS was incorrect. The Tribunal directed the TPO to adopt a 3% royalty rate and deleted the adjustment for technical services fee. The appeal was allowed, and the order was pronounced in the open court on 03/07/2023.