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2019 (3) TMI 1353 - AT - Income TaxDisallowance of payments made for royalty and technical know-how received - Accepted Most appropriate method for benchmarking the manufacturing segment as TNNM - Different method (CUP method) for royalty and technical knowhow - HELD THAT - Neither the TPO nor the CIT (A) has discarded the most appropriate method adopted by the Assessee which was TNMM in the present case for benchmarking the manufacturing segment. Facts on the record also show that the TPO has not discarded the exercise undertaken by the Assessee in determining the ALP of the international transaction related to royalty and technical fees by using the aggregate approach and benchmarking it with manufacturing segment. We find force in the arguments of the Ld. AR that where the assessee had used TNMM to benchmark all its transactions and the TPO having accepted TMNN as the most appropriate method, it was not open to the TPO to subject only one element, i.e. payment of technical assistance fee, to an entirely different method (CUP) as this would lead to chaos and be detrimental to the interests of both the assessee and the revenue. We also find it appropriate to mention that the TPO, in the subsequent years, has accepted the aggregate approach and the TNMM method as against the approach of the TPO in this year to benchmark the transaction separately. The TPO has arbitrarily applied CUP, which is not supported by the approach of the TPO in the subsequent years. The view of the lower authorities that the benchmarking done by the Assessee is incorrect and the approach of the TPO, as has been upheld by the CIT (A), is not sustainable. Our view is also supported by comparison of margins of the Assessee with the margin of the comparable companies. As stated elsewhere in the order, the Assessee has earned the margin of 9.25% with respect to manufacturing activities as against the margin of 11.98% earned by the comparable companies. Thus, the Assessee s margin is within the ( /-) 5% range. Therefore, the approach of the Assessee is correct in so far as it relates to the payment of Royalty and Fee for Technical know-how and the adjustment in relation to international transactions pertaining to payments for royalty and technical know-how deserve to be deleted.
Issues Involved:
1. Jurisdictional error in the reference to the Transfer Pricing Officer (TPO). 2. Validity of the addition made by re-computing the arm’s length price (ALP) of international transactions. 3. Determination of ALP for royalty and technical know-how fees. 4. Adverse findings contrary to evidence. 5. Disallowance of warranty expenses. 6. Withdrawal of interest under section 234D. 7. Initiation of penalty proceedings under section 274 read with section 271(1)(c). Issue-wise Analysis: 1. Jurisdictional Error in the Reference to the TPO: The assessee argued that the reference made by the AO to the TPO suffered from jurisdictional error as the AO did not record any reasons for concluding that it was necessary to refer the matter to the TPO for computation of the ALP. However, this ground was not specifically argued by the assessee’s representative and was considered general in nature by the Tribunal. 2. Validity of the Addition Made by Re-computing the ALP of International Transactions: The assessee contended that the AO, TPO, and CIT(A) erred in making an addition of ?39,805,532 to the returned income by re-computing the ALP of international transactions. The Tribunal noted that the TPO applied the Comparable Uncontrolled Price (CUP) method instead of the Transactional Net Margin Method (TNMM) used by the assessee without providing comparable data, which was not in accordance with Rule 10B of the Income Tax Rules, 1962. 3. Determination of ALP for Royalty and Technical Know-how Fees: The assessee paid ?3,39,34,585 as a lump sum fee for technical know-how and ?58,70,947 as royalty to its AE, Woodward Governor Company, USA. The TPO determined the ALP as Nil, concluding that no benefit was derived from such know-how. The Tribunal found that the assessee provided substantial evidence, including agreements, manuals, and drawings, proving the receipt and utilization of technical know-how. The Tribunal held that the TPO’s application of the CUP method was arbitrary and unsupported by comparable data. The Tribunal upheld the assessee’s use of TNMM, noting that the TPO accepted this method in subsequent years. 4. Adverse Findings Contrary to Evidence: The Tribunal observed that the TPO and CIT(A) disregarded the substantial documentation provided by the assessee, which demonstrated the business necessity and benefits derived from the technical know-how and royalty payments. The Tribunal found the lower authorities’ conclusions based on surmises and unsupported by evidence. 5. Disallowance of Warranty Expenses: The assessee argued that the CIT(A) erred in not deleting the disallowance of ?2,659,823 on account of warranty expenses. This ground was not pressed by the assessee’s representative and was dismissed as not pressed by the Tribunal. 6. Withdrawal of Interest under Section 234D: The Tribunal noted that the issue of withdrawal of interest under section 234D was consequential and required action at the end of the AO while giving the appeal effect. 7. Initiation of Penalty Proceedings under Section 274 Read with Section 271(1)(c): The assessee argued that the AO erred in initiating penalty proceedings mechanically and without adequate satisfaction. The Tribunal did not specifically adjudicate this ground, considering it consequential. Conclusion: The Tribunal allowed the assessee’s appeal partly, holding that the TPO’s adjustment of ?3,98,05,532 in relation to royalty and technical know-how payments was unwarranted and deserved to be deleted. The Tribunal upheld the assessee’s use of TNMM for determining the ALP and found the TPO’s application of the CUP method arbitrary and unsupported by comparable data. The Tribunal dismissed the ground related to warranty expenses as not pressed and noted that issues related to interest under section 234D and penalty proceedings were consequential.
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