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2023 (12) TMI 1182 - AT - Income TaxTP adjustment - royalty paid by the assessee to its AE - selection of MAM - Whether CUP is the most appropriate method for benchmarking the royalty payment made by the assessee to its AE; Or Other Method can be treated as MAM on the facts of the present case? - HELD THAT - The method of the assessee can be pigeonholed in the other method provided in Rule 10AB r.w.s. 92C (1) and in our opinion this is the MAM in the peculiar facts of the Assessee. Accordingly, we hold that other method would be a good substitute for CUP as there is lack of reliable comparables and looking to the fact that the royalty payments have been made for unique intangibles, therefore, we direct the ld. TPO to adopt other method as the Most Appropriate Method. However, the working given by the assessee before us as incorporated above needs to be examined afresh by identifying the costs and profits attributable to manufacture and sales to the non-AE and to find out appropriate allocation of the costs and what could be the profits on account of royalty which can be stated to be attributable on account of royalty. The assessee is directed to substitute the working on the basis of other method . The method of the assessee can be pigeonholed in the other method provided in Rule 10AB r.w.s. 92C (1) and in our opinion this is the MAM in the peculiar facts of the Assessee. Accordingly, we hold that other method would be a good substitute for CUP as there is lack of reliable comparables and looking to the fact that the royalty payments have been made for unique intangibles, therefore, we direct the ld. TPO to adopt other method as the Most Appropriate Method. However, the working given by the assessee before us as incorporated above needs to be examined afresh by identifying the costs and profits attributable to manufacture and sales to the non-AE and to find out appropriate allocation of the costs and what could be the profits on account of royalty which can be stated to be attributable on account of royalty. The assessee is directed to substitute the working on the basis of other method . With this direction, all the grounds raised by the assessee are allowed for statistical purposes.
Issues Involved:
1. Transfer Pricing Adjustment for Royalty Payment 2. Benchmarking Method for Royalty Payment Summary: Issue 1: Transfer Pricing Adjustment for Royalty Payment The assessee, a subsidiary of Nissel ASB Machine Co Ltd (ASB Japan), challenged the transfer pricing adjustment of Rs. 7,51,00,267/- on account of royalty paid to its AE. The assessee manufactures Injection Stretch Blow Molding (ISB) machines and components, with operations segmented into AE and non-AE segments. The AE segment involves manufacturing machines exclusively for ASB Japan under a Sales & Purchase Agreement (SPA), whereas the non-AE segment involves domestic sales using intangibles licensed by ASB Japan under a Technical License Agreement (TLA) with a royalty rate of 12%. Issue 2: Benchmarking Method for Royalty Payment The Transfer Pricing Officer (TPO) rejected the assessee's entity-level Transactional Net Margin Method (TNMM) for benchmarking royalty payments, requiring a Comparable Uncontrolled Price (CUP) analysis instead. The TPO determined the Arm's Length Price (ALP) at "Nil" and adjusted the entire royalty payment of Rs. 13,91,42,366/-. The Dispute Resolution Panel (DRP) upheld the CUP method and rejected the assessee's "other method" under Rule 10AB, leading to a reduced adjustment of Rs. 7.51 Crores and an ALP of 5.5%. The Tribunal noted the unique and valuable nature of the intangibles provided by ASB Japan, which made finding suitable comparables under the CUP method challenging. The Tribunal emphasized the OECD Guidelines, which support the use of "other methods" in cases involving unique intangibles. The Tribunal directed the TPO to adopt the "other method" as the Most Appropriate Method (MAM) and re-examine the costs and profits attributable to the non-AE segment to determine the appropriate royalty payment. Conclusion: The Tribunal concluded that the "other method" under Rule 10AB is the MAM for benchmarking the royalty payment due to the lack of reliable comparables and the unique nature of the intangibles involved. The appeal was allowed for statistical purposes, directing the TPO to re-evaluate the royalty payment using the "other method".
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