2025 (4) TMI 387 - AT - Income Tax

TP adjustment - Purchase of material from AE - assessee is stated to have entered into international transactions and specified domestic transaction within the meaning of section 92B and 92BA with its Associate Enterprise defined in section 92A - HELD THAT -We do not find any merit in the contention raised on behalf of the appellant that DRP ignored to record independent findings on the point of method selected and rejected by TPO. It cannot be said that this aspect remained unadjudicated. In the given facts and circumstances of the appeal at hand the decisions cited on behalf of the appellant do not come to its aid so as to say that the observations made and the conclusions arrived at by TPO in selecting TNMM method be discarded from consideration or that CPM method selected by the assessee be applied in determination of ALP. A perusal of the final assessment order would reveal that the AO considered all the grounds raised by the assessee after the passing of the order by DRP discussed the same and gave effect to the directions issued by DRP on each point. The assessment as regards payments made for purchase of raw material by way of international transactions deserves to be upheld. International transactions- pertaining payment of royalty - Main claim of the assessee was that transactions of payment of royalty should be benchmarked as a part of activity of the assessee and not as a separate transaction the reason being that the same is intrinsically linked to the manufacturing activities. TPO rejected CPM applied by the assessee. However from the material available on record we do not find any merit in the said claim of the assessee that the transactions pertaining to payment of royalty to AE were intrinsically linked to the manufacturing activities so as to term the same to be separate transactions. After going through the material on record we find the royalty transactions are integrated simply because the transactions pertaining to manufacturing business collectively drive its business operations and benefit its business as a whole. Assessee could not establish that same could be evaluated on a combined or aggregate basis. Having regard to the material available on record it can safely be said that said transaction of payment of royalty is a separate class of transaction. Comparable Agreements - Whether same could actually be termed as such? - The assessee had applied TNMM to benchmark its international transactions of import of raw materials sub-assemblies and components payment of technical assistance fees payment of royalty payment of software and purchase of fixed assets. All these were categorized under one head Manufacturing of automotive components . Therein during transfer price proceedings the assessee was unable to substantiate the need for payment of technical assistance fees to its foreign AE. TPO had also observed that neither any cost benefit analysis nor any benchmarking exercise was undertaken at the time of entering into the agreement. Therein as regards payment of royalty TPO had accepted TNMM in respect of payment of royalty as well but disputed its application for payment of technical assistance and rather CUP method was sought to be applied. Hon ble High Court held that TNMM had to be applied in respect of the technical fee payment too TPO having accepted TNMM for other international transactions. Additional Evidence - Whether deserves to be produced here? - Nothing has been brought to our notice as to why said additional evidence was not produced before the authorities below. It is not case of the appellant that the authorities below decided the case without giving sufficient opportunity to the assessee to adduce evidence. No reason or substantial cause to allow the appellant to bring on record said three royalty agreements. Accordingly prayer of the appellant in this regard is rejected. We do not find any merit in the contentions raised on behalf of the appellant as regards assessment relating to payments of royalty.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered in this appeal were:

• Whether the Transactional Net Margin Method (TNMM) was the most appropriate method for determining the Arm's Length Price (ALP) for the international transactions involving the purchase of raw materials from the Associated Enterprise (AE).
• Whether the payment of royalty to the AE should be benchmarked separately using the Comparable Uncontrolled Price (CUP) method instead of being aggregated with other transactions under the Cost Plus Method (CPM).

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Determination of ALP for Purchase of Raw Materials

• Relevant Legal Framework and Precedents: The determination of ALP is guided by Section 92C of the Income Tax Act, 1961, and Rule 10B of the Income Tax Rules, 1962. The TNMM and CPM are among the prescribed methods for determining ALP.
• Court's Interpretation and Reasoning: The Tribunal upheld the TPO's selection of TNMM over CPM. It noted that the TPO had rejected CPM due to the lack of reliable data on direct and indirect costs of production in comparable companies. The Tribunal agreed with the TPO's reasoning that TNMM was more appropriate given the availability of reliable net margin data.
• Key Evidence and Findings: The TPO had selected a set of 16 comparable companies to benchmark the transactions and determined an arm's length median margin of 7.21%. The Tribunal found that the TPO provided adequate reasoning for rejecting CPM, citing issues with data reliability and comparability adjustments.
• Application of Law to Facts: The Tribunal applied Rule 10C, which prescribes selecting the most appropriate method based on the facts and circumstances of the case. It found that the TPO's choice of TNMM was justified given the lack of reliable data for CPM.
• Treatment of Competing Arguments: The appellant argued that CPM was rejected without justification and that TNMM was selected arbitrarily. The Tribunal dismissed these arguments, finding that the TPO had provided sufficient reasoning for the selection of TNMM.
• Conclusions: The Tribunal upheld the TPO's determination of ALP using TNMM, finding no merit in the appellant's objections.

Issue 2: Benchmarking of Royalty Payments

• Relevant Legal Framework and Precedents: The determination of ALP for royalty payments involves the application of the CUP method, as per Rule 10B of the Income Tax Rules, 1962. The Tribunal considered precedents such as Sony Ericsson's case, which emphasized separate benchmarking for distinct transactions.
• Court's Interpretation and Reasoning: The Tribunal agreed with the TPO's decision to benchmark royalty payments separately using the CUP method. It noted that the royalty transaction was a separate class of transaction and not closely linked with other manufacturing activities.
• Key Evidence and Findings: The TPO had identified four comparable agreements to determine an average royalty rate of 1.905%. The Tribunal found that the TPO had conducted a detailed analysis and provided adequate justification for the selection of comparables.
• Application of Law to Facts: The Tribunal applied the principles of separate benchmarking for distinct transactions, as established in precedents. It found that the TPO's selection of the CUP method was appropriate given the nature of the royalty transaction.
• Treatment of Competing Arguments: The appellant argued that the royalty payments should be benchmarked as part of the manufacturing activity. The Tribunal rejected this argument, finding that the appellant failed to establish an intrinsic link between the royalty and other transactions.
• Conclusions: The Tribunal upheld the TPO's separate benchmarking of royalty payments using the CUP method and rejected the appellant's contentions.

3. SIGNIFICANT HOLDINGS

• Preserve Verbatim Quotes of Crucial Legal Reasoning: The Tribunal noted, "When reliable method viz TNMM is available then there is no need to go to CPM especially when the reliable data either in the taxpayer's case or in the comparable cases is not available for ascertaining the direct and indirect cost of production of services."
• Core Principles Established: The decision reinforced the principle that separate transactions should be benchmarked independently unless they are intrinsically linked. It also emphasized the importance of selecting the most appropriate method based on data availability and reliability.
• Final Determinations on Each Issue: The Tribunal dismissed the appeal, upholding the TPO's use of TNMM for raw material purchases and the CUP method for royalty payments. It found no merit in the appellant's objections and confirmed the adjustments made by the TPO.