2017 (1) TMI 389 - HC - Income Tax

Segregation of the transaction including inter alia royalty and fee for technical services - TPA - Held that - There can be no strait jacket or inviolable rule in this regard. The recent judgment of this Court in Sony Ericsson Mobile Communication India (P) Ltd. vs Commissioner of Income Tax (2015 (3) TMI 580 - DELHI HIGH COURT) stated that aggregation of such transaction is permissible and relied upon the OECD Commentary in this regard. At the same time the observations are not in fact determinative or conclusive. The Court was careful to leave the issue open for examination having regard to the facts of each case. In other words, as to whether the assessee s claime that aggregation is essential in a given case is an entirely fact dependent exercise to be viewed having regard to the nature of the transaction and the surrounding circumstances. The assessee contends that the amounts paid under the royalty license and technical support agreements had to be viewed along with all other expenses and, therefore, aggregated. The Revenue s contention, however, is to the contrary. The entire issue as to whether aggregation is warranted in the circumstances, should be gone into afresh in view of the law declared in Sony Ericsson (supra) and clarified in Magneti Marelli (2016 (11) TMI 123 - DELHI HIGH COURT) wherein held if the transactions are, in the opinion of the TPO, not at arm s length, the required adjustment has to be made, as provided in the Act, irrespective of the fact that the expenditure is allowable under other provisions of the Act. There can conceivably be various reasons not to subject such payments, such as for instance, if no similar data exists at all; or that sectional data for such payments is absent. Quite possibly, this may also be a general pattern of expenditure which AEs may insist to part with technology; further, similarly, other models of payment- deferred or lump sum, along with royalty or inclusive of it, may be discerned in comparable transactions. As far as the issue of most appropriate method is concerned, this Court is of the opinion that no definitive ruling ought to be given at this stage. As to whether in the event of de-segregation the CUP method is the most appropriate rather than TNM method should in our opinion be left open for consideration depending on the determination of the issue of aggregation/ de-segregation itself. In other words, that whether in the event of de-segregation, which would be the appropriate method, should be left to the TPO to decide, after hearing counsel for the parties. However, we clarify that in the event it is held that aggregation is permissible in the facts of this case, the findings of the Revenue authorities and the Tribunal that the TNMM method was warranted, would not be disturbed.

Summary

Issues:
1. Whether desegregation of transactions including royalty and technical services was permissible?
2. Whether aggregation of transactions is essential in determining the arm's length price?
3. Which method is the most appropriate for determining the arm's length price in case of desegregation?

Analysis:

Issue 1: Desegregation of transactions
The appellant contended that desegregating the transaction involving royalty and technical support was inappropriate as they were part of a composite understanding. The Revenue argued that desegregation is necessary as per Section 92C of the Income Tax Act. The court noted that there is no fixed rule for aggregation or desegregation. Referring to previous judgments, the court emphasized that each case must be examined based on its facts. The court held that the question of aggregation should be reconsidered in line with the law established in previous cases.

Issue 2: Aggregation of transactions
The court referred to a previous case where the necessity of payment for technical assistance was questioned. The court highlighted that the burden is on the assessee to prove that the international transaction was at arm's length. The court emphasized that the obligation to make payments does not end the inquiry into arm's length pricing. The court stated that if transactions are not at arm's length, adjustments must be made as per the Act, regardless of the allowance under other provisions. The court directed a fresh examination of the aggregation issue based on previous judgments.

Issue 3: Most appropriate method for determining arm's length price
The court did not provide a definitive ruling on the most appropriate method at this stage. It stated that the choice between the CUP method and TNM method should be determined based on the decision regarding aggregation or desegregation. The court clarified that if aggregation is deemed permissible, the findings of the Revenue authorities and Tribunal regarding the TNM method would stand. The appeal was partly allowed, and the matter was remitted for reconsideration by the TPO, who would decide on both aspects after hearing counsel for the parties.