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2019 (10) TMI 296 - AT - Income TaxTP Adjustment - payment of royalty to the AE - MAM - Assessee adopted TNMM method at entity level aggregating all the international transactions with OP/OR as the PLI - HELD THAT - There is no dispute that the assessee has derived the benefit from the technical information given by the AE. There was an agreement reduced in writing between the assessee and the AE for payment of royalty and for extending necessary technical support to the assessee for manufacturing product continuously and consistently. CIT(A) has given a finding that the technical information on the manufacturing the activity was received and benefitted by the assessee. AR submitted that the manufacturing activity of company and the continuous technical support for which the royalty is paid are independent and interrelated and as held in the case of M/s. Johanson Johnson 2017 (3) TMI 1520 - BOMBAY HIGH COURT the TPO obliged to follow any one of the methods prescribed in section 92C of the Act. Instead, the ld.TPO adopted the benefit test which is not one of the prescribed methods. Thus, the order of the TPO is defective in not following the methods prescribed under the Act. Commercial expediency is the business decision of the tax payer and the AO cannot sit and judge the business expediency as decided by the Hon'ble Delhi High Court. The coordinate bench of ITAT, Delhi also held that TNMM is the most appropriate method for benchmarking the royalty payment. On application of TNMM as MAM at the entity level the PLI of the assessee more than the comparable cases, thus the transactions of the assessee company are at Arm s length. Following the judicial precedents discussed in the preceding paragraphs, we hold that determination of royalty at Rs. NIL is unjustified and the most appropriate method for determining the royalty payment is TNMM method at the entity level aggregating all the transactions including the payment for royalty. Accordingly, we hold that the adjustment made by the TPO is not warranted and the addition made by the Assessing Officer is deleted and the order of the ld. CIT(A) is upheld. For A.Y. 2007-08, the facts are identical and having held that TNMM is the most appropriate method, no adjustment is called for on account of transfer pricing issues. In the instant case, the tax effect involved in this appeal is also less than ₹ 50.00 lakhs which is squarely covered by the CBDT Circular No. No.17/2019, dated 08/08/2019, therefore, this appeal is not maintainable.
Issues Involved:
1. Justification of the Transfer Pricing Officer (TPO) in determining the Arm's Length Price (ALP) for royalty payments. 2. Application of the benefit test for royalty payments. 3. Segregation of royalty payments from other transactions for transfer pricing purposes. 4. Appropriateness of the Transaction Net Margin Method (TNMM) versus the Comparable Uncontrolled Price (CUP) method. 5. Validity of the TPO’s determination of ALP for royalty payments at Rs. NIL. 6. Benchmarking of royalty payments under the Transfer Pricing regulations. Issue-wise Detailed Analysis: 1. Justification of the TPO in Determining ALP for Royalty Payments: The Revenue argued that the TPO was justified in holding that the taxpayer failed the benefit test against payment of royalty, thus determining the ALP at Rs. NIL. The TPO segregated the royalty payment from other transactions and used the CUP method, considering it the most appropriate for analyzing the royalty payment. The TPO's decision was based on the view that the taxpayer could not demonstrate tangible benefits derived from the royalty payment. 2. Application of the Benefit Test for Royalty Payments: The TPO applied the benefit test to determine the ALP of royalty payments, concluding that the taxpayer did not derive any benefit from the payment to the AE. The TPO's stance was that the taxpayer failed to substantiate the receipt of intangibles and the benefits derived therefrom. The CIT(A), however, found that the taxpayer had indeed received technical information and support from the AE, which was beneficial for the manufacturing process and product quality improvement. The CIT(A) held that the TPO did not consider the evidence provided by the taxpayer, such as e-mail correspondence indicating the technical assistance received. 3. Segregation of Royalty Payments from Other Transactions: The TPO separated the royalty payment from other international transactions, viewing it as an independent transaction that should be analyzed separately using the CUP method. The CIT(A) disagreed, stating that the royalty payment was interlinked with the taxpayer's manufacturing activities and other transactions, and therefore, should not be segregated. The CIT(A) emphasized that the TNMM was the most appropriate method for determining the ALP at the entity level, aggregating all transactions. 4. Appropriateness of TNMM versus CUP Method: The taxpayer argued that the TNMM was the most appropriate method for determining the ALP, as it aggregated all transactions, including royalty payments, at the entity level. The CIT(A) supported this view, noting that the TPO did not bring any comparable cases to justify the use of the CUP method. The CIT(A) relied on judicial precedents that favored the aggregation of transactions and the use of TNMM for benchmarking purposes. 5. Validity of the TPO’s Determination of ALP for Royalty Payments at Rs. NIL: The CIT(A) found the TPO's determination of the ALP at Rs. NIL to be unjustified. The CIT(A) held that the TPO did not follow any of the prescribed methods under the Act for determining the ALP and instead applied the benefit test, which is not a recognized method. The CIT(A) concluded that the taxpayer had received technical support from the AE, and therefore, the royalty payment was justified. The CIT(A) relied on judicial precedents that emphasized the necessity of following prescribed methods for determining ALP and rejected the TPO's approach. 6. Benchmarking of Royalty Payments under Transfer Pricing Regulations: The CIT(A) held that the taxpayer's benchmarking of royalty payments using the TNMM was appropriate. The CIT(A) noted that the taxpayer's PLI was higher than the comparables, indicating that the transactions, including royalty payments, were at arm's length. The CIT(A) directed the Assessing Officer to examine whether the taxpayer's PLI fell within the acceptable range and to make proportionate adjustments if necessary. The CIT(A) also referenced judicial precedents that supported the use of TNMM for benchmarking royalty payments and rejected the TPO's approach of determining the ALP at Rs. NIL without comparable data. Conclusion: The appeals filed by the Revenue were dismissed, and the cross objections filed by the taxpayer were deemed infructuous. The CIT(A)'s order was upheld, confirming that the TNMM was the most appropriate method for determining the ALP at the entity level, aggregating all transactions, including royalty payments. The TPO's determination of the ALP at Rs. NIL was found to be unjustified, and the adjustments made by the TPO were deleted. The taxpayer succeeded on both merits and tax effect for the assessment years in question.
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