2019 (12) TMI 1206 - AT - Income Tax

TP Adjustment - international transaction of Allocation of shared service charges - whether the transaction of Payment of shared service charges on one hand and Import of raw material and Export of finished goods on the other, namely, the manufacturing activity, can be construed as closely linked transactions ? - HELD THAT - We are dealing with a situation in which the assessee is trying to club the transaction of Payment of shared service charges with the transactions of manufacturing activity, which is a step further away from the technical know-how in the process of manufacturing. In view of the foregoing discussion, it is held that the instant transaction of payment of shared service charges cannot be aggregated with the international transactions concerned with the manufacturing activity. We, therefore, reject the aggregation approach as put forth on behalf of the assessee and ex consequenti, the additional ground is hereby dismissed. We find that the question of aggregation or segregation of the transactions can arise only when it is proved that the assessee actually availed the services for which it made the payment. We have noted supra that the assessee has admittedly not proved the receipt of the services. It has further been admitted by the ld. AR that the assessee has no evidence to prove the receipt of services through correspondence or e-mails or visits of the personnel of the AEs. Once the addition is sustained on the ground that the assessee failed to prove the receipt of services at the very outset, there can be no question of any aggregation. It is held that neither the aggregation of the transaction of allocation of shared service charges is permissible with the other reported transactions under the TNMM in the facts as are instantly obtaining nor the assessee could adduce any evidence either for the cost sharing arrangement without any mark up or the actual receipt of services. We, therefore, uphold the disallowance. Addition in respect of the international transaction of Payment of Trademark charges - HELD THAT - Once it was found that the assessee actually paid royalty at total of 4.5% under the international transaction, then the course open to the TPO should have been to determine the ALP of the international transaction of payment of royalty including use of Contractual Trademarks by considering total payment at 4.5%, instead of shutting the door by holding that there was no need to pay further 0.5% of Net Sales Volume when the assessee was already paying 4% towards royalty. The fact that the assessee did pay royalty at 4.5% clearly demonstrates that the payment of further 0.5% ought to have been considered as increase in the rate of royalty from 4% to 4.5%, being the international transaction to be benchmarked by considering total payment of royalty at 4.5%. As the authorities below have proceeded with the disallowance of 0.5% translating into an addition of ₹ 19,96,178/-, we set-aside the impugned order on this score and remit the matter to the file of AO/TPO for determining afresh the ALP of the international transaction of payment of royalty including towards use of Contractual Trademarks by considering the transacted value of the transaction at a combined rate of 4.5%, consisting of Payment of royalty at ₹ 1,99,62,183/- and Payment of Trademark charges at ₹ 19,96,178/-. If in such a fresh processing of the total royalty transaction under the transfer pricing provisions, some adjustment is called for, the same be made. Needless to say, the assessee will be allowed a reasonable opportunity of hearing.

Issues Involved:
1. Transfer pricing addition for 'Allocation of shared service charges'.
2. Transfer pricing addition for 'Payment of Trademark charges'.
3. Adoption of 'Combined Transaction approach under the Transactional Net Marginal Method (TNMM)' for benchmarking international transactions.

Issue-wise Detailed Analysis:

1. Transfer Pricing Addition for 'Allocation of Shared Service Charges':

The first issue pertains to the confirmation of a transfer pricing addition of ?2,13,97,960/- for the international transaction of 'Allocation of shared service charges' for the assessment year 2011-12. The assessee, part of the Knorr Bremse group, did not benchmark this transaction, claiming it was a 'Cost allocation arrangement'. The Transfer Pricing Officer (TPO) found no evidence of the actual receipt of services or any cost allocation working. The TPO determined Nil Arm’s Length Price (ALP) due to the lack of evidence, a finding affirmed by the Commissioner of Income Tax (Appeals) [CIT(A)]. The Tribunal upheld this decision, noting the absence of any primary documentation or evidence of services rendered by the Associated Enterprise (AE).

The assessee's additional ground to adopt the 'Combined Transaction approach under the TNMM' was admitted as a pure question of law. However, the Tribunal rejected this approach, stating that the transactions of shared service charges and manufacturing activities were not 'closely linked transactions' and thus could not be aggregated. The Tribunal emphasized that the term 'transaction' includes plural transactions only if they are closely linked, which was not the case here. Consequently, the additional ground was dismissed, and the disallowance was upheld due to the failure to prove the receipt of services.

2. Transfer Pricing Addition for 'Payment of Trademark Charges':

The second issue involves the confirmation of an addition of ?19,96,178/- for the international transaction of 'Payment of Trademark charges' for the assessment year 2011-12. The assessee had an agreement with KB-SfN effective from 01-01-2011 to pay 0.5% on third-party gross sales for the use of trademarks. The TPO noted that the earlier 'Technical Transfer Agreement' (TTA) already included consideration for the use of trademarks, and thus, the additional payment was unwarranted. The Tribunal found that the assessee was already paying 4% royalty under the TTA, which included the use of trademarks. The Tribunal held that the payment of 0.5% under the new agreement should be considered as an increase in the royalty rate to 4.5%. The matter was remitted to the AO/TPO to determine the ALP afresh, considering the total payment of royalty at 4.5%.

For the assessment years 2012-13 and 2013-14, similar issues were raised regarding the payment of 0.5% for the use of trademarks. The Tribunal set aside the impugned orders and remitted the matters to the AO/TPO for fresh determination of the ALP, following the same directions as for the assessment year 2011-12.

3. Adoption of 'Combined Transaction Approach under the TNMM':

The assessee raised an additional ground to adopt the 'Combined Transaction approach under the TNMM' for benchmarking the international transaction of payment of shared service charges. The Tribunal admitted this ground as it involved a pure question of law. However, on merits, the Tribunal rejected this approach, stating that the transactions of shared service charges and manufacturing activities were not 'closely linked transactions' and thus could not be aggregated. The Tribunal emphasized that closely linked transactions must be similar or alike, which was not the case here. The additional ground was dismissed, and the aggregation approach was rejected.

For the assessment year 2013-14, the Tribunal upheld the addition of ?26,22,597/- for payment of shared service charges, as the assessee failed to produce evidence of receipt of services or cost allocation without markup. The Tribunal also rejected the combined transaction approach for this year, following the reasoning given for the assessment year 2011-12.

Conclusion:

The Tribunal upheld the disallowance of shared service charges due to the lack of evidence for the receipt of services and rejected the combined transaction approach for benchmarking. The matter of trademark charges was remitted to the AO/TPO for fresh determination of the ALP, considering the total royalty payment at 4.5%. The appeals were partly allowed for statistical purposes.

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