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2023 (1) TMI 1029 - AT - Income TaxTP adjustment with respect to the international transaction of Payment of Royalty - segregation of Royalty transaction from the Manufacturing segment - HELD THAT - We note that the facts of the instant case are similar to those of Magneti Marelli ( 2016 (11) TMI 123 - DELHI HIGH COURT inasmuch as the assessee therein also paid royalty to its AE for use of Technical support for the manufacture of its products and the Hon ble High Court did not approve clubbing of payment of technical fees with other transactions under the Manufacturing segment. In view of the foregoing discussion it is held that the international transaction of payment of Royalty by the assessee for use of technical support cannot be clubbed with other international transactions under the Manufacturing segment. ALP determination of the Royalty transaction - Other method for determining the ALP - TPO has emphasized on the expression similar uncontrolled transaction used in Rule 10AB for considering these three companies as comparable despite the fact that the licensed products by them were quite different from that of the assessee. At this stage we want to emphasize that Rule 10AB talks of considering the price paid or that would have been paid for the same or similar uncontrolled transaction . The words the same appear in the language of the rule prior to the word similar joined by the words uncontrolled transaction . It thus indicates that similar uncontrolled transactions are to be considered only if same uncontrolled transactions are not available. Preference in Rule 10AB has to be given to same uncontrolled transactions over similar uncontrolled transactions. As against the comparable uncontrolled transactions considered by the TPO recognized as similar the assessee brought on record same uncontrolled transactions namely the licensing of technical know-how by the assessee s same AE to two independent entities in Korea and China for the manufacture of same Diesel engines. Not only the assessee placed on record invoices issued by the assessee s AE to these independent entities in China and Korea but Agreement for licensing of technical know-how to Korean party has also been produced. This Agreement a copy placed at page 10 onwards of the additional paper book is between MAN Diesel and Turbo Denmark (being same entity which licensed the technical know-how to the assessee also) and STX Engine Company Ltd. Republic of Korea (an independent unrelated party). Enclosure-1 to the Agreement shows that the technical know-how was given to the Korean party for manufacturing Diesel Engines being the same product for which the assessee was licensed with. This indicates that the technical know-how provided under this Agreement is of the same product in an uncontrolled transaction. Rates of Royalty charged by the assessee s AE from the assessee as well as the Korean party - The assessee s Agreement with its AE shows the rates of Royalty at 19.50 Euro per KW which was charged for the year at 19.92 Euro per KW. The Agreement between the assessee s AE and Korean party gives the rate of Royalty at 23.80 Euro per KW. This explains that not only the product for which the assessee s AE charged Royalty from the assessee is similar to that for which technical know-how was supplied to a Korean independent third party but the rate charged from the assessee is also relatively lower. Similarly the invoices of the assessee s AE raised on another independent Chinese party also show that the rate charged for the similar product is higher than that charged from the assessee. When same uncontrolled transaction is pitted against the similar uncontrolled transaction there is no prize for guessing that the preference has to be given to the same uncontrolled transaction. The ld. DR after going through the Agreement between the assessee s AE and Korean party could not point out any substantial difference between the terms of the Agreement with that of the assessee except for certain cosmetic changes. As the Royalty for same product charged by the assessee s AE from another Korean party in terms of Euro per KW is more than that charged from the assessee we hold that the transaction of payment of Royalty is at ALP. The addition of Rs. 12.98 crore and odd is therefore directed to be deleted. Transfer pricing adjustment in the segment of Design Engineering Services - assessee in this segment is aggrieved only by the inclusion of Aabsys Information Technology Pvt. Ltd. in the list of comparables by the TPO - The principal business activities of this company include Database Services with Data processing and Tabulation Services Online Information and Data Retrieval Services Electronic Data Interchange Services Web search Portal Content Services Code and Protocol Conversion Services etc. Total revenue of this company as appearing in its Profit and loss account is Rs. 11, 12, 78, 745/- whose break up is given in Note No. 15 as consisting of GIS/CAD and Software Services . As opposed to this the assessee is not rendering any Software services to its AE. The only services rendered by it are Engineering. It is further observed from the Annual report of this company that no segmental information is available which could throw light on the operating costs in respect of the revenues of this company from Engineering services de hors Software services. Since the assessee is not providing any Software services and the software services of this company constitute around 78% of its revenue and further that no segmental information is available we hold that this company cannot be treated as comparable. We therefore order to exclude it from the list of comparables. The impugned order on this issue is set-aside and the matter is remitted to the file of the AO/TPO for re-determining the ALP of the international transaction of Design Engineering Services by excluding Aabsys Information Technology Pvt. Ltd. from the list of comparables.
Issues Involved:
1. Transfer pricing adjustment for the international transaction of 'Payment of Royalty.' 2. Transfer pricing adjustment in the segment of 'Design Engineering Services.' Detailed Analysis: 1. Transfer Pricing Adjustment for 'Payment of Royalty': The first issue raised in the appeal concerns the transfer pricing adjustment of Rs. 12,98,02,765/- related to the international transaction of 'Payment of Royalty.' The assessee, a subsidiary of a German company, MAN, aggregated its 'Manufacturing activity' and 'Trading activity' for demonstrating them at Arm's Length Price (ALP). The Assessing Officer (AO) and Transfer Pricing Officer (TPO) segregated the 'Manufacturing segment' and focused on the Royalty payment of Rs. 25,93,47,186/- to the Associated Enterprise (AE) for technical know-how, determining the ALP separately under 'Other method' as per Rule 10AB. This resulted in a transfer pricing adjustment of Rs. 12,98,02,785/-. The Tribunal observed that Section 92(1) of the Income-tax Act mandates that income from an international transaction should be computed having regard to the ALP. Section 92C(1) specifies that the ALP should be determined for each international transaction separately unless they are closely linked. The Tribunal emphasized that cross-subsidization of international transactions is impermissible, as it would contravene the intent of Chapter-X of the Act. The Tribunal referred to the Punjab & Haryana High Court judgment in Knorr Bremse India (P) Ltd. Vs. ACIT, which held that several transactions could form a single composite transaction if they are closely linked. However, the onus is on the assessee to prove such linkage. In the present case, the Tribunal found no inextricable link between the payment of Royalty and other international transactions under the Manufacturing segment. Thus, the ALP of the Royalty transaction could not be aggregated with others. Regarding the ALP determination, the TPO applied the 'Other method' and selected three comparables, resulting in an average profit rate of 4.56%. The assessee objected to the selection of comparables, arguing differences in the nature of business and territory of Royalty Agreements. The Tribunal noted that Rule 10AB allows considering the price for the same or similar uncontrolled transactions. The assessee provided evidence of the same uncontrolled transactions, showing that the AE charged higher Royalty rates to independent entities in Korea and China for the same product. Consequently, the Tribunal held that the Royalty transaction was at ALP and directed the deletion of the addition of Rs. 12.98 crore. 2. Transfer Pricing Adjustment in the Segment of 'Design Engineering Services': The second issue pertains to the transfer pricing adjustment in the segment of 'Design Engineering Services.' The assessee rendered design engineering services to its AE, computing its Profit Level Indicator (PLI) at 12.12% under the TNMM, compared to the weighted average OP/OC of 5 comparables at 11.19%. The TPO altered the list of comparables, including Aabsys Information Technology Pvt. Ltd., resulting in a proposed transfer pricing adjustment of Rs. 1,48,05,266/-. The assessee contested the inclusion of Aabsys Information Technology Pvt. Ltd., arguing that it was engaged in offering Geospatial and IT Services, not comparable to the assessee's Engineering Support Services. The Tribunal examined the functions performed by the assessee and noted that Aabsys Information Technology Pvt. Ltd. derived 78% of its revenue from Software services, whereas the assessee did not render any Software services. Additionally, no segmental information was available for Aabsys Information Technology Pvt. Ltd. to segregate its Engineering services revenue from Software services revenue. Given these differences, the Tribunal held that Aabsys Information Technology Pvt. Ltd. could not be treated as comparable. The Tribunal ordered the exclusion of Aabsys Information Technology Pvt. Ltd. from the list of comparables and remitted the matter to the AO/TPO for re-determining the ALP of the international transaction of 'Design Engineering Services' by excluding Aabsys Information Technology Pvt. Ltd. Conclusion: The appeal was partly allowed. The Tribunal directed the deletion of the transfer pricing adjustment related to the 'Payment of Royalty' and remitted the matter concerning the 'Design Engineering Services' segment for re-determination of ALP.
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