2023 (8) TMI 458 - HC - Income Tax

TP Adjustment - MAM for Royalty payment - TPO has accepted the TNMM method as the most appropriate method to benchmark Assessee s international transactions under the manufacturing activity but decided to separately benchmark the royalty - HELD THAT - TPO having accepted that TNMM method applied by Assessee was the most appropriate method in respect of all the international transactions including payment of royalty cannot dispute application of TNMM method as the most appropriate method for the payment of royalty only for which CUP method was sought to be applied. We would concur with Appellant that having accepted the TNMM method as the most appropriate, it was not open to the TPO to subject only one element, i.e, payment of royalty, to an entirely different CUP method. The adoption of a method as the most appropriate one assures the applicability of one standard or criteria to judge an international transaction. Each method is a package in itself, as it were, containing the necessary elements that are to be used as filters to judge the soundness of the international transaction in an ALP fixing exercise. If this were to be disturbed, the end result would be distorted and within one ALP determination for a year, two or even five methods can be adopted. This would spell chaos and be detrimental to the interests of both Assessee and the revenue. Tribunal was totally incorrect in saying that accepting aggregation of royalty payment with other international transactions under the manufacturing segment for the Assessment Year 2006-2007 was in the context of an earlier agreement under which the royalty was paid. TPO himself had accepted the benchmark of the international transaction of payment of royalty under the aggregation approach along with transactions of the manufacturing segment. Tribunal failed to recognize that the royalty agreement for the years under consideration was the same agreement. We have to notice that neither the TPO nor the DRP had even whispered or mentioned in their orders about any facts being different from the earlier orders. In such situation, the Tribunal was not justified in taking a different view for these three assessment orders. The Apex Court in 1991 (11) TMI 2 - SUPREME COURT has held that in the absence of change in material facts, the department is bound by the previous decision. Once the Tribunal in its earlier orders has held that the transaction of payment of royalty for use of technology is inextricably linked with manufacturing activity and should be aggregated with other international transactions in the manufacturing segment for the purposes of benchmarking the same, and the TPO having accepted the aggregating of international transaction of payment of royalty with other international transactions in the manufacturing segment and not drawn any adverse inferences in respect of such aggregation of royalty payment under identical agreement, the Tribunal should have followed the order of the co-ordinate bench rendered under identical facts. - Decided in favour of assessee.

Summary

Issues Involved:
1. Consistency of the Appellate Tribunal's decision with its previous rulings.
2. Legality of the Tribunal's order ignoring previous methodologies accepted by the department.
3. Appropriateness of the Tribunal's reliance on a specific case law.

Summary:

Issue 1: Consistency of the Appellate Tribunal's Decision
The first issue was whether the Appellate Tribunal erred in law by passing an order contrary to its previous rulings in the Assessee's own case for earlier assessment years without referring the issue to a Special (Full) Bench. The Tribunal had previously upheld the principles of aggregation for benchmarking international transactions of manufacturing activity. However, in the current case, it rejected the aggregation approach and made an upward adjustment to the value of the international transaction pertaining to the payment of royalty on export sales. The Tribunal's decision was deemed inconsistent with its earlier rulings, which had accepted the aggregation approach.

Issue 2: Legality of the Tribunal's Order Ignoring Previous Methodologies
The second issue questioned the legality of the Tribunal's order, which ignored the fact that the department had accepted the methodology applied by the Assessee for benchmarking transactions for transfer pricing purposes in seven earlier years. The Tribunal upheld the TPO's decision to separately benchmark the royalty payment transaction, despite the TPO having accepted the TNMM method as the most appropriate method for the Assessee's international transactions under the manufacturing segment in previous years. The court concluded that the TPO could not subject only one element, i.e., payment of royalty, to a different method (CUP) when the TNMM method had been accepted for all international transactions.

Issue 3: Appropriateness of the Tribunal's Reliance on Specific Case Law
The third issue was whether the Tribunal erred in relying on the Delhi High Court's decision in the case of Magneti Marelli Power Train India P. Ltd. Vs. Deputy Commissioner of Income-tax. The Tribunal held that the international transaction of payment of royalty could not be clubbed with other international transactions under the manufacturing segment. However, the court found that the Tribunal misread the law as laid down in Magneti Marelli, where it was held that once the TNMM method is accepted as the most appropriate, it is not permissible to apply a different method to a single element of the transaction. The court emphasized that each method is a package containing necessary elements to judge the soundness of an international transaction, and disturbing this would result in a distorted outcome.

Conclusion:
The court concluded that the Tribunal was incorrect in its approach and should have followed its earlier orders, which accepted the aggregation of royalty payments with other international transactions under the manufacturing segment. The court answered all three questions in favor of the Assessee and allowed the appeals.