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TMI Blog2015 (2) TMI 203X X X X Extracts X X X X X X X X Extracts X X X X ..... claim that these could be achieved due to utilization of advanced technical know-how transferred by AE. The TPO has not been able disprove these facts with any sound argument. Considering the totality of facts and circumstances, we are of the opinion, reduction of rate of royalty by TPO from 3% to 2% is without any basis, hence, cannot be accepted. Accordingly, we delete the addition made on account of TP adjustment to royalty payment. - Decided in favour of assessee. - ITA No. 1492/Hyd/2014 - - - Dated:- 4-2-2015 - SHRI P.M. JAGTAP AND SHRI SAKTIJIT DEY, JJ. For the Appellant : Shri Kanchun Kaushal Shri Abhiroop Bhargav For the Respondent : Smt. G. Aparna Rao ORDER PER SAKTIJIT DEY, J.M.: This is an appeal by assessee against the order of assessment dated 24/07/2014 passed u/s 143(3) r.w.s. 144C(5) 144C(13) of the Act, for assessment year 2010-11, in pursuance to directions of Dispute Resolution Panel (DRP). Grounds raised by assessee are as under: 1. The ld. AO/Ld. Panel has erred in making an adjustment to the arm s length price of appellant s international transaction relating to payment of royalty by INR 32,086,570. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... marked them by adopting transaction net margin method (TNMM) as most appropriate method and operating profit to sales as profit level indicator (PLI). By carrying out search in prowess capitaline data bases, assessee searched for comparables which yielded 14 companies with average margin of 4.32%. As assessee s margin is 11.69%, prices of the international transaction were considered to be within arm s length. Further, as far as payment of royalty is concerned, assessee also undertook an alternative analysis under comparable uncontrolled price method (CUP) by bringing in three comparables with average royalty payment of 3.65% as against assessee s rate of royalty at 3%. Hence, payment of royalty at 3% to AE was found to be within arm s length. For the impugned assessment year, assessee filed its return of income declaring total income at nil after set off of brought forward losses and unabsorbed depreciation under the normal provisions. Assessee also declared book profit of ₹ 40,18,18,315 u/s 115JB of the Act. During the assessment proceeding, AO noticing that assessee has entered into international transactions with its AE, made a reference to the TPO for determining ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cting the royalty payment of 2% on the net sales. However, DRP directed that sales made to AE should not be excluded from payment of royalty as long as price of goods sold to AE and Non-AE are similar. As a result of such direction of DRP, AO examined the issue which resulted in reduction of TP adjustment to ₹ 3,20,86,570 in the final assessment order. 5. The ld. AR submitted before us that this is the first year of payment of royalty and assessee does not own any intangibles. It was submitted that all the intangibles were owned by AE. As per the terms of royalty agreement, AE has to provide the technical know-how and assistance for manufacturing products. Assessee is also required to manufacture the products strictly in terms with the technical knowhow and the guidelines set by AE keeping with the international standards. Royalty payment has also been made by assessee at 3% on the net sales in terms with the agreement. Ld. AR submitted that assessee to bench mark the royalty payment has not only made analysis under TNMM, but, has also undertaken the study under the CUP method. It was submitted, assessee has brought comparables under both the methods to justify the royalty ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 013. 6. The ld. DR, on the other hand, relied upon the reasoning of DRP and TPO. 7. We have considered the submissions made by learned counsels from both the sides and perused the orders of departmental authorities as well as other materials on record. We have also carefully examined the decisions placed before us. At the outset, it needs to be mentioned, the only dispute arising for consideration before us is determination of ALP of royalty at 2% by TPO as against 3% claimed by assessee. Undisputedly, assessee on 01/04/2009 has entered into a royalty agreement with its AE, RAK, UAE. As per clause 1.1 of the agreement, RAK, UAE will provide the technology assistance and on-going process, product improvement and complete know-how assistance to assessee. Clause 2.1 of the agreement stipulates, assessee shall manufacture the products in keeping with the highest quality standards, rules, and specifications internationally available and in accordance with guidelines established from time to time by RAK, UAE. Further, assessee shall use apparatus, ancillary equipment, accessories and materials that will ensure that such standards, rules, specifications and guidelines are met. Claus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... payment. 9. Further, it is evident from TP order, though, TPO has not brought any material to controvert assessee s claim of receiving pecuniary benefit from the technical know-how provided by AE, in terms of sizeable sales, garnering of creditable market share, minimal product recalls, low after sales maintenance cost etc. but he tried to overcome it by observing that such increase in sale is as a result of increase in advertisement marketing expenses and also on payment of commission and discount. TPO observed, upgradation in technical expertise of AE is as a result of inputs by the assessee with regard to market trends in India. TPO also observed that royalty payment will also depend upon market share, which according to TPO, RAK, UAE is not having. Thus, TPO finally concluded as assessee has failed to satisfy the benefit test, payment of royalty at 3% on net sales to AE is not justified. TPO, therefore, held that arm s length percentage of royalty payment should be 2%. 10. We are really surprised to see the reasoning of TPO in fixing the ALP of royalty payment at 2%. It is manifest from TPO s order he has rejected assessee s TP analysis under TNMM. Further, in para 6.4 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed the rival submissions and perused the relevant material on record. It is observed that the impugned royalty was paid by the assessee company to its AE namely Castrol Ltd. UK at 3.5 % of the net exfactory sale price of products manufactured and sold in India as per the technical collaboration agreement. This international transaction involving payment of royalty to its AE was bench-marked by the assessee by following CUP method in its TP study report and since average rate of royalty of three comparables selected by it was higher at 4.67% than the rate at which royalty was paid by the assessee to its AE, the transaction involving payment of royalty was claimed to be at arm s length. A perusal of the order passed by the TPO u/s 92CA (3) of the Act shows that neither these comparables selected by the assessee in its TP study report were rejected by her nor any new comparables were selected by her by making a fresh search in order to show that the payment of royalty by the assessee to its AE was not at arm s length. She simply relied on the approval of SIA to hold that any royalty paid by the assessee on exports and other income was not allowable and disallowed the royalty payment t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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