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TMI Blog2016 (6) TMI 123X X X X Extracts X X X X X X X X Extracts X X X X ..... e payment of royalty, we find that the DRP has accepted the marginal use of technical know-how by the assessee from its AE, for which it directed to adopt 0.25% on sales as the ALP of royalty payment in respect of this model. It is this ad hoc approach of the DRP which has been turned down by the Tribunal for the earlier years leading to the restoration of the matter to the file of AO/TPO for a fresh determination of the ALP of this transaction by using the transaction by transaction approach, which the assessee has done for this year by applying the CUP method in respect of the international transaction of payment of royalty. As the facts and circumstances for the instant year continue to remain similar vis-à-vis the preceding years, respectfully following the precedent, we set aside the impugned order and remit the matter to the AO/TPO for a fresh determination of the ALP of the international transaction of 'Payment of royalty’ for model 3DX by applying the CUP method after affording a reasonable opportunity of being heard. - Decided in favour of assessee for statistical purposes. - ITA No.1075/Del/2016 - - - Dated:- 31-3-2016 - SHRI R.S. SYAL, AM SHRI KULDIP SINGH, JM ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3D during the period 1987 to financial year 2005 because the agreement between the assessee and its AE for such payment of royalty expired in 1987 and a new agreement was entered into only w.e.f. 5.3.2004. The ld. AR stated that no royalty was paid during the above period due to non-existence of any agreement between the assessee and its AE and not due to any unexpired patent. Coming back, the assessee was also called upon by the TPO to file agreements along with necessary annexures for products 3D and 3DX and also to substantiate new inventions/improvements in product 3DX vis- -vis product 3D. The assessee furnished such details along with agreements and also a technical report of some professor from IIT Delhi on the study made by him on the features of models 3D and 3DX. The TPO noticed that such report was also filed by the assessee before the Dispute Resolution Panel (DRP) during the course of proceedings for the assessment years 2008-09 and 2009-10. The assessee justified payment of royalty on 3DX model by submitting that it received technical knowhow, information and assistance from JCB group for its manufacturing activities. Various documents were filed to indicate differenc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mparable uncontrolled circumstances. Determining the ALP of this international transaction at Nil, the TPO recommended transfer pricing adjustment of ₹ 164.74 crore. The assessee assailed the draft order, incorporating the transfer pricing adjustment proposed by the TPO before the Dispute Resolution Panel. Vide its direction dated 23.12.2015, the DRP noticed it to be a recurring issue from the assessment year 2006-07 onwards for which the Tribunal has remanded the matter back to the TPO/AO for fresh determination of ALP of international transaction of payment of royalty. The DRP approved the findings given by the TPO in applying the benefit test and in coming to the conclusion that the assessee did not receive any significant benefit from the payment of royalty to its AE because product 3DX was developed in India. Considering that the DRP for earlier years determined ALP of royalty on 3DX model at 0.25% on sales, it gave similar direction for the extant year as well. That is how, the AO vide his final order, reduced the amount of addition to ₹ 156.38 crore, after allowing the benefit of 0.25% as directed by the DRP. The assessee is aggrieved against this addition. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessment year 2010-11, a copy of which order is available on page 111 onwards of the paper book. It was fairly admitted before us on behalf of the assessee that the facts and circumstances of the instant year are mutatis mutandis similar to the earlier years. 5. The ld. Sr. AR, however, put forth two fold submissions, viz., first that no addition on account of transfer pricing adjustment is permissible as the AO has not made any disallowance u/s 37(1), and second, the application of the TNMM on entity level should be upheld covering the international transaction of payment of royalty. 6.1. In so far as the first contention is concerned, the ld. AR submitted that the AO did not make any disallowance u/s 37(1) of the Act on account of payment of royalty. Relying on the judgment of the Hon'ble Delhi High Court in CIT v. Cushman Wakefield (India) (P.) Ltd. (2014) 367 ITR 730 (Del), he contended that not having made any addition u/s 37(1), the AO was debarred from making addition towards transfer pricing adjustment on this score. This was strongly opposed by the ld. DR. 6.2. We are unconvinced with the submission advanced on behalf of the assessee. Their Lordships in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the provisions of section 37(1) of the Act. 6.3. When we advert to the facts of the instant case, it turns out that the TPO proposed the transfer pricing adjustment equal to the stated value of transaction at ₹ 164.74 crore with Nil ALP of `Payment of royalty by holding that no benefit was received by the assessee as a result of the payment of royalty and hence no payment on this account was warranted. The AO in his draft order has taken its ALP at Nil on the basis of recommendation of the TPO without carrying out any independent investigation in terms of the deductibility or otherwise of such payment in terms of section 37(1) of the Act. An addition of ₹ 156.38 crore has been made by the AO in his final assessment order giving effect to the direction given by the DRP and not by invoking section 37(1) of the Act. As per the ratio decidendi in Cushman Wakefield India (P.) Ltd. (supra), the TPO was required to simply determine the ALP of the international transaction of `Payment of royalty unconcerned with the fact, if any benefit accrued to the assessee and thereafter, it was for the AO to decide the deductibility of this amount u/s 37(1) of the Act. As the TPO in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... her international transaction carried out by the assessee as a distributor, who either simply acts an agent of manufacturer or purchases goods from the manufacturer for resale at his own account. The Hon ble High Court held that where the TNMM has been applied as the most appropriate method by a Distributor, which method has not been disturbed by the TPO, then, the international transaction of AMP and distribution activities should be clubbed. It further held that for determining the ALP of such transactions under a combined approach, only such comparables should be chosen which conform to the AMP functions and other distribution functions conducted by the assessee. If there is some difference in the functions under these international transactions, including that of AMP, between the assessee and the comparables, then, suitable adjustment should be made to bring both the transactions at par. If probable comparables are not performing similar functions as done by the assessee and no adjustment is possible for bringing the international transactions of the assessee in an aggregated manner at par with those undertaken by the comparables, then, segregation should be done and the intern ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fit of ₹ 140/-, but returned reduced net profit of ₹ 120/- as the Indian AE had incurred brand building expenses to the tune of ₹ 20/- for the foreign AE, whereas the net profit on sales declared by comparable uncontrolled transactions was ₹ 100/- only. Thus, it was observed that the costs including AMP expenses are independent of cost of imported raw material/finished products having some correlation with overall profit. The example highlights the weakness of the TNM Method. The reasoning would be equally valid, where no AMP or ‗brand building' expenses are incurred. (See paragraph 21.8 to 22.10 of the majority decision). The net profit margins can be affected by variation of operating expenses. Thus, the requirement to select appropriate comparable and adjustment. It would be inappropriate and unsound to accept comparables, with or without adjustment and apply TNM Method, and yet conjecturise and mistrust the arm's length price. TNM Method would not be the most appropriate method when there are considerable value additions by the subsidiary AEs. In paragraph 22.9, the majority decision has observed that all costs including the AMP expenses ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n of the ld. AR for aggregating all the international transactions including `Payment of royalty , and then applying TNMM on entity level, cannot be upheld because the international transaction of `Payment of royalty is independent of other transactions. The tribunal in assessee s own case has also jettisoned such argument advanced on behalf of the assessee for earlier years and has rightly held that the ALP of the international transaction of `Payment of royalty should be done separately on a transaction by transaction approach, which has been rightly interpreted by the assessee as a CUP method, that was employed by the assessee in its transfer pricing study report for the year under consideration. Ergo, we turn down the argument of the ld. AR and approve in principle that the TNMM cannot be applied and the international transaction of payment of royalty in respect of model 3DX has to be benchmarked by applying CUP as the most appropriate method. 8. Now, coming to the determination of ALP of this international transaction under the CUP method, we find that the assessee chose three companies as comparable, which, in our considered opinion, have been rightly rejected by the TPO ..... X X X X Extracts X X X X X X X X Extracts X X X X
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