9911796707
TMI Blog2016 (6) TMI 1005X X X X Extracts X X X X X X X X Extracts X X X X ..... by Form No. 3CEB declaring eight international transactions. On a reference made by the AO for determining the arm's length price (ALP) of the reported international transactions, the Transfer Pricing Officer (TPO) observed that all the eight international transactions were shown at ALP in an aggregated manner by following the transactional net margin method (TNMM) as the most appropriate method on entity level. The TPO observed that the assessee also exports some of the finished goods to this AE in Germany while majority of sales were made to unrelated parties. In the backdrop of such facts, it was opined that the international transactions of payment of - 'Royalty' amounting to Rs. 3,24,20,870 and 'Fees for technical services' amounting to Rs. 4,72,12,010 - could not be aggregated with other international transactions for determining their ALP. He, therefore, segregated these two international transactions from the remaining transactions, all of which were shown at ALP under the combined TNMM approach and accordingly proceeded to determine the ALP of such two transactions under the Comparable uncontrolled price (CUP) method. The ALP of these two transactions was determined by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s been done by the TPO. 5.2. The key question which, therefore, falls for our consideration is whether the segregation of these two transactions of payment of Royalty and Fees for technical services from the other international transactions, is justified? 5.3. The Hon'ble jurisdictional High Court in Sony Ericson Mobile Communication India Pvt. Ltd. vs. CIT (2015) 374 ITR 118 (Del), has dealt with the circumstances in which aggregation can be done in the context of AMP expenses. The principles laid down in this case are universally applicable and are not confined to the peculiar facts of that case alone. It has been held that 'transaction includes the number of closely linked transactions.' Dealing with AMP expenses, it held vide paras 80 and 81 that inter-connected international transactions can be aggregated and section 92(3) does not prohibit the set off. Further, in paras 91, 121 and others, it held that the ALP of AMP expenses should be determined preferably in a bundled manner with the distribution activity. Vide paras 194 (i), (ii), (viii) and others it held that for determining the ALP of these transactions in a bundled manner, suitable comparables having undertaken simil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al product they must be aggregated and considered to be a single transaction and the value thereof ought to be computed by the TNMM is not acceptable. Merely because the purchase of each item and the acceptance of each service is a component leading to the manufacture/production of the final product sold or service provided by the assessee, it does not follow that they are not independent transactions for the sale of goods or provision of services. The end product requires several inputs. The inputs may be acquired as part of a single composite transaction or by way of several independent transactions. In the latter case, the sale of certain goods and/or the provision of certain services from out of the total goods purchased or services availed of by an assessee together can form part of a separate independent international transaction. In such an event, the AO/TPO must value this group of sale or purchase of goods and/or provision of services as separate transactions.' 5.5. When we consider the ratio decidendi of the above referred two judgments, the picture which emerges is that although closely related transactions can be aggregated, but, unrelated transactions cannot be clubbe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Agreement dated 6.3.2009, that the assessee paid total fees for technical services at Rs. 4.72 crore. Royalty payment @ 8% made to Gruner AG, under the Agreement dated 6.3.2009, stands at Rs. 3.24 crore. Thus it is palpable that the assessee paid royalty and fees for technical services to its AE pursuant to the Agreements which are solely for this purpose. There is no reference or mention whatsoever of any other international transactions undertaken by the assessee during the year in these Agreements. It is further found that the international transactions of import of raw material and export of finished goods along with lease of machine/tools and purchase of plant and machinery, etc., have no link with payment of royalty and payment of fees for technical services. The two international transactions of payment of royalty and fees for technical services are altogether independent from the international transactions of import of raw materials, etc. The ld. AR vehemently harped on the fact that royalty and fees for technical services was paid by the assessee on the basis of import of raw material and, hence, these transactions should be considered along with the other international tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s that the provisions of this section shall not apply in a case where the computation of income having regard to ALP has the effect of reducing income chargeable to tax. The net effect of section 92(3) is that if transacted value income from an international transaction is more than its arm's length price income, then, the ALP income should be discarded and the actual income should be considered. To sum up, it is the higher of actual income or the ALP income from an international transaction, which should to be taken into consideration for computing the total income. It does not mean that the actual more income from one international transaction vis-a-vis its ALP income should be combined with another unrelated transaction which gives actual income less than the ALP income and then both be processed together under this Chapter so as to set off the income (Transacted income minus ALP income) from the first transaction with the potential income arising from the second transaction (ALP income minus transacted value income). When we consider more than one separate transaction under the combined umbrella of TNMM on an entity level, it is quite possible that a probable addition on accoun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d or paid is directly compared with the price charged or paid in an uncontrolled comparable transaction. Rest of the four specific methods seek to make comparison of the price charged or paid indirectly through the medium of normal profit arising in a comparable uncontrolled transaction. Further, the CUP method is a transaction specific method which strives to determine the ALP of an international transaction on a micro level, thereby lending more credibility to the ALP of a transaction. As such, we hold that the CUP is the most appropriate method for determining the ALP of these transactions under the present circumstances and the TPO was justified in applying the CUP as the most appropriate method. III. Determination of ALP under CUP method 7.1. The next issue for our consideration is the determination of ALP under the CUP method. It can be seen that the TPO has worked out percentage of 0.56% in the case of two comparables, namely, Havels India Ltd. and Autometers Alliance Ltd. with the numerator of total of royalties and fees for technical services and denominator of Sales. It is this 0.56% which has been considered for making transfer pricing adjustment of Rs. 7.78 crore. In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ply such benchmark for determining the ALP of these two international transactions. In the entire episode, there is no reference to the price paid by the comparables as a yardstick for comparing with the price paid by the assessee. The approach adopted by the authorities is obviously erroneous as they have sought to compare percentage of expenses to sales rather than the price paid under a comparable uncontrolled situation. 7.4. There is a further fallacy in the calculation made by the TPO inasmuch as he computed the ratio of expenses of royalty and technical know-how to sales at 0.56% of comparables and applied such percentage on the figure of the assessee's sales for recommending the transfer pricing adjustment. We have noticed above that the assessee paid royalty/fees for technical services only on the `value addition' made by it in respect of sales effected inasmuch the same has been paid on the net ex-factory sale price of the product, exclusive of excise duty minus the cost of the standard bought out components and the landed cost of imported components, including ocean freight, insurance, custom duties, etc. In such circumstances, even the comparison of the ratio of these e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nal deleted the disallowance u/s 40A(2), being the excessive and unreasonable payment of royalty to the associated concern, by holding that since the permission was given by the RBI, its reasonableness could not have been gone into by the AO. Setting aside the Tribunal order on this score, the Hon'ble Delhi High Court held that : 'the Tribunal is not correct in observing that since the permission is given by the RBI, the reasonableness and genuineness of the expenditure could not have been gone into by the AO. The purpose for which such permission is given by the RBI is totally different. The RBI is only concerned with the foreign exchange and, therefore, would look into the matter from that point of view. The RBI, at the time of giving such permission would not keep in mind the provisions of the IT Act and that is the function of the IT authorities and, therefore, they can validly go into such an issue'. It is explicitly clear from the enunciation of law by the Hon'ble Delhi High Court that the grant of permission by the RBI to payment of royalty is not sacrosanct for the purposes of the Act and, can be examined by the AO to ascertain its excessiveness. We want to make it clear th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rall electronic goods segment, there can be different products or components and the technical know-how required for components cannot be compared with the electronic goods on the whole. In our considered opinion, at best, the rate of royalty approved by the RBI has a persuasive value in the process of determination of ALP of Royalty for a particular case and cannot be considered as conclusive. Similar view has been taken by the Delhi Bench of the Tribunal in LG Electronics India Pvt. Ltd. vs. ACIT (2015) 167 TTJ 417 (Del). We, therefore, refuse to accept the payment of royalty and fees for technical services at ALP simply on the ground that it was paid at the maximum rate stipulated by the Reserve Bank of India. V. Whether the TP provisions apply when deduction is available under the Act ? 9.1. The ld. AR argued that its profit is deductible u/s 80IC of the Act. He vehemently submitted that once the profit from rendering of software development services is deductible, then, no motive can be attributed for artificially reducing the profit by manipulating the price with its AE. It was elaborated that the profit of an assessee, eligible for deduction under section 80IC, becomes tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r Chapter VI-A shall be allowed in respect of the amount of income by which the total income of the assessee is enhanced after computation of income under this sub-section:'. 9.3. A circumspect perusal of this proviso read along with sub-section (4) of section 92C divulges that when the total income of an assessee from an international transaction is computed having regard to its ALP, then, no deduction u/s 10A or any other section including those covered under Chapter VIA of the Act shall be allowed in respect of the amount of income by which the total income of the assessee has been enhanced after computation of income determined on the basis of the ALP of an international transaction. The legislature has unconditionally provided for not allowing the benefit of deduction under any section in respect of the addition made on account of transfer pricing adjustment. Not allowing of any benefit u/s 80IC in respect of an addition on account of transfer pricing adjustment pre-supposes the existence of transfer pricing addition in the first instance to an assessee who is otherwise eligible to the benefit of deduction under this section. If one was to presume that no addition towards tra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a) which supports the making of transfer pricing adjustment notwithstanding the availability of deduction under such sections to the assessee, apart from clear statutory mandate contained in proviso to section 92C(4), we are more inclined to go with the view of the Special Bench. 9.5. It is, therefore, held that the eligibility of the assessee to deduction u/s 80IC of the Act does not operate as a bar on determining the ALP of international transaction undertaken by it and further the enhancement of income due to such transfer pricing addition cannot be considered for allowing the benefit of deduction under this section. Similar view has been taken by the Delhi bench of the tribunal in Headstrong Services India Pvt. Ltd. VS. DCIT (in ITA No. 6200/Del/2012) vide its order dated 11.2.2016. This contention is, therefore, jettisoned. VI. Rule of Consistency 10.1. The ld. AR lastly submitted that the TPO was not justified in differing with the determination of ALP as done by the assessee for the reason that similar adjustment made by him for the immediately preceding assessment year, namely, 2010-11, came to be deleted by the DRP and no further appeal was filed by the Revenue. Relyin ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
