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TMI Blog2016 (11) TMI 123X X X X Extracts X X X X X X X X Extracts X X X X ..... a exists at all; or that sectional data for such payments is absent. Quite possibly, this may also be a general pattern of expenditure which AEs may insist to part with technology; further, similarly, other models of payment- deferred or lump sum, along with royalty or inclusive of it, may be discerned in comparable transactions. However, to say that such a substantial amount had to necessarily be paid and that it was a commercial decision, dictated by need for the technology, in the light of a specific query, it could not be said by the assessee that later profits justified it, or that has essentiality precluded the scrutiny. This court holds that the explanation by the assessee that the payment of ₹ 38.58 crores in the circumstances was correctly not accepted. The first question is answered against the assessee. The remit directed by the impugned order is, therefore, upheld. Transactional Net Margin Method applied for benchmarking/computing arm's length price in respect of transaction relating to "technical assistance fee" - Held that:- This court concurs with the assessee that having accepted the TNMM as the most appropriate, it was not open to the TPO to subject onl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ine Control Units (ECUs). It reported six international transactions including Payment of technical assistance fee to the extent of ₹ 38,58,80,000/- This transaction alone is the subject matter of dispute; the TPO did not question the other five international transactions. The relevant facts for this transaction are that the assessee entered into agreement with its foreign Associated Enterprise (A.E.) for acquiring technology required for the purpose of manufacturing ECUs in respect of the following : - (1) Euro IV/75 HP 1.3 SDE/Suzuki Swift car application (2) Bharat III/75 HP 1.3 SDE/MS Swift application (3) Bharat III/75 HP 1.3 SDE/Tata Indica car application (4) Bharat III/75 HP 1.3 SDE/Fiat India Palio-Linea car application. 3. The assessee applied the Transactional Net Margin Method (TNMM) to benchmark its international transactions of import of raw materials, subassemblies and components, payment of technical assistance fees, payment of royalty, payment of software and purchase of fixed assets. All these were categorized under one broad head, viz. Manufacturing of automotive components . The ratio of the assessee's projected' operating profit ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ponents' and analyzed all such transactions on a combined basis. This type of combined benchmarking of all the international transactions is not in accordance with law. The mere fact that the overall profit earned by the assessee is more, would not ipso facto lead to the interference then all the international transactions are at ALP. The Special Bench of the Tribunal in the case of LG Electronics India Pvt. Ltd. Vs ACIT 2013 140 ITD 41 (Delhi) (SB) has held to this extent. Thus, the approach so adopted by the assessee in combining so many international transaction for determining ALP on a consolidated basis, is incorrect. 7. The next major flaw in the assessee's calculation is that it took into consideration the 'Projected operating profit margin' to show that its international transaction for the current year was at ALP. The requirement under the relevant provisions of the Act along with the rules is to consider the actual' figures and not any projected' figures. It is beyond our comprehension as to how the projected figures can be substituted for the actuals when the requirement is to benchmark actual international transactions at ALP. We, ther ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uncontrolled comparable transaction to analyze if the price paid in an international transaction is at ALP. Nothing of the sort has been done by the TPO to make comparison of any comparable case with that of the assessee. He simply proceeded to adopt nil value of as ALP of the international transaction of payment of technical fee and proposed addition for the full amount. In our considered opinion, when the assessee did receive technical information and earned income by using the same, it cannot be said that it has ALP at nil. Some sort of comparison is inevitable under this method, unless it is shown that the assessee did not get any advantage at all by making payment to its AE. 10. Thus it is seen that neither the assessee followed correct methodology for determination of ALP of this international transaction, nor the TPO/DRP applied the CUP method for determination of ALP in correct perspective. In such a situation, the order passed by the A.O making addition proposed by the TPO, cannot be upheld. In our considered opinion, the ends of justice would meet adequately if the impugned order on this issue is set aside and the matter is restored to the file of AO/TPO for a fres ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ub-section (1) of section 92C, therefore, does not bar or prohibit clubbing of closely connected or intertwined or continuous transactions. This is discernible also from sub-rule (2) of rule 10B quoted above. The sub-rule refers to services provided , functions performed , contractual terms (whether or not such terms are formal or in writing) of the transactions which lay down explicitly or impliedly the responsibilities, risks and benefits to be divided between the respective parties to the transactions. The use of plurality by way of necessity and legislative mandate is evident in the said rule. 81. Similarly, sub-rule (3) of rule 10B refers to transactions being compared or comparison of the enterprises entering into such transactions likely to affect the price or cost charged, etc. A reading of rule 10C reassures and affirms that the general principle of plurality is not abandoned or discarded. ********** ***************** ******* 91. In case the tested party is engaged in single line of business, there is no bar or prohibition from applying the TNM method on entity level basis. The focus of this method is on the net profit amount in proportion to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... legitimate business transaction would be an arbitrary exercise. This legal position stands affirmed in EKL Appliances Ltd. (supra). The decision accepts two exceptions to the said rule. The first being where the economic substance of the transaction differs from its form. In such cases, the tax authorities may disregard the parties' characterisation of the transaction and re-characterise the same in accordance with its substance. The Tribunal has not invoked the said exception, but the second exception, i.e. when the form and substance of the transaction are the same, but the arrangements made in relation to the transaction, when viewed in their totality, differ from those which would have been adopted by the independent enterprise behaving in a commercially rational manner. The second exception also mandates that actual structure should practically impede the tax authorities from determining an appropriate transfer price. The majority judgment does not record the second condition and holds that in their considered opinion, the second exception governs the instant situation as per which, the form and substance of the transaction were the same but the arrangements made in relat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... els in question. The law being flexible on the issue, de-segregation or separation of the said fee component and subjecting it to separate examination was not justified. On the second question, it was argued that the findings of the TPO were erroneous and inconsistent. Having upheld the deployment of the TNMM, it was not open to use the CUP method for only one part of the transaction, i.e the one payment for technology. 9. Ms. Vibhuti Malhotra, counsel for the revenue, refuted the assessee s submissions. She urged firstly that Sony Ericsson (supra) does not stipulate any invariable rule with respect to aggregation or desegregation of transactions. Rather, it merely endorsed the view that aggregation is desirable. It was argued that while the commercial decision- making and choices of an entity are to be largely left intact, this court recognized that in ALP determination, it is essential that there are two exceptions to the principle: (i) where the economic substance of a transaction differs from its form; and (ii) where the form and substance of the transaction are' the same but arrangements made in relation to the transaction, viewed in their totality, differ fro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... specified domestic transaction shall be determined by any of the following methods, being the most appropriate method, in the following manner, namely :- (a) comparable uncontrolled price method, by which,- (i) the price charged or paid for property transferred or services provided in a comparable uncontrolled transaction, or a number of such transactions, is identified; (ii) such price is adjusted to account for differences, if any, between the international transaction or the specified domestic transaction and the comparable uncontrolled transactions or between the enterprises entering into such transactions, which could materially affect the price in the open market; (iii) the adjusted price arrived at under sub-clause (ii) is taken to be an arm's length price in respect of the property transferred or services provided in the international transaction or the specified domestic transaction; (b) resale price method, by which,- (i) the price at which property purchased or services obtained by the enterprise from an associated enterprise is resold or are provided to an unrelated enterprise, is identified; (ii) such resale price is reduced ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... split method, which may be applicable mainly in international transactions or specified domestic transactions involving transfer of unique intangibles or in multiple international transactions or specified domestic transactions which are so interrelated that they cannot be evaluated separately for the purpose of determining the arm's length price of any one transaction, by which- (i) the combined net profit of the associated enterprises arising from the international transaction or the specified domestic transaction in which they are engaged, is determined; (ii) the relative contribution made by each of the associated enterprises to the earning of such combined net profit, is then evaluated on the basis of the functions performed, assets employed or to be employed and risks assumed by each enterprise and on the basis of reliable external market data which indicates how such contribution would be evaluated by unrelated enterprises performing comparable functions in similar circumstances; (iii) the combined net profit is then split amongst the enterprises in proportion to their relative contributions, as evaluated under sub-clause (ii); (iv) the profit thus appo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... into account to arrive at an arm's length price in relation to the international transaction or the specified domestic transaction; (f) any other method as provided in rule 10AB. 12. In short, the relevant provisions, i.e Sections 92, 92-C, 92-D and 92-E read together with Rule 10-B and 10-D indicate the approach of the TPO tasked with the obligation to discern, if in a given set of circumstances, the assessee has disclosed international transactions, as well as an ALP. The assessee has to each year that international transactions are entered into with AE, file transfer pricing reports. These TP reports should be factually correct; and the assessee has to satisfy the queries of the TPO. Section 92-C underlines that the method appropriate to the transaction, amongst the four specified ones, is to be applied. In the judgment of this court, reported as Commissioner of Income Tax v. EKL Appliances Ltd. (2012) 345 ITR 241 (Del), it was held as follows: It is very imperative on the part of the assessee, to establish before the TPO, that the payments made were commensurate to the volume and quality of services and such costs are comparable. No such efforts was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... while determining ALP. There are observations, undoubtedly, in that judgment indicating that aggregation of various payments and outgoings is permissible under the Act and the rules. At the same time, Denso India (supra) while endorsing that view- also stated that whether to permit aggregation or not is a fact dependent decision, driven by the materials in any given case. 14. The assessee/appellant during 2008-09 entered into four License Technology Assistance Agreements (LTAAs) with its overseas AE for four products for obtaining ECU technology. In return for the technical knowhow, the assessee agreed to compensate the AE through a fee amounting to US $ 2 million for each LTAA (total US$ 8 million equivalent to over ₹ 38 crores) on installment basis. It explained that the overseas AE provides crucial and pivotal support to the assessee in carrying out its business in India by providing access to patented products and technology developed by it. The assessee argued that without receiving such technology/technical know-how/ information/assistance from the overseas AE, the assessee would not be able to conduct/carry out manufacturing and sales of ECUs in India at all. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nceivably be various reasons not to subject such payments, such as for instance, if no similar data exists at all; or that sectional data for such payments is absent. Quite possibly, this may also be a general pattern of expenditure which AEs may insist to part with technology; further, similarly, other models of payment- deferred or lump sum, along with royalty or inclusive of it, may be discerned in comparable transactions. However, to say that such a substantial amount had to necessarily be paid and that it was a commercial decision, dictated by need for the technology, in the light of a specific query, it could not be said by the assessee that later profits justified it, or that has essentiality precluded the scrutiny. 16. In the light of the above discussion, this court holds that the explanation by the assessee that the payment of ₹ 38.58 crores in the circumstances was correctly not accepted. The first question is answered against the assessee. The remit directed by the impugned order is, therefore, upheld. 17. As far as the second question is concerned, the TPO accepted TNMM applied by the assessee, as the most appropriate method in respect of all the internatio ..... X X X X Extracts X X X X X X X X Extracts X X X X
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