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TMI Blog2017 (12) TMI 1404X X X X Extracts X X X X X X X X Extracts X X X X ..... Tax (IT) Vs. Ballast Nedam Dredging (2013 (1) TMI 830 - ITAT MUMBAI). Applying the said principle, we hold that on this count also, there is no merit in making any adjustment on account of the international transactions of payment of royalty. Accordingly, we hold that there is no merit in the order of TPO/Assessing Officer in holding the arm's length price of international transactions of payment of royalty at Nil. Coming to the second aspect of the issue, where the assessee was making payment of royalty to its associated enterprises at the rates which have been approved by the RBI. We find that the Hon’ble Bombay High Court in CIT Vs. SGS India (P.) Ltd. [2015 (11) TMI 1619 - BOMBAY HIGH COURT] had held that rate of royalty approved by SIA/RBI would constitute CUP data and the transaction would be at arm's length price.In the facts of present case, where the assessee has paid royalty to its associated enterprises as per the rates which were approved by RBI, which is not in dispute, then the said transaction would be at arm's length price. Accordingly, we hold that no addition is warranted on this count under Transfer Pricing provisions. Accordingly, we hold so. International ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uity. The assessee had acquired Wheel Rim division of Bharat Forge Ltd. and had commenced manufacture of wheel rims from 04.06.1996. On 30.06.1997, Hayes Corporation, USA acquired Lemmerz Werke Gmbh and in August, 1998, the Hayes group increased its holding in the company to 85% by acquiring additional 60% equity held by Kalyani group. The issue which has been raised by the Revenue in the present appeal is in relation to the royalty payments and hence, we refer to the royalty payments made to associated enterprises and refer to the TP adjustments in the case. The Assessing Officer had made reference under section 92CA(1) of the Act to the Transfer Pricing Officer (in short the TPO ), who in turn, passed the order under section 92CA(3) of the Act. In addition to export of finished goods being Truck and Trailer Wheel Rims and import of Moulds Dies, the assessee had also paid royalty for use of technical know-how of ₹ 33.29 lakhs. The assessee had benchmarked the international transactions by applying TNMM method. The TPO noted that the assessee had paid royalty for use of technical know-how @ 3% to 4.5% to its associated enterprises M/s. Hayes Lammerz Werke BmbH (in short H ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and how the charge of 2% would recover value of technology and further, what was life cycle of technology. 6. Before the CIT(A), the assessee explained that the TPO was inaccurate in his conclusion; firstly the assessee pays royalty only on non-associated enterprises sales. It had paid royalty of ₹ 33 lakhs on total sales of ₹ 93.26 crores; thus, the effective royalty payment works out only 0.36% of total sales. Vis- -vis queries of the TPO, the assessee explained that it could not furnish the data relatable to expenditure incurred by associated enterprises in the development of technology and the basis for charging the same, as, such information was not available with it. It was pleaded that the said information pertained to records of many years prior to the transfer pricing proceedings. The assessee emphasized that the associated enterprises provided continuous support and updates of new technological developments to the assessee and it also provided designs and drawings and training to the assessee. The assessee claimed the said payment to be at arm's length price considering the rate on royalty was paid by the comparable companies on application of TNMM met ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1992 ended on 17.06.2002. In assessment year 2003-04 royalty payment was made for part of the year. In assessment year 2004-05, no royalty payment was made and in assessment year 2005-06, new agreement was entered into and the assessee paid royalty for the period 01.01.2005 to 31.03.2005. He further pointed out that the TPO had determined royalty at Nil as against sum of ₹ 33,28,797/- paid by the assessee in assessment year 2003-04. Our attention was drawn to observations of the TPO in this regard. The assessee had applied TNMM method in its transfer pricing study report, on the basis of RBI's approval, which as per the learned Departmental Representative for the Revenue was not correct approach. 9. The learned Authorized Representative for the assessee on the other hand, referring to the order of TPO at page 5 pointed out that the assessee had aggregated three international transactions and had applied TNMM method. He further pointed out that export of finished products was to the tune of ₹ 13.71 crores. With respect to royalty, there were no sales and the said transactions subsumed into total international transactions. He further pointed out that once he accep ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y was being paid to get technical information and updates in the field, from its associated enterprises. The TPO had determined the arm's length price of international transactions of royalty payment at Nil for various reasons. The first part of the order of CIT(A) is that the said royalty payment was being accepted to be at arm's length price in the hands of assessee in various years and hence, there is no necessity of discussing the issue on merits. He makes reference to the order of TPO for assessment year 2004-05 and in the subsequent year when no adjustment to the royalty payment has been made. The case of Revenue on the other hand, is that the assessee had paid royalty only upto 17.06.2002 i.e. for part of assessment year 2003-04 and has not made any payment of royalty in assessment year 2004-05. Further, the assessee has entered into new agreement w.e.f. 01.01.2005 and for assessment year 2005-06, the payment of royalty was for part of the year again. 12. The first issue which arises in the present appeal is in respect of payment of royalty on account of agreement which is dated 17.06.1992. The assessee before us has filed events chart which is placed at page 83 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Bharat Forge Ltd. was on 01.03.1996. As per terms of Technology License Agreement entered into on 17.06.1992, payment of royalty was for period of ten years from the effective date of agreement or seven years from the date of commencement of commercial production, whichever was earlier. Ten years from the effective date of agreement i.e. 17.06.1992 ended on 17.06.2002. However, seven years from the date of commencement of commercial production started on 01.03.1996 and ended on 01.03.2003. Since 17.06.2002 was earlier to 01.03.2003, the period of payment of royalty as per agreement dated 17.06.1992 ends on 17.06.2002. We are concerned with the said payment for part of the year i.e. starting from 01.04.2002 to 17.06.2002, which falls within assessment year 2003-04. The assessee has also placed on record tabulated details of payment of royalty assessment year wise starting from assessment year 1997-98, which is as under:- Assessment Year Royalty Paid (Rs.) Disallowance of Royalty AY 1997-98 1,47,07,391 No disallowance AY 1998-99 1,06,35 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Vs. Ballast Nedam Dredging (supra). Applying the said principle, we hold that on this count also, there is no merit in making any adjustment on account of the international transactions of payment of royalty. Accordingly, we hold that there is no merit in the order of TPO/Assessing Officer in holding the arm's length price of international transactions of payment of royalty at Nil. We reverse the same. 15. Now, coming to the second aspect of the issue, where the assessee was making payment of royalty to its associated enterprises at the rates which have been approved by the RBI. We find that the Hon ble Bombay High Court in CIT Vs. SGS India (P.) Ltd. in Income Tax Appeal No.1807/2013, judgment dated 18.11.2015 had held that rate of royalty approved by SIA/RBI would constitute CUP data and the transaction would be at arm's length price. The said proposition has been applied by the Pune Bench of Tribunal in John Deere India (P.) Ltd. Vs. ITO (supra) and vide para 19, it was held as under:- 19. Coming to the merits of the case, where the royalty has been paid by the assessee at a rate lesser than 3% as against which the RBI has approved the rate at 3% for payment of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... No disallowance AY 2012-13 6,45,18,221 No disallowance AY 2013-14 6,08,16,072 No disallowance 18. The learned Authorized Representative for the assessee stressed that the said payment of royalty in succeeding years has been accepted to be at arm's length price and no adjustment has been made to the said international transactions of payment of royalty. First of all, the TPO has proposed an adhoc adjustment without following any provisions of the Act, for benchmarking said international transactions of payment of royalty. The objection of TPO in this regard was that the assessee had failed to provide the details of cost of development of technology by its associated enterprises and how the associated enterprises recover or intended to recover the same from third parties or from other group entities. The second objection was that the assessee had not established if other group entities charged royalty at all. The next plea of theTPO was the assessee having paid royalty not only for domestic sales but exports also. The role of the TPO while benchmarking a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct to benchmark the international transactions undertaken by the assessee and whether the same are at arm's length or not. Then, it was incumbent upon the TPO to follow the provisions of the Act in order to benchmark the said transaction of payment of royalty and whether it warrants any adjustment on account of arm's length price. The TPO is at liberty to make any separate adjustment on this account, where adjustment is made in respect of any other international transaction. However, the TPO is not empowered to propose an adhoc adjustment which admittedly, is not as per law. The objection of the TPO was that the assessee is paying royalty to associated enterprises both on old products and new products and as per the TPO, the payment of royalty on old products does not appear to be justified. It is not the role of TPO to determine whether the payment of royalty is justified or not, on adhoc basis but the arm's length price of same has to be determined by following the procedures laid down in the Income Tax Act. The TPO has failed to do so. Further, since the TPO had not proposed the adjustment as per the Act, there was no occasion for the assessee to raise any objections ..... X X X X Extracts X X X X X X X X Extracts X X X X
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