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TMI Blog2018 (2) TMI 1210X X X X Extracts X X X X X X X X Extracts X X X X ..... owhow is directly linked with manufacturing and resultantly sales. Incurring of loss cannot be the parameter to hold that the technological knowhow or license was of no benefit hence there was no requirement to pay the royalty. Loss cannot be co- related with the economic benefit of use of technology or knowhow because profit and loss are market driven and host of other economic factors. TPO was only required to see, whether the payment of royalty meets the arm’s length requirement of ALP or not. When the chance was given to the TPO in the remand proceedings by the CIT(A) he has failed to examine the external CUP. CIT (A) has analyzed all the factors and various comparable uncontrolled transactions to reach to a conclusion that royalty payment @ 3.15% is at ALP, and accordingly, we do not find any reason to deviate from such a finding and the same is upheld. - Decided against revenue. X X X X Extracts X X X X X X X X Extracts X X X X ..... s-VI Sale of sample CPM 33255 4. So far as the transaction of royalty payment is concern, the TPO observed that royalty payment amounting to ₹ 91,42,654/- was paid to its AE, which has been stated to be for non exclusive right of license to use of the technology including knowhow of its AE for the purpose of carrying on manufacturing of automotive components in India. In consideration to the license and rights availed, the assessee had to pay royalty to its AE @ 3% of sales in terms of the agreement. For the purpose of bench marking the said transaction, the assessee applied CUP method as the most appropriate method, considering the rate of royalties specified under FEMA regulations. The assessee has also submitted that M/s. Hindustan Motors Ltd. had entered into an agreement for provision of technology with 'Mitsubishi Corporation' for provision of technology, for which Hindustan Motors Ltd. was paying @ 5% of sales apart from 'technical assistance fee'. Since the rate which has been paid by the assessee is below 5%, therefore, it was stated that it meets the arm's length requirement. Apart from that, the limit prescribed by the Reserve Bank of India in cases of royalt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f payment of royalty. Various external comparables were given for the purpose of external CUP to demonstrate that average rate of royalty across the industry was around 3%, whereas assessee has paid royalty to its AE effectively @ 3.15% of the net sales which is comparable to the royalty paid in comparable uncontrolled transactions. The list of such comparables submitted by the assessee are as under:- Licensor Licensee Licensor country Licensee country Effective Date Royalty Rate Database relied Description David T. St. James, individual Turbodyne Systems, Inc.; Turbodyne Technologies, Inc. Montecito, CA Carpinteria CA 10/15/ 2001 2.00% Royalty Stat Exclusive technology and patent license to make use and sell products related to an electrically assisted engine charging system, an intelligent engine air intake system, and an exhaust gas driven electric generating system, with right to sublicense. E.T.C. Industries Ltd. Direction Technologies Inc. Vancouver Blaine, WA 1/9/ 1999 2.00% Royalty Stat Exclusive license under technology, trademark and copyright to manufacture and market electric vehicles M.C.D. Ltd. March Motors Ltd. United Kingd ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... roducts and/or systems embodying five U.S. patents and related technical knowhow to commercialize the technology embodied in five issued and one pending US patent in the field of fuel conversion systems. Electrosource Inc. SMH A UTOMOBILE S.A.I 3/14/ 1997 3%- 5% Royalty Stat Worldwide license, unlimited in time and with authority to issue sub-license, restricted to the use of the background know-how for micro passenger cars with hybrid power and four wheels. Nissan Motor Co Ltd -SP ADR Samsung group 1.6%- 1.9% Royalty Stat Licensing of manufacturing technology to build an auto manufacturing business from scratch to South Korean conglomerate; includes state- of-the- Sumitomo (SEI) Brake Systems Inc Sapura Motors BHD 3.0% Royalty Stat Technical Assistance Agreement to produce Brake Caliper Assembly. Average 3.0% 7. The additional evidence filed by the assessee was forwarded to the TPO to submit his remand report which has been incorporated by the ld. CIT (A) from pages 11 to 15 of the appellate order. In the said remand report, the TPO submitted that the CUP data relied upon by the assessee is unreliable and cited the OECD Transfer Pricing Guidelines and the de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, wherein the average royalty paid across the industry for the license to use technology and knowhow is approximately 3%. Thus, the assessee's payment of royalty to its AE was justified by using the external CUP, that is, by placing catena of comparable uncontrolled transaction of the third parties. The learned TPO without actually carrying out any analysis of the comparables during the remand proceedings or assigning any basis had simply held that royalty should be taken at Nil, because assessee has incurred loss at entity level and that is why the technical knowledge or knowhow from AE has not provided any economic benefit to the assessee. Such an observation or reasoning cannot be upheld at all, because once there is a valid agreement for transfer of non-exclusive right for use of license to use technology including knowhow of AE for the purpose of carrying out manufacturing of automotive parts from which assessee has earned substantial revenue receipts, then such a use of technology and knowhow is directly linked with manufacturing and resultantly sales. Incurring of loss cannot be the parameter to hold that the technological knowhow or license was of no benefit hence there wa ..... X X X X Extracts X X X X X X X X Extracts X X X X
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