9911796707
TMI Blog2018 (2) TMI 1280X X X X Extracts X X X X X X X X Extracts X X X X ..... been accrued to the taxpayer. It is only for the businessman to see as to how to execute the decision for better running of the business. TPO/DRP have erred in making adjustment of ALP on account of royalty payment by the taxpayer to its AE - Decided in favour of assessee X X X X Extracts X X X X X X X X Extracts X X X X ..... ents/spare parts from AEs CPM 2,04,59,04,263 (ii) Import of capital goods CPM 1,36,37,40,983 (iii) Export of spare parts CPM 5,82,41,276 (iv) Export of Motorcycles RPM 1,17,43,01,910 (v) Royalty CUP 18,77,26,589 (vi) Model Fee CUP 20,11,65,967 (vii) Technical Guidance Fee CUP 16,98,99,424 (viii) Interest on short term financing CUP 36,91,245 (ix) Reimbursement of warranty claims to AEs - 42,12,004 (x) Reimbursement/support received - 11,51,64, 916 3. The Transfer Pricing Officer (TPO) on the basis of transfer pricing study submitted by the taxpayer found all the international transactions made by the taxpayer with its AE at Arm's Length except transaction recorded at Sl.No.(v) as to payment of 'royalty' and made adjustment at ALP as under :- Sl. No. Nature of International transaction ALP determined by assessee (INR) ALP determined by this office (INR) Adjustment u/s 92CA (NR) 1. Payment of royalty 24,78,07,525/- Nil 24,78,07,525/- Total 24.78 crores 4. The taxpayer carried the matter before the ld. DRP by filing objections who has disposed of the objections. Feeling aggrieved, the taxpayer has come up before the Tribunal by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re motorcycles at its factory premises, right to use "Yamaha" Trademark and permit the company dealers to use "Yamaha" trademark in the course of marketing activities in India, Nepal and Bhutan. The technology provided by the AE has been developed specifically for the assessee and similar technology is not available with non-AE. This royalty is being paid at a predetermined rate on the basis of number of units of particular model sold by the assessee company. 15. The learned TPO had disallowed the payment of royalty on the allegation that there is no rationale for making payment of royalty when AE is not passing any economic benefit to the assessee as assessee is not able to make any profit out it. In response to the allegation of the TPO, the assessee had submitted a detailed reply vide letter dated 05.11.2012 giving the nature and description of the intangible licensed by its AE i.e. Yamaha Motor Co. Ltd. , Japan to the assessee company which reads as under:- "1. Nature & Description of intangibles licensed - Yamaha Motor Co. Ltd., Japan (YMC) has granted the Company an exclusive, non-transferable and non-divisible to use the technical information - - To manufacture or p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pecifically for the Assessee. 7. The payments for technology provided by YMC are made by the Company in two modes:- - Payment towards lump sum technical know-how fees equivalent to 50% of the variable research and development cost incurred by YMC for the development of new models of motorcycles; and - Royalty at a pre-determined rate on the basis of number of units of the particular model sold by the Company. The royalty is paid towards the balance cost incurred by YMC for development of new models of motorcycles. 8. No cost benefit analysis is done at the time of technology transfer. It may be appreciated that the royalty is required to be paid by the Assessee to YMC only on sale of motorcycles and not on production. If there will be no sale, there will be no royalty payments. 9. As mentioned above no cost benefit analysis is done and hence this question is not applicable. 10. It may be noted that similar technology is not available with non-AEs and is not readily available in the open market, and is developed by YMC specifically for the Assessee. Accordingly it is not possible to undertake any benchmark analysis to compare payment of royalty with any non-AEs at ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nnot refuse to pay royalty for the use of the intangibles from its AE. 18. We note that the TPO in its order has arbitrarily rejected the above explanation submitted by the assessee by saying that assessee's claims are preposterous to say the least. The TPO further has arbitrarily stated that the technical information passed on by the AE to the assessee company is of no use to the assessee. We are of the view that this observation of the TPO is incorrect and unsustainable. There is no denial to the fact that the assessee company is using the technology provided by its AE for manufacture or process locally manufactured parts. It is using the trademark "Yamaha". The intangibles, as stated hereinabove, have been used by the assessee company and as such it cannot be said that these are of no use to the assessee. 19. The next allegation of the TPO is that the introduction of the technology has signalled the beginning of a phase of spiralling losses for the assessee. Firstly it is incorrect observation and even otherwise losses cannot be a ground for not paying royalty for the services availed from the AE. 20. The reasoning of the TPO that in this competitive market, the mere pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ense; there is certainly no authority for that. What the TPO has done in the present case is to hold that the assessee ought not to have entered into the agreement to pay royalty/ brand fee, because it has been suffering losses continuously. So long as the expenditure or payment has been demonstrated to have been incurred or laid out for the purposes of business, it is no concern of the TPO to disallow the same on any extraneous reasoning. As provided in the OECD guidelines, he is expected to examine the international transaction as he actually finds the same and then make suitable adjustment but a wholesale disallowance of the expenditure, particularly on the grounds which have been given by the TPO is not contemplated or authorised." 22. The above view has also been upheld by the Hon'ble Punjab & Haryana High Court in the case of M/s Knorr-Bremse India Pvt. Ltd. vs. ACIT, ITA No. 182 (2013) dated 6th November, 2015 where the Court held as under:- "20. A reading of the orders of the TPO, the DRP and of the Tribunal makes it clear that one of the main reasons for not accepting the assessee's case was that the assessee had not been able to substantiate that the payment for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of international transactions as well as by virtue of other factors. In that event, the assessee having profited from the venture involving the international transactions, obviously, would not establish that the arm's length price was correct or justified. 25. It would make no difference even if the profit is entirely on account of the international transaction. In fact, even if it is established that on account of an international transaction an assessee's venture has profited, it does not necessarily establish that the transaction was entered into at an arm's length price. Mere profitability does not indicate that the transaction which was responsible for the enhancement of the profits was at an arm's length price. That an international transaction has enabled an assessee to earn profit is one thing and the price paid for the same is another thing altogether. Profit is a motive and the aim of a venture. The factors that are involved in achieving this objective are the means of achieving this end. Absent any special term in the contract, the seller of goods or the provider of services is not concerned whether its purchaser profits from the use that the goods or services are p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly demonstrate the justification for payment of the royalty and determination of its arm's length price and accordingly the DRP was not justified in confirming the order of the TPO in proposing disallowance of ₹ 18.78 crores on account of the royalty paid by the assessee. Accordingly, we direct the AO to delete this addition made on account of the royalty." 11. In view of what has been discussed above and the decision rendered by the coordinate Bench of the Tribunal, we are of the considered view that when AE has granted exclusive nontransferable and non-divisible licence to use the technical information for manufacture, to use Yamaha trademark and permit the company dealers to use the Yamaha trademark in the course of marketing activities in India and then paid the royalty at predetermined rate, it is not the prerogative of the TPO to decide if any tangible benefit has been transferred to the taxpayer from the technical know-how received from its AE because decision of a businessman for business expenditure or payment of royalty for running the business cannot be interfered by the TPO in any manner. Moreover, liability of the business expenditure and adjustment of ALP cann ..... X X X X Extracts X X X X X X X X Extracts X X X X
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