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TMI Blog2018 (8) TMI 378X X X X Extracts X X X X X X X X Extracts X X X X ..... ly supplied to the OEMs and in the circumstances, out of the total consumption of raw material consumed by the assessee which, it has been noticed, is less than 20% procured from the AE and import of stores and spares from the AE is also 10% of the total consumption. The allegation of the TPO that the assessee has purchased raw material from the AE and is exporting again to the AE in the facts of the present case is misplaced. At the cost of reiteration, the export to the AE is only 5% and royalty paid on sales to the extent of 94% is for sales to non-AE and only 6% sale to the AE. The inferences drawn by the TPO, it is found, were de hors facts. It is also being claimed on behalf of the assessee that the export turnover of the assessee over the years has been reducing and most of the years, sales made to the AE is less than 2%. Be that as it may, in the facts of the present case, we find that where admittedly from the turnover of ₹ 1,300 crores, the export sales is only ₹ 65 crores and noting the fact that the assessee is domestically selling its product to Maruti Udyog Ltd., Honda Motors, Hyundai, Toyota, Mitsubishi, VoxWagon, General Motors, Skoda and Tata Motors, we ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r dated 31/03/2013 was challenged in appeal before the CIT (A) by the assessee. Reliance was placed upon the decision of the ITAT in the case of Sona Okegawa Precision Forgings Ltd. Vs Additional CIT (2012) 17 Taxmann.com 141 (Delhi). Considering the facts and the law, the addition was deleted by the CIT (A). The said action is challenged by the Revenue in the present appeal. 4. We have heard the submissions and perused the material available on record. 4.1 On a reading of the TPO s order, it emerges that the assessee company was established in the year 1987 for manufacturing of high quality automotive glass for the Indian automobile industry. Subsequently, the assessees also forayed into manufacturing of architectural and float glass. 4.2 During the relevant assessment year, the assessee had three lines of business (i) Auto Glass; (ii) Float Glass; and (iii) Architectural Glass. It has been stated that owing to the low sales volume in the architectural glass segment, this segment was aggregated with the Auto Glass Division. Accordingly, the assessee had organized its business into two Strategic Business Units ('SBUs') of Auto Glass and Float Glass. It is noticed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ount and not the enterprise level; (ii) M/s Ankit Diamonds (2010-TII-67-ITAT-Mum- TPJ wherein it had been held that under TNMM, ALP has to be determined on the profit realized from an International transaction and not at entity level; (iii) M/s Birla Soft (India) Ltd (2011-TII-41-ITAT-Del-TP) the ITAT wherein it had been held that segmental account, even if unaudited, can be considered if the income or the expenses have been properly allocated; (iv) M/s Chiron Behring Vaccines Pvt Ltd (2011- TII-30-ITAT-Mum-TP) wherein it had been held that TNMM requires comparison of net margin realized from international transaction and not comparison of operating margin of the enterprise as a whole. According to the ITAT, transaction by transaction approach has to be adopted; (v) M/s Exxon Mobil Company India Pvt Ltd (2011-TII-68- ITAT-MUM:TP) wherein it had been held that two different activities like research activity and activity of promoting the licensing of technology owned by the group marketing activity) cannot be clubbed together; (vi) M/s Global Vantedge Pvt Ltd [2010-TIOL-24- ITAT-Del] wherein it had been held that Comparability is to be done at segmental level and not at entity level; ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ility to evaluate its transaction on standalone basis on the ground that there is no statuary requirement to maintain segmental data. Entity level comparison not permissible when only 50% transactions were international transactions; ALP to be determined on segmental results only; (xviii) M/s UE Trade Corporation (India) (2011-TII-04-ITAT-Del-TP) wherein it had been held that the AO had made the adjustment by applying CUP method on transaction by transaction basis and the ITAT upheld the AO's approach of benchmarking on transaction by transaction basis; (xix) M/s Vedaris Technology wherein it had been held that company with no segmental information and having major revenue from other activity cannot be taken as a comparable; and (xx) M/s Wockhardt Ltd (2010-TII- 46-ITAT-Mum-TP) wherein it had been held that TNMM requires comparison of net margin realized from International transaction or on aggregate of international transactions and not comparison of margins of enterprise as a whole. 4.5 Considering the provisions and the judicial precedent, the TPO concluded that the issue on facts has to be separately benchmarked as even Section 92B of the Act recognizes the analysis of d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Auto Glass Division are float glass, PVB and other spares and consumables. The marketing department provides the sales plan based on its interactions with and the demand forecast of the OEM customers. This sales plan is input for the production team that decides on the production plan accordingly. Based on the estimated production, the material requirement and hence the procurement plans are made and the orders are placed with the vendors. The float glass supply for the Auto Glass Division is procured from AEs, third party suppliers as well as from the Float Glass Division of the Company. However, procurement of float glass from Float Glass Division is subject to various constraints like available capacity, capability (quality and thickness, etc.) of the plant as well as consideration for the opportunity cost of catering to its external customers vis-a-vis captive consumption by the Auto division. Among its AEs, AIS procures float glass from AGC Flat Glass Asia Pacific Pte. Ltd., Singapore ('AGC, Singapore'). With respect to the purchase of stores, consumables and child parts, such purchases are made from both AEs as wells as non-AEs. During the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ely driven by the market forces of demand and supply. It is more like a commodity product with low margins. Commission AIS also trades in certain types of float glass imported from its Group Companies. For these sales the Company utilizes its existing dealer network. In certain cases where the AEs have made any direct sale in the Indian market, AIS receives a commission income. Thus, AIS in its Float Glass Division acts in the capacity of an independent entrepreneurial company engaged manufacture of float glass to the market through its dealer network. It undertakes all functions associated with management of production of float glass. Assets employed Tangibles owned by AIS AIS utilizes its manufacturing facilities, office premises, warehousing facilities, communication facilities, etc. for the purpose of its business. Intangibles The AEs owns significant intangibles like technology, know-how, technical information, research findings, proprietary knowledge and other intangibles like techniques, testing/quality control standards, etc. which are a result of the R D activities undertaken by the Group. On the other hand, AIS does no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e time of entering into the agreement so as to compare the payment of royalty/technical fee/ trademark fee to the AE vis a vis an independent party under similar circumstances. If so, the details thereof. 10. Please show with evidence as to what tangible and direct benefit has been derived by you by use of such intangible. 11. Please state and quantify as to how the benefits derived by the use of technology commensurate with the payment made. Also please state the methodology use for quantification of the benefits. 12. What is the rate of royalty paid by other AEs to the company providing the intangible? If there is a difference in the rate of royalty, please state as to what is the difference in the technology transferred to the assessee company and the other AEs. 13. Whether the AE is providing similar technology to any independent party also? If yes what is the rate of royalty charged from such independent parties ? 14. Please show with evidence that royalty/technical fee/ trademark fee payments are not included in the price of goods purchased from the AE. If no such evidence is produced why should it not be presumed that the royalty/technical fee / t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .2 and is reproduced hereunder for ready reference : 5.1 The assesses in its reply dated 16.10.2012 inter-alia stated as under : The assessee has paid royalty to Asahi Glass Co. Ltd., Japan ('Asahi Japan'} towards use of patented technology under licensing arrangement for manufacturing of auto and float glass products. The royalty to Asahi Japan is based on fixed percentage on net sales. Similarly, the assessee has also paid royalty to Glaverbel towards use of patented technology under licensing arrangement for manufacturing of float glass. The royalty to Glaverbel is based on fixed rate on units manufactured. The assessee would like to refer to License agreement on tempered glass by new roller form furnace (Phase 2.5) entered with Asahi Japan wherein the assessee has received right to use the patented technology, technical data, know-how for the manufacture, use and sale of tempered sidelite glass within a designated territory to the assessee. The patent related information of such technology and know-how is provided in Exhibit 1-1 of the agreement. Further, the assessee would like to refer to Clauses 1.3 and 1.4 read with Schedule A of its agree ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se raw material for manufacture of auto-glass, the float glass technology would be crucial for the performance of its automotive division. Generally, the float division provides about 50% of the total raw material requirement of the automotive division. Thus, in the absence of the requisite know-how, the assessee would be compelled to rely on external suppliers which would result in a dip in its overall profits. Further, reliance on external suppliers may also disrupt the continuity and quality of production cycle. During FY 2008-09, the assessee commanded a market share of 80% of the automotive glass market including after-market and 34% of the float glass industry2. Your goodself would also appreciate that the assessee's business was originally conceived as a strategic alliance between Asahi Japan and Maruti Suzuki to primarily cater to the automotive glass requirements of the latter based on float glass imports made from Asahi Japan. Subsequently, the assessee acquired Float Glass India in 2002, a joint venture between Tata and Asahi Glass, as a backward integration strategy to indigenously manufacture float glass for its automotive glass plant. Presently, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iver on the trust and confidence reposed by its customers. It maybe also noteworthy that significant portion of the sales revenue of the assessee represents sales made to global OEMs in India. These sales would not have been possible in absence of the technical and brand affiliation with the Asahi Group. Further, a mammoth portion of the benefit derived by the assessee includes retention of its customer base who may be lured by competitors unless the assessee constantly evolves its product portfolio. The direct benefit which assessee derives from the technology and technical knowhow arrangement with Asahi Group is the increase in the sales over the years with its ability to cater to the changing needs of its customer which can be seen from the table below: The assessee humbly submits that the tangible and direct benefits from the use of technical know-how cannot always be measured in terms of growth in profitability. Since assessee acts an entrepreneur and bears all business risks, the profitability of the assessee is bound to be impacted by market factors and not because of intra group transactions as such payment of royalty. Further, the assessee would li ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Automotive Europe SA Belgium. 3. The assessee, in a way is paying royalty to Asahi Glass Company Ltd. for the exports made to it and other AEs. 4.12 In view thereof, the explanation offered was not accepted by the TPO who was of the view that payment of royalty to the AE for the exports made to AEs is in the nature of price reduction for the products sold to AEs. The assessee company, he was of the view, was in fact worked as a contract manufacturer for the limited purpose of exports made to the AEs. The technology was taken from the AEs, the raw material was purchased from the AEs, the goods were sold to the AEs and on such sale of goods to AEs royalty is also paid to the AEs. The TPO, in this regard, it will be pertinent to mention that the position of the assessee company with regard to manufacturing for the AEs was taken to be akin to that of a Contract Manufacturer wherein the assessee was purchasing raw material from the AEs. Goods were manufactured in India and then a part of it is exported to AEs. The royalty paid as a percentage of sales to the associated enterprise was held them not to be at arm's length because it amounted to collecting royalty on the sal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sion taken since would necessitate in incurring cost by way of investments etc. which would be weighed keeping in mind the licence fee to be paid vis - vis the expected benefits from the additional investments etc. for an independent enterprise. Further, he also considered the possibility that the said intangibles may already stand included in the price of goods sold by the AE or purchased from the AE by the related party. These situation, it was noticed, had also been considered in the OECD guidelines. 6.17 The compensation for the use of intangible property may be included in the price charged for the sale of goods when, for example, one enterprise sells unfinished products to another and, at the same time, makes available its experience for further processing of these products. Whether it could be assumed that the transfer price for the goods includes a license charge and, that, consequently, any additional payment for royalties would ordinarily have to be disallowed by the country of the buyer, would depend very much upon the circumstances of each deal and there would appear to be no general principle which can be applied except that there should be no double deduction f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lty to AE for exports is in nature of price reduction and in fact the assessee company is working as contract manufacturer. The TPO has disregarded- the assessee claims that the total exports sales of the assessee is only 5.72% of its total sale. And assessee conducts sales to some OEM outside India through AE to utilize its capacity. 5.2 Facts on exports sales by assessee to its AEs are at arm's length price of the international transaction The assessee is a. reputed manufacturer of Automotive Glass for automotive manufacturer segment in India selling and hold around 75% of market share in terms of sales. Total turnover of the assessee was around ₹ 1300 Crs out of which the export sale was ₹ 65 crs. which comes to 5% of the total turnover of the company The assessee sales its product to almost all the manufacturer of automobile in India which includes Maruti Udyog Limited, Honda Motors Limited, Hyundai Motors India Limited, Mahindra Mahindra, Volkswagen, Tata Motors, General Motors, Nissan, Ford, etc. The assessee is a pioneer in automotive glass selling industry and holds 75% market share. The assessee is a well known company listed on s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rly the import of exports of Stores.' Spares is only 10% or total consumption of assessee. For your reference Annual report of Asahi India Glass Limited is enclosed as annexure 5 The assessee purchase only a small portion of its requirement from AE and rest of the requirement is fulfilled from outside sources. Further the purchase of raw material from AE does not only used to manufacture goods from AE butits used for manufacturing of goods to be sold to customers other than AE to. The assessee wish to remind that the export to AE is only 5% of the total turnover of assessee. Further the royalty paid on sales to for doing sale of 94% sales to non AE 6% sale to AE. ...... Your Honor will appreciate that the operation of the assessee does not depends on the exports to AE. The assessee has shown incremental in sale every year in past 10 years but the export to AE has not increase in the same tune. In fact the business of the assessee has grown tremendously in the years when to export was made to AE. Your Honor should also consider that the export turnover to the assessee on the assessment year in appeal is highest ever. In most of the years ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts AE. The TPO has observed' that the appellant has purchased technology from AE, the appellant is purchasing raw material from AE arid thereafter exporting it to AE. In this regard the assessee has submitted the following chart in respect to the total purchase and sales of the appellant: Particular Indigenous Purchase Imported From Non AE Imported From AE Total Consumption % of import from AE to total consumption Raw Material consumed 14336 10773 5863 30972 19 Stores and Spares 7852 1843 1092 10787 10 6.4 The appellant has submitted that the percentage of import form AE to total Consumption of Raw Material Consumed and Stores Spares is 19% and 10% respectively. The appellant has stated that it purchases only a small portion of its requirement from AE and the rest of the requirement is fulfilled from non-AEs. The appellant has, stated that the busin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the ld. CIT(A). On the other hand, the ld. DR has relied on the orders of the AD and the DRP. 5. We have considered the facts of the case and submissions made before us. It is seen that the main question is whether the royalty paid by the assessee @ 3% of the net sale price stands justified under CUP. The assessee has placed on record a copy of the letter dated 30.04.1993 written by the Reserve Bank of India, Exchange Control Department, to Sona Steering Systems Ltd., in which payment of royalty @ 3% on domestic sales was allowed to be paid for a period of five years. There are similar other correspondences which have been placed on record. The assessee has also placed on record a press note issued by the Government of India, Ministry of Commerce, and Industries, Department of Industrial Policy . Promotion, issued in', 2003, under which royalty payment @ 8% on export sales and 5% on domestic sales have been referred to be reasonable for the purpose of processing approval of payments. On the other hand, the AD failed to bring any material on record that payment of royalty @ 3% was not at arm's length. Therefore, the payment stands justified under the CUP method. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , the assessee takes advantage of the AE s reputation and business base to have exports on good commercial and price terms with secured payment from the AE for better logistic and best payment through the AE . In the facts of the present case, the goods produced by the assessee are directly supplied to the OEMs and in the circumstances, out of the total consumption of raw material consumed by the assessee which, it has been noticed, is less than 20% procured from the AE and import of stores and spares from the AE is also 10% of the total consumption. The allegation of the TPO that the assessee has purchased raw material from the AE and is exporting again to the AE in the facts of the present case is misplaced. At the cost of reiteration, the export to the AE is only 5% and royalty paid on sales to the extent of 94% is for sales to non-AE and only 6% sale to the AE. The inferences drawn by the TPO, it is found, were de hors facts. It is also being claimed on behalf of the assessee that the export turnover of the assessee over the years has been reducing and most of the years, sales made to the AE is less than 2%. Be that as it may, in the facts of the present case, we find that whe ..... X X X X Extracts X X X X X X X X Extracts X X X X
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