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TMI Blog2018 (9) TMI 413X X X X Extracts X X X X X X X X Extracts X X X X ..... on of business support services and technical service fees are remitted back to the file of the ld Transfer Pricing Officer for determination of their ALP. with respect to the royalty payment of ₹ 42055227/- ALP of which determined by ld TPO of ₹ 4715664/-, we also remit the issue back to the file of the ld AO with a direction to the assessee to show how payment of royalty is inextricably linked with the manufacturing activities and why it ought to be aggregated and benchmarked together with other international transaction under transactional net margin method. - ITA No. 6840/Del/2017 - - - Dated:- 4-9-2018 - SMT DIVA SINGH, JUDICIAL MEMBER AND SHRI PRASHANT MAHARISHI, ACCOUNTANT MEMBER For The Assessee : Shri G.C.Srivastava, Adv For The Revenue : Shri Suvinay K. Dash, Adv ORDER PER PRASHANT MAHARISHI, A. M. 1. This appeal is filed by the assessee against the order of the Asst Commissioner of Income Tax, Circle 5(1), New Delhi (the ld AO) passed on 13/9/2017 under section 143(3) of the Income Tax Act, 1961 ( the Act) in pursuance to the direction of the ld. Dispute Resolution Panel I, New Delhi (the ld DRP) issued under section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Hon ble DRP erred on facts and law in making an addition of INR 9,55,07,159/- to the income of the Appellant on account of international transactions pertaining to payment of business support service, payment of technical support service and payment of royalty. 3. The Ld. AO/TPO/DRP erred on facts and in law in determining the arm s length principle ( ALP ) of the Appellant s international transactions pertaining to payment of Business Support Services at Nil against the sum of INR 4,08,06,578/-, payment of Technical Support Services at Nil against the sum of INR 1,73,61,018/- and payment of royalty at INR 47,15,664/- against the sum of INR 42,055,227/- incurred by the Appellant and thereby making an addition of INR9,55,07,159/. While undertaking the above, the Ld. AO/TPO/DRP have grossly erred: 3.1 in disregarding the ALP, as determined by the Appellant in the TP documentation maintained by it in terms of Section 92D of the Income Tax Act, 1961 ( the Act ) read with Rule 10D of the Income Tax Rules, 1962 ( the Rules ); 3.2 in incorrectly rejecting the aggregation approach as followed by the Appellant for the transactions of payment o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ves; 3.10 while computing the arm s length royalty rate for comparables (using the companies selected as comparables by Appellant in its TP documentation) by taking the royalty paid by the comparables on their total sales thereby irrationally assuming that the royalty paid by them pertains to overall sales and not on certain specific technology availed for a particular product line, even though such information is not available in the annual report/public domain; 3.11 using the comparables selected by the Appellant in its Transfer Pricing ( TP ) Documentation for the purpose of application of CUP method for benchmarking the payment of royalty made by the Appellant, disregarding the fact that 3 out of the selected 6 comparables have not even paid royalty; 3.12 incorrectly rejecting the additional evidence filed by the Appellant before the Hon ble DRP in form of an internal CUP for benchmarking the payment of royalty. 4. That the Ld. AO/TPO/DRP erred in making various statements in their respective orders, based on conjectures, surmises, inferences and presumptions which are not in accordance with the facts of the case and is against legal pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e. He therefore submitted that in the past year as well as in the subsequent years all the international transactions of the assessee were accepted where assessee applied transactional net margin method on aggregate basis. He therefore submitted that only for this year the international transactions have been disturbed by the Learned Transfer Pricing Officer without any change in the facts and circumstances of the case. He further submitted that this year combined transaction approach followed by the assessee has been rejected by the Learned Transfer Pricing Officer without considering the decision of the Hon ble Jurisdictional High Court in case of Sony Ericsson. He further submitted that with respect to the provision of the business support services the assessee submitted a complete list of documents which are enlisted at page number 141 of the paper book which has not been considered by the learned transfer pricing officer as well as the ld DRP. He further referred to page Nos. 12 and 13 of the paper book wherein letter is placed dated 5th July 2017, where vide para number 7 the assessee has placed on record the additional evidences before the learned dispute resolution panel in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng all the six comparable companies disregarding the fact that three of such companies have not paid any royalty and therefore they should not have been included as a comparable. In the end, he submitted that the order passed by the Ld Transfer Pricing Officer, ld. Assessing Officer and Learned Dispute Resolution Panel are not in accordance with the law and disregarding the evidences submitted before them. 4. The Learned Departmental Representative vehemently supported the orders of the lower authorities. He vehemently contested the argument of the learned authorised representative that all the transactions must be aggregated and the transactional margin method should be adopted as the most appropriate method for benchmarking the international transactions. It is stated that the royalty transaction is not closely linked with the business support services as well as the provision of the technical support services by the assessee, therefore they cannot be aggregated. He further referred to paper book submitted by the assessee in the form of additional evidences and details filed before the learned dispute resolution panel. He further stated referring to page number 12 of the paper ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and benchmarked those transaction aggregating all of them together under the transactional net margin method (TNMM) method as most appropriate method taking the Profit Level Indicator (PLI) OP/Sales six comparables were taken. The PLI of the assessee was 17.9 % and PLI of the comparables was worked out at 4.09% and held that international transactions carried out by the assessee are at arm s length. The ld TPO accepted the 7 transactions and did not propose any adjustment. He benchmarked the payment of royalty transaction of ₹ 42055227/-, at ₹ 4715664/- and payment of business support income of ₹ 40806578/- on payment of technical support services of ₹ 17361018/- at Nil. While holding so the ld Transfer Pricing Officer adopted the transaction by transaction approach rejecting the combined transaction approach applied by the assessee. For holding so, he relied upon almost 20 judicial precedents. Therefore, he proceeded to benchmark the transaction related to business support services, payment for technical support fees and royalty payment separately. With respect to the business support services, he held that assessee has not furnished the contemporaneou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... examined the aspect of benefit and need on the basis of commercial wisdom of the assessee while benchmarking the international transaction where ALP is determined at Nil. Further, with respect to the transaction by transaction approach Vs. Aggregation of the transaction for subsequent year as well as in the earlier year, the ld TPO has accepted the aggregation approach adopted by the assessee. It is not disputed that for AY 2011-12 and 2013-14, the ld TPO has accepted the aggregation approach. Therefore, following the principle of consistency, where there is no change in the facts and circumstances of the case for this year, the ld TPO should have followed the same approach. If for any reason, he wants to deviate from the same, he should also give a detailed reason why he is deviating. In the order of the ld TPO, we do not find any such discussion. He has merely relied upon several judicial precedents for applying transaction by transaction approach for benchmarking these three services. However, on reading the order of the ld TPO where he has considered on page No. 15 and 16 of his order but surprisingly he has not considered para No 136 to 139 of the decision of the Hon'ble ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... chnical service fees are remitted back to the file of the ld Transfer Pricing Officer for determination of their ALP. The assessee is also directed to produce the relevant details with respect to rendition of services with credible and contemporaneous evidences for impugned Assessment Year and also to demonstrate how these transactions are required to be aggregated. 6. Further, with respect to the royalty payment of ₹ 42055227/- ALP of which determined by ld TPO of ₹ 4715664/-, we also remit the issue back to the file of the ld AO with a direction to the assessee to show how payment of royalty is inextricably linked with the manufacturing activities and why it ought to be aggregated and benchmarked together with other international transaction under transactional net margin method. Further, the ld TPO has considered the comparable without showing that whether in case of the comparables there was any payment of royalty and what was the basis. In the case of the assessee it is submitted that assessee has paid royalty in terms of the agreement where royalty was payable @5% of the net sales of licensed products in India and @8% of net sales of licensed products outside I ..... X X X X Extracts X X X X X X X X Extracts X X X X
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