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TMI Blog2018 (11) TMI 1543X X X X Extracts X X X X X X X X Extracts X X X X ..... ine the Arm's Length Price (ALP) in the said international transaction. The international transaction that the assessee had undertaken was that it had made a payment to its US affiliate UST Global for a sum of Rs. 9,01,63,335 as management fees. The TPO held that by the said payment of management fees, the assessee has not got any benefit out of the same and hence the ALP should be determined at Nil and the transfer pricing adjustment was proposed for Rs. 9,01,63,335. On receipt of the TPO's order, the Assessing Officer prepared a draft assessment order incorporating transfer pricing adjustment made by the TPO of management fees of Rs. 9,01,63,335. Further, the A.O. also disallowed the aforesaid management fees u/s 40(a)(i) of the I.T.Act on a protective basis, since no TDS was made by the assessee. 3. Against the draft assessment order, the assessee filed objections before the Dispute Resolution Panel (DRP) u/s 144C(2)(b) of the I.T.Act. The DRP confirmed the view taken by the TPO / AO. On receipt of the DRP's direction dated 21.02.2017, final assessment orders were passed on 31.03.2017. 4. Aggrieved by the final assessment order, the assessee has filed the present appeal. Three ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... each transaction. This view was supported by the judgment of Delhi High Court in the case of Magnetic Marelli Powertrain India (P.) Ltd. (supra) wherein held that:- "17. As far as the second question is concerned, the TPO accepted TNMM applied by the assessee as the most appropriate method in respect of all the international transactions including payment of royalty. The TPO, however, disputed application of TNMM as the most appropriate method for the payment of technical assistance fee of Rs. 38,58,80,000 only for which Comparable Uncontrolled Price ("CUP") method was sought to be applied. Here, this court concurs with the assessee that having accepted the TNMM as the most appropriate, it was not open to the TPO to subject only one element i.e payment of technical assistance fee, to an entirely different (CUP) method. The adoption of a method as the most appropriate one assures the applicability of one standard or criteria to judge an international transaction by each method is a package in itself, as it were, containing the necessary elements that are to be used as filters to judge the soundness of the international transaction in an ALP fixing exercise. If this were to be dis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s prescribed under the law. A similar view has been taken in 'Sona Okegawa Precision Forgings Ltd.' (supra) and in 'KHS Machinery Pvt. Ltd. v. ITO 53 SOT 100 (Ahm) (URO). 35. It is, thus, seen that the royalty payment @ 3% by the assessee is at arm's length. The Technical Collaboration Agreement stands approved by the Government of India. The royalty payment has been accepted by the department as having been made by the assessee wholly and exclusively for its business purposes. For Assessment Years 2004- 05 and 2005-06, such payment of royalty has been allowed by the CIT (A). As per the FEMA Regulations, royalty can be paid on net sales @ 5% on domestic sales and @ 8% on export sales. The royalty payment by the assessee falls within these limits. It also falls within the limits of payment of royalty in the auto mobile sector, as per the market trend. This payment of royalty is at the same percentage as that paid by other auto ancillaries in the automotive industry. Then in 'Ekla Appliances' (supra) and in 'Ericsson India Pvt. Ltd. v. DeIT 2012-TII-48-ITAT-Qel-TP, it has been held that royalty payment cannot be disallowed on the basis of the so-called ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TPO as a disallowance of expense could not be upheld. In other words, the TPO cannot simply arrive at a conclusion that quality and volume of services received by the Appellant were not commensurate with payment made by the Appellant. This view is fortified by the order of Tribunal in the case of Merck Ltd. (supra) - upheld by Bombay High Court [ITA 272 of 2014]. 24.7 Such argument in our view is not convincing. The argument would have been valid if fees was fixed in respect of each service, which was compulsorily required to be provided to the assessee, but it is not so in the present case. The agreement listed certain services on which the assessee requires guidance/assistance from time to time. The assessee was thus entitled to any of the services as and when required. Therefore, applying CUP method to the service not availed by the assessee during the year is not justified. It would have been appropriate if the AO had applied CUP method to the payment made during the year by the assessee for the three services and compared with similar payment for such services by an independent party. No efforts have been made by TPO/ AO to determine the market value of services received b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he purpose of determining such arm's length price. It is not a precondition to conclude that the payment is within arm's length. In other words, the TPO cannot apply the benefit test for determining ALP as he cannot assess the benefit derived by assessee in a particular transaction. This view is fortified by the following judgments:- (i) R.A.K Ceramics India (P.) Ltd. (supra) which was upheld by Andhra Pradesh High Court [IT Appeal No. 595 of 2016]- '10. We are really surprised to see the reasoning of TPO in fixing the ALP of royalty payment at 2%. It is manifest from TPO's order he has rejected assessee's TP analysis under TNMM. Further, in para 6.4 of his order TPO has mentioned of undertaking an independent analysis under TNMM for selecting comparables and determining ALP. However, even after repeatedly scanning through his order, we failed to find any such analysis being done by him. Similarly, though in para 5.1.1, Id. DRP has observed that TPO has benchmarked intangible transactions by using CUP, but, the order passed by TPO does not support such conclusion. It is an accepted principle of law that TPO has to determine the ALP by adopting anyone of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oyalty of three comparables selected by it was higher at 4.67% than the rate at which royalty was paid by the assessee to its AE, the transaction involving payment of royalty was claimed to be at arm's length. A perusal of the order passed by the TPO u/s 92CA(3) of the Act shows that neither these com parables selected by the assessee in its TP study report were rejected by her nor any new com parables were selected by her by making a fresh search in order to show that the payment of royalty by the assessee to its AE was not at arm's length. She simply relied on the approval of SIA to hold that any royalty paid by the assessee on exports and other income was not allowable and disallowed the royalty payment to the extent of Rs. 40,51,486/- treating the same as the royalty paid by the assessee in respect of exports sale and other income. We are unable to agree with this strange method followed by the TPO to make a TP adjustment in respect of royalty payment which is not sustainable either in law or on the facts of the case. She has neither rejected the method followed by the assessee to benchmark the transaction in respect of payment of royalty nor has been adopted any recogn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with reference to the advise given to assessee, providing a concrete evidence with reference to the services in the nature of specific activities is difficult, like proving the role of an anesthesian in an operation conducted by a surgeon. There may be an evidence of operation being performed by the Doctor in the form of sutures or scars etc., which can be proved later but the role of an anesthesian before operation and after gaining consciousness is difficult to prove as that is not tangible in nature. Likewise, for the advise given by various group centres to the group companies in day-to-day manner is difficult to place on record by way of concrete evidence but the way business is conducted, one can perceive the same. Assessee has given a detailed write-up as well as the services provided and benefit obtained which were not contradicted. The Assessing Officer did not believe the same in the absence of concrete evidence. Unless the Assessing Officer steps into assessee's business premises and observes the role of these companies/assessee's business transactions, it will be difficult to place on record the sort of advice given in day-to-day operations. What sort of evi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt case is to hold that 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 authorized. 23. Apart from the legal position stated above, even on merits the disallowance of the entire brand fee/royalty payment was not warranted. Assessee has furnished copious material and valid reasons as to why it was suffering losses continuously and these have been referred to by us earlier. Full justification supported by facts and figures have been given to demonstrate that the increase in the employees cost, finance charges, administrative expenses, depreciation cost and capacity increase have contributed to the continuous losses. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uded services' as available under the DTAA and as a consequence, the remuneration received by the US Company would not be 'fees for included services'. We have to find that the interpretation of the provisions of the DTAA between the Governments of India and USA have not been correctly carried out by the Tribunal. We, hence, set aside the orders of the lower authorities answering the questions of law (iii) and (iv) against the Revenue and in favour of the assessee. In view of the answers already given by us, we are of the opinion that questions of law raised at (v) and (vi) need not be answered. In ITA no.38 of 2014, the orders are set aside and the AO is directed to consider the claim of expenditure afresh without looking at the application of Section 195(1), which is not applicable. There is no requirement, as found by us, to deduct tax at source. In all the other appeals, the proceedings under Section 201 of the IT Act are set aside." 8. In view of the judgment of the Hon'ble High Court, we hold that the disallowance u/s 40(a)(i) is not justified. It is ordered accordingly. Hence, ground No.4 is allowed. Ground No.5 9. As mentioned earlier, the assessee had paid management ..... X X X X Extracts X X X X X X X X Extracts X X X X
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