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TMI Blog2018 (10) TMI 1630X X X X Extracts X X X X X X X X Extracts X X X X ..... pumps. In the Transfer Pricing Study report, the assessee characterised itself as a "Licence Manufacturer". It entered into ten types of international transactions with its Associated Enterprises (AE), viz., Sulzer Pumps, Switzerland. The assessee grouped following international transactions entered with its AE and adopted TNMM method to benchmark them:- (a) Purchase of raw material (b) Sale of finished goods (c) Payment of Royalty (d) Payment of technical knowhow (e) Commission paid. The assessee selected itself as tested party and arrived at a margin of 14.13% by adopting Profit Level Indicated (PLI) as Operating Profit/Sales. The assessee selected 11 comparables and arrived at a mean margin of 8.26%. Accordingly the assessee submitted that the transactions entered with AE were at arms length. 3. The TPO rejected the aggregation of above said transactions. With regard to Royalty payments, the TPO determined the ALP at NIL for the following reasons:- (a) As per the agreement entered with its AE, the assessee has no exclusive right to sell goods manufactured by it in India or overseas without the previous approval of its AE. (b) Hence the assessee cannot be consider ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... IT(A) did not reject the TPSR prepared by the Assessee. 4.1.2 Assessee has total export sales of INR 87.63 crores (page 26 of PB) of which export to AEs was INR 37.70 crores (page 27 of PB). Thus, the Assessee has directly exported to third party customers in overseas market. If the Assessee was a contract manufacturer in export market then it would have exported only to its AEs and not to third party customers. This indicates that Assessee is license manufacturer and not contract manufacturer. 4.1.3 The learned CIT(A) relying on clause 2.1 to 2.4 of inter-company license agreement concluded that Assessee has exclusive right to manufacture the contract products in India but does not have exclusive right to sell or export anywhere without previous consent in writing from AE (page 16 of CIT(A) order). On this point the Assessee wishes to submit that the business of Sulzer Group (including that of the Assessee) is based on tender floated by prospective customers. Against these tender, bid is to be submitted. In order to avoid multiple bids from Sulzer Group for the same customer tender, a clause (i.e. clause 2.3) is inserted in the license agreement that requires Assessee to take ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 21 to 25 of the ruling). Thus, Assessee has benchmarked the transaction using one of the prescribed method and concluded that the transaction of payment of royalty to technology is at arm's length price. Accordingly, the benchmarking analysis undertaken by the Assessee should be accepted and adjustment made by the learned TPO/AO/CIT(A) should be deleted. 4.1.7 The Assessee also wishes to submit that the royalty rate is approved by RBI under automatic route which provides payment of royalty at 5% on domestic sales and 8% on export sales plus a lumpsum payment of fixed fees. Since the rate which royalty is paid by the Assessee is approved by RBI it should be treated to be at arm's length price. 4.2 Payment of technical knowhow 4.2.1 As discussed in point 2 and 3 above, the learned TPO and CIT(A) recharacterized Assessee as contract manufacturer. On this point of the Assessee wishes to submit that the Assessee is a licensed manufacturer and not contract manufacturer. For detailed reason and submission of the Assessee kindly refer to point 4.1.1 to 4.1.4 above. 4.2.2 Further, the Assessee also wishes to submit that the learned TPO has not used any of the prescribed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... indicates that Sulzer Management AG is also known as Sulzer Management Ltd. Hence we humbly submit that the adjustment made should be deleted." 8. The Ld D.R, however, submitted that the assessee could not explain as to how these transactions are inextrically connected. He submitted that the Ld CIT(A) has taken the view that each of the transactions is different/distinguishable and hence they should be evaluated separately. The Ld A.R placed his reliance on the decision rendered by Delhi bench of ITAT in the case of Cairn India Ltd (ITA No.1459/Del/2016 dated 09-10-2017). 9. We heard the parties and perused the record. We notice that the tax authorities have considered the assessee as a "Contract Manufacturer" and accordingly disallowed the Royalty and Technical knowhow expenses. In the written submissions, the assessee has demonstrated that the purpose of obtaining approval for sales from its AE is to avoid competition between the AEs. The assessee has also submitted that out of the total export sales of Rs. 87.63 crores, the exports made to AEs was only Rs. 37.70 crores and the remaining exports have been made to non-AEs. Had the assessee been a contract manufacturer, it could ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y. In any case, this transaction has also not been benchmarked under any of the recognised methods by the TPO. Accordingly we restore this issue also to the file of AO/TPO for examining it afresh. 12. The next issue contested by the assessee relates to the disallowance of Provision for Diwali gifts to employees. The assessee provided a sum of Rs. 9.00 lakhs under this head and claimed the same as expenses. The AO took the view that this expenditure is akin to bonus and hence it is allowable only on payment basis u/s 43B of the Act. The AO also took the view that this expenditure may be considered as Contingent in nature, as it is not certain that the concerned employees shall continue in service upto Diwali. Accordingly he disallowed the claim and the Ld CIT(A) also confirmed the same. 13. The Ld A.R submitted that the provision of Rs. 9.00 lakhs made as on 31.3.2008 has been reversed by the assessee in the succeeding year, meaning thereby, the same was offered as income in the succeeding year. The Ld A.R submitted that if the disallowance is confirmed by the Tribunal in this year, then the assessee may be given relief in the succeeding year by giving appropriate directions to th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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