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TMI Blog2019 (7) TMI 923X X X X Extracts X X X X X X X X Extracts X X X X ..... el Industries Ltd. and Jalbindu Agritech Pvt. Ltd. (Jalbindu) on the share holding of 75%, 15% and 10% respectively. The assessee undertakes manufacturing, assembling and marketing in India of Typhoon family of non-pressure compensated Driplines and Botton Drippers and provides technical and extension service according to customers' needs before, during and after sales. During the previous year relevant to the assessment year under dispute, the assessee had entered into a number of international transactions with its overseas AEs as enlisted below and by aggregating to such transactions the assessee has benchmarked them by applying Cost Plus Method (CPM):- Nature of Transaction Value of Transaction Method Used for Bench Mark Import of raw material, store and consumables Rs. 69,03,563 CPM Import of traded finished goods Rs. 2,34,99,840 CPM Import of machinery Rs. 3,23,20,061 CPM Payment of royalty Rs. 56,30,506 CPM 4. After verifying the transfer pricing study report, the Transfer Pricing Officer accepted the aggregation and benchmarking of all international transactions with the AEs, except, the transaction relating to payment of royalty to the AE. Insofar a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Assessing Officer made the addition in the assessment order. Being aggrieved with the addition so made, the assessee preferred appeal before the first appellate authority. 6. In course of hearing of appeal before the first appellate authority, the assessee challenged the determination of arm's length price of royalty payment at nil. Further, to justify the payment of royalty, the assessee again furnished various documentary evidences including the agreement dated 18th September 1975, between Netafim, Israel, and Hydroplan Group to demonstrate that Netafim, Israel, incurred cost for acquiring intellectual property. Further, the assessee also submitted that the AE increases additional R&D cost to tailor its drippers as per different market needs and to improve efficiency in usage and product. In this context the assessee furnished a working of royalty and R&D investment at 5%. Further, it was submitted, during the year 2002 all the intellectual property costs were recovered through royalty charges with the exception of China. In this context, the assessee furnished a chart before the first appellate authority indicating the cost of dripper and other materials and royalty char ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce of royalty payment is CUP method. He submitted, since the assessee failed to furnish the details of royalty payment, the Transfer Pricing Officer determined the arm's length price of royalty as nil. The learned Departmental Representative submitted, learned Commissioner (Appeals) has erroneously deleted the addition by holding that the Transfer Pricing Officer has followed "whole entity approach'', therefore, there was no need to benchmark the royalty separately. Referring to sections 92(1) & 92C(1) of the Act as well as rule 10B(1) of the Rules and certain OECD guidelines, the learned Departmental Representative submitted, each international transaction should be benchmarked independently. Further, he submitted, for benchmarking the arm's length price RBI/SIA approval cannot be considered as a CUP as it is not provided under rule 10B(1)(a). Further, he submitted, OECD transfer pricing guidelines of 2010 also do not provide such comparability. He submitted, merely because payment of royalty was after prolonged negotiation and deliberation between the parties it cannot be treated to be at arm's length unless it is compared with price paid in respect of similar uncontr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent is not correct. He submitted, the contention of the Department that the whole entity approach is not provided under law is unacceptable since the payment of royalty is closely linked to the other international transactions, hence, cannot be evaluated separately. In this context, he relied upon the following decisions:- i) Sony Erections Mobile Communications India Pvt. Ltd. v/s CIT, [2015] 374 ITR 118; ii) Cummins India Ltd. v/s ACIT, [2015] 68 SOT 14; iii) Demag Cranes and Component India Pvt. Ltd. v/s DCIT, [2015] 30 taxmann.com 364; iv) Panasonic India Pvt. Ltd. v/s ITO, [2010] 7 taxmann.com 117; and v) Intimate Fashion India Pvt. Ltd. v/s ACIT, [2012] 24 taxmann.com 80. 9. The learned Authorised Representative submitted, the order passed by the Transfer Pricing Officer would reveal that while determining the arm's length price of the royalty payment at nil, he has not applied any of the prescribed methods. He submitted, for the first time before the Tribunal, the Revenue has came up with altogether new plea that Transfer Pricing Officer has applied CUP method. He submitted, it is well settled principle of law that the Transfer Pricing Officer has to ben ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Netafim, Israel, including payment of royalty. It is also a fact that in the transfer pricing study report, the assessee has aggregated all international transactions including payment of royalty and benchmarked them applying CPM as the most appropriate method. It is evident, the Transfer Pricing Officer has accepted the benchmarking of all international transactions under CMP except the payment of royalty. It further transpires from the material on record, to alternatively support its claim that the payment of royalty is at arm's length, the assessee has relied upon RBI / SIA approvals for payment of royalty. It is evident, the Transfer Pricing Officer rejected the benchmarking of royalty paid to Netafim, Israel done by the assessee in the transfer pricing study report basically for the reason that the assessee failed to provide the details of cost incurred by the AE for development of technology and further, it failed to furnish the rates of royalty paid by the other group concerns. Of course, the Transfer Pricing Officer has also observed that RBI / SIA approvals cannot be considered for benchmarking the payment of royalty. Having done so, it is apparent, the Transfer Pricin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty payment at nil. Therefore, the learned Departmental Representative while arguing the issue before us has given a completely new dimension to the order of the Transfer Pricing Officer, which is otherwise not forthcoming from the said order. The issue is whether the learned Departmental Representative can introduce such fresh and completely new argument at this stage. On going through the provisions of the Act, it is evident that the Transfer Pricing Officer has to determine the arm's length price of an international transaction by applying a prescribed method. Section 92C of the Act prescribes the methods under which arm's length price can be computed. Rule 10B of the Rules lays down the mechanism for computation of arm's length price under different methods. As per rule 10B(i)(a), for determination of arm's length price of international transaction under CUP, the price charged or paid for property transferred or service provided in a comparable uncontrolled transaction or a number of such transactions have to be identified and making adjustment to such price, as may be required, it has to be taken as an arm's length price of the international transaction betw ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment of royalty was approved by the RBI/SIA can be considered as arm's length price. In the case of A.W.Faber Castell India Pvt. Ltd. (supra) cited by the learned Departmental Representative, though, the Tribunal has observed that arm's length price of royalty needs to be determined in accordance with the Transfer Pricing regulations, however, the bench also observed that if an authority by way of specific approval has allowed a particular rate of payment, it does carry persuasive value and can act as one of the supportive tools for carrying out benchmarking of transaction relating to payment of royalty. Insofar as the decision of the Tribunal in Skol Breweries (supra) cited by the learned Departmental Representative, we must observe that the Tribunal has observed that press note of Ministry of Commerce fixing rate of royalty under FDI policy cannot be considered to be relevant for determination of arm's length price under the Act. However, following the well settled proposition of law that the view favourable to the assessee has to be taken, we are inclined to follow the decisions cited by the learned Authorised Representative holding that the determination of arm' ..... X X X X Extracts X X X X X X X X Extracts X X X X
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