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TMI Blog2020 (3) TMI 947X X X X Extracts X X X X X X X X Extracts X X X X ..... r consideration in AY 2014-15 are common issue with reference to determination of ALP in respect of an international transaction between the assessee and its Associate Enterprises (AE) u/s. 92 of the Act. 3. As far as the aforesaid common issue is concerned, the factual details for AY 2013-14 are that the assessee is a company engaged in the manufacture of automotive front axle, rear axle and propeller shaft. The assessee is vendor to Toyota Kirloskar Motors Ltd. for their vehicles sold under the brand name 'Qualis' and 'Innova' for axles and propeller shafts. One of the international transaction between the assessee and its AE viz., Toyota Motor Corporation, Japan [TMC], was payment of royalty under agreement between the assessee and TMC. TMC was to provide technical know-how, which includes process know-how, designs & drawings to manufacture R-150 and C-550 transmission units and axles & propellers, shafts and engine assembly. There was an agreement dated 19.12.2012 between TMC and assessee and also another agreement dated 27.4.2012 named as Technical Assistance Agreement for axles and propeller shaft for IMV. As per agreement, assessee was to pay TMC royalty for using technolo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ia. So it starts an AE in Cayman Islands and pays royalty to the AE. By doing this, it reduces its profits in India to the market average. As a cover, it prepares documentation or how the AE gave the taxpayer the knowhow of a new technique to weld gear machines. There is no way of benchmarking such unpatented knowhow (even for patents, a survey shows that 98% of patents cannot be commercially harnessed). The company pays less tax in India, and can justify the profit shifting by saying that it is within tolerance limit of TNMM mean margin. 5.5. In this situation, TNMM actually defeats the very purpose of transfer pricing as an anti-abuse provision. There is no justification for application of TNMM, because the so-called tech supplied by the AE to this hypothetical company is not 'start-up tech'. It is technological update/upgradation. There is no benchmark of such technology intangible. As such, intangibles can be benchmarked only using analytical approaches. TNMM is very crude, and it definitely does not give any indication of the arms length nature of royalty transactions." 6. After having rejected TNMM, the TPO proceeded to apply the Profit Split Method [PSM] as the MA ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a) Conducts all R&D Activities 2) Assets a) Owns the asset 3) Risks a) Takes all research risk, including risks in development of early stage technologies and disruptive technologies The FAR of taxpayer relative to the royalty transaction are as under (note that there are many other functions of taxpayer it conducts as a full-fledged entrepreneur, but they are not relevant for a profit split analysis): 1) Functions a) Manufacturing and sales (these functions and returns from same are covered in routine market profits, and hence do not carry weight here). 2) Assets a) None 3) Risks a) Complete entrepreneurial risk 6.2. The most critical factor here is that the AE has given "start up tech" and "manufacturing know how". After few years, the start-up tech and manufacturing knowhow would have replenished their useful economic life. Then the AE would have to be compensated for incremental technologies only. Weightage of incremental tech is low, but weightage of manufacturing knowhow (how to start operations, what do do, how to establish the plant), and "start-up technology" arc high. Owing to this, the TPO makes the following weightage assignments: Taxpay ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ontinuous that they cannot be evaluated on separate basis for the purpose of determining Arm's Length Price of any transaction. The Assessee relied on the decision of ITAT Delhi Bench in the case of Global One India (P). Ltd. v. Assisstant Commissioner Of income-tax, Circle 12(1), New Delhi [2014] 44 taxmann.com 100 (Trib.) ITAT wherein it was held that in a case where the assessee generates out of operations that are highly integrated, when one transaction, requires deployment of assets and functions of different entities, located in different Geographical location to ultimately deliver services and when such combined efforts generate revenues, the MAM for determining arm's length price is "Profit Split Method" (PSM). Reference was made to Rule 10B(1)(d) of the Income Tax Rules, 1962 (Rules) which describes "Profit Split Method (PSM) as follows: Rule 10B (1)(d) prescribes as follows: (i) the combined net profit of the associated enterprises arising from the international transaction [or the specified domestic transaction] in which they are engaged, is determined; (ii) The relative contribution made by each of the associated enterprises to the earning of such combines ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng the specific objection of the Assessee that in the international transaction between the Assessee and its AE there was no contribution of unique intangible by the Assessee and that there were not multiple interrelated transactions which cannot be separately evaluated, the DRP upheld the application of RPM as MAM by observing as follows:- "2.11 Thus in PSM, the first step is to identify the combined net profit of the assessee and the AE, arising from the international transactions in which they are engaged in the present case is the royalty payment received by the AE. In the second step, the relative contribution made by each of the entities which have contributed to the earning of such combined net profit is evaluated on FAR analysis of each entity and based on that, it is seen how such contribution should be evaluated by unrelated enterprise performing functions in similar circumstances. Next, the combined net profit is split between the related enterprise in proportion to their related contribution which has been evaluated after carrying out FAR analysis. Lastly, the profit which has been apportioned to the assessee is taken into account to arrive at Arm's Length Price a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t passage of time cannot be the basis to discard TNMM which is already held by the Tribunal and upheld by the Hon'ble High Court as no longer the MAM because the conditions necessary for PSM as MAM are not met in the case of the Assessee. Even going by Rule 10B(1)(d), there should be contribution by each of the parties to a transaction for earning profits from sale of goods or provision of services. Then the contribution of each of the parties is identified and the profit is split between those parties. In the case of the Assessee the technology is given by TMC, Japan for which royalty is paid. The use of the technology in manufacturing and the sale of the product so manufactured contribute to the profit of the Assessee and TMC, Japan has nothing to do with that. There is therefore absence the first condition for application of PSM as MAM. As submitted by the Assessee PSM is used as MAM only in a case involving transfer of unique intangible or in multiple inter-related international transactions which cannot be valued separately for determining the ALP. The OECD guidelines cited on behalf of the assessee clearly supports the aforesaid approach and the OECD guidelines in this regard ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tor that a transactional profit split may be appropriate. The context of the transaction, including the industry in which it occurs and the factors affecting business performance in that sector can be particularly relevant to evaluating the contributions of the parties and whether such contributions ale unique and valuable. Depending on the facts of the case, other indicators that the transactional profit split may be the most appropriate method could include a high level of integration in the business operations to which the transactions relate and /or the shared assumption of economically significant risks (or the separate assumption of closely related economically significant risks) by the parties to the transactions. It is important to note that the indicators are not mutually exclusive and on the contrary may often be found together in a single case. 2.127. At the other end of the, spectrum, where the accurate delineation of the transaction determines that one party to the transaction performs only simple functions, does not assume economically significant risks in relation to the transaction and does not otherwise make any contribution which is unique and valuable ........ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee are treated as allowed. 19. The facts in AY 2014-15 are identical and the reasoning given in AY 2013-14 will equally apply to the AY 2014-15 also and the TPO is directed to compute the ALP for AY 2014-15 by applying TNMM as the MAM , after affording due opportunity to the assessee. 20. The other issues with regard to the objections regarding the manner in which ALP was determined by applying PSM as the MAM does not require any adjudication because of the conclusion that TNMM is the MAM. 21. As far as AY 2013-14 is concerned, ground No.12 raised by the assessee needs to be adjudicated and the same is as follows:- "II. Corporate Tax 12. Disallowance of depreciation on assets purchased by way of slump sale i. The learned AO erred in concluding that the appellant has claimed excess consequential depreciation on assets purchased by way of slump sale during the Financial Year 2002-03, amounting to Rs. 9,762,694. ii. The learned AO ought to have appreciated that value as per the valuation report has to be considered for capitalizing the assets which are purchased on a slump sale. iii. The learned AO erred in concluding that the Assessee has inflated the value of assets for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e competent valuer and claimed depreciation on such value. Since in AY 2002-03 it was held that the sale was not a slump sale, the depreciation as claimed by the Assessee was not allowed. However, in AY 2002-03, the ITAT in the assessee's own case in its order dated May 5, 2017 has held that the aspect of valuation was not examined by the AO during the course of assessment proceedings and accordingly, remanded the issue of valuation to the file of the learned AO for fresh verification. The AO has passed an Order Giving Effect to the order of the ITAT allowing the claim of depreciation of assets acquired from KSL on the basis of valuation report of the Assessee. 24. As far as AY 2013-14 is concerned, in the final assessment order dated July 7, 2017 passed for AY 2013-14, the AO disallowed excess depreciation of Rs. 9,762,694, being the difference between depreciation on value of assets as per valuation report and depreciation on WDV in the hands of KSL. This is because the issue of depreciation had not attained finality in AY 2003-04 the year of slump sale. Now that the issue has been resolved, the DRP has already given a direction on this issue by holding that the issue is consequ ..... X X X X Extracts X X X X X X X X Extracts X X X X
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