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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 ..... ot be evaluated separately for applying PSM. Assessee does not make any unique contribution to the transaction, hence PSM in this case cannot be applied. Therefore, we are of the view that TNMM is the Most Appropriate Method in the case of assessee. Tribunal has upheld TNMM as MAM from AY 2007-08 to 2011-12. In those AYs the dispute was whether TNMM or CUP was the MAM. It is for the first time in AY 2013-14 that the revenue has sought to apply PSM as MAM. In the given facts and circumstances, we are of the view that TNM Method is the Most Appropriate Method and the AO is directed to apply the said method in determining the ALP, after affording opportunity of being heard to the assessee. The grounds of appeal of the assessee are treated as allowed. Claim of depreciation of assets acquired from KSL on the basis of valuation report of the Assessee - slump sale - HELD THAT:- 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 ₹ 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. Thi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ical 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 technology of which TMC had a right to permit the assessee to use the technology. A sum of ₹ 48.23 crores was paid as royalty by the assessee in AY 2013-14. 4. Since the aforesaid payment of royalty was an international transaction, income arising from such international transaction had to be determined having regard to the ALP as prescribed u/s. 92 of the Act. The assessee in respect of its claim that the royalty paid was at arm s length filed a Transfer Pricing (TP) analysis for which it had chosen Transaction Net Margin Method (TNMM) as the Most Appropriate Method [MAM] for determining the ALP. The PLI chosen for the purpose of comparison of the assessee s profit margin with comparable companies was OP/OR (operating revenue) which was worked out at 8.11% by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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 MAM for the following reasons:- 5.10. ECONOMIC FACTS OF THE CASE AND PSM AS MAM The TP audits in this case for past 5-6 years were studied. The ITAT decisions were also perused. The TPO makes the following remarks on facts of the case for FY 2012-13:- The company has been in operation since 2003. Any start-up technology that the taxpayer would have got from the AE have already expired their useful economic life. Start-up technology being very critical for the entire operation, making a net margin level analysis under TNMM still had merits in initial years of operation. The Hon'ble ITAT has stated in this case for AY 2007-08 that TNMM should be used as the most appropriate method. This was reiterated for AY 2010-11 The economi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nufacturing 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: Taxpayer AE Functions 0 1 Assets 0 1 Risks 3 1 Total 3 3 Ratio 50% 50% 6.3. EBIT-R margin of Toyota Kirloskar Auto Parts Ltd: TOYOTA KIRLOSKAR AUTO Revenue from operations 11762450000 Add: Exchange gain 0 Operating R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was incorrect. In this regard it was pointed out that the in the intermittent assessment years i.e. prior to AY 2013-14, the TPO accepted the TNMM as the MAM and has taken a different stand only in AY 2013-14. It was also submitted that the PSM is not applicable because for application of PSM as the MAM, there should be contribution of unique intangible by the taxpayer also. In this regard, the submissions of the assessee was that PSM is generally applied in cases involving multiple transactions amongst associated enterprises (AEs) which are so interrelated and closely linked or continuous 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... external market criteria may include, for example, profit split percentages or returns observed among independent enterprises with comparable functions. It was pointed out that the transaction in the case of the Assessee has no such features where unique intangibles or any multiple interrelated international transactions, which cannot be evaluated separately for determining the ALP are involved. Reference was also made to the OECD-transfer pricing guideline for multinational enterprises and tax administration in Chapter 2 on transfer pricing methods, at page 93, para C.1. 10. Without meeting 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, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dopt the TNMM as the MAM, as the economic life of the technology would no longer exist. In our view, there is no basis for the TPO as well as the DRP to come to a conclusion that technology in question was to be used by a start-up. There is no basis for the TPO and DRP to come to a conclusion that the Assessee is a start up in manufacture of various parts for automobiles. The technology in question was that of TMC Japan. The technology is being used by the Assessee even today. There is no basis for the TPO/DRP s conclusion that the useful economic life of the technology would be only 5 years. In any event 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 roya ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he commercial and financial relations between the associated enterprises, including an analysis of what each party to the transaction does, and the context in which the controlled transactions take place. That is, the accurate delineation of a transaction requires a two-sided analysis (or a multi-sided analysis of the contributions of more than two associated enterprises, where necessary) irrespective of which transfer pricing method is ultimately found to be the most appropriate. 2.126. The existence of unique and valuable contributions by each party to the controlled transaction is perhaps the clearest indicator 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 assump ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urt of Karnataka in ITA No.104/2015, judgment dated 16.7.2018, which was an appeal of the revenue against the order of Tribunal for AY 2008-09. The Tribunal has upheld TNMM as MAM from AY 2007-08 to 2011-12. In those AYs the dispute was whether TNMM or CUP was the MAM. It is for the first time in AY 2013-14 that the revenue has sought to apply PSM as MAM. In the given facts and circumstances, we are of the view that TNM Method is the Most Appropriate Method and the AO is directed to apply the said method in determining the ALP, after affording opportunity of being heard to the assessee. The grounds of appeal of the assessee 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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tification of actual cost in respect of different assets comprised in the business taken over by way of slump sale is required to be done on a reasonable basis by spreading over the net consideration as between different assets. Reference to Accounting Standard 10 issued by the Institute of Chartered Accountants of India was made wherein it has been stated that where several assets are purchased for a consolidated price, the consideration should be apportioned to various assets on a fair basis as determined by the competent valuers. Accordingly, the assessee has considered value of assets purchased on slump sale, based on the valuation done by the 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 o ..... 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