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TMI Blog2023 (5) TMI 109X X X X Extracts X X X X X X X X Extracts X X X X ..... een succinctly recorded by the TPO in his order as well. He still chose to propose adjustment in respect of full payment. In our considered opinion, when the rate of royalty payment and fee for drawings etc. has been approved or deemed to have been approved by the RBI, then such payment has to be considered at ALP. We, therefore, direct to delete addition of Rs. 4.29 crore made by the A.O. in this regard. The payments are to be considered at ALP and accordingly direct the assessing officer to delete the addition and allow the grounds of appeal. Reimbursement of expenditure - Contentions raised by the Ld. DR on this issue that no information was filed and the benefit has been obtained by the assessee and these facts were never brought on record before A.O/DRP. Accordingly, to meet the ends of justice, we restore the disputed issue to the file of the AO to examine details and adjudicate afresh and the assessee should be provided adequate opportunity of hearing and shall cooperate in submitting the information and we allow the ground of appeal of the assessee for statistical purposes. - ITA No. 1886/Mum/2027 - - - Dated:- 27-3-2023 - Shir M Balaganesh, Accountant Member An ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n facts of the case for subsequent AY and erroneously concluding that facts of the case in the year under consideration (i.e.; AY 2012-13) and subsequent AY 2013-14 are different. Ground No. 3: 3. On the facts and circumstances of the case, the Ld. AO, under the directions of the Hon'ble DRP, erred in confirming the action of the Ld. TPO of making an addition to the Appellant's total income with respect to the international transaction of payment of engineering and manufacturing drawing fees amounting to Rs. 43,54,921. In doing so, the Ld. AO/Hon'ble DRP have erred in: 3.1. Rejecting the benchmarking analysis conducted by the assessee using CUP to demonstrate the arm's length nature of the transaction of payment of engineering and manufacturing drawing fees; 3.2. Not taking cognizance of the corroborative benchmarking analysis conducted by the assessee using the TNM method to demonstrate the arm's length nature of the transaction of payment of engineering manufacturing drawings fees in the order; 3.3. Failing to understand the distinct nature of intangibles (i.e. technical know-how technical and manufacturing drawings) requiring sepa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he documentary evidence submitted by the assessee with respect to the said transaction of reimbursement of expenses to AE; and 5.3. Failing to acknowledge the business efficacy of the transaction of reimbursement of expenses. The above grounds are without prejudice to each other. Your Appellant craves leave to add, amend, alter, modify and/or substitute, and to withdraw the above grounds of appeal. 2. The brief facts of the case that the assessee company is engaged in the business of manufacturing of various machinery for sugar, cement, mining and boilers and also member of ThyssenKrupp Group Technologies being a segment of ThyssenKrupp Group AG of Germany, the assessee executes the contracts involving design, manufacturing, supply, erection and commission of cement plants, sugar plants and supply of mining equipment bulk materials, handling systems and boilers. The assessee has filed the return of income for the A.Y 2012-13 on 158,12,84,280/-, subsequently the case was selected for scrutiny and notice u/s 143(2) and 142(1) of the Act along with questionnaire was issued. In compliance, the Ld. AR of the assessee appeared from time to time and submitted the detail ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Method 1 Purchase of raw materials (paid) 15,17,57,063 TNMM 2 Sale of finished goods received (received) 66,34,939 TNMM 3 Payment of technology royalty (paid) 1,82,63,136 CUP 4 Fees for project engineering (paid) 43,54,921 CUP 5 Payment of brand license fees (paid) 5,65,11,397 CUP 6 Provision of engineering services (received) 6,99,76,343 TNMM 7 Provision for inspection services (received) 21,32,734 TNMM 7a Provision for inspection services (paid) 5,65,11,397 TNMM 10 E mil Transport cost (paid) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .71% 5 Gillianders Arbuthnot Company Ltd Project segment 9.55% Arithmetic Mean 8.31% 4. Similarly the PLI was worked out based on the five comparables selected and margin of 7.21 referred at para 6.3 of the TPO order. 6.3 The assessee has submitted that the 5 comparables selected by it have earned a margin (op/sales) of 8.31% while the assessee has earned a margin of 7.21% the working of which is as under: Particulars Total (Rs. in millons) Sales 16589.00 OI 16589.00 Total Operating Cost (OC) 15392.99 Operating profit (OP) 1196.01 OP/OI 7.21% Further the TPO has called for the segment wise information and operating margin referred at 6.5 to 6.8 as under: 6.5 Further, in the TP report, the assessee has corroborated the arm's length nature of its international tran ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 13.72% 7 TRF Ltd 5.83% Arithmetic Mean 7.96% 5. In respect of royalty, brand licence and project engineering and manufacturing drawings, the TPO has considered the TPSR report and the trade mark owned by TK AG. Further the TPO has dealt on the submissions and the facts and observed at Para 7.3 to 7.5 as under: 7.3 As such TPO made an observation that the royalty was paid by the assessee for a bundle of services/rights, for the territory of India and not outside. On the other hand the assessee also incurred huge cost for advertisement and marketing in respects of trademark owned by the AE. This arrangement rendered redundant, the agreement for provisions of international marketing service, for which an additional payment had been made by the assessee. The very fact that the brand continued to be owned by the foreign AE, which benefits from such expenditure towards international marketing services and royalty payment, would not be acceptable, if transacted between the two independent parties at an Arm's Length basis. 7.4 Further TPO ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e for the expenditure, TPO treated the same as NII. 13.3 Further TPO observed that since the benefit received for all the above expense claimed as reimbursements had not been substantiated ALP was determined as NIL, as in a Arm's Length scenario no independent person would make any payments without benefits received. One needs to understand, whether, and how much, of such expenditure was for the purpose of benefit of the assessee (deductible under Section 37 of the Act), and secondly, whether that amount passed a transfer pricing analysis. It also had to demonstrated that the price paid was such that an independent entity would have paid for such services for the benefits (if any) received by it. Despite the opportunity being provided, no evidence or explanation was furnished. Reliance is placed on the decision of the Hon'ble Delhi High Court in the case of CIT VS M/s Cushman and Wakefield (India) P Ltd in ITA No. 475/2012 wherein the court vide its order dated 23.05.2014 has upheld the above view. Finally the transfer pricing adjustment is as under: Description Amount in Rs. Royalty, brand license fee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... knowhow, payment of engineering, and manufacturing drawing fees and payment of brand license fee and for availing the services, were the assesee has paid 2% of contract value to its AE and royalty paid @5% of the selling price to its AE and the agreement between the assessee and krupp polysius AG was approved by the RBI and the assessee has bench marked the transactions with the TNMM and the TPO has overlooked these facts. The fees has been paid for the purpose transactions and TPO has treated as Rs. Nil. Whereas the assessee has incurred this expenditure and therefore the transactions value cannot be taken as Nil. In respect of brand license fee, the AO has overlooked the fees as per the agreement of year 1996 and the Ld.AR referred to copy of brand licence agreement with its AE placed at page 145 to 154 of the order. Whereas the Hon ble tribunal for the A.Y 2008-09 and 200910 has considered these facts of agreement. Further the assessee for the A.Y 2010-11 A.Y.2011-12 has opted for VSVS and demonstrated Form no3. Whereas in respect of A.Y 2013-14 and subsequent years there is no addition. The Ld.AR emphasized that the DRP has also overlooked facts and for the A.Y 2011-12 the D ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... espondent Assessee's objection to the application of the margin applicable to arrive at ALP at 6.29% on transactions with third party i.e. non-AE transactions. The Assessing Officer passed an order in accordance with the above order of the TPO. (c) Being aggrieved, the assessee carried the above issue in Appeal to the Tribunal. The Tribunal by the impugned order held that only transactions entered into by an assessee with its AE are subject to transfer pricing adjustment and not otherwise. Thus, allowing the Assessee's appeal before it. (d) The grievance of the Revenue before us is that the adjustment is not to be restricted only in respect of transactions entered into with the AE. All the transactions of the Respondent- Assessee would have necessarily be varied/ adjusted by the margin arrived at by the TPO to arrive at the ALP. (e) We find that in terms of Chapter X of the Act, redetermination of the consideration is to be done only with regard to income arising from International Transactions on determination of ALP. The adjustment which is mandated is only in respect of International Transaction and not transactions entered into by assessee with independent unr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 17. DCIT Vs. ThyssenKrupp Industries Ind Pvt Ltd, ITA No. 2084/Mum/204 18. CIT Vs SGS India Pvt Ltd., ITA 1807 of 2013 (Bom HC) 19. DCIT Vs. AVT MC Cormick Ingredients Ltd (Automatic Approval), ITA No. 2167/Mds/2013 20. ACIT Vs. Dow Agrosciences Ind Pvt Ltd, [2016] 76 taxmann.com 124 21. DCIT Vs. SI Group India Ltd., ITA No. 813/Mum/2013 22. Spicer India Pvt Ltd Vs. ACIT, 2017 (10) TMI 1291 23. ACIT Vs. Netafim Irrigation India Ltd.,, [2019] 106 taxmann.com 61 24. CIT Vs. Wlspun Zuchi Textiles Ltd., [2017] 391 ITR 211 25. UT Worldwide Ind P Ltd, Vs DCIT, [2019] 103 taxmann.com 422 26. Omni Active Health Technologies Ltd., Vs. DCIT, [2018] 92 taxmann.com 88 27. PCIT Vs. Vishay Components India Ltd., [2019] 103 taxmann.com 421. 13. Further the Ld. AR also submitted that for A.Y 2010-11 and 2011-12 the assessee has opted for VSVS scheme and paid the taxes referred to page 390 to 393 of the paper book in respect of from 3 issued. Further the Ld. AR filed Form No. 5 issued by the department after payments are received. The Ld. AR contentions are that the TPO has not considered the expenses and treated ALP as Nil. We find the issue ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the A.Y. 2007-08, the learned AR stated that this point has been decided in assessee's favour. The learned Departmental Representative, however, relied on the impugned order. 14.3 After considering the rival submissions and perusing the relevant material on record, we find that the assessee entered into collaboration agreement with its AE for payment of 2% of contract value for manufacturing, drawing and engineering services and 5% of the selling price as royalty. The assessee applied to the RBI seeking approval in respect of payment of royalty and technical fee through Central Bank of India. A copy of letter addressed by the Central Bank of India to the RBI dated 26.03.2008 is available on page 240 of the paper book. Through this letter, the Central Bank of India forwarded relevant documents along with a copy of the agreement. The RBI vide its letter dated 21.04.2008 requested Central Bank of India to consider the assessee's case in accordance with its AP (DIR Series) No.76 dated 24.02.2007. It is in pursuance to the deemed approval by RBI under the automatic approval scheme that the assessee made payment of royalty and technical fee to its AE. It is relevant to note ..... X X X X Extracts X X X X X X X X Extracts X X X X
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