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TMI Blog2023 (6) TMI 338X X X X Extracts X X X X X X X X Extracts X X X X ..... margins as per the most appropriate method, it would be inappropriate to treat a particular expenditure as a separate international transaction. It was held that such an exercise would lead to unusual and absurd results. Also in Lenovo (India) (P.) Ltd. case [ 2023 (1) TMI 1242 - ITAT BANGALORE] held that if margins of assessee with respect to its trading segment were accepted to be at arm's length by TPO, then no separate adjustment of AMP expenses could be made by treating it as an international transaction. Thus adjustment made by the TPO towards technical know-how fees despite accepting the entity level margins, is hereby deleted. Adjustment invoking the provisions of section 40(a)(i) - we note that the assessee could not establish whether or not the tax had been deducted at source on the impugned payment due to absence of historical records. Irrespective of such fact, in our view, the action of the CIT(A) to invoke section 40(a)(i) of the Act is misplaced. As noted above, the payment towards technical know-how was capitalized in the books of the assessee and depreciation on the same was claimed. We note that in Nector Beverages (P.) Ltd. [ 2009 (7) TMI 5 - SUPR ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r concluded that the technical know-how fees should not have been paid by the assessee to its AE. Thus, by treating the ALP of such payment at NIL, the TPO made an adjustment of Rs. 9,07,39,440 in his order under section 92CA(3) passed on 15.12.2006. Subsequently, the assessment order under section 143(3) dated 28.12.2006 was passed by the AO incorporating the aforesaid transfer pricing adjustment. 4. On appeal, the CIT(A) vide order dated 20.09.2019 upheld the adjustment made by the TPO and incorporated in the assessment order by the AO. Further, the CIT(A) alternatively held that as the payment of technical know-how was made without deduction of tax at source, the same is disallowable under section 40(a)(i) of the Act. 5. Aggrieved by the order of the CIT(A), assessee has filed the present appeal. The grounds raised read as follows: 1. That on the facts and circumstances of the case, the order passed by the Learned Commissioner of Income-tax (Appeals) -7, Bengaluru, [ CIT(A) 1, to the extent prejudicial to the Appellant is bad in law and liable to be quashed. 2. On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in making an adj ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the circumstances of the case and in law, the assessment order dated 28 December 2006, passed by the Addl. Commissioner of Income-tax, Range-7(3), Mumbai (Addl. Commissioner') under section 143(3) of the Income-tax Act, 1961 (Ace), is illegal, bad in law and without jurisdiction, as the Addl. Commissioner did not have the power to perform the functions of an 'Assessing Officer', in absence of an order issued to him under section 120(4)(b) of the Act conferring him with valid jurisdiction. The Appellant prays that the said assessment order passed without valid jurisdiction ought to be quashed. 13. On the facts in the circumstances of the case and in law, the assessment order 28 December 2006, passed by the Addl. Commissioner, is illegal, bad in law and without jurisdiction, as the Addl. Commissioner did not have the valid jurisdiction to pass the said order, in absence of an order transferring him jurisdiction in accordance with section 127 of the Act. The Appellant prays that the said assessment order passed without valid jurisdiction ought to be quashed. 7. The learned AR submitted that once the net profit margin is accepted to be at arm's leng ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of the assessee for all transactions except for the payment of technical know-how fee to AE. This in our view would mean that the TPO has accepted the entity level margins earned by the assessee but proceeded to make TP adjustment on payment towards technical know-how. The Hon'ble Delhi High Court in the case of Sony Ericsson Mobile Communications India (P.) Ltd. Vs. CIT [2015] 374 ITR 118 held that once the revenue accepts the entity level margins as per the most appropriate method, it would be inappropriate to treat a particular expenditure as a separate international transaction. It was held that such an exercise would lead to unusual and absurd results. The relevant observations from the above judgment in this context are as under:- 101. However, once the Assessing Officer/TPO accepts and adopts TNM Method, but then chooses to treat a particular expenditure like AMP as a separate international transaction without bifurcation/ segregation, it would as noticed above lead to unusual and incongruous results as AMP expenses is the cost or expense and is not diverse. It is factored in the net profit of the inter-linked transaction. This would be also in consonance with Rul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oyalty has been considered as a closely linked transaction as a part of operating cost. Therefore a separate adjustment for royalty is not required. The AR of the assessee relied on the judgments of assessee's own case Toyota Kirloskar Motors (P.) Ltd. v. Addl. C1T [2022] 138 taxmann.com 107 (Bang. - Trib.), in para nos.5 to 13, wherein held as under:- Ground Nos. 10-12: 5. The Ld.AR submitted that assessee selected TNMM as the most appropriate method and operating margin at entity level after including royalty was compared with comparable companies. The operating margin of the assessee are at arm's length as concluded by the Ld.TPO. 6. The assessee submits that once the operating margin at segment or entity level is at arm's length, separate analysis of Royalty is not required. This is for the following reasons: Section 92C(1) provides that the arm's length price shall be computed applying the most appropriate method out of the methods listed in section 92C(I). Rule IOC lays down the guidelines for selection of the most appropriate method. The most appropriate method is to be selected having regard to nature of transaction or class of transaction or cl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 39;ble Delhi High Court in the case of Sony Ericsson Mobile Communications India (P.) Ltd. v CIT reported in [2015] 55 taxmann.com 240 (Delhi) which explains the terms closely linked transaction and under what circumstances a bundled approach can be adopted. The judgment also overrules ITAT Special Bench decision in the case of L.G. Electronics India Pvt. Ltd v. ACIT reported in [2013] 29 taxmann.com 300 (Delhi - Trib.) (SP) that rejected 'bundled approach'. 10. The Ld.AR thus submitted that its manufacturing activity and payment of royalty are closely inter-linked, interdependent and flow from a common source. He at the cost of repetition reiterated that once the net profit margin is determined to be at arm's length, it pre-supposes that the various components of income and expenditure considered in the process of arriving at the net profit are also at arm's length is to be upheld. On the contrary, the Ld.DR relied on the orders passed by the authorities below. We have perused the submissions advanced by both sides in the light of records placed before us. It is the contention of the Ld.AR that assessee has paid royalty to TMC in accordance with the techn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rein it was held that it was incumbent upon the TPO to work out the ALP of the relevant transactions by following some authorized method and the entire cost borne by the assessee cannot be disallowed by taking the ALP at Nil. The Tribunal also referred to the decision of the Hon'ble Delhi High Court in the case of CIT v. EKL Appliances Ltd.. ITA No. 1068/2011 dated 29-3-2012. In the aforesaid decision. the assessee entered into an agreement pursuant to which it paid brand fee/royalty to an associated enterprise. The TPO disallowed the payment on the ground that as the assessee was regularly incurring huge losses, the knowhow/brand had not benefited the assessee and so the payment was not justified. This was reversed by the CIT (A) Tribunal on the ground that as the payment was genuine, the TPO could not question commercial expediency. On appeal by the department, the Hon'ble Delhi High Court held that the transfer pricing guidelines laid down by the OECD make it clear that barring exceptional cases, the tax administration cannot disregard the actual transaction or substitute other transactions for them and the examination of IT(TP)A No. 1315/Bang/2011 a controlled trans ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... also sates that the Assessee's stand is accepted opening it to a reading that the appeal has been allowed in favour of the Assessee as well as that of it being set aside for the TPO to do it in accordance with the methods recognized under the Act. 6. The Tribunal was also pleased to set aside the matter to the file of the TPO for AY 2008-09 when read with para 51 leads to a belief that the TPO is to recomputed the ALP. 7. Therefore, it is requested that the Hon'ble ITAT may clarify and adjudicate the above issue. 22. The Id DR reiterated the stand of Revenue as contained in the petition. We have considered the contentions in the petition and are of the view that the same are devoid of any merit. The addition by way of adjustments to the ALP has been deleted by the Tribunal in para 47 of its order. The observations in para 48 to 51 has been very clearly mentioned MP No. 7/Bang/20 I 5 to be purely academic. Therefore, the confusion as is sought to be brought out in the petition is without any basis and is rather mischievous. All that the AO has to do while giving effect to the order of Tribunal is to delete the addition on account of adjustment to ALP. We may also add ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... national transaction. Respectfully following the above view, we direct the Ld.AO/TPO to delete the adjustment proposed towards royalty as a separate international transaction. Accordingly, ground nos. 10 to 12 raised by assessee stands allowed. 13.1 The ld.DR relied on the order of the lower authorities and he submitted that since the assessee has adopted TNMM and the TPO has also accepted the methods for calculation ALP, the TPO has not made separate adjustment in regard to payment of royalty, therefore, this issue should not be raised by the assessee. 13.2 After hearing both the sides, we observe from the order of the TPO, he has calculated the ALP in regard to royalty payment determined under TNMM of Rs. 154.54 crores however, no separate adjustment of royalty has been proposed by the TPO since the TNMM was adopted at NTT level which includes royalty also. The ld.DRP also expressed his opinion that the TPO has not proposed any adjustment towards royalty payment. Considering the above observations and arguments, we uphold the order of the DRP and no separate adjustment is required for the payment of royalty if the TNMM approach has been adopted at entity level as dec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... DS; but is a statutory deduction on an asset which is otherwise eligible for deduction of depreciation. Section 40(a)(i) and (ia) of the Act provides for disallowance only in respect of expenditure, which is revenue in nature, therefore, the provision does not apply to a case of the assessee whose claim is for depreciation, which is not in the nature of expenditure but an allowance. The depreciation is not an outgoing expenditure and therefore, provisions of Section 40(a)(i) and (ia) of the Act are not applicable. In the absence of any requirement of law for making deduction of tax out of expenditure, which has been capitalized and no amount was claimed as revenue expenditure, no disallowance under Section 40(a)(i) and (ia) of the Act would be made. It is also pertinent to note that depreciation is a statutory deduction available to the assessee on a asset, which is wholly or partly owned by the assessee and used for business or profession. The depreciation is an allowance and not an expenditure, loss or trading liability. The Commissioner of Income Tax (Appeals) has held that the payment has been made by the assessee for an outright purchase of Intellectual Property Rights and not ..... X X X X Extracts X X X X X X X X Extracts X X X X
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