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TMI Blog2023 (9) TMI 596X X X X Extracts X X X X X X X X Extracts X X X X ..... agreements with respect to the timing, tenure, geographical location of the parties, relevant terms and conditions of the agreement, justification for increasing it by 2% and consequent increase in the functional liability of the recipient party etc. and submit before the learned transfer pricing officer for examining the arm s-length price. The first onus lies on the assessee to submit that the international transactions of the payment of royalty at the rate of 5% on carcass grade carbon black is arm s-length. Accordingly, we set-aside all the grounds of appeal of the assessee with respect to the benchmarking of international transaction back to the file of the learned assessing officer where the assessee would be benchmarking the transaction by adopting the cup method as held above. The learned AO/TPO may examine the benchmarking and decide the issue afresh. In the result, ground number 1 7 of the appeal for assessment year 2006 07 are allowed with above directions. TP Adjustment - holding that the arm s-length price of the royalty incurred is Rs nil - As for the similar reasons, with respect to the carcass grade carbon black royalty paid at the rate of 5%, we have set-a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot applicable in the facts of the case. In view of this, we do not find any infirmity in the direction of the learned dispute resolution panel and dismiss the solitary ground of appeal. - Shri Prashant Maharishi, AM And Shri Rahul Chaudhary, JM For the Assessee : Mr. Percy J Pardiwala Sr Adv, Mr. Jeet Kamdar, Adv For the Revenue : Ms. Samruddhi Hande, Sr.AR. ORDER PER BENCH 01. This is the bunch of 8 appeals in case of Cabot India Ltd (the assessee/appellant) for several years starting from assessment year 2006 07 to 2011 12 involving common issue of transfer pricing with respect to benchmarking of international transaction of Royalty expenditure and corporate taxes issues of cenvat credit, disallowance of carry forward of losses, depreciation and addition on account of non-reconciliation of ITS data. Both the parties submitted that with respect to the benchmarking of Royalty, the most appropriate method is required to be adjudicated and with respect to carry forward of losses and addition on account of non-reconciliation of ITS data only direction to the assessing officer is required. In view of this, both parties argued all the grounds together a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... new technology, therefore the increase of 3% royalty in case of carcass grade product is not justified. Thus the learned transfer pricing officer computed the arm s-length price of the royalty at the rate of 2% against the rate of 5% paid by the assessee. When the matter reached before the learned dispute resolution panel the action of the learned TPO determining the arm s-length price of the royalty at the rate of 2% instead of 5% was upheld. The assessee preferred an appeal before the coordinate bench in ITA number 8495/M/2010 which was decided on 19 December 2012. With respect to the royalty benchmarking coordinate bench dealt with the issue as per Para number 11 of its order. The coordinate bench considered that for assessment year 2005 06 the coordinate bench in assessee s own case as per order dated 31 May 2011 in ITA number 6622/ MUM/2009 and CO number 170/M/2010 has set-aside the whole issue back to the file of the learned assessing officer for determining the most appropriate method. It is important to note down the finding of the coordinate bench for assessment year 2005 06 at Para number 11 (page number 13). In that assessment year also the royalty was paid at the r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e USA which is comparable with the assessee and AE. Therefore, he refused to accept the benchmarking for determining the arm s-length price. Accordingly, the learned TPO held that in the original assessment proceedings the assessee explained that there is no technical difference between the two rates of carbon black , assessee has also furnished technical commentaries which confirmed that there is no technical difference between trade grade carbon black and carcass grade carbon black. The only difference is in the pilate size and the ultimate usage either at the bottom of a tyre or in the sidewall. Therefore, he considered both the grades similar and accordingly held the arm s-length price of the royalty on carcass grade at the rate of 3% like trade grade. Accordingly adjustment was made amounting to ₹ 13,275,681. Consequently order giving effect under section 254 of the act was passed on 6/2/2015. 05. The assessee preferred an appeal before the learned CIT A submitting that assessee has justified the benchmarking by adopting CUP method as the most appropriate method stating that rates at which royalty was paid by other group companies of Cabot group to cabot Corporation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 6. The learned Commissioner of India Tax (Appeals) erred in relying in conjecture in order to decide the issue against the appellant. 7. Having regard to the facts and circumstances of the case and the provisions of law, the appellant submits that the Assessing Officer/Transfer Pricing Officer be directed to allow royalty payable on Carcass Grade Carbon Black @5% as claimed in the Return of Income. 07. Therefore in the appeal of the assessee the only challenge is with respect to determination of the arm s-length price with respect to royalty paid by the assessee on carcass trade carbon black. 08. The learned authorized representative i. Referred to the order of the coordinate bench dated 19 December 2012 wherein the matter was remitted back to the TPO for determining the arm s-length price using the most appropriate method. ii. referred to its letter dated 15 January 2015 wherein the assessee adopted CUP method by conducting search on royalty source database for companies in petrochemical industry wherein the royalty rates ranged between 3% to 30%. The assessee also submitted the rates of the secretary of industrial assistant website wherein the royalty rates ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... black of the assessee is at arm s-length price. 09. The learned departmental representative vehemently submitted that a. assessee is paying royalty on two products. There is no difference between both these products. b. Assessee has not submitted anything which even remotely suggest that the technology with respect to both the products are different. c. Earlier assessee was paying Royalty @ 2 % now by amending agreement it has increased it to 5 %. There is no change in FAR . Therefore even otherwise the increase is unjustified. d. For one product i.e. trade grade product assessee is paying 3% royalty and for carcass grade product assessee is paying 5% royalty. Therefore, internal CUP is available. The learned TPO is correct in adopting the CUP method and adopting the comparable price of 3% royalty on trade grade products. Thus, the argument of the learned DR was that CUP is the most appropriate method in this case where internal CUP comparable data is available. e. With respect to the other method it was submitted that for the impugned assessment year same is not applicable. f. Further the RBI rates and SIA rates cannot be considered appropriate for benchmarkin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... alty paid by the assessee to its associated enterprise of trade grade carbon black (3%) with royalty payment for carcass grade at the rate of 5%. Probably the learned TPO has considered it as internal CUP available. However, both the transactions are controlled transactions as those are with its associated enterprises. Therefore the comparison made by the learned TPO and the learned CIT A are completely incorrect. However, we hasten to add that though internal CUP does not apply, however we do not agree that for benchmarking this royalty transaction of carcass grade royalty payment at the rate of 5% CUP cannot be adopted as the most appropriate method for determining the ALP. Assessee argued before the coordinate bench for earlier years that the product manufactured by the assessee being unique and the technology or technical input provided by Cabot Corporation USA also being unique, it is very difficult to find out a case involving supply of similar technology or technical input so as to ascertain a comparable uncontrolled price paid for the royalty. The assessee also argued that no data available for that year in respect of uncontrolled comparable transactions which have a simi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itions and commercial aspects which may or may not be present in the present agreement of assessee with AE as neither the assessee nor the AO is privy to that information. Therefore, reliance on the rates adopted by the RBI and SIA both are rejected and cannot be taken for benchmarking the transaction by adopting cup method. The assessee has benchmarked the royalty rates on intellectual property database royalty source.com. Wherein the assessee has narrowed down search to only carbon black segment of industry. This is unfair and not justified. Each transaction of royalty is unique, if it is not so, who will pay royalty for a common technology. Therefore the assessee widen the search to include all companies in the petrochemical industry which gave a list of 11 companies as stated by the assessee. However before us, no such details were produced. Annexure L stated in the letter has not been submitted before us. Assessee also did not show that what is the ballpark rates of royalty in those 11 comparables and why the same should not be used. 012. The assessee has also used the transactional net margin method as the most appropriate method. However we do not have any reasoning fro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... roach cannot be adopted. Assessee has not shown any evidence of benchmarking by adopting the income based approach and therefore we hold that the CUP method is the most appropriate method. Assessee has used Royalty sources database that is required to be used or it may use any other royalty database, the assessee should make a search of the comparable royalty agreements with respect to the timing, tenure, geographical location of the parties, relevant terms and conditions of the agreement, justification for increasing it by 2% and consequent increase in the functional liability of the recipient party etc. and submit before the learned transfer pricing officer for examining the arm s-length price. The first onus lies on the assessee to submit that the international transactions of the payment of royalty at the rate of 5% on carcass grade carbon black is arm s-length. Accordingly, we set-aside all the grounds of appeal of the assessee with respect to the benchmarking of international transaction back to the file of the learned assessing officer where the assessee would be benchmarking the transaction by adopting the cup method as held above. The learned AO/TPO may examine the benchma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rned TPO/AO with direction to the assessee to benchmarked the above transaction by adopting the most appropriate method as CUP for establishing that those transactions are at arm s-length price for AY 2006-07 and 2007-08, with similar direction, for this year also, for Royalty payments for both grades of carbon black, where the learned TPO has challenged also with respect to the absence of any new technology for increase in the royalty rates, we set-aside this issue to the learned TPO, directing assessee to establish by the contemporaneous documents that the international transaction is at arm s-length of royalty payment. Ld TPO may examine the same and determine the arm s-length price. Accordingly ground number 5, 6 and 7 of the appeal are allowed with above direction. 018. With respect to the ground number 1 of unutilized cenvat credit against addition under section 145A of ₹ 25,397,539, it is the claim of the assessee that this issue is covered in favour of the assessee by the order of the coordinate bench in assessee s own case for assessment year 2001 02, 2002 03 and also confirmed by the honourable Bombay High Court for assessment year 2002 03. Further, the lea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e has paid a sum of ₹ 84,779,185/ . 027. Both the parties confirmed that for this year also the learned transfer pricing officer has determined the arm s-length price of the royalty expenditure at Rs Nil holding that there is no new technology, the direct benefit was not demonstrated and the royalty payments are therefore not justified. 028. Identical issue arose in case of the assessee for assessment year 2008 09 wherein we have set-aside the issue back to the file of the learned assessing officer/transfer pricing officer with a direction to the assessee to benchmark the royalty transaction and demonstrate before the lower authorities that it is carried out at arm arm s-length. With similar direction we also set-aside these grounds of appeal for assessment year 2009 10 to the file of the learned TPO/AO. In the result these grounds are allowed for statistical purposes. 029. No other grounds are pressed for assessment year 2009 10 and therefore the appeal of the assessee for assessment year 2009 10 in ITA number 6318/M/2014 is partly allowed. 030. For assessment year 2010 11 the assessee has filed appeal in ITA number 2108/M/2016 and the learned assessing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l before us against the relief granted by the learned CIT A. 035. As we have set-aside the appeal of the assessee to the file of the learned transfer pricing officer wherein similar grounds of benchmarking of the royalty transactions are involved, the grounds of appeal filed by the learned assessing officer are also restored back to the file of the learned AO/TPO. Accordingly the appeal filed by the learned assessing officer is also allowed with above directions. 036. In the result appeal filed by the learned assessing officer in ITA number 2595/M/2016 for assessment year 2010 11 is allowed for statistical purposes. 037. ITA 2586/M/2016 is filed by the assessee and ITA number 1911/M/2016 is filed by the learned assessing officer for the assessment year 2011 12 against the assessment order passed by the learned assessing officer under section 143 (3) read with section 144C (13) of the act dated 29/1/2016 against the returned income filed by the assessee on 25/11/2011 at a loss of ₹ 312,278,296 is assessed at loss of ₹ 284,077,536. 038. The appeal of the assessing officer is against the direction of the learned Dispute Resolution Panel of deleting the ad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee has already discarded the same. Ld AO held that Once the assets are not used for the purposes of the business, depreciation on the same is not allowable. Accordingly he disallowed depreciation of ₹ 77,043,394. 044. Against which the assessee preferred an objection before the learned Dispute Resolution Panel. The learned DRP following the decision of the honourable jurisdictional Bombay High Court in case of Sonic Biochem And Extractions Private Limited, allowed the claim of the assessee. Accordingly, following the direction of the learned Dispute Resolution Panel, disallowance of depreciation was deleted but the learned assessing officer is in appeal before us. 045. After hearing the parties, we find that the learned dispute resolution panel has followed the decision of the honourable Bombay High Court. The learned departmental representative could not show us any reason that why the decision of the honourable Bombay High Court is not applicable in the facts of the case. In view of this, we do not find any infirmity in the direction of the learned dispute resolution panel and dismiss the solitary ground of appeal. 046. In the result ITA number 1911/M/201 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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