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TMI Blog2023 (7) TMI 1318X X X X Extracts X X X X X X X X Extracts X X X X ..... ricted to 3%, i.e., Rs. 3,34,61,905 against the actual claim of 8% i.e. Rs. 5,35,39,048. 1.6 Applying the ALP rate for royalty @ 3% as held by Hon'ble Courts in certain case laws which is not a methodology prescribed by Rule 10B(1) & Rule 10C. 2. Ld. AO erred in charging interest u/s 234B and 234C under the facts & in law in the circumstances of the case. 3. Ld. AO erred by initiating the penalty proceedings u/s 271(1)(c)." 3. Grunder India Pvt. Ltd. is incorporated in October 2008 and started its operations in November 2009 and is engaged in manufacturing of Latching relays, Solenoids and Actuators specifically used in electrical meters. Gruner India is a joint venture of Gruner AG, Germany in India. The assessee enjoys the exclusive rights to manufacture the relays, actuators and solenoids in India. 4. The assessee applied aggregation approach under TNMM on entity level to justify the ALP of all the transactions including payment of Royalty/FTS alongwith the transaction for purchase of raw material and other transactions. Excerpts from the order of the ld. DRP: "The present proceedings arise with reference to the draft assessment order passed by the Assessing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ces. The assessee contends that the amounts paid under the royalty license and technical support agreements had to be viewed along with all other expenses and, therefore, aggregated. The Revenue's contention, however, is to the contrary. 9. Recently in the judgment of this Court in Magneti Marelli Powertrain India (P) Ltd. v. Dy. CIT [2016] 389 ITR 469/75 taxmann.com 213, this Court had observed after noticing the judgment in Sony Ericsson Mobile Communication India (P.) Ltd. (supra) as well as in the CIT v. EKL Appliances Ltd [2012] 345 ITR 241/209 Taxman 200/24 taxmann.com 199 (Delhi), and observed as follows:- ".............14 The assessee/appellant during 2008-09 entered into four License & Technology Assistance Agreements (LTAAs) with its overseas AE for four products for obtaining ECU technology. In return for the technical know-how, the assessee agreed to compensate the AE through a fee amounting to US $ 2 million for each LTAA (total US$ 8 million equivalent to over Rs. 38 crores) on installment basis. .................... 16. In the light of the above discussion, this court holds that the explanation by the assessee that the payment of Rs. 38.58 crores in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ansaction basis for transfer pricing. The TPO also observed that royalty and technical services fees together amounted to 11.10% of the total operating expenses of the assessee, and therefore these action should be separately benchmarked. 1.2.2 The TPO further observed that payment of royalty is not required to be paid to the AE because it is not bringing any income to the assessee directly. With regard financial services fee payment, the TPO held that the assessee is endorsing the technology developed by the AE which is further adding to the reach of the AE, and payment of technical services fee is not justified as AE is charging itself. The TPO, thus applying CUP method, determined adjustment of Rs. 835,79,670/- which has been proposed enhancement in the draft assessment order. 1.2.3 The assessee has filed objections u/s 144C (2) before the DRP to the draft asstt. Order. Gruner India Private Limited (Gruner India" or taxpayer) was incorporated in October 2008 and started its operations in November 2009. It is engaged in manufacturing of Latching Relays, Solenoids and Actuators (Electromechanical Product, used in electrical and electronic meters industry and automotive in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... approach adopted by the TPO, treating royalty and FTS transactions as separate 'International Transaction' for the purposes of benchmarking the arm's length price. It is also alleged that the TPO failed to follow the directions of Hon'ble Delhi High Court in assessee's own case for AY 2011-12, as remanded by the Hon'ble ITAT and failed to apply CUP. 2.2.2. The assessee has contended that in the TP study, aggregated approach was adopted under TNMM method (OP/OC of 10.92% as PLI) at the entity level and the average PLI of 9 comparables stood at 4.56%. It is further contended that the TPO in original order dated 22.01.2016 had accepted all the transactions under the TNMM to be at arm's length price. In page 5 of the synopsis, Ld. AR of the assessee has referred to the Hon'ble ITAT decision (para 13 & 14) to contend that the TPO was required to follow the directions of the Hon'ble ITAT and should have applied TNMM at entity level. 2.2.3 We have considered the submissions and arguments of the assessee and perused the Hon'ble ITAT Delhi order on the issue in para 13 of the order Hon'ble ITAT has referred to the appeal decided by the Hon& ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 16) 240 Taxman 713. Upholding the ITAT decision in this case on the issue of payment of technical assistance fee Hon'ble High Court held that the payment to AE cannot be justified merely by explaining the necessity, relying on profits at entity level. Relevant paragraph of the Hon'ble High Court's order (in Magneti Marelli case) is as under: "15. The assesse's argument that the technology itself would not have been given to it, but for the substantial fee (paid over and above the royalty payable), in the opinion of this court, requires a closer scrutiny. The initial burden is always upon the assessee to prove that the international transaction was at Ami's Length. Its TP report necessarily bad to draw a comparison with other entities (maybe competitors) to show the general degree of profitability of the venture in question. The lower authorities quite correctly turned down the method of explaining the justification of the technical feewith "proof" of its necessity by saying on profits. Undoubtedly, the assessee was obliged to make the payment and that obligation arise from the agreements, a pre-incorporation binding contract. However, that contractual obligation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... judgments, which has held that payment of royalty and technical fees, should normally be benchmarked separately, irrespective of the growth in turnover for the years, or the profit earned at the entity level. We have referred to some of the decisions in the cases of (i) Abhishek Auto Industries Ltd. v. Dy. CIT [2011] 9 taxman.com 27 (Delhi) wherein it had been held that only International actions are to be taken into account and not the enterprise level; (ii) Dy. CIT A Diamonds (2011) 9 taxmann.com 37/43 SOT 523 (Mum.) wherein it had held that under TNMM ALP has to be determined on the profit realized from an International transaction and not at entity level: (iii) Birla Soft (India) Ltd. v. Dy. CIT (2011)9 taxmann.com 263/44 SOT 664 (Delhi) the ITAT wherein it had been held that segmental account, even if unaudited, can be considered if the income or the expenses have been properly allocated; (iv) Chinon Behring Vaccines (P) Ltd v. Asstt. CIT [2011] 10 taxmann.com 125 (Mum) wherein it had been held that TNMM requires comparison of net margin realized from international transaction and not comparison of operating margin of the enterprise as a whole. According to the ITAT, tra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ount ICB (P) Ltd. [2011-TII-31ITAT-Mum-TP] wherein it had been held that segmental results are to be considered and not the profit at entity level; (xi) Twinkle Diamond (supra) and Addl. CIT v. Tej Diam [2010] 37 SOT 341 (Mum) wherein it had been held that TNMM does not permit comparison enterprise level profits and that it requires comparison of net profit margin realized from an international transaction or aggregate of class of international transactions; (xi) UCB India (P.) Ltd. v. Asstt. CIT [2009] 121 ITD 131 (Mum.) wherein it had been held that Rule 10B(1)(e) refers to net profit realised from international transactions and not of enterprise as a whole. The assessee cannot justify its inability to evaluate its transaction on stand-alone basis on the ground that there is no statuary requirement to maintain segmental data. Entity level comparison not permissible when only 50% transactions were international transactions; ALP to be determined on segmental results only: (xviii) Asstt. CIT vs. LE Trade Corpn. (India) [2011] 44 SOT 457 (Delhi) wherein it had been held that the AO had made the adjustment by applying CUP method on transaction by transaction basis and the ITAT upheld ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rmining the Arm's Length Price (ALP) of the Fee for Technical Services to be "NIL", without appreciating the fact that technical personnel of Gruner AG, Germany visited India from time to time to render technical services and support. 7.3. In disregarding the legally binding agreements entered between the appellant and Gruner AG, Germany pertaining to payment of royalty and Fees for Technical Services respectively without assigning any cogent reasons. DRP directions: 3. Having considered the submission of the assessee, we find that TPO's action of holding the arm's length price (ALP) of royalty and FTS, at NIL is within the scope of remand by the Hon'ble ITAT and the direction of the Hon'ble High Court in 's own case for AY 201112. In the show cause notice of the TPO dated 242018 (Para 3) CUP, Le, the ratio of royalty expenses to sales by the comparable, UCAL Fuel Systems Ltd. (0.42%) as against 5.82% of the assessee, was proposed. However, in respect of FTS, the TPO asked the assessee to justify the payment of Rs.391,46,879/- to the AE, in view of the fact that royalty was already being paid for the technical know-how for manufacturing the produ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oyalty by the AE, Gruner AG. The AE has similar venture in Serbia and Tunisia (as per the Gruner AG website), as that in India, and the assessee could have demonstrated that the rate of royalty payment by the assessee in India, was comparable with that by the Serbia and Tunisia units. In the absence of such information, being furnished by the assessee, one is compelled to seek external comparables within India in similar trade. Hon'ble Delhi Tribunal in case of Lumax Industries Ltd. vide ITA No.6212/Del/2013 order dated 22.04.2016 held as under: "22.............. Moreover, the following decisions are instances of the external CUP having been employed and this has not been disputed by the Department:- 1. Sona Okegawa Precision Forgings Ltd. v. ACIT (ITA No.4781/Del/2010) 2 ACIT v. Sona Olegaus Precision Forgings Ltd. (ITANo.260/Del/2010) 3. CIT v. Federal Mogul TPR India Ltd. (ITA No 398/2012) 4. Climate Systems India Ltd. v. CIT (2009) 319 ITR 113(Delhi) 5. CIT v. Eicher Motors Ltd. (2007) 293 ITR 464 (MP) 6. Praga Tools Ltd. v. CIT (1980) 123 ITR 773 (A&P) 7. Ekl Appliances (2012-TII-01-HC-DEL-TP) 8. Ericson India Pot. Ltd. v. DCIT (2012- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g royalty and FTS at entity led on ground that aggregation approach can be accepted only if the volume of expenses is very small as compared to the operating expenses. 7.5. by failing to appreciate that application of aggregation approach is based on principle of close interrelation between the transaction and not upon volume of expenses." 5. Heard the arguments of both the parties and perused the material available on record. 6. Two issues have to be considered in this case. The first being whether the CUP is the MAM or TNMM is the MAM. Second is whether the ALP for royalty @ 3% is a correct methodology determined by the ld. DRP or not. 7. Rule 10B(1) reads as under: "10B (1) For the purposes of sub-section (2) of section 92C, the arm's length price in relation to an international transaction [or a specified domestic transaction] shall be determined by any of the following methods, being the most appropriate method, in the following manner, namely :- (a) comparable uncontrolled price method, by which,- (i) the price charged or paid for property transferred or services provided in a comparable uncontrolled transaction, or a number of such transactions, is identif ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rable uncontrolled transaction, or a number of such transactions, is determined; (iii) the normal gross profit mark-up referred to in sub-clause (ii) is adjusted to take into account the functional and other differences, if any, between the international transaction [or the specified domestic transaction] and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect such profit mark-up in the open market; (iv) the costs referred to in sub-clause (i) are increased by the adjusted profit mark-up arrived at under sub-clause (iii); (v) the sum so arrived at is taken to be an arm's length price in relation to the supply of the property or provision of services by the enterprise; (d) profit split method, which may be applicable mainly in international transactions [or specified domestic transactions] involving transfer of unique intangibles or in multiple international transactions [or specified domestic transactions] which are so interrelated that they cannot be evaluated separately for the purpose of determining the arm's length price of any one transaction, by which- (i) the combined net p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le uncontrolled transaction or a number of such transactions is computed having regard to the same base; (iii) the net profit margin referred to in sub-clause (ii) arising in comparable uncontrolled transactions is adjusted to take into account the differences, if any, between the international transaction [or the specified domestic transaction] and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect the amount of net profit margin in the open market; (iv) the net profit margin realised by the enterprise and referred to in sub-clause (i) is established to be the same as the net profit margin referred to in sub-clause (iii); (v) the net profit margin thus established is then taken into account to arrive at an arm's length price in relation to the international transaction [or the specified domestic transaction]; [(f) any other method as provided in rule 10AB.]" 8. Rule 10C reads as under: "10C. (1) For the purposes of sub-section (1) of section 92C, the most appropriate method shall be the method which is best suited to the facts and circumstances of each particular international tran ..... X X X X Extracts X X X X X X X X Extracts X X X X
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