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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 ..... f ALP at Nil is incorrect. The Hon ble High Court of Delhi in Magneti Marelli [ 2016 (11) TMI 123 - DELHI HIGH COURT] held that if segregation approach is permissible, TNMM shall apply. Owing to these facts, the appeal of the assessee is hereby allowed. X X X X Extracts X X X X X X X X Extracts X X X X ..... and the direction was given to apply the TNMM at the entity level. The Hon'ble Jurisdictional High Court in the aforesaid order 20.12.2016 by following the judgment in the case of Magneti Marelli Powertrain India Pvt. Ltd. Vs DCIT (2016) 290 CTR 60 (DEL) remitted the issue back to the file of the TPO for reconsideration. The relevant findings have been given in paras 8 to 12 of the said order which reach as under: 8. So far as the question of aggregation or desegregation, as the case may be concerned, we notice that there can be no strait jacket or inviolable rule in this regard. The recent judgment of this Court in Sony Ericsson Mobile Communication India (P) Ltd v. CIT [2015] 374 ITR 118/231 Taxman 113/55 taxmann.com 240 stated that aggregation of such transaction is permissible and relied upon the OECD Commentary in this regard. At the same time the observations are not in fact determinative or conclusive. The Court was careful to leave the issue open for examination having regard to the facts of each case. In other words, as to whether the assessee's claim that aggregation is essential in a given case is an entirely fact dependent exercise to be viewed having regard ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ify that in the event it is held that aggregation is permissible in de fits of this case, the findings of the Revenue authorities and the Tribunal than the TNMM method was warranted, would not be disturbed. 12. In the light of the above findings, the appeal is partly allowed. The matter is remitted for re-consideration by the concerned TPO, who shall hear counsel for the parties and render findings on both aspects". 14. Since the facts, for under considerations are similar to the facts involved in the preceding assessment year 2011-12. We, therefore, by respectfully following the aforesaid referred to order, remand this issue back to the file of the AO/TPO to be decided as has been directed in ITA 708/2016 vide order dated 20.12.2016 by the Hon'ble Jurisdictional High Court." 1.2 The TPO considered the submission of the assessee vide letter dated 27.2008 in response to the show-cause notice, however rejected the assessee's contention of following the aggregated approach and applying TNMM at the entity love to justify payment of royalty and technical fee to the AE. Referring to the UN manual on transfer pricing, TPO was of the view that the taxpayer's indiv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1/-. 2. Objection wise directions of the panel are as below: 2.1 Ground No. 1 & 2: 1. Draft Assessment Order passed u/s 254/143(3) r.w.s. 144C r.w.s. 92CA(3) under the set aside directions of Hon'ble Delhi ITAT is bad in law and needs to be quashed. 2. Ld. TPO has erred in law and on facts of the case by proposing to add Rs. 8,35,79,670/- to the income of the assessee u/s 92CA(3). DRP's Directions 2.1.1 These grounds are general which does not require separate adjudication. 2.2 Ground Nos. 3-6: 3. Ld. TPO has erred by benchmarking the transactions of Royalty and FTS payments using CUP Method even when these are justified under TNMM. 4. Ld. TPO erred in failing to appreciate that when CUP cannot be applied due to absence of comparables then ALP shall be determined under other suitable method which may be TNMM. 5. Ld. TPO failed to follow the directions issued by Hon'ble Delhi High Court on the same facts in the case of assessee for AY 2011-12, requiring to follow the directions issued in Magneti Marelli Powertrain India Pvt. Ltd. vs. DCTT [(2016) 389 ITR 469] and Sony Ericsson Mobile Communication India (P) Ltd. us. CIT [(2015) 374 ITR 118)] ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fter hearing counsel for the parties. However, we clarify that in the event it is held that aggregation is permissible in the facts of this case, the findings of the revenue authorities and the Tribunal that the TNMM method was warranted, would not be disturbed." 2.2.3.2 It is clear that application of CUP was left open by the Hon'ble High Court to the TPO, depending on the determination of the issue of aggregation/ segregation itself. It is only in the event when it is found that aggregation is most appropriate approach in the facts of the case, that the TNMM method could not be disturbed. There is no dispute that in the event of considering the aggregated approach at the entity level, TNMM method would be the most appropriate method holding the assessee as the tested party. 2.2.4 The Panel has also considered the decision dated 25.10.2016 of Hon'ble Delhi High Court in case of Magneti Marelli (290 CTR 60), referred to in the order dated 21.12.2016 of the Hon'ble Delhi High Court in assessee's case. The matter, in case of Magne Marelli, related to payment of technical assistance fee. Hon'ble Delhi High Court in case of Magneti Marelli (supra), also conside ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a specific query, it could not be said by the assessee that later profits justified it, or that has essentiality precluded the scrutiny. 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 the circumstances was correctly not accepted. The first question is answered against the assessee. The remit directed by the impugned order is therefore, upheld." 2.2.4 Having considered the decisions above, we are of the view that the enquiry into international transactions relating to payment of royalty and technical services fee to the AE by the assessee cannot be subsumed in the profits earned from the sale of manufactured goods at the entity level, per se. The assessee's turnover of finished gods is Rs.92.04 crores, which includes export sales to AES of Rs. 24.11 crores (only) Import of raw materials, spares and components amounting to Rs.28.73 accounted for 35.6% of the operating cost). The royalty has been paid on the tire sales of finished goods, 74% of which is to the unrelated parties. Import of raw materials, payment of royalty and FTS, and sale/export of finished goods are three signifi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... venue stream; (ix) Ranbaxy Laboratories Ltd. v. Addl. CIT [2008] 167 Taxman 30/110 ITD 428 (Delhi) wherein it had been held that ideally ALP should be determined transaction by transaction; (x) SAB Labs India (P) Ltd. [2010-TII-44-ITAT- Bang-TP wherein it had been held that comparable with no segmental break/up/information is not to be considered; (xi) Star Diamond Group v. Dy. DIT (International Taxation) [2011] 9 taxmann.com 311/44 SOT 532 (Mum.) wherein it had been held that ALP of the International transaction is only to be determined. Entity level profit margin cannot be taken; (xii) ACIT v. Star India (P.) Ltd. [TT Appeal No. 3846(M) of 2006, dated 28-52008] wherein it had been held that each international transaction is to be examined separately and ALP should be determined accordingly and different activities cannot be clubbed and common ALP cannot be determined; (xiii) Dy. CIT v. Starlite [2010] 40 SOT 421 (Mum) wherein it had been held that TNMM does not permit comparison at enterprise level profits, it requires comparison of net margin realized from an international transaction (Xix) xxxxxx Software Solutions (P.) Ltd. Vs. Asstt. CIT (2011) 11 Taxmann.com 264/46 SOT 48 ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le Communication India (P) Ltd's case (supra) and Knorr-Bremse (supra), it is manifest that the contention of the ld. AR for aggregating all the international transactions including Payment of royalty, and then applying TNMM on entity level, cannot be upheld because the international transaction of Payment of royalty is independent of other transactions. The tribunal in assessee's own case has also jettisoned such argument advanced on behalf of the assessee for earlier years and has rightly held that the ALP of the international transaction of Payment of royalty' should be done separately on a transaction by transaction approach, which has been rightly interpreted by the assessee as a CUP method, that was employed by the assessee in its transfer pricing study report for the year under consideration. Ergo, we turn down the argument of the Id. AR and approve in principle that the TNMM cannot be applied and the international transaction of payment of royalty in respect of model 3DX has to be benchmarked by applying CUP as the most appropriate method." TPO action of applying CUP method for determining ALP of royalty is upheld. 7. La TPO has erred- 7.1. In disa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... services, or the comparable rate for the payment of services, the argued that FIS should be benchmarked alongwith the purchase of raw material, at the aggregate level (TNMM). Reliance was placed on the ITAT Delhi decision in case of Lumax Industries (ITA No.4456/Del/2012) 3.3 We are of the view that ALP of royalty payment could not be taken as NIL and benefit test could not be applied. Hon'ble Delhi High Court decision CIT Vs. Cushman & Wakefield (India) (P) Ltd. [2014] 367 ITR 730 is squarely on this issue. 3.3.2 In so far as the assessee's contention that UCAL could not be taken as comic we do not find the arguments acceptable. Both the assessee and the TPO haw failed to find a comparable using Royalstat data, which has paid royalty to totally unrelated party. It suggest that for benchmarking the ALP for royalty, the soquitument of having transaction with the unrelated party is not a necessary requirement. There are a catena of judgment on this issue. Further, the identity of products is not a valid criteria to exclude a comparable while benchmarking royalty. The basic product being transferred under the royalty license agreement is the technical knowhow to manufact ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nies is directly comparable with that de by the assessee company. The assessee, as observed, is also an auto ancillary manufacturing automotive parts for OEMs. In all these cases, as in that of the payment of royalty was related to transfer of technical assistance and Show in the automotive industry. That being so, the CUP method is available mps the issue of arm's length price qua the payment of royalty. 3.3.3. In view of the above, TPO is directed to adopt royalty rate of 3% for benchmarking the royalty payment. 3.3.4 With regard to the payment of technical services / assistance fee, the TPO has failed to apply CUP correctly as directed by the Hon'ble ITAT. The ALP could not be taken as NIL by applying the benefit test. The fact of expenditure being incurred by assessee for its business in not in dispute, and settled. In the DRP original order 21.12.2016 (page 15-17) has referred to the rates payable by the assessee for the technical services, as per the agreement. The TPO has failed to search for comparable cases to determine the arm's length price of the services, which was required for benchmarking and subsequent adjustment if any. In view of the above, TPO&# ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or similar services, in a comparable uncontrolled transaction, or a number of such transactions; (iii) the price so arrived at is further reduced by the expenses incurred by the enterprise in connection with the purchase of property or obtaining of services; (iv) the price so arrived at is adjusted to take into account the functional and other differences, including differences in accounting practices, 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 gross profit margin in the open market; (v) the adjusted price arrived at under sub-clause (iv) is taken to be an arm's length price in respect of the purchase of the property or obtaining of the services by the enterprise from the associated enterprise; (c) cost plus method, by which,-- (i) the direct and indirect costs of production incurred by the enterprise in respect of property transferred or services provided to an associated enterprise, are determined; (ii) the amount of a normal gross profit mark-up to such costs (compute ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... clause (i) may, in the first instance, be partially allocated to each enterprise so as to provide it with a basic return appropriate for the type of international transaction [or specified domestic transaction] in which it is engaged, with reference to market returns achieved for similar types of transactions by independent enterprises, and thereafter, the residual net profit remaining after such allocation may be split amongst the enterprises in proportion to their relative contribution in the manner specified under sub-clauses (ii) and (iii), and in such a case the aggregate of the net profit allocated to the enterprise in the first instance together with the residual net profit apportioned to that enterprise on the basis of its relative contribution shall be taken to be the net profit arising to that enterprise from the international transaction [or the specified domestic transaction]; (e) transactional net margin method, by which,-- (i) the net profit margin realised by the enterprise from an international transaction [or a specified domestic transaction] entered into with an associated enterprise is computed in relation to costs incurred or sales effected or assets emplo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t to which reliable and accurate adjustments can be made to account for differences, if any, between the international transaction [or the specified domestic transaction] and the comparable uncontrolled transaction or between the enterprises entering into such transactions; (f) the nature, extent and reliability of assumptions required to be made in application of a method." 9. In the light of the above, we have gone through the history of the case. The similar issue in the case of the assessee has been a subject matter of adjudication by the order of the Hon'ble High Court of Delhi vide order dated 20.12.2016. The Hon'ble High Court considered the issue of payment of assistance fee as held in the case of, 1. Magnetic Marelli (290 CTR 60) 2. EKL Appliances Ltd. (345 ITR 241) 3. Sony Ericsson (374 ITR 118) 4. Denso India Ltd. (240 Taxman 713) and remanded the matter to the revenue. 10. We find that the turnover of finished goods is Rs.92 Cr. and export sales to AE was Rs.24 Cr. The import of raw material was Rs.28 Cr. Royalty has been paid on the total sales. 12. In the specific facts of this case and export of goods to AE, the TNMM is the MAM. The ld. DRP has dete ..... X X X X Extracts X X X X X X X X Extracts X X X X
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