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TMI Blog2023 (12) TMI 1182X X X X Extracts X X X X X X X X Extracts X X X X ..... out appropriate allocation of the costs and what could be the profits on account of royalty which can be stated to be attributable on account of royalty. The assessee is directed to substitute the working on the basis of other method . The method of the assessee can be pigeonholed in the other method provided in Rule 10AB r.w.s. 92C (1) and in our opinion this is the MAM in the peculiar facts of the Assessee. Accordingly, we hold that other method would be a good substitute for CUP as there is lack of reliable comparables and looking to the fact that the royalty payments have been made for unique intangibles, therefore, we direct the ld. TPO to adopt other method as the Most Appropriate Method. However, the working given by the assessee before us as incorporated above needs to be examined afresh by identifying the costs and profits attributable to manufacture and sales to the non-AE and to find out appropriate allocation of the costs and what could be the profits on account of royalty which can be stated to be attributable on account of royalty. The assessee is directed to substitute the working on the basis of other method . With this direction, all the grounds rais ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s manufactured by the assessee. ASB Japan has been constantly investing in developing manufacturing and marketing knowhow for manufacturing and selling of injection molding machines. 6. In the TP Study Report assessee stated that royalty payment which is in connection with technology and brand name received by ASB India from its AE in Japan for which assessee is required to pay royalty @12%. The royalty is payable in respect of annual domestic sales and in the TPSR assessee used overall entity level TNMM for benchmarking the royalty payment. On sales of Rs. 116,44,01,257/- assessee had paid royalty of Rs. 13,91,42,366/- and it was stated that its margin in non AE segment are high and are at ALP in comparison with comparable uncontrolled transactions. 7. The ld. TPO was of opinion that royalty constitutes separate class and accordingly, he held that entity level benchmarking undertaken by the assessee is to be rejected. Accordingly, assessee was required to provide CUP analysis. In response, assessee conducted CUP analysis on a without prejudice basis and identified certain comparable uncontrolled transactions by referring to the Royalty- STAT data base to identify the compara ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ned on account of three functions i.e. the transfer of intangibles from the AE, manufacturing profits and profits attributable to sales function. The argument of the assessee is that it has come up with a method to reasonably attributed profit pertaining to the manufacturing and sales functions in the Non-AE segment and when this is reduced from the gross profits the difference should represent the thumb rule royalty. The assessee does not maintain segment wise accounts but to support its case, the assessee has claimed that it has bifurcated its accounts between the AE and Non-AE segment on the basis of the allocation key of 'material ratios. Subsequently when the assessee found that this allocation key is not proper, it has claimed that the revised bifurcation of accounts has been done on the basis of 'labour hours employed in manufacturing a machine' in both the segments. The assessee has claimed that there is more labour man-hours employed in the Non-AE segment as the machines manufactured in this segment are complete machines while the machines manufactured in the AE segment are semi-finished. The assessee claims that as per its methodology the profit that can be re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e that the assessee does not possess any technical knowhow and it is manufacturing molding machines as well as designing and manufacturing molds which is a huge technology intensive activity. This technical knowhow has been provided by ASB Japan. It has been contended before us that assessee makes machines for molding of PET bottles and there are various factors and check points in molding the PET bottles such as weight, production, volume, thickness etc., and only ASB, Japan has the technology for changing the form of the mold, changing the parts, machinery options, changing the normal molding process and change of temperature adjustment etc. There is a constant research and development which is undertaken by the ASB, Japan as it alone has requisite knowledge and repertoire to address any problem. It has been further stated that assessee receives various benefits from ASB Japan in the form of intangibles like; a. License to use brand ASB : ASB Japan had granted Assessee a license to use the name 'ASB in corporate name, trade name, trade mark, etc. b. License to use technical know-how: ASB Japan has licensed technical know-how to the Assessee for manufacturing and selli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of data shall be relevant in determining the MAM. The assessee submits that in the case at hand, there is inability to find comparables, especially in the case when the goods being manufactured are capital goods. Even the OECD Guidelines prescribe that in cases of unique and valuable intangibles, the applicability of CUP is not reliable, and the taxpayer must turn to other methods available at its disposal. He further submitted that CUP analysis was submitted on a without prejudice basis and in view of the reasons explained above the Assessee always pleaded with the ld.TPO/ ld. DRP that CUP is not the MAM. In any case, for the following reasons, the lower authorities have erred in taking into consideration the royalty agreements namely, Optikos Corporation and DynEco Corporation for use of technical knowhow only and ignoring the other two baskets of royalty agreements:- (i) The chosen agreements grant exclusive and worldwide license to the licensees therein, whereas as par TLA, the assessee has a non-exclusive license for use in India and in certain nearby countries only; (ii) The chosen agreements permit the licensees therein to grant the sub-license, which is not the case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... segment before royalty) less (Profit reasonably attributable to the functions performed by the Non-AE segment) The functions performed by the Non-AE segment are manufacturing and sales. As a benchmark of the manufacturing function, the Assessee proposes that the four comparable companies, identified in the contract manufacturing set for benchmarking the AE segment submitted before the ITAT as additional evidence, ought to be used As a benchmark of the sales function, the Assessee seeks to rely on the trading set of comparable companies, which the Assessee has filed as additional evidence before this Tribunal. Particulars OP/OR Royalty Rate as per the Technical License Agreement 12.00% Royalty as a percentage of Non-AE segment sales* A 10.85% Non-AE segment profit (after royalty, as per segmental res B 15.85% Profit before royalty C = A + B 26.70% Profit reasonably a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... priate comparables and looking to the unique and valuable intangibles which has been licensed to the assessee, we are unable to uphold that the CUP could be the most appropriate method in the case of the assessee. 20. In so far as other methods are concerned, i.e. RPM, CPM and PSM, the same are ostensibly are not applicable which has been admitted by both the parties. Even the TNMM also as agreed by both the parties under these facts are also not applicable because TNMM is one sided method which makes it difficult to apply in the cases where royalty transactions have been benchmarked wherein there is a transfer of valuable intangibles and therefore, TNMM would not give accurate results. 21. The other method as per Rule 10B reads as under:- 10AB. For the purposes of clause (f) of sub-section (1) of section 92C, the other method for determination of the arm's length price in relation to an international transaction [or a specified domestic transaction]shall be any method which takes into account the price which has been charged or paid, or would have been charged or paid, for the same or similar uncontrolled transaction, with or between non-associated enterprises, unde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntract manufacturing and that the principal, i.e., ASB Japan, being the owner of intangibles, would command a considerable amount of royalty given that the business is critically dependent on research and development and the quality of intangibles, which is entirely the responsibility of ASB Japan. Compared to other methods such as CUP and TNMM, the other method is more suitable, because the former methods do not factor in this party perspective and carry out a crude comparison with other companies without adjusting such comparison to the needs of the parties involved in the business group and transactions. 24. The other method is also relevant because it is price-oriented. The other method builds upon the price that would have been paid in an uncontrolled scenario. This is because the this method, as explained above, directly involves percentages of segmental profits and arrives at the arm's length percentage of royalty given that the TLA also stipulates royalty to be paid as a percentage of sales, the other method is directly applicable. This price-oriented approach is recognised by Rule 10AB as well which states that the other method can be any method which takes ..... X X X X Extracts X X X X X X X X Extracts X X X X
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