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TMI Blog2024 (2) TMI 386X X X X Extracts X X X X X X X X Extracts X X X X ..... is issue came for consideration before Special Bench in the case of Total Oil India Pvt. Ltd. [ 2023 (4) TMI 988 - ITAT MUMBAI (SB)] wherein it answered the following question in favour of the revenue as held where dividend is declared, distributed or paid by a domestic company to a non-resident shareholder(s), which attracts Additional Income Tax (Tax on Distributed Profits) referred to in Sec. 115-O of the Act, such additional income tax payable by the domestic company shall be at the rate mentioned in Section 115- O of the Act and not at the rate of tax applicable to the non-resident shareholder(s) as specified in the relevant DTAA with reference to such dividend income. Nevertheless, we are conscious of the sovereign's prerogative to extend the treaty protection to domestic companies paying dividend distribution tax through the mechanism of DTAAs. Thus, wherever the Contracting States to a tax treaty intend to extend the treaty protection to the domestic company paying dividend distribution tax, only then, the domestic company can claim benefit of the DTAA, if any. Decided against assessee. Levy of interest u/s 234B 234C of the Act, which is consequential and mandat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as royalty to Toyota Motor Corporation, Japan (henceforth TMC) and Toyota Motor Asia Pacific Pte Ltd., Singapore (subsequently TDEM). The royalty payment was made under the Technical Assistance Agreement between the assessee and its AE. The assessee paid royalty on the net ex-factory sale price of manufacturing sales (both export and domestic) as under: 1. Manufactured vehicles sold in India -6% of LVA 2. Export of manufactured vehicles and Parts -6% of LVA 3. Spares and components 3% of LVA The break-up of royalty paid was as follows: Particulars Nature of Royalty Amount (Rs.) TMC Royalty towards license and technology for manufacture and sale of licensed vehicles and parts and components 6,35,65,75,520/- TDEM Royalty towards license and technology for manufacture and sale of accessories 6,46,18,88,517/- 3.2 During the transfer pricing proceedings, the TPO issued a show-cause notice to the assessee in which he noted that royalty should be charged on new technology transfer and not at a constant rate a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o, towards achievement of a common goal, it is not possible to split the financial data to arrive at the net result from a particular and individual transaction. The data regarding comparable transactions are available only at the entity level and not at the individual transaction level. The net profit at an entity level would broadly justify the intrinsic value of all the underlying transactions particularly when the trading and manufacturing segments are interdependent and integrated. When arm's length price is determined using combined transaction approach under TNM M, an individual item cannot be separately evaluated. Under such circumstances, once the net profit margin is demonstrated to be at arm's length, it pre-supposes that the various components of income and expenditure that have been considered in the process of arriving at the Net Profit are also at arm's length. Therefore, separate evaluation of royalty payments is not required. 3.4 The TPO rejected the arguments of the assessee that royalty could not be benchmarked separately, holding as follows: 10.3.1 Though segmental information with respect to manufacturing and trading has been provide ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pegged at 4.7%. The assessee highlighted the fact that TMC incurs R D expenses to the extent of 3.88% of sales, which was higher than the effective royalty rate paid by the assessee. Therefore, the assessee contended, that even if the royalty payment was separately benchmarked, it would still be at arm's length based on the above external comparable data. 3.6 The TPO rejected the assessee's submission and held that CUP was to be taken as the MAM for benchmarking royalty. The TPO also observed that, apart from the payment of royalty, the assessee was having in-house R D expenses and making payment for technical know-how also. As these expenses were related to the development/improvement of technical design used for manufacturing activity, the sum of these expenses was considered for benchmarking the transaction. In the case of the comparables, royalty R D expenses were considered to benchmark the transaction. Based on this formula, the TPO found the ratio of the assessee's royalty expenses to net sales to be 4.30%. The TPO selected 3 comparables, that had been chosen by the taxpayer itself in the manufacturing segment in its TP study viz. Ashok Leyland Ltd., SML ISU ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Technical Assistance Agreement dated 15.12.2010, which are reproduced below, indicate that the assessee is also purchasing parts, components and materials from third parties, to whom the technical know-how arrangement does not apply. 4.1 The ld. CIT(A) observed that Outgoing Licensed Parts means the parts and components exclusive for other vehicles than the Licensed Vehicles, of which the manufacturing license shall be granted to the Licensee under this Agreement, and which may be manufactured or purchased from third parties by the Licensee and sold by the Licensee directly or indirectly lo the Licensor or other third parties as original equipment parts and/or spare parts for such other vehicles. The scope of the Outgoing Licensed Parts and their respective purchasers shall be stipulated in Appendix B attached hereto, which may from time to time be changed by the Licensor. 4.2 Local Parts means the parts, components and materials for the Licensed Vehicles or the Outgoing Licensed Parts, which may be manufactured or purchased from third parties by the Licensee by using any technical now-how, information, data, etc. furnished by the Licensor to the Licensee hereunder and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er for the A.Y. 2003-04 in which the Tribunal had clearly stated that the finding of interlinking of the manufacturing and trading segments has to be case- specific and year-specific. The royalty paid for A.Y. 2018-19 is governed by the Technical Assistance Agreement dated 15.12.2010, which was not the case in A.Y. 2007-08. Thus, it is seen that none of the decisions of the Tribunal in the assessee's case for the earlier years have held that royalty cannot be benchmarked as a separate transaction. The order of the Tribunal for A.Y. 2007-08 was upheld by the Hon'ble High Court of Karnataka vide its order dated 13.07.2018. However, in the aforesaid judgment, the Hon'ble High Court had held that no substantial question of law arose in that appeal. The High Court, relying on its decision ITA No.536/2015 C/w ITA No. 537/2015 in the case of Pr. CIT Anr. Vs. M/s. Softbrands India Put. Ltd., had dismissed the Revenue's appeal on the grounds that unless an ex-fade perversity in the findings of the Income Tax Appellate Tribunal is established by the assessee, the appeal at the instance of an assessee or the Revenue under Section 260-A of the Act was not maintainable. Thus, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee in its submissions has also acknowledged that the royalty/R D expenditure is primarily related to manufacturing activity in the case of both the assessee and the comparable companies. Therefore, it would be appropriate if the denominator is manufacturing sales in the case of the comparables also. The assessee has also submitted that while computing the royalty ratio, the TPO has adopted gross manufacturing sales, which is inclusive of excise duty, as the denominator. The TPO in para 7.1 of the order has accepted the assessee's claim that excise duty is a non-operating item to be reduced from the operating revenue as well as the operating cost. The TPO is directed to compute the royalty ratio of the assessee as well as of the selected comparables, by taking net manufacturing sales, exclusive of excise duty as the denominator. 4.8 In the order u/s 92CA, the TPO had considered R D expenses of Rs. 50.21 crores and Technical Know-how fees paid of Rs. 21.32 crores as part of royalty for computing the ratio. The break-up of the payment to the AEs for technical know-how is tabulated below: Sl. No. Nature of International Transaction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Toyota Motor Corporation 32,37,77,269 Toyota Motor Asia Pacific Pte Ltd 47,00,419 Toyota Daihatsu Engineering and Manufacturing Co.Ltd. 1,00,39,264 Toyota Auto Body Co. Ltd. 1,12,23,112 Sub Total (A) 34,97,40,064 Software Expenses Toyota Motor Corporation 6,48,31,938 Toyota Motor Asia Pacific Pvt. Ltd. 23,00,054 Toyota Daihatsu Engineering and Manufacturing Co. Ltd. 1,42,23,521 Sub Total (B) 8,13,55,512 Others Training Development, Travelling, Membership Others Toyota Motor Corporation 8,62,31,403 Toyota Daihatsu Engineering and Manufacturing Co. Ltd. Sub Total (C) 8,62,31,403 Total (A+B+C) 51,73,26,9 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dance with the procedure and conditions set forth in Appendix G attached hereto. 4.14 From the above Article, it is clear that the Technical Assistance Fee is paid for the know-how used in the manufacturing functions of the assessee. The details submitted by the assessee also confirm the same. This amount has rightly been included by the TPO. 4.15 With respect to the R D expenses, it is observed that the homologation and testing charges are directly related to the manufacturing functions of the assessee. The assessee has given the following details of homologation and testing charges: The assessee has entered into homologation testing service agreement with TMC and under which TMC renders certain services or assistance to TKM to undertake homologation testing of vehicles, parts and components to comply with India specific regulatory requirement. The assessee paid Rs. 47,00,419/- to Toyota Motor Asia Pacific Ptd Ltd (TMAP) for import of Toyota Vios passenger vehicle, Lexus ES vehicle for testing and certification purpose, The assessee paid testing evaluation expenses of Rs. 1,00,39,263/- to TMAP for Etios X cross edition The Assessee availed the support of Toy ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... isions of Coordinate Benches of this Tribunal as well as various High courts, Co-joint reading of these orders, we direct the Ld.AO/TPO to delete the adjustment proposed for royalty as a separate international 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. Conside ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to net sales ratio in case of Appellant without appreciating that these expenses are not related to technical know-how for manufacturing. 7. Without prejudice to above, the learned CIT(A) has erred in confirming the action of the TPO in: a. Not considering Tata Motors Ltd and Mahindra and Mahindra Ltd as comparable for computation of arm s length price of royalty payment without appreciating the fact these companies incur R and D expenses with unrelated parties. b. Adopting single year data for analysis, without appreciating that the business, commercial and technological factors mandate adoption of multiyear data and. c. Not granting adjustment for superior quality of technology in case of Appellant. 8. The CIT(A) has erred in stating that the Appellant itself had separately benchmarked royalty payments without appreciating that it had adopted TNMM at entity level in the TP Study and separate benchmarking details of royalty were submitted during assessment proceedings as alternative contention. 7. As we decided in ground No.3 in favour of the assessee in earlier para, the ground Nos.4 to 8 relating to computation of royalty have become academic. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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