9911796707
TMI Blog2023 (2) TMI 1273X X X X Extracts X X X X X X X X Extracts X X X X ..... ;) u/s 92CA of the Income-tax Act, 1961. II. Grounds on rejection of the transfer pricing documentation, computation of Appellant's operating margin and use of various filters 2. The learned AO/ learned TPO/ Hon'ble DRP erred in rejecting the TP documentation maintained by the Appellant by invoking provisions of sub-section (3) of 92C of the Act. 3. The Learned AO/ Learned TPO/ Hon'ble DRP erred in rejecting comparability analysis undertaken in the TP documentation and in conducting a fresh comparability analysis by introducing various filters for the purpose of determining the Arm's Length Price ("ALP") of the international transaction. 4. The learned AO/ learned TPO/ Hon'ble DRP erred in treating foreign exchange as operating in nature. 5. The learned AD! learned TPO/ Hon'ble DRP erred in considering export incentives as non-operating in nature. Further, the Hon'ble DRP has not provided proper reasoning for rejection of Appellant's ground. 6. The learned AO/learned TPO erred in not appreciating the treatment of excise duty for computation of Appellant's operating margin. 7. The learned AO/ learned TPO/ Hon'ble DRP erred in sel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ited 16. The learned AO/ learned TPOL Hon'ble DRP erred in not considering that Hindustan Hardy Limited was selected by the learned TPO, in Appellant's own case, in the set of comparable companies for AY 2015-16 and AY 2016-17. 17 Further, learned AO/ learned TPO/ Hon'ble DRP erred in not considering the following companies in the final set of comparable companies which have been accepted by the Hon'ble DRP in Appellant's own case in previous assessment years: 1. Bharat Gears Limited in AY 2015-16; 2. Rare (Madras) Limited in AY 2015-16; 3. Packwell Gaskets Private Limited in AY 2016-17; 4. Sibar Auto Parts Limited in AY 2016-17. Iv. Grounds on benchmarking of payment of royalty separately and incorrect application of residual PSM 18. The learned AO/learned TPO/ Hon'ble DRP erred in disregarding the Transactional Net Margin Method ('TNMM') analysis performed by the Appellant to justify the arm's .ngth nature of the payment of royalty transaction. 19. The AO/ learned TPO/ Hon'ble DRP erred in not understanding that the Appellant had adopted TNMM for benchmarking the royalty transaction in its TP Documentation of FY 2017-18 as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pplication of PSM. 27. The learned AO/ learned TPO/ Hon'ble DRP erred in assigning arbitrary weights to the functions performed by the Appellant vis-à-vis the Associated Enterprises without carrying out a detailed FAR analysis. Further, the learned AO/ learned TPO/ Hon'ble DRP erred in applying an ad-hoc 50:50 profit split without giving any logical reasoning for arriving at this method. 28. The learned AO/ learned TPO/ Hon'ble DRP has also erred in determining the royalty rate at 0.335% on sales, without giving any logical basis for the same. 29. The learned AO/ learned TPO/ Hon'ble DRP erred in proposing an adjustment against royalty payment twice. The learned AO/ learned TPO/ Hon'ble DRP erred in not considering the fact that the royalty expenses have been considered as part of the operating cost base at an entity level for the purpose of adjusting the margins under the manufacturing segment using Transactional Net Margin Method ("TNMM") and considering royalty transaction under PSM analysis lead to double adjustment. Further, Hon'ble DRP erred in not considering their own directions passed in Appellant's case for AY 2017-18, considering ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve front axles, rear axle, propeller shafts, transmission units and engines. The assessee is a vendor to Toyoto Kirloskar Motors Limited. 4. After reference received, the assessee was asked to file documents as per sec. 92D of the Act. The assessee filed same and it was noticed that for determination of ALP, the tax payer had entered into the following international transactions:- Particulars Amount in Rs. Method used Purchase of raw materials components 449,34,41,578 TNMM Sale of sample parts 26,73,450 TNMM Sale of parts 256,47,06,798 TNMM Purchase of fixed assets including CWIP and TA fee CWIP 471,11,509 TNMM & other method Payment of technical assistance fee capitaliser 10,51,517 TNMM Payment of royalty 58,02,54,891 TNMM Payment of warranty fee 198,50,000 TNMM Payment of support fee 42,27,247 TNMM Payment of training fee 22,70,933 TNMM Payment towards repairs and maintenance 2,38,019 TNMM Payment of interest on loan 2,27,27,677 Other method Repayment of loan 52,58,60,000 Reimbursement of expenses 80,94,736 Other method Recovery of expenses 68,55,109 TNMM 5. The TPO further observed from the financial statements that there is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2909477(1) in the case of royalty adjustment, it was reduced to Rs.53,06,90,000/-, accordingly the total adjustments were suggested for Rs. 1,01,13,20,000 ( Manufacturing Segment Rs. 48,06,30,000 + MSS Segment for Royalty Rs. 53,06,90,000). Further the DRP direction dated 15.07.2022 the T.P. adjustment was reduced to Rs. 85,30,90,000/- ( Manufacturing Segment Rs. 32,24,00,000 + MSS Segment for Royalty Rs. 53,06,90,000). 9. Aggrieved from the final assessment order dated 21.07.2022, DIN No. ITBA/AST/S/143/(3)/2022-23/1043968195(1), the assessee filed appeal before the Income Tax Appellate Tribunal. 10. The ld.AR submitted that the assessee filed rectification application before the DRP on 16/08/2022 which is placed at paper book page No. 560 to 562 and submitted that the royalty adjustment has been made twice and it was further submitted that in assessee's own case, the facts remains similar to assessment year 2016-17 and the DRP panel is upheld royalty expenses have already been considered as part of operating expenses at entity level under the manufacturing segment using TNMM subjecting the royalty transactions against to PSMN analysis would lead twice adjustment. This rectifica ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot require any interference, therefore adjustment under the royalty calculated by the lower authorities should be upheld. 13. After hearing both the parties and perusing the entire materials on record and examining the order of the lower authorities, we observe that the ground No.1 was not pressed by the AR of the assessee, therefore, it is dismissed as not pressed. 14. In respect of ground nos.2 to 11, after considering the submissions of the ld.AR that after rectification order passed by the revenue authorities as observed from the their orders which are placed on the paper book , it becomes academic in nature and does not require any adjudication. 15. In ground No.12 to 17 and 29, we found substance in the submissions of ld.AR and after perusal of the rectification orders passed by the revenue authorities, the adjustment made under the manufacturing segment is Rs.48,06,30,000/- becomes nil, therefore this ground taken by the assessee becomes infructuous. 16. Ground No.18 to 28 is towards royalty adjustment 16.1. On perusal of the order of the revenue authorities, we observe that the royalty adjustment has been made separately by applying profit level method (PSM) whereas th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on of each of the parties is identified and the profit is split between those parties. In the case of the Assessee the technology is given by TMC, Japan for which royalty is paid. The use of the technology in manufacturing and the sale of the product so manufactured contribute to the profit of the Assessee and TMC, Japan has nothing to do with that. There is therefore absence the first condition for application of PSM as MAM. As submitted by the Assessee PSM is used as MAM only in a case involving transfer of unique intangible or in multiple inter-related international transactions which cannot be valued separately for determining the ALP. The OECD guidelines cited on behalf of the assessee clearly supports the aforesaid approach and the OECD guidelines in this regard reads as follows:- "Further reliance is also placed on OECD Guidelines, which clearly lay down the situations in which the PSM is selected as an appropriate method for benchmarking. The relevant extract from the OECD Guidelines (para 2.109) is as below: "A transactional profit split method may also be found to be the most appropriate method in cases where both parties to a transaction make unique and valuable cont ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the most appropriate method could include a high level of integration in the business operations to which the transactions relate and /or the shared assumption of economically significant risks (or the separate assumption of closely related economically significant risks) by the parties to the transactions. It is important to note that the indicators are not mutually exclusive and on the contrary may often be found together in a single case. 2.127. At the other end of the, spectrum, where the accurate delineation of the transaction determines that one party to the transaction performs only simple functions, does not assume economically significant risks in relation to the transaction and does not otherwise make any contribution which is unique and valuable "2.147. Under the transactional profit split method, the relevant profits are to be split between the associated enterprises on an economically valid basis that approximates the division of profits that would have been anticipated and reflected in an agreement made at arm's length. In general, the determination of the relevant profits to be split and of the profit splitting factors should: Be consistent with the function ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
