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TMI Blog2023 (2) TMI 1326X X X X Extracts X X X X X X X X Extracts X X X X ..... ded T.P.O has not used any of the prescribed method to make TP adjustment. It has been further alleged that the ld. T.P.O/D.R.P has not brought anything on record to compare the alleged international transactions with comparable uncontrolled transactions to test the ALP of such transactions - HELD THAT:- We in the interest of justice, the issue should be remanded back to the file of the A.O/T.P.O for re-adjudication as per law while complying with the principles of natural justice. We order accordingly. Grounds No. 1 to 8 of the appeal are allowed for statistical purposes. - SHRI INTURI RAMA RAO, AM AND SHRI PARTHA SARATHI CHAUDHURY, JM For the Appellant: S/Shri Percy Pardiwalla, Darpan Kirpalani For the Respondent: Shri Ganesh Bare. CIT ORDER PER PARTHA SARATHI CHAUDHURY, JM This Appeal preferred by the assessee emanates from the direction of the learned Dispute Resolution Panel (hereinafter referred to as the DRP‟ for short) dated 29-06-2022 for A.Y. 2018-19 as per the following grounds of appeal I Grounds related to transfer pricing adjustment: 1. Transfer pricing adjustment should be deleted as being bad in law Erred in law and in facts in making the reference to the le ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f ALP with respect to alleged DEMPE activities during the proceedings before Hon'ble DRP Erred in law and in facts by inappropriately considering Other Method as the most appropriate method during the proceedings before the Hon'ble DRP for determination of ALP with respect to alleged DEMPE activities without use of any comparable uncontrolled data for benchmarking in spite of the fact that no method was applied while passing the transfer pricing order under section 92CA(3) of the Act. 7. Applying inappropriate methodology to compute the adjustment with respect to alleged DEMPE activities without identifying comparable uncontrolled transactions Erred in law and in facts in applying the methodology to compute the adjustment without identifying comparable uncontrolled transactions with respect to alleged DEMPE activities. 8. Inappropriate rejection of aggregate / combined transaction approach Erred in law and in facts by rejecting the combined transaction approach adopted by the appellant at entity level for benchmarkiting the various international transactions entered into by the appellant II. Grounds related to corporate tax adjustment 9. Disallowance of royalty expenditure ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lty expenditure while passing the final assessment order dated 29-07-2022. The assessee submits that the issue as to the nature of expenditure for which the disallowance has been made in the current year pursuant to the directions of the ld. D.R.P has already been adjudicated in favour of the assessee as revenue expenditure in the following mentioned assessment years in Assessee s own case by the Tribunal. AY Page reference of the order of Hon ble ITAT 2014-15 Allowed Refer para 4 on page 4 of the order and on page 509 of factual paperbook 2013-14 Allowed Refer para 6 and 7 on page 19 of the order from page 503 to 505 of the factual paperbook 2012-13 Allowed - Refer para 29 (g) on page 39 of the order and on page 520 of factual paperbook 2011-12 Allowed - Refer para 17 on page 11 of the order and on page 636 of factual paperbook for AY 2009-10, similarly para 35 for AY 2010-11 and para 38 for AY 2011-12 on page 18 and 19 of the order and page 643 and 644 of the factual paperbook. 2010-11 2009-10 2008-09 Allowed - Refer para 20 on page 16 of the order and page 622 of factual paperbook for AY 2006-07 and similarly para 30 on page 21 of the order and page 624 of factual paperbook for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... improvements and developments in the manufacturing process of the licensed products; Right to use of the name and trademarks of Daimler AG during the currency of the agreement; and Providing training to MB India ‟s personnel at Daimler AG premises. (a) In consideration of the above, as per Article 13 of the agreement, MB India is required to pay to Daimler AG, an annual royalty at 5% of the value addition on licensed vehicles sold after 1 January 1999. The agreement gets amended from time to time to amend/extend the scope by adding or deleting vehicles models. The terms of the agreement were further amended with effect from 1 October 2007 based on the perusal of various clauses of the agreement as summarized above, it can be seen that: MB India has not acquired know-how from Daimler AG on an outright basis. MB India has only acquired a license/right to use know-how of Daimler AG in respect of the licensed products. The agreement clearly provides that Daimler AG will remain the sole and exclusive owner of the technical know-how, technical information, trade mark etc. and that MB India is debarred from claiming any title to the said rights. Such license right cannot be equated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Assessee is essentially a licensed right to use knowhow for the period of the agreement. Therefore, the royalty expenditure in this regard, in our opinion, is revenue in nature. 29. The assessee further submits that the status on account of royalty for various years is provided as follows: Assessment Year Status Date of the order Status of the Issue AY 2000-01 and AY 2001-02 - Allowed as revenue expenditure by the Hon ble CIT(A) and also confirmed by the Hon ble ITAT for AY 2000-01 and AY 2001-02 23 December 2021 In Favour of MB India AY 2002-03 -Allowed as revenue expenditure by the Hon ble ITAT for AY 2002-03 06 June 2016 (Refer page 131 to 192 of the Paper Book) Department Appeal pending before Hon ble Bombay High Court for admission of appeal AY 2003-04 and AY 2004-05 -Allowed as revenue expenditure by the Hon ble ITAT for AY 2003- 04 and AY 2004-05 30 Sept 2016 (Refer page 88 to 130 of the Paper Book) AY 2005-06 -Allowed as revenue expenditure by the Hon ble ITAT for AY 2005- 06 25 October 2018 (Refer page 23 to 65 of the Paper Book) AY 2006-07, AY 2007-08 and AY 2008-09 -Allowed as revenue expenditure by the Hon ble ITAT for AY 2006- 07, AY 2007-08 AY 2008-09 30 April 2019 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for technology made should be commensurate to the benefit derived or expected to be derived and the Arm s Length Price should be treated either as NIL or to the extent of benefit actually derived from such payment. Accordingly, the T.P.O computed excess royalty paid by the assessee (being royalty on the net profits earned by the assessee since the same pertains to efforts undertaken by the assessee and no services were received for the same) and proposed an adjustment of a differential amount of Rs. 5,63,47,440/- which was computed as follows: Computation of effective royalty on sales price by the learned TPO: Particulars Ref Amount (in INR) Royalty paid @ 5% on net value added 1 64,09,76,668 Total Sales of finished goods 2 52,20,30,00,000 Effective royalty as a percentage of sale (3 = 1 / 2 %) 3 1.23% Computation of Royalty adjustment by the learned TPO: Particulars (page 299 of the Appeal memo being TP order) Ref Amount (in INR) Total Sales of finished goods 1 52,20,30,00,000 Operating margin earned by Assessee 2 8.95% Total sales excluding net profit (being cost of sales) 3 47,53,08,31,500 Royalty paid @ 1.23% on (1) above being actual royalty paid on value added 4 64,09,76,668 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld. D.R.P stated that the T.P.O has used other methods to compute the adjustment, however, the same has not been mentioned by the T.P.O in his order. Justifying the computation of adjustment the ld. D.R.P merely stated that the T.P.O has made an addition of 1.23% of net profit and not 5% being the royalty paid. Also the adjustment works out to be 3.80% of the total AMP expenditure of Rs. 146.20 crores which is reasonable. 10. In this regard the assessee submits that as per the Technology License Agreement, it is liable to pay a running royalty at the rate of 5% of the net value added for the right to use licensed technology. Accordingly, the Assessee had paid royalty of Rs. 64,09,76,668 for the AY 2018-19. Annexure 4 of the Technology License Agreement prescribes the detailed mechanism to compute the net value addition on which royalty is payable by the Assessee. The assessee has nowhere stated that it is paying Royalty @ 1.23% on gross sales. That figure was derived by the TPO by dividing the royalty of Rs. 64,09,76,668 by the total sales of Rs. 52,20,30,00,000. Further, in order for the provisions of Chapter X to apply, inter alia the following conditions need to be satisfied wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ies (4.75% being operating profit as a percentage of operating revenue). Since the Assessee had earned higher operating profit margin than the arm s length operating profit margin, the international transactions entered into by the assessee were concluded to be at arm s length. Further, the said operating margin would take into account the rewards for all the activities performed by the Assessee. Accordingly, a separate TP adjustment is not warranted. Also, it is important to note that the above approach has not been questioned by the learned TPO/ ld. DRP and, accordingly, the same should be considered to be accepted by the authorities. Even if the ld. DRP is justified in its conclusion that the TPO has adopted a method prescribed in rule 10AB, nevertheless, the upholding of the addition of an ad hoc 3.8% of the expenses on advertising, marketing and publicity can never fall within the scope of the prescription in rule 10AB. Further, with regard to the specific clauses referred by the learned TPO to establish the existence of an international transaction, the assessee submits as below: Sr. No. Agreement Learned TPO s allegation Assessee s Submission 1 Distributor Agreement ( DA ) d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (low end activities). These are one off sales and generally to Government of India or statutory bodies or embassies of foreign countries. In this regard, the Assessee submits that considering the nature of agreement, the Assessee shares the customer data since the sale is being done by its AE. Further, for the functions performed, the Assessee is getting appropriately remunerated by way of commission income which is generally 5% of vehicle sales and 10%/15%/16% of spare part sales. 12. Considering the above, the assessee prays that it has not performed the DEMPE functions and, accordingly, the said TP adjustment needs to be deleted. 13. We have considered the submissions of the parties herein and have perused the orders of the T.P.O and the ld. D.R.P. That the issue whether the assessee has performed DEMPE functions or not has to be examined and verified in detail keeping in mind the relevant clauses of the agreement entered into by the assessee. In their submissions the assessee has contended that the ld. A.O and ld. D.R.P has failed to establish existence of international transaction between Assessee and its AE for DEMPE‟ functions. The assessee has also contended ld. T.P.O ..... X X X X Extracts X X X X X X X X Extracts X X X X
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