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TMI Blog2025 (2) TMI 1031X X X X Extracts X X X X X X X X Extracts X X X X ..... in this regard can be placed on the judgment of Radha Swami Satsang [1991 (11) TMI 2 - SUPREME COURT] However, the ld. Tax authorities seems to have artificially distinguished the transaction of assessee with Non-UK and UK AEs, to apply a different rate in case of non-UK AE.
We are inclined to allow ground nos. 4 to 6 and the additional ground, as raised. TPO is directed to accept the parameters of determination of compensation as accepted in APA and accordingly benefit the assessee in determination of ALP of disputed transaction with non-UK AE, too. X X X X Extracts X X X X X X X X Extracts X X X X ..... 1.23% Class II Reimbursement and recovery of expenses CUP On cost to cost basis Table 2: Summary of economic analysis for specified domestic transactions Nature of SDTs Most Appropriate Method Arm's length price Payment for services Rendered Other method Refer Section 11 Payment of key managerial Remuneration Other method Refer Section 11 3.1 The Transfer Pricing Officer ('TPO') accepted all the international transactions except the transaction of payment of royalty in relation to licensed manufacturing segment of the Appellant on various models. The details of the royalties paid to the AEs is shown below: Name of the AE Country Model Royalty paid @ 5% (In INR) J.C. Bamford Excavators Ltd United Kingdom ("UK") 3DX 1,712,215,011 2DX 25,562,495 JCB Heavy Products Ltd. Tracked Excavator 210,539,866 JCB Earthmovers Ltd. Wheel Loader Shovels 49,713,841 JCB VibromaxGmBH Germany Compactor 25,388,509 Grand Total 2,023,419,722 3.2 To benchmark the royalty transaction, the Appellant selected CUP as the most appropriate method and computed average royalty rate of 4 comparable agreements at 6.37% of net sales. Accordingly as per the assessee, royal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 29/05/2019 of the co-ordinate bench:- "Accordingly, we direct Ld. TPO to determine arm's length price of international transaction entered into by assessee with Associated Enterprise in Germany for A.Y. 2013-14 as per law. Needless to say that proper opportunity shall be granted to assessee to represent its case." 5. Thereafter in second round of assessment proceedings the AO made a fresh reference under section 92CA(1) of the Act to TPO for determination of ALP of royalty paid by the Appellant to Non UK AE. The TPO determined arm's length rate of royalty to be 2%, based on identification of single comparable agreement with royalty rate of 3% by application of broad search criteria under 'Other Method'. The TPO, thereafter, also made adjustment of 1% to the royalty rate in the alleged comparable agreement, and consequently, made substantive adjustment of INR 1,52,33,105 on account of royalty paid to Non UK AE - JCB VibromaxGmBH. The AO passed draft order dated September 29, 2021, incorporating the adjustments computed by the TPO and the DRP upheld the transfer pricing addition vide directions dated June 08, 2022. Pursuant to the same, the AO passed the impugned assessment order ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng the business model and key value drivers of the Appellant; 4.5. misinterpreting disclosures made in the audit report of the Appellant and erroneously alleging that the Appellant is engaged in R&D activities, Import substitution and that the AE does not have patent registered in relation to the licensed products. 5. Without prejudice and on the facts and circumstances of the case and in law, the AO/DRP/TPO erred in computing the ad hoc transfer price of the royalty at rate of 2 percent post certain economic adjustments based on surmises and conjectures de hors the fact that in the comparable agreement selected by TPO, the royalty rate was 3%. 6. Without prejudice, that on the facts and circumstances of the case and in law, the AO/ DRP/TPO have erred by not giving due cognizance to the fact that the Appellant has entered into settlement with the Revenue under a Mutual Agreement Procedure ("MAP") between the Competent Authority ("CA") of India and CA of the UK under Article 27 of India-UK Double Taxation Avoidance Agreement for AY 2013-14 in respect of royalty payments made to UK based AEs and completely disregarding the fact that the royalty payments to UK based AEs as well ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cluded considering the multiple aspects and has persuasive value for non-covered transactions as well if they are similar in nature. Reliance in this regard is placed on the decision of Hon'ble Delhi High Court in the case of Pr. CIT vs Ameriprise India Pvt Ltd ITA 206 / 2016 wherein proposition has been accepted in relation to application of the APA entered into with CBDT for other years. Reliance in this regard is also placed on the following: i. FIS Global Business Solutions India (P) Ltd. vs DCIT: [2020] 118 taxmann.com 221 (Delhi - Trib.) ii. Aker Powergas Pvt Ltd vs DCIT: ITA 2213/Mum/2017 iii. Spencer Stuart (India) (P.) Ltd. vs ACIT: ITA No. 7117/Mum/2012 iv. DCIT vs Mission Pharma Logistics (India) Pvt. Ltd.: I.T.A. No. 15/Ahd/2019 v. AbicorBinzel Production (India) Pvt. Ltd. vs. DCIT: ITA No. 139/PN/2014 vi. Tieto IT Services India (P.) Ltd. vs. DCIT: (2018) 92 taxmann.com 8 (Pune-Trib.) 7.1 Then Ld. Counsel has submitted that the DRP/TPO has not followed the principal of consistency, in so far, approach for computing ALP of royalty. In this regard, the Appellant placed on record, a summary chart depicting the approach applied in case of the Appellant over th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt with the Revenue under a MAP between the CA of India and CA of UK under Article 27 of India-UK Double Taxation Avoidance Agreement and it has been held in various jurisprudence that ALP of similar transactions can be determined through the same parameters as agreed in the MAP with CA of a different jurisdiction. It was pointed out that the MAP authorities have also resolved the dispute regarding royalty payment to JCB UK entities between 4-5%. Thus, the stand of the Appellant gets fortified further that 5% royalty payment is at ALP and deserves to be accepted as have been consistently accepted in the past and subsequent years and also under APA. Reliance in this regard is placed in the Hon'ble Bombay High Court Judgement in the case of J.P. Morgan Services India Pvt. Ltd[2019] 263 Taxman 141 (Bombay), as affirmed by the Hon'ble Supreme Court in [2020] 119 taxmann.com 414 (SC), wherein it was held as under:- "MAP has been drawn after the consideration of relevant aspects giving rise to transfer pricing adjustment and the CBDT in the later year agreed that such transfer pricing consideration in relation to US based transactions can be safely adopted for the purpose of the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l not be possible to manufacture various earthmoving and construction equipment. The Appellant also leverages from the technical assistance received from the AE. With respect to allegation made by TPO that all the agreements are specific to US, the Appellant submits that the RoyaltyStat database has been compiled from the US SEC and it is obvious fact that the agreements will be specific to US, but it covers worldwide territory also, including India. For any licensee, the most critical aspect is whether the technology being received provides substantial commercial value and competitive relevance, rather than its patentability or legal protection. The fact that the Appellant is being able to successfully utilize the technology and manufacture various products and sell them in the Indian market, substantiates that the technology and technical inputs received under the TTAs have significant commercial value for which any third party would have paid royalty of equivalent amount. Further, the Appellant would like to highlight that in the earthmoving and construction equipment industry, no single patent may be filed for the entire earthmoving and construction machine, indeed patent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ically linked with licensed manufacturing segment of the Appellant wherein the royalty amount has already been included in the cost base of licensed manufacturing. Accordingly, the Appellant also submitted a corroborative analysis of benchmarking the international transactions in the nature of payment of royalty using TNMM as the most appropriate method. 14. Further, the transaction of transfer of technology in lieu of royalty payment is an integral part of the licensed manufacturing segment of the Appellant. Therefore, by benchmarking the profit margin earned under licensed manufacturing segment, the transaction of payment of royalty gets automatically benchmarked. Further, in accordance with the TTA, along with the license to manufacture, the Appellant gets access to various IPR such as the underlying technology, know-how, technical information, material specifications, production standards, etc. 15. However, DRP/TPO disregarded the submissions of the Appellant and went on to decide ALP of royalty rate at 2%. The TPO rejected the benchmarking of royalty transaction in aggregation under TNMM by giving reference to the Hon'ble ITAT's direction for AY 2006-07 to AY 2008-09 in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mentions the "licensed products", are all similarly worded and have similar intent reflecting as to how the non UK AE was to be compensated similarly to UK AE. The agreements establish that the JCB group based in UK entities or non UK entities had entered into identical technology transaction agreement for manufacturing of different licensed products. So far as the rights which assessee had received under two sets of agreements about manufacturing of licensed products in terms of use of trade mark, patent, know-how and license, the same are owned by the said foreign entities as part of the JCB group. We find no force in the contention of learned DR that since the JCB group is based in UK and has the ownership of the brand 'JCB', it is only the UK based AE of the JCB group should be entitled to be benefited from compensation for use of the JCB brand and accordingly have higher royalty. The non UK AE are part of the JCB group and if for any licensed products developed and protected in non UK country, the said product is manufactured by assessee in India that also entitles the assessee to use the JCB brand and royalty flows to the group only. The specific clauses relating to trade ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t A.Y. 2013-14. 21. Further, taking into consideration as to how on the basis of these agreements of 2004 with addendum of 2010 with UK AE entities and the agreement of 2010 with non UK entity JCB, Germany, the royalty rates have been accepted in past between 4 or 5% only. 22. Then considering the fact that the TPO itself changed the method to "other method" and conducted a fresh search which yielded 12 comparables out of which the TPO selected only one comparable agreement with a royalty rate of 3% and then only on an ad-hoc basis TPO reduced this rate from 3% to 2% without giving any cogent reason just to bring the royalty rate at par with previous years, wherein the TPO has conducted the similar process however, only to benchmark 3DX model. Apart from above, when we consider the manner in which learned TPO has arrived at the ad-hoc rate of 2% by rejecting the assessee's bench marking using CUP method and substituting it by "other methods", we find that the "other method" was justified in assessee's own case for A.Y. 2006-07, 2007-08 and 2008-09 for the reason of product having local inputs. There is no such case this year. 23. We further find that, the learned TPO has tried t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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