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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 ..... echnology to Appellant through various collaboration agreements. The Appellant had entered into Technology Transfer Agreements ('TTA') with its Associated Enterprises ('AEs') to receive requisite technology and know-how to enable it to manufacture technological advanced products of earthmoving and construction equipment. 3. During the Assessment year ("AY") 2013-14, the Appellant entered into various international transactions with its AEs. The summary of international transactions is as follows:- Segments/business activities Most Appropriate Method Net profit indicator JCB India's price/operating margin Comparables price/operating margin 1. Component Manufacturing Class I Import of raw material, components and spares Export of components rectification and rework Transactional Net Margin Method (TNMM) Operating Profit (OP)/Total Cost (TC) 8.29% 3.73% Class II Reimbursement and recovery of expenses Comparable Uncontrolled Price (CUP) Method On cost to cost basis 2. Equipment manufacturing A. Under contract manufacturing arrangement Class I Import of raw material, components and spares Export of finished Goods TNMM OP/TC 5.83% 5.27% Class II Reimbursement a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent of royalty has been benchmarked under TNMM in the TP documentation. The case of assessee is that given the payment of royalty is intrinsically linked with equipment licensed manufacturing segment of the Appellant, the international transactions under license manufacturing segment were benchmarked in aggregation under TNMM, including the transaction in the nature of payment of royalty. According to the assessee, under the corroborative analysis conducted by the Appellant, the average mean of OP/ Sales margin earned by the comparable companies is 6.16% as against the Appellant's margin of 11.57%. Therefore, based on the corroborative analysis also, it was concluded that the value of the international transaction pertaining to payment of royalty by Appellant is at arm's length price. 4. Ld. Counsel of assessee has pointed that in the first round of assessment proceedings the TPO in his order dated October 20, 2016, made TP adjustment of INR 1,21,40,52,000 by treating the arm's length price of royalty paid at 2% as against the 5% royalty paid by the Appellant. The AO passed draft assessment order dated December 29, 2016, making the aforesaid transfer pricing addition. The Dispute ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... order passed by the AO is bad in law and void ab initio since the order passed dated July 29, 2022, is not accompanied with the notice of tax demand and tax computation sheet as required under section/s 156 read with section 143 of the Act, thus barred by limitation 3. That on the facts and circumstances of the case and in law, the AO/DRP/TPO have erred on facts and in law, in making a substantive transfer pricing adjustment on account of payment of royalty made to associated enterprise (AE') based in Germany (hereinafter referred to as "Non-UK AE"), even though the royalty paid to Non-UK AE had been accepted to be at arm's length in past AYs as well as subsequent AYs 4. That on the facts and circumstances of the case and in law, the AO / DRP / TPO have erred on facts and in law, in making a substantive adjustment of INR 1,52,33,105/- towards transfer pricing adjustment on the royalty amount paid by the Appellant to its Non-UK AE, without appreciating or erring:- 4.1. the economic analysis, benchmarking methodology followed and arbitrarily rejecting/ ignoring the uncontrolled comparable license agreements identified for applying Comparable Uncontrolled Price ('CU ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the case and in law, the AO also erred in proposing to initiate penalty proceedings under section 271(1)(c) of the Act for furnishing inaccurate particulars of income. Each of the above grounds is independent and without prejudice to the other grounds of appeal preferred by the Appellant. The Appellant prays for leave to add, alter, vary, omit, substitute or amend the above grounds of appeal, at any time before or at, the time of hearing, of the appeal." 6. Taking into consideration the contentions of both the sides we find that grounds of appeal No. 1 & 2 are general and need no specific determination. The substantial grounds pressed are grounds No. 3 to 6 covering the issue of ALP bench marking of Royalty Payment to non-UK entities, JCB VibromaxGmBH. 6.1 Ld. Counsel has primarily relied a Advance Pricing Agreement ('APA') for the years AY 2018-19 to 2022-23, which covers royalty transactions with JCB UK entities. The Arm's Length Rate of royalty in the agreement is determined at 5%. It is contended that the Appellant's pre-royalty operating margin in the licensed manufacturing segment falls within the range of 13.5% to 18.5%. Accordingly the Ld. Counsel has stres ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the convenience compilation) No addition Not applicable as agreement entered into on 23 October 2013 5% 2. 2011-12 5% 3. 2012-13 5% 4. 2013-14 Impugned AY - Addition made for Germany entity. However, the royalty payment in respect of UK entities was covered under MAP. 4% 5. 2014-15 Adjustment made on 3DX model only (refer items 9-10 of the convenience compilation) No addition No addition 4% 6. 2015-16 3% 7. 2016-17 4% 8. 2017-18 Settled under MAP Pending before TPO (second round of proceedings) 4% 7.2 Ld. Counsel has pointed out that in the similar facts and circumstances for assessment years 2014-15 and 2015-16, the department had sought to make the adjustment in respect of Royalty payment of model other than 3DX by invoking the provisions of section 263 of the Act and the matter travelled to the Tribunal. The Tribunal vide order dated January 19, 2022, quashed the order passed by the PCIT under section 263 of the Act. The Tribunal affirmed that the payment made by the Appellant for Royalty, excluding JCB UK Entities, was at an arm's length. In this regard, Appellant's counsel has placed reliance on the decision of the Hon'ble Supreme Court in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iii. ACIT vs EIT Services India (P) Ltd.: [2022] 142 taxmann.com 175 (Bangalore - Trib.) 9. Then on the rejection of benchmarking approach adopted by Appellant with respect to payment of royalty it comes up that in the TP documentation maintained by the Appellant, the international transaction in the nature of payment of royalty was benchmarked under CUP method. The Appellant carried out search on RoyaltyStat's online database of royalty rates (www.royaltystat.com), wherein non-comparable agreements were eliminated and agreements were selected, which may be appropriate to provide a benchmark for the royalty payable by the Appellant for the patent, technology / technical know-how, and trademark / trade name licenses to the Non-UK AE. The search yielded 4 comparable agreements and the arm's length royalty rate was determined at 6.37% vis-à-vis the 5% royalty paid by the Appellant. The TPO rejected the comparables selected by the Appellant by observing the following: * Neither the product nor the time or the country is comparable, thereby, defeating satisfaction of CUP method. * All the agreements are specific to US. * Quantum of payment of royalty is different and so ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llant holds multiple patents in Germany, being the location of principal manufacturing company and in India for components and parts which are used to make earthmoving and construction equipment." 10. In this context it was pointed out that the TPO rejected the economic analysis performed by the Appellant and carried out a search using CUP with the India region. The TPO stated that the aforesaid search did not yield any comparable agreement and erroneously came to the conclusion that no independent entity in India is paying any royalty in respect of earthmoving and construction equipment. 11. Ld. Counsel submitted that in absence of any comparable agreement selected by the TPO under CUP method, the comparable agreement selected by the Appellant should be accepted by allowing sufficient flexibility in the comparability standard so that ends of justice are made. This view of the Appellant was supported on the basis of Organisation for Economic Cooperation and Development Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations ('OECD Guidelines') which states that useful information that are not identical to the controlled transactions, should not be dismis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on date by judgement pronounced by Hon'ble Delhi High Court in the case of Sony Ericsson Mobile Communications India(P) Ltd. v. CIT: [2015] 374 ITR 118 (Delhi). 16. Revenue's case; This all is countered by the Ld. DR by first relying completely on the orders of ld. Tax authorities below. It was contended by him that Tribunal has already denied the benefit of MAP in first round observing that MAP is not applicable to non-UK entites. It was contended that APA was entered in 2019 but was not pleaded earlier. So same cannot be a legal ground. It was contended by him that the agreement of assessee with Non-UK AE is different as there is no benefit of the Brand to the assessee, which is owned by the UK entity. He relied different clauses of the agreement trying to differentiate the nature of technology transfer and as to how there is no benefit of brand JCB to the assessee. 17. Findings; We have given thoughtful consideration to the submissions and edifying aspects that comes up on the facts is that in the second round of proceedings the learned TPO has taken into consideration the fact that this Tribunal with regard to UK based AE has accepted the MAP and TPO has also reflected in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s by the assessee. 18. There is nothing on record to show that the right to manufacture and marketing of licensed product received from UK AE 'excavator loader" or the licensed product of non UK AE, JCB, Germany of "soil compactor" require any different sets of technical capabilities to manufacture them or the research and development activity of the two set of licensed products is in any way so distinct that there should be different sets of principles for royalty compensation. Merely on an assumption of robust research and development facility of assessee with regard to some products developed in India, the compensation under the technology transfer agreement with non UK AE cannot be distinguished. The burden on the learned TPO was to establish with categorical evidences that the licensed products were different in material part with regard to technology, market and profitability so as to apply different parameter for compensation as one applicable on UK entities and accepted in MAP. However, without any such exercise, the learned TPO has held the royalty payment to be not at arms' length. 19. The learned TPO has relied the previous years' orders wherein TNMM was rejected for b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s only one comparables i.e. L22795 which may be said to be a good comparable. Although this is also not geographically similar, I propose to choose this as a comparable since this agreement pertains to Asia (Republic of Korea), and no other comparable agreement was found in India. Thus, the following agreement was found to be comparable to the assessee by applying "other method": S. No. Source Database Agreement ID/Reference Nol. % of royalty on sales 1 RoyaltyStat L22795 3 24. We find that thereupon, without any finding of fact or finding substantiated by reasoning, in a very arbitrary manner the TPO has held as follows: "It is seen that the AE is charging royalty from the assessee based on sales on the premise that technology transfer is leading to enhancement in sales of the assessee. However, as stated in earlier parts of the order, intense functions being performed by the assessee on its own accord are also playing a crucial role in increase in its sales. Hence, commensurate adjustments need to be made to eliminate the material effects of such differences, which have arisen due to the additional functions being carried out by the assessee, as listed above. Acc ..... X X X X Extracts X X X X X X X X Extracts X X X X
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