Income Tax Appellate Tribunal - Delhi
M/S. Gruner India Pvt. Ltd., New Delhi vs Dcit, New Delhi on 16 June, 2017
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH 'I-1', NEW DELHI
Before Sh. N. K. Saini, AM and Sh. Kuldip Singh, JM
ITA No. 771/Del/2017 : Asstt. Year : 2012-13
Gruner India Pvt. Ltd. Vs Deputy Commissioner of Income
C/o-S.S. Kothari Mehta & Co., Tax, Circle-10(2),
Chartered Accountants, 146, New Delhi
Tribhuvan Complex, Ishwar Nagar,
Mathura Road, New Delhi-110065
(APPELLANT) (RESPONDENT)
PAN No. AADCG2938H
Assessee by : Sh. H. P. Agarwal, Adv.
Revenue by : Sh. Amendra Kumar, CIT DR
Date of Hearing : 27.03.2017 Date of Pronouncement : 16.06.2017
ORDER
Per N. K. Saini, AM:
This is an appeal by the assessee against the order dated 19.01.2017 of the AO passed u/s 143(3) r.w.s. 144C(13) of the Income Tax Act, 1961 (hereinafter referred to as the Act).
2. Following grounds have been raised in this appeal:
"1. On the facts and circumstances of the case and in law Ld. DRP has erred in confirming addition of Rs. 8,35,79,669/- made to the income of the assessee u/s 92CA(3) by Ld. TPO.
2. The Ld. DRP has erred in law and on facts by:2 ITA No. 771/Del/2017
Gruner India Pvt. Ltd.
2.1. rejecting aggregation-approach under TNMM for benchmarking international transactions relating to royalty and FTS at entity level.
2.2. failing to correctly appreciate that purchase of raw material is closely inter-linked with the payment of Royalty and FTS.
2.3. failing to accept that representatives of Gruner AG, Germany visited India from time to time to render the technical services.
2.4. incorrectly assuming multiple year data has been used for the purpose of TNMM method.
3. Ld. DRP erred by failing to appreciate that a comparable under TNMM may not be a comparable under CUP method.
3.1. Failed to appreciate instructions followed by Hon'ble ITAT on same issue in AY 2011-12.
3.2. erred in correctly identifying the proportion of the controlled transaction of royalty undertaken by Havells India Limited.
3.3. erred by incorrectly deriving the amount of royalty to be paid as percentage of Non-AE sale of assessee.
4. Ld. DRP erred by confirming the rejection of 7 comparables out of total 9 comparables determined in TP study on incorrectly assuming that they are not incurring expenditure on Royalty/ FTS.
3 ITA No. 771/Del/2017Gruner India Pvt. Ltd.
5. Ld. DRP has erred in law and on facts of the case by confirming to benchmark under CUP Method the transactions of Royalty and FTS payments even when these are justified under TNMM.
6. Ld. DRP failed to appreciate the judgment of Hon'ble Delhi High Court in the similar issue in case of Magneti Marelli Powertrain India Pvt. Ltd.
7. Ld. AO erred in charging interest u/s 234B under the facts & in law in the circumstances of the case.
8. The appellant craves leave to amend, delete or add any of the above grounds of appeal before or during the course of hearing of the appeal."
3. From the aforesaid grounds, it is gathered that the main grievance of the assessee in this appeal relates to the addition of Rs.8,35,79,669/- proposed by the TPO u/s 92CA(3) of the Income Tax Act, 1961 (hereinafter referred to as the Act) and made by the AO.
4. Facts of the case in brief are that the assessee filed the return of income on 29.11.2012 declaring an income of Rs.22,07,925/- under the normal provisions after claiming deduction of Rs.9,69,52,976/- u/s 80IC of the Act. The TP study was prepared u/s 92D r.w.r. 10D of the Income Tax Rules, 1962 and aggregation approach under the TNMM method was adopted for the justification of the arm's length price of all the international transactions undertaken with the Associated Enterprises (AE) M/s Gruner AG, Germany. The assessee selected 9 comparables 4 ITA No. 771/Del/2017 Gruner India Pvt. Ltd.
having average PLI of 4.55% while the PLI of the assessee was at 10.92%. The AO referred the matter to the TPO u/s 92CA(1) for determination of Arm's Length Price for the international transactions. The TPO noticed that the TP report and the other relevant documents furnished by the assessee revealed that following transactions had been entered into:
S:No Nature of Transaction Value Method
Applied
1 Import Raw Materials, spares & consumables 28,73,75,051 TNMM
2 Export- Finished Goods 24,11,41,091 TNMM
3 Purchase of Plant & Machinery 1,22,95,618 TNMM
4 Royalties (paid) 5,35,39,092 TNMM
5 Fees for technical Services (paid) 3,93,46,879 TNMM
6 Interest on Purchase of Fixed Assets 2,17,185 CUP
7 Dividend paid 1,17,60,000 NA
8 Reimbursement of travelling expenses 60,33,570 At Actual
5. The TPO determined the Arm's Length Price of royalty and FTS against the expenses of the assessee as under:
Particular Arm's length Actual expenses Difference (proposed expenditure adjustment u/s 92CA) Fees for technical services 39,45,872 3,93,46,879 3,54,01,007 Payment of royalty 53,60,429 5,35,39,092 4,81,78,663 Total expenses on royalty 93,06,302 9,28,85,971 8,35,79,669 and technical fees
6. The TPO rejected justification of the Arm's Length Price for the aforesaid 2 transactions out of 6 transactions under the aggregation approach under TNMM adopted by the assessee and made an adjustment of Rs.8,35,79,699/-. The TPO identified CUP as the most suitable method for the aforesaid 2 transactions by comparing the payment of 5 ITA No. 771/Del/2017 Gruner India Pvt. Ltd.
royalty/FTS of the set of 9 comparables identified under TNMM by the assessee. Accordingly, the TPO proposed the addition of Rs.8,35,79,669/- on account of Arm's Length Price.
7. Being aggrieved the assessee filed the objection before the Dispute Resolution Panel (DRP) u/s 144C(5) of the Act. However, the ld. DRP relied on the decision of the ITAT for the assessment year 2011-12 in assessee's own case wherein the decision of the TPO to segregate international transactions of payment of royalty and FTS from other international transactions was upheld. However, regarding the direction of the ITAT to apply the CUP method, the ld. DRP observed that in the absence of comparable data provided by the assessee, the method suggested by the ITAT cannot be applied. The relevant findings are given in para 9.4.1 of the order of the DRP dated 21.12.2016 which read as under:
"9.4.1 The Panel has considered the decision of the Hon'ble ITAT in the assessee's own case for the preceding previous year. The Hon'ble ITAT has directed the TPO that since the payment of Royalty and Technical Fees has been made only on the value addition therefore, the comparison of the ratio of these expenses to the sales is total unwarranted. The expenses have been paid by the assessee as a percentage of value addition made by it and not on the total sale price. The order of the Hon'ble ITAT has been considered, the amount of value addition in respect of the taxpayer is available, however the same figures in respect of the comparables are not available, further no such details have been furnished by the assessee. Therefore in absence of furnishing of such comparables and 6 ITA No. 771/Del/2017 Gruner India Pvt. Ltd.
data by the Assessee the method suggested by the Hon'ble ITAT cannot be applied. The Hon'ble ITAT has further stated that the TPO selected two out of the nine comparables of the assessee. The selection of the .comparables by the TPO has not been upheld by the Hon'ble ITAT The assessee during the proceedings before the Panel did not furnish any new set of comparables which were appropriate for the purpose of benchmarking using CUP as the MAM. Computation in accordance with the guidelines suggested by the Hon'ble ITAT were also not furnished by the assessee. The assessee only claimed before the Panel that the benchmarking should still be done by applying TNMM rather than by CUP which has been held as the MAM even as per the directions of the ITAT. The assessee claimed that it had not accepted the decision of the Hon'ble ITAT and had filed appeal against the order of the ITAT with the High Court.
Keeping in view the above facts the Panel relies upon the order of the TPO. From the above discussion by the TPO it is apparent that out of nine comparables proposed by the assessee seven are such wherein the OP/OR Margin is not similar to the margin of the assessee. The rejection of these comparables by the TPO is upheld by the Panel. This leaves only two comparables that is · Havells India Limited · Auto meters alliance limited Which are making similar expenditure as being incurred by the assessee. Since, the comparables under the CUP should be making similar expenditure, therefore, the rejection of such comparables is also upheld by the Panel. The Panel therefore, rejects the claim of the assessee to apply TNMM as the MAM and upholds CUP as the MAM. The Panel also upholds the selection of comparables by the TPO and the computation of 7 ITA No. 771/Del/2017 Gruner India Pvt. Ltd.
arm's length as determined by the TPO. The Panel thus, refuses to interfere with the order of the TPO/AO."
On the direction of the ld. DRP, the AO passed the impugned order and made the addition of Rs.8,35,79,669/-.
8. Being aggrieved the assessee is in appeal. The ld. Counsel for the assessee submitted that in the preceding year, the ITAT in ITA No.6794/Del/2105 observed that the approach adopted by the TPO was not proper and against the methodology of CUP. A reference was made to page nos. 83 to 87 of the assessee's paper book which is relevant portion of the order of the ITAT for the assessment year 2011-12. It was further submitted that the ITAT rejected the panel of selection of comparable under CUP but the DRP failed to follow those instructions which were placed on record before the ld. DRP. It was pointed out that against the order dated 29.04.2016 of the ITAT in ITA No. 6794/Del/2015, the assessee filed an appeal before the Hon'ble Delhi High Court vide Appeal No. 708/2016 on the following issues:
"-Whether out of total 6 transactions, only 2 transactions, i.e., royalty and FTS shall be segregated when all other transactions are accepted under aggregated TNMM.
-If not aggregated, whether CUP is suitable over aggregated TNMM for royalty/ FTS."
9. It was further submitted that the Hon'ble Jurisdictional High court passed its judgment in favour of the assessee and remitted back the case 8 ITA No. 771/Del/2017 Gruner India Pvt. Ltd.
to the TPO for reconsideration of the aggregation approach in view of the ratio laid down in the following cases:
Ø Magneti Marelli Powertrain India Pvt. Ltd. vs DCIT [(2016) 290 CTR 60 (Del) Ø Sony Ericsson Mobile Communication India (P) Ltd. vs CIT (2015) 374 ITR 118 (Del.) Copies of the aforesaid orders of the Hon'ble Delhi High Court in the case of the assessee and M/s Magneti Marelli was furnished which are placed at page nos. 45 to 64 of the assessee's paper book.
10. The ld. Counsel for the assessee submitted that the product was manufactured by the assessee by using the required technology & technical know-how was unique and that the technology or technical input provided by the AE i.e. Gruner AG, Germany also being unique one, it may not be possible to find the case involving the supply of similar technology or technical input so as to ascertain a comparable uncontrolled price paid for royalty/FTS. It was further stated that in view of the methodology prescribed by Rule 10B(1)(a) of the I.T. Rules, CUP method is applicable in a situation where there exists a similar transaction for comparison, i.e. there exists a comparable transaction either:
"i) of the assessee with the third party, or
ii) of the assessee's AE with the third party, or
iii) between 2 unrelated third parties"9 ITA No. 771/Del/2017
Gruner India Pvt. Ltd.
11. It was stated that the payment of royalty by the assessee could only be compared with that of the third party, if it had been undertaken with an unrelated entity. Therefore, under the circumstances when CUP may not be applied, option would be to resort to TNMM. It was further stated that by considering the nature of the transactions and the single line business of the assessee, it may be suitable to apply TNMM at the entity level i.e. aggregation approach. However, for the royalty/FTS, the transactional approach under the TNMM may not be suitable due to unavailability of information of uncontrolled comparables at the transaction level, thus, in such circumstances, entity level information is the best recourse available. It was pointed out that the ld. DRP failed to acknowledge the ruling of the Hon'ble Delhi High Court in the case of Magneti Marelli (supra), which was placed before the ld. DRP vide submission dated 07.12.2016, in this regard a reference was made to page no. 43 of the assessee's paper book. It was prayed that the assessee's case should be viewed on the basis of the ruling of Hon'ble Delhi High court in the assessee's own case for the assessment year 2011-12 and in the case of M/s Magneti Marelli (supra).
12. In his rival submissions the ld. DR strongly supported the order of the authorities below.
13. We have considered the submissions of both the parties and carefully gone through the material available on the record. In the 10 ITA No. 771/Del/2017 Gruner India Pvt. Ltd.
present case, it is noticed that an identical issue was involved in assessee's own case in the assessment year 2011-12 in ITA No. 6794/Del/2015 which was decided by the ITAT "I-2" Bench, New Delhi vide order dated 29.04.2016. Against the said order, the assessee preferred an appeal to the Hon'ble Delhi High Court at New Delhi in ITA 708/2016 wherein vide order dated 20.12.2016, the issue was remanded back to the file of the TPO and the direction was given to apply the TNMM at the entity level. The Hon'ble Jurisdictional High Court in the aforesaid order dated 20.12.2016 by following the judgment in the case of Magneti Marelli Powertrain India Pvt. Ltd. Vs DCIT (2016) 290 CTR 60 (Del.) remitted the issue back to the file of the TPO for reconsideration. The relevant findings have been given in paras 8 to 12 of the said order which read as under:
"8. So far as the question of aggregation or desegregation, as the case may be concerned, we notice that there can be no strait jacket or inviolable rule in this regard. The recent judgment of this Court in Sony Ericsson Mobile Communication India (P) Ltd. vs Commissioner of Income Tax (2015) 374 ITR 118 (Del) stated that aggregation of such transaction is permissible and relied upon the OECD Commentary in this regard. At the same time the observations are not in fact determinative or conclusive. The Court was careful to leave the issue open for examination having regard to the facts of each case. In other words, as to whether the assessee's claim that aggregation is essential in a given case is an entirely fact dependent exercise to be viewed having regard to the nature of the transaction and the surrounding circumstances. The assessee contends that the amounts paid 11 ITA No. 771/Del/2017 Gruner India Pvt. Ltd.
under the royalty license and technical support agreements had to be viewed along with all other expenses and, therefore, aggregated. The Revenue's contention, however, is to the contrary.
9. Recently in the judgment of this Court in Magneti Marelli Powertrain India Pvt. Ltd. vs Deputy Commissioner of Income Tax (2016) 290 CTR (Del) 60, this Court had observed after noticing the judgment in Sony Ericsson (supra) as well as in the Commissioner of Income Tax vs. EKL Appliances Ltd. (2012) 345 ITR 241 (Del), and observed as follows:
".....14. The assessee/appellant during 2008-09 entered into four License & Technology Assistance Agreements (LTAAs) with its overseas AE for four products for obtaining ECU technology. In return for the technical know-how, the assessee agreed to compensate the AE through a fee amounting to US$ 2 million for each LTAA (total US$ 8 million equivalent to over Rs.38 crores) on installment basis. It explained that the overseas AE provides crucial and pivotal support to the assessee in carrying out its business in India by providing access to patented products and technology developed by it. The assessee argued that without receiving such technology/technical know-how/ information/assistance from the overseas AE, the assessee would not be able to conduct/carry out manufacturing and sales of ECUs in India at all. The assessee strengthened this contention by saying that it earned revenue of Rs.42.23 crores from the sale of ECUs using the above mentioned technical knowhow as a result of payment of Rs.38.59 crores during FY 2008-09. Further, the assessee also earned aggregate revenue of Rs.174.89 crores during a period of 3 consecutive years (i.e. FY 2008-09, FY 2009-10 and FY 2010-11) against a total payment of US $ 8,000,000, equivalent to Rs.38.59 crores paid in FY 2008-09. During 12 ITA No. 771/Del/2017 Gruner India Pvt. Ltd.
the transfer price proceedings, the assessee was unable to substantiate the need for payment of technical assistance fees to its foreign AE. The TPO has observed that the assessee tried to establish its case for the arm's length nature of the transaction by stating that it gained in the form of higher sales. The TPO observed that neither any cost benefit analysis nor any benchmarking exercise was undertaken at the time of entering into the agreement. The TPOs rejection of the TNMM method at entity level was undoubtedly not correct. That, however, would not conclude the issue.
15. The assessees argument that the technology itself would not have been given to it, but for the substantial fee (paid over and above the royalty payable), in the opinion of this court, requires a closer scrutiny. The initial burden is always upon the assessee to prove that the international transaction was at Arm's Length. Its TP report necessarily had to draw a comparison with other entities (maybe competitors) to show the general degree of profitability of the venture in question. The lower authorities quite correctly turned down the method of explaining the justification of the technical fee-with "proof" of its necessity by relying on profits. Undoubtedly the assessee was obliged to make the payment and that obligation arose from the agreements, a pre-incorporation binding contract. However, that such contractual obligation existed cannot ipso facto be the end of the enquiry. ALP determination in respect of every payment that is part of an international transaction is to be conducted irrespective of such obligation undertaken by the parties. If the transactions are, in the opinion of the TPO, not at arm's length, the required adjustment has to be made, as provided in the Act, irrespective of the fact that the expenditure is allowable under other provisions of the Act. There can conceivably be various reasons not to subject 13 ITA No. 771/Del/2017 Gruner India Pvt. Ltd.
such payments, such as for instance, if no similar data exists at all; or that sectional data for such payments is absent. Quite possibly, this may also be a general pattern of expenditure which AEs may insist to part with technology; further, similarly, other models of payment deferred or lump sum, along with royalty or inclusive of it, may be discerned in comparable transactions. However, to say that such a substantial amount had to necessarily be paid and that it was a commercial decision, dictated by need for the technology, in the light of a specific query, it could not be said by the assessee that later profits justified it, or that has essentiality precluded the scrutiny.
16. In the light of the above discussion, this court holds that the explanation by the assessee that the payment of Rs.38.58 crores in the circumstances was correctly not accepted. The first question is answered against the assessee. The remit directed by the impugned order is, therefore, upheld.
10. In the light of the above discussion, it is held that the entire issue as to whether aggregation is warranted in the circumstances, should be gone into afresh in view of the law declared in Sony Ericsson (supra) and clarified in Magneti Marelli (supra) above. 11. As far as the issue of most appropriate method is concerned, this Court is of the opinion that no definitive ruling ought to be given at this stage. As to whether in the event of de-segregation the CUP method is the most appropriate rather than TNM method should in our opinion be left open for consideration depending on the determination of the issue of aggregation/ de-segregation itself. In other words, that whether in the event of de- segregation, which would be the appropriate method, should be left to the TPO to decide, after hearing counsel for the parties. However, we clarify that in the event it is held that aggregation is permissible in the facts of this case, the findings 14 ITA No. 771/Del/2017 Gruner India Pvt. Ltd.
of the Revenue authorities and the Tribunal that the TNMM method was warranted, would not be disturbed.
12. In the light of the above findings, the appeal is partly allowed. The matter is remitted for re-consideration by the concerned TPO, who shall hear counsel for the parties and render findings on both aspects."
14. Since the facts, for the year under consideration are similar to the facts involved in the preceding assessment year 2011-12. We, therefore, by respectfully following the aforesaid referred to order, remand this issue back to the file of the AO/TPO to be decided as has been directed in ITA 708/2016 vide order dated 20.12.2016 by the Hon'ble Jurisdictional High Court.
15. In the result, the appeal of the assessee is allowed for statistical purposes.
(Order Pronounced in the Court on 16/06/2017) Sd/- Sd/-
(Kuldip Singh) (N. K. Saini)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Dated: 16/06/2017
*Subodh*
Copy forwarded to:
1. Appellant
2. Respondent
3. CIT
4. CIT(Appeals)
5.DR: ITAT
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