Indian Kanoon - Search engine for Indian Law

I TA No s.1 3 3 3 &1 2 8 9 / Ko l /2 0 1 7 I TA No s.2 0 6 & 2 0 7 / Ko l / 2 0 1 8 A s se s smen t Yea r s: 2 0 0 8 - 0 9 , 2 0 0 9 - 1 0 & 2 0 1 0 - 1 1 royalty agreement between the assessee and its Associated Enterprises (AEs), the assessee is required to pay royalty to Refractory Licenser a royalty rate of 3% on the domestic sales and 5% on export sales and to the Systems Licensor, a royalty of 2% on the domestic sales and 3% on export sales. In order to justify the arm's length nature of its transaction, the assessee has applied the CUP method where it has stated that the assessee has compared the royalty rates for other Indian companies and it is observed that the same is at par with the rates at which royalty is paid by VIL. [Page - 11 of the Transfer Pricing Report). However,the TPO noticed that in order to verify the assessee's claim, the assessee has not brought on record the details of such Indian companies to which the assessee's claims its case to be comparable. The characteristics of comparables are considered important for comparison in the CUP method. In the case of Intangible property, it would comprise the form of transaction (e.g. licensing or sale), the type of property (e.g. patent, trademark, or know-how), the duration and degree of protection, and the anticipated benefits from the use of the property. The question thus, came before the TPO that which is the most appropriate method - CUP or TNMM for determining ALP? Traditional transaction methods, such as CUP, are normally the most direct method for determining ALP. The transactional profit split method, on the other hand, is based on an approximation of the division of profits that independent enterprises would have expected to realize from engaging in the transaction(s). The TPO noted that the greatest weakness is that the net margin of a taxpayer can be influenced by some factors that either do not have an effect, or have a less substantial or direct effect, on price or gross margins. These aspects make accurate and reliable determinations of arm's length net margins difficult. Thus, so far as the appropriateness of the method is concerned, CUP is the most appropriate method for determining the transactions here, namely, royalty. Then TPO cited the judgment of coordinate bench of ITATMumbai in the case of Gharda Chemicals vs DCIT (ITA No. 2242/Mum/06, AY 2002-03) wherein it was held that CUP method is preferred over other method.As the assessee has not conducted any search to benchmark its royalty payment, an independent search analysis was conducted by TPO using the Royaltystatdatabase, Pa g e | 3 M/s Vesuvius India Ltd.