SNF (India) Private Limited, Visakhapatnam V. DCIT, Circle-5(1), Visakhapatnam

CO 63/VIZ/2017

• Counselvise Citation: [2019] 115 COUNSELVISE.COM (IT) 9282 (ITAT-VISAKHAPATNAM)
• Duration Of Justice: 2 year(s) 1 month(s) 20 day(s)
• Appeal Type: Cross Objection
• Pronouncement Date: 04-10-2019
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: DB
• Assessment Year: 2007-2008
• Appeal Filed On: 14-08-2017
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: SUMAN MALIK
• Keywords: Transfer pricing; International transaction; Additional evidence; Wholly owned subsidiary; Valuation report; Tax effect; Commercial expediency; Set aside
• Section: 92C; 143(3); 37(1); 10B; 201; 12; 28; 2; 11; 15; 92

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL VISAKHAPATNAM BENCH, VISAKHAPATNAM BEFORE SHRI V. DURGA RAO , HONBLE JUDICIAL MEMBER & SHRI D.S. SUNDER SINGH , HONBLE ACCOUNTANT MEMBER ITA NO S . 279 & 280 / VIZ /201 7 (ASST. YEAR : 20 0 7 - 0 8 & 2008 - 0 9 ) DCIT, CIRCLE - 5(1), VISAKHAPATNAM . V S . M/S. SNF (INDIA) PVT. LTD., PLOT NO.9, JAWAHARLAL NEHRU PHARMA CITY, PARAWADA, VISAKHAPATNAM . PAN NO. AAACP 4070 A (APPELLANT) (RESPONDENT) C.O.NOS. 63 & 64/VIZ/2017 (ARISING OUT OF ITA NO S . 279 & 280 / VIZ /201 7 ) (ASST. YEAR : 20 07 - 08 & 2008 - 09 ) M/S. SNF (INDIA) LIMITED, PLOT NO.9, JAWAHARLAL NEHRU PHARMA CITY, PARAWADA, VISAKHAPATNAM. VS. DCIT, CIRCLE - 5(1), VISAKHAPATNAM. PAN NO. AAACP 4070 A (APP LICANT ) (RESPONDENT) ASSESSEE BY : SHRI AJIT KUMAR JAIN A R . DEPARTMENT BY : SMT. SUMAN MALIK SR. DR DATE OF HEARING : 22 / 0 8 /201 9 . DATE OF PRONOUNCEMENT : 04 / 1 0 /201 9 . O R D E R PER D.S. SUNDER SINGH, ACCOUNTANT MEMBER THESE APPEAL S BY THE REVENUE AND THE CROSS OBJECTIONS BY THE ASSESSEE ARE DIRECTED AGAINST THE COMMON ORDER OF 2 ITA NO S . 279 & 280/VIZ/2017 C.O.NOS.63&64/VIZ/2017 ( M/S. SNF (INDIA) PVT. LTD. ) COMMISSIONER OF INCOME TAX (APPEALS) - 2 , VISAKHAPATNAM , DATED 27 /0 2 /201 7 FOR THE ASSESSMENT YEARS 200 7 - 08 & 200 8 - 0 9 . SINCE THE FACTS AND THE ISSUES ARE COMMON THE APPEALS ARE CLUBBED AND HEARD TOGETHER AND DISPOSED OF BY WAY OF THIS CONSOLIDATED ORDER . 2. FIRST WE TAKE UP THE APPEAL FOR THE A.Y. 2008 - 09 IN ITA NO. 280/VIZ/2017. FACTS OF BOTH THE CASE S ARE IDENTICAL, HOWEVER, APPEAL FOR THE A.Y. 2007 - 08 IS BELOW TAX EFFECT OF RS. 50.00 LAKHS . THE DEPARTMENT HAS RAISED THE FOL L O W ING GROUNDS OF APPEAL: - 1. WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE HON'BLE CIT(APPEALS) WAS JUSTIFIED IN HOL DING THAT THE TPO DID NOT ANALYSE THE PAYMENT ON ACCOUNT OF ROYALTY AND TECHNICAL KNOW - HOW UNDER TNMM OR ANY OTHER METHOD, CONTRARY TO THE FACT THAT THE TPO HELD THAT THE TAX PAYER FAILED THE BENEFIT TEST AGAINST PAYMENT OF ROYALTY FOR RECEIVING THE SERVIC ES AND ACCORDINGLY UNDER CUP, ARM'S LENGTH PRICE IS TREATED AS NIL. 2. THE LD. CIT(APPEALS) HAS FAILED TO APPRECIATE THAT EVEN THOUGH THE TAX PAYER WAS ASKED TO JUSTIFY THE PAYMENT APPLYING THE BENEFIT TEST, WHICH THE TAX PAYER COULD NOT FULFIL L . 3. THE LD. CIT(APPEALS) FAILED TO APPRECIATE THAT IF THE TERMS AND CONDITIONS OF THE AGREEMENT ARE SACROSANCT, THEN THERE WOULD NEVER BE ANY ADJUSTMENT TO ARM'S LENGTH. THE TERMS AND CONDITIONS ARE TO BE TESTED BETWEEN WHAT INDEPENDENT PARTIES WOULD D O IN AN ARM' S LENGTH SITUATION. 4. ROYALTY PAYMENT CANNOT BE AGGREGATED WITH THE OTHER INTERNATIONAL TRANSACTIONS FOR THE PURPOSE OF DETERMINING THE ALP. 5. ROYALTY HAS BEEN PAD UNDER A SEPARATE AGREEMENT AND THEREFORE HAS NO RELATION WITH THE OTHER TRANSACTIONS OF TH E ASSESSEE WITH ITS AE. 6. PAYMENT OF ROYALTY AND THE OTHER TRANSACTIONS WITH THE AE ARE NOT CLOSELY RELATED TRANSACTIONS BUT ARE SEPARATE AND INDEPENDENT INTERNATIONAL TRANSACTION AND THEREFORE THESE CANNOT BE TREATED AS CLOSELY LINKED TRANSACTION FOR TH E PURPOSE OF TRANSFER PRICING ADJUSTMENT. 3 ITA NO S . 279 & 280/VIZ/2017 C.O.NOS.63&64/VIZ/2017 ( M/S. SNF (INDIA) PVT. LTD. ) 7. THE LD. CIT(A) OUGHT TO HAVE NOTICED THAT THE PROFIT MARGINS SHOWN BY THE ASSESSEE IS LOW COMPARED TO COMPARABLE CASES WHICH JUSTIFIES DISALLOWANCE OF ROYALTY. 3 . DURING THE APPEAL HEARING, LD. D R SUBMITTED THAT GROUND NOS. 1 TO 3 ARE RELATED TO THE BENEFIT TEST MADE BY THE TRANSFER PRICING OFFICER (TPO) FOR ALLOWING ROYALTY PAYMENT . GROUND NOS. 4 TO 7 ARE RELATED TO DETERMINATION OF A RM S L ENGTH P RICE (ALP) IN RESPECT OF PAYMENT OF ROYALTY TO THE ASSOCIATED ENTERPRISES (AE S ). 4 . BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE SNF INDIA PRIVATE LTD., IS A 100% SUBSIDIARY OF SPCM SA, FRANCE HAS SET UP ITS MANUFACTURING UNIT IN PATANCHERUVU, HYDERABAD AND IS ENGAGED IN THE BUSINESS OF MANUFACTURE AND SALE OF WATER SOLUBLE POLYMERS. THE A SSESSEES PRODUCT RANGE IS USED IN A VARIETY OF PROCESS INDUSTRIES SUCH AS OIL DRILLING , PAPER MANUFACTURING, SUGAR, TEXTILES, CERAMICS, COSMETICS AND AGRICULTURE ETC. FOR THE A.Y. 2008 - 09, DURING THE COURSE OF ASSESSMENT PROCEE DINGS, THE ASSESSING OFFICER HA D OBSERVED THAT ASSESSEE HAD ENTERED INTO INTERNATIONAL TRANSACTIONS EXCEEDING THE LIMIT PRESCRIBED IN THE ACT. THEREFORE, THE ISSUE WAS REFERRED TO THE ADDL. DIR ECTOR OF INCOME TAX (TRANSFER PRICING), HYDERABAD FOR DETERMINING THE ALP OF INTERNATIONAL TRANSACTION. 4 ITA NO S . 279 & 280/VIZ/2017 C.O.NOS.63&64/VIZ/2017 ( M/S. SNF (INDIA) PVT. LTD. ) 4.1 THE ASSESSEE HAS ENTERED INTO INTERNATIONAL TRANSACTION AS UNDER: - S. NO. DESCR I PTION OF TRANSACTION AMOUNT (RS.) METHOD 1 PURCHASE OF VARIOUS TYPES OF POLYMERS AND OTHER RAW MATERIALS 20,94,12,569 TMMM 2 PURCHASE OF FINISHED GOODS FOR DISTRIBUTION 1,90,72,758 TMMM 3 SALE OF MANUFACTURED FINISHED GOODS 4,03,45,480 TMMM 4 PURCHASE OF EQUIPMENTS 17,88,971 TMMM 5 ROYALTY PAYMENTS UNDER TECHNICAL KNOW - HOW AGREEMENT 1,75,00,000 TMMM 6 REIMBURSEMENT OF TRANSLATION CHARGES 12,79,586 TMMM TOTAL 28,93,99,364 4.2 THE FINANCIAL RESULTS FOR THE A.Y. 2008 - 09 RELEVANT TO THE F.Y. 2007 - 08 AS PER THE ORIGINAL RETURN OF INCOME FILED BY THE ASSESSEE ARE AS UNDER: - (RUPEES IN CRORES) OPERATING REVENUE : 48.90 OPERATING COSTS : 41.68 OPERATING PROFIT : 7.2 OP/OR : 14.76% OP/OC : 17.32% 4.3 THE TAX PAYER HAS CONDUCTED THE TRANSFER PRICING STUDY AND SEARCHED FOR THE COMPARABLES BY USING PROWESS DATA BASE IN SEARCH OF COMPARABLES APPLYING VARIOUS KEY WORDS AND AFTER APPLYING CERTAIN FILTERS , THE TAX PAYER HAS SHORT - LISTED AROUND 10 COMPARABLE S, WHOSE ARITHMETIC MEAN PLI (OP/SALES) WAS 5 ITA NO S . 279 & 280/VIZ/2017 C.O.NOS.63&64/VIZ/2017 ( M/S. SNF (INDIA) PVT. LTD. ) COMPUTED AT 11.8% AS AG AINST THE MA RGIN OF TAXPAYER OF 14.76% AND A CCORDINGLY, THE TAXPAYER HELD THAT THE TRANSACTIONS ARE AT ARM S L ENGTH PRICE AND NO ADJUSTMENT WAS MADE. THE TAXPAYER ADOPTED TNMM (TRANSACTION NET MARGIN METHOD) AS MO ST APPROPRIATE METHOD (MAM) AT THE ENTITY LEVEL. 5. THE L D.TPO SEGREGATED THE ROYALTY PAYMENT AND WORKED OUT THE OPERATING MARGIN (OP/OR) OF PURCHASE S AND SALES AT 18.34% AFTER EXCLUDING THE R OYALTY PAYMENT AND NO ADJUSTMENT WAS PROPOSED ON PURCHASE S AND SALES. THE TPO ALSO VIEWED THAT TNMM IS MAM FOR DETERMINING THE ALP FOR TRADING TRANSACTION. HOWEVER , THE TPO SEGREGATED THE ROYALTY PAYMENT AND DETERMINED THE ALP OF ROYALTY AT RS. NIL . THE TPO WAS OF THE VIEW THAT THE TRANSFER PRICING STUDY MADE BY THE ASSESSEE WITH REGARD TO PAYMENT OF ROYALTY WAS UNACCEPTABLE, SINCE , TH E ASSESSEE HAD AGGREGATED THE PAYMENT OF ROYALTY WITH OTHER TRANSACTION S . THE TPO SEPARA TED THE PAYMENT OF ROYALTY FROM TRADING TRANSACTION S AND PROCEEDED TO BENCHMARK AND SAME USING CUP METHOD AS THE TRANSACTION IS IN THE NATURE OF INTANGIBLE WHICH IN THE OPINION OF THE T P O HAS TO BE ANALYSED SEPARATELY. THE TPO REFERRED THE DECISION OF ITAT, MUMBAI BENCH IN THE CASE OF UCB INDIA PVT. LTD., [317 ITR 292 (AT) (MUMBAI)] AND HELD THAT EACH CLASS OF TRANSACTION HAS TO BE 6 ITA NO S . 279 & 280/VIZ/2017 C.O.NOS.63&64/VIZ/2017 ( M/S. SNF (INDIA) PVT. LTD. ) ANALYSED SEPARATELY . THEREFORE, VIEWED THAT CUP IS AN APPROPRIATE METHOD TO ANALYSE ALP OF ROYALTY PAID TO SPCM SA, FRANCE , VIDE AGREEMENT ENTERED ON 29/12/2004. THE TPO FURTHER VIEWED THAT THE PAYMENT MADE TO AE S UNDER PRESCRIBED FEMA GUIDELINES CANNOT BE TAKEN AS A BENCHMARK AND THE T RANS F ER PRICING IS ALTOGETHER IS A DIFFERENT SUBJECT AND HAS TO BE ANALYSED WITHIN THE AMBIT OF LAW PRESCRIBED U/SEC. 92 CA OF THE ACT. THE TPO EXAMINED THE ASPECT OF ROYALTY PAYMENTS MADE BETWEEN THE GROUP ENTITIES AND ALSO THE APPROACH FOLLOWED BY OTHER COUNTRIES LIKE USA , AUSTRALIA, CANADA, GERMANY ETC. WHILE EXAMINING THE ROYALTY PAYMENTS AND ALSO THE OECD GUIDELINES. THE TPO HAS OPINED THAT UNLESS THERE IS DIRECT BENEFIT DERIVED BY THE ASSESSEE FROM THE TANGIBLES COMMENSURATING THE PAYMENT OF ROYALTY OR EXPECTED TO BE DERIVED WHEN PARTIES DEAL WITH EACH OTHER AT ARM S LENGTH, ALP OF SUCH PAYMENT FOR ROYALTY WOUL D BE TREATED AS EITHER RS. NIL OR TO THE EXTENT IT IS SHOWN THAT THE BENEFIT ACTUALLY DERIVED FROM SUCH PAYMENT. THE TPO ASKED THE ASSESSEE TO JUSTIFY THE PAYMENT MADE TO THE AE AND SUBSTANTIATE THE RECEIPT OF INTA N GIBLES AND THE BENEFITS DERIVED T H E R E FROM . S INCE THE ASSESSEE FAILED TO SATISFY BENEFIT TEST AS REQUIRED , T HE TPO HELD THAT THE ASSESSEE DID NOT DERIVE ANY BENEFIT BY PAYMENT OF ROYALTY 7 ITA NO S . 279 & 280/VIZ/2017 C.O.NOS.63&64/VIZ/2017 ( M/S. SNF (INDIA) PVT. LTD. ) TO THE AE . THEREFORE, THE ALP PAYMENT MADE TOWARDS ROYALTY WAS DETERMINED AT RS. NIL . IN THIS CASE, IT IS ALSO RELEVANT TO MENTION THE OBSERVATIONS OF THE TPO IN THE TPOS ORDER FOR THE A.Y. 2007 - 08 IN PARAGRAPH NO. 7.4 OF PAPER BOOK AT PAGE NO. 54 WHICH READS AS UNDER: - AS ALREADY DISCUSSED IN THE EARLIE R PART OF THE ORDER, THE PLI (OP/SALE) OF THE TAXPAYER FOR THE YEAR UNDER CONSIDERATION IS AT 8.57% AS COMPARED TO THE ARITHMETIC MEAN OF THE TWO COMPARABLES SELECTED BY THE TOP AT 10.45% IS SIGNIFICANTLY LOWER. THEREFORE, THE TAXPAYER COULD NOT DEMONSTRA TE THE TANGIBLE BENEFITS THAT ARE DERIVED FROM THE SO CALLED PURCHASE OF TECHNOLOGY FROM ITS AE. THE UNIQUENESS AND USEFULNESS OF THE SO CALLED TECHNOLOGY IS NOT DEMONSTRATED BY THE TAXPAYER. IT IS A WELL KNOWN FACT THAT THE TECHNOLOGY BECOMES OBSOLETE A ND REDUNDANT OVER A PERIOD OF TIME. THEREFORE, THE VALUE OF THE TECHNOLOGY GETS ERODED AS THE TIME LAPSES. THE TAXPAYER CANNOT PAY ROYALTY INDEFINITELY FOR THE TECHNOLOGY WHICH IS ALREADY GETS ABSORBED OVER A PERIOD OF TIME. IN AN ARMS LENGTH SITUATION, NO INDEPENDENT PARTY PAYS ROYALTY PERPETUALLY WITHOUT DERIVING ANY ADDITIONAL BENEFITS. 5.1 IN THIS CASE , FOR THE A.Y. 2008 - 09 THE TAX PAYER HAS MADE THE ROYALTY PAYMENT OF RS. 1.75 CRORES TO THE AE S @5% O N DOMESTIC SALES AND 8% ON EXTERNAL SALES. SINCE THE TPO HAS DETERMINED THE ALP AT RS. NIL , THE ASSESSING OFFICER HAS COMPLETED THE ASSESSMENT U/SEC. 143(3) R.W.S. 92CA(3) BY MAKING THE ADDITION OF RS. 1.75 CRORES REPRES EN TING THE ALP OF THE ROYALTY TRANSACTION AS PER THE TPOS ORDER. 6 . AGAINST THE ORDER OF THE ASSESSING OFFICER, THE ASSESSEE WENT ON APPEAL TO THE LD. CIT(A) . T HE LD. CIT(A) AFTER ANALYSING AND 8 ITA NO S . 279 & 280/VIZ/2017 C.O.NOS.63&64/VIZ/2017 ( M/S. SNF (INDIA) PVT. LTD. ) EXAMINING THE COMPLETE DETAILS PLACED BEFORE HIM FOUND THAT AS PER THE CORRESPONDENCE AND EVIDENCE , THE ASSESSEE S PLEA THAT IT HAD RECEIVED TECHNICAL INFORMATION FROM ITS AE AND SUCH TECHNICAL INFORMATION PROVIDED BY THE AE WAS ESTABLISHED. THE LD.CIT(A) FURTHER HELD THAT THE TPO WITHOUT CONSIDERING THE E - MAIL CORRESPONDENCE , HAS TAKEN A VIEW THAT THE TECHNICAL SERVICES PROVIDED IN THE AGREEMENT ARE GENERAL IN NATURE IN PARAGRAPH NO. 16.4 OF THE LD. CIT(A)S ORDER. FOR THE BENEFIT OF UNDERSTANDING AND CLARITY WE EXTRACT PARA 16.4 OF THE LD. CIT(A)S ORDER IS AS FOLLOWS: - 16.4 THUS, THE PERUSAL OF THE E - MAIL CORRESPONDENCE FAIRLY INDICATE THAT THE INDIAN ENTITY SEEKS EVALUATION REPORTS ON THE LAB TRIALS CONDUCTED BY IT ON THE PRODUCT FORMULATION SENT BY THE AE, REQUESTED FOR ANALYSIS OF COMPETITOR PRODUCTS AND SUGGESTIONS TO IMPROVE THEIR PRODUCT PERFORMANCE EQUIVALENT TO THE COMPETITOR PRODUCT OR FIND SUBSTITUTE, GUI DANCE ON THE PROCESS PROPOSED TO BE TAKEN BY THE INDIAN ENTITY ETC. AND IT IS ALSO SEEN THAT THE AE PERSONNEL HAVE CARRIED OUT EVALUATION TESTS ON THE SAMPLES SENT BY INDIAN ENTITY, SUGGESTED CHANGES IN PROCESS - SUCH AS INCORPORATION OF BLEND/CHEMICAL, TO IMPROVE PRODUCT STABILITY, PERFORMANCE COMPARED TO COMPETITIVE PRODUCT, SUGGESTIONS FOR FURTHER TESTS AND ANALYSIS, F ORWARDING OF FORMULATIONS ETC. IT IS ALSO SEEN THAT SOME OF THE PERSONNEL VISITED IND IA SUCH AS PIERRE LYOT, WILLY DURAND, FABIEN BLANDEAU, CEDERIC FRAVERO ARE TEC HNICAL PERSONNEL, TO WHOM E - MAILS WERE ADDRESSED SEEKING CLARIFICATION AND G UIDANCE. THEREFORE, IT CAN BE SAID THAT THE INDIAN ENTITY HAS AVAILED TECHNICAL INFORMATION FROM ITS A E IN THE MANUFACTURE OF PRODUCTS, IN THE PROCESS FOR MANUFACTURING ETC. IT IS ALSO SEEN THAT THE INFORMATION PASSED ON BY THE AE IS AFTER CARRYING OUT CERTAIN ANALYSIS OR OUT OF THEIR EXPERTISE AND EXPERIENCE. THEREFORE, IT CANNOT BE SAID THAT THEY ARE MER E ROUTINE INFORMATION. SOME OF 9 ITA NO S . 279 & 280/VIZ/2017 C.O.NOS.63&64/VIZ/2017 ( M/S. SNF (INDIA) PVT. LTD. ) THE SUGGESTIONS GIVEN BY THE AE ARE TOWARDS IMPROVING THE QUALITY OF THE PRODUCT TO OVERCOME THE PERFORMANCE OF COMPETITOR PRODUCT, AND HENCE IT CAN BE SAID THAT THESE ARE TECHNICAL INFORMATION PASSED ON TO IMPROVE THE PROCES S OR THE QUALITY OF THE PRODUCT. IT IS ALSO SEEN THAT THE SALES REVENUE AND PROFITABILITY OF THE COMPANY HAS INCREASED OVER THE YEARS. CONSIDERING THESE MATERIAL EVIDENCE ON RECORD, THE ASSESSEE'S PLEA THAT IT HAD RECEIVED TECHNICAL INFORMATION FROM ITS AE AND HAS BENEFITS FROM SUCH TECHNICAL INFORMATION PROVIDED BY THE AE REMAIN SUBSTANTIATED. I FIND THAT THE TPO WITHOUT CONSIDERING THE E - MAIL CORRESPONDENCE HAS TAKEN THE VIEW THAT THE TECHNICAL SERVICES PROVIDED IN THE AGREEMENT ARE GENERAL IN NATURE, PRO BABLY AS THE THRUST OF ARGUMENT BEFORE THE TPO WAS THAT AS THE ROYALTY PAYMENT WAS APPROVED BY RBI, IT WOULD MEET THE REQUIREMENTS OF ALP. 7 . THE LD. CIT(A) FURTHER HELD THAT IT IS MANDATORY TO BENCHMARK THE INTERNATIONAL TRANSACTIONS AS PER THE RELEVANT TP PROVISIONS AND THE RBI APPROVAL FOR PAYMENT OF ROYALTY WOULD NOT BE THE CRITERIA . THE PROVISI ONS OF SECTION 92C R.W.R. 10B ARE CLEAR THAT THE ALP IN RELATION TO INTERNATIONAL TRANSACTION S SHALL BE DETERMINED AS PER THE METHODS PRESCRIBED IN THE ACT AND THE APPROVAL OF RBI GIVEN FOR REMITTANCE OF IMPUG N ED AMOUNT TO THE AE WOULD NOT IN ANY WAY FALL WITHIN THE METHODS PRESCRIBED UNDER THE ACT. THUS , THE CONTENTION OF THE ASSESSEE JUST IF YING T HE PAYMENT MADE TO THE AE WITH THE APPROVAL OF RBI WAS REJECTED BY THE LD. CIT(A) . THE LD.CIT(A) FURTHER HELD THAT BENC H MARK OF ROYALTY AS A SEPARATE TRANSACTION IS PERMISSIBLE AS THE ROY ALTY IS A SEPARATE TRANSACTION. FURTHER HELD THAT AGGREGATION FOR 10 ITA NO S . 279 & 280/VIZ/2017 C.O.NOS.63&64/VIZ/2017 ( M/S. SNF (INDIA) PVT. LTD. ) TRANSACTIONS FOR BENCHMARK ING AND THE SELECTION OF THE MOST APPROPRIATE METHOD DEPENDS ON THE FACTS AND CIRCUMSTANCES OF THE CASE SUCH AS THE NATURE OF TRANSITIONS TO BE AGGRE GATED TAKING INTO ACCOUNT THE ENTIRE ACTIVITIES AND FUNCTIONS OF THE ENTERPRISE, THE AVAILABILITY OF COMPARABLE DATA ETC. AND RELIED ON RULE 10C(2) WHICH READS AS UNDER: - 10C. (1) X X X X (2) IN SELECTING THE MOST APPROPRIATE METHOD AS SPECIFIED IN SUB - RULE (1), THE FOLLOWING FACTORS SHALL BE TAKEN INTO ACCOUNT, NAMELY: (A) THE NATURE AND CLASS OF THE INTERNATIONAL TRANSACTION [OR THE SPECIFIED DOMESTIC TRANSACTION]; (B) THE CLASS OR CLASSES OF ASSOCIATED ENTERPRISES ENTERING INTO THE TRANSACTION AND THE FUNCTIONS PERFORMED BY THEM TAKING INTO ACCOUNT ASSETS EMPLOYED OR TO BE EMP LOYED AND RISKS ASSUMED BY SUCH ENTERPRISES; (C) THE AVAILABILITY, COVERAGE AND RELIABILITY OF DATA NECESSARY FOR APPLICATION OF THE METHOD; (D) THE DEGREE OF COMPARABILITY EXISTING BETWEEN THE INTERNATIONAL TRANSACTION [OR THE SPECIFIED DOMESTIC TRANSACTI ON] AND THE UNCONTROLLED TRANSACTION AND BETWEEN THE ENTERPRISES ENTERING INTO SUCH TRANSACTIONS; (E) THE EXTENT TO WHICH RELIABLE AND ACCURATE ADJUSTMENTS CAN BE MADE TO ACCOUNT FOR DIFFERENCES, IF ANY, BETWEEN THE INTERNATIONAL TRANSACTION [OR THE SPECI FIED DOMESTIC TRANSACTION] AND THE COMPARABLE UNCONTROLLED TRANSACTION OR BETWEEN THE ENTERPRISES ENTERING INTO SUCH TRANSACTIONS; (F) THE NATURE, EXTENT AND RELIABILITY OF ASSUMPTIONS REQUIRED TO BE MADE IN APPLICATION OF A METHOD. 8 . THE LD. CIT(A) HAVING OBSERVED THAT THE ASSESSEE HA D AVAILED THE BENEFIT UNDER THE ROYALTY AGREEMENT AND THE FOREIGN 11 ITA NO S . 279 & 280/VIZ/2017 C.O.NOS.63&64/VIZ/2017 ( M/S. SNF (INDIA) PVT. LTD. ) AE DID NOT ENTER INTO ROYALTY AGREEMENT FOR TRANSFER OF KNOW - HOW WITH A N Y INDEPENDEN T THIRD PARTIES AND CONSIDERING THE FACT THAT THE TPO AFTER ANALYSING THE FACTS AND THE BENCHMARKING OF THE OTHER INTERNATIONAL TRANSACTIONS COULD NOT IDENTIFY ANY COMPARABLE DATA FOR THE IMPUGNED TWO ASSESSMENT YEARS TO BENCHMARK THE PAYMENT OF ROYALTY T RANSACTION UNDER THE CUP METHOD , V I E W E D THAT CUP METHOD IS NOT MOST APPROPRIATE METHOD AND OWING TO THE FACTS AND THE CIRCUMSTANCES TNMM IS MOST APPROPRIATE METHOD IN THE A.Y. 2007 - 08 & 2008 - 09 . THE ASSESSEE ADOPTED TNMM METHOD AT ENTITY LEVEL AGGREGATING ALL THE INTERNATIONAL TRANSACTIONS WITH OP/OR AS THE PLI . FOR THE A.Y. 2007 - 08 , THE ASSESSEE HAS COMPUTED ITS PLI AT 9.9% AND HAS SELECTED 13 COMPARABLE S AND WHOSE AVERAGE MEAN OF OP/OR WAS GIVEN AT 6.42% AND CLAIMED THAT ALL ITS INTERNATIONAL TRANSACTIONS WERE AT ALP . THE TPO HAS SELECTED TWO COMPARABLES TAKING INTO ACCOUNT , THE CURRENT YEAR DATA AND APPLYING APPROPRIATE FILTERS, AND THE AVERAGE MEAN OF OP/SALES WAS WORKED OUT 10.45%. THE TPO ALSO COMPUTED THE ASSESSEES OP/SALES AT 8.57% . THE LD.CIT(A) HELD THAT THE ASSESSING OFFICER/TPO MAY EXAMINE WHETHER THE ASSESSEES CLAIM THAT ITS PLI FALLS WITHIN THE RANGE OF (+/ - ) 5% AND ACCORDINGLY DETERMINE WHETHER THE ALP 12 ITA NO S . 279 & 280/VIZ/2017 C.O.NOS.63&64/VIZ/2017 ( M/S. SNF (INDIA) PVT. LTD. ) REQUIREMENTS ARE MET . IF THE ASSESSEES PLI AS DETERMINED BY THE TPO DOES NOT FALL WITHIN THE (+/ - ) 5% RANGE, THE LD. CIT(A) DIRECTED THE ASSESSING OFFICER TO MAKE PROPORTIONATE ADJUSTMENT BY WAY OF DETERMINATION OF ALP. 9 . FOR THE A.Y. 2008 - 09 , THE ASSESSEE HA D CONDUCTED THE TP STUDY AND BENCHMARK ED THE ARITHMETIC MEAN OF 10 COMPARABLES, WITH PLI ( OP/SALES ) WAS GIVEN AT 11.85 % AS AGAINST THE ASSESSEES PLI OF 14.76% ADOPTING TNMM AS MAM . CONSIDERING THE FACT THAT THE ASSESSEES PLI IS MORE THAN PLI OF COMPARABLES, THE LD. CIT(A) HELD TH A T NO ADJUSTMENT IS REQUIRED. ACCORDINGLY, DELETED THE ADDITION MADE BY THE ASSESSING OFFICER TO THE EXTENT OF 1.75 CRORES FOR THE A.Y. 2008 - 09 . 10 . AGAINST THE ORDER OF THE LD. CIT(A), THE REVENUE IS IN APPEAL S AND THE ASSESSEE FILED THE CROSS OBJECTION S BEFORE THIS TRIBUNAL. 1 1 . DURING THE APPEAL HEARING, LD.DR ARGUED THAT THE ASSESSEE HAS NOT ESTABLISHED BEFORE THE TPO THAT IT HA D DERIVED ANY BENEFIT FROM INTANGIBLES. THE TPO HAS DIRECTED THE ASSESSEE TO DEMONSTRATE THE BENEFITS DERIVED BY THE TAX PAYER WITH EVIDENCE AND THE ASSESSEE FAILED TO DEMONSTRATE THAT THE ASSESSEE - COMPANY HA D DERIVED ANY BENEFIT BY PAYMENT OF ROYALTY TO THE AE. THEREFORE, THE ASSESSEE HAS NOT PASSED THROUGH THE BENE FIT TEST 13 ITA NO S . 279 & 280/VIZ/2017 C.O.NOS.63&64/VIZ/2017 ( M/S. SNF (INDIA) PVT. LTD. ) F OR PAYMENT OF ROYALTY. T HOUGH THERE IS NO BENEFIT TEST METHOD IN THE TRANSFER PRICING SCHEME , THE EXPENDITURE WHOLLY AND EXCLUSIVELY LAID OUT FOR THE PURPOSE OF BUSINESS IS THE ALLOWABLE EXPENDITURE AS PER SECTION 37(1) OF THE ACT, HENCE ARGUED THAT THE DEPARTMENT CANNOT CONFINE ITSELF TO THE PROVISIONS OF SECTION 92CA(3) R.W.R. 10B WITHOUT ESTIMATING THE VERY NATURE OF ALLOWABILITY OF THE EXPENDITURE AND THE T.P PROVISIONS HAVE TO BE READ ALONG WIT H THE ENTIRE SCHEME OF TAXATION BUT NOT TO BE READ AL ONE . T HE LD.DR ARGUED THAT FOR ALLOWING THE EXPENDITURE SATISF ACTION OF CONDITIONS IN SECTION 37(1) IS ALSO REQUIRED TO BE PROVED AND ARGUED THAT THE TPO HAS RIGHTLY FOUND THAT THE ASSESSEE DID NOT DERIVE ANY BENEFIT FROM THE PAYMENT MADE FOR INTANGIBLES. THUS, THERE IS NO CASE FOR MAKING THE ROYALTY PAYMENT AND THE LD. CIT(A) ERRED IN HOLDING THAT THE ASSESSEE HAD RECEIVED THE BENEFIT OUT OF PAYMENT OF ROYALTY . LD.DR FURTHER ARGUED THAT THE LD. CIT(A) ERRED IN AGGREGATING THE TRANSACTION AND REJECTING THE CUP METHOD, THE ROYALTY IS A SEPARATE PAYMENT FOR WHICH THE ALP REQU IRED TO BE DETERMINED. THE ACT AND OECD GUIDELINES PERMITS THAT THE ROYALTY AS A SEPARATE AND INDEPENDENT TRANSACTION FOR BENCHMARKING THE INTERNATIONAL TRANSACTION AND CANNOT BE LINK ED WITH OTHER 14 ITA NO S . 279 & 280/VIZ/2017 C.O.NOS.63&64/VIZ/2017 ( M/S. SNF (INDIA) PVT. LTD. ) TRANSACTIONS FOR THE PURPOSE OF TRANSFER PRICING ADJUSTMENT . THE PROFIT MARGIN SHOWN BY THE ASSESSEE IS LOW COMPARABLE TO THE COMPARABLE CASES. THUS, ARGUED THAT THE ASSESSING OFFICER RIGHTLY DEALT WITH THE ROYALTY PAYMENT AS A SEPARATE TRANSACTION AND DETERMINED THE TRANSFER PRICING INDEPENDENTLY. SINCE THE ASSESSEE DID NOT RECEIVE THE BENEFIT FOR THE INTANGIBLES OR ROYALTIES, THE LD.DR SUPPORTED THE ORDER OF THE TPO /AO AND REQUESTED TO SET ASIDE THE ORDER OF THE LD. CIT(A) AND ALLOW THE APPEAL OF THE REVENUE. 1 2 . ON THE OTHER HAND, LD. AR ARGUED THAT THE TPO HAS DETERMINED THE ALP OF ROYALTY PAYMENT AT RS. NIL AGAINST THE PAYMENT OF RS.1.75 CRORES BY THE ASSESSEE WHICH IS UNJUSTIFIED AND AGAINST THE TRANSFER PRICING SCHEME AND METHODS SPECIFIED IN RULE 10B OF I.T RULES FOR DETERMI NI NG THE ALP . THE LD.A.R FURTHER SUBMITTED THAT T HE ASSESSEE HAD ENTERED INTO AN A GREEMENT FOR PAYMENT OF R OYALTY WITH SPCM SA, FRANCE FOR USING TECHNOLOGY AND GETTING TECHNICAL INFORMATION CONTINUOUSLY AND CONSISTEN TLY. AS PER THE AGREEMENT, THE ASSESSEE SHALL MAKE ROYALTY @5% ON DOMESTIC SALE S AND 8% ON EXTERNAL SALES TO ITS AE , SPCM SA . THE TECHNICAL INFORMATION SUPPLIED BY THE AE IS CONFIDENTIAL IN NATURE AND IT IS NECESSARY TO THE ASSESSEE TO MANUFACTUR E THE PRODUCTS 15 ITA NO S . 279 & 280/VIZ/2017 C.O.NOS.63&64/VIZ/2017 ( M/S. SNF (INDIA) PVT. LTD. ) INCLUDING TRANSFER OF FORMULATION SEEDS, RAW MATERIAL SPECIFICATION IN PRO CESS QUALITY CONTROL PROCESS TESTING AND WORKING INSTRUCTIONS FOR MAKING OPERATIONS AND THE CONSEQUENT SHEETS . THE ASSESSEES MANUFACTURING ACTIVIT Y IS INTERLINKED AND INTERRELATED WITH THE CONTINUOUSLY SUPPLIED TECHNICAL INFORMATION FROM THE AE AND WITHOU T TECHNICAL SUPPORT FROM THE AE THE ASSESSEE WOULD NOT BE IN A POSITION TO UNDERTAKE THE MANUFACTURING OPERATIONS . THE EXISTENCE OF THE ASSESSEE - COMPANY IS BASED ON TECHNICAL ASSISTANCE PROVIDED BY THE HOLDING COMPANY AND ARGUED THAT THIS ASSISTANCE IS A BIG BENEFIT TO THE ASSESSEE COMPANY AS THE COMPANY IS ABLE TO COORDINATE ITS OPERATIONS DUE TO TECHNICAL ASSISTANCE PROVIDED BY THE AE . THOUGH, THE TPO HAS GIVEN FINDING IN TRANSFER PRICING ORDER THAT THE ASSESSEE DID NOT DERIVE ANY BENEFIT OU T OF THE PAY MENT OF THE ROYALTY, T HE LD. CIT(A) AFTER VERIFYING THE ADDITIONAL EVIDENCE AND THE INFORMATION SUBMITTED BY THE ASSESSEE DURING APPEAL HEARING , GIVEN A FINDING THAT THE ASSESSEES CLAIM THAT IT HA D DERIVED THE BENEFIT FROM TECHNICAL INFORMATION PROVIDED B Y THE AE WAS SUBSTANTIATED. THEREFORE, ARGUED THAT THE ASSESSEE HA D ESTABLISHED THE BENEFIT RECEIVED FROM THE AE FOR PAYMENT OF ROYALTY. 16 ITA NO S . 279 & 280/VIZ/2017 C.O.NOS.63&64/VIZ/2017 ( M/S. SNF (INDIA) PVT. LTD. ) THE TPO SEPARATED THE ROYALTY FROM THE REMAINING TRANSACTION S AND HELD THAT CUP METHOD IS A MOST APPROPRIATE METHOD FOR DETERMINATION OF ROYALTY PA YMENT, HOWEVER, THE TPO DID NOT BRING OUT ANY COMPARABLE CASES TO DETERMINE THE TRANSFER PRICING FOR BENCHMARKING THE ROYALTY PAYMENT. T HE ROYALTY PAYMENT CANNOT BE SEPARATED FROM THE REMAINING TRANSACTIONS . THERE IS NO JUST IFICATION FOR SEGREGATION OF ROYALTY , SINCE , ALL THE TRANSACTIONS ARE INTERLINKED AND INTERRELATED AND SUBMITTED THAT IN THE CIRCUMSTANCES THE TNMM IS MOST APPROPRIATE METHOD AT THE ENTITY LEVEL, WHICH THE LD. CIT(A) ALSO ACCEPTED . THE LD.AR FURTHER SUBMITTED THAT THOUGH THE TPO HAD REJECTED THE COMPARABLES FOR MINOR DEVIATIONS, THE TPO SELECTED ONLY TWO COMPARABLES INSTEAD OF 13 COMPARABLES SUBMITTED BY THE TAXPAYER DURING THE TRANSFER PRICING PROCEEDINGS WHICH IS NOT JUSTIFIED. LD.AR ARGUED THAT THE ISSUE OF AGGREGATION OF TRANSACTION AND DETERMINATION OF ALP AT RS. NIL WAS DECIDED BY NUMBER OF HIGH COURTS AND TRIBUNALS. THE LD.AR RELIED ON THE DECISION OF THE HON'BLE TELANGANA AND ANDHRA PRADESH HIGH COURT IN THE CASE OF DCIT V S. R.A.K. CERAMICS INDIA PVT. LTD. IN I.T.T.A.NO. 595/2016, DATED 23/12/2016 . SIMILARLY , LD.AR ALSO RELIED ON THE DECISION OF THE HON'BLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. M/S. JOHNSON & JOHNSON LTD., IN ITA 17 ITA NO S . 279 & 280/VIZ/2017 C.O.NOS.63&64/VIZ/2017 ( M/S. SNF (INDIA) PVT. LTD. ) NO.1030/2014 , DATED 07/03/2017 AND THE DECISION OF THE HON'BLE DELHI HIGH COURT IN THE CASE OF PR.CIT - 3 VS. FRIGOGLASS INDIA PVT. LTD., IN ITA NO. 123/2017 , DATED 03/03/2017 AND ARGUED THAT ONCE THE ASSESSEE IS HAVING THE AGREEMENT FOR PAYMENT OF ROYALTY, THE TPO CANNOT SIT ON THE JUDGMENT FOR DETERMINATION OF ALP IN THE CASE OF ROYALTY . SIMILARLY, BY PLACING RELIANCE ON THE DECISION OF THE HON'BLE BOMBAY HIGH COURT IN THE CASE OF M/S. JOHNSON & JOHNSON LTD., (SUPRA) ARGUED THAT THE DISALLOWANCE OF PAYMENT ON THE BASIS OF ASSUMPTION THAT IT IS EXCESSIVE, IS AN ACTION COMPLETELY DEHORS THE PROVISIONS OF TRANSFER PRICING ADJUSTMEN T . BY PLACING RELIANCE ON THE JUDGMENT OF THE HON'BLE DELHI HIGH COURT IN THE CASE OF FRIGOGLASS INDIA PVT. LTD. (SUPRA) , LD.AR ARGUED THAT THE PAY MENT OF ROYALTY CAN BE BENCHMAR KED USING TNMM AS THE MOST APPROPRIATE METHOD AND THAT COMMERCIAL EXPEDIENCY FOR PAYMENT OF SUCH ROYALTY CANNOT BE QUESTIONED . ACCORDINGLY, LD.AR ARGUED THAT IN THE INSTANT CASE APPLYING THE BENEFIT TEST IS NOT PROVIDED IN SEC. 92C OF THE ACT AND THE ASSESSING OFFICER HAS TO NECESSARILY APPLY THE METHOD PRESCRIBED IN RILE 10B OF THE IT RULES FOR DETERMINATION OF ALP OF INTERNATIONAL TRANSACTION. THUS, ARGUED THAT HAVING NOT FOLLOWED ANY OF THE METHOD BY THE TPO, THE ADJUSTMENTS MADE BY THE TPO AT RS. NIL 18 ITA NO S . 279 & 280/VIZ/2017 C.O.NOS.63&64/VIZ/2017 ( M/S. SNF (INDIA) PVT. LTD. ) IS UNJUSTIFIED. SIMILARLY , BY RELYING ON THE DECISION OF THE HON'BLE HIGH COURT OF TELANGANA & ANDHRA P RADESH IN THE CASE OF R.A.K. CERAMICS INDIA PVT. LTD. (SUPRA) THE LD.AR ARGUED THAT THE TRANSFER PRICING ADJUSTMENTS MADE BY THE ASSESSING OFFICER REQUIRED TO BE DELETED AND R E QUESTED TO UPHOLD THE ORDER OF THE LD. CIT(A). 1 3 . WE HAVE HEARD BOTH THE SIDES AND PERUSED THE MATERIAL PLACED ON RECORD. 1 4 . IN THE INSTANT CASE, FOR THE A.Y. 2007 - 08, THE ASSESSEE HAS MADE THE PAYMENT OF ROYALTY TO ITS AE I.E. SPCM SA, FRANCE FOR RS. 1.10 CRORES AND FOR THE A.Y. 2008 - 09 THE AMOUNT OF ROYALTY PAYMENT WAS RS. 1.75 CRORES. THE TAXPAYER HAS CONDUCTED THE TRANSFER PRICING STUDY AND HELD THAT TNMM IS MOST APPROPRIATE METHOD AT THE ENTITY LEVEL AND ON STUDY OF TRANSFER PRICING, THE TAXPAYER CONCLUDED THAT THE PLI (OP/SALES) OF THE ASSESSEE IS MORE THAN COMPARABLE CASES AND THUS HELD THAT THE INTERNATIONAL TRANSACTIONS ARE AT ALP. THE LD.TPO ALSO HAS ACCEPTED FOR TRADING TRANSACTIONS THE TNMM IS MAM AND DID NOT SUGGEST ANY ADJUSTMENT. HOWEVER HE HAS HELD THAT IN DETERMINING THE ALP, THE PAYMENT OF ROYALTY REQUIRED TO BE SEGREGATED, SINCE, THE ROYALTY IS AN INDEPENDENT A ND SEPARATE TRANSACTION. ACCORDINGLY, THE TPO CONSIDERED THAT CUP IS THE MOST APPROPRIATE METHOD FOR 19 ITA NO S . 279 & 280/VIZ/2017 C.O.NOS.63&64/VIZ/2017 ( M/S. SNF (INDIA) PVT. LTD. ) DETERMINING THE ALP OF ROYALTY. FOR THE REMAINING TRANSACTIONS, THE TPO HAD ACCEPTED THE TNMM IS MOST APPROPRIATE METHOD AND NO ADJUSTMENT WAS MADE. AS FAR AS ROYALTY IS CONCERNED, THE TPO HAS MADE THE BENEFIT TEST AND HELD THAT THE ASSESSEE DID NOT DERIVE ANY BENEFIT OUT OF THE ROYALTY PAYMENT AND THE TAXPAYER COULD NOT DEMONSTRATE THE TANGIBLE BENEFITS THAT ARE DERIVED FROM PURCHASE OF TECHNOLOGY FROM ITS SALES. THUS VIEWED THAT THE TAXPAYER CANNOT PAY INDEFINITELY FOR THE TECHNOLOGY WHICH GETS ABSORBED OVER A PERIOD OF TIME. HENCE, DETERMINED THE ALP OF THE ROYALTY PAYMENT AT RS. NIL FOR THE TRANSFER PRICING ANALYSIS. FOR THE A.Y. 2008 - 09, AGAINST T HE PAYMENT OF RS. 1.75 CRORES TAKING THE SAME ANALYSIS, THE TPO HAS DETERMINED THE ALP OF ROYALTY AT RS. NIL. ACCORDINGLY, THE ASSESSING OFFICER MADE THE TRANSFER PRICING ADJUSTMENTS AS SUGGESTED BY THE TPO AND PASSED THE ASSESSMENT ORDER. 14 .1 ON APPEAL LD. CIT(A) ADMITTED THE ADDITIONAL EVIDENCE AND EXAMINED THE CORRESPONDENCE AND E - MAILS AND HELD THAT THE ASSESSEE HAS SUBSTANTIATED THE BENEFITS DERIVED FROM TECHNICAL INFORMATION PROVIDED BY THE AE. THE LD.AR ARGUED THAT USE OF TECHNICAL INFORMATION IS INTERLINKED AND INTERRELATED WITH THE MANUFACTURING ACTIVITY OF THE ASSESSEE, THEREFORE, SUBMITTED THAT 20 ITA NO S . 279 & 280/VIZ/2017 C.O.NOS.63&64/VIZ/2017 ( M/S. SNF (INDIA) PVT. LTD. ) THAT THE PAYMENT OF ROYALTY IS A MANDATORY REQUIREMENT TO THE ASSESSEE FOR CARRYING ON MANUFACTURING ACTIVITY OF THE ASSESSEE COMPANY. THE LD. CIT(A) HAS COMPLETELY ANALYSED THE ISSUE AFTER GIVING OPPORTUNITY TO THE TPO/ASSESSING OFFICER AND HELD THAT THE ASSESSEE GOT TECHNICAL SUPPORT FROM THE AE IN THE MANUFACTURING PRO CESS AND IN MANUFACTURE OF ITS PRODUCTS . SOME OF THE SUGGESTIONS GIVEN BY THE AE TOWARDS IMPROVING THE QUALITY OF THE PRODUCT TO OVERCOME THE PERFORMANCE OF COMPETITOR PRODUCT AND ACCORDINGLY GIVEN A FINDING THAT THE ASSESSEE HAS RECEIVED THE TECHNICAL SUPPORT FROM THE AE . DURING APPEAL HEARING, LD.DR COULD NOT PLACE ANY EVIDENCE TO CONTROVERT THE FINDING GIVEN BY THE LD.CIT(A). THE ABOVE OBSERVATION MADE BY THE LD.CIT(A) IS BASED ON THE FACTS AND AFTER ANALYSING THE INFORMATION PLACED BEFORE HIM THEREFORE WE, DO NOT SEE ANY REASON TO DIFFER WITH THE FINDING OF THE LD. CIT(A) TO HOLD THAT THE ASSESSEE HAD RECEIVED TE CHNICAL INFORMATION FROM ITS AE AND HAS BENEFITED FROM SUCH TECHNICAL INFORMATION PROVIDED BY THE AE. THE LD.AR RELIED ON THE DECISION IN THE CASE OF M/S. JOHNSON & JOHNSON LTD. (SUPRA) WHEREIN TH E HON'BLE HIGH COURT OF BOMBAY HAS HELD THAT THE TPO IS OBLIGED TO FOLLOW ANY ONE OF THE PRESCRIBED METHODS TO DETERMINE THE ALP AS DETAILED IN SECTION 92C(1) OF THE ACT. FOR THE SAKE OF CONVENIENCE, 21 ITA NO S . 279 & 280/VIZ/2017 C.O.NOS.63&64/VIZ/2017 ( M/S. SNF (INDIA) PVT. LTD. ) WE EXTRACT THE RELEVANT PORTION OF THE ORDER WHICH IS EXTRACTED AS UNDER: - (II) THE TPO IS OBLIGED UNDER THE LAW TO DETERMINE THE ALP BY FOLLOWING ANY ONE OF THE PRESCRIBED METHODS OF DETERMINING THE ALP AS DETAILED IN SECTION 92C(1) OF THE ACT. IN THIS CASE, THERE IS NOTHING ON RECORD TO INDICATE THAT THE T PO HAD APPLIED ANY ONE OF THE PRESCRIBED METHODS IN SECTION 92C(1) OF THE ACT TO DETERMINE THE ALP BEFORE DISALLOWING THE PAYMENT OF RS.200.82 LAKHS INCURRED BY THE RESPONDENT ON ACCOUNT OF PUBLICITY AND SALES MANAGEMENT AS BEING EXCESSIVE AND/OR PAYABLE B Y ITS PARENT, M/S. JOHNSON & JOHNSON, USA. (III) THE IMPUGNED ORDER HOLDS THAT TRANSFER PRICING ADJUSTMENT DONE BY DISALLOWING THE PAYMENT, ON THE BASIS OF AN ASSUMPTION THAT IT IS EXCESSIVE, IS AN ACTION COMPLETELY DEHORS THE PROVISIONS OF TRANSFER PRICIN G ADJUSTMENT FOUND IN CHAPTER X OF THE ACT. THE DETERMINATION OF THE ALP HAS TO BE DONE ONLY BY FOLLOWING ONE OF THE ME THODS PRESCRIBED UNDER THE ACT. 14.2 HAVING ACCEPTED THAT THE ASSESSEE COMPANY HAS RECEIVED THE TECHNICAL SUPPORT FROM THE AE, WE ARE OF THE VIEW THAT DETERMINATION OF ALP AT RS. NIL IS UNJUSTIFIED AND THE ASSESSING OFFICER/TPO IS BOUND TO FOLLOW ANY O NE OF THE METHODS PRESCRIBED IN THE ACT TO DETERMINE THE ALP EITHER THE ROYALTY AS INDEPENDENT TRANS A CTION O R AGGREGATING THE TRAN SA CTION AT THE ENTITY LEVEL . T HOUGH THE LD.TPO HAS ADOPTED THE CUP AS MAM FOR DETERMINING THE ALP OF ROYALTY , TPO DID NOT BRING ANY COMPARABLE CASES. THEREFORE ADOPTING THE CUP METHOD WITHOUT THE SUPPORT OF ANY COMPARABLE CASES WOULD BE DEFECTIVE . 22 ITA NO S . 279 & 280/VIZ/2017 C.O.NOS.63&64/VIZ/2017 ( M/S. SNF (INDIA) PVT. LTD. ) 15. DURING THE APPEAL HEARING , THE LD.AR ARGUED THAT THE PAYMENT OF ROYALTY IS INTERLINKED WITH THE MANUFACTURING ACTIVITY AND OTHER TRADING TRANSITIONS, THEREFORE, THE TNMM IS MOST APPROPRIATE METHOD AT THE ENTITY LEVEL AND IT IS NECESSARY TO AGGREGATE THE ENTIRE TRANSACTIONS WITHOUT DELINKING WITH THE ROYALTY PAYMENTS. THE DEPARTMENT COULD NOT ESTABLISH THAT THE ROYALTY IS INDEPENDENT AND SEPARATE TRANSACTION FOR UNBUNDLING THE ROYALTY FROM THE OTHER TRANSACTIONS TO DETERMINE THE ALP INDEPENDENTLY. ONCE IT IS ACCEPTED THAT THE TECHNICAL SUPPORT IS REQUIRED FO R MANUFACTURING THE PRODUCT AND IT IS INTERRELATED THE PAYMENT OF ROYALTY CANNOT BE SEGREGATED AND THE TRANSACTIONS REQUIRED TO BE AGGREGATED AT THE ENTITY LEVEL AND THE ALP REQUIRED TO BE DETERMINED ON THE WHOLE TRANSACTIONS. THOUGH THE TPO HELD THAT THE CUP IS MOST APPROPRIATE METHOD FOR DETERMINING THE TRANSFER PRICING OF THE ROYALTY BUT DID NOT BRING ANY COMPARABLES FOR DETERMINATION OF THE ROYALTY PAYMENT. MERELY BECAUSE OF SOME MISTAKES IN COMPARABLE CASES, THE TPO HAD REJECTED THE COMPARABLES FURNI SHED BY THE TAXPAYER DURING THE TRANSFER PRICING PROCEEDINGS AND REJECTING THE TNMM AS MOST APPROPRIATE METHOD WHICH IS NOT JUSTIFIED. THE LD.CIT(A) RELIED ON THE DECISION OF SONY ERICSON MOBILE COMMUNICATIO NS INDIA (P) LTD WHEREIN THE HON BLE 23 ITA NO S . 279 & 280/VIZ/2017 C.O.NOS.63&64/VIZ/2017 ( M/S. SNF (INDIA) PVT. LTD. ) DELHI HIGH C OURT HELD THAT AGGREGATION OF TRANSACTION IS DESIRABLE AND NOT MERELY PERMISSIBLE, IF THE NATURE OF TRANSACTION(S) TAKEN AS A WHOLE IS SO INTERRELATED THAT IT WILL BE MORE RELIABLE MEANS OF DETERMINING THE ARMS LENGTH CONSIDERATION FOR THE CONTROLLED TRA NSACTIONS. IN THE INSTANT CASE ASSESSEE HAS NOT AVAILED SIMILAR TECHNOLOGY FROM ANY OTHER THIRD PARTY AND THE ASSOCIATED ENTERPRISE HAS NOT PROVIDED THE TECHNOLOGY TO ANY OTHER THIRD PARTY. T HE LD.TPO HAS NOT BROUGHT ANY CO MPARABLE CASES UNDER CUP METHOD F OR DETERMINATION OF ALP. THEREFORE TAKING IN TO CONSIDERATION THE ENTIRE FACTS AND THE MATERIALS PLACED BEFORE US WE, AGREE WITH THE LD.CIT(A) THAT THE TNMM IS MOST APPROPRIATE METHOD TO DETERMINE THE ALP AT ENTITY LEVEL. HAVING HELD THAT TNMM IS MOST APPR OPRIATE METHOD WE REFER TO THE DECISION OF THE HON'BLE HIGH COURT OF TELANGANA & A.P. IN THE CASE OF R.A.K. CERAMICS INDIA PVT. LTD. RELIED UPON BY THE LD.AR WHEREIN THE HON'BLE HIGH COURT HAS HELD AS UNDER: - ........... ONCE IT IS ADMITTED BY THE REVENUE THAT THE ASSESSEE ENTERED INTO A ROYALTY AGREEMENT WITH THE AE AND THE ASSESSEE CLAIMED BENEFIT FROM SUCH AGREEMENT, IN THE FORM OF QUANTUM INCREASE IN SALES WITH NO APPARENT INCREASE IN PRODUCTION, MINIMAL PRODUCT RECALLS AND LOW AFTER SALES MAINT ENANCE COST, AND CONSEQUENTLY PAID ROYALTY IN TERMS THEREOF, IT WAS NOT FOR THE TPO TO DETERMINE AS TO WHAT COULD BE THE OTHER REASONS FOR INCREASE IN THE ASSESSEE'S SALES AND PROFIT. 24 ITA NO S . 279 & 280/VIZ/2017 C.O.NOS.63&64/VIZ/2017 ( M/S. SNF (INDIA) PVT. LTD. ) 1 6. IN THE ASSESSEES CASE, THERE IS AN AGREEMENT ENTERED BY THE ASSE SSEE FOR PAYMENT OF ROYALTY @ 5% ON DOMESTIC SALES AND 8% ON FOREIGN EXPORT. THERE IS NO DISPUTE WITH REGARD TO THE GENUINENESS OF THE AGREEMENT ENTERED INTO BY THE ASSESSEE WITH THE AE. THEREFORE, THE DECISION OF THE HON'BLE HIGH COURT OF TELANGANA AND A.P. IN THE CASE OF R.A.K. CERAMICS INDIA PVT. LTD. (SUPRA) SUPPORTS THE CASE OF THE ASSESSEE. 1 7. THE LD.AR RELIED ON THE DECISION OF THE ITAT, DELHI IN THE CASE OF FRIGOGLASS INDIA PVT. LTD. (SUPRA) WHEREIN THE ITAT HELD THAT THE PAYMENTS OF ROYALTY CA N BE BENCHMARKED AND TNMM IS THE MOST APPROPRIATE METHOD AND THE COMMERCIAL EXPEDIENCY FOR PAYMENT OF SUCH ROYALTY CANNOT BE QUESTION ED . THE DECISION OF THE ITAT IS UPHELD BY THE HON'BLE DELHI HIGH COURT AND THE DEPARTMENT FILED SLP BEFORE THE HON'BLE SUP REME COURT AND THE HON'BLE SUPREME COURT DISMISSED THE SLP. FOR THE SAKE OF CONVENIENCE, WE EXTRACT THE RELEVANT PART OF THE ORDER OF THE TRIBUNAL AS UNDER: - 16. WE HAVE HEARD THE RIVAL PARTIES AT LENGTH AND CAREFULLY PERUSED THE MATERIAL ON RECORD. AS FAR AS THE ISSUE OF ROYALTY IS CONCERNED, WE FIND THAT THE ASSESSEE HAD FILED IN THE COURSE OF THE TPO ASSESSMENT AS WELL AS BEFORE THE DRP, DETAILED SUBMISSIONS, INCLUDING AGREEMENT BETWEEN AE AND THE ASSESSEE, JUSTIFYING HOW THE TECHNICAL KNOW - HOW SUPPLI ED BY ITS AE WAS CRUCIAL TO THE RUNNING OF ITS BUSINESS. IN CIT VS EKL APPLIANCES 341 ITR 241 (DEL), THE HON 'BLE DELHI HIGH COURT HAD THE OCCASION TO CONSIDER AN ISSUE OF DISALLOWANCE OF ROYALTY BY TPO BECAUSE THE ASSESSEE IN THAT CASE HAD BEEN SUFFERING LOSSES, THE HON 'BLE HIGH COURT WHILE HOLDING THAT SO LONG AS THE EXPENDITURE 25 ITA NO S . 279 & 280/VIZ/2017 C.O.NOS.63&64/VIZ/2017 ( M/S. SNF (INDIA) PVT. LTD. ) OR PAYMENT BY ASSESSEE HAS BEEN DEMONSTRATED TO HAVE BEEN INCURRED OR LAID OUT FOR THE PURPOSES OF BUSINESS, IT IS NO CONCERN OF THE TPO TO DISALLOW THE SAME ON ANY EXTRANEOUS REA SONING...... ...... HERE, IN THE PRESENT APPEAL, WHAT WE SEE IS THE TPO SITTING ON JUDGMENT ON THE BUSINESS AND COMMERCIAL EXPEDIENCY OF THE ASSESSEE WHICH IS ERRONEOUS AS PER THE PROVISIONS OF THE ACT AS LAID DOWN CLEARLY BY THE HON 'BLE DELHI HIGH COURT IN EKL APPLIANCES (SUPRA). AS FAR AS THE DEPARTMENT'S RELIANCE ON THE HON 'BLE DELHI HIGH COURT'S JUDGMENT IN ABHINANDAN INVESTMENTS (SUPRA) AND ON THE DECISION OF THE CO ORDINATE I BENCH OF THE DELHI TRIBUNAL IN THE CASE OF BOMBARDIER TRANSPIRATION INDIA PVT. LTD. IS CONCERNED, THESE JUDGMENTS WERE RENDERED ON A DIFFERENT SET OF FACTS AND HENCE THE RATIO AS 'LAID DOWN BY THESE ARE NOT APPLICABLE TO THE FACTS OF THE PRESENT APPEAL. FURTHERMORE, WE ARE OF THE OPINION THAT ONCE TNMM HAS BEEN APPLIED TO THE ASSESSEE COMPANY'S TRANSACTION, IT COVERS WITHIN ITS AMBIT THE ROYALTY TRANSACTIONS IN QUESTION TOO AND HENCE THE DEPARTMENT'S CONTENTION FOR APPLYING THE CUP METHOD IS ERRONEOUS. HENCE, FOLLOWING THE RATIO OF THE HON 'BLE DELHI HIGH COURT IN CIT VS EKL A PPLIANCES (SUPRA), WE HOLD THAT THE ADDITION MADE BY THE TPO AND UPHELD BY THE DRP IS UNSUSTAINABLE AND IS LIABLE TO BE DELETED...... 1 8 . IN THE INSTANT CASE, THERE IS NO DISPUTE THAT THE ASSESSEE HAS DERIVED THE BENEFIT FROM THE TECHNICAL INFORMATION GI VEN BY THE AE. THERE WAS AN AGREEMENT REDUCED IN WRITING BETWEEN THE ASSESSEE AND THE AE FOR PAYMENT OF ROYALTY AND FOR EXTENDING NECESSARY TECHNICAL SUPPORT TO THE ASSESSEE FOR MANUFACTURING PRODUCT CONTINUOUSLY AND CONSISTENTLY . THE LD. CIT(A) HAS GIVEN A FINDING THAT THE TECHNICAL INFORMATION ON THE MANUFACTURING THE ACTIVITY WAS RECEIVED AND BENEFITTED BY THE ASSESSEE. THE LD.AR SUBMITTED 26 ITA NO S . 279 & 280/VIZ/2017 C.O.NOS.63&64/VIZ/2017 ( M/S. SNF (INDIA) PVT. LTD. ) THAT THE MANUFACTURING ACTIVITY OF COMPANY AND THE CONTINUOUS TECHNICAL SUPPORT FOR WHIC H THE ROYALTY IS PAID ARE INDEPENDENT AND INTERRELATED AND AS HELD BY THE HON'BLE BOMBAY HIGH COURT IN THE CASE OF M/S. JOHANSON & JOHNSON , THE TPO OBLIGED TO FOLLOW ANY ONE OF THE METHODS PRESCRIBED IN SECTION 92C OF THE ACT . INSTEAD , THE LD.TPO ADOPTED THE BENEFIT TEST WHICH IS NOT ONE OF THE PRESCRIBED METHODS . THUS, THE ORDER OF THE TPO IS DEFECTIVE IN NOT FOLLOWING THE METHODS PRESCRIBED UNDER THE ACT. COMMERCIAL EXPEDIENCY IS THE BUSINESS DECISION OF THE TAX PAYER AND THE AO CANNOT SIT AND JUDGE THE BUSINESS EXPEDIENCY AS DECIDED BY THE HON'BLE DELHI HIGH COURT. THE COORDINATE BENCH OF ITAT, DELHI ALSO HELD THAT TNMM IS THE MOST APPROPRIATE METHOD FOR BENCHMARKING THE ROYALTY PAYMENT. ON APPLICATION OF TNMM AS MAM AT THE ENTITY LEVEL THE PLI OF THE ASSESSEE MORE THAN THE COMPARABLE CASES, THUS THE TRANSACTI ONS OF THE ASSESSEE COMPANY ARE AT ARMS LENGTH . FOLLOWING THE JUDICIAL PRECEDENTS DISCUSSED IN THE PRECEDING PARAGRAPHS, WE HOLD THAT DETERMINATION OF ROYALTY AT RS. NIL IS UNJUSTIFIED AND THE MOST APPROPRIATE METHOD FOR DETERMINING THE ROYALTY PAYMENT I S TNMM METHOD AT THE ENTITY LEVEL AGGREGATING ALL THE TRANSACTIONS INCLUDING THE PAYMENT FOR ROYALTY . ACCORDINGLY, WE HOLD THAT THE ADJUSTMENT MADE BY THE 27 ITA NO S . 279 & 280/VIZ/2017 C.O.NOS.63&64/VIZ/2017 ( M/S. SNF (INDIA) PVT. LTD. ) TPO IS NOT WARRANTED AND THE ADDITION MADE BY THE ASSESSING OFFICER I S DELETED AND THE ORDER OF THE LD. CIT(A) IS UPHELD. 1 9 . FOR A.Y. 2007 - 08, THE FACTS ARE IDENTICAL AND HAVING HELD THAT TNMM IS THE MOST APPROPRIATE METHOD, NO ADJUSTMENT IS CALLED FOR ON ACCOUNT OF TRANSFER PRICING ISSUES. IN THE INSTANT CASE, THE TAX EFFECT INVOLVED IN THIS APPEAL I S ALSO LESS THAN RS.50.00 LAKHS WHICH IS SQUARELY COVERED BY THE CBDT CIRCULAR NO. NO.17/2019 , DATED 0 8 /08/ 2019 , THEREFORE, THIS APPEAL IS NOT MAINTAINABLE. THEREFORE, THE ASSESSEE SUCCEEDS FOR THE A.Y. 2007 - 08 BOTH ON MERITS AS WELL AS ON TAX EFFECT. AC CORDINGLY, THE APPEALS FILED BY THE REVENUE ARE DISMISSED. 20. THE CROSS OBJECTIONS FILED BY THE ASSESSEE ARE SUPPORTING TO THE ORDERS OF THE LD. CIT(A). HAVING DELETED THE ADDITIONS MADE BY THE ASSESSING OFFICER, THE CROSS OBJECTIONS FILED BY THE ASSESSE E BECOMES INFRUCTUOUS, HENCE, DISMISSED. 21. IN THE RESULT, APPEAL S FILED BY THE REVENUE AND THE CROSS OBJECTIONS FILED BY THE ASSESSEE ARE DISMISSED. ORDER PRONOUNCED IN OPEN COURT ON TH IS 0 4 T H DAY OF O C T . , 201 9 . S D / - S D / - (V. DURGA RAO) ( D.S. SUNDER SINGH ) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED : 0 4 T H O C T . , 201 9 . 28 ITA NO S . 279 & 280/VIZ/2017 C.O.NOS.63&64/VIZ/2017 ( M/S. SNF (INDIA) PVT. LTD. ) VR/ - COPY TO: 1. THE ASSESSEE M/S. SNF (INDIA) PVT. LTD., PLOT NO.9, JAWAHARLAL NEHRU PHARMA CITY, PARAWADA, VISAKHAPATNAM. 2. THE REVENUE DCIT, CIRCLE - 5(1), VISAKHAPATNAM. 3. THE CIT - 2, VISAKHAPATNAM. 4. THE CIT(A) - 2, VISAKHAPATNAM . 5. THE D.R . , VISAKHAPATNAM. 6. GUARD FILE. BY ORDER (VUKKEM RAMBABU) SR. PRIVATE SECRETARY, ITAT, VISAKHAPATNAM.