DOOWON AUTOMOTIVE SYSTEMS INDIA PRIVATE LIMITED,KANCHIPURAM V. DCIT, CORPORATE CIRCLE 1(1)- CHENNAI, CHENNAI

ITTPA 88/CHNY/2024

AI Insights

The case involves M/s. Doowon Automotive Systems India Private Limited, which appealed against the order of the Deputy Commissioner of Income Tax concerning transfer pricing adjustments for the assessment year 2021-22. The primary issues revolved around the adjustments for customs duty, working capital, and the treatment of royalty and technical fee payments. The Tribunal examined whether these transactions should be aggregated and tested under TNMM or treated separately. The Tribunal found that the adjustments for customs duty and working capital were justified and that the royalty and technical fee payments should be aggregated and tested under TNMM, following the necessary adjustments.

• Counselvise Citation: [2025] 140 COUNSELVISE.COM (IT) 397186 (ITAT-CHENNAI)
• Appeal Type: Income Tax (Transfer Pricing) Appeal
• Pronouncement Date: 30-05-2025
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: D
• Assessment Year: 2021-2022
• Other Referred Cases: Motonic India Automotive Pvt. Ltd Vs. ACIT, Skoda Auto India (P) Ltd. v. ACIT, Toyota Kirloskar Motors Pvt. Ltd. v. ACIT, Putzmeister Concrete Machines Pvt. Ltd. v. DCIT, Demag Cranes & Components (India) Pvt. Ltd. v. DCIT, Siemens Gamesa Renewable Power (P.) Ltd v. DCIT, Magneti Marelli Powertrain India (P.) Ltd. v. DCIT, Air Liquid Engg. India (P.) Ltd. v. DCIT, Cadbury India Ltd. v. ACIT, EKL Appliances Ltd. v. ACIT, KHS Machinery Pvt. Ltd. v. ITO, Durr India (P.) Ltd. V. ACIT
• Laws Referred To: Income Tax Act
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: V SREENIVASAN
• Assessee Lawyers: S.P.CHIDAMBARAM
• Keywords: Set aside; Opportunity of being heard; Transfer pricing; International transaction; Commercial expediency
• Section: 143(3); 37

Judgement Text

"आयकर अपीलीय अधिकरण, ’डी’ न्यायपीठ, चेन्नई। IN THE INCOME TAX APPELLATE TRIBUNAL ‘D’ BENCH: CHENNAI माननीय श्री मनु क ुमार धिरर ,न्याधयक सदस्य एवं माननीय श्री अमिताभ शुक्ला, लेखा सदस्य क े सिक्ष BEFORE HON’BLE SHRI MANU KUMAR GIRI, JUDICIAL MEMBER AND HON’BLE SHRI AMITABH SHUKLA, ACCOUNTANT MEMBER आयकर अपील सं./IT(TP)A No.88/Chny/2024 Assessment Years: 2021-22 M/s. Doowon Automotive Systems India Private Limited, Plot B 19 and B 20 , Sipcot Industrial Park, Oragadam, Sriperumbudur Taluk, Kachipuram Dist, Tamil Nadu-602 105. [PAN: AACCD4172F] Deputy Commissioner of Income Tax, Corporate Circle-1(1), Chennai. (अपीलार्थी/Appellant) (प्रत्यर्थी/Respondent) अपीलार्थी की ओर से/ Assessee by : Shri S.P.Chidambaram, Advocate प्रत्यर्थी की ओर से /Revenue by : Shri AR V Sreenivasan, CIT सुनवाई की तारीख/Date of Hearing : 07.05.2025 घोषणा की तारीख /Date of Pronouncement : 30.05.2025 आदेश / O R D E R PER AMITABH SHUKLA, A.M : This appeal is filed by the assessee against the order bearing DIN & Order No.ITBA / AST / S / 143(3) / 2024-25 / 1068976589(1) dated 19.09.2024 of the Learned Deputy Commissioner of Income Tax for the assessment years 2021-22 passed in compliance to directions of Dispute Resolution Panel-2, Bengaluru vide order dated 26.08.2024. 2.0 Before proceeding further, we deem it necessary to briefly recapitulate the factual matrix of the case. The appellant assessee is IT(TP)A No.88 /Chny/2024 Page - 2 - of 28 engaged in the manufacturing of automobile air conditioner, cooling systems, automotive ancillaries, components and other automotive parts. During the year under consideration the assessee had engaged into international transactions which were in the nature of purchase and sale of finished goods, purchase of fixed assets, royalty and technical fee. Majority of the international transactions were aggregated and benchmarked by the assessee using Transactional Net Margin Method. The appellant assessee had disclosed a margin of 2.10% (after claiming custom duty and working capital adjustment) Vis-a-Vis 7 comparable companies range of 1.16% to 3.95%. In course of proceedings before the lower authorities, the Ld.TPO vide his order dated 26.10.2023 has denied the custom duty adjustment and working capital adjustment and also undertook a fresh search and introduced 6 new comparable. Accordingly the Ld.TPO reworked the margins of Assessee at 1.08% vis a vis 13 comparable companies at 3.69% to 5.35% with a median of 4.44% and proposed an upward adjustment of Rs.7,38,11,168/-. Apart from the impugned primary adjustment, the Ld.TPO proceeded to disallow Royalty of Rs.7,48,18,848/- and Technical Fee of Rs.48,07,002/- holding that these two transactions cannot be aggregated and tested under TNMM but it should be excluded and tested on a standalone basis under “Other method”. Further, in respect of claim of Royalty transaction, the TPO has also observed that the assessee has not furnished the IT(TP)A No.88 /Chny/2024 Page - 3 - of 28 Annexure to the Invoice for Royalty, and that the amendment to Royalty agreement was unsigned as also the fact that there was difference in the actual quantum of Royalty paid and presented in Form 3CEB. The assessee preferred its objections under section 144C(5) of the Act before the Ld. Dispute Resolution Panel which confirmed the transfer pricing adjustment as proposed in the draft assessment order. On being aggrieved, the assessee is in appeal before this Tribunal for TP issues. 3.0 The first issue raised by the assessee through its grounds of appeal Nos. 2.3 to 2.7 is regarding the customs duty adjustments. The Ld. Counsel for the assessee submitted that the same is erroneous in as much as Ld.DRP has failed to appreciate that the percentage of imported goods consumed by the assessee is 49.39% as against 21.22% of comparable companies. The Ld. Counsel drew our attention to an extensive paper book of the assessee which was placed on records. The Ld. AR submitted that the assessee had imported certain components by incurring additional liability towards customs duty for which cenvat credit is not available and as such urged that the proportionate non-cenvatable portion of basic customs duty paid should be eliminated for a fair and reasonable comparison under TNMM method. The Id. Counsel for the assessee has further submitted that this issue is squarely covered in favour of the assessee by the decision of this Tribunal in assessee’s own case for the assessment years 2011-12, IT(TP)A No.88 /Chny/2024 Page - 4 - of 28 2012-13, 2013-14 and 2014-15 vide ITA No.3061/Chny/2017. The Ld. Counsel for assessee has also placed on records a copy of the order of the TPO dated 01.03.2022 for AY 2013-14 giving effect to the order of the ITAT and submitted that the TPO had examined and allowed custom duty adjustment. It was prayed that similar decision be taken for the present appeal also. 4.0 Per contra, the Id. DR though in principle agreed that the issue of custom duty is covered in favor of the Assessee, however, submitted that in AY 2013-14 difference in custom duty was 85.74% as against 21.50% for comparable companies whereas in the subject AY, the difference of custom duty has narrowed down to 49.39% as against 21.22%, therefore Ld DR submitted that adjustment may not be necessary for the present year as directed by this tribunal in its decision in ITA No.3061/Chny/2017 supra. 5.0 We have heard the rival submissions in the light of the material available on record. As far as the controversy as to whether the adjustment of custom duty is allowable or not is no longer res integra as the said issue is already decided in favor of the Assessee in its own case by this Hon’ble Tribunal in ITA No 3061/Chny/2017 vide order dated 23.11.2021 wherein it is held as under: “4. We have heard both the sides, perused the materials available on record and gone through the orders of authorities below including case IT(TP)A No.88 /Chny/2024 Page - 5 - of 28 law and paper books filed by the assessee. Similar grounds was subject matter before the Tribunal and vide order dated 18.08.2017 in I.T.A. No. 2560/Mds/2016 relevant to the assessment year 2011-12, wherein, decision of the Coordinate Benches of the Tribunal in assessee’s own case for the assessment year 2011-12 in I.T.A. No. 692/Mds/2016 dated 25.01.2017 has been followed while adjudicating the above ground. The relevant findings of the Tribunal order relevant to the assessment year 2011-12 are extracted as under: \"5. We heard the rival submissions, perused the material on record and judicial decisions. The Ld. AR explained that the company was incorporated in the year 2006 and in the second year of operation.· The raw material component include import cost which constitute a major cost and claim adjustment of custom duty (non-cenvatable) before TPO. We rely on coordinate bench decision of Motonic India Automotive Pvt. Ltd Vs. ACIT, ITA No. 741/Mds/2014 dated 17.08.2016 at page 5 Para 6 which read as under: \"6. The Id. AR submitted that in respect of custom duty component suitable adjustment to be made while determining the ALP. In our opinion, the plea of the assessee is justified. The TPO has not considered the custom duty adjustment on the reason that it is equivalent to central excise in commercial market. This is not correct. The Tribunal consistently holding that while determining ALP, there should be suitable adjustment in respect of custom duty, which was considered in the following cases : i) Skoda Auto India (P) Ltd. v. ACIT, Aurangabad (30 SOT 319)[Pune} ii) Toyota Kirloskar Motors Pvt. Ltd.· v. ACI T, Bangalore - ITA No. 828/Bang/2010 iii) Putzmeister Concrete Machines Pvt. Ltd. v. DCIT, Panaji - ITA No. 107/PNJ/2012 iv) Demag Cranes & Components (India) Pvt. Ltd. v. DCIT, Pune in ITA No.120/PN/2011 6.1 At this stage, it is pertinent to mention the finding of the Pune Bench in the case of Demag Cranes & Components (India) Pvt. Ltd. v. DCIT(supra) dated 4.1.2012. in ITA No.120/PN/2011, which is as follows : \"37. We have heard the parties and perused the available material on records in the light of the second limb of the ground 4(b). It is relevant mentioned that we have already analysed the relevant provisions of Income Tax rules vis a vis the scope of the adjustments in the IT(TP)A No.88 /Chny/2024 Page - 6 - of 28 preceding paragraphs in the context of the adjustments on account of the 'working capital'. In principles, our findings on the issue remain applicable to the adjustments on account of the import cost mentioned in ground 4(b) too. The difference between the AL Margin before and after the said adjustments on account of 'import cost' works out to 0.57% (7.18%-6.61%). Revenue has not disputed the said working of the assessee. In these factual circumstances and in the light of the scope of adjustments discussed above, in our opinion and in principle, the assessee should win on this ground too. One such decision relied upon by the assessee 's counsel supports our finding relates to the decision of this bench of the Tribunal in the case of Skoda Auto India p Ltd 122 TTJ 699 (Pune) dated March 2009 wherein, it is held (in para 19 of the order) that, \"No doubt , a higher import content of raw material by itself does not warrant an adjustment in operating margins, as was held in Sony India (P) Ltd. 's case (supra), but what is to be really seen is whether this high import content was necessitated by the extraordinary circumstances beyond assessee 's control. As was observed by a Co-ordinate Bench of this Tribunal in the case of EGain Communication (P) Ltd. (supra) \"the differences which are likely to materially affect the price, cost charged or paid in, or the profit in the pen market are to be taken into consideration with the idea to make reasonable and accurate adjustment to eliminate the differences having material effect\". We do not agree with the AO that every time the assessee pays the higher import duty, it must be passed on to the customers or it must be adjusted for in negotiating the purchasing price. All these things could be relevant only when higher import content is a part of the business model which the assessee has consciously chosen but then if it is a business model to import the SKD kits of the cars, assemble it and sell it in the market, that is certainly not the business models of the comparables that the TPO has adopted in this case. The adjustments then are required to be made for functionally differences. The other way of looking at the present situation is to accept that business model of the assessee company and the comparable companies are the same and it is on account of initial stages of business that the unusually high costs are incurred. The adjustments are thus required either way. It is, therefore, permissible in principle to make adjustments in the costs and profits in fit cases. We also do not agree with the authorities below that the onus is on the assessee to get all such details of the comparable concerns so as to make this comparison possible. The assessee cannot be expected to get the details and particulars which are not in public domain. In such a situation, i.e. when information available in public domain is not sufficient to make these comparisons IT(TP)A No.88 /Chny/2024 Page - 7 - of 28 possible, it is inevitable that some approximations are to be made and reasonable assumptions are to be made. The argument before us was that it was first year of assessee 's operations and complete facilities ensuring a reasonable , indigenous raw material content was not in place. The assessee 's claim is that it was in these circumstances that the assessee had to sell the cars with such high, import contents, and essentially high costs, while the normal selling price of the car was computed in the light of the costs as would apply when the complete facilities of regular production are in place. None of these arguments were before any of the authorities below. What was argued before the AO was mere fact of higher costs on account of higher import duty but then this argument proceeded on the fallacy that on operating profit margin for higher import duty is pern:zissible merely because the higher costs are incurred for the inputs. That argument has been rejected by a Coordinate Bench and we are in respectful agreement with the views of our esteemed colleagues. This additional argument was not available before the authorities below and it will indeed be unfair for us to adjudicate on this factual aspect without allowing the TPO to examine all the related relevant facts. We, therefore, deem it fit and proper to remit this matter to the file of the TPO for fresh adjudication in the light of our above observations.\" 38. The perusal of the impugned orders shows that the above cited guidelines by way of decision of this bench of the Tribunal in the case of Skoda Auto India p Ltd (supra) were not available to the revenue authorities. Therefore, we are of the opinion, the issue should be set aside to the files of the TPO with direction to examine the claim of the assessee relating to the import cost factor and eliminate the difference if any. However, the TPO/AO/DRP shall see to it that the difference in question is 'likely to materially affect' the price/profit in the open market as envisaged in sub rule (3) of Rule 1 OB of the Income tax Rules, 1962. Accordingly, ground 4(b) is allowed pro tanto. \" Accordingly, we direct the A.O. to give suitable adjustment against the custom duty component while determining the ALP. Considering the custom duty adjustment and co-ordinate bench decision, we remit the disputed issue to the file of AO for custom duty adjustment.\" 4.1 The Id. DR could not controvert the above findings of the Tribunal in assessee’s own case for earlier assessment year. Similar IT(TP)A No.88 /Chny/2024 Page - 8 - of 28 decision by the Tribunal was also given for the assessment year 2012- 13. By giving effect to the order of the ITAT, vide order dated 23.08.2017, the TPO had examined and allowed custom duty adjustment. Thus, respectfully following the above decision of the Coordinate Benches of the Tribunal, for the assessment year under consideration also, we direct the Assessing Officer to give suitable adjustment against the custom duty component while determining the ALP.” 6.0 We have noted that the facts of the present case are identical to those available in the judicial precedence hereinabove and no distinguishment has been made out by the Revenue. We have also noted that there is sufficient force in the arguments of the Ld AR that mere narrow down of the difference cannot be a basis to deny the adjustment. We are in agreement that the adjustment is sought only on proportionate basis of the non-cenvatable portion of basic customs duty. Accordingly in respectful compliance to the decision in ITA No.3061 in assesee’s own case supra, we are of the view that assessee is rightfully eligible for custom duty adjustment to make it comparable with comparable companies. Accordingly, we direct the Ld. AO to give suitable adjustment against the custom duty component while determining the ALP in this case. All the grounds of appeal Nos. 2.3 to 2.7 raised by the assessee on this issue are therefore allowed. 7.0 The next issue raised by the assessee through grounds of appeal Nos. 2.8 to 2.10 are regarding denial of working capital adjustment. The Ld. Counsel for the assessee submitted that the IT(TP)A No.88 /Chny/2024 Page - 9 - of 28 assessee had sought working capital adjustment on the ground of differences in working capital levels between assessee and comparable companies. However, Ld. TPO concluded that these differences could not be measured with reasonable accuracy as the financial statements would only show opening and closing balances of Debtors and Creditors on specific year ending dates and not their movement during the year. The Ld TPO’s rejection was confirmed by the Id. DRP. The Ld. AR submitted that working capital adjustment is calculated on the basis of the methodology prescribed by OECD guidelines and therefore the same cannot be faulted. The Ld. Counsel for the assessee placed on record a copy of the order of the Ld.TPO for AY 2013-14 dated 01.03.2022 giving effect to the order of the ITAT, whereby the TPO had examined and allowed working capital adjustment for the assessment years 2013-14. In support of its contentions, the Ld. AR invited reference to evidences and records placed in its paper book. 8.0 Per contra, the Id. DR supported the order of lower authorities. 9.0 We have heard rival submissions in the light of material available on records. We have noted that an Hon’ble Coordinate Bench of this tribunal has considered similar issue, of working capital adjustment, in the assessment year 2013-14 and vide its order ITA No 3061/Chny/2017 vide order dated 23.11.2021 as held as under: IT(TP)A No.88 /Chny/2024 Page - 10 - of 28 “5.2 We have heard the rival contentions. With regard to the allowability of working capital adjustment, the Tribunal has considered similar issue in the assessment year 2011-12 and vide its order in I.T.A. No. 692/Mds/2016, the Tribunal has observed and held as under: \"7. The Ld. AR argued that the Assessing Officer/DRP has confirmed the action of the TPO in not providing working capital adjustment while determining net profit margin of the assessee. In the assessee’s own case in the assessment year 2009-10, DRP in its order dated 20.12.2013 has directed the TPO to examine the issue and consider working capital adjustment. Whereas, the Ld. TPO observed that the assessee company is actually buying the parts from the AE and working capital adjustment to be allowed if the assessee demonstrates with AE of allowing the credit period to the assessee and DRP confirm the action of the TPO and the Ld. AR demonstrated the Arithmetic Mean of 4.58% of seven comparables selected at Page 41 of paper book and referred to the working capital adjustment PLR of 12.26% with the comparables current assets being sundry creditors, sundry debtors and inventories at Page 42 and supported working capital adjustment of comparables company based on the financial statements. The Ld. DR relied on the order of TPO and prayed for no adjustment is required. Considering the facts and material on record the financial statements and the paper book, there is necessity for working capital adjustment and accordingly we remit the issue to the file of AO to consider the material for fresh consideration. \" 5.3 By giving effect to the order of the ITAT, vide order dated 28.10.2018-, the TPO had examined and allowed the benefit of working capital adjustment. Thus, respectfully following the above decision of the Coordinate Benches of the Tribunal, · for the assessment year under consideration also, we direct the Assessing Officer to give suitable adjustment against the working capital component while determining the ALP.” 10.0 Thus, respectfully following the above decision of the Coordinate Benches of the Tribunal, we deem it appropriate to remit the matter to the file of Ld.AO with directions to readjudicate the matter de novo after giving suitable adjustment against for working capital. The IT(TP)A No.88 /Chny/2024 Page - 11 - of 28 assessee shall be at liberty to produce all the evidences in its possession before the Ld.AO for consideration. The assessing officer shall give due opportunity of being heard to the assessee. Thus, all the grounds of appeal Nos. 2.8 to 2.10 on this issue are allowed for statistical purposes. 11.0 The next issue raised through grounds of appeal nos. 2.16 and 2.17 are in respect of treatment of miscellaneous expenses as non- operating expense. The Ld. TPO had excluded the miscellaneous expenses claimed by the assessee while computing the margins of comparable companies on the premise that assessee has not furnished bifurcation of such expense. The Ld. DRP sustained the order of the Ld.TPO holding that these expenses are additional cost not related to core business. The ld. AR pointed out that Rule 10TA does not specifically exclude Miscellaneous Expenses from the definition of operating expenses. It was argued that Rule 10TA excludes only such expenses which are not incurred in the normal course of business of the Assessee. The Ld. AR vehemently argued that every company in its ordinary course of business does incur miscellaneous expense. The ld. AR argued that treatment of an item of expenditure as operating or non- operating is dependent on nature of said item of expense and mere exclusion of the same from operating expenses on account of non- availability of detailed break-down may not be a right approach. The Ld. IT(TP)A No.88 /Chny/2024 Page - 12 - of 28 AR submitted that many times on account of the multitude of expenses and their small values such items are grouped together and disclosed under the head miscellaneous expense. Such a grouping would not mean that the impugned expenses are not connected to the business. In support of his arguments, the ld. AR has placed reliance on the decision of Delhi ITAT in the case of ITO vs E Value serve.com (2016) 75 taxmann.com 195 (Delhi – Trib) wherein it is held that miscellaneous expenses ought to be treated as operating expenses for assessee as well as comparable companies. The Ld. AR further submitted that the TPO has considered miscellaneous expenses as operating in nature for comparable companies in the assessee’s own case in all the earlier 12.0 Per contra the Ld. DR supported the order of the lower authorities. 13.0 We have heard the rival submissions in the light of materials available on record. We find force in the argument of the assessee that it is the nature of expenditure which decides whether it is connected to normal business operations or not. We also concur with the view that miscellaneous expense is something which every company would incur for its normal operations and as such we are in agreement with the contention that such miscellaneous expense ought to be treated as “operating expenses”. Miscellaneous expenses are also part of allowable expenditure under section 37 of the Act. In this regard, we draw support from the decision of the Delhi Tribunal in the case of ITO vs E Value IT(TP)A No.88 /Chny/2024 Page - 13 - of 28 serve.com (2016) 75 taxmann.com 195 (Delhi – Trib) wherein it was held that miscellaneous expenses ought to be treated as operating expenses for Assessee as well as comparable companies. Relevant para of the order is produced below: “47. Ground no. 6: The main contention of department is that ld. CIT(A) had concluded that misc. income and misc. expenses were operating profits without verifying their nature. We find that ld. CIT(A) has observed in regard to misc. income that the same pertained to income from other sources and the misc. income was included as part of operating profit in the case of comparable company. Therefore, there could not be any prejudice to revenue on this count. As regards misc. expenses, ld. CIT(A) has observed that the same included a multitude of expenses that were too small in value. But since they pertained to the operations of the company, they were treated as operating expenses for both the tested party as well as the comparable companies. The TP analysis, as we have earlier observed, is not an exact science and we have to arrive at reasonable conclusions which would not materially affect the profit margins. Therefore, we do not find any reason to interfere with the finding of ld. CIT(A) on this count. In the result ground no. 6 is dismissed”. 14.0 We have noted the facts of the present case are akin to those available in judicial precedence discussed herein above and no distinguishment could be made. Accordingly, in respectful compliance to the same, we are of the considered view that miscellaneous expense ought to be considered as part of “operating expense” of comparable companies. The impugned allowance is also permissible in view of its treatment in earlier years in conformity with principles of consistency. Accordingly, we remit the matter to the Ld.TPO with the direction to re IT(TP)A No.88 /Chny/2024 Page - 14 - of 28 determine the margin of the comparable companies after including the same. Accordingly, the grounds of appeal Nos. 2.16 to 2.17 are allowed for statistical purposes. 15.0 The next issue raised by the assessee vide grounds of appeal nos. 2.24 to 2.31 relates to Royalty payment. The Ld. Counsel for the assessee submitted that Royalty payment should not have been separately benchmarked as it was already benchmarked under TNMM. It was submitted that the Ld. TPO however rejected the assessee’s approach and instead, proceeded to benchmark these transactions under the \"other method\" and ultimately disallowed the payment. The Ld AR submitted that the facts in relation to Royalty transaction is that the Assessee was incorporated in the year 2006 and commenced operations in FY 2009-10. Initially the Assessee has entered into Technical Assistance Agreement dated 01.04.2009 for procurement of technology from its AE. As per the said agreement, the assessee had initially agreed to pay a lump sum amount for each model of vehicle. However, the AE did not insist on payment of “Running Royalty” in the initial years of operation as the parties impliedly had agreed that post break-even of the Assessee, the AE would start to recover “running royalty”. The Ld. Counsel informed that the assessee started making profits from AY 2015- 16 and therefore, the parties entered into an amendment agreement with effect from 01.01.2016 wherein the parties agreed that “running royalty” IT(TP)A No.88 /Chny/2024 Page - 15 - of 28 of 3% on turnover would be payable by the Assessee to its AE. The Ld AR contended that for its manufacturing process, the assessee is completely dependent on the technology provided by its AE. The assessee’s entire business is dependent upon know how from its AEs. The position was significant as the assessee does not undertake any independent research activity nor does it own any intangibles. Therefore, the running royalty payment is inextricably connected with the manufacturing operations and as such the Ld AR argueed that the said transaction will have to necessarily aggregated and rightly benchmarked under TNMM. It was submitted that after providing Customs duty adjustment, Working capital adjustment and treating Miscellaneous expenses as operating expense, the PLI of Assessee will be 2.10% which will be within the ALP Range of comparable companies 1.07% to 3.92%. The Ld AR further submitted that the Ld.TPO also made the impugned disallowance, inter-alia, holding that royalty payment need not be allowed since the amendment to the agreement was unsigned, the attachment/ report to invoice was not furnished, there existed difference between actual payment and amount of royalty reported in Form 3CEB and that no Royalty was paid in earlier years. 16.0 The Ld. Counsel submitted that as regards the issue of unsigned agreement, the controversy was unnecessary since the Korean version of the amendment to the agreement was signed. It was submitted IT(TP)A No.88 /Chny/2024 Page - 16 - of 28 that though one unsigned copy of the English version was provided yet there was one more copy of the same amendment to the agreement furnished as Annexure 2 to submissions in tabular format which was actually signed. The Ld AR submitted that the parties to the agreement have acted upon the agreement and the Ld TPO has not disputed the same which alludes that the Ld.TPO did not doubt the transaction per se. Mere fact that one copy of the amendment was not signed although the second copy of the English version and even the Korean version was signed would not render the agreement unacceptable. On the issue of non-submission of attachment of the report to the invoice, it was argued that the report was prepared for every six months as per calendar year instead of financial year format. For the purposes of transfer pricing reporting and disclosure, the assessee represented the said data and therefore non-submission was not the case. As regards, differences between actual payment and the amounts reported in Form-3CEB, the Ld.AR argued that the amounts reflected in the financials and Form 3CEB were on provisional basis whereas during the course of TP proceedings, the assessee had furnished the workings for actual payment of royalty pertaining to the subject AY and hence the differences. In support of its contentions, a reconciliation was provided through workings placed in the paper book. On the issue that royalty was not paid in earlier AY’s, the Ld. Counsel submitted that the royalty payment was made from AY 2017- IT(TP)A No.88 /Chny/2024 Page - 17 - of 28 18 onwards and the same has not disputed by the TPO. However, only in AY 2020-21 for the very first time the TPO has disallowed this payment. Further, the Ld AR submitted that the AE did not want to charge for technology until the Assessee had started generating profits on its own and therefore only from AY 2017-18, the AE started recovering Royalty. 17.0 Per contra, the Ld DR relied upon the order of lower authorities. 18.0 We have heard rival submissions in the light of material available on records. We have noted that as the assessee is not doing any independent research etc, its business is totally dependent upon its AEs for the technology support and for which royalty is required to be paid. We have also noted that neither the Ld.TPO nor the Ld.DRP doubted the fact that the assessee is dependent on its AE for the technology to manufacture the auto components. The genuineness of the royalty expenditure thus stands established. We have noted that twin authorities have merely disregarded the receipt of services on thin line reasoning. Further, we also note that the Ld DR has not disputed the fact that the Korean version of the amendment to the agreement was signed. That apart, it is an undisputed fact that the parties have acted upon the agreement and as such doubting the transaction only on the ground of a missing signature in the English version of the agreement may not be appropriate. Further, the reports were also furnished in a modified format to align with the financial year and as such the contention IT(TP)A No.88 /Chny/2024 Page - 18 - of 28 of the TPO the that reports were not furnished also seems to be not correct. Even in respect of the mismatch between the working of royalty and quantum reflected in the financials/Form 3CEB is concerned, the appellant has furnished the reconciliation and clearly explained that the difference is due to the fact that the difference is because of provisional vs actual payment. We are of the considered view that the assessee has adequately explained all the questions of the lower authorities, we are therefore convinced that the reasoning of lower authorities to disallow the payment of royalty cannot be sustained. Having decided that the assessee is in actual receipt of technology for which royalty payments were made, it is imperative to decide whether the payment for the same is at arm’s length or not. In this regard, the assessee has aggregated this transaction with the manufacturing transaction and benchmarked the same under TNMM. The Ld AR emphatically argued that since the appellant is dependent on the technology for manufacturing the said transaction (i.e. running royalty payment) is inextricably connected with core business operation and as such it cannot be segregated and benchmarked independently. For this proposition the Ld AR has relied on decision of this Tribunal in the case of Siemens Gamesa Renewable Power (P.) Ltd v. DCIT 155 taxmann.com 406 holding as under: “9. The second issue raised by Ld. AR is against royalty adjustment on turnover pertaining to development of land, substation development and erection and commissioning. We find that this issue is also IT(TP)A No.88 /Chny/2024 Page - 19 - of 28 covered by the cited decision of Tribunal in assessee’s own case as under: — 11.1 It is brought to our notice that the TPO himself has agreed that such activities required technology support. The only contention raised by the TPO is that such activity did not require any technology, which is available in India. In other words, the contention of the TPO is that required technology for this activity is available in India. In our opinion, it is not the prerogative of TPO to decide whether the assessee should have used the technology provided by its AE or not. It is to be noted that assessee developed wind farms, installed and commissioned WGS on the basis of input provided by its AE. The AE has vast experience in implementing such projects across global and therefore, the assessee obtained expertise knowledge from AE in order to ensure better quality to its customers. In our opinion, the TPO cannot question commercial expediency of incurring any expenditure by the assessee as held by the following judgments:— (a) In the case of Hive Communication (P.) Ltd. (supra) (b) In the case of EKL Appliances Ltd. (supra) (c) In the case of Computer Graphic Ltd. (supra) 11.2 Further, once the TNMM has been applied for the transaction and it covered under its ambit the royalty transaction in question. A separate analysis and consequent deletion of royalty payment is unwarranted. Placing reliance in the case of Magneti Marelli Powertrain India (P.) Ltd. (supra) wherein held that:— 17. As far as the second question is concerned, the TPO accepted TNMM applied by the assessee, as the most appropriate method in respect of all the international transactions including payment of royalty. The TPO, however, disputed application of TNMM as the most appropriate method for the payment of technical assistance fee of Rs. 38,58,80,000 only for which Comparable Uncontrolled Price (\"CUP\") method was sought to be applied. Here, this court concurs with the assessee that having accepted the TNMM as the most appropriate, it was not open to the TPO to subject only one element, i.e payment of technical assistance fee, to an entirely different (CUP) method. The adoption of a method as the most appropriate one assures the applicability of one standard or criteria to judge an international transaction by. Each method is a package in itself, as it were, containing the necessary elements that are to be used as filters to judge the soundness of the international transaction in an ALP fixing IT(TP)A No.88 /Chny/2024 Page - 20 - of 28 exercise. If this were to be disturbed, the end result would be distorted and within one ALP determination for a year, two or even five methods can be adopted. This would spell chaos and be detrimental to the interests of both the assessee and the revenue. The second question is, therefore, answered in favour of the assessee; the TNMM had to be applied by the TPO/AO in respect of the technical fee payment too. 11.3 A similar view was taken by Co-ordinate Bench of Hyderabad in the case of Air Liquid Engg. India (P.) Ltd. (supra) wherein held that:— '20. Furthermore, we are of the opinion that once TNMM has been applied to the assessee company's transaction, it covers under its ambit the Royalty transactions in question too and hence separate analysis and consequent deletion of the Royalty payments by the TPO in the instant case seems erroneous. We draw support from the Hon'ble Mumbai ITAT decision, Cadbury India Ltd. v. ACIT (ITA No. 7408/Mum/2010 and ITA No. 7641/Mum/2010 dated 13-11-2013) wherein the Hon'ble ITAT upheld the use of TNMM for Royalty as well as relied on many of the above decisions to hold adjustment by TPO was erroneous: \"33. The TPO has made the disallowance in question mainly on the basis of the benefit test. In this regard, it is seen that the payment of royalty cannot be examined divorced from the production and sales. Royalty is inextricably linked with these activities. In the absence of production and sale of products, there would be no question arising regarding payment of any royalty. Rule 1OA(d) of the ITAT Rules defines 'transaction' as a number of closely linked transactions. Royalty, then, is a transaction closely linked with production and sales, it cannot be segregated from these activities of an enterprise, being embedded therein. That being so, royalty cannot be considered and examined in isolation on a stand-alone basis. Royalty is to be calculated on a specified agreed basis, on determining the net sales which, in the present case, are required to be determined after excluding the amounts of standard bought out components, etc., since such net sales do not stand recorded by the assessee in its books of account. Therefore, it is our considered opinion that the assessee was correct in employing an overall TNMM for examining the royalty. The TPO worked out the difference in the PU of the outside party (the assessee) at 4.09% and the comparables at 7.05%. This has not been shown to fall outside the permissible range. IT(TP)A No.88 /Chny/2024 Page - 21 - of 28 34. The decision of the Tribunal in 'Ekla Appliances', 2012- TH-01- HCDel- TP, has been sought to be distinguished by the TPO, observing that the facts in that case are not in pari material with those of the assessee’s case. However, therein also, the benefit test had been applied by the TPO, as in the present case. The matter was carried in appeal before the Hon'ble High Court. The Hon'ble Delhi High Court has held that the so-called benefit test cannot be applied to determine the ALP of royalty payment at nil and that the TPO could apply only one of the methods prescribed under the law. A similar view has been taken in 'Sona Okegawa Precision Forgings Ltd.' case (supra) and in 'KHS Machinery Pvt. Ltd. v. ITO' 53 SOT 100 (Ahm) (URO). 35. It is, thus, seen that the royalty payment @ 3% by the assessee is at arm's length. The Technical Collaboration Agreement stands approved by the Government of India. The royalty payment has been accepted by the department as having been made by the assessee wholly and exclusively for its business purposes. For Assessment Years 2004-05 and 2005-06, such payment of royalty has been allowed by the CIT (A). As per the FEMA Regulations, royalty can be paid on net sales @ 5% on domestic sales and @ 8% on export sales. The royalty payment by the assessee falls within these limits, it also falls within the limits of payment of royalty in the automobile sector, as per the market trend. This payment of royalty is at the same percentage as that paid by other auto ancillaries in the automotive industry. Then, in 'Ekla Appliances' (supra) and in 'Ericsson India Pvt. Ltd. v. DCIT', 2012-TII-48- ITAT-Del-TP, it has been held that royalty payment cannot be disallowed on the basis of the so-called benefit test and the domain of the TPO is only to examine as to whether the payment based on the agreement adheres to the arm's length principle or not. That being so, the action of the TPO in the present case, to make the disallowance mainly on the ground of the benefit test is unsustainable in law. 36. Keeping in view all the above factors, the disallowance made on account of royalty is found to be totally uncalled for and it is deleted as such....\" 21. Hence, following the ratio of the Hon'ble Delhi High Court in EKL Appliances (supra) and various other decisions as noted above and given the facts and circumstances of the instant case, we hold that the addition made by the TPO and upheld by the DRP is unsustainable and is to be deleted. Hence Ground No. 2 is held in favour of the assessee. Hence, the appeal of the Revenue ITA No. 1040/Hyd/2011 IT(TP)A No.88 /Chny/2024 Page - 22 - of 28 is dismissed and Assessee’s appeal in ITA No. 1159/Hyd/2011 is allowed.' 11.4 Being so, in our opinion, there is no question of downward adjustment towards on royalty payment to AE on the ground that no royalty is allowable on turnover pertained to development of land, substation development and erection and commissioning. This ground of assessee in both the appeals is allowed. Facts being pari-materia the same, this ground stand allowed accordingly.” 19.0 We have noted that in the case of Magneti Marelli Powertrain India (P.) Ltd. v. DCIT [2016] 75 taxxmann.com 213 (Delhi) it was held that :- “17. As far as the second question is concerned, the TPO accepted TNMM applied by the assessee, as the most appropriate method in respect of all the international transactions including payment of royalty. The TPO, however, disputed application of TNMM as the most appropriate method for the payment of technical assistance fee of Rs. 38,58,80,000 only for which Comparable Uncontrolled Price (\"CUP\") method was sought to be applied. Here, this court concurs with the assessee that having accepted the TNMM as the most appropriate, it was not open to the TPO to subject only one element, i.e payment of technical assistance fee, to an entirely different (CUP) method. The adoption of a method as the most appropriate one assures the applicability of one standard or criteria to judge an international transaction by. Each method is a package in itself, as it were, containing the necessary elements that are to be used as filters to judge the soundness of the international transaction in an ALP fixing exercise. If this were to be disturbed, the end result would be distorted and within one ALP determination for a year, two or even five methods can be adopted. This would spell chaos and be detrimental to the interests of both the assessee” 19.1 In CIT v. Benetton India (P.) Ltd. 171 taxmann.com 536 it was held that :- IT(TP)A No.88 /Chny/2024 Page - 23 - of 28 “61. Apart from acquiring technical know-how, there may have several other elements of costs such as cost for utilities, cost of labour etc. The fact that an assessee may incur a loss in its business, does not necessarily mean that the value of the utilities availed by it or the value of the labour employed is Nil. As noted here in before, the arms' length analysis is not concerned with the commercial expediency of incurring costs. Itis merely confined to determining the ALP of the material or the services used. 62.In the present case, the Assessee had in its commercial wisdom decided to acquire technical know-how for carrying on its business activities. This decision is not subject of a review on merits by the learned TPO. The learned TPO is to merely examine whether the amount paid by the Assessee for acquiring the technical know-how was on arms' length basis. In other words, what would be the costs an assessee would require to pay if it had acquired the technical know- how from an entity other than its AE on an arms' length basis.” 19.2 In the case of Durr India (P.) Ltd. V. ACIT 78 taxmann.com 50 it was ruled that :- “In the case of Frigoglass India (P) Ltd (supra) Delhi Bench of the Tribunal had held CUP method could be adopted after discarding TNMM only when a comparable product or service is available. Ld. TPO and ld. DRP were not able to identify a single uncontrolled comparable for bench marking R & D fees and management fees paid by the assessee. This may be due to the difficulties in finding another entity that had rendered services which were identical to what were given to the assessee by M/s. Durr Systems Gmbh, Germany, that too in an uncontrolled set of circumstance. In such a situation in our opinion assessee could not be faulted in insisting that the TNMM method adopted by it for analyzing its international transactions with Associated Enterprises, for the impugned assessment years should be accepted. Nevertheless, we find that lower authorities having rejected the TNMM method did not verify the appropriateness of the comparables selected by the assessee in its TP study. Functional profile of the comparables and that of the assessee were never IT(TP)A No.88 /Chny/2024 Page - 24 - of 28 verified. Lower authorities did not verify whether the Arms Length Price analysis done by the assessee based on TNMM was correctly done and whether any modification in the comparables selected or the PLI computed were necessary. Thus, while setting aside the orders of the lower authorities for all the impugned assessment years, we remit the issue of fixing the Arms Length Price of the international transactions of the assessee under TNMM, back to the file of the ld. Assessing Officer /ld. TPO for consideration afresh in accordance with law.” 20.0 We have noted the facts of the present case are akin to those available in judicial precedence discussed herein above. Thus, as the assessee’s business is inextricably link with technology receipt from its AEs and hence the royalty payment which is connected to such technology transfer cannot be segregated and bench marked separately. The judicial precedence discussed hereinabove also support this line of thinking. Accordingly, in respectful compliance to the same, we direct the Assessing Officer to aggregate Royalty Payments and benchmark the same under Transactional Net Margin Method (TNMM) after allowing customs duty adjustment, working capital adjustment and treating miscellaneous expenses as operating in nature for the assessee and the comparable companies. In case the assessee’s margin is at arm’s length then there would perhaps be no requirement to make separate adjustment for Royalty payments. Accordingly, we remit this issue to the Ld.TPO to redetermine the arm’s length price as per our observations herein above. The grounds of appeal Nos. 2.24 to 2.31 are therefore allowed for statistical purposes. IT(TP)A No.88 /Chny/2024 Page - 25 - of 28 21.0 The next issue raised by the assessee through grounds of appeal nos. 2.32 to 2.39 is regarding the issue of Technical fee payment. The Ld.Counsel for the assessee submitted that the, Ld. TPO has disallowed the technical fee payment on the ground that the assessee has not substantiated the need and benefit of technical services and as such the TPO segregated this transaction and benchmarked it under “other method”. The appellant assessee is of the view that technical fee payment should not separately benchmarked as it is already benchmarked under TNMM. The Ld. Counsel submitted that after providing Customs duty adjustment, working capital adjustment and treating miscellaneous expenses as operating expense, the PLI of Assessee will be 2.10% which will be within the ALP Range of comparable companies 1.07% to 3.92%. 22.0 Per contra, the Ld DR relied upon the order of lower authorities. 23.0 We have heard the rival submissions in the light of material available on records. It is the case of the assessee that it has imported certain capital goods from its AE for which it required training of its employees to utilise such machinery and as such it has sought the assistance of AE to train the employees. The AE’s have deputed their staff to train the Indian employees to effectively utilise the machinery. There is nothing on records to question the genuineness of the service rendered by the AEs. It is also not in doubt that the services were not IT(TP)A No.88 /Chny/2024 Page - 26 - of 28 rendered by the AEs to the assessee. Thus, as the assessee is in actual receipt of technical services, it is now only imperative to decide whether the payment for the same is at arm’s length are not. In this regard, we have noted that the assessee has aggregated this transaction with the manufacturing transaction and benchmarked the same under TNMM. The Ld AR emphatically argued that since the appellant is dependent on the technical assistance for manufacturing, the said transaction (i.e. payment of technical fee) is inextricably connected with core business operation and as such it cannot be segregated and benchmarked independently. For this proposition the Ld AR relied on jurisdictional decision in the cases of Siemens Gamesa Renewable Power (P.) Ltd v. DCIT 155 taxmann.com 406 (supra). 24.0 We have noted that the facts of the present case are akin to those available in judicial precedence discussed herein above and no distinguishment of facts was pointed out by the Revenue. Accordingly, in respectful compliance to the same, we direct the Assessing Officer to aggregate technical fee payments and benchmark the same under Transactional Net Margin Method (TNMM) after allowing customs duty adjustment, working capital adjustment and treating miscellaneous expenses as operating in nature for the assessee and the comparable companies. In case the assessee’s margin is at arm’s length then there would be no requirement to make separate adjustment for technical fee IT(TP)A No.88 /Chny/2024 Page - 27 - of 28 payments. With these specific directions we remit this issue to the Ld.TPO to redetermine the arm’s length price as per our observations herein above. Accordingly, all the grounds of appeal nos.2.32 to 2.39 are allowed for statistical purposes. 25.0 The next issue raised by the assessee vide ground of appeal nos. 2.19 to 2.21 is regarding non-removal of royalty payments and technical fees while computing the margins of the appellant under TNMM method. It is the case of the assessee that while determining the margins of the appellant under TNMM, the Ld.TPO has considered royalty and technical fees as operating expense though the said expenses were disallowed by him. It is the contention of the Ld. AR that this has resulted in double disallowance as it has impacted the margins under TNMM and these expenses are also disallowed separately. The Ld. AR submitted that the DRP has erroneously upheld the Ld.TPO’s action. 26.0 Per contra, the Ld. DR relied upon the order of lower authorities. 27.0 We have heard the rival submissions in the light of material available on records. We are of the view that only in case where the royalty and technical fee are disallowed, they should be excluded while determining the margins of the assessee under TNMM. However in the instant case, since we have already held that the assessee has derived benefit from payment of royalty and technical fees, the same needs to be IT(TP)A No.88 /Chny/2024 Page - 28 - of 28 considered as operating expense while determining the margins of the appellant under TNMM. Accordingly, we direct the Ld.TPO to exclude royalty and technical fees only in cases where they are disallowed and not otherwise. Accordingly, all the grounds of appeal Nos.2.19 to 2.21 are allowed for statistical purposes. 28.0 During the course of the present proceedings, the Ld. Counsel or the assessee submitted that ground of appeal nos. 2.1, 2.2, 2.11 to 2.15, 2.18, 2.22, 2.23 are academic in nature and therefore not pressed. Hence the grounds of appeal Nos. 2.1, 2.2, 2.11 to 2.15, 2.18, 2.22, 2.23 are dismissed. 29. In the result, the appeal of the assessee is partly allowed. Order pronounced on 30th , May -2025 at Chennai. Sd/- (मनु क ुमार धिरर) (MANU KUMAR GIRI) न्याधयक सदस्य / Judicial Member Sd/- (अधमताभ शुक्ला) (AMITABH SHUKLA) लेखा सदस्य /Accountant Member चेन्नई/Chennai, धदनांक/Dated: 30th , May -2025. KB/- आदेश की प्रतितिति अग्रेतिि/Copy to: 1. अिीिार्थी/Appellant 2. प्रत्यर्थी/Respondent 3. आयकर आयुक्त/CIT - Chennai 4. तिभागीय प्रतितिति/DR 5. गार्ड फाईि/GF "