JCB India Ltd., New Delhi V. DCIT, New Delhi

ITA 1075/DEL/2016

• Counselvise Citation: [2016] 133 COUNSELVISE.COM (IT) 6211 (ITAT-DELHI)
• Duration Of Justice: 30 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-03-2016
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: I1
• Next Hearing Date: 29-03-2016
• Assessment Year: 2011-2012
• Appeal Filed On: 01-03-2016
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: AMRENDRA KUMAR
• Assessee Lawyers: SYALI
• Keywords: Transfer pricing; Opportunity of being heard; International transaction
• Section: 143(3); 37(1)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCHES : I-1 : NEW DELHI BEFORE SHRI R.S. SYAL, AM & SHRI KULDIP SINGH, JM ITA NO.1075/DEL/2016 ASSESSMENT YEAR : 2011-12 JCB INDIA LTD., B-1/I-1, 2 ND FLOOR, MOHAN COOPERATIVE INDUSTRIAL ESTATE, MATHURA ROAD, NEW DELHI. PAN: AAACE0078P VS. DCIT, CIRCLE 13(1), NEW DELHI. (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI M.S. SYALI, SR. ADVOCATE & SHRI TARANDEEP SINGH, CA DEPARTMENT BY : SHRI AMRENDRA KUMAR, CIT, DR DATE OF HEARING : 29.03.2016 DATE OF PRONOUNCEMENT : 31.03.2016 ORDER PER R.S. SYAL, AM: THIS APPEAL FILED BY THE ASSESSEE IS DIRECTED AGAI NST THE FINAL ASSESSMENT ORDER PASSED BY THE ASSESSING OFFICER (A O) ON 30.1.2016 U/S ITA NO.1075/DEL/2016 2 143(3) READ WITH SECTION 144C(1) OF THE INCOME-TAX ACT, 1961 (HEREINAFTER ALSO CALLED THE ACT) IN RELATION TO THE ASSESSMENT YEAR 2011-12. 2. THE ONLY GRIEVANCE RAISED IN THIS APPEAL IS AGAI NST THE ADDITION OF RS.156,38,82,889/- MADE BY THE AO ON ACCOUNT OF TRA NSFER PRICING ADJUSTMENT. 3. BRIEFLY STATED, THE FACTS OF THE CASE ARE THAT T HE ASSESSEE IS A WHOLLY OWNED INDIAN SUBSIDIARY OF J.C. BAMFORD EXCAVATORS LTD., UK. IT COMMENCED ITS OPERATIONS IN THE YEAR 1979 AND IS EN GAGED IN THE MANUFACTURE OF EARTHMOVING AND CONSTRUCTION EQUIPME NTS. THE ASSESSEE REPORTED 19 INTERNATIONAL TRANSACTIONS FOR THE YEAR IN QUESTION IN FORM NO. 3CEB INCLUDING PAYMENT OF ROYALTY WITH TRANSA CTED VALUE OF RS.185,76,44,174/-. THE ASSESSEE USED THE TRANSACT IONAL NET MARGIN METHOD (TNMM) TO BENCHMARK ITS MAJOR INTERNATIONAL TRANSACTIONS. PROFIT LEVEL INDICATOR (PLI) OF OPERATING PROFIT TO TOTAL COST (OP/TC) WAS ADOPTED. THE ASSESSEE EMPLOYED COMPARABLE UNC ONTROLLED PRICE (CUP) METHOD QUA THE INTERNATIONAL TRANSACTION OF `PAYMENT OF ROYAL TY ITA NO.1075/DEL/2016 3 TO DEMONSTRATE THAT THE SAME WAS AT ARMS LENGTH PR ICE (ALP). ON A REFERENCE MADE BY THE AO TO THE TRANSFER PRICING OF FICER (TPO), THE LATTER DISPUTED ONLY THE INTERNATIONAL TRANSACTION OF PAYMENT OF ROYALTY. THE TPO OBSERVED THAT OUT OF TOTAL ROYALTY PAYMENT OF RS.185.76 CRORE, THE ASSESSEE PAID A ROYALTY AMOUNTING TO RS.164,74, 23,297/- IN RESPECT OF PRODUCT 3DX TO ITS ASSOCIATED ENTERPRISE (AE) @ 5% OF DOMESTIC SALES AND 8% OF EXPORT SALES. A SHOW CAUSE NOTICE WAS IS SUED REQUIRING THE ASSESSEE TO EXPLAIN AS TO WHY SUCH ROYALTY OF RS.16 4 CRORE AND ODD WAS PAID ON MODEL 3DX MACHINE WHICH WAS NOTHING, BUT RE PLICATION OF MODEL 3D, WHOSE PATENT EXPIRED LONG BACK. AT THIS STAGE, WE CONSIDER IT RELEVANT TO MENTION THAT THE VIEW POINT OF THE TPO THAT THE ASSESSEE DID NOT PAY ANY ROYALTY ON MODEL 3D DURING THE PERIOD 1 987 TO THE FINANCIAL YEAR 2005 ON ACCOUNT OF UNEXPIRED PATENT, IS FACTUA LLY INCORRECT. THE LD. AR HAS CANDIDLY ADMITTED DURING THE COURSE OF HEARI NG BEFORE US THAT NO ROYALTY WAS PAID FOR THE PRODUCT 3D DURING THE PERI OD 1987 TO FINANCIAL YEAR 2005 BECAUSE THE AGREEMENT BETWEEN THE ASSESSE E AND ITS AE FOR SUCH PAYMENT OF ROYALTY EXPIRED IN 1987 AND A NEW A GREEMENT WAS ENTERED INTO ONLY W.E.F. 5.3.2004. THE LD. AR STATE D THAT NO ROYALTY WAS ITA NO.1075/DEL/2016 4 PAID DURING THE ABOVE PERIOD DUE TO NON-EXISTENCE O F ANY AGREEMENT BETWEEN THE ASSESSEE AND ITS AE AND NOT DUE TO ANY UNEXPIRED PATENT. COMING BACK, THE ASSESSEE WAS ALSO CALLED UPON BY T HE TPO TO FILE AGREEMENTS ALONG WITH NECESSARY ANNEXURES FOR PRODU CTS 3D AND 3DX AND ALSO TO SUBSTANTIATE NEW INVENTIONS/IMPROVEMENT S IN PRODUCT 3DX VIS--VIS PRODUCT 3D. THE ASSESSEE FURNISHED SUCH DETAILS AL ONG WITH AGREEMENTS AND ALSO A TECHNICAL REPORT OF SOME PROF ESSOR FROM IIT DELHI ON THE STUDY MADE BY HIM ON THE FEATURES OF MODELS 3D AND 3DX. THE TPO NOTICED THAT SUCH REPORT WAS ALSO FILED BY THE ASSESSEE BEFORE THE DISPUTE RESOLUTION PANEL (DRP) DURING THE COURSE OF PROCEEDINGS FOR THE ASSESSMENT YEARS 2008-09 AND 2009-10. THE ASSE SSEE JUSTIFIED PAYMENT OF ROYALTY ON 3DX MODEL BY SUBMITTING THAT IT RECEIVED TECHNICAL KNOWHOW, INFORMATION AND ASSISTANCE FROM JCB GROUP FOR ITS MANUFACTURING ACTIVITIES. VARIOUS DOCUMENTS WERE F ILED TO INDICATE DIFFERENCE IN PRODUCTS 3D AND 3DX. THE ASSESSEE AL SO SUBMITTED THAT IT WAS GRANTED AN EXCLUSIVE NON-TRANSFERRABLE LICENSE IN INDIA TO MANUFACTURE, ASSEMBLE, USE AND SELL PRODUCTS AND, F OR THAT PURPOSE, TO USE THE KNOW-HOW INVENTIONS COVERED BY THE PATENT R IGHTS. THE ASSESSEE ITA NO.1075/DEL/2016 5 STILL FURTHER SUBMITTED THAT IT DID NOT OWN ANY PAT ENT RIGHTS IN INDIA FOR 3D AND THE DESIGN REGISTRATIONS WERE DONE IN ITS NA ME TO PROTECT THE POTENTIAL INFRINGEMENTS OF DESIGNS IN INDIA. THE T PO OBSERVED THAT THERE WAS A CHANGE IN THE APPROACH OF THE ASSESSEE IN THIS YEAR VIS--VIS THE EARLIER YEARS INASMUCH AS THE ASSESSEE BENCHMAR KED THE INTERNATIONAL TRANSACTION OF `PAYMENT OF ROYALTY BY USING CUP AS THE MOST APPROPRIATE METHOD IN CONTRAST TO THE TNMM USED FOR EARLIER YEARS ON ENTITY LEVEL. HE FURTHER OBSERVED THAT THE FACTS F OR THIS YEAR REGARDING PAYMENT OF ROYALTY WERE SIMILAR TO THOSE FOR PRECED ING YEARS IN WHICH IT WAS HELD THAT - PAYMENT OF ROYALTY REQUIRES SEPARA TE ANALYSIS ON THE BASIS OF TRANSACTION BY TRANSACTION APPROACH AND FO R THAT CUP METHOD IS TO BE APPLIED AS THE MOST SUITABLE METHOD FOR THE R OYALTY PAYMENT TRANSACTION; NEW PRODUCT 3DX IS EXISTING OLD PRODUC T 3D WITH THE SAME INDIAN MANUFACTURER OF KIRLOSKAR LTD.; AND THE ASSE SSEE HAD NOT PAID ANY ROYALTY ON PRODUCT 3D FROM THE YEAR 1987 TO FINANCI AL YEAR 2005-06. AS REGARDS THE USE OF THE CUP METHOD BY THE ASSESSEE F OR BENCHMARKING THE INTERNATIONAL TRANSACTION OF `PAYMENT OF ROYALTY O N 3DX FOR THE YEAR UNDER CONSIDERATION, THE TPO DID NOT FIND ANY CONV INCING REASONS TO ITA NO.1075/DEL/2016 6 ACCEPT THREE COMPARABLES CHOSEN BY THE ASSESSEE ON SEVERAL GROUNDS TABULATED ON PARA 14 OF HIS ORDER INCLUDING DIFFERE NCE IN TYPE OF TECHNOLOGY AND DIFFERENT GEOGRAPHICAL LOCATIONS INASMUCH AS BOTH THE PAYERS AND PAYEES WERE FOREIGN PARTIES. THEN, THE TPO VIEWED THE ASSESSEES ANNUAL REPORTS FOR EARLIER YEARS WHICH I NDICATED THE CARRYING ON OF R&D ACTIVITY BY IT IN RESPECT OF THE PRODUCTS INCLUDING 3DX. CONSIDERING THE FACT THAT THERE WAS NOT MUCH DIFFER ENCE BETWEEN THE PRODUCT 3D, ON WHICH THE ASSESSEE DID NOT PAY ANY R OYALTY FROM 1987 TILL THE FINANCIAL YEAR 2005 ON ONE HAND AND PRODUCT 3DX ON THE OTHER ON WHICH THE SAID ROYALTY HAS BEEN PAID AND THE FURTHE R FACT THAT THE ASSESSEE ITSELF CARRIED OUT R&D ACTIVITY IN RESPECT OF 3DX M ODEL DURING EARLIER YEARS, THE TPO CAME TO HOLD THAT NO INDEPENDENT PER SON WOULD HAVE PAID ROYALTY ON PRODUCT 3DX UNDER THE COMPARABLE UN CONTROLLED CIRCUMSTANCES. DETERMINING THE ALP OF THIS INTERNA TIONAL TRANSACTION AT NIL, THE TPO RECOMMENDED TRANSFER PRICING ADJUSTMEN T OF RS.164.74 CRORE. THE ASSESSEE ASSAILED THE DRAFT ORDER, INCO RPORATING THE TRANSFER PRICING ADJUSTMENT PROPOSED BY THE TPO BEFORE THE D ISPUTE RESOLUTION PANEL. VIDE ITS DIRECTION DATED 23.12.2015, THE DRP NOTICED IT TO BE A ITA NO.1075/DEL/2016 7 RECURRING ISSUE FROM THE ASSESSMENT YEAR 2006-07 ON WARDS FOR WHICH THE TRIBUNAL HAS REMANDED THE MATTER BACK TO THE TPO/AO FOR FRESH DETERMINATION OF ALP OF INTERNATIONAL TRANSACTION O F PAYMENT OF ROYALTY. THE DRP APPROVED THE FINDINGS GIVEN BY THE TPO IN A PPLYING THE BENEFIT TEST AND IN COMING TO THE CONCLUSION THAT THE ASSESSEE DID NOT RECEIVE ANY SIGNIFICANT BENEFIT FROM THE PAYMENT OF ROYALTY TO ITS AE BECAUSE PRODUCT 3DX WAS DEVELOPED IN INDIA. CONSIDE RING THAT THE DRP FOR EARLIER YEARS DETERMINED ALP OF ROYALTY ON 3D X MODEL AT 0.25% ON SALES, IT GAVE SIMILAR DIRECTION FOR THE EXTANT YEA R AS WELL. THAT IS HOW, THE AO VIDE HIS FINAL ORDER, REDUCED THE AMOUNT OF ADDITION TO RS.156.38 CRORE, AFTER ALLOWING THE BENEFIT OF 0.25% AS DIREC TED BY THE DRP. THE ASSESSEE IS AGGRIEVED AGAINST THIS ADDITION. 4. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE RELEVANT MATERIAL ON RECORD. THE CONTROVERSY IN THE PRESENT APPEAL IS AGAINST THE INTERNATIONAL TRANSACTION OF `PAYMENT OF ROYALTY A ND THAT TOO, ONLY ON MODEL 3DX. IT IS MANIFEST THAT THE TPO, FOLLOWING HIS FINDINGS GIVEN FOR EARLIER YEARS, INITIALLY DETERMINED NIL ALP OF THE INTERNATIONAL ITA NO.1075/DEL/2016 8 TRANSACTION BY NOTICING, INTER ALIA , THAT THE ASSESSEE DID NOT PAY ANY ROYALTY FOR USE OF TECHNOLOGY OF PRODUCT 3D FOR THE YEARS 1987 TO THE FINANCIAL YEAR 2005 AND FURTHER THAT IT DEVELOPED TECHNOLOGY FOR 3DX MODEL THROUGH ITS OWN R&D DIVISION AND AS SUCH THE ASSESSEE DID NOT RECEIVE ANY BENEFIT FROM THE SO-CALLED USE OF THE T ECHNOLOGY OF 3DX FROM ITS AE FOR WHICH THE ROYALTY WAS PAID. HE APPR OVED, IN PRINCIPLE, THE APPLICATION OF CUP METHOD BY THE ASSESEE FOR TH E YEAR UNDER CONSIDERATION IN CONTRAST TO THE TNMM ON ENTITY LEV EL FOR EARLIER YEARS, WHICH WAS NOT ACCEPTED BY HIM AS THE MOST APPROPRIA TE METHOD. HOWEVER, ON MERITS IT WAS FOUND THAT NO COMPANIES C ITED BY THE ASSESSEE WERE COMPARABLE AND THAT SINCE THE ASSESSEE DID NOT DERIVE ANY BENEFIT, THE ALP OF THIS TRANSACTION WAS NIL. IT IS ONLY PUR SUANT TO THE DIRECTION OF THE DRP THAT FINALLY THE ALP WAS DETERMINED AT 0.25 % OF THE AMOUNT OF SALES AS AGAINST 5% AND 8% PAID BY THE ASSESSEE ON DOMESTIC AND EXPORT SALES. IT IS AN ADMITTED POSITION THAT THIS IS A RE CURRING ISSUE FROM THE A.Y. 2006-07 WHEN THE ASSESSEE STARTED PAYING ROYAL TY ON PRODUCT 3DX. THE TRIBUNAL VIDE ITS COMBINED ORDER DATED 18.9.201 3 FOR THE ASSESSMENT YEARS 2006-07 TO 2008-09 HAS NOT APPROVED THE ASSE SSEES APPROACH IN ITA NO.1075/DEL/2016 9 FOLLOWING THE TNMM FOR BENCHMARKING ALL ITS INTERNA TIONAL TRANSACTIONS INCLUDING `PAYMENT OF ROYALTY IN AN AGGREGATED MAN NER. IT HAS BEEN HELD THAT THE BENCHMARKING SHOULD BE DONE ON A TRAN SACTION TO TRANSACTION BASIS. IN SIMPLE WORDS, THE TRIBUNAL R ECOMMENDED THE FOLLOWING OF THE CUP METHOD QUA THE INTERNATIONAL TRANSACTION OF PAYMENT OF ROYALTY. IT FURTHER FOUND THAT THE ALP OF THE INTERNATIONAL TRANSACTION COULD NOT BE TAKEN 0.25% ON AD HOC BASIS. IN THE ULTIMATE ANALYSIS, IT RESTORED THE MATTER TO THE FILE OF THE AO/TPO FOR DETERMINING THE ALP OF THE INTERNATIONAL TRANSACTION OF PAYMENT OF ROYALTY AFRESH. THIS VIEW HAS BEEN CONSISTENTLY FOLLOWED BY THE TRI BUNAL FOR THE ASSESSMENT YEAR 2009-10, A COPY OF WHICH ORDER IS A VAILABLE ON PAGE 107 ONWARDS OF THE PAPER BOOK AND FOR THE ASSESSMENT YE AR 2010-11, A COPY OF WHICH ORDER IS AVAILABLE ON PAGE 111 ONWARDS OF THE PAPER BOOK. IT WAS FAIRLY ADMITTED BEFORE US ON BEHALF OF THE ASSE SSEE THAT THE FACTS AND CIRCUMSTANCES OF THE INSTANT YEAR ARE MUTATIS MUTANDIS SIMILAR TO THE EARLIER YEARS. ITA NO.1075/DEL/2016 10 5. THE LD. SR. AR, HOWEVER, PUT FORTH TWO FOLD S UBMISSIONS, VIZ., FIRST THAT NO ADDITION ON ACCOUNT OF TRANSFER PRICING ADJ USTMENT IS PERMISSIBLE AS THE AO HAS NOT MADE ANY DISALLOWANCE U/S 37(1), AND SECOND, THE APPLICATION OF THE TNMM ON ENTITY LEVEL SHOULD BE U PHELD COVERING THE INTERNATIONAL TRANSACTION OF PAYMENT OF ROYALTY. 6.1. IN SO FAR AS THE FIRST CONTENTION IS CONCER NED, THE LD. AR SUBMITTED THAT THE AO DID NOT MAKE ANY DISALLOWANCE U/S 37(1) OF THE ACT ON ACCOUNT OF PAYMENT OF ROYALTY. RELYING ON THE JUDGM ENT OF THE HON'BLE DELHI HIGH COURT IN CIT V. CUSHMAN & WAKEFIELD (INDIA) (P.) LTD. (2014) 367 ITR 730 (DEL), HE CONTENDED THAT NOT HAVING MADE ANY ADDITION U/S 37(1), THE AO WAS DEBARRED FROM MAKING ADDITION TOWARDS TRANSFER PRICING ADJUSTMENT ON THIS SCORE. THIS WAS STRONGLY OPPOSED BY THE LD. DR. 6.2. WE ARE UNCONVINCED WITH THE SUBMISSION ADVA NCED ON BEHALF OF THE ASSESSEE. THEIR LORDSHIPS IN THE AFORE REFERRED CASE HAVE HELD THAT THE AUTHORITY OF THE TPO IS LIMITED TO CONDUCTING TRANS FER PRICING ANALYSIS FOR DETERMINING THE ALP OF AN INTERNATIONAL TRANSAC TION AND NOT TO DECIDE ITA NO.1075/DEL/2016 11 IF SUCH SERVICES EXIST OR BENEFITS DID ACCRUE TO TH E ASSESSEE. SUCH LATER ASPECTS HAVE BEEN HELD TO BE FALLING IN THE EXCLUSI VE DOMAIN OF THE AO. IN THAT CASE, IT WAS OBSERVED THAT THE E-MAILS CONS IDERED BY TRIBUNAL FROM MR. BRAGANZA AND MR. CHOUDHARY DEALT WITH SPECIFIC INTERACTION AND RELATED TO BENEFITS OBTAINED BY ASSESSEE, PROVIDING A SUFFICIENT BASIS TO HOLD THAT BENEFIT ACCRUED TO ASSESSEE. AS THE DETA ILS OF SPECIFIC ACTIVITIES FOR WHICH COST WAS INCURRED BY BOTH AES (FOR ACTIVI TIES OF MR. BRAGANZA AND MR. CHOUDHARY), AND ATTENDANT BENEFITS TO ASSES SEE WERE NOT CONSIDERED, THE HON'BLE HIGH COURT REMANDED THE MAT TER TO FILE OF CONCERNED AO FOR AN ALP ASSESSMENT BY TPO, FOLLOWED BY AO'S ASSESSMENT ORDER IN ACCORDANCE WITH LAW CONSIDERING THE DEDUCTIBILITY OR OTHERWISE AS PER SECTION 37(1) OF THE ACT. IN OUR C ONSIDERED OPINION, THE ARGUMENT OF THE LD. AR ADVOCATING FOR THE DELETION OF THE ADDITION ON THE SOLE GROUND OF THE AO NOT DISALLOWING ANY AMOUNT U/ S 37(1) OF THE ACT IS SANS MERIT. THERE IS NO DOUBT THAT THE TPO INITI ALLY DETERMINED NIL ALP OF THE INTERNATIONAL TRANSACTION OF `PAYMENT OF ROYALTY, WHICH WAS GIVEN EFFECT TO BY THE AO IN THE IMPUGNED ORDER, AF TER TAKING INTO CONSIDERATION THE DIRECTION GIVEN BY THE DRP. IT IS OBVIOUS THAT WHEN THE ITA NO.1075/DEL/2016 12 TPO DETERMINED NIL ALP OF THIS TRANSACTION, NOTHING WAS LEFT WITH THE AO TO DO FURTHER. IN SEQUENCE, THE TPO PASSES HIS O RDER FIRST AND THEN AFTER PASSING THROUGH THE ROUTE OF THE DRP, THE MAT TER COMES TO THE AO FOR PASSING THE FINAL ORDER OF ASSESSMENT. ONCE A P ARTICULAR AMOUNT HAS BEEN ADDED ON ACCOUNT OF TRANSFER PRICING ADJUSTMEN T BY RELYING ON THE TPOS ORDER, THERE CANNOT BE ONE MORE DISALLOWANCE OF THE SAME AMOUNT OR SOME PART OF IT BY THE AO U/S 37(1) OF THE ACT. RATHER ITS CONVERSE IS TRUE. IT IS POSSIBLE THAT THE TPO MAY FIND A PARTIC ULAR INTERNATIONAL TRANSACTION TO BE AT ALP AND THE AO, MAY THEREAFTER MAKE DISALLOWANCE BY CONSIDERING THE APPLICABILITY OF SECTION 37(1). BE THAT AS IT MAY, THE HONBLE HIGH COURT IN THIS CASE HAS REMITTED THE MA TTER BACK TO THE AUTHORITIES BELOW FOR FOLLOWING THE MANDATE, VIZ., THE TPO FIRSTLY DETERMINING THE ALP OF THE INTERNATIONAL TRANSACTIO N AND THEN THE AO APPLYING THE PROVISIONS OF SECTION 37(1) OF THE ACT . 6.3. WHEN WE ADVERT TO THE FACTS OF THE INSTANT CAS E, IT TURNS OUT THAT THE TPO PROPOSED THE TRANSFER PRICING ADJUSTMENT EQUAL TO THE STATED VALUE OF TRANSACTION AT RS.164.74 CRORE WITH NIL ALP OF ` PAYMENT OF ROYALTY ITA NO.1075/DEL/2016 13 BY HOLDING THAT NO BENEFIT WAS RECEIVED BY THE ASSE SSEE AS A RESULT OF THE PAYMENT OF ROYALTY AND HENCE NO PAYMENT ON THIS ACC OUNT WAS WARRANTED. THE AO IN HIS DRAFT ORDER HAS TAKEN ITS ALP AT NIL ON THE BASIS OF RECOMMENDATION OF THE TPO WITHOUT CARRYING OUT ANY INDEPENDENT INVESTIGATION IN TERMS OF THE DEDUCTIBI LITY OR OTHERWISE OF SUCH PAYMENT IN TERMS OF SECTION 37(1) OF THE ACT. AN ADDITION OF RS.156.38 CRORE HAS BEEN MADE BY THE AO IN HIS FINA L ASSESSMENT ORDER GIVING EFFECT TO THE DIRECTION GIVEN BY THE DRP AND NOT BY INVOKING SECTION 37(1) OF THE ACT. AS PER THE RATIO DECIDENDI IN CUSHMAN & WAKEFIELD INDIA (P.) LTD . (SUPRA), THE TPO WAS REQUIRED TO SIMPLY DETERMINE THE ALP OF THE INTERNATIONAL TRANSACTION OF `PAYMENT OF ROYALTY UNCONCERNED WITH THE FACT, IF ANY BENEFIT ACCRUED TO THE ASSESSEE AND THEREAFTER, IT WAS FOR THE AO TO DECIDE THE DED UCTIBILITY OF THIS AMOUNT U/S 37(1) OF THE ACT. AS THE TPO IN THE INST ANT CASE INITIALLY DETERMINED NIL ALP BY HOLDING THAT NO BENEFIT ACCRU ED TO THE ASSESSEE AND THE AO MADE THE ADDITION WITHOUT EXAMINING THE APPLICABILITY OF SECTION 37(1) OF THE ACT, WE FIND THE ACTIONS OF TH E AO/TPO RUNNING IN CONTRADICTION TO THE RATIO LAID DOWN IN CUSHMAN & WAKEFIELD (SUPRA) . ITA NO.1075/DEL/2016 14 RESPECTFULLY FOLLOWING THE PRECEDENT, WE SET ASIDE THE IMPUGNED ORDER AND REMIT THE MATTER TO THE FILE OF AO/TPO FOR DECI DING THIS ISSUE IN CONFORMITY WITH THE LAW LAID DOWN BY THE HON'BLE JU RISDICTIONAL HIGH COURT IN THE CASE OF CUSHMAN & WAKEFIELD (INDIA) (P.) LTD. (SUPRA) AND ALSO THE TRIBUNAL ORDERS IN ASSESSEES OWN CASE FOR IMMEDIATELY PRECEDING FIVE ASSESSMENT YEARS TO THE EXTENT THEY ACCORD WITH THIS JUDGMENT. 7.1. NEXT ARGUMENT OF THE LD. AR WAS THAT THE TNM M WAS APPLICABLE ON ENTITY LEVEL DE HORS THE SEPARATE DETERMINATION OF ALP OF THE INTERNATIONAL TRANSACTION OF PAYMENT OF ROYALTY UND ER THE CUP METHOD BY THE ASSESSEE. IT WAS ARGUED THAT THE ASSESSEES MAIN EMPHASIS IN THE TP STUDY REPORT AND ALSO BEFORE THE TPO WAS THAT TH E TNMM SHOULD BE APPLIED ON ENTITY LEVEL AND THAT THE DETERMINATION OF ALP OF THE INTERNATIONAL TRANSACTION OF PAYMENT OF ROYALTY UND ER THE CUP METHOD WAS WITHOUT PREJUDICE TO ITS MAIN ARGUMENT OF THE A PPLICABILITY OF THE TNMM. NOTWITHSTANDING THE FACT THAT SUCH A CONTENTI ON HAS BEEN REPELLED BY THE TRIBUNAL FOR EARLIER YEARS, STILL THE LD. AR CANVASSED THIS ITA NO.1075/DEL/2016 15 VIEW BEFORE US BY RELYING ON THE JUDGMENT OF THE H ONBLE JURISDICTIONAL HIGH COURT IN SONY ERICSSON MOBILE COMMUNICATIONS INDIA (P) LTD. VS. CIT (2015) 374 ITR 118 (DEL) , WHICH IN THE OPINION OF THE LD. AR, IS AN AUTHORITY FOR THE PROPOSITION THAT AGGREGATION OF A LL THE INTERNATIONAL TRANSACTIONS FOR BENCHMARKING UNDER THE TNMM IS PE RMISSIBLE AND, THERE IS NO NEED TO SEPARATELY DETERMINE THE ALP OF ANY INTERNATIONAL TRANSACTION INCLUDING `PAYMENT OF ROYALTY. 7.2. WE ARE UNABLE TO COUNTENANCE THIS CONTENTIO N. IN A GROUP OF APPEALS BY `DISTRIBUTORS (NOT MANUFACTURERS) LED B Y SONY ERICSON MOBILE COMMUNICATIONS (SUPRA), THEIR LORDSHIPS ESPOUSED THE DETERMINATION OF THE ALP OF ADVERTISEMENT, MARKETIN G AND PROMOTION EXPENSES (AMP EXPENSES). DEALING WITH THE COMPUTATI ON OF ALP OF THE INTERNATIONAL TRANSACTION OF AMP EXPENSES BY A DIST RIBUTOR, THE HONBLE HIGH COURT HELD, INTER ALIA , THAT THE INTERNATIONAL TRANSACTION OF AMP EXPENSES SHOULD BE BUNDLED/AGGREGATED WITH OTHER IN TERNATIONAL TRANSACTION CARRIED OUT BY THE ASSESSEE AS A DISTRI BUTOR, WHO EITHER SIMPLY ACTS AN AGENT OF MANUFACTURER OR PURCHASES GOODS FR OM THE MANUFACTURER ITA NO.1075/DEL/2016 16 FOR RESALE AT HIS OWN ACCOUNT. THE HONBLE HIGH CO URT HELD THAT WHERE THE TNMM HAS BEEN APPLIED AS THE MOST APPROPRIATE M ETHOD BY A DISTRIBUTOR, WHICH METHOD HAS NOT BEEN DISTURBED BY THE TPO, THEN, THE INTERNATIONAL TRANSACTION OF AMP AND DISTRIBUTION A CTIVITIES SHOULD BE CLUBBED. IT FURTHER HELD THAT FOR DETERMINING THE A LP OF SUCH TRANSACTIONS UNDER A COMBINED APPROACH, ONLY SUCH C OMPARABLES SHOULD BE CHOSEN WHICH CONFORM TO THE AMP FUNCTIONS AND OTHER DISTRIBUTION FUNCTIONS CONDUCTED BY THE ASSESSEE. IF THERE IS S OME DIFFERENCE IN THE FUNCTIONS UNDER THESE INTERNATIONAL TRANSACTIONS, I NCLUDING THAT OF AMP, BETWEEN THE ASSESSEE AND THE COMPARABLES, THEN, SUI TABLE ADJUSTMENT SHOULD BE MADE TO BRING BOTH THE TRANSACTIONS AT PA R. IF PROBABLE COMPARABLES ARE NOT PERFORMING SIMILAR FUNCTIONS AS DONE BY THE ASSESSEE AND NO ADJUSTMENT IS POSSIBLE FOR BRINGING THE INTERNATIONAL TRANSACTIONS OF THE ASSESSEE IN AN AGGREGATED MANNE R AT PAR WITH THOSE UNDERTAKEN BY THE COMPARABLES, THEN, SEGREGATION SH OULD BE DONE AND THE INTERNATIONAL TRANSACTION OF AMP SHOULD BE SEPA RATELY PROCESSED UNDER THE TRANSFER PRICING PROVISIONS. IN SUCH A DE TERMINATION OF ALP OF ITA NO.1075/DEL/2016 17 AMP EXPENSES IN A SEGREGATED MANNER, PROPER SET OFF ON ACCOUNT OF EXCESS PURCHASE PRICE ADJUSTMENT SHOULD BE ALLOWED. 7.3. WE CAN SUMMARIZE THE RELEVANT POSITION EMAN ATING FROM THE JUDGMENT OF THE HONBLE HIGH COURT IN THE CASE OF A `DISTRIBUTOR, AS UNDER : - INTER-CONNECTED INTERNATIONAL TRANSACTIONS CAN BE A GGREGATED AND SECTION 92(3) DOES NOT PROHIBIT THE SET-OFF [PARAS 80 & 81]; AMP IS A SEPARATE FUNCTION. AN EXTERNAL COMPARABLE SHOULD PERFORM SIMILAR AMP FUNCTIONS. [PARAS 165 &166] ; ALP OF AMP EXPENSES SHOULD BE DETERMINED PREFERABLY IN A BUNDLED MANNER WITH THE DISTRIBUTION ACTIVITY [PARA S 91, 121 & OTHERS] ; FOR DETERMINING THE ALP OF THESE TRANSACTIONS IN A BUNDLED MANNER, SUITABLE COMPARABLES HAVING UNDERTAKEN SIMI LAR ACTIVITIES OF DISTRIBUTION OF THE PRODUCTS AND ALSO INCURRING OF AMP EXPENSES, SHOULD BE CHOSEN [PARAS 194(I), (II), (VI II) & OTHERS]; ITA NO.1075/DEL/2016 18 IF NO COMPARABLES HAVING PERFORMED BOTH THE FUNCTI ONS IN A SIMILAR MANNER ARE AVAILABLE, THEN, SUITABLE ADJU STMENT SHOULD BE MADE TO BRING INTERNATIONAL TRANSACTIONS AND COMPAR ABLE TRANSACTIONS AT PAR [PARA 194 (III)] ; IF ADJUSTMENT IS NOT POSSIBLE OR COMPARABLE IS NOT AVAILABLE, THEN, THE TNMM ON ENTITY LEVEL SHOULD NOT BE APPLIED [P ARAS 100, 121, 194(III) & (VI)] ; IN THE ABOVE EVENTUALITY, INTERNATIONAL TRANSACTION OF AMP SHOULD BE VIEWED IN A DE-BUNDLED MANNER OR SEPARATELY [PAR AS 121& 194(XI)] ; IN SEPARATELY DETERMINING THE ALP OF AMP EXPENSES, THE TPO IS FREE TO CHOOSE ANY OTHER SUITABLE METHOD [PARA 194( XIII)]; IN SO MAKING A TP ADJUSTMENT ON ACCOUNT OF AMP EXPE NSES, A PROPER SET OFF/PURCHASE PRICE ADJUSTMENT SHOULD BE ALLOWED FROM THE OTHER TRANSACTION OF DISTRIBUTION OF THE PRODUC TS [PARA 93] ; 7.4. THOUGH THE JUDGMENT IN SONY (SUPRA) LAYS DOWN AT LENGTH THE BROADER PRINCIPLES FOR DETERMINATION OF THE ALP OF AMP EXPENSES IN THE ITA NO.1075/DEL/2016 19 CASE OF A `DISTRIBUTOR, CERTAIN PRINCIPLES DEALING EXCLUSIVELY WITH THE DETERMINATION OF THE ALP OF AMP EXPENSES IN THE CAS E OF A `MANUFACTURER HAVE ALSO BEEN LAID DOWN. SUCH DISCU SSION HAS BEEN MADE IN PARA 92 OF THE JUDGMENT, THE RELEVANT PART OF WHICH IS REPRODUCED HERE AS UNDER : - `92. THE MAJORITY JUDGMENT REFERS TO AN EXAMPLE WHE RE THE INDIAN AE MAY HAVE EARNED ACTUAL PROFIT OF RS.140/-, BUT R ETURNED REDUCED NET PROFIT OF RS.120/- AS THE INDIAN AE HAD INCURRE D BRAND BUILDING EXPENSES TO THE TUNE OF RS.20/- FOR THE FOREIGN AE, WHEREAS THE NET PROFIT ON SALES DECLARED BY COMPARABLE UNCONTROLLED TRANSACTIONS WAS RS.100/- ONLY. THUS, IT WAS OBSERVED THAT THE C OSTS INCLUDING AMP EXPENSES ARE INDEPENDENT OF COST OF IMPORTED RA W MATERIAL/FINISHED PRODUCTS HAVING SOME CORRELATION WITH OVERALL PROFIT. THE EXAMPLE HIGHLIGHTS THE WEAKNESS OF THE TNM METHOD. THE REASONING WOULD BE EQUALLY VALID, WHERE NO AMP OR BRAND BUILDING' EXPENSES ARE INCURRED. (SEE PARAGRAPH 21. 8 TO 22.10 OF THE MAJORITY DECISION). THE NET PROFIT MARGINS CAN BE A FFECTED BY VARIATION OF OPERATING EXPENSES. THUS, THE REQUIREM ENT TO SELECT APPROPRIATE COMPARABLE AND ADJUSTMENT. IT WOULD BE INAPPROPRIATE AND UNSOUND TO ACCEPT COMPARABLES, WITH OR WITHOUT ADJUSTMENT AND APPLY TNM METHOD, AND YET CONJECTURISE AND MISTRUST THE ARM'S LENGTH PRICE. TNM METHOD WOULD NOT BE THE MOST APP ROPRIATE METHOD WHEN THERE ARE CONSIDERABLE VALUE ADDITIONS BY THE SUBSIDIARY AES. IN PARAGRAPH 22.9, THE MAJORITY DEC ISION HAS OBSERVED THAT ALL COSTS INCLUDING THE AMP EXPENSES ARE INDEPENDENT OF COST OF MATERIAL. THIS INDICATES THAT THE OBSERV ATIONS HAVE BEEN MADE WITH REFERENCE TO MANUFACTURING ACTIVITIES. IT WOULD NOT BE APPROPRIATE AND PROPER TO APPLY THE TNM METHOD IN C ASE THE INDIAN ASSESSED IS ENGAGED IN MANUFACTURING ACTIVIT IES AND DISTRIBUTION AND MARKETING OF IMPORTED AND MANUFACT URED PRODUCTS, ITA NO.1075/DEL/2016 20 AS INTERCONNECTED TRANSACTIONS. IMPORT OF RAW MATER IAL FOR MANUFACTURE WOULD POSSIBLY BE AN INDEPENDENT INTERN ATIONAL TRANSACTION VIZ. MARKETING AND DISTRIBUTION ACTIVIT IES OR FUNCTIONS. WE HAVE EARLIER USED THE TERM `PLAIN VANILLA DISTRI BUTOR'. WHEN WE USE THE WORDS `PLAIN VANILLA DISTRIBUTOR' WE DO NOT MEAN PLAIN VANILLA SITUATIONS, BUT VALUE ADDITIONS AND EACH PA RTY MAKING VALUABLE UNIQUE CONTRIBUTION. 7.5. IT IS DISCERNIBLE FROM THE ITALICIZED PART OF THE ABOVE PARA THAT THE APPLICATION OF TNM METHOD IS NOT APPROPRIATE AND PROPER IN CASE THE ASSESSEE IS ENGAGED IN MANUFACTURING ACTIVITIES. IN SUCH CIRCUMSTANCES, THE IMPORT OF RAW MATERIAL FOR MANUFACTURE WOULD BE AN INDEPENDENT INTERNATIONAL TRANSACTION VIZ., MARKETING AND DISTR IBUTION ACTIVITIES OR FUNCTIONS. THE ESSENCE OF THE ABOVE PARA IS THAT TWO OR MORE UNRELATED TRANSACTIONS CANNOT BE AGGREGATED AND IN CASE OF A `MANUFACTURER, THE INTERNATIONAL TRANSACTIONS CONCERNED WITH THE MANUF ACTURING ACTIVITY CANNOT BE AGGREGATED WITH THE AMP ACTIVITIES AS BOT H ARE SEPARATE AND DISTINCT. 7.6. NITTY GRITTY OF THE ABOVE DISCUSSION IS TH AT AGGREGATION OF RELATED TRANSACTIONS IS PERMISSIBLE, BUT THERE IS NO RULE T HAT ALL THE RELATED AND UNRELATED TRANSACTIONS CAN BE COMBINED AND SHOWN AT ALP UNDER THE TNMM ON ENTITY LEVEL. THE HONBLE PUNJAB & HARYANA HIGH COURT IN ITA NO.1075/DEL/2016 21 KNORR-BREMSE INDIA P. LTD. VS. ACIT (2016)380 ITR 3 07 (P&H) HAS HELD THAT IN ORDER TO COMBINE TWO OR MORE TRANSACTI ONS, IT IS ESSENTIAL THAT THEY SHOULD BE EITHER INEXTRICABLY LINKED TO EACH O THER EITHER BY WAY OF A PACKAGE DEAL OR THAT A NUMBER OF TRANSACTIONS ARE P RICED DIFFERENTLY BUT ON THE UNDERSTANDING THAT THE ASSESSEE WILL ACCEPT ALL OF THEM TOGETHER (I.E. EITHER TAKE ALL OR LEAVE ALL). IT FURTHER HEL D THAT MERELY BECAUSE PURCHASE OF GOODS AND ACCEPTANCE OF SERVICES LEAD T O MANUFACTURE OF FINAL PRODUCT, IT DOES NOT FOLLOW THAT THEY ARE DEP ENDENT TRANSACTIONS. 7.7. ON GOING THROUGH THE FACTS AND RATIO OF THE DECISIONS IN SONY ERICSSON (SUPRA) AND KNORR-BREMSE (SUPRA), IT IS MANIFEST THAT THE CONTENTION OF THE LD. AR FOR AGGREGATING ALL THE IN TERNATIONAL TRANSACTIONS INCLUDING `PAYMENT OF ROYALTY, AND THEN APPLYING TNMM ON ENTITY LEVEL, CANNOT BE UPHELD BECAUSE THE INTERNATIONAL TRANSACTION OF `PAYMENT OF ROYALTY IS INDEPENDENT OF OTHER TRANS ACTIONS. THE TRIBUNAL IN ASSESSEES OWN CASE HAS ALSO JETTISONED SUCH ARG UMENT ADVANCED ON BEHALF OF THE ASSESSEE FOR EARLIER YEARS AND HAS RI GHTLY HELD THAT THE ALP OF THE INTERNATIONAL TRANSACTION OF `PAYMENT OF ROY ALTY SHOULD BE DONE ITA NO.1075/DEL/2016 22 SEPARATELY ON A TRANSACTION BY TRANSACTION APPROAC H, WHICH HAS BEEN RIGHTLY INTERPRETED BY THE ASSESSEE AS A CUP METHOD , THAT WAS EMPLOYED BY THE ASSESSEE IN ITS TRANSFER PRICING STUDY REPOR T FOR THE YEAR UNDER CONSIDERATION. ERGO, WE TURN DOWN THE ARGUMENT OF T HE LD. AR AND APPROVE IN PRINCIPLE THAT THE TNMM CANNOT BE APPLIE D AND THE INTERNATIONAL TRANSACTION OF PAYMENT OF ROYALTY IN RESPECT OF MODEL 3DX HAS TO BE BENCHMARKED BY APPLYING CUP AS THE MOST A PPROPRIATE METHOD. 8. NOW, COMING TO THE DETERMINATION OF ALP OF THIS INTERNATIONAL TRANSACTION UNDER THE CUP METHOD, WE FIND THAT THE ASSESSEE CHOSE THREE COMPANIES AS COMPARABLE, WHICH, IN OUR CONSIDERED O PINION, HAVE BEEN RIGHTLY REJECTED BY THE TPO ON SEVERAL COGENT REASO NS TABULATED VIDE PARA 14 OF HIS ORDER INCLUDING DIFFERENCE IN TYPE O F TECHNOLOGY AND DIFFERENT GEOGRAPHICAL LOCATIONS INASMUCH AS BOTH T HE PAYERS AND PAYEES WERE FOREIGN PARTIES. HOWEVER, THE FACT REMAINS THA T IF THE ASSESSEES COMPARABLES ARE NOT CORRECT AND THE ASSESSEE IS NOT FORTHCOMING WITH A NEW SET OF COMPARABLES, THEN, IT BECOMES THE DUTY O F THE TPO TO FIND OUT ITA NO.1075/DEL/2016 23 RELEVANT COMPARABLES AND PROCEED TO DETERMINE THE A LP ACCORDINGLY. COMING BACK TO THE TPOS OPINION ABOUT NIL ALP OF T HE PAYMENT OF ROYALTY, WE FIND THAT THE DRP HAS ACCEPTED THE MARG INAL USE OF TECHNICAL KNOW-HOW BY THE ASSESSEE FROM ITS AE, FOR WHICH IT DIRECTED TO ADOPT 0.25% ON SALES AS THE ALP OF ROYALTY PAYMENT IN RES PECT OF THIS MODEL. IT IS THIS AD HOC APPROACH OF THE DRP WHICH HAS BEEN TURNED DOWN BY T HE TRIBUNAL FOR THE EARLIER YEARS LEADING TO THE RESTO RATION OF THE MATTER TO THE FILE OF AO/TPO FOR A FRESH DETERMINATION OF THE ALP OF THIS TRANSACTION BY USING THE TRANSACTION BY TRANSACTION APPROACH, WHICH THE ASSESSEE HAS DONE FOR THIS YEAR BY APPLYING THE CUP METHOD IN RESPECT OF THE INTERNATIONAL TRANSACTION OF PAYMENT OF ROYA LTY. AS THE FACTS AND CIRCUMSTANCES FOR THE INSTANT YEAR CONTINUE TO REMA IN SIMILAR VIS--VIS THE PRECEDING YEARS, RESPECTFULLY FOLLOWING THE PRE CEDENT, WE SET ASIDE THE IMPUGNED ORDER AND REMIT THE MATTER TO THE AO/T PO FOR A FRESH DETERMINATION OF THE ALP OF THE INTERNATIONAL TRANS ACTION OF `PAYMENT OF ROYALTY FOR MODEL 3DX BY APPLYING THE CUP METHOD A FTER AFFORDING A REASONABLE OPPORTUNITY OF BEING HEARD. ITA NO.1075/DEL/2016 24 9. IN THE RESULT, THE APPEAL IS ALLOWED FOR STATIST ICAL PURPOSES. THE ORDER PRONOUNCED IN THE OPEN COURT ON 31.03.201 6. SD/- SD/- [KULDIP SINGH] [R.S. SYAL] JUDICIAL MEMBER ACCOUNTANT MEMBER DATED, 31 ST MARCH, 2016. DK COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT (A) 5. DR, ITAT AR, ITAT, NEW DELHI.