R A K Ceramics India Private Limited, V. Dy.CIT., Circle-3(1), Hyderabad

ITA 1492/HYD/2014

• Counselvise Citation: 149222514 RSA 2014
• Duration Of Justice: 4 month(s) 12 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 04-02-2015
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Next Hearing Date: 22-01-2015
• Assessment Year: 2010-2011
• Appeal Filed On: 22-09-2014
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: G APARNA RAO
• Assessee Lawyers: ABHIROOP BHARGAV
• Keywords: Depreciation; Transfer pricing; International transaction; Unabsorbed depreciation
• Section: 92C; 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH A, HYDERABAD BEFORE SHRI P.M. JAGTAP, ACCOUNTANT MEMBER AND SHRI SAKTIJIT DEY, JUDICIAL MEMBER ITA NO. 1492/HYD/2014 ASSESSMENT YEAR: 2010-11 R.A.K. CERAMICS INDIA PVT. LTD., SECUNDERABAD. PAN AACCR6424N DY. COMMISSIONER OF INCOME- TAX, CIRCLE 3(1), HYDERABAD (APPELLANT) (RESPONDENT) ASSESSEE BY SHRI KANCHUN KAUSHAL & SHRI ABHIROOP BHARGAV REVENUE BY SMT. G. APARNA RAO DATE OF HEARING 22-01-2015 DATE OF PRONOUNCEMENT 04-02-2015 O R D E R PER SAKTIJIT DEY, J.M.: THIS IS AN APPEAL BY ASSESSEE AGAINST THE ORDER OF ASSESSMENT DATED 24/07/2014 PASSED U/S 143(3) R.W.S. 144C(5) & 144C(13) OF THE ACT, FOR ASSESSMENT YEAR 2010-11, IN PURSUANCE TO D IRECTIONS OF DISPUTE RESOLUTION PANEL (DRP). GROUNDS RAISED BY A SSESSEE ARE AS UNDER: 1. THE LD. AO/LD. PANEL HAS ERRED IN MAKING AN ADJU STMENT TO THE ARMS LENGTH PRICE OF APPELLANTS INTERNATIONAL TRANSACTION RELATING TO PAYMENT OF ROYALTY BY INR 32,086,570. 2. THE LD. PANEL FAILED TO APPRECIATE THAT LD. AO/L D. TRANSFER PRICING OFFICER (TPO) HAS GROSSLY ERRED BY NOT SATI SFYING ANY OF CONDITIONS PRESCRIBED UNDER SECTION 92C(3) OF THE A CT WHILE MAKING TRANSFER PRICING ADJUSTMENTS AND ACCORDINGLY THE ORDER PASSED BY LD. AO/LD. PANEL SHOULD BE SET ASIDE IN E NTIRETY. 3. THE LD. AO/LD.TPO/LD. PANEL HAVE ERRED BY DISREG ARDING THE BENCHMARKING APPROACH AND METHODOLOGY FOLLOWED BY T HE 2 ITA NO. 1492/HYD/2014 R.A.K. CERAMICS INDIA P. LTD. APPELLANT WITH REGARD TO PAYMENT OF ROYALTY TO ASSO CIATED ENTERPRISE. 4. THE LD. AO/LD. TPO/LD. PANEL ERRED BY ACTING IN ARBITRARY AND AD-HOC MANNER BY DETERMINING THE ARMS LENGTH PRICE OF PAYMENT OF ROYALTY TO BE 2% OF NET SALES, AND ALSO BY NOT FOLLOWING ANY PRESCRIBED TRANSFER PRICING METHODOLO GY, AS REQUIRED U/S 92C OF THE ACT WHILE DETERMINING ARMS LENGTH PRICE FOR PAYMENT OF ROYALTY. 2. AS CAN BE SEEN FROM THE GROUNDS, SOLITARY ISSUE ARISING FOR CONSIDERATION IS WITH REGARD TO DETERMINATION OF AR MS LENGTH PRICE (ALP) OF ROYALTY PAID TO AE BY TRANSFER PRICING OFF ICER (TPO) AND CONFIRMED BY DRP AT 2% AS AGAINST 3% CLAIMED BY ASS ESSEE. 3. BRIEFLY THE FACTS RELATING TO THE AFORESAID ISSU E IN DISPUTE ARE, ASSESSEE AN INDIAN COMPANY IS A WHOLLY OWNED SUBSID IARY OF RAK CERAMICS PSC, UNITED ARAB EMIRATES (RAK HOLDINGS). ASSESSEE MANUFACTURES VITRIFIED TILES AND SANITARY WARE PROD UCTS IN INDIA. THE PRODUCTS MANUFACTURED BY ASSESSEE ARE SOLD IN DOMES TIC AND EXPORT MARKET. DURING THE RELEVANT FY, ASSESSEE HAS ALSO SOLD PRODUCTS TO ITS AE. THE DETAILS OF INTERNATIONAL TRANSACTIONS E NTERED INTO BY ASSESSEE WITH ITS AE DURING THE RELEVANT FY ARE AS UNDER: S.NO. NATURE OF TRANSACTION AMOUNT (RS.) 1. PURCHASE OF RAW MATERIALS 10,71,25,849 2. RESALE OF RAW MATERIALS 34,50,965 3. SALE OF FINISHED GOODS 7,76,13,306 4. PAYMENT OF ROYALTY 9,62,59,711 5. SALE OF CAPITAL ITEMS 85,99,307 6. PAYMENT OF INTEREST ON ECB 2,01,96,839 AS FAR AS INTERNATIONAL TRANSACTIONS AT SL. NO. 1 T O 4 ARE CONCERNED, ASSESSEE IN ITS TP STUDY BENCH MARKED THEM BY ADOPT ING TRANSACTION NET MARGIN METHOD (TNMM) AS MOST APPROPRIATE METHOD AND OPERATING PROFIT TO SALES AS PROFIT LEVEL INDICATOR (PLI). BY CARRYING OUT SEARCH IN PROWESS & CAPITALINE DATA BASES, ASSESSEE SEARCHED FOR COMPARABLES WHICH YIELDED 14 COMPANIES WITH AVERAGE MARGIN OF 4.32%. AS ASSESSEES MARGIN IS 11.69%, PRICES OF TH E INTERNATIONAL TRANSACTION WERE CONSIDERED TO BE WITHIN ARMS LENG TH. FURTHER, AS FAR 3 ITA NO. 1492/HYD/2014 R.A.K. CERAMICS INDIA P. LTD. AS PAYMENT OF ROYALTY IS CONCERNED, ASSESSEE ALSO U NDERTOOK AN ALTERNATIVE ANALYSIS UNDER COMPARABLE UNCONTROLLED PRICE METHOD (CUP) BY BRINGING IN THREE COMPARABLES WITH AVERAGE ROYALTY PAYMENT OF 3.65% AS AGAINST ASSESSEES RATE OF ROYALTY AT 3 %. HENCE, PAYMENT OF ROYALTY AT 3% TO AE WAS FOUND TO BE WITHIN ARM S LENGTH. FOR THE IMPUGNED ASSESSMENT YEAR, ASSESSEE FILED ITS RETURN OF INCOME DECLARING TOTAL INCOME AT NIL AFTER SET OFF OF BR OUGHT FORWARD LOSSES AND UNABSORBED DEPRECIATION UNDER THE NORMAL PROVIS IONS. ASSESSEE ALSO DECLARED BOOK PROFIT OF RS. 40,18,18,315 U/S 1 15JB OF THE ACT. DURING THE ASSESSMENT PROCEEDING, AO NOTICING THAT ASSESSEE HAS ENTERED INTO INTERNATIONAL TRANSACTIONS WITH ITS AE , MADE A REFERENCE TO THE TPO FOR DETERMINING ALP OF THE INTERNATIONAL TRANSACTIONS. IN COURSE OF PROCEEDING BEFORE TPO, HE CALLED FOR PROD UCTION OF BOOKS OF ACCOUNT AND ALSO VARIOUS OTHER INFORMATIONS AND DOC UMENTS. AFTER EXAMINING THE BOOKS OF ACCOUNT, FINANCIAL STATEMENT S AS WELL AS OTHER RELEVANT INFORMATIONS, TPO WAS OF THE VIEW THAT THE TP ANALYSIS DONE BY ASSESSEE CANNOT BE ACCEPTED AS ASSESSEE HAS AGGR EGATED INTANGIBLE TRANSACTIONS LIKE PAYMENT OF ROYALTY WIT H TANGIBLE TRANSACTIONS, SUCH AS, SALE AND PURCHASE OF GOODS. FURTHER, HE OBSERVED THAT AS ASSESSEE HAS CONSIDERED THREE YEAR S DATA, WHICH IS NOT AS PER THE TP PROVISIONS, TP ANALYSIS CANNOT BE ACCEPTED. ACCORDINGLY, AO WAS OF THE VIEW THAT AN INDEPENDENT ANALYSIS UNDER THE TNMM HAS TO BE UNDERTAKEN BY USING CONTEMPORANE OUS DATA. SINCE THE ONLY ADJUSTMENT MADE BY TPO IS CONFINED T O PAYMENT OF ROYALTY, IT IS APPROPRIATE TO CONFINE THE DISCUSSIO NS TO THAT ISSUE ALONE. AS CAN BE SEEN FROM THE DISCUSSIONS MADE BY TPO, HE REJECTED ANALYSIS DONE BY ASSESSEE UNDER TNMM, AS F AR AS PAYMENT OF ROYALTY IS CONCERNED. TPO ALSO REJECTED ALTERNAT IVE ANALYSIS DONE BY ASSESSEE UNDER CUP BY OBSERVING THAT COMPARABLES SELECTED BEING USA COMPANIES, THE ANALYSIS MADE CANNOT BE AC CEPTED. HAVING REJECTED ASSESSEES TP ANALYSIS BOTH UNDER TNMM AS WELL AS CUP, AO PROCEEDED TO DETERMINE ARMS LENGTH PERCENTAGE O F ROYALTY PAYMENT BY APPLYING THE BENEFIT TEST. TPO OBSERVED, THOUGH ASSESSEE 4 ITA NO. 1492/HYD/2014 R.A.K. CERAMICS INDIA P. LTD. CLAIMS THAT IT HAS BEEN BENEFITTED BY TECHNICAL KNO W-HOW RECEIVED FROM THE AE, BUT, SUCH CLAIM OF ASSESSEE IS NOT SUP PORTED BY FACTS AND FIGURES. TPO OBSERVED THAT INCREASE IN SALES IS BECAUSE OF ASSESSEES OWN ADVERTISEMENT AND MARKETING SKILLS A ND ALSO COMMISSION AND DISCOUNT GIVEN BY ASSESSEE. THUS, ON CONSIDERATION OF THE AFORESAID FACTS, TPO OBSERVED THAT AS ASSESS EE HAS NOT BEEN ABLE TO CONCLUSIVELY ESTABLISH THE BENEFIT TEST FOR THE RECEIPT OF TECHNOLOGY, THE ARMS LENGTH PERCENTAGE OF ROYALTY PAYMENT MAY BE ALLOWED AT 2% AS AGAINST 3% CLAIMED BY ASSESSEE. AS A RESULT OF REDUCTION OF ROYALTY PAYMENT FROM 3% TO 2%, THE DIF FERENCE OF RS. 4,61,65,103 WAS TREATED AS TRANSFER PRICING ADJUSTM ENT TO BE MADE U/S 92CA OF THE ACT. IN TERMS WITH THE ORDER PASSED BY TPO, AP FRAMED THE DRAFT ASSESSMENT ORDER MAKING ADDITION OF RS. 4 ,61,65,103. ASSESSEE OBJECTED TO THE ADDITION MADE IN DRAFT ASS ESSMENT ORDER BEFORE THE DRP. 4. THE DRP, HOWEVER, UPHELD TPOS DECISION OF RESTR ICTING THE ROYALTY PAYMENT OF 2% ON THE NET SALES. HOWEVER, DR P DIRECTED THAT SALES MADE TO AE SHOULD NOT BE EXCLUDED FROM PAYMEN T OF ROYALTY AS LONG AS PRICE OF GOODS SOLD TO AE AND NON-AE ARE SI MILAR. AS A RESULT OF SUCH DIRECTION OF DRP, AO EXAMINED THE ISSUE WHI CH RESULTED IN REDUCTION OF TP ADJUSTMENT TO RS. 3,20,86,570 IN TH E FINAL ASSESSMENT ORDER. 5. THE LD. AR SUBMITTED BEFORE US THAT THIS IS THE FIRST YEAR OF PAYMENT OF ROYALTY AND ASSESSEE DOES NOT OWN ANY IN TANGIBLES. IT WAS SUBMITTED THAT ALL THE INTANGIBLES WERE OWNED BY AE . AS PER THE TERMS OF ROYALTY AGREEMENT, AE HAS TO PROVIDE THE TECHNIC AL KNOW-HOW AND ASSISTANCE FOR MANUFACTURING PRODUCTS. ASSESSEE IS ALSO REQUIRED TO MANUFACTURE THE PRODUCTS STRICTLY IN TERMS WITH THE TECHNICAL KNOW- HOW AND THE GUIDELINES SET BY AE KEEPING WITH THE INTERNATIONAL STANDARDS. ROYALTY PAYMENT HAS ALSO BEEN MADE BY A SSESSEE AT 3% ON THE NET SALES IN TERMS WITH THE AGREEMENT. LD. A R SUBMITTED THAT 5 ITA NO. 1492/HYD/2014 R.A.K. CERAMICS INDIA P. LTD. ASSESSEE TO BENCH MARK THE ROYALTY PAYMENT HAS NOT ONLY MADE ANALYSIS UNDER TNMM, BUT, HAS ALSO UNDERTAKEN THE S TUDY UNDER THE CUP METHOD. IT WAS SUBMITTED, ASSESSEE HAS BROUGHT COMPARABLES UNDER BOTH THE METHODS TO JUSTIFY THE ROYALTY PAYME NT OF 3%. HOWEVER, AO WITHOUT FOLLOWING ANY OF THE METHODS AN D WITHOUT ASSIGNING VALID REASONS HAS REJECTED THE ANALYSIS M ADE BY ASSESSEE UNDER BOTH THE TNMM AS WELL AS CUP, AND HAS ADOPTED A VERY STRANGE METHOD FOR DETERMINING THE ARMS LENGTH PER CENTAGE OF ROYALTY AT 2%. LD. AR SUBMITTED THAT TPO WHILE DETERMINING THE ALP HAS TO ACT STRICTLY IN CONFORMITY WITH THE STATUTORY PROVI SIONS AND CANNOT EXAMINE THE NECESSITY OF A TRANSACTION OR PAYMENT B Y ASSUMING THE ROLE OF AO. THE SPECIFIC DUTY OF THE TPO IS TO DETE RMINE ALP BY FOLLOWING THE METHOD PRESCRIBED UNDER THE STATUTE. TPO CANNOT APPLY THE BENEFIT TEST FOR DETERMINING ALP AS HE CANNOT A SSESS THE BENEFIT DERIVED BY ASSESSEE IN A PARTICULAR TRANSACTION. FU RTHER, LD. AR SUBMITTED, THE BENEFIT DERIVED BY ASSESSEE FROM TEC HNICAL KNOW-HOW AND ASSISTANCE IS PROVED FROM THE FACT THAT NOT ONL Y THE SALES HAVE INCREASED MANY FOLD WHILE PRODUCTION REMAINED SAME WHICH IS A RESULT OF PREMIUM PRICING BUT ALSO THERE IS MINIMAL PRODUC T RECALLS, LOW AFTER SALES MAINTENANCE COST WHICH PROVES THE FACT THAT S UCH ACHIEVEMENTS COULD NOT HAVE BEEN POSSIBLE WITHOUT UPGRADATION OF TECHNOLOGY. THUS, TPO HAVING NOT CONTROVERTED THE FACT THAT ASS ESSEE HAS BEEN BENEFITTED FROM THE TECHNICAL KNOW-HOW AND ASSISTAN CE PROVIDED BY AE, THE REDUCTION OF ROYALTY FORM 3% TO 2% ON ADHOC BASIS IS UNREASONABLE AND UNJUSTIFIED. LD. AR SUBMITTED, TPO HAS NOT BROUGHT ON RECORD A VALID REASON WHY THE COMPARABLES BROUGH T BY ASSESSEE BOTH UNDER TNMM AS WELL AS CUP SHOULD NOT BE ACCEPT ED. IT WAS SUBMITTED, HAD TPO BROUGHT HIS OWN SET OF COMPARAB LES JUSTIFYING THE RATE OF ROYALTY AT 2%, THEN, HE COULD HAVE REDU CED THE RATE OF ROYALTY FROM 3% TO 2%, HOWEVER, WITHOUT BRINGING AN Y COMPARABLE CASE, TPO CANNOT REDUCE ROYALTY FROM 3% TO 2% BY SI MPLY APPLYING THE BENEFIT TEST. IN SUPPORT OF SUCH CONTENTION, L D. AR RELIED UPON THE FOLLOWING DECISIONS: 6 ITA NO. 1492/HYD/2014 R.A.K. CERAMICS INDIA P. LTD. 1. DCIT VS. M/S OWENS CORNING INDUSTRIES (INDIA) P. LTD., ITA NOS. 549 AND 595/HYD/14, ORDER DATED 13/10/14. 2. KIRBY BUILDING SYSTEMS INDIA LTD. VS. ADDL. CIT, ITA NOS. 1651/H/10 AND 1975/H/11, ORDER DATED 18/07/14. 3. M/S TOYOTA KIRLOSKAR MOTOR (P) LTD. VS. ACIT, IT (TP)A NO. 1315/BANG/11, ORDER DATED 11/07/14. 4. LUMAX INDUSTRIES LTD. VS. ACIT, [2013] 157 TTJ ( DEL) 412 5. M/S CASTROL INDIA LTD., ITA NO. 1292/MUM/07 AND OTHERS, ORDER DATED 20/12/2013. 6. THE LD. DR, ON THE OTHER HAND, RELIED UPON THE R EASONING OF DRP AND TPO. 7. WE HAVE CONSIDERED THE SUBMISSIONS MADE BY LEARN ED COUNSELS FROM BOTH THE SIDES AND PERUSED THE ORDERS OF DEPAR TMENTAL AUTHORITIES AS WELL AS OTHER MATERIALS ON RECORD. W E HAVE ALSO CAREFULLY EXAMINED THE DECISIONS PLACED BEFORE US. AT THE OUTSET, IT NEEDS TO BE MENTIONED, THE ONLY DISPUTE ARISING FOR CONSIDERATION BEFORE US IS DETERMINATION OF ALP OF ROYALTY AT 2% BY TPO AS AGAINST 3% CLAIMED BY ASSESSEE. UNDISPUTEDLY, ASSESSEE ON 0 1/04/2009 HAS ENTERED INTO A ROYALTY AGREEMENT WITH ITS AE, RAK, UAE. AS PER CLAUSE 1.1 OF THE AGREEMENT, RAK, UAE WILL PROVIDE THE TECHNOLOGY ASSISTANCE AND ON-GOING PROCESS, PRODUCT IMPROVEMEN T AND COMPLETE KNOW-HOW ASSISTANCE TO ASSESSEE. CLAUSE 2.1 OF THE AGREEMENT STIPULATES, ASSESSEE SHALL MANUFACTURE THE PRODUCTS IN KEEPING WITH THE HIGHEST QUALITY STANDARDS, RULES, AND SPECIFICA TIONS INTERNATIONALLY AVAILABLE AND IN ACCORDANCE WITH GUIDELINES ESTABLI SHED FROM TIME TO TIME BY RAK, UAE. FURTHER, ASSESSEE SHALL USE APPAR ATUS, ANCILLARY EQUIPMENT, ACCESSORIES AND MATERIALS THAT WILL ENSU RE THAT SUCH STANDARDS, RULES, SPECIFICATIONS AND GUIDELINES ARE MET. CLAUSE 3.1 OF THE AGREEMENT PROVIDES, IN CONSIDERATION OF THE ONG OING TECHNICAL ASSISTANCE ON PROCESS AND PRODUCT IMPROVEMENT TO BE PROVIDED OR ANY OTHER SERVICES AS SPECIFIED IN THE AGREEMENT, I NCLUDING ANY 7 ITA NO. 1492/HYD/2014 R.A.K. CERAMICS INDIA P. LTD. TECHNOLOGY OR SERVICES PROVIDED, ASSESSEE SHALL PAY TO RAK, UAE ROYALTY EQUIVALENT TO 3% OF THE NET EX-FACTORY SALE PRICE OF THE PRODUCTS ON BOTH DOMESTIC AS WELL AS EXPORT SALES D URING THE TENURE OF THE ROYALTY AGREEMENT. 8. FROM THE CLAUSES OF THE ROYALTY AGREEMENT REFERR ED TO ABOVE, IT BECOMES CLEAR NOT ONLY RAK, UAE, WILL PROVIDE THE T ECHNICAL KNOW- HOW AND ASSISTANCE FOR MANUFACTURING PRODUCTS, BUT, ASSESSEE WILL ALSO HAVE TO MANUFACTURE BY USING SUCH TECHNICAL KN OW-HOW, ASSISTANCE IN ACCORDANCE WITH INTERNATIONAL STANDAR DS AND GUIDELINES SET BY RAK, UAE. FOR USING SUCH TECHNICAL KNOW-HOW, ASSISTANCE, ETC. ASSESSEE IS REQUIRED TO PAY ROYALTY OF 3% TO I TS AE BOTH ON DOMESTIC AND EXPORT SALES. DEPARTMENT HAS NOT DENIE D EXISTENCE OF ROYALTY AGREEMENT NOR THE FACT THAT PAYMENT OF ROYA LTY AT 3% IS AS PER THE TERMS OF THE AGREEMENT. TPO HAS ALSO NOT DISPUT ED THE FACT THAT THERE IS TRANSFER OF TECHNICAL KNOW-HOW AND ASSISTA NCE FROM THE AE TO ASSESSEE. WHAT THE TPO DISPUTES IS THE QUANTUM OF R OYALTY PAID. AS CAN BE SEEN FROM THE TP REPORT OF THE ASSESSEE AS W ELL AS OTHER MATERIALS ON RECORD, ASSESSEE HAS BENCHMARKED ALP O F ROYALTY PAID TO AE BY APPLYING TNMM. AS AVERAGE MARGIN OF COMPAR ABLES SELECTED WAS 4.32% AS AGAINST ASSESSEES MARGIN OF 11.69%, P AYMENT OF ROYALTY WAS FOUND TO BE WITHIN ARMS LENGTH. ASSESS EE ALSO UNDERTOOK ALTERNATIVE ANALYSIS UNDER CUP METHOD. ASSESSEE HAS SEARCHED ROYALSTAT DATABASE WHICH YIELDED THREE COMPANIES AS COMPARABLES WITH AVERAGE ROYALTY PAID OF 3.65% ON NET SALES AS AGAINST 3% BY ASSESSEE. THEREFORE, EVEN UNDER CUP METHOD ALSO PAY MENT OF ROYALTY AT 3% WAS FOUND TO BE WITHIN ARMS LENGTH. THE TPO DID NOT ACCEPT ASSESSEES TP ANALYSIS UNDER TNMM BY OBSERVI NG THAT PAYMENT OF ROYALTY BEING AN INTANGIBLE TRANSACTION SHOULD NOT HAVE BEEN AGGREGATED WITH TANGIBLE TRANSACTIONS. AS FAR AS, ASSESSEES ANALYSIS UNDER CUP METHOD IS CONCERNED, TPO HAS REJ ECTED IT CITING FOLLOWING REASONS: 8 ITA NO. 1492/HYD/2014 R.A.K. CERAMICS INDIA P. LTD. I) IT IS AN ALTERNATE ANALYSIS II) DATABASE USED IS FOR US BASED COMPANIES III) COPIES OF AGREEMENTS NOT FURNISHED; AND IV) BENCH MARKING HAS TO BE DONE FOR INDIAN COMPANI ES IN SIMILAR TRADE MAKING ROYALTY PAYMENT. 9. FURTHER, IT IS EVIDENT FROM TP ORDER, THOUGH, TP O HAS NOT BROUGHT ANY MATERIAL TO CONTROVERT ASSESSEES CLAIM OF RECEIVING PECUNIARY BENEFIT FROM THE TECHNICAL KNOW-HOW PROVI DED BY AE, IN TERMS OF SIZEABLE SALES, GARNERING OF CREDITABLE MA RKET SHARE, MINIMAL PRODUCT RECALLS, LOW AFTER SALES MAINTENANCE COST E TC. BUT HE TRIED TO OVERCOME IT BY OBSERVING THAT SUCH INCREASE IN SALE IS AS A RESULT OF INCREASE IN ADVERTISEMENT & MARKETING EXPENSES AND ALSO ON PAYMENT OF COMMISSION AND DISCOUNT. TPO OBSERVED, UPGRADATI ON IN TECHNICAL EXPERTISE OF AE IS AS A RESULT OF INPUTS BY THE ASS ESSEE WITH REGARD TO MARKET TRENDS IN INDIA. TPO ALSO OBSERVED THAT ROYA LTY PAYMENT WILL ALSO DEPEND UPON MARKET SHARE, WHICH ACCORDING TO T PO, RAK, UAE IS NOT HAVING. THUS, TPO FINALLY CONCLUDED AS ASSES SEE HAS FAILED TO SATISFY THE BENEFIT TEST, PAYMENT OF ROYALTY AT 3% ON NET SALES TO AE IS NOT JUSTIFIED. TPO, THEREFORE, HELD THAT ARMS LENG TH PERCENTAGE OF ROYALTY PAYMENT SHOULD BE 2%. 10. WE ARE REALLY SURPRISED TO SEE THE REASONING OF TPO IN FIXING THE ALP OF ROYALTY PAYMENT AT 2%. IT IS MANIFEST FR OM TPOS ORDER HE HAS REJECTED ASSESSEES TP ANALYSIS UNDER TNMM. FUR THER, IN PARA 6.4 OF HIS ORDER, TPO HAS MENTIONED OF UNDERTAKING AN INDEPENDENT ANALYSIS UNDER TNMM FOR SELECTING COMPARABLES AND D ETERMINING ALP. HOWEVER, EVEN AFTER REPEATEDLY SCANNING THROUG H HIS ORDER, WE FAILED TO FIND ANY SUCH ANALYSIS BEING DONE BY HIM. SIMILARLY, THOUGH IN PARA 5.1.1, LD. DRP HAS OBSERVED THAT TPO HAS BE NCHMARKED INTANGIBLE TRANSACTIONS BY USING CUP, BUT, THE ORDE R PASSED BY TPO DOES NOT SUPPORT SUCH CONCLUSION. IT IS AN ACCEPTED PRINCIPLE OF LAW THAT TPO HAS TO DETERMINE THE ALP BY ADOPTING ANY O NE OF THE METHODS PRESCRIBED U/S 92C OF THE ACT. MODE AND MAN NER OF 9 ITA NO. 1492/HYD/2014 R.A.K. CERAMICS INDIA P. LTD. COMPUTATION OF ALP UNDER DIFFERENT METHODS HAVE BEE N LAID DOWN IN RULE 10B. EVEN, ASSUMING THAT TPO HAS FOLLOWED CUP METHOD FOR DETERMINING ALP OF ROYALTY PAYMENT, AS HELD BY LD. DRP, IT NEEDS TO BE EXAMINED IF IT IS STRICTLY IN COMPLIANCE WITH ST ATUTORY PROVISIONS. RULE 10B(1)(A) LAYS DOWN THE PROCEDURE FOR DETERMIN ING ALP UNDER CUP METHOD. AS PER THE SAID PROVISION, TPO AT FIRST HAS TO FIND OUT THE PRICE CHARGED OR PAID FOR PROPERTY TRANSFERRED OR SERVICES PROVIDED IN A COMPARABLE UNCONTROLLED TRANSACTION, OR A NUMB ER OF SUCH TRANSACTIONS. THEREAFTER, MAKING NECESSARY ADJUSTME NTS TO SUCH PRICE, ON ACCOUNT OF DIFFERENCES BETWEEN THE INTERN ATIONAL TRANSACTION AND COMPARABLE UNCONTROLLED TRANSACTIONS OR BETWEEN THE ENTERPRISES ENTERING INTO SUCH TRANSACTIONS, WHICH COULD MATERI ALLY AFFECT THE PRICE IN THE OPEN MARKET, TPO WILL DETERMINE THE ALP. IT IS PATENT AND OBVIOUS FROM TPOS ORDER, THE DETERMINATION OF ALP AT 2% IS NOT AT ALL IN CONFORMITY WITH RULE 10B(1)(A). THE TPO HAS NOT BROUGHT EVEN A SINGLE COMPARABLE TO JUSTIFY ARMS LENGTH PERCENTAG E OF ROYALTY AT 2% EITHER UNDER CUP OR TNMM METHOD. ON THE CONTRARY, O BSERVATIONS MADE BY TPO GIVES AMPLE SCOPE TO CONCLUDE THAT ADOP TION OF ROYALTY AT 2% IS NEITHER ON THE BASIS OF ANY APPROVED METHO D NOR ANY REASONABLE BASIS. RATHER IT IS ON ADHOC OR ESTIMATE BASIS, HENCE, NOT IN ACCORDANCE WITH STATUTORY PROVISIONS. THE APPROA CH OF TPO IN ESTIMATING ROYALTY AT 2% BY APPLYING THE BENEFIT TE ST, IN OUR VIEW, IS NOT ONLY IN COMPLETE VIOLATION OF TP PROVISIONS BUT AGAINST THE SETTLED PRINCIPLES OF LAW. ITAT, MUMBAI BENCH IN CASE OF M/ S CASTROL INDIA LTD. VS. ADDITIONAL CITY, ITA NO. 1292/MUM/2007 DAT ED 20/12/2013 WHILE EXAMINING IDENTICAL ISSUE OF DETERMINATION OF ALP AT NIL BY APPLYING THE BENEFIT TEST HELD AS UNDER: 11. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND P ERUSED THE RELEVANT MATERIAL ON RECORD. IT IS OBSERVED THAT TH E IMPUGNED ROYALTY WAS PAID BY THE ASSESSEE COMPANY TO ITS AE NAMELY CASTROL LTD. UK AT 3.5 % OF THE NET EXFACTORY SALE PRICE OF PRODUCTS MANUFACTURED AND SOLD IN INDIA AS PER THE TECHNICAL COLLABORATION AGREEMENT. THIS INTERNATIONAL TRANSAC TION INVOLVING PAYMENT OF ROYALTY TO ITS AE WAS BENCH-MARKED BY TH E ASSESSEE 10 ITA NO. 1492/HYD/2014 R.A.K. CERAMICS INDIA P. LTD. BY FOLLOWING CUP METHOD IN ITS TP STUDY REPORT AND SINCE AVERAGE RATE OF ROYALTY OF THREE COMPARABLES SELECT ED BY IT WAS HIGHER AT 4.67% THAN THE RATE AT WHICH ROYALTY WAS PAID BY THE ASSESSEE TO ITS AE, THE TRANSACTION INVOLVING PAYME NT OF ROYALTY WAS CLAIMED TO BE AT ARMS LENGTH. A PERUSAL OF THE ORDER PASSED BY THE TPO U/S 92CA (3) OF THE ACT SHOWS THA T NEITHER THESE COMPARABLES SELECTED BY THE ASSESSEE IN ITS T P STUDY REPORT WERE REJECTED BY HER NOR ANY NEW COMPARABLES WERE SELECTED BY HER BY MAKING A FRESH SEARCH IN ORDER T O SHOW THAT THE PAYMENT OF ROYALTY BY THE ASSESSEE TO ITS AE WA S NOT AT ARMS LENGTH. SHE SIMPLY RELIED ON THE APPROVAL OF SIA TO HOLD THAT ANY ROYALTY PAID BY THE ASSESSEE ON EXPORTS AN D OTHER INCOME WAS NOT ALLOWABLE AND DISALLOWED THE ROYALTY PAYMENT TO THE EXTENT OF RS. 40,51,486/- TREATING THE SAME AS THE ROYALTY PAID BY THE ASSESSEE IN RESPECT OF EXPORTS SALE AND OTHER INCOME. WE ARE UNABLE TO AGREE WITH THIS STRANGE ME THOD FOLLOWED BY THE TPO TO MAKE A TP ADJUSTMENT IN RESP ECT OF ROYALTY PAYMENT WHICH IS NOT SUSTAINABLE EITHER IN LAW OR ON THE FACTS OF THE CASE. SHE HAS NEITHER REJECTED THE MET HOD FOLLOWED BY THE ASSESSEE TO BENCH-MARK THE TRANSACTION IN RE SPECT OF PAYMENT OF ROYALTY NOR HAS BEEN ADOPTED ANY RECOGNI ZED METHOD TO DETERMINE THE ALP OF THE SAID TRANSACTION S. THE APPROVAL OF SIA ADOPTED BY THE TPO AS BASIS TO MAKE TP ADJUSTMENT IN RESPECT OF ROYALTY PAYMENT WAS UNTENA BLE AND EVEN GOING BY THE SAID BASIS WRONGLY ADOPTED BY THE TPO, NO TP ADJUSTMENT IN RESPECT OF ROYALTY PAYMENT WAS LIA BLE TO BE MADE. AS PER THE SAID BASIS, THE NET SALES OF THE A SSESSEE AFTER EXCLUDING EXPORT SALE AND OTHER INCOME WERE TO THE EXTENT OF RS. 1118.70 CRORES AND THE ROYALTY PAID THEREON AT RS. 24.38 CRORE BEING LESS THAN THE RATE OF 3.5% APPROVED BY SIA, THERE WAS NO CASE OF ANY EXCESS PAYMENT MADE OF ROYALTY B Y ASSESSEE THAN APPROVED BY SIA TO JUSTIFY ITS DISALL OWANCE BY WAY OF TP ADJUSTMENT. IN OUR OPINION, THE LD. CIT ( A) COULD NOT APPRECIATE THESE INFIRMITIES IN THE ORDER OF THE TP O DESPITE THE SAME WERE SPECIFICALLY BROUGHT TO HIS NOTICE ON BEH ALF OF THE ASSESSEE AND CONFIRMED THE TP ADJUSTMENT MADE BY TH E TPO IN RESPECT OF ROYALTY PAYMENT WHICH WAS TOTALLY UNJUST IFIED. WE THEREFORE, DELETE THE ADDITION MADE BY THE AO/TPO A ND CONFIRMED BY THE LD. CIT ON ACCOUNT OF TP ADJUSTMEN T IN RESPECT OF ROYALTY PAYMENT AND ALLOW GROUND NO. 3 OF THE AS SESSEES APPEAL. 11. SIMILAR VIEW HAS ALSO BEEN EXPRESSED IN THE OTH ER DECISIONS RELIED UPON BY LD. AR. AT THE COST OF REPETITION, I T NEEDS REITERATION, ASSESSEE HAS BENCHMARKED THE ROYALTY PAYMENT BY BRI NGING COMPARABLES BOTH UNDER TNMM AS WELL AS CUP. WHEREAS , TPO HAS 11 ITA NO. 1492/HYD/2014 R.A.K. CERAMICS INDIA P. LTD. REJECTED THE ANALYSIS DONE BY ASSESSEE UNDER BOTH T HE METHODS WITHOUT ANY REASONABLE BASIS NOR HAS BROUGHT A SING LE COMPARABLE TO JUSTIFY ALP OF ROYALTY AT 2%. UNFORTUNATELY, LD. DR P HAS APPROACHED THE ENTIRE ISSUE IN RATHER MECHANICAL MANNER WITHOU T EXAMINING WHETHER APPROACH OF THE TPO IS IN ACCORDANCE WITH S TATUTORY MANDATE. THEREFORE, DETERMINATION OF ALP OF ROYALTY AT 2% CANNOT BE SUPPORTED, HENCE, DESERVES TO BE STRUCK DOWN. MOREO VER, THEORY OF BENEFIT TEST APPLIED BY TPO ALSO FALLS FLAT CONSIDE RING THE FACT THAT TPO DOES NOT QUESTION THE NECESSITY OF PAYING ROYAL TY BUT ONLY OBJECTS TO THE QUANTUM. FURTHER, QUANTUM INCREASE I N SALE WITH NO APPARENT INCREASE IN PRODUCTION, MINIMAL PRODUCT RE CALLS, LOW AFTER SALES MAINTENANCE COST CERTAINLY GOES TO PROVE ASSE SSEES CLAIM THAT THESE COULD BE ACHIEVED DUE TO UTILIZATION OF ADVAN CED TECHNICAL KNOW-HOW TRANSFERRED BY AE. THE TPO HAS NOT BEEN AB LE DISPROVE THESE FACTS WITH ANY SOUND ARGUMENT. CONSIDERING TH E TOTALITY OF FACTS AND CIRCUMSTANCES, WE ARE OF THE OPINION, REDUCTION OF RATE OF ROYALTY BY TPO FROM 3% TO 2% IS WITHOUT ANY BASIS, HENCE, C ANNOT BE ACCEPTED. ACCORDINGLY, WE DELETE THE ADDITION MADE ON ACCOUNT OF TP ADJUSTMENT TO ROYALTY PAYMENT. GROUNDS RAISED ARE A LLOWED. 12. IN THE RESULT, ASSESSEES APPEAL IS ALLOWED. PRONOUNCED IN THE OPEN COURT ON 04/02/2015. SD/- SD/- (P.M. JAGTAP) (SAKT IJIT DEY) ACCOUNTANT MEMBER JU DICIAL MEMBER HYDERABAD, DATED: 4 TH FEBRUARY, 2015 KV 12 ITA NO. 1492/HYD/2014 R.A.K. CERAMICS INDIA P. LTD. COPY TO:- 1)R.A.K. CERAMICS INDIA P. LTD., P.B. NO. 11, IDA P EDDAPURAM, ADB ROAD, EAST GODAVARI DIST., SAMALKOT 533 44 0 2) DCIT, CIRCLE 3(1), HYDERABAD. 3) DRP, HYDERABAD 4) TPO-II, ` , HYDERABAD 5) THE DEPARTMENTAL REPRESENTATIVE, I.T.A.T., HYDE RABAD.