Praxair India Private Limited, Bangalore V. ACIT, Bangalore

ITA 23/BANG/2012

• Counselvise Citation: [2016] 133 COUNSELVISE.COM (IT) 0191 (ITAT-BANGALORE)
• Duration Of Justice: 4 year(s) 6 month(s) 17 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 27-07-2016
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 06-06-2016
• Assessment Year: 2007-2008
• Appeal Filed On: 09-01-2012
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: P CHANDRASHEKAR
• Assessee Lawyers: K R VASUDEVAN
• Keywords: Business income; Depreciation; Transfer pricing; Search and seizure; International transaction; Unabsorbed depreciation
• Section: 143(3); 115JB; 15

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH, BANGALORE BEFORE SHRI VIJAY PAL RAO, JUDICIAL MEMBER AND SHRI INTURI RAMA RAO, ACCOUNTANT MEMBER IT (TP) A NO. 23 / BANG/20 1 2 (ASSESSMENT YEAR: 20 0 7 - 08 ) M/S.PRAXAIR (I) PVT. LTD. POST BAG NO.4251, NO.8, ULSOOR ROAD, BANGALORE - 560042. PA NO. AAACP 9993 J VS. APPELLANT ASST. COMMISSIONER OF INCOME - TAX, LTU, BANGALORE RESPONDENT APPELLANT BY : SHRI K.R.VASUDEVAN, ADVOCATE. RESPONDENT BY : SHRI P.CHANDRASHEKAR. CIT(DR). DATE OF HEARING : 0 6 / 06/2016 DATE OF PRONOUNCEMENT : 27 /07/2016 O R D E R PER I NTURI RAMA RAO, AM : THIS IS AN APPEAL FILED BY THE ASSESSEE DIRECTED AGAINST THE ORDER OF ASSESSMENT ORDER PASSED U/S 143(3) R.W.S. 144C(13) OF THE INCOME - TAX ACT,1961 [ TH E ACT FOR SHORT] DATED 04/11/2011 FOR THE ASSESSMENT YEAR 2007 - 08. IT (TP) A NO . 23 /B ANG / 2012 PAGE 2 OF 17 2. THE ASSESSEE RAISED THE FOLLOWING GROUNDS OF APPEAL: I. TRANSFER PRICING ADJUSTMENT 1. THE HONOURABLE DRP, THE LD. AO AND THE LD. TPO HAVE ERRED IN DETERMINING THE AR M'S LENGTH PRICE [ALP] OF THE ROYALTY PAYMENT TO BE NIL, AND THEREBY MAKING THE TRANSFER PRICING ADJUSTMENT OF RS. 32,918,381. 2. IN DETERMINING THE ALP OF ROYALTY PAYMENT AT 'NIL', THE HONOURABLE DRP, THE LD. AO AND THE LD. TPO HAVE GROSSLY ERRED IN: A. NO T ANALYSING OR PROVIDING ANY COMPARABLE UNCONTROLLED PRICE [CUP] CONTRACTS FOR THE APPLICATION OF CUP METHOD; B. IN REJECTING THE ANALYSIS OF AGGREGATION UNDER TRANSACTIONAL NET MARGIN METHOD [TNMM] CONDUCTED BY THE APPELLANT IN THE TRANSFER PRICING REPORT W ITHOUT PROVIDING ANY COGENT REASONS FOR SUCH REJECTIONS; C. IN DISREGARDING THE EXTERNAL COMPARABLE UNCONTROLLED TRANSACTION (EXTERNAL CUT) SEARCH PERFORMED BY THE APPELLANT AND PROVIDED AS A SUPPLEMENTARY ANALYSIS TO JUSTIFY THE ARM'S LENGTH NATURE OF THE I NTERNATIONAL TRANSACTION PERTAINING TO PAYMENT OF ROYALTY; D. IN DISREGARDING THE INTERNAL COMPARABLE UNCONTROLLED TRANSACTION (INTERNAL CUT) SEARCH PERFORMED BY THE APPELLANT AND PROVIDED AS A SUPPLEMENTARY ANALYSIS TO JUSTIFY THE ARM'S LENGTH NATURE OF THE INTERNATIONAL TRANSACTION PERTAINING TO PAYMENT OF ROYALTY; E. IN DISREGARDING THE COMPARABLE INTER - COMPANY ROYALTY RATES BETWEEN THE PARENT AND OTHER GROUP COMPANIES SUBMITTED BY THE APPELLANT AND PROVIDED AS A SUPPLEMENTARY ANALYSIS TO JUSTIFY THE ARM'S L ENGTH NATURE OF THE INTERNATIONAL TRANSACTION PERTAINING TO PAYMENT OF ROYALTY. IT (TP) A NO . 23 /B ANG / 2012 PAGE 3 OF 17 3. FURTHER THE HONOURABLE DRP, THE LD. AO AND THE LD. TPO ERRED IN: A. IN DISREGARDING THE LEGALLY BINDING AGREEMENT ENTERED BETWEEN THE APPELLANT AND ITS AES PERTAINING TO PAYM ENT OF ROYALTY WITHOUT ASSIGNING ANY COGENT REASONS; B. CONCLUDING THAT NO ECONOMIC VALUE WAS DERIVED AND THAT NO TANGIBLE AND COMMERCIAL BENEFIT WAS RECEIVED BY THE ASSESSEE ON THE PAYMENT OF ROYALTY; C. IGNORING THE FACT THAT THE ECONOMIC VALUE DERIVED IS AL SO RELATION TO IN THE NATURE OF INCREASED VISIBILITY IN THE MARKET, INCREASED DEMAND FOR THE PRODUCTS OF THE APPELLANT IN INDIA, AND ATTAINING STABILITY AND RELIABILITY IN THE MARKET; D. IN NOT TAKING INTO COGNIZANCE THE ADDITIONAL DOCUMENTATION SUPPORT SUBM ITTED ALONG WITH THE ABOVE GROUND OF OBJECTION AS THE PROOF OF TANGIBLE AND COMMERCIAL BENEFIT RECEIVED BY THE ASSESSEE FROM THE ASSOCIATED ENTERPRISE [AE]. 4. THE HONOURABLE DRP, THE LD. AO AND THE LD. TPO OUGHT TO HAVE APPRECIATED THE FOLLOWING: A. THE F ACT THAT THE TRANSACTIONS PERTAINING TO PAYMENT OF ROYALTY CANNOT BE TESTED IN ISOLATION AS THE SAME IS INTERLINKED TO THE PRIMARY MANUFACTURING OPERATIONS OF THE APPELLANT; B. THE FACT THE MANUFACTURING TECHNOLOGY [I.E. SUPPLY SYSTEM TECHNOLOGIES AND APPLIC ATIONS TECHNOLOGIES TO MANUFACTURE AND SELL THE INDUSTRIAL GASES] AND RELATED SUPPORT IS INDISPENSABLE FOR THE MANUFACTURING PROCESS OF THE ASSESSEE AND THIS TECHNOLOGY AND RELATED SUPPORT FACILITIES AND RESOURCES IS ONLY AVAILABLE WITH THE ASSOCIATED ENTE RPRISE [AE]; C. THE 'BENEFIT TEST' DOCUMENTATION PROOF AS PROVIDED BY THE ASSESSEE, IN SUPPORT OF BENEFIT RECEIVED FROM THE AE IN THE FORM OF TECHNICAL, OPERATIONAL, MAINTENANCE, QUALITY ASSURANCE, APPLICATION SUPPORT AND SAFETY SUPPORT; IT (TP) A NO . 23 /B ANG / 2012 PAGE 4 OF 17 D. THE BENEFIT DERIVED BY THE APPELLANT IN USING THE GLOBAL BRAND NAME OF ITS PARENT I.E. 'PRAXAIR' TO BID FOR CONTRACTS, AVAIL LOANS FROM THE BANKS, INCREASE THE PRESENCE IN DOMESTIC MARKET, ETC. 5. THE APPELLANT CRAVES LEAVE TO ADD, TO ALTER OR AMEND ALL OR ANY OF THE AFORE - STATED GROUNDS OF APPEAL. II . CORPORATE TAX 1. BROUGHT FORWARD UNABSORBED DEPRECIATION THE LEARNED ASSESSING OFFICER AND THE HONOURABLE DRP HAVE ERRED IN SETTING OFF BROUGHT FORWARD UNABSORBED DEPRECIATION PERTAINING TO ASSESSMENT YEAR 1997 - 98 AMOUNTING TO R S 33,060,114 INSTEAD OF THE ELIGIBLE SUM OF RS 36,834,436. 2. CARRY FORWARD OF UNABSORBED DEPRECIATION THE LEARNED ASSESSING OFFICER AND THE HONOURABLE DRP HAVE ERRED IN COMPUTING THE AMOUNT OF UNABSORBED DEPRECIATION TO BE CARRIED FORWARD TO FUTURE ASSESSME NT YEARS AT RS.,17 1,544,189,037 INSTEAD OF RS. 1,919,416,420 CLAIMED IN THE RETURN OF INCOME. 3. BRIEFLY, FACTS OF THE CASE ARE THAT THE ASSESSEE IS A COMPANY INCORPORATED UNDER THE PROVISIONS OF THE COMPANIES ACT, 1956. IT IS WHOLLY OWNED SUBSIDI ARY OF M/S.PRAXAIR PACIFIC LTD., MAUTITIUS. IT IS ENGAGED IN THE BUSINESS OF MANUFACTURE OF INDUSTRIAL GASES. THE ASSESSEE - COMPANY FILED RETURN OF INCOME FOR THE ASSESSMENT YEAR 2007 - 08 ON 31/10/2007DECLARING NIL INCOME. LATE ON, RETURN OF INCOME WAS RE VISED ON 8/1/2009 AT NIL INCOME. HOWEVER, THE ASSESSEE - COMPANY RETURNED BOOK PROFITS U/S 115JB OF THE ACT. AFTER PROCESSING THE RETURN OF INCOME U/S 143(1) OF THE INCOME - TAX ACT, 1961 [HEREINAFTER REFERRED TO AS 'THE ACT' FOR SHORT] THE IT (TP) A NO . 23 /B ANG / 2012 PAGE 5 OF 17 CASE WAS TAKEN UP FOR SCRUTINY ASSESSMENT. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE ASSESSING OFFICER (AO) NOTICED THAT THE ASSESSEE - COMPANY HAD REPORTED THE FOLLOWING TRANSACTIONS AS INTERNATIONAL TRANSACTIONS WITHIN THE MEANING OF THE PROVISIONS OF SEC.92 B OF TH E ACT IN FORM 3CD R E PORT ALONG WITH TRANSFER PRICING (TP) STUDY REPORT: 3.1 AFTER NOTICING THE ABOVE, THE AO MADE A REFERENCE U/S 92CA TO THE TRANSFER PRICING OFFICER (TPO) FOR DETERMINATION OF ARMS LENGTH PRICE (ALP) IN RESPECT OF ABOVE REPORTED IN TERNATIONAL TRANSACTIONS. THE TPO HAD ACCEPTED THAT ABOVE INTERNATIONAL TRANSACTIONS EXCEPT ROYALTY PAYMENT OF RS.3,29,18,381/ - PAID TO ITS AE PRAXAIR TECHNOLOGY INC., USA ARE AT ARM S LENGTH AND AFTER ANALYZING THE TERMS OF ROYALTY AGREEMENT, THE TPO CON CLUDED THAT THE TRANSACTIONS O F ROYALTY SHOULD B E ANALYZ ED SEPARATELY. AFTER CALLING FOR INFORMATION FROM THE ASSESSEE - COMPANY, THE TPO ANALYZED THE ENTIRE PAYMENT OF ROYALTY AND HELD THAT THE ASSESSEE - COMPANY HAD NOT GOT ANY TANGIBLE COMMERCIAL BENEFIT IN TERMS OF IMPROVED PROBABILITY EVEN AFTER PAYING TECHNICAL KNOW - HOW AND THEREFORE, HE INFERRED THAT PAYMENTS ARE ONLY MADE TO IT (TP) A NO . 23 /B ANG / 2012 PAGE 6 OF 17 SIPHON OFF PROFITS FROM INDIA WITH MINIMUM INCIDENCE OF TAX. HE FINALLY CONCLUDED AS FOLLOWS: 5.5 SUMMARY TO SUM UP, THE ALP OF THE ROYALTY PAYMENTS BY THE TAXPAYER FOR USE OF KNOW HOW IS DETERMINED AT NIL BECAUSE: 1. THE TAXPAYER DID NOT PRODUCE ANY EVIDENCE / DOCUMENTATION ON HOW THE ROYALTY RATE FIXED. AT AN ARM'S LENGTH, PARTY RECEIVING TECHNOLOGY WOULD LIKE TO SEE THE PROFI TABILITY FROM FUTURE REVENUE STREAMS BEFORE FIXING A ROYALTY RATE. 2. THE TAXPAYER DID NOT PRODUCE ANY CASH FLOW STUDY AT THE TIME OF ENTERING INTO TECHNICAL ASSISTANCE AGREEMENT WITH ITS AE SHOWING THAT THE ROYALTY RATE IS NOT FIXED BASED ON EXPECTED BENEF IT. 3. THERE IS NO PROOF THAT THE OTHER GROUP CONCERNS OR THIRD PARTIES ARE ALSO CHARGED IDENTICAL ROYALTY. 4. THE TAXPAYER HAS ALSO NOT BEEN ABLE TO SHOW THAT IT DERIVED ANY ECONOMIC BENEFIT FROM THE ALLEGED KNOW HOW RECEIVED THE AE. 5. THE PROFIT THAT ACCRUES TO THE LICENSEE MAY NOT ARISE SOLELY THROUGH THE ENGINE OF THE TECHNOLOGY. THERE ARE RETURNS FROM THE MIX OF ASSETS IT EMPLOYS SUCH AS FIXED AND WORKING CAPITAL AND THE RETURNS FROM INTANGIBLE ASSETS SUCH AS DISTRIBUTION SYSTEMS, TRAINED WORKFORCE, ETC. ALLOWANCES NEED TO BE MADE FOR THEM. IN THE ABSENCE OF ANY DATA PROVIDED BY THE TAXPAYER, IT IS IMPOSSIBLE TO KNOW WHAT PERCENTAGE OF PROFITS THE LICENSEE WOULD LIKE TO SHARE AT AN ARM S LENGTH AFTER REMOVING THE RETURNS FROM ASSETS EMPLOYED AND OTHER ECO NOMIC FACTORS WHICH MAY NOT ARISE SOLELY THROUGH THE ENGINE OF THE TECHNOLOGY. 6. THE TAXPAYER DID NOT GIVE THE DETAILS OF ROYALTY RATES IN THE INDUSTRY. IT (TP) A NO . 23 /B ANG / 2012 PAGE 7 OF 17 THUS THE ARM'S LENGTH PRICE OF ROYALTY IS DETERMINED AT RS. NIL. A. PAYMENT OF ROYALTY RS. 3,29,18,381/ B. ARM S LENGTH PRICE UNDER CUP RS. NIL C. ADJUSTMENT U/S 92CA RS. 3,29,18,381/ - THE ABOVE AMOUNT OF RS 3,29,18,381/ - IS TREATED AS ADJUSTMENTS U/S 92CA AS THE VALUE OF ROYALTY TRANSACTIONS IN UNCONTROLLED CONDITIONS IS TREATED AS RS. NIL UNDER CUP AND IN THE ABSENCE OF ANY SUBSTANTIATION TO SHOW THAT SUBSTANTIAL BENEFIT IS ACCRUED TO THE TAXPAYER. THUS THE ABOVE AMOUNT OF RS. 3,29,18,381/ IS TREATED AS TRANSFER PRICING ADJUSTMENT FOR THE FY 2006 - 07. 3.2 THUS, T HE TPO DETERMINED ALP OF ROYALTY PAYMENT AT NIL AND ACCORDINGLY, HE SUGGESTED ADJUSTMENT U/S 92CA OF RS.3,29,18,381/ - . THE AO HAS PASSED THE DRAFT ASSESSMENT ORDER DATED 28/12/2010 AFTER MAKING TP ADJUSTMENT AS SUGGESTED BY THE TPO OF RS.3,29,18,381/ - . 4 . BEING AGGRIEVED, ASSESSEE - COMPANY FILED OBJECTIONS BEFORE THE DRP WHO, VIDE ORDER DATED 28/9/2011 HAD CONFIRMED THE FINDING OF THE TPO THAT THE TRANSACTION OF ROYALTY CANNOT BE AGGREGATED WITH TOTAL MANUFACTURING COST AND ALSO CONFIRMED THE TP ADJUSTM ENT IN RESPECT OF ROYALTY. THE AO PASSED THE FINAL ASSESSMENT ORDER DATED 04/11/2011. 5. BEING AGGRIEVED, ASSESSEE - COMPANY IS IN PRESENT APPEAL BEFORE US. IT (TP) A NO . 23 /B ANG / 2012 PAGE 8 OF 17 5.1 LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE TRANSACTION OF ROYALTY SHOULD BE AGGRE GATED WITH THE TOTAL MANUFACTURING COST OF THE ASSESSEE - COMPANY AND IN ANY EVENT, AFTER PAYMENT OF ROYALTY THE NET MARGIN EARNED BY ASSESSEE - COMPANY FOR THE YEAR UNDER CONSIDERATION IS 18.15% AS AGAINST PROFIT EARNED BY COMPARABLE COMPANY IN THE SAME BUSIN ESS OF 13.42%. IN ANY EVENT, HE SUBMITTED THAT IN VIEW OF THE DECISION OF THE HON BLE DELHI HIGH COURT IN THE CASE OF EKL APPLIANCES (24 TAXMANN.COM 199) THE CRITERIA OF BENEFIT TEST IS NO LONGER RELEVANT TO DECIDE THE ALP OF TRANSACTION AND IT IS NO LONG ER NECESSARY TO ESTABLISH THAT EXPENDITURE HAS RESULTED IN PROFIT OR INCOME EITHER IN THE SAME YEAR OR IN ANY OF THE SUBSEQUENT YEARS. IN SUPPORT OF THIS PROPOSITION, HE RELIED ON THE FOLLOWING JUDGMENTS: I. CIT VS. EKL APPLIANCES (24 TAXMNN.199) ; II. DCIT VS. A IR LIQUIDE ENGG. INDIA PVT.LTD.(2014) 52 TAXMANN.171 (HYD) ; AND III. SC ENVIRO AGRO INDIA PVT. LTD. VS. DCIT (2013) 33 TAXMANN.COM 261 (MUM) LEARNED COUNSEL FOR ASSESSEE ALSO FILED COPIES OF AGREEMENTS IN SUPPORT OF ROYALTY PAYMENT. HE FURTHER SUBMITTED THAT ROYALTY PAID IS LESS THAN 5% OF THE SALE WHICH IS ALSO APPROVED BY THE RESERVE BANK OF INDIA. THEREFORE, HE SUBMITTED THAT PAYMENT OF ROYALTY TO ITS AES IS AT ARM S LENGTH AND DOES NOT REQUIRE ANY ADJUSTMENT. IT (TP) A NO . 23 /B ANG / 2012 PAGE 9 OF 17 5.2 ON THE OTHER HAND, LD.CIT(DR) RELIED ON THE ORDERS OF THE LOWER AUTHORITIES. 5.3 WE HEARD RIVAL SUBMISSIONS AND PERUSED MATERIAL ON RECORD. FIRST WE DEAL WITH THE CONTENTION OF THE ASSESSEE THAT TRANSACTION PAYMENT OF ROYALTY SHOULD BE AGGREGATED WITH ALL INTERNATIONAL TRANSACTION AND S HOULD BE COMPUTED BY FOLLOWING TNMM. THE PRINCIPLE OF AGGREGATION ARE LAID DOWN IN RULE 10A(D) OF THE IT RULES. THE CIRCUMSTANCES IN WHICH TRANSACTION SHOULD BE AGGREGATED ARE LAID DOWN IN RULE 10A(D) OF THE IT RULES WHICH ARE AS FOLLOWS: 10A. F OR THE PURPOSES OF THIS RULE AND RULES 10AB TO 10E, ..................................................... ( D ) TRANSACTION INCLUDES A NUMBER OF CLOSELY LINKED TRANSACTIONS. 5.4 THE ONLY CON TENTION URGED BY THE LEARNED COUNSEL FOR ASSESSEE IS THAT ROYALTY FORMS PART OF THE MANUFACTURING COST AND ROYALTY EXPENDITURE IS VERY MINIMUM AND THEREFORE SHOULD BE AGGREGATED. THIS IS NOT ONE OF THE CIRCUMSTANCES ENVISAGED UNDER THE PROVISIONS OF RULE 10A(D) OF THE RULES. FURTHERMORE SPECIAL BENCH OF THE TRIBUNAL IN THE CASE OF L.G.ELECTRONICS INDIA (P) LTD. VS. ACIT (153 ITD 591) VIDE PARA.8.3 HELD THAT INTERNATIONAL TRANSACTION OF ROYALTY PAYMENT IS A SEPARATE TRANSACTION AND NOT CLOSELY LINKED WITH OTHER TRANSACTIONS. THEREFORE, CANNOT BE MIXED WITH OTHER TRANSACTIONS FOR THE IT (TP) A NO . 23 /B ANG / 2012 PAGE 10 OF 17 PURPOSE OF DETERMINATION OF ALP AT THE ENTITY LEVEL UNDER TNMM CANNOT BE ALLOWED. EVEN THE HON BLE DELHI HIGH COURT IN THE CASE OF SONY ERICSON MOBILE COMMUNICATION INDIA (P) L TD. VS. CIT (374 ITR 118) HELD THAT ONLY CLOSELY LINKED TRANSACTIONS CAN BE AGGREGATED BUT TRANSACTIONS WHICH ARE NOT CLOSE LY RELATED TO EACH OTHER WOULD REQUIRE DETERMINATION IN A SEGREGATE MANNER. THE DELHI BENCH OF TRIBUNAL HELD IN THE CASE OF GURNER I NDIA (P) LTD. VS. DCIT (70 TAXMANN.COM 240) AS FOLLOWS: 5.5 WHEN WE CONSIDER THE RATIO DECIDENDI OF THE ABOVE REFERRED TWO JUDGMENTS, THE PICTURE WHICH EMERGES IS THAT ALTHOUGH CLOSELY RELATED TRANSACTIONS CAN BE AGGREGATED, BUT, UNRELATED TRANSACTIONS C ANNOT BE CLUBBED FOR DETERMINING ALP ON A COMBINED BASIS. THE RELEVANT CRITERIA TO DETERMINE WHETHER CERTAIN TRANSACTIONS BE CONSIDERED AS ONE INTERNATIONAL TRANSACTION OR NOT IS TO SEE IF SUCH TRANSACTIONS WERE ENTERED INTO A PACKAGE DEAL OR WERE INTENDED TO BE SIMULTANEOUSLY ACCEPTED OR THESE ARE SO CLOSELY LINKED THAT ONE CANNOT AT ALL STAND WITHOUT THE OTHER. IF THE ABOVE CRITERIA IS SATISFIED, THEN, TWO OR MORE RELATED TRANSACTIONS CAN BE CONSIDERED AS ONE INTERNATIONAL TRANSACTION FOR THE PURPOSE OF D ETERMINING THEIR ALP. ON THE CONTRARY, IF THE ABOVE CRITERIA IS NOT SATISFIED, THEN, THESE TRANSACTIONS ARE TO BE VIEWED SEPARATE FROM EACH OTHER AND, ACCORDINGLY, THEIR ALP SHOULD ALSO BE DETERMINED IN A DISTINCT MANNER AS IF THESE ARE TWO SEPARATE INDEPE NDENT TRANSACTIONS. THE MERE FACT THAT BOTH THE INTRA - GROUP SERVICES AND GOODS ARE UTILIZED BY THE ASSESSEE FOR THE MANUFACTURE OF THE FINAL PRODUCT, CANNOT BE TREATED DECISIVE TO CONSIDER SUCH SEPARATE TRANSACTIONS AS A SINGLE TRANSACTION. 5.6 ADVERTING T O THE FACTS OF THE INSTANT CASE, WE FIND THAT THAT THE ASSESSEE ENTERED INTO AN AGREEMENT WITH ITS AE, NAMELY, GRUNER AG, A GERMAN COMPANY, ON 6 TH OF MARCH, 2009, A COPY OF WHICH HAS BEEN PLACED ON PAGES 167 ONWARDS OF THE PAPER BOOK. UNDER THIS AGREEMENT, THE ASSESSEE WAS GRANTED A LICENCE PERMITTING USE OF TECHNOLOGY AND TECHNICAL KNOW - HOW IN THE FIELD OF ELECTRO MECHANICAL COMPONENTS AND ALSO THE BRAND NAME OF ITS FOREIGN AE. IN LIEU OF SUCH USE OF TECHNICAL KNOW - HOW AND BRAND NAME, THE ASSESSEE BECAME L IABLE TO PAY A LICENCE FEES AND ROYALTY AS STATED IN SCHEDULE II TO THIS AGREEMENT. THIS SCHEDULE PROVIDES FOR PAYMENT OF ROYALTY AND FEES FOR TECHNICAL SERVICES IT (TP) A NO . 23 /B ANG / 2012 PAGE 11 OF 17 EACH @ 8% CALCULATED ON THE BASIS OF THE NET EX - FACTORY SALE PRICE OF THE PRODUCT, EXCLUSIVE O F EXCISE DUTY MINUS THE COST OF THE STANDARD BOUGHT OUT COMPONENTS AND THE LANDED COST OF IMPORTED COMPONENTS, IRRESPECTIVE OF THE SOURCE OF PROCUREMENT, INCLUDING OCEAN FREIGHT, INSURANCE, CUSTOM DUTIES, ETC. APART FROM THIS AGREEMENT, THE ASSESSEE ALSO E NTERED INTO ANOTHER AGREEMENT DATED 25.6.2009 WITH GRUNER AG, GERMANY, FOR AVAILING CERTAIN MANAGEMENT SERVICES. A COPY OF SUCH AGREEMENT IS AVAILABLE ON PAGE 107 ONWARDS OF THE PAPER BOOK. UNDER THIS AGREEMENT, THE ASSESSEE AGREED TO PAY AT THE HOURLY RAT ES. IT IS THE PAYMENT PURSUANT TO THE AGREEMENT DATED 25.6.2009 AND 8% FEES FOR TECHNICAL SERVICES UNDER THE AGREEMENT DATED 6.3.2009, THAT THE ASSESSEE PAID TOTAL FEES FOR TECHNICAL SERVICES AT RS. 4.72 CRORE. ROYALTY PAYMENT @ 8% MADE TO GRUNER AG, UNDER THE AGREEMENT DATED 6.3.2009, STANDS AT RS. 3.24 CRORE. THUS IT IS PALPABLE THAT THE ASSESSEE PAID ROYALTY AND FEES FOR TECHNICAL SERVICES TO ITS AE PURSUANT TO THE AGREEMENTS WHICH ARE SOLELY FOR THIS PURPOSE. THERE IS NO REFERENCE OR MENTION WHATSOEVER OF ANY OTHER INTERNATIONAL TRANSACTIONS UNDERTAKEN BY THE ASSESSEE DURING THE YEAR IN THESE AGREEMENTS. IT IS FURTHER FOUND THAT THE INTERNATIONAL TRANSACTIONS OF IMPORT OF RAW MATERIAL AND EXPORT OF FINISHED GOODS ALONG WITH LEASE OF MACHINE/TOOLS AND PUR CHASE OF PLANT AND MACHINERY, ETC., HAVE NO LINK WITH PAYMENT OF ROYALTY AND PAYMENT OF FEES FOR TECHNICAL SERVICES. THE TWO INTERNATIONAL TRANSACTIONS OF PAYMENT OF ROYALTY AND FEES FOR TECHNICAL SERVICES ARE ALTOGETHER INDEPENDENT FROM THE INTERNATIONAL TRANSACTIONS OF IMPORT OF RAW MATERIALS, ETC. THE LD. AR VEHEMENTLY HARPED ON THE FACT THAT ROYALTY AND FEES FOR TECHNICAL SERVICES WAS PAID BY THE ASSESSEE ON THE BASIS OF IMPORT OF RAW MATERIAL AND, HENCE, THESE TRANSACTIONS SHOULD BE CONSIDERED ALONG WI TH THE OTHER INTERNATIONAL TRANSACTIONS INCLUDING IMPORT OF RAW MATERIALS, SPARES AND CONSUMABLES. WE ARE AFRAID THAT THIS CONTENTION IS NOT CORRECT. WE HAVE DISCUSSED HEREINABOVE THAT THE AGREEMENT DATED 6.3.2009 PROVIDES FOR PAYMENT OF ROYALTY AND FEES F OR TECHNICAL SERVICES: 'CALCULATED ON THE BASIS OF THE NET EX - FACTORY SALE PRICE OF THE PRODUCT, EXCLUSIVE OF EXCISE DUTY MINUS THE COST OF THE STANDARD BOUGHT OUT COMPONENTS AND THE LANDED COST OF IMPORTED COMPONENTS, IRRESPECTIVE OF THE SOURCE OF PROCURE MENT, INCLUDING OCEAN FREIGHT, INSURANCE, CUSTOM DUTIES, ETC.' THUS, IT IS MANIFEST THAT ROYALTY AND FEES FOR TECHNICAL SERVICES IS PAYABLE BY THE ASSESSEE ON SALE PRICE NET OF EXCISE DUTY AND IMPORT OF RAW MATERIAL, ETC. TO PUT IT SIMPLY, SUCH PAYMENT OF ROYALTY AND FEES FOR TECHNICAL SERVICES @ 8% IS ONLY ON 'VALUE ADDITION'. THERE MAY BE TOTAL IMPORT OF GOODS WORTH RS. 100/ - . HOWEVER, ROYALTY AND FEES FOR TECHNICAL SERVICES WILL BE PAID ONLY ON THE SALE PRICE OF GOODS AS REDUCED, INTER ALIA , BY IMPORT OF THE CORRESPONDING RAW MATERIALS, ETC. IF, IT (TP) A NO . 23 /B ANG / 2012 PAGE 12 OF 17 DURING A PARTICULAR YEAR, RAW MATERIAL, ETC., ARE CONSUMED WORTH RS. 60/ - , THE REMAINING RS. 40/ - WILL BE IN STOCK. IN SUCH A SITUATION, ROYALTY AND FEES FOR TECHNICAL SERVICES WILL BE PAID WITH REFERENCE TO THE A MOUNT OF SALE PRICE AS REDUCED, INTER ALIA , BY RS. 60/ - . THE ESSENCE OF THE MATTER IS THAT ROYALTY AND FEES FOR TECHNICAL SERVICES IS REQUIRED TO BE CALCULATED ON THE BASIS OF EX FACTORY SALE PRICE OF THE GOODS AS REDUCED BY THE EXPENSES AND NOT ON IMPORT OF RAW MATERIALS. IT IS FURTHER PERTINENT TO NOTE THAT THE ASSESSEE IS NOT OBLIGED TO MAKE 100% PURCHASES AND SALE TO ITS AES ALONE. THE ASSESSEE IS FREE TO PURCHASE RAW MATERIALS AND OTHER COMPONENTS FROM AND ALSO SELL ITS GOODS TO ITS NON - RELATED PARTIES AS WELL. THIS EXPLICITLY PROVES THAT THE PAYMENT OF ROYALTY AND FEES FOR TECHNICAL SERVICES HAS RELATION WITH THE TOTAL SALES MADE BY THE ASSESSEE AND IT CANNOT BE CONSTRUED AS INTERLINKED WITH IMPORT OF RAW MATERIALS FROM ITS AE ALONE. 5.7 IT IS SIMPLE A ND PLAIN THAT CROSS SUBSIDIZATION OF THE INTERNATIONAL TRANSACTIONS IN A COMBINED APPROACH IS IMPERMISSIBLE. IT IS CLEAR FROM SECTION 92(1) THAT IF AN INTERNATIONAL TRANSACTION IS RECORDED SHOWING A LOWER INCOME THAN ITS ALP INCOME, THEN IT IS THE HIGHER A LP INCOME, WHICH SHOULD BE CONSIDERED FOR THE PURPOSE OF COMPUTATION OF THE TOTAL INCOME. SECTION 92(3) OF THE ACT MANIFESTS THAT THE PROVISIONS OF THIS SECTION SHALL NOT APPLY IN A CASE WHERE THE COMPUTATION OF INCOME HAVING REGARD TO ALP HAS THE EFFECT O F REDUCING INCOME CHARGEABLE TO TAX. THE NET EFFECT OF SECTION 92(3) IS THAT IF TRANSACTED VALUE INCOME FROM AN INTERNATIONAL TRANSACTION IS MORE THAN ITS ARM'S LENGTH PRICE INCOME, THEN, THE ALP INCOME SHOULD BE DISCARDED AND THE ACTUAL INCOME SHOULD BE C ONSIDERED. TO SUM UP, IT IS THE HIGHER OF ACTUAL INCOME OR THE ALP INCOME FROM AN INTERNATIONAL TRANSACTION, WHICH SHOULD TO BE TAKEN INTO CONSIDERATION FOR COMPUTING THE TOTAL INCOME. IT DOES NOT MEAN THAT THE ACTUAL MORE INCOME FROM ONE INTERNATIONAL TRA NSACTION VIS - A - VIS ITS ALP INCOME SHOULD BE COMBINED WITH ANOTHER UNRELATED TRANSACTION WHICH GIVES ACTUAL INCOME LESS THAN THE ALP INCOME AND THEN BOTH BE PROCESSED TOGETHER UNDER THIS CHAPTER SO AS TO SET OFF THE INCOME (TRANSACTED INCOME MINUS ALP INCOM E) FROM THE FIRST TRANSACTION WITH THE POTENTIAL INCOME ARISING FROM THE SECOND TRANSACTION (ALP INCOME MINUS TRANSACTED VALUE INCOME). WHEN WE CONSIDER MORE THAN ONE SEPARATE TRANSACTION UNDER THE COMBINED UMBRELLA OF TNMM ON AN ENTITY LEVEL, IT IS QUITE POSSIBLE THAT A PROBABLE ADDITION ON ACCOUNT OF TRANSFER PRICING ADJUSTMENT ARISING FROM ONE INTERNATIONAL TRANSACTION MAY BE USURPED BY THE INCOME FROM THE OTHER INTERNATIONAL TRANSACTION GIVING HIGHER INCOME ON TRANSACTED VALUE. THAT IS THE REASON FOR WH ICH THE LEGISLATURE HAS PROVIDED FOR DETERMINING THE ALP OF EACH INTERNATIONAL TRANSACTION SEPARATELY FROM THE OTHERS. AS THE INTERNATIONAL IT (TP) A NO . 23 /B ANG / 2012 PAGE 13 OF 17 TRANSACTIONS OF PAYMENT OF ROYALTY AND FEES FOR TECHNICAL SERVICES ARE SEPARATE TRANSACTIONS AND NOT CLOSELY LINKED WITH THE OTHER TRANSACTIONS WITH WHICH THE ASSESSEE HAS MERGED THEM, WE CANNOT PERMIT SUCH MERGER OR AGGREGATION FOR THE PURPOSE OF THE DETERMINING THEIR ALP ON ENTITY LEVEL UNDER TNMM. WE, THEREFORE, REJECT THIS CONTENTION RAISED ON BEHALF OF THE ASSESSEE . THE ABOVE DECISION IS SQUARELY APPLICABLE IN THE FACTS OF THE PRESENT CASE . ACCORDINGLY, WE HOLD THAT INTERNATIONAL TRANSACTION OF PAYMENT OF ROYALTY IS A SEPARATE TRANSACTION AND THEREFORE SHOULD BE BENCH MARKED SEPARATELY. 5.5 HAVING HELD THAT ROYALTY PAYMENT IS A SEPARATE INTERNATIONAL TRANSACTION, SAME REQUIRES TO BE BENCH MARKED UNDER CUP METHOD. THOUGH ROYALTY CANNOT BE DETERMINED AT NI L BY HOLDING THAT NO BENEFIT HAD ACCRUED TO THE ASSESSEE - COMPANY ON ACCOUNT OF PAYMENT OF ROYALTY FOLLOWI NG DECISION OF THE HON BLE DELHI HIGH COURT IN THE CASE OF EKL APPLIANCES (SUPRA) THE BURDEN IS ON THE ASSESSEE PROVE THAT TECHNICAL SERVICES ARE ACTUALLY RENDERED BY THE AE TO THE ASSESSEE. IN IDENTICAL CIRCUMSTANCES, IN THE CASE OF 3M INDIA LTD. VS. ACI T, LTU , IN ITA NOS.725 & 727/BANG/2011 DATED 13/05/2016 IT WAS HELD BY US AS UNDER: THE CO - ORDINATE BENCH OF THE TRIBUNAL, TO WHICH ONE OF US I.E. THE ACCOUNTANT MEMBER IS THE AUTHOR OF THE ORDER, IN THE CASE OF M/S.B FOURESS PVT. LTD. VS. DCIT IN ITA NOS .847/BANG/2014 DATED 30/12/2015 HELD AS FOLLOWS: ............THUS, THE ASSESSEE FAILED TO DISCHARGE THE BURDEN OF PROVING THAT THE EXPENDITURE LAID OUT WERE INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS. WE MAY FURTHER ADD THAT THE HON BLE SU PREME COURT IN THE CASE OF CIT VS IMPERIAL IT (TP) A NO . 23 /B ANG / 2012 PAGE 14 OF 17 CHEMICAL INDUSTRIES (IND.) PVT. LTD (1969) 74 ITR 17 HAS UNEQUIVOCALLY HELD THAT THE BURDEN OF PROVING THAT A PARTICULAR EXPENDITURE HAD BEEN AID OUT OR INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS ENTIRELY LIES ON THE ASSESSEE. THE DISCHARGE OF THE BURDEN HAD TO BE EFFECTIVE AND MEANINGFUL AND NOT TO COVER UP BY MERELY BOOK ENTRIES AND PAPER WORK. THE MERE FACT OF PAYMENT OF COMMISSION BY ACCOUNT PAYEE CHEQUES AND COMPLIANCES WITH THE TDS PROVISI ONS SHALL NOT ALONE ENABLE THE ASSESSEE TO CLAIM DEDUCTION UNLESS AND AMOUNT HAS BEEN EXPENDED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS. 11. A CO - ORDINATE BENCH TRIBUNAL OF DELHI IN THE CASE OF KANU KITCHEN KULTURE (P)LTD VS DCIT (2013) 28 ITR (T) 49 (DEL. - TRIB.) HELD THAT WHETHER THE ASSESSEE FAILED TO DEMONSTRATE THE SERVICES RENDERED BY THE COMMISSION AGENT, THE COMMISSION WAS DISALLOWED. THE RELEVANT PARAS OF THE JUDGMENT ARE REPRODUCED BELOW; 22. THUS THE ASSESSEE AS UTTERLY FAILED TO DEMONSTRATE THE NATURE AND EXTENT OF SERVICE RENDERED BY THE AGENT AND AVAILED OF BY THE ASSESSEE FOR ITS BUSINESS OF MODULAR KITCHEN. IN THIS SCENARIO WHAT APPEARS ON RECORD IS MERELY BOOK ENTRIES COUPLED WITH TDS THE AMOUNT WHICH WILL BE CLAIMED AS A RE FUND BY THE RECIPIENT BEING A LOSS MAKING CONCERN. IN OUR CONSIDERED VIEW THE ASSESSEE HAS PRODUCED ONLY SKELETAL PAPER WORK OF THE ARRANGEMENT WITHOUT ANY IOTA OF EVIDENCE ABOUT ACTUAL BUSINESS SERVICES RENDERED. 23. THE ASSESSEE S CLAIM FOR ALLOWING SIM ILAR COMMISSION PAYMENT IN SUBSEQUENT YEAR CARIES NO MERIT INASMUCH AS THE LEARNED DR HAS RIGHTLY PLEADED THAT EACH AND EVERY YEAR OF ASSESSMENT IS SEPARATE AND INDEPENDENT UNIT AND PRINCIPLES OF RESJUDICATA DO NOT APPLY. THE ASSESSMENT FOR THE ASSESSMENT YEAR 2009 - 10 IS IT (TP) A NO . 23 /B ANG / 2012 PAGE 15 OF 17 UNDER SECTION 143(1) AND FOR THE ASSESSMENT YEAR 2010 - 11 THERE IS NO MENTION OF THE COMMISSION AT ALL. THEREFORE, WE ARE UNABLE TO GIVE EVIDENCED TO THE FACTS WHOSE RECORD IS NOT BEFORE US AND NOT REFERRED TO BEFORE THE LOWER AUTHORITI ES . 12. SIMILARLY, THE HON BLE DELHI HIGH COURT IN THE CASE OF SCHNEIDER ELECTRIC (IND.) LTD VS CIT (21008) 304 ITR 360 (DEL.) HELD THAT IN THE ABSENCE OF MATERIAL ON RECORD SUGGESTING THAT THE COMMISSION AGENTS HAD PROCURED THE SALE ORDERS, NO COMMISS ION SHOULD BE ALLOWED. THE RELEVANT PARA OF THE JUDGMENT IS REPRODUCED BELOW; 13. WE AGREE WITH THE TRIBUNAL THAT THERE IS ABSOLUTELY NO MATERIAL ON RECORD TO SUGGEST THAT M/S RAM AGENCIES HAD PROCURED ANY SALE ORDERS FOR THE ASSESSEE. THE PRODUCTION O F A FEW BILLS OR PAYMENT HAVING BEEN MADE BY ACCOUNT PAYEE CHEQUES CANNOT BY ITSELF SHOW THAT M/S RAM AGENCIES HAD PROCURED SALE ORDERS FOR THE ASSESSEE. APART FROM AN INTERNAL NOTE, THERE IS NO EVIDENCE OF ANY CORRESPONDENCE OR ANY PERSONAL; MEETINGS ETC. BETWEEN THE ASSESSEE AND M/S RAM AGENCIES TO SUGGEST THAT THE WAS ANY RELATIONSHIP ON THE BASIS OF WHICH M/S RAM AGENCIES PROCURED SOME ORDERS FOR THE ASSESSEE FOR WHICH IT WAS ENTITLED TO RECEIVE COMMISSION. MOREOVER, WE FIND THAT THE UNDERSTANDING BETW EEN THE PARTIES WAS AN ORAL UNDERSTANDING AND IT APPEARS TO BE DOUBTFUL THAT SUCH AN ORAL UNDERSTANDING CAN BE ARRIVED AT WITHOUT ANY LONG STANDING RELATIONSHIP HAVING BEEN ESTABLISHED BETWEEN THE ASSESSEE AND M/S RAM AGENCIES. IT SEEMS A BIT OUT OF PLACE THAT THE PARTIES ENTERED INTO AN ORAL BUSINESS RELATIONSHIP INVOLVING SUCH HUGE AMOUNTS OF MONEY OVER A PERIOD OF TIME . IT (TP) A NO . 23 /B ANG / 2012 PAGE 16 OF 17 13, THE CO - ORDINATE BENCH OF DELHI IN THE CASE OF PRINTER HOUSE PVT.LTD. VS DCIT (DEL.) AUTHORED BY ACCOUNTANT MEMBER, AFTER REFERR ING TO THE ABOVE PRECEDENCE ON THIS ISSUE HELD AS FOLLOWS: THUS, HAVING REGARD TO THE RATIO LAID DOWN IN THE ABOVE CASES THAT IN THE ABSENCE OF PROOF IN SUPPORT OF THE SERVICES RENDERED BY THE COMMISSION AGENT, NO COMMISSION CAN BE ALLOWED AS A DEDUCTION. THEREFORE, WE DISMISS THE APPEAL FILED BY THE ASSESSEE AND ALLOW THE APPEALS FILED BY THE REVENUE . 14. IN THE PRESENT CASE, THE LEARNED CIT(A) HAD NOT EXAMINED ANY EVIDENCE TO SHOW THAT THE AGENTS HAVE ACTUALLY RENDERED THEIR SERVICES. THE LEARNED CIT (A) HAD TOTALLY MISDIRECTED HIMSELF BY EXAMINING THE ISSUE FROM THE ANGLE OF TAX DEDUCTED AT SOURCE AND HE HAD FAILED TO EXAMINE WHETHER THE SERVICES ARE ACTUALLY RENDERED BY THE COMMISSION AGENTS OR NOT. THEREFORE, WE ARE UNABLE TO SUSTAIN THE ORDER OF T HE LEARNED CIT(A) AND HOLD THAT THE COMMISSION PAYMENTS IN QUESTION ARE NOT ALLOWABLE KEEPING IN VIEW THE RATIO LAID DOWN IN THE CASES CITED SUPRA. THE ASSESSEE COMPANY HAD MISERABLY FAILED TO DEMONSTRATE THE ACTUAL SERVICES RENDERED BY THE AGENTS TO WH OM THE COMMISSION PAYMENTS WERE MADE, DESPITE AMPLE OPPORTUNITY GRANTED BY THIS TRIBUNAL TO FURNISH EVIDENCE IN SUPPORT OF SERVICE RENDERED BY COMMISSION AGENT. 5.6 THUS, THE CONDITION TO PROVE THAT TECHNICAL SERVICE WAS ACTUALLY RENDERED BY TH E AE TO ASSESSEE - COMPANY IS A CONDITION PRECEDENT FOR ALLOWANCE OF THE SAME. THE TPO HAD NO OCCASION TO EXAMINE THIS ASPECT, AS THE ASSESSEE - COMPANY HAD NOT PRODUCED ANY EVIDENCE IN SUPPORT OF THE TECHNICAL SERVICES RENDERED. BEFORE US, THE ASSESSEE - COMP ANY FILED CERTAIN EVIDENCE IN AN IT (TP) A NO . 23 /B ANG / 2012 PAGE 17 OF 17 ENDEAVOUR TO ESTABLISH THAT ACTUALLY TECHNICAL SERVICES WERE RENDERED. THEREFORE, WE DEEM IT FIT TO REMIT THE MATTER BACK TO THE FILE OF THE TPO/AO FOR THE PURPOSE OF DE NOVO DETERMINATION OF ALP AFTER SATISFYING HIMSELF T HAT THE SERVICES WERE ACTUALLY RENDERED. 6. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS PARTLY ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 27 TH JULY , 2016 SD/ - SD/ - (VIJAY PAL RAO) (INTURI RAMA RAO) JUDICIA L MEMBER ACCOUNTANT MEMBER PLACE : BANGALORE D A T E D : 27 /0 7 /2016 SRINIVASULU, SPS COPY TO : 1 APPELLANT 2 RESPONDENT 3 CIT(A) - II BANGALORE 4 CIT 5 DR, ITAT, BANGALORE. 6 GUARD FILE BY ORDER ASSISTANT REGISTRAR INCOME - TAX APPELLATE TRIBUNAL BANGALORE