Gruner India Pvt. Ltd., New Delhi V. ACIT, CIRCLE- 10(2), New Delhi

ITA 4062/DEL/2019

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Gruner India Pvt. Ltd., a joint venture with Gruner AG, Germany, engaged in manufacturing electromechanical products, appealed against the order of the Assessing Officer (AO) which had adjusted the arm's length price (ALP) of royalty and technical service fees paid to its associated enterprise (AE). The main contention was whether the transactions should be aggregated under TNMM at the entity level or benchmarked separately using CUP. The Tribunal noted that the Delhi High Court had previously remanded the issue back to the TPO, emphasizing the need for a detailed examination of each transaction's context and the application of the most appropriate method for determining ALP.

• Counselvise Citation: [2023] 140 COUNSELVISE.COM (IT) 121414 (ITAT-DELHI)
• Duration Of Justice: 4 year(s) 1 month(s) 27 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 02-07-2023
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: I
• Next Hearing Date: 04-04-2023
• Assessment Year: 2012-2013
• Appeal Filed On: 05-05-2019
• Other Referred Cases: Magneti Marelli Powertrain India Pvt. Ltd. Vs DCIT, Sony Ericsson Mobile Communication India (P) Ltd v. CIT, EKL Appliances Ltd v. CIT, Denso India Ltd. v. Dy. CIT, Climate Systems India Ltd. v. CIT, Federal Mogul TPR India Ltd. v. CIT, Praga Tools Ltd. v. CIT, Eicher Motors Ltd. v. CIT, Sona Okegawa Precision Forgings Ltd. v. ACIT, Birla Soft (India) Ltd. v. Dy. CIT, Chinon Behring Vaccines (P) Ltd v. Asstt. CIT, Global Vantedge (P) Ltd. v. Dy. CIT, Marubeni India (P) Ltd., Ranbaxy Laboratories Ltd. v. Addl. CIT, SAB Labs India (P) Ltd., Star Diamond Group v. Dy. DIT (International Taxation), ACIT v. Star India (P.) Ltd., UCB India (P.) Ltd. v. Asstt. CIT, Technimount ICB (P) Ltd, Twinkle Diamond v. Addl. CIT, Lumax Industries v. CIT, JCB India Ltd. v. CIT
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Transfer pricing; International transaction
• Section: 234B; 144C; 48; 13

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH ‘I’, NEW DELHI Before Dr. B. R. R. Kumar, Accountant Member Sh. Yogesh Kumar US, Judicial Member ITA No. 4062/Del/2019 : Asstt. Year : 2012-13 M/s Gruner India Pvt. Ltd., 15 DSIDC, Okhla Industrial Area, Phase-II, Scheme-1, New Delhi-110020 Vs ACIT, Circle-10(2), New Delhi (APPELLANT) (RESPONDENT) PAN No. AADCG2938H Assessee by : Sh. Pancham Sethi, CA Revenue by : Sh. Mrinal Kumar Das, Sr. DR Date of Hearing: 05.04.2023 Date of Pronouncement: 03.07.2023 ORDER Per Dr. B. R. R. Kumar, Accountant Member: The present appeal has been filed by the assessee against the order dated xx.02.2019 passed by the AO u/s 254/143(3) r.w.s. 144C of the Income Tax Act, 1961. 2. Following grounds have been raised by the assessee: “1.1 Confirming addition of Rs.3,34,61,905/- made to the income of the assessee u/s 92CA(3). 1.2 Rejecting aggregation-approach under TNMM for benchmarking international transaction at entity level. 1.3 Confirming to benchmark under CUP Method the transaction of Royalty payment even when this is justified under TNMM. ITA No. 4062/Del/2019 Gruner India Pvt. Ltd. 2 1.4 Failing to appreciate that when CUP cannot be applied due to absence of comparables then ALP shall be determined under other suitable method which may be TNMM. 1.5 Holding that amount of royalty paid to AE should be restricted to 3%, i.e., Rs. 3,34,61,905 against the actual claim of 8% i.e. Rs. 5,35,39,048. 1.6 Applying the ALP rate for royalty @ 3% as held by Hon'ble Courts in certain case laws which is not a methodology prescribed by Rule 10B(1) & Rule 10C. 2. Ld. AO erred in charging interest u/s 234B and 234C under the facts & in law in the circumstances of the case. 3. Ld. AO erred by initiating the penalty proceedings u/s 271(1)(c).” 3. Grunder India Pvt. Ltd. is incorporated in October 2008 and started its operations in November 2009 and is engaged in manufacturing of Latching relays, Solenoids and Actuators specifically used in electrical meters. Gruner India is a joint venture of Gruner AG, Germany in India. The assessee enjoys the exclusive rights to manufacture the relays, actuators and solenoids in India. 4. The assessee applied aggregation approach under TNMM on entity level to justify the ALP of all the transactions including payment of Royalty/FTS alongwith the transaction for purchase of raw material and other transactions. Excerpts from the order of the ld. DRP: “The present proceedings arise with reference to the draft assessment order passed by the Assessing Officer (AO), in pursuance to the ITAT, Delhi order dated 16.06.2017 (wrongly mentioned as ITA No. 4062/Del/2019 Gruner India Pvt. Ltd. 3 27.03.2017 by the TPO) in ITA No. 771/Del/2017. The ITAT, Delhi considered the Delhi High Court decision dated 20.12.2016 (TTA 708/2016) in assessee's own case for AY 2011-12 (Para 8-12) whereby the issue was remitted back to the file of TPO for re- consideration, and set aside the matter of benchmarking the AE transactions of payment of royalty and technical support fee to the file of TPO. Relevant extracts of the ITAT order is reproduced below for reference: “13. We have considered the submissions of both the parties and carefully gone through the material available on the record. In the present case, it is noticed that an identical issue was involved in the assessee's own case in the assessment year 2011-12 in ITA No. 6794/Del/2015 which was decided by the ITAT "1-2" Bench, New Delhi vide order dated 29.04.2016. Against the said order, the assessee preferred an appeal to the Hon'ble Delhi High Court at New Delhi in ITA 708/2016 wherein vide order dated 20.12.2016, the issue was remanded back to the file of the TPO and the direction was given to apply the TNMM at the entity level. The Hon'ble Jurisdictional High Court in the aforesaid order 20.12.2016 by following the judgment in the case of Magneti Marelli Powertrain India Pvt. Ltd. Vs DCIT (2016) 290 CTR 60 (DEL) remitted the issue back to the file of the TPO for reconsideration. The relevant findings have been given in paras 8 to 12 of the said order which reach as under: 8. So far as the question of aggregation or desegregation, as the case may be concerned, we notice that there can be no strait jacket or inviolable rule in this regard. The recent judgment of this Court in Sony Ericsson Mobile Communication India (P) Ltd v. CIT [2015] 374 ITR 118/231 Taxman 113/55 taxmann.com 240 stated that aggregation of such transaction is permissible and relied upon the OECD Commentary in this regard. At the same time the observations ITA No. 4062/Del/2019 Gruner India Pvt. Ltd. 4 are not in fact determinative or conclusive. The Court was careful to leave the issue open for examination having regard to the facts of each case. In other words, as to whether the assessee's claim that aggregation is essential in a given case is an entirely fact dependent exercise to be viewed having regard to the nature of the transaction and the surrounding circumstances. The assessee contends that the amounts paid under the royalty license and technical support agreements had to be viewed along with all other expenses and, therefore, aggregated. The Revenue's contention, however, is to the contrary. 9. Recently in the judgment of this Court in Magneti Marelli Powertrain India (P) Ltd. v. Dy. CIT [2016] 389 ITR 469/75 taxmann.com 213, this Court had observed after noticing the judgment in Sony Ericsson Mobile Communication India (P.) Ltd. (supra) as well as in the CIT v. EKL Appliances Ltd [2012] 345 ITR 241/209 Taxman 200/24 taxmann.com 199 (Delhi), and observed as follows:- “.............14 The assessee/appellant during 2008-09 entered into four License & Technology Assistance Agreements (LTAAs) with its overseas AE for four products for obtaining ECU technology. In return for the technical know-how, the assessee agreed to compensate the AE through a fee amounting to US $ 2 million for each LTAA (total US$ 8 million equivalent to over Rs. 38 crores) on installment basis. .................... 16. In the light of the above discussion, this court holds that the explanation by the assessee that the payment of Rs. 38.58 crores in the circumstances was correctly not accepted. The first question is answered against the assessee. The remit directed by the impugned order is, therefore, upheld." ITA No. 4062/Del/2019 Gruner India Pvt. Ltd. 5 10. In the light of the above discussion, it is held that the entire issue as to whether aggregation is warranted in the circumstances, should be gone into afresh in view of the law declared in Sony Ericsson Mobile Communication India (P.) Ltd. (supra) and clarified in Magneti Marelli Powertrain India (P) Ltd (supra) above. 11. As far as the issue of most appropriate method is concerned, this Court is of the opinion that no definitive ruling ought to be given at this stage. As to whether in the event of de-segregation the CUP method is the most appropriate rather than TNM method should in our opinion be left open for consideration depending on the determination of the issue of aggregation/de-segregation itself. In other words, that whether in the event of de-segregation, which would be the appropriate method, should be left to the TPO to decide, after bearing counsel for the parties. However, we clarify that in the event it is held that aggregation is permissible in de fits of this case, the findings of the Revenue authorities and the Tribunal than the TNMM method was warranted, would not be disturbed. 12. In the light of the above findings, the appeal is partly allowed. The matter is remitted for re-consideration by the concerned TPO, who shall hear counsel for the parties and render findings on both aspects". 14. Since the facts, for under considerations are similar to the facts involved in the preceding assessment year 2011-12. We, therefore, by respectfully following the aforesaid referred to order, remand this issue back to the file of the AO/TPO to be decided as has been directed in ITA 708/2016 vide order dated 20.12.2016 by the Hon'ble Jurisdictional High Court.” 1.2 The TPO considered the submission of the assessee vide letter dated 27.2008 in response to the show-cause notice, however rejected the assessee's contention of following the aggregated ITA No. 4062/Del/2019 Gruner India Pvt. Ltd. 6 approach and applying TNMM at the entity love to justify payment of royalty and technical fee to the AE. Referring to the UN manual on transfer pricing, TPO was of the view that the taxpayer's individual national and controlled transactions or a group of such transactions should ideally be analyzed on a transaction by transaction basis for transfer pricing. The TPO also observed that royalty and technical services fees together amounted to 11.10% of the total operating expenses of the assessee, and therefore these action should be separately benchmarked. 1.2.2 The TPO further observed that payment of royalty is not required to be paid to the AE because it is not bringing any income to the assessee directly. With regard financial services fee payment, the TPO held that the assessee is endorsing the technology developed by the AE which is further adding to the reach of the AE, and payment of technical services fee is not justified as AE is charging itself. The TPO, thus applying CUP method, determined adjustment of Rs. 835,79,670/- which has been proposed enhancement in the draft assessment order. 1.2.3 The assessee has filed objections u/s 144C (2) before the DRP to the draft asstt. Order. Gruner India Private Limited (Gruner India" or taxpayer) was incorporated in October 2008 and started its operations in November 2009. It is engaged in manufacturing of Latching Relays, Solenoids and Actuators (Electromechanical Product, used in electrical and electronic meters industry and automotive industry. The year under consideration is effectively the 3 year of operations of the company. Gruner India is a joint venture between Mr. B.M. Vaish and Gruner AG, Germany in Inulia. Gruner India enjoys the exclusive rights to manufacture the relays, actuators and solenoids in India, under the ITA No. 4062/Del/2019 Gruner India Pvt. Ltd. 7 "Gruner" brand and license to use the technical knowhow of Gruner AG. During the year, assessee undertook following transactions with its associated enterprise (AE), namely, Gruner AG: Description of the transaction Amount Import-Raw Materials, spares & consumables 28,73,75,051 Export-Finished Goods 24,11,41,091 Purchase of Plant & Machinery 1,22,95,618 Royalty (Paid) 5,35,39,092 Fees for technical Services(Paid) 3,93,46,879 Interest on purchase of Fixed Assets 2,17,185 Dividend Paid 1,17,60,000 Reimbursement of travelling expenses 60,33,570 Total 65,17,08,486 1.4. The impugned transactions considered by the TPO for adjustment is royalty payment and FTS payment (shown in Bold letters in the table above) aggregating to Rs. 928,85,971/-. 2. Objection wise directions of the panel are as below: 2.1 Ground No. 1 & 2: 1. Draft Assessment Order passed u/s 254/143(3) r.w.s. 144C r.w.s. 92CA(3) under the set aside directions of Hon'ble Delhi ITAT is bad in law and needs to be quashed. 2. Ld. TPO has erred in law and on facts of the case by proposing to add Rs. 8,35,79,670/- to the income of the assessee u/s 92CA(3). ITA No. 4062/Del/2019 Gruner India Pvt. Ltd. 8 DRP's Directions 2.1.1 These grounds are general which does not require separate adjudication. 2.2 Ground Nos. 3-6: 3. Ld. TPO has erred by benchmarking the transactions of Royalty and FTS payments using CUP Method even when these are justified under TNMM. 4. Ld. TPO erred in failing to appreciate that when CUP cannot be applied due to absence of comparables then ALP shall be determined under other suitable method which may be TNMM. 5. Ld. TPO failed to follow the directions issued by Hon'ble Delhi High Court on the same facts in the case of assessee for AY 2011-12, requiring to follow the directions issued in Magneti Marelli Powertrain India Pvt. Ltd. vs. DCTT [(2016) 389 ITR 469] and Sony Ericsson Mobile Communication India (P) Ltd. us. CIT [(2015) 374 ITR 118)] 6. Ld. TPO failed to apply CUP as directed by Hon'ble ITAT. DRP Directions 2.2.1. These grounds (3-6) relate to the segregated approach adopted by the TPO, treating royalty and FTS transactions as separate 'International Transaction' for the purposes of benchmarking the arm's length price. It is also alleged that the TPO failed to follow the directions of Hon'ble Delhi High Court in assessee's own case for AY 2011-12, as remanded by the Hon'ble ITAT and failed to apply CUP. 2.2.2. The assessee has contended that in the TP study, aggregated approach was adopted under TNMM method (OP/OC of 10.92% as PLI) at the entity level and the average PLI of 9 comparables stood ITA No. 4062/Del/2019 Gruner India Pvt. Ltd. 9 at 4.56%. It is further contended that the TPO in original order dated 22.01.2016 had accepted all the transactions under the TNMM to be at arm's length price. In page 5 of the synopsis, Ld. AR of the assessee has referred to the Hon'ble ITAT decision (para 13 & 14) to contend that the TPO was required to follow the directions of the Hon'ble ITAT and should have applied TNMM at entity level. 2.2.3 We have considered the submissions and arguments of the assessee and perused the Hon'ble ITAT Delhi order on the issue in para 13 of the order Hon'ble ITAT has referred to the appeal decided by the Hon'ble Delhi High Court in ITA No. 708/2016 dated 20.12.2016. The Hon'ble ITAT has also mentioned (in para 13) referring to the High Court's order that, "the issue was remanded back to the file of the TPO and the direction was given to apply the TNMM at the entity level." Having perused the Hon'ble Delhi High Court order we find that there is no such absolute direction by the Hon'ble High Court. Relevant paragraph of the Hon'ble High Court order dated 20.12.2016 is reproduced below: "11. As far as the issue of most appropriate method is concerned, this Court is of the opinion that no definitive ruling ought to be given at this stage. As to whether in the event of de-segregation the CUP method is the most appropriate rather than TNM method should in our opinion be left open for consideration depending on the determination of the issue of aggregation/de-segregation itself. In other words, that whether in the event of de-segregation, which would be the appropriate method, should be left to the TPO to decide, after hearing counsel for the parties. However, we clarify that in the event it is held that aggregation is permissible in the facts of this case, the findings of the revenue authorities and the Tribunal that the TNMM method was warranted, would not be disturbed.” ITA No. 4062/Del/2019 Gruner India Pvt. Ltd. 10 2.2.3.2 It is clear that application of CUP was left open by the Hon'ble High Court to the TPO, depending on the determination of the issue of aggregation/ segregation itself. It is only in the event when it is found that aggregation is most appropriate approach in the facts of the case, that the TNMM method could not be disturbed. There is no dispute that in the event of considering the aggregated approach at the entity level, TNMM method would be the most appropriate method holding the assessee as the tested party. 2.2.4 The Panel has also considered the decision dated 25.10.2016 of Hon'ble Delhi High Court in case of Magneti Marelli (290 CTR 60), referred to in the order dated 21.12.2016 of the Hon'ble Delhi High Court in assessee's case. The matter, in case of Magne Marelli, related to payment of technical assistance fee. Hon'ble Delhi High Court in case of Magneti Marelli (supra), also considered the decisions rendered by the Hon'ble High Court in case of EKL Appliances Ltd (2012) 345 ITR 241, Sony (2015) 374 ITR 118 and Denso India Ltd (2016) 240 Taxman 713. Upholding the ITAT decision in this case on the issue of payment of technical assistance fee Hon’ble High Court held that the payment to AE cannot be justified merely by explaining the necessity, relying on profits at entity level. Relevant paragraph of the Hon'ble High Court's order (in Magneti Marelli case) is as under: “15. The assesse's argument that the technology itself would not have been given to it, but for the substantial fee (paid over and above the royalty payable), in the opinion of this court, requires a closer scrutiny. The initial burden is always upon the assessee to prove that the international transaction was at Ami's Length. Its TP report necessarily bad to draw a comparison with other entities (maybe competitors) to show the general degree of profitability of the venture in question. The lower authorities quite correctly turned down the method of explaining the justification of the technical fee- ITA No. 4062/Del/2019 Gruner India Pvt. Ltd. 11 with "proof" of its necessity by saying on profits. Undoubtedly, the assessee was obliged to make the payment and that obligation arise from the agreements, a pre-incorporation binding contract. However, that contractual obligation existed cannot ipso facto be the end of the enquiry. ALP determination in respect of every payment that is part of an international transaction is to be inducted irrespective of such obligation undertaken by the parties. If the transactions opinion the TPO, not at arm’s length, the required adjustment has to be made, as provided in the Act, respective of the fact that the expenditure is allowable under other provisions of the Act. There can conceivably be various reasons not to subject such patients, such as for instance, if no similar data exists at all, or that sectional data for payments is absent. Quite possibly, this may also be a general pattern of expenditure which AEs may insist to part with technology, further, similarly, other models of payment deferred or lump sum, along with royalty or inclusive of it, may be discerned in comparable transactions. However, to say that such a substantial amount had to necessarily be paid and that it was a commercial decision, dictated by need for the technology, in the light of a specific query, it could not be said by the assessee that later profits justified it, or that has essentiality precluded the scrutiny. 16. In the light of the above discussion, this court holds that the explanation by the assessee that the payment of Rs. 38.58 crores in the circumstances was correctly not accepted. The first question is answered against the assessee. The remit directed by the impugned order is therefore, upheld." 2.2.4 Having considered the decisions above, we are of the view that the enquiry into international transactions relating to payment of royalty and technical services fee to the AE by the assessee cannot be subsumed in the profits earned from the sale of manufactured goods at the entity level, per se. The assessee's turnover of finished ITA No. 4062/Del/2019 Gruner India Pvt. Ltd. 12 gods is Rs.92.04 crores, which includes export sales to AES of Rs. 24.11 crores (only) Import of raw materials, spares and components amounting to Rs.28.73 accounted for 35.6% of the operating cost). The royalty has been paid on the tire sales of finished goods, 74% of which is to the unrelated parties. Import of raw materials, payment of royalty and FTS, and sale/export of finished goods are three significant yet separate and independent international transactions, in the present facts of the case, capable of being benchmarked in a segregated manner. There is a cates of judgments, which has held that payment of royalty and technical fees, should normally be benchmarked separately, irrespective of the growth in turnover for the years, or the profit earned at the entity level. We have referred to some of the decisions in the cases of (i) Abhishek Auto Industries Ltd. v. Dy. CIT [2011] 9 taxman.com 27 (Delhi) wherein it had been held that only International actions are to be taken into account and not the enterprise level; (ii) Dy. CIT A Diamonds (2011) 9 taxmann.com 37/43 SOT 523 (Mum.) wherein it had held that under TNMM ALP has to be determined on the profit realized from an International transaction and not at entity level: (iii) Birla Soft (India) Ltd. v. Dy. CIT (2011)9 taxmann.com 263/44 SOT 664 (Delhi) the ITAT wherein it had been held that segmental account, even if unaudited, can be considered if the income or the expenses have been properly allocated; (iv) Chinon Behring Vaccines (P) Ltd v. Asstt. CIT [2011] 10 taxmann.com 125 (Mum) wherein it had been held that TNMM requires comparison of net margin realized from international transaction and not comparison of operating margin of the enterprise as a whole. According to the ITAT, transaction by transaction approach has to be adopted; (v) Exxon Mobil Co. India (P.) Ltd v. Dy. CIT (2011) 12 taxmann.com 84/46 SOT 294 (URO) (Mum.) wherein it had been held that two different activities like research activity and activity of promoting the licensing of technology owned by the group marketing activity) cannot be clubbed together; (vi) Global Vantedge (P) Ltd. v. Dy. CIT [2010] 37 ITA No. 4062/Del/2019 Gruner India Pvt. Ltd. 13 SOT 1 (Delhi) wherein it had been held that Comparability is to be done at segmental level and not at entity level; (vii) Following decision in the case of Asstt. CIT v. Twinkle Diamond [2011] 10 laxmann.com 294/45 SOT 115 (URO) (Mum.) etc. the ITAT, Mumbai in the case of Asstt. CIT v. Golawala Diamonds [2011] 44 SOT 645 wherein it had been held that net margin realized from the transaction or class of transactions is to be compared and not entity level margin; (viii) Marubeni India (P) Ltd. [20011-THI-36-ITAT-Del- TP] wherein it had been held that the profit of a particular operation cannot be clubbed with the earning of any other revenue stream; (ix) Ranbaxy Laboratories Ltd. v. Addl. CIT [2008] 167 Taxman 30/110 ITD 428 (Delhi) wherein it had been held that ideally ALP should be determined transaction by transaction; (x) SAB Labs India (P) Ltd. [2010-TII-44-ITAT- Bang-TP wherein it had been held that comparable with no segmental break/up/information is not to be considered; (xi) Star Diamond Group v. Dy. DIT (International Taxation) [2011] 9 taxmann.com 311/44 SOT 532 (Mum.) wherein it had been held that ALP of the International transaction is only to be determined. Entity level profit margin cannot be taken; (xii) ACIT v. Star India (P.) Ltd. [TT Appeal No. 3846(M) of 2006, dated 28-5- 2008] wherein it had been held that each international transaction is to be examined separately and ALP should be determined accordingly and different activities cannot be clubbed and common ALP cannot be determined; (xiii) Dy. CIT v. Starlite [2010] 40 SOT 421 (Mum) wherein it had been held that TNMM does not permit comparison at enterprise level profits, it requires comparison of net margin realized from an international transaction (Xix) xxxxxx Software Solutions (P.) Ltd. Vs. Asstt. CIT (2011) 11 Taxmann.com 264/46 SOT 48 (Mum.) wherein it had been held that TNMM required comparison of net margin realized from the international transaction and not enterprise level margin; (c) Technimount ICB (P) Ltd. [2011-TII-31- ITAT-Mum-TP] wherein it had been held that segmental results are to be considered and not the profit at entity level; (xi) Twinkle ITA No. 4062/Del/2019 Gruner India Pvt. Ltd. 14 Diamond (supra) and Addl. CIT v. Tej Diam [2010] 37 SOT 341 (Mum) wherein it had been held that TNMM does not permit comparison enterprise level profits and that it requires comparison of net profit margin realized from an international transaction or aggregate of class of international transactions; (xi) UCB India (P.) Ltd. v. Asstt. CIT [2009] 121 ITD 131 (Mum.) wherein it had been held that Rule 10B(1)(e) refers to net profit realised from international transactions and not of enterprise as a whole. The assessee cannot justify its inability to evaluate its transaction on stand-alone basis on the ground that there is no statuary requirement to maintain segmental data. Entity level comparison not permissible when only 50% transactions were international transactions; ALP to be determined on segmental results only: (xviii) Asstt. CIT vs. LE Trade Corpn. (India) [2011] 44 SOT 457 (Delhi) wherein it had been held that the AO had made the adjustment by applying CUP method on transaction by transaction basis and the ITAT upheld the AO's approach of benchmarking on transaction by transaction basis; (xix) M/s. Wockhardt Ltd. (2010-TII-46-ITAT- Mum-TP) wherein it had been held that TNMM requires comparison of net margin realized from International transaction or on aggregate of international transactions and not comparison of margins of enterprise as a whole. 2.2.5 In view of the above reasons on facts as they stand, we find no infirmity in the TRXY's order, in so far the separate benchmarking of royalty and FTS payment to AE is concerned. Assessee's approach of TNMM method at entity level margin to justify these payments cannot be accepted. The objections are therefore not sustainable. In a plethora of decisions including those referred in para 2.24 above, CUP has been upheld to be the appropriate method to benchmark the payment of royalty and FTS payment to AEs. In case of JCB India Ltd [2016] 69 taxmann.com 383 (Delhi - Trib.), it was held as under: ITA No. 4062/Del/2019 Gruner India Pvt. Ltd. 15 “7.7 On going through the facts and ratio of the decisions in Sony Ericsson Mobile Communication India (P) Ltd's case (supra) and Knorr-Bremse (supra), it is manifest that the contention of the ld. AR for aggregating all the international 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 transactions. The tribunal in assessee's own case has also jettisoned such argument advanced on behalf of the assessee for earlier years and has rightly held that the ALP of the international transaction of Payment of royalty' should be done separately on a transaction by transaction approach, which has been rightly interpreted by the assessee as a CUP method, that was employed by the assessee in its transfer pricing study report for the year under consideration. Ergo, we turn down the argument of the Id. AR and approve in principle that the TNMM cannot be applied and the international transaction of payment of royalty in respect of model 3DX has to be benchmarked by applying CUP as the most appropriate method." TPO action of applying CUP method for determining ALP of royalty is upheld. 7. La TPO has erred- 7.1. In disallowing the payment of Royalty & FTS on the ground that these payments are not required to be paid as these are not bringing any income to the assessee. 7.2. In determining the Arm's Length Price (ALP) of the Fee for Technical Services to be “NIL", without appreciating the fact that technical personnel of Gruner AG, Germany visited India from time to time to render technical services and support. ITA No. 4062/Del/2019 Gruner India Pvt. Ltd. 16 7.3. In disregarding the legally binding agreements entered between the appellant and Gruner AG, Germany pertaining to payment of royalty and Fees for Technical Services respectively without assigning any cogent reasons. DRP directions: 3. Having considered the submission of the assessee, we find that TPO's action of holding the arm's length price (ALP) of royalty and FTS, at NIL is within the scope of remand by the Hon'ble ITAT and the direction of the Hon'ble High Court in 's own case for AY 2011- 12. In the show cause notice of the TPO dated 242018 (Para 3) CUP, Le, the ratio of royalty expenses to sales by the comparable, UCAL Fuel Systems Ltd. (0.42%) as against 5.82% of the assessee, was proposed. However, in respect of FTS, the TPO asked the assessee to justify the payment of Rs.391,46,879/- to the AE, in view of the fact that royalty was already being paid for the technical know-how for manufacturing the products. 3.2 The assessee in his submission to the TPO objected to the selection of UCAL for comparison for royalty payment/expenses relying on Rule 10B(1)(a), stating that royalty payment by UCAL was to a related entity, i.e. the holding company. It was also claimed that FAR of the comparable UCAL was not similar to the assessee, as the products of the assessee and UCAL were different and catered to different Industrial segments. The TPO has accepted that the FAR of UCAL is dissimilar to that of the assessee. 3.2.2 With regard to the FTS payment, the assessee merely submitted that payment was for the use of patents owned by Gruner AG and the intangibles in the form of knowhow, design and models used for the production of goods. It is also argued that the technology transferred is unique and only the employees of Grunner AG are familiar and with the expertise to support the assessee's ITA No. 4062/Del/2019 Gruner India Pvt. Ltd. 17 production activities. Without furnishing specific details of functions performed by the technical personnel paged for the services, or the comparable rate for the payment of services, the argued that FIS should be benchmarked alongwith the purchase of raw material, at the aggregate level (TNMM). Reliance was placed on the ITAT Delhi decision in case of Lumax Industries (ITA No.4456/Del/2012) 3.3 We are of the view that ALP of royalty payment could not be taken as NIL and benefit test could not be applied. Hon'ble Delhi High Court decision CIT Vs. Cushman & Wakefield (India) (P) Ltd. [2014] 367 ITR 730 is squarely on this issue. 3.3.2 In so far as the assessee's contention that UCAL could not be taken as comic we do not find the arguments acceptable. Both the assessee and the TPO haw failed to find a comparable using Royalstat data, which has paid royalty to totally unrelated party. It suggest that for benchmarking the ALP for royalty, the soquitument of having transaction with the unrelated party is not a necessary requirement. There are a catena of judgment on this issue. Further, the identity of products is not a valid criteria to exclude a comparable while benchmarking royalty. The basic product being transferred under the royalty license agreement is the technical knowhow to manufacture and the brand used for the final product. 3.3.3 We are of the considered view that internal CUP would have been the most appropriate method to benchmark charging of royalty by the AE, Gruner AG. The AE has similar venture in Serbia and Tunisia (as per the Gruner AG website), as that in India, and the assessee could have demonstrated that the rate of royalty payment by the assessee in India, was comparable with that by the Serbia and Tunisia units. In the absence of such information, being furnished by the assessee, one is compelled to seek external comparables within India in similar trade. Hon'ble Delhi Tribunal in case of Lumax ITA No. 4062/Del/2019 Gruner India Pvt. Ltd. 18 Industries Ltd. vide ITA No.6212/Del/2013 order dated 22.04.2016 held as under: “22.............. Moreover, the following decisions are instances of the external CUP having been employed and this has not been disputed by the Department:- 1. Sona Okegawa Precision Forgings Ltd. v. ACIT (ITA No.4781/Del/2010) 2 ACIT v. Sona Olegaus Precision Forgings Ltd. (ITANo.260/Del/2010) 3. CIT v. Federal Mogul TPR India Ltd. (ITA No 398/2012) 4. Climate Systems India Ltd. v. CIT (2009) 319 ITR 113(Delhi) 5. CIT v. Eicher Motors Ltd. (2007) 293 ITR 464 (MP) 6. Praga Tools Ltd. v. CIT (1980) 123 ITR 773 (A&P) 7. Ekl Appliances (2012-TII-01-HC-DEL-TP) 8. Ericson India Pot. Ltd. v. DCIT (2012-11-48-ITAT-Del-TP) ITA No.4456/Del/2012 24. In 'Son Okegawa Precision Forgings Ltd. (supra), it has been held that since the royalty paid by the Indian company was 3% of net sales and it falls within the range of @ 8% on export sales and 5% on domestic sales as per directions of the RBI, therefore, the payment stands justified under the CUP method. 25. This view was accepted by the Tribunal in Sonu Okegawa’s case for Assessment Year 2004-05 also, as well as in ‘Climate Systems (supra), Swaraj Engines Ltd. (supra) and ‘Eicher Motors’ (supra). ITA No. 4062/Del/2019 Gruner India Pvt. Ltd. 19 In ‘Federal Mogul’ (supra), payment of royalty @ 3% on the sale price on transfer of technical knowledge and information was accepted. 28. All the above companies, like the assessee, were in the auto ancillary industry. 29. In ‘Praga Tools Ltd.’ (supra), which was also in an auto ancillary industry, payment of royalty @5% on the sale price, on transfer of technical knowhow and assistance was accepted 30. The royalty payment by the above companies is directly comparable with that de by the assessee company. The assessee, as observed, is also an auto ancillary manufacturing automotive parts for OEMs. In all these cases, as in that of the payment of royalty was related to transfer of technical assistance and Show in the automotive industry. That being so, the CUP method is available mps the issue of arm's length price qua the payment of royalty. 3.3.3. In view of the above, TPO is directed to adopt royalty rate of 3% for benchmarking the royalty payment. 3.3.4 With regard to the payment of technical services / assistance fee, the TPO has failed to apply CUP correctly as directed by the Hon'ble ITAT. The ALP could not be taken as NIL by applying the benefit test. The fact of expenditure being incurred by assessee for its business in not in dispute, and settled. In the DRP original order 21.12.2016 (page 15-17) has referred to the rates payable by the assessee for the technical services, as per the agreement. The TPO has failed to search for comparable cases to determine the arm's length price of the services, which was required for benchmarking and subsequent adjustment if any. In view of the above, TPO's action cannot be upheld. The adjustment is directed to be deleted. ITA No. 4062/Del/2019 Gruner India Pvt. Ltd. 20 DPO in law & on facts of the case: 7.4 by rejecting the aggregation approach under TNMM for benchmarking royalty and FTS at entity led on ground that aggregation approach can be accepted only if the volume of expenses is very small as compared to the operating expenses. 7.5. by failing to appreciate that application of aggregation approach is based on principle of close interrelation between the transaction and not upon volume of expenses.” 5. Heard the arguments of both the parties and perused the material available on record. 6. Two issues have to be considered in this case. The first being whether the CUP is the MAM or TNMM is the MAM. Second is whether the ALP for royalty @ 3% is a correct methodology determined by the ld. DRP or not. 7. Rule 10B(1) reads as under: “10B (1) For the purposes of sub-section (2) of section 92C, the arm's length price in relation to an international transaction [or a specified domestic transaction] shall be determined by any of the following methods, being the most appropriate method, in the following manner, namely :— (a) comparable uncontrolled price method, by which,— (i) the price charged or paid for property transferred or services provided in a comparable uncontrolled transaction, or a number of such transactions, is identified; ITA No. 4062/Del/2019 Gruner India Pvt. Ltd. 21 (ii) such price is adjusted to account for differences, if any, between the international transaction [or the specified domestic transaction] and the comparable uncontrolled transactions or between the enterprises entering into such transactions, which could materially affect the price in the open market; (iii) the adjusted price arrived at under sub-clause (ii) is taken to be an arm's length price in respect of the property transferred or services provided in the international transaction [or the specified domestic transaction] ; (b) resale price method, by which,— (i) the price at which property purchased or services obtained by the enterprise from an associated enterprise is resold or are provided to an unrelated enterprise, is identified; (ii) such resale price is reduced by the amount of a normal gross profit margin accruing to the enterprise or to an unrelated enterprise from the purchase and resale of the same or similar property or from obtaining and providing the same or similar services, in a comparable uncontrolled transaction, or a number of such transactions; (iii) the price so arrived at is further reduced by the expenses incurred by the enterprise in connection with the purchase of property or obtaining of services; (iv) the price so arrived at is adjusted to take into account the functional and other differences, including differences in accounting practices, if any, between the international transaction [or the specified domestic transaction] and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect the amount of gross profit margin in the open market; ITA No. 4062/Del/2019 Gruner India Pvt. Ltd. 22 (v) the adjusted price arrived at under sub-clause (iv) is taken to be an arm's length price in respect of the purchase of the property or obtaining of the services by the enterprise from the associated enterprise; (c) cost plus method, by which,— (i) the direct and indirect costs of production incurred by the enterprise in respect of property transferred or services provided to an associated enterprise, are determined; (ii) the amount of a normal gross profit mark-up to such costs (computed according to the same accounting norms) arising from the transfer or provision of the same or similar property or services by the enterprise, or by an unrelated enterprise, in a comparable uncontrolled transaction, or a number of such transactions, is determined; (iii) the normal gross profit mark-up referred to in sub-clause (ii) is adjusted to take into account the functional and other differences, if any, between the international transaction [or the specified domestic transaction] and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect such profit mark-up in the open market; (iv) the costs referred to in sub-clause (i) are increased by the adjusted profit mark-up arrived at under sub-clause (iii); (v) the sum so arrived at is taken to be an arm's length price in relation to the supply of the property or provision of services by the enterprise; (d) profit split method, which may be applicable mainly in international transactions [or specified domestic transactions] involving transfer of unique intangibles or in multiple international transactions [or specified domestic transactions] which are so ITA No. 4062/Del/2019 Gruner India Pvt. Ltd. 23 interrelated that they cannot be evaluated separately for the purpose of determining the arm's length price of any one transaction, by which— (i) the combined net profit of the associated enterprises arising from the international transaction [or the specified domestic transaction] in which they are engaged, is determined; (ii) the relative contribution made by each of the associated enterprises to the earning of such combined net profit, is then evaluated on the basis of the functions performed, assets employed or to be employed and risks assumed by each enterprise and on the basis of reliable external market data which indicates how such contribution would be evaluated by unrelated enterprises performing comparable functions in similar circumstances; (iii) the combined net profit is then split amongst the enterprises in proportion to their relative contributions, as evaluated under sub- clause (ii); (iv) the profit thus apportioned to the assessee is taken into account to arrive at an arm's length price in relation to the international transaction [or the specified domestic transaction]: Provided that the combined net profit referred to in sub-clause (i) may, in the first instance, be partially allocated to each enterprise so as to provide it with a basic return appropriate for the type of international transaction [or specified domestic transaction] in which it is engaged, with reference to market returns achieved for similar types of transactions by independent enterprises, and thereafter, the residual net profit remaining after such allocation may be split amongst the enterprises in proportion to their relative contribution in the manner specified under sub-clauses (ii) and (iii), and in such a case the aggregate of the net profit allocated to the enterprise in the ITA No. 4062/Del/2019 Gruner India Pvt. Ltd. 24 first instance together with the residual net profit apportioned to that enterprise on the basis of its relative contribution shall be taken to be the net profit arising to that enterprise from the international transaction [or the specified domestic transaction]; (e) transactional net margin method, by which,— (i) the net profit margin realised by the enterprise from an international transaction [or a specified domestic transaction] entered into with an associated enterprise is computed in relation to costs incurred or sales effected or assets employed or to be employed by the enterprise or having regard to any other relevant base; (ii) the net profit margin realised by the enterprise or by an unrelated enterprise from a comparable uncontrolled transaction or a number of such transactions is computed having regard to the same base; (iii) the net profit margin referred to in sub-clause (ii) arising in comparable uncontrolled transactions is adjusted to take into account the differences, if any, between the international transaction [or the specified domestic transaction] and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect the amount of net profit margin in the open market; (iv) the net profit margin realised by the enterprise and referred to in sub-clause (i) is established to be the same as the net profit margin referred to in sub-clause (iii); (v) the net profit margin thus established is then taken into account to arrive at an arm's length price in relation to the international transaction [or the specified domestic transaction]; [(f) any other method as provided in rule 10AB.]” ITA No. 4062/Del/2019 Gruner India Pvt. Ltd. 25 8. Rule 10C reads as under: “10C. (1) For the purposes of sub-section (1) of section 92C, the most appropriate method shall be the method which is best suited to the facts and circumstances of each particular international transaction [or specified domestic transaction], and which provides the most reliable measure of an arm's length price in relation to the international transaction [or the specified domestic transaction, as the case may be]. (2) In selecting the most appropriate method as specified in sub-rule (1), the following factors shall be taken into account, namely:— (a) the nature and class of the international transaction [or the specified domestic transaction]; (b) the class or classes of associated enterprises entering into the transaction and the functions performed by them taking into account assets employed or to be employed and risks assumed by such enterprises; (c) the availability, coverage and reliability of data necessary for application of the method; (d) the degree of comparability existing between the international transaction [or the specified domestic transaction] and the uncontrolled transaction and between the enterprises entering into such transactions; (e) the extent to which reliable and accurate adjustments can be made to account for differences, if any, between the international transaction [or the specified domestic transaction] and the comparable uncontrolled transaction or between the enterprises entering into such transactions; ITA No. 4062/Del/2019 Gruner India Pvt. Ltd. 26 (f) the nature, extent and reliability of assumptions required to be made in application of a method.” 9. In the light of the above, we have gone through the history of the case. The similar issue in the case of the assessee has been a subject matter of adjudication by the order of the Hon’ble High Court of Delhi vide order dated 20.12.2016. The Hon’ble High Court considered the issue of payment of assistance fee as held in the case of, 1. Magnetic Marelli (290 CTR 60) 2. EKL Appliances Ltd. (345 ITR 241) 3. Sony Ericsson (374 ITR 118) 4. Denso India Ltd. (240 Taxman 713) and remanded the matter to the revenue. 10. We find that the turnover of finished goods is Rs.92 Cr. and export sales to AE was Rs.24 Cr. The import of raw material was Rs.28 Cr. Royalty has been paid on the total sales. 12. In the specific facts of this case and export of goods to AE, the TNMM is the MAM. The ld. DRP has determined royalty payment @ 3% instead of 8% considered by the assessee, taking into consideration, the royalty payment of Federal Mogul TPR India Ltd., Climate Systems India Ltd. and Eicher Motors Ltd. The moot argument of the ld. AR was that the FAR of these companies is different. 13. Having gone through the entire facts and circumstances of the case, we find that the arbitrary selection of royalty rate of 3% by the ld. DRP is without brining any correct comparables ITA No. 4062/Del/2019 Gruner India Pvt. Ltd. 27 on record. With regard to payment of FTS in A.Y. 2012-13, the ld. DRP agreed that the TPO failed to apply CUP correctly and is determination of ALP at Nil is incorrect. The Hon’ble High Court of Delhi in Magneti Marelli held that if segregation approach is permissible, TNMM shall apply. 14. Owing to these facts, the appeal of the assessee is hereby allowed. 15. In the result, the appeal of the assessee is allowed. Order Pronounced in the Open Court on 03/07/2023. Sd/- Sd/- (Yogesh Kumar US) (Dr. B. R. R. Kumar) Judicial Member Accountant Member Dated: 03/07/2023 *Subodh Kumar, Sr. PS* Copy forwarded to: 1. Appellant 2. Respondent 3. CIT 4. CIT(Appeals) 5. DR: ITAT ASSISTANT REGISTRAR