M/s. Gruner India Pvt. Ltd., New Delhi V. DCIT, New Delhi

ITA 6794/DEL/2015

• Counselvise Citation: [2016] 132 COUNSELVISE.COM (IT) 8124 (ITAT-DELHI)
• Duration Of Justice: 4 month(s) 1 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 29-04-2016
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: I2
• Next Hearing Date: 26-04-2016
• Assessment Year: 2011-2012
• Appeal Filed On: 28-12-2015
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: A M GOVIL
• Assessee Lawyers: ARPRIT MITTAL
• Keywords: Business income; Transfer pricing; Search and seizure; International transaction; Rule of consistency
• Section: 92C; 143(3); 10AA; 10B; 28; 10; 2

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCHES : I-2 : NEW DELHI BEFORE SHRI R.S. SYAL, AM & SHRI KULDIP SINGH, JM ITA NO.6794/DEL/2015 ASSESSMENT YEAR : 2011-12 GRUNER INDIA PVT. LTD., C/O SS KOTHARI MEHTA & CO., CAS, 146, TRIBHUVAN COMPLEX, ISHWAR NAGAR, MATHURA ROAD, NEW DELHI. PAN: AADCG2938H VS. DCIT, CIRCLE-10(2), NEW DELHI. (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI ALOK GUPTA, FCA, SHRI PANCHAM SETHI, FCA & SHRI ARPRIT MITTAL, CA DEPARTMENT BY : SHRI A.M. GOVIL, CIT, DR DATE OF HEARING : 26.04.2016 DATE OF PRONOUNCEMENT : 29.04.2016 ORDER PER R.S. SYAL, AM: THIS APPEAL FILED BY THE ASSESSEE IS DIRECTED AGAI NST THE FINAL ASSESSMENT ORDER PASSED BY THE ASSESSING OFFICER (A O) U/S 143(3) READ ITA NO.6794/DEL/2015 2 WITH SECTION 144C OF THE INCOME-TAX ACT, 1961 (HERE INAFTER ALSO CALLED THE ACT) ON 30.11.2015 IN RELATION TO THE ASSESSM ENT YEAR 2011-12. 2. THE FIRST ISSUE RAISED IN THIS APPEAL IS AGAINST THE ADDITION ON ACCOUNT OF TRANSFER PRICING ADJUSTMENT AMOUNTING TO RS.7,78,95,037/-. 3. BRIEFLY STATED, THE FACTS OF THE CASE ARE THAT T HE ASSESSEE, AN INDIAN SUBSIDIARY OF GRUNER AG, GERMANY, IS ENGAGED IN MAN UFACTURE OF LATCHING RELAYS, SOLENOIDS AND ACTUATORS. IT IS ME ETING ITS BUSINESS REQUIREMENTS OF RAW MATERIAL, SPARES AND OTHER CONS UMABLES BY MAKING PURCHASES FROM ITS ASSOCIATED ENTERPRISE (AE). THE ASSESSEE FILED ITS RETURN OF INCOME ACCOMPANIED BY FORM NO. 3CEB DECLA RING EIGHT INTERNATIONAL TRANSACTIONS. ON A REFERENCE MADE BY THE AO FOR DETERMINING THE ARMS LENGTH PRICE (ALP) OF THE REP ORTED INTERNATIONAL TRANSACTIONS, THE TRANSFER PRICING OFFICER (TPO) OB SERVED THAT ALL THE EIGHT INTERNATIONAL TRANSACTIONS WERE SHOWN AT ALP IN AN AGGREGATED MANNER BY FOLLOWING THE TRANSACTIONAL NET MARGIN ME THOD (TNMM) AS THE MOST APPROPRIATE METHOD ON ENTITY LEVEL. THE T PO OBSERVED THAT THE ASSESSEE ALSO EXPORTS SOME OF THE FINISHED GOODS TO THIS AE IN GERMANY ITA NO.6794/DEL/2015 3 WHILE MAJORITY OF SALES WERE MADE TO UNRELATED PART IES. IN THE BACKDROP OF SUCH FACTS, IT WAS OPINED THAT THE INTERNATIONAL TRANSACTIONS OF PAYMENT OF - ROYALTY AMOUNTING TO RS.3,24,20,870 AND FEE S FOR TECHNICAL SERVICES AMOUNTING TO RS.4,72,12,010 - COULD NO T BE AGGREGATED WITH OTHER INTERNATIONAL TRANSACTIONS FOR DETERMINING TH EIR ALP. HE, THEREFORE, SEGREGATED THESE TWO INTERNATIONAL TRANS ACTIONS FROM THE REMAINING TRANSACTIONS, ALL OF WHICH WERE SHOWN AT ALP UNDER THE COMBINED TNMM APPROACH AND ACCORDINGLY PROCEEDED TO DETERMINE THE ALP OF SUCH TWO TRANSACTIONS UNDER THE COMPARABLE U NCONTROLLED PRICE (CUP) METHOD. THE ALP OF THESE TWO TRANSACTIONS WA S DETERMINED BY THE TPO BY CHOOSING TWO COMPANIES AS COMPARABLE, NA MELY, HAVELS INDIA LTD. AND AUTOMETERS ALLIANCE LTD., OUT OF THE ASSESSEES LIST OF COMPARABLES GIVEN UNDER THE TNMM. HE FOUND OUT THE RATIO OF EXPENSES OF ROYALTY AND TECHNICAL KNOW-HOW FEES TO TOTAL SALES OF THESE TWO COMPANIES AT 1.08% AND 0.03%, RESPECTIVEL Y, WITH THE AVERAGE RATE OF 0.56%. THE TPO WORKED OUT SIMILAR RATIO IN CASE OF THE ASSESSEE AT 16.26%. THUS, IT WAS HELD THAT THE TRANSACTIONS OF PAYMENT OF THESE TWO EXPENSES WERE NOT AT ARMS LENGTH PRICE. BY AP PLYING THE ITA NO.6794/DEL/2015 4 BENCHMARK OF 0.56%, THE TPO RECOMMENDED TRANSFER PR ICING ADJUSTMENT AMOUNTING TO RS.7,78,95,037. THE ASSESSEE REMAINED UNSUCCESSFUL BEFORE THE DISPUTE RESOLUTION PANEL (DRP). THAT IS HOW, AN ADDITION OF RS.7.78 CRORE CAME TO BE MADE IN THE FINAL ASSESSME NT ORDER, AGAINST WHICH THE ASSESSEE HAS COME UP IN APPEAL BEFORE US. 4. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE RELEVANT MATERIAL ON RECORD. IT IS MANIFEST FROM THE ABOVE D ISCUSSION THAT THE ASSESSEE DEMONSTRATED ALL THE EIGHT INTERNATIONAL T RANSACTIONS AT ALP ON A COMBINED BASIS UNDER THE TNMM. THE TPO HAS DISPUT ED ONLY THE TRANSACTIONS OF PAYMENT OF ROYALTY AND FEES FOR TEC HNICAL SERVICES, WHOSE ALP HAS BEEN DETERMINED UNDER THE CUP METHOD, THEREBY IMPLIEDLY ACCEPTING THE REMAINING SIX INTERNATIONAL TRANSACTIONS AT ALP UNDER THE TNMM. I. WHETHER SEGREGATION OF THE TWO TRANSACTIONS IS JUSTIFIED? 5.1. THE FIRST ISSUE RAISED BY THE LD. AR IS AGAI NST THE SEPARATE DETERMINATION OF ALP OF THE INTERNATIONAL TRANSACTI ONS OF PAYMENT OF ROYALTY AND FEES FOR TECHNICAL SERVICES. HE URGED THAT THESE TWO ITA NO.6794/DEL/2015 5 INTERNATIONAL TRANSACTIONS OUGHT TO HAVE BEEN CONSI DERED ALONG WITH OTHER INTERNATIONAL TRANSACTIONS IN AN AGGREGATED M ANNER UNDER THE TNMM AS WAS DONE BY THE ASSESSEE. RELYING ON CERTA IN TRIBUNAL ORDERS, IT WAS ARGUED THAT THE AUTHORITIES BELOW WE RE NOT JUSTIFIED IN SEGREGATING THESE TWO TRANSACTIONS FOR DETERMINING THEIR ALP UNDER CUP METHOD. THIS CONTENTION WAS STRONGLY OPPOSED BY TH E LD. DR WHO SUBMITTED THAT THERE WAS NO RELATION BETWEEN PAYMEN T OF ROYALTY AND FEES FOR TECHNICAL SERVICES AND OTHER INTERNATIONA L TRANSACTIONS OF IMPORT OF RAW MATERIALS, EXPORT OF FINISHED GOODS, LEASE O F MACHINE/TOOLS, PURCHASE OF PLANT AND MACHINERY, DIVIDEND PAID AND TESTING AND CELEBRATION FEES RECEIVED. IN HIS OPINION, THESE TW O TRANSACTIONS WERE REQUIRED TO BE SEPARATELY BENCHMARKED AS HAS BEEN D ONE BY THE TPO. 5.2. THE KEY QUESTION WHICH, THEREFORE, FALLS FO R OUR CONSIDERATION IS WHETHER THE SEGREGATION OF THESE TWO TRANSACTIONS O F PAYMENT OF ROYALTY AND FEES FOR TECHNICAL SERVICES FROM THE OTHER INTE RNATIONAL TRANSACTIONS, IS JUSTIFIED? ITA NO.6794/DEL/2015 6 5.3. THE HONBLE JURISDICTIONAL HIGH COURT IN SONY ERICSON MOBILE COMMUNICATION INDIA PVT. LTD. VS. CIT (2015) 374 IT R 118 (DEL) , HAS DEALT WITH THE CIRCUMSTANCES IN WHICH AGGREGATION C AN BE DONE IN THE CONTEXT OF AMP EXPENSES. THE PRINCIPLES LAID DOWN I N THIS CASE ARE UNIVERSALLY APPLICABLE AND ARE NOT CONFINED TO THE PECULIAR FACTS OF THAT CASE ALONE. IT HAS BEEN HELD THAT TRANSACTION INCL UDES THE NUMBER OF CLOSELY LINKED TRANSACTIONS. DEALING WITH AMP EXPE NSES, IT HELD VIDE PARAS 80 AND 81 THAT INTER-CONNECTED INTERNATIONAL TRANSACTIONS CAN BE AGGREGATED AND SECTION 92(3) DOES NOT PROHIBIT THE SET OFF. FURTHER, IN PARAS 91, 121 AND OTHERS, IT HELD THAT THE ALP OF A MP EXPENSES SHOULD BE DETERMINED PREFERABLY IN A BUNDLED MANNER WITH T HE DISTRIBUTION ACTIVITY. VIDE PARAS 194 (I), (II), (VIII) AND OTH ERS IT HELD THAT FOR DETERMINING THE ALP OF THESE TRANSACTIONS IN A BUND LED MANNER, SUITABLE COMPARABLES HAVING UNDERTAKEN SIMILAR ACTIVITIES OF DISTRIBUTION OF THE PRODUCTS AND ALSO INCURRING OF AMP EXPENSES SHOULD BE CHOSEN. IT STILL FURTHER HELD IN PARAS 100, 121, AND 194 (III), (VI) AND (XI) THAT IF ADJUSTMENT IS NOT POSSIBLE OR COMPARABLES ARE NOT A VAILABLE, THEN, TNMM ON ENTITY LEVEL SHOULD NOT BE APPLIED AND THE INTERNATIONAL ITA NO.6794/DEL/2015 7 TRANSACTION OF AMP SHOULD BE VIEWED IN A DEBUNDLED OR A SEGREGATED MANNER. IN SEPARATELY DETERMINING THE ALP OF THE A MP EXPENSES, THE HONBLE HIGH COURT HELD THAT THE TPO IS FREE TO CHO OSE ANY OTHER SUITABLE METHOD AND IN MAKING TP ADJUSTMENT ON ACCO UNT OF AMP EXPENSES, APPROPRIATE SET OFF/PURCHASE PRICE ADJUST MENT SHOULD BE ALLOWED FROM THE OTHER TRANSACTION OF DISTRIBUTION OF THE PRODUCTS. THE HONBLE HIGH COURT ALSO HELD IN PAGE 92 OF ITS JUDG MENT THAT IT WOULD NOT BE PROPER AND APPROPRIATE TO APPLY THE TNMM MET HOD IN CASE THE INDIAN ASSESSED IS ENGAGED IN MANUFACTURING ACTIVI TIES AND DISTRIBUTION AND MARKETING OF IMPORTED AND MANUFACTURED PRODUCTS AS INTERCONNECTED TRANSACTIONS. IMPORT OF RAW MATERIAL FOR MANUFACTURE WOULD POSSIB LY BE AN INDEPENDENT TRANSACTION VIZ., MARKETING AND DIST RIBUTION ACTIVITIES OR FUNCTIONS . A CAREFUL PERUSAL OF THE JUDGMENT OF THE HONBLE JURISDICTIONAL HIGH COURT DIVULGES THAT THOUGH A NU MBER OF CLOSELY LINKED TRANSACTIONS CAN BE AGGREGATED, BUT, THE TRA NSACTIONS WHICH ARE NOT CLOSELY RELATED TO EACH OTHER WOULD REQUIRE DETERMI NATION IN A SEGREGATED MANNER. ITA NO.6794/DEL/2015 8 5.4. THE HONBLE PUNJAB & HARYANA HIGH COURT IN KNORR BREMSE INDIA P. LTD. VS. ACIT (2016) 380 ITR 307 (P&H) , HAS HELD THAT IN CASE OF A PACKAGE DEAL WHERE EACH ITEM IS NOT SEPARATELY VALU ED, BUT, ALL ARE GIVEN A COMPOSITE PRICE, THIS SHOULD BE CONSIDERED AS ONE INTERNATIONAL TRANSACTION AND PROCESSED ACCORDINGLY FOR THE TRANS FER PRICING PURPOSE. IT FURTHER HELD THAT WHERE A NUMBER OF TRANSACTIONS AR E PRICED DIFFERENTLY, BUT, ON THE UNDERSTANDING THAT THE PRICING WAS DEPE NDENT UPON THE ASSESSEE ACCEPTING ALL OF THEM TOGETHER (I.E., EITH ER TAKE ALL OR LEAVE ALL), THEN ALSO, THE SEPARATE TRANSACTIONS BE CONSIDERED AS ONE INTERNATIONAL TRANSACTION. IN SUCH CIRCUMSTANCE, BURDEN HAS BEEN PLACED ON THE ASSESSEE TO PROVE THAT ALTHOUGH EACH TRANSACTION IS PRICED SEPARATELY, BUT, THEY WERE PROVIDED UNDER ONE COMMON UNDERSTANDING. IT FURTHER LAID DOWN EMPHATICALLY THAT : ` THE CONTENTION THAT AS THE SERVICES AND GOODS ARE UTILIZED BY THE ASSESSEE FOR THE MANUFACTURE OF THE FINAL PRODUCT THEY MUST BE AGGREGATED AND CONSIDERED TO BE A SINGLE TR ANSACTION AND THE VALUE THEREOF OUGHT TO BE COMPUTED BY THE TNMM IS N OT ACCEPTABLE. MERELY BECAUSE THE PURCHASE OF EACH ITEM AND THE AC CEPTANCE OF EACH SERVICE IS A COMPONENT LEADING TO THE MANUFACTURE/P RODUCTION OF THE ITA NO.6794/DEL/2015 9 FINAL PRODUCT SOLD OR SERVICE PROVIDED BY THE ASSES SEE, IT DOES NOT FOLLOW THAT THEY ARE NOT INDEPENDENT TRANSACTIONS FOR THE SALE OF GOODS OR PROVISION OF SERVICES. THE END PRODUCT REQUIRES SEV ERAL INPUTS. THE INPUTS MAY BE ACQUIRED AS PART OF A SINGLE COMPOSIT E TRANSACTION OR BY WAY OF SEVERAL INDEPENDENT TRANSACTIONS. IN THE LAT TER CASE, THE SALE OF CERTAIN GOODS AND/OR THE PROVISION OF CERTAIN SERVI CES FROM OUT OF THE TOTAL GOODS PURCHASED OR SERVICES AVAILED OF BY AN ASSESSEE TOGETHER CAN FORM PART OF A SEPARATE INDEPENDENT INTERNATIONAL T RANSACTION. IN SUCH AN EVENT, THE AO/TPO MUST VALUE THIS GROUP OF SALE OR PURCHASE OF GOODS AND/OR PROVISION OF SERVICES AS SEPARATE TRANSACTIO NS. 5.5. WHEN WE CONSIDER THE RATIO DECIDENDI OF THE ABOVE REFERRED TWO JUDGMENTS, THE PICTURE WHICH EMERGES IS THAT ALTHOU GH CLOSELY RELATED TRANSACTIONS CAN BE AGGREGATED, BUT, UNRELATED TRAN SACTIONS CANNOT BE CLUBBED FOR DETERMINING ALP ON A COMBINED BASIS. T HE RELEVANT CRITERIA TO DETERMINE WHETHER CERTAIN TRANSACTIONS BE CONSID ERED AS ONE INTERNATIONAL TRANSACTION OR NOT IS TO SEE IF SUCH TRANSACTIONS WERE ENTERED INTO A PACKAGE DEAL OR WERE INTENDED TO BE SIMULTAN EOUSLY ACCEPTED OR ITA NO.6794/DEL/2015 10 THESE ARE SO CLOSELY LINKED THAT ONE CANNOT AT ALL STAND WITHOUT THE OTHER. IF THE ABOVE CRITERIA IS SATISFIED, THEN, TWO OR MO RE RELATED TRANSACTIONS CAN BE CONSIDERED AS ONE INTERNATIONAL TRANSACTION FOR THE PURPOSE OF DETERMINING THEIR ALP. ON THE CONTRARY, IF THE ABO VE CRITERIA IS NOT SATISFIED, THEN, THESE TRANSACTIONS ARE TO BE VIEWE D SEPARATE FROM EACH OTHER AND, ACCORDINGLY, THEIR ALP SHOULD ALSO BE DE TERMINED IN A DISTINCT MANNER AS IF THESE ARE TWO SEPARATE INDEPENDENT TRA NSACTIONS. THE MERE FACT THAT BOTH THE INTRA-GROUP SERVICES AND GOODS A RE UTILIZED BY THE ASSESSEE FOR THE MANUFACTURE OF THE FINAL PRODUCT, CANNOT BE TREATED DECISIVE TO CONSIDER SUCH SEPARATE TRANSACTIONS AS A SINGLE TRANSACTION. 5.7. ADVERTING TO THE FACTS OF THE INSTANT CASE, WE FIND THAT THAT THE ASSESSEE ENTERED INTO AN AGREEMENT WITH ITS AE, NAM ELY, 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. UND ER THIS AGREEMENT, THE ASSESSEE WAS GRANTED A LICENCE PERMITTING USE O F TECHNOLOGY AND TECHNICAL KNOW-HOW IN THE FIELD OF ELECTRO MECHANIC AL COMPONENTS AND ALSO THE BRAND NAME OF ITS FOREIGN AE. IN LIEU OF S UCH USE OF TECHNICAL ITA NO.6794/DEL/2015 11 KNOW-HOW AND BRAND NAME, THE ASSESSEE BECAME LIABLE TO PAY A LICENCE FEES AND ROYALTY AS STATED IN SCHEDULE II TO THIS A GREEMENT. THIS SCHEDULE PROVIDES FOR PAYMENT OF ROYALTY AND FEES F OR TECHNICAL SERVICES EACH @ 8% CALCULATED ON THE BASIS OF THE NET EX-FAC TORY SALE PRICE OF THE PRODUCT, EXCLUSIVE OF EXCISE DUTY MINUS THE COST OF THE STANDARD BOUGHT OUT COMPONENTS AND THE LANDED COST OF IMPORTED COMP ONENTS, IRRESPECTIVE OF THE SOURCE OF PROCUREMENT, INCLUDIN G OCEAN FREIGHT, INSURANCE, CUSTOM DUTIES, ETC. APART FROM THIS AG REEMENT, THE ASSESSEE ALSO ENTERED 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 P APER BOOK. UNDER THIS AGREEMENT, THE ASSESSEE AGREED TO PAY AT THE H OURLY RATES. IT IS THE PAYMENT PURSUANT TO THE AGREEMENT DATED 25.6.2009 A ND 8% FEES FOR TECHNICAL SERVICES UNDER THE AGREEMENT DATED 6.3.20 09, THAT THE ASSESSEE PAID TOTAL FEES FOR TECHNICAL SERVICES AT RS.4.72 C RORE. 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 ASS ESSEE PAID ROYALTY AND FEES FOR TECHNICAL SERVICES TO ITS AE PURSUANT TO T HE AGREEMENTS WHICH ITA NO.6794/DEL/2015 12 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 T HAT THE INTERNATIONAL TRANSACTIONS OF IMPORT OF RAW MATERIAL AND EXPORT O F FINISHED GOODS ALONG WITH LEASE OF MACHINE/TOOLS AND PURCHASE OF P LANT AND MACHINERY, ETC., HAVE NO LINK WITH PAYMENT OF ROYALTY AND PAYM ENT OF FEES FOR TECHNICAL SERVICES. THE TWO INTERNATIONAL TRANSACTI ONS OF PAYMENT OF ROYALTY AND FEES FOR TECHNICAL SERVICES ARE ALTOGET HER INDEPENDENT FROM THE INTERNATIONAL TRANSACTIONS OF IMPORT OF RAW MAT ERIALS, 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 ALON G WITH 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 FOR TECHNICAL SERVICES: CALCULATED ON THE BASIS OF THE NET EX-FACTORY SALE PRICE OF THE PRODU CT, EXCLUSIVE OF EXCISE DUTY MINUS THE COST OF THE STANDARD BOUGHT OUT COMP ONENTS AND THE ITA NO.6794/DEL/2015 13 LANDED COST OF IMPORTED COMPONENTS, IRRESPECTIVE OF THE SOURCE OF PROCUREMENT, INCLUDING OCEAN FREIGHT, INSURANCE, CU STOM DUTIES, ETC. THUS, IT IS MANIFEST THAT ROYALTY AND FEES FOR TECH NICAL SERVICES IS PAYABLE BY THE ASSESSEE ON SALE PRICE NET OF EXCISE DUTY AN D IMPORT OF RAW MATERIAL, ETC. TO PUT IT SIMPLY, SUCH PAYMENT OF R OYALTY AND FEES FOR TECHNICAL SERVICES @ 8% IS ONLY ON `VALUE ADDITION . THERE MAY BE TOTAL IMPORT OF GOODS WORTH RS.100/-. HOWEVER, ROYALTY A ND FEES FOR TECHNICAL SERVICES WILL BE PAID ONLY ON THE SALE PRICE OF GOO DS AS REDUCED, INTER ALIA , BY IMPORT OF THE CORRESPONDING RAW MATERIALS, ETC . IF, DURING A PARTICULAR YEAR, RAW MATERIAL, ETC., ARE CONSUMED W ORTH RS.60/-, THE REMAINING RS.40/- WILL BE IN STOCK. IN SUCH A SITUA TION, ROYALTY AND FEES FOR TECHNICAL SERVICES WILL BE PAID WITH REFERENCE TO THE AMOUNT 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 REDU CED BY THE EXPENSES AND NOT ON IMPORT OF RAW MATERIALS. IT IS FURTHER P ERTINENT 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 MATERI ALS AND OTHER ITA NO.6794/DEL/2015 14 COMPONENTS FROM AND ALSO SELL ITS GOODS TO ITS NON- RELATED PARTIES AS WELL. THIS EXPLICITLY PROVES THAT THE PAYMENT OF R OYALTY AND FEES FOR TECHNICAL SERVICES HAS RELATION WITH THE TOTAL SALE S MADE BY THE ASSESSEE AND IT CANNOT BE CONSTRUED AS INTERLINKED WITH IMPO RT OF RAW MATERIALS FROM ITS AE ALONE. 5.8. IT IS SIMPLE AND PLAIN THAT CROSS SUBSIDIZAT ION OF THE INTERNATIONAL TRANSACTIONS IN A COMBINED APPROACH IS IMPERMISSIBL E. 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 HI GHER ALP INCOME, WHICH SHOULD BE CONSIDERED FOR THE PURPOSE OF COMPU TATION 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 COMPUTA TION OF INCOME HAVING REGARD TO ALP HAS THE EFFECT OF REDUCING INC OME CHARGEABLE TO TAX. THE NET EFFECT OF SECTION 92(3) IS THAT IF TRA NSACTED VALUE INCOME FROM AN INTERNATIONAL TRANSACTION IS MORE THAN ITS ARMS LENGTH PRICE INCOME, THEN, THE ALP INCOME SHOULD BE DISCARDED AN D THE ACTUAL INCOME SHOULD BE CONSIDERED. TO SUM UP, IT IS THE H IGHER OF ACTUAL ITA NO.6794/DEL/2015 15 INCOME OR THE ALP INCOME FROM AN INTERNATIONAL TRAN SACTION, WHICH SHOULD TO BE TAKEN INTO CONSIDERATION FOR COMPUTING THE TOTAL INCOME. IT DOES NOT MEAN THAT THE ACTUAL MORE INCOME FROM ONE INTERNATIONAL TRANSACTION VIS-A-VIS ITS ALP INCOME SHOULD BE COMBINED WITH ANOTHER UNRELATED TRANSACTION WHICH GIVES ACTUAL INCOME LES S THAN THE ALP INCOME AND THEN BOTH BE PROCESSED TOGETHER UNDER TH IS CHAPTER SO AS TO SET OFF THE INCOME (TRANSACTED INCOME MINUS ALP INC OME) 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 UM BRELLA OF TNMM ON AN ENTITY LEVEL, IT IS QUITE POSSIBLE THAT A PRO BABLE ADDITION ON ACCOUNT OF TRANSFER PRICING ADJUSTMENT ARISING FROM ONE INT ERNATIONAL TRANSACTION MAY BE USURPED BY THE INCOME FROM THE OTHER INTERNA TIONAL TRANSACTION GIVING HIGHER INCOME ON TRANSACTED VALUE. THAT IS T HE REASON FOR WHICH THE LEGISLATURE HAS PROVIDED FOR DETERMINING THE AL P OF EACH INTERNATIONAL TRANSACTION SEPARATELY FROM THE OTHER S. AS THE INTERNATIONAL TRANSACTIONS OF PAYMENT OF ROYALTY AND FEES FOR TEC HNICAL SERVICES ARE SEPARATE TRANSACTIONS AND NOT CLOSELY LINKED WITH T HE OTHER TRANSACTIONS ITA NO.6794/DEL/2015 16 WITH WHICH THE ASSESSEE HAS MERGED THEM, WE CANNOT PERMIT SUCH MERGER OR AGGREGATION FOR THE PURPOSE OF THE DETERMINING T HEIR ALP ON ENTITY LEVEL UNDER TNMM. WE, THEREFORE, REJECT THIS CONTEN TION RAISED ON BEHALF OF THE ASSESSEE. 5.9. UNDER THESE CIRCUMSTANCES, WE ARE OF THE CO NSIDERED OPINION THAT THE TPO WAS JUSTIFIED IN SEGREGATING THE INTERNATIO NAL TRANSACTIONS OF PAYMENT OF ROYALTY AND FEES FOR TECHNICAL SERVICES FROM OTHER INTERNATIONAL TRANSACTIONS AS THESE ARE NOT LINKED WITH IMPORT OF RAW MATERIAL ETC. FROM ITS AE. THE ASSESSEES CONTENTI ON IN THIS REGARD IS, ERGO, REPELLED. II. SELECTION OF THE MOST APPROPRIATE METHOD. 6.1. HAVING HELD THAT THE INTERNATIONAL TRANSACTION S OF PAYMENT OF ROYALTY AND FEES FOR TECHNICAL SERVICES SHOULD BE S EPARATELY BENCHMARKED FROM THE OTHER INTERNATIONAL TRANSACTIONS, THE NEXT SIGNIFICANT QUESTION WHICH ARISES FOR OUR CONSIDERATION IS THE DETERMINA TION OF THE MOST APPROPRIATE METHOD. ITA NO.6794/DEL/2015 17 6.2. SECTION 92C(1) PROVIDES THAT THE ALP IN RELA TION TO AN INTERNATIONAL TRANSACTION SHALL BE DETERMINED BY ANY OF THE METHO DS GIVEN IN THIS PROVISION, BEING, THE MOST APPROPRIATE METHOD HAVI NG REGARD TO THE NATURE OF TRANSACTION OR CLASS OF TRANSACTION, ETC. THE METHODS SO SPECIFICALLY GIVEN IN THIS PROVISION, INTER ALIA , INCLUDE CUP, TNMM AND COST PLUS METHOD. 6.3. WE HAVE REJECTED THE ASSESSEES POINT OF VIE W OF COMBINING SEVERAL TRANSACTIONS UNDER THE TNMM. NOW LET US EXAMINE IF THE APPLICATION OF CUP METHOD IS IN ORDER FOR DETERMINING THE ALP OF P AYMENT OF ROYALTY AND FEES FOR TECHNICAL SERVICES. BY NOW, IT IS FAIR LY SETTLED THROUGH A CATENA OF DECISIONS THAT THE CUP IS THE MOST APPROP RIATE METHOD TO DETERMINE THE ALP OF AN INTERNATIONAL TRANSACTION B ECAUSE IT SEEKS TO COMPARE THE PRICE CHARGED OR PAID FOR PROPERTY TRAN SFERRED OR SERVICES RENDERED PROVIDED PROPER COMPARABLES ARE AVAILABLE. IT IS UNDER THIS METHOD ALONE THAT THE PRICE CHARGED OR PAID IS DIRE CTLY COMPARED WITH THE PRICE CHARGED OR PAID IN AN UNCONTROLLED COMPAR ABLE TRANSACTION. REST OF THE FOUR SPECIFIC METHODS SEEK TO MAKE COMP ARISON OF THE PRICE ITA NO.6794/DEL/2015 18 CHARGED OR PAID INDIRECTLY THROUGH THE MEDIUM OF NO RMAL PROFIT ARISING IN A COMPARABLE UNCONTROLLED TRANSACTION. FURTHER, THE CUP METHOD IS A TRANSACTION SPECIFIC METHOD WHICH STRIVES TO DETERM INE THE ALP OF AN INTERNATIONAL TRANSACTION ON A MICRO LEVEL, THEREBY LENDING MORE CREDIBILITY TO THE ALP OF A TRANSACTION. AS SUCH, WE HOLD THAT THE CUP IS THE MOST APPROPRIATE METHOD FOR DETERMINING THE ALP OF THESE TRANSACTIONS UNDER THE PRESENT CIRCUMSTANCES AND TH E TPO WAS JUSTIFIED IN APPLYING THE CUP AS THE MOST APPROPRIATE METHOD. III. DETERMINATION OF ALP UNDER CUP METHOD 7.1. THE NEXT ISSUE FOR OUR CONSIDERATION IS THE DE TERMINATION OF ALP UNDER THE CUP METHOD. IT CAN BE SEEN THAT THE TPO HAS WORKED OUT PERCENTAGE OF 0.56% IN THE CASE OF TWO COMPARABLES, NAMELY, HAVELS INDIA LTD. AND AUTOMETERS ALLIANCE LTD. WITH THE NU MERATOR OF TOTAL OF ROYALTIES AND FEES FOR TECHNICAL SERVICES AND DENOM INATOR OF SALES. IT IS THIS 0.56% WHICH HAS BEEN CONSIDERED FOR MAKING TRA NSFER PRICING ADJUSTMENT OF RS.7.78 CRORE. IN ORDER TO EVALUATE THE STAND POINT OF THE ITA NO.6794/DEL/2015 19 TPO, IT IS RELEVANT TO CONSIDER THE MANDATE OF RULE 10B(1)(A) WHICH DEALS WITH THE DETERMINATION OF ALP UNDER THE CUP M ETHOD, AS UNDER :- (A) COMPARABLE UNCONTROLLED PRICE METHOD, BY WHICH , (I) THE PRICE CHARGED OR PAID FOR PROPERTY TRANSFER RED OR SERVICES PROVIDED IN A COMPARABLE UNCONTROLLED TRAN SACTION, OR A NUMBER OF SUCH TRANSACTIONS, IS IDENTIFIED ; (II) SUCH PRICE IS ADJUSTED TO ACCOUNT FOR DIFFEREN CES, IF ANY, BETWEEN THE INTERNATIONAL TRANSACTION AND THE COMPA RABLE UNCONTROLLED TRANSACTIONS OR BETWEEN THE ENTERPRISE S ENTERING INTO SUCH TRANSACTIONS, WHICH COULD MATERIALLY AFFECT TH E PRICE IN THE OPEN MARKET ; (III) THE ADJUSTED PRICE ARRIVED AT UNDER SUB-CLAUS E (II) IS TAKEN TO BE AN ARMS LENGTH PRICE IN RESPECT OF THE PROPERTY TRANSFERRED OR SERVICES PROVIDED IN THE INTERNATION AL TRANSACTION ; 7.2. A CAREFUL PERUSAL OF THE MECHANISM PROVIDED UN DER RULE 10B(1)(A) FOR DETERMINING THE ALP OF AN INTERNATIONAL TRANSAC TION DIVULGES THAT UNDER SUB-CLAUSE (I), THE PRICE CHARGED OR PAID FOR SERVICES PROVIDED IN A COMPARABLE UNCONTROLLED TRANSACTION IS IDENTIFIED. UNDER SUB-CLAUSE (II), THE PRICE SO DETERMINED UNDER SUB-CLAUSE (I) IS ADJUSTED TO ACCOUNT FOR DIFFERENCES, IF ANY, BETWEEN INTERNATIONAL TRANSACT ION AND THE COMPARABLE UNCONTROLLED TRANSACTIONS. UNDER SUB-CLAUSE (III), THE ADJUSTED PRICE ARRIVED UNDER SUB-CLAUSE (II) IS TAKEN AS ALP IN RE SPECT OF PROPERTY TRANSFERRED OR SERVICES PROVIDED IN THE INTERNATION AL TRANSACTION. THUS, IT ITA NO.6794/DEL/2015 20 IS EXPLICIT FROM THE MANDATE OF SUB-CLAUSE (I) OF R ULE 10B(1)(A) THAT IT IS THE PRICE CHARGED OR PAID FOR THE SERVICES PROVIDED IN A COM PARABLE UNCONTROLLED TRANSACTION, WHICH IS TAKEN INTO CONSI DERATION. IT IS THIS ADJUSTED PRICE PAID FOR AVAILING SERVICES WHICH CONSTITUTES THE BENCHMARK FOR COMPARISON WITH THE PRICE PAID FOR AVAILING OF ANY SERVICES IN AN INTERNATIONAL TRANSACTION. COROLLAR Y OF THE ABOVE IS THAT THE PRICE PAID FOR AVAILING OF SERVICES IN A COMPARABLE UNCONTROLL ED TRANSACTION IS COMPARED WITH THE PRICE PAID IN AN INTERNATIONAL TRANSACTION. THE EMPHASIS UNDER THE CUP METHOD IS ON THE COMPARISON OF PRICE PAID FOR AVAILING SERVICES. 7.3. WHEN WE ADVERT TO THE FACTS OF THE INSTANT C ASE, WE FIND THAT THE TPO HAS SIMPLY COMPUTED RATIO OF THE EXPENSES OF RO YALTY AND FEES FOR TECHNICAL SERVICES WITH SALES OF THE COMPARABLES AT 0.56% AND, THEN, PROCEEDED TO APPLY SUCH BENCHMARK FOR DETERMINING T HE ALP OF THESE TWO INTERNATIONAL TRANSACTIONS. IN THE ENTIRE EPIS ODE, THERE IS NO REFERENCE TO THE PRICE PAID BY THE COMPARABLES AS A YARDSTICK FOR COMPARING WITH THE PRICE PAID BY THE ASSESSEE. THE APPROACH ADOPTED BY ITA NO.6794/DEL/2015 21 THE AUTHORITIES IS OBVIOUSLY ERRONEOUS AS THEY HAVE SOUGHT TO COMPARE PERCENTAGE OF EXPENSES TO SALES RATHER THAN THE PRICE PAID UNDER A COMPARABLE UNCONTROLLED SITUATION. 7.4. THERE IS A FURTHER FALLACY IN THE CALCULATI ON MADE BY THE TPO INASMUCH AS HE COMPUTED THE RATIO OF EXPENSES OF RO YALTY AND TECHNICAL KNOW-HOW TO SALES AT 0.56% OF COMPARABLES AND APPLI ED SUCH PERCENTAGE ON THE FIGURE OF THE ASSESSEES SALES FOR RECOMMEND ING THE TRANSFER PRICING ADJUSTMENT. WE HAVE NOTICED ABOVE THAT THE ASSESSEE PAID ROYALTY/FEES FOR TECHNICAL SERVICES ONLY ON THE `VA LUE ADDITION MADE BY IT IN RESPECT OF SALES EFFECTED INASMUCH THE SAME H AS BEEN PAID ON 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, INCLUDING OCEAN FREIGHT, INSUR ANCE, CUSTOM DUTIES, ETC. IN SUCH CIRCUMSTANCES, EVEN THE COMPARISON OF THE RATIO OF THESE EXPENSES TO SALES OF COMPARABLES WITH THE RATIO OF THESE EXPENSES TO THE SALES OF THE ASSESSEE IS TOTALLY UNWARRANTED, BECA USE THESE EXPENSES HAVE BEEN PAID BY THE ASSESSEE AS A PERCENTAGE OF ` VALUE ADDITION MADE ITA NO.6794/DEL/2015 22 BY IT AND NOT ON THE SALE PRICE. THUS IT IS PATENT THAT THE TPO NOT ONLY APPLIED CUP METHOD IN A WRONG MANNER BUT ALSO WENT WRONG IN DETERMINING ALP IN SUCH WRONG APPLICATION. 7.5. IT IS STILL FURTHER OBSERVED THAT THE TPO HAS SELECTED TWO COMPANIES AS COMPARABLES, NAMELY, HAVELS INDIA LTD. AND AUTOM ETERS ALLIANCE LTD., OUT OF THE ASSESSEES LIST OF NINE COMPARABLE S GIVEN UNDER THE TNMM. THE ASSESSEES CONTENTION MADE BEFORE THE TP O AS WELL AS THE DRP THAT HAVELS INDIA LTD. PAID ROYALTY TO A RELATE D ENTITY AND AUTOMETERS ALLIANCE LTD. OWNS R&D DEPARTMENT AND IN CURRED HIGH R&D COST WHICH MIGHT NOT REQUIRE IT TO OBTAIN TECHN OLOGY FROM ANY OTHER AE, HAVE NOT BEEN DEALT WITH. THE LD. AR CON TENDED THAT THESE TWO COMPANIES WERE CHOSEN AS COMPARABLE OUT OF A WH OLE LOT OF NINE COMPANIES WHICH WAS, AGAIN, NOT PROPER. WE ARE IN AGREEMENT WITH SUCH A CONTENTION. NOT ONLY THE ASSESSEES OBJECTIONS SH OULD HAVE BEEN DEALT WITH BUT ALSO AN OPPORTUNITY SHOULD HAVE BEEN GIVEN FOR THE CONSIDERATION OR EXCLUSION OF OTHER COMPANIES. UNDE R SUCH CIRCUMSTANCES, ALBEIT, WE APPROVE THE APPLICATION O F THE CUP AS THE MOST ITA NO.6794/DEL/2015 23 APPROPRIATE METHOD IN THE GIVEN CIRCUMSTANCES FOR D ETERMINING THE ALP OF THE INTERNATIONAL TRANSACTION OF ROYALTY AND FEE S FOR TECHNICAL SERVICES, BUT, THE MANNER OF SELECTION OF COMPARABLES ALSO CA NNOT BE UPHELD. IV. WHETHER RATE OF ROYALTY/FTS APPROVED BY RBI IS ALWAYS AT ALP ? 8.1. THE LD. AR CONTENDED THAT THE ROYALTY AND FEES FOR TECHNICAL SERVICES WERE PAID BY THE ASSESSEE TO ITS AE AS PER THE RATES APPROVED BY THE RBI UNDER THE AUTOMATIC ROUTE AND THE SAME PER SE BE CONSIDERED AT ALP. SOUNDING A CONTRA NOTE, THE LD. DR PUT FORTH THAT SUCH RATES APPROVED BY THE GOVERNMENT OF INDIA/RESERVE BANK OF INDIA ARE MEANT FOR THE PURPOSE OF REGULATING THE FLOW OF FOREIGN E XCHANGE UNDER THE FEMA AND ARE, HENCE, NOT BINDING ON THE TPO FOR TH E COMPUTATION OF THE ALP. 8.2. HAVING REGARD TO THE RIVAL SUBMISSIONS MADE BE FORE US, WE FIND THAT THE HONBLE JURISDICTIONAL HIGH COURT IN CIT VS. NESTLE INDIA (2011) 337 ITR 103 (DEL) HAS ANSWERED THIS QUESTION BY CONSIDERING THE PROVISIONS OF SECTION 40A(2) ALONG WITH SECTION 92, ETC., OF THE ACT. IN ITA NO.6794/DEL/2015 24 THAT CASE, THE TRIBUNAL DELETED THE DISALLOWANCE U/ S 40A(2), BEING THE EXCESSIVE AND UNREASONABLE PAYMENT OF ROYALTY TO TH E ASSOCIATED CONCERN, BY HOLDING THAT SINCE THE PERMISSION WAS G IVEN BY THE RBI, ITS REASONABLENESS COULD NOT HAVE BEEN GONE INTO BY THE AO. SETTING ASIDE THE TRIBUNAL ORDER ON THIS SCORE, THE HONBLE DELHI HIGH COURT HELD THAT : THE TRIBUNAL IS NOT CORRECT IN OBSERVING THAT SI NCE THE PERMISSION IS GIVEN BY THE RBI, THE REASONABLENESS AND GENUINENES S OF THE EXPENDITURE COULD NOT HAVE BEEN GONE INTO BY THE AO. THE PURPOS E FOR WHICH SUCH PERMISSION IS GIVEN BY THE RBI IS TOTALLY DIFFERENT . THE RBI IS ONLY CONCERNED WITH THE FOREIGN EXCHANGE AND, THEREFORE, WOULD LOOK INTO THE MATTER FROM THAT POINT OF VIEW. THE RBI, AT THE TIM E OF GIVING SUCH PERMISSION WOULD NOT KEEP IN MIND THE PROVISIONS OF THE IT ACT AND THAT IS THE FUNCTION OF THE IT AUTHORITIES AND, THEREFOR E, THEY CAN VALIDLY GO INTO SUCH AN ISSUE. IT IS EXPLICITLY CLEAR FROM TH E ENUNCIATION OF LAW BY THE HONBLE DELHI HIGH COURT THAT THE GRANT OF PERM ISSION BY THE RBI TO PAYMENT OF ROYALTY IS NOT SACROSANCT FOR THE PURPOS ES OF THE ACT AND, CAN BE EXAMINED BY THE AO TO ASCERTAIN ITS EXCESSIVENES S. WE WANT TO MAKE IT CLEAR THAT THIS JUDGMENT IN THE CASE OF NESTLE INDIA (SUPRA) WAS ITA NO.6794/DEL/2015 25 RENDERED FOR THE ASSESSMENT YEARS 1997-98 AND 1998- 99. CHAPTER-X OF THE ACT CONTAINING THE TRANSFER PRICING PROVISIONS CAME INTO FORCE ONLY W.E.F. ASSESSMENT YEAR 2002-03. HOWEVER, THE FACT R EMAINS THAT THE QUESTION BEFORE THE HONBLE HIGH COURT WAS TO CONSI DER THE REASONABLENESS OF THE ROYALTY AMOUNT PAID BY THAT A SSESSEE TO ITS ASSOCIATED CONCERN UNDER THE PROVISIONS OF SECTION 40A(2). THE NITTY- GRITTY OF SECTION 40A(2) IS TO DISALLOW ANY EXCESSI VE AND UNREASONABLE PAYMENT MADE TO THE CLOSELY RELATED PERSONS AS REFE RRED TO IN CLAUSE (B) OF SECTION 40A(2). SIMILARLY, THE PURPOSE OF CHAPTE R-X OF THE ACT IS ALSO TO ENSURE THAT INCOME FROM INTERNATIONAL TRANSACTIO NS IS COMPUTED HAVING REGARD TO THE ARMS LENGTH PRICE. IN THIS WAY, ANY EXCESS PAYMENT MADE TO ASSOCIATED ENTERPRISES IN AN INTERNATIONAL TRANS ACTION IS RECOMPUTED TO BRING IT IN LINE WITH WHAT AN INDEPENDENT PARTY WOU LD CHARGE FROM ANOTHER UNRELATED PARTY. THE ESSENCE OF BOTH THE PR OVISIONS IS SAME IN SO FAR AS THE PAYMENT OF EXPENSES TO RELATED PARTIES I S CONCERNED. 8.3. IT IS SIGNIFICANT TO NOTE THAT THE RBI PROVIDE S FOR MAXIMUM PERMISSIBLE RATE OF ROYALTY ETC. WHICH CAN BE PAID. SUCH RATE OF ROYALTY ITA NO.6794/DEL/2015 26 ETC. AS PERMITTED IS APPLICABLE TO ALL THE MANUFACT URING ACTIVITIES ACROSS THE BOARD WITH A FEW EXCEPTIONS. THE TECHNICAL KNOW -HOW REQUIRED FOR MANUFACTURING ELECTRONIC GOODS IS QUITE DIFFERENT F ROM THE TECHNICAL KNOW-HOW REQUIRED FOR MANUFACTURING AUTOMOBILES OR HEAVY INDUSTRIAL EQUIPMENTS. THAT IS THE REASON FOR WHICH THE RBI PR OVIDES FOR A UNIVERSAL UPPER RATE OF ROYALTY ETC. SO THAT THE PA RTIES MAY NEGOTIATE THE ACTUAL RATE DEPENDING UPON COMPLEXITY OF THE TECHNI CAL KNOW-HOW REQUIRED FOR THE CONCERNED PRODUCT. WITH THE GIVEN MAXIMUM COMMON RATE OF 5%, THE ACTUAL RATE MAY BE ANYTHING 5% OR 4 % OR 3% OR 2% OR 1% ETC., DEPENDING UPON THE INTRICACY OF THE KNOW-H OW REQUIRED FOR THE CONCERNED PRODUCT ALONG WITH OTHER RELEVANT FACTORS . SUCH A RATE FLUCTUATING FROM 0% TO 5% CAN NEVER CONSTITUTE A BE NCHMARK FOR ALL THE BUSINESSES FOR WHICH TECHNICAL KNOW-HOW MAY BE REQU IRED. WHAT WE NEED TO DO IN A TRANSFER PRICING ANALYSIS IS TO FIN D OUT A COMPARABLE CASE ENGAGED IN THE SAME LINE OF BUSINESS. THE RATE OF R OYALTY FOR USE OF TECHNICAL KNOW-HOW OF INDUSTRIAL EQUIPMENTS CANNOT BE CONSIDERED AS COMPARABLE WITH THAT OF ELECTRONIC GOODS. EVEN WITH IN THE OVERALL ELECTRONIC GOODS SEGMENT, THERE CAN BE DIFFERENT PR ODUCTS OR COMPONENTS ITA NO.6794/DEL/2015 27 AND THE TECHNICAL KNOW-HOW REQUIRED FOR COMPONENTS CANNOT BE COMPARED WITH THE ELECTRONIC GOODS ON THE WHOLE. IN OUR CONSIDERED OPINION, AT BEST, THE RATE OF ROYALTY APPROVED BY T HE RBI HAS A PERSUASIVE VALUE IN THE PROCESS OF DETERMINATION OF ALP OF ROY ALTY FOR A PARTICULAR CASE AND CANNOT BE CONSIDERED AS CONCLUSIVE. SIMIL AR VIEW HAS BEEN TAKEN BY THE DELHI BENCH OF THE TRIBUNAL IN LG ELECTRONICS INDIA PVT. LTD. VS. ACIT (2015) 167 TTJ 417 (DEL) . WE, THEREFORE, REFUSE TO ACCEPT THE PAYMENT OF ROYALTY AND FEES FOR TECHNICAL SERVI CES AT ALP SIMPLY ON THE GROUND THAT IT WAS PAID AT THE MAXIMUM RATE STI PULATED BY THE RESERVE BANK OF INDIA. V. WHETHER THE TP PROVISIONS APPLY WHEN DEDUCTION I S AVAILABLE UNDER THE ACT ? 9.1. THE LD. AR ARGUED THAT ITS PROFIT IS DEDUC TIBLE U/S 80IC OF THE ACT. HE VEHEMENTLY SUBMITTED THAT ONCE THE PROFIT FROM R ENDERING OF SOFTWARE DEVELOPMENT SERVICES IS DEDUCTIBLE, THEN, NO MOTIVE CAN BE ATTRIBUTED FOR ARTIFICIALLY REDUCING THE PROFIT BY MANIPULATING TH E PRICE WITH ITS AE. IT WAS ELABORATED THAT THE PROFIT OF AN ASSESSEE, ELIG IBLE FOR DEDUCTION UNDER ITA NO.6794/DEL/2015 28 SECTION 80IC, BECOMES TAX NEUTRAL IRRESPECTIVE OF I TS QUANTUM. HE, THEREFORE, URGED THAT EITHER THE INTERNATIONAL TRAN SACTION SHOULD NOT BE PROCESSED IN TERMS OF CHAPTER-X OF THE ACT OR HIGHE R AMOUNT OF DEDUCTION SHOULD BE ALLOWED CORRESPONDING TO THE AM OUNT OF ADDITION ON ACCOUNT OF TRANSFER PRICING ADJUSTMENT. THIS WAS F ORCEFULLY CONTESTED BY THE LD. DR. 9.2. HAVING HEARD THE RIVAL SUBMISSIONS AND PERUS ED THE RELEVANT MATERIAL, WE FIND OURSELVES UNABLE TO ACCEPT BOTH T HE SUBMISSIONS ADVANCED BY THE LD. AR ON THIS ASPECT OF THE MATTER . IN SO FAR AS THE FIRST SUBMISSION FOR NOT CARRYING OUT ANY TRANSFER PRICIN G ADJUSTMENT IN VIEW OF THE BENEFIT ENJOYED BY IT U/S 80IC OF THE ACT IS CONCERNED, WE FIND THAT NO EXCEPTION HAS BEEN CARVED OUT BY THE STATUT E FOR NON- DETERMINATION OF THE ALP OF AN INTERNATIONAL TRANSA CTION OF AN ASSESSEE WHO IS ELIGIBLE FOR THE BENEFIT OF DEDUCTION SECTIO N 10A/10B OR ANY OTHER SECTION OF CHAPTER-VIA OF THE ACT. SECTION 92(1) C LEARLY PROVIDES THAT ANY INCOME ARISING FROM AN INTERNATIONAL TRANSACTIO N IS REQUIRED TO BE COMPUTED HAVING REGARD TO ITS ARMS LENGTH PRICE. THERE IS NO PROVISION ITA NO.6794/DEL/2015 29 EXEMPTING THE COMPUTATION OF TOTAL INCOME ARISING F ROM AN INTERNATIONAL TRANSACTION HAVING REGARD TO ITS ALP, IN THE CASE O F AN ASSESSEE ENTITLED TO DEDUCTION U/S 80IC OR ANY OTHER SUCH RELEVANT PR OVISION. SECTION 92C DEALING WITH COMPUTATION OF ALP CLEARLY PROVIDES TH AT THE ALP IN RELATION TO AN INTERNATIONAL TRANSACTION SHALL BE D ETERMINED BY ONE OF THE METHODS GIVEN IN THIS PROVISION. THIS SECTION ALSO DOES NOT IMMUNE AN INTERNATIONAL TRANSACTION FROM THE COMPUTATION OF I TS ALP WHEN INCOME IS OTHERWISE ELIGIBLE FOR DEDUCTION. ON THE CONTRA RY, WE FIND THAT SUB- SECTION (4) OF SECTION 92C PLAINLY STIPULATES THAT WHERE AN ALP IS DETERMINED, THE AO MAY COMPUTE THE TOTAL INCOME OF THE ASSESSEE HAVING REGARD TO THE ALP SO DETERMINED. THIS SHOWS THAT THE TOTAL INCOME OF AN ASSESSEE ENTERING INTO AN INTERNATIONA L TRANSACTION, IS REQUIRED TO BE NECESSARILY COMPUTED HAVING REGARD T O ITS ALP WITHOUT ANY EXCEPTION. THUS, THE LD. ARS ARGUMENT THAT S INCE ITS INCOME IS SUBJECT TO DEDUCTION U/S 80IC, THE PROVISIONS OF TH E CHAPTER-X OF THE ACT SHOULD NOT BE APPLIED, IN OUR CONSIDERED OPINION, H AS NO FORCE IN VIEW OF THE CLEAR STATUTORY MANDATE CONTAINED IN PROVISO TO SECTION 92C(4), WHICH READS AS UNDER:- ITA NO.6794/DEL/2015 30 ` PROVIDED THAT NO DEDUCTION UNDER SECTION 10A OR SEC TION 10AA OR SECTION 10B OR UNDER CHAPTER VI-A SHALL BE ALLOWED IN RESPECT OF THE AMOUNT OF INCOME BY WHICH THE TOTAL INCOME OF T HE ASSESSEE IS ENHANCED AFTER COMPUTATION OF INCOME UNDER THIS SUB -SECTION: . 9.3. A CIRCUMSPECT PERUSAL OF THIS PROVISO READ A LONG WITH SUB-SECTION (4) OF SECTION 92C DIVULGES THAT WHEN THE TOTAL INC OME OF AN ASSESSEE FROM AN INTERNATIONAL TRANSACTION IS COMPUTED HAVIN G REGARD TO ITS ALP, THEN, NO DEDUCTION U/S 10A OR ANY OTHER SECTION INC LUDING THOSE COVERED UNDER CHAPTER VIA OF THE ACT SHALL BE ALLOWED IN RE SPECT OF THE AMOUNT OF INCOME BY WHICH THE TOTAL INCOME OF THE ASSESSEE HAS BEEN ENHANCED AFTER COMPUTATION OF INCOME DETERMINED ON THE BASIS OF THE ALP OF AN INTERNATIONAL TRANSACTION. THE LEGISLATURE HAS UNC ONDITIONALLY PROVIDED FOR NOT ALLOWING THE BENEFIT OF DEDUCTION UNDER ANY SECTION IN RESPECT OF THE ADDITION MADE ON ACCOUNT OF TRANSFER PRICING AD JUSTMENT. NOT ALLOWING OF ANY BENEFIT U/S 80IC IN RESPECT OF AN A DDITION ON ACCOUNT OF TRANSFER PRICING ADJUSTMENT PRE-SUPPOSES THE EXISTE NCE OF TRANSFER PRICING ADDITION IN THE FIRST INSTANCE TO AN ASSESSEE WHO I S OTHERWISE ELIGIBLE TO THE BENEFIT OF DEDUCTION UNDER THIS SECTION. IF ONE WAS TO PRESUME THAT NO ADDITION TOWARDS TRANSFER PRICING ADJUSTMENT IS COM PREHENSIBLE IN THE ITA NO.6794/DEL/2015 31 CASE OF AN ASSESSEE ENJOYING THE BENEFIT OF DEDUCTI ON U/S 80IC, THEN THERE WAS NO NEED TO ENSHRINE AN EXPRESS PROVISION FORBID DING THE GRANT OF DEDUCTION UNDER THIS SECTION IN RESPECT OF ENHANCEM ENT OF INCOME DUE TO TRANSFER PRICING ADJUSTMENT. ONCE THE LEGISLATURE H AS ENGRAFTED AN UNAMBIGUOUS PROVISION EXPLICITLY SPELLING OUT THE N ON-GRANTING OF DEDUCTION U/S 80IC ON THE ENHANCED INCOME DUE TO TR ANSFER PRICING ADDITION, WE ARE AFRAID TO ACCEPT THE ASSESSEES CO NTENTION, WHICH RUNS DIAGONALLY OPPOSITE TO THE UNEQUIVOCAL LANGUAGE OF PROVISO TO SECTION 92C(4). THIS CONTENTION, IF TAKEN TO A LOGICAL CON CLUSION, WOULD AMOUNT TO OBLITERATING THE PROVISIO ITSELF, WHICH IS PATEN TLY INCORRECT. 9.4. OUR VIEW IS FORTIFIED BY THE SPECIAL BENCH ORDER IN THE CASE OF AZTECH SOFTWARE AND TECHNOLOGY SERVICES LTD. VS. AC IT (2007) 107 ITD 141 (SB) (BANGALORE) IN WHICH SIMILAR ISSUE HAS BEEN DECIDED BY THE SPECIAL BENCH BY HOLDING THAT AVAILABILITY OF EXEMP TION U/S 10A TO THE ASSESSEE IS NO BAR TO APPLICABILITY OF SECTIONS 92C AND 92CA. SIMILAR VIEW HAS BEEN TAKEN BY PUNE BENCH OF THE TRIBUNAL I N THE CASE OF ACIT VS. MSS INDIA (P) LTD. (2009) 123 TTJ 657 (PUNE) AND SEVERAL OTHER ITA NO.6794/DEL/2015 32 ORDERS. THE RELIANCE OF THE LD. AR ON THE ORDER OF THE MUMBAI BENCH OF THE TRIBUNAL IN THE CASE OF DCIT VS. TATA CONSULTANTS SERVICES LTD. (ITA NO. 7513/M/2010) DATED 4.11.2015, IN OUR CONSIDERED OPINION IS MISCONCEIVED, BECAUSE, IN THAT CASE, THE TRIBUNAL P RIMARILY FOUND THAT THE AO ERRED IN NOT HIMSELF EXAMINING THE ISSUE OF TP AND FAILED TO APPLY HIS MIND TO THE TP REPORT FILED BY THE ASSESS EE. THE LAST SENTENCE IN PARA 54 OF THE ORDER UPHOLDING THE ASSESSEES C ONTENTION THAT NO TP ADJUSTMENT CAN BE MADE WHERE THE ASSESSEE ENJOYS BE NEFIT OF DEDUCTION U/S 10A OR 80HHE, ETC., IS ONLY OBITER DICTA INASMUCH AS THE ADDITION WAS FOUND TO BE NOT SUSTAINABLE ON THE OTHER MAIN G ROUNDS AS DISCUSSED IN THE BODY OF THE ORDER. ON THE CONTRARY, WE FIND THAT THE DECISION OF THE SPECIAL BENCH IN AZTECH SOFTWARE (SUPRA) PERMITTING THE APPLICABILITY OF SECTIONS 92C AND 92CA TO AN ASSESSEE AVAILING TH E BENEFIT OF SECTION 80IC ETC. OF THE ACT IS ITS RATIO DECIDENDI. THE LD. AR HAS NOT POINTED OUT ANY JUDGMENT OF SOME HONBLE HIGH COURT DECIDIN G THIS POINT EITHER WAY. IN VIEW OF THE FACT THAT THERE IS ALREADY A S PECIAL BENCH DECISION IN THE CASE OF AZTECH SOFTWARE (SUPRA) WHICH SUPPORTS THE MAKING OF TRANSFER PRICING ADJUSTMENT NOTWITHSTANDING THE AVA ILABILITY OF DEDUCTION ITA NO.6794/DEL/2015 33 UNDER SUCH SECTIONS TO THE ASSESSEE, APART FROM CLE AR STATUTORY MANDATE CONTAINED IN PROVISO TO SECTION 92C(4), WE ARE MORE INCLINED TO GO WITH THE VIEW OF THE SPECIAL BENCH. 9.5. IT IS, THEREFORE, HELD THAT THE ELIGIBILIT Y OF THE ASSESSEE TO DEDUCTION U/S 80IC OF THE ACT DOES NOT OPERATE AS A BAR ON DETERMINING THE ALP OF INTERNATIONAL TRANSACTION UNDERTAKEN BY IT AND FURTHER THE ENHANCEMENT OF INCOME DUE TO SUCH TRANSFER PRICING ADDITION CANNOT BE CONSIDERED FOR ALLOWING THE BENEFIT OF DEDUCTION UN DER THIS SECTION. SIMILAR VIEW HAS BEEN TAKEN BY THE DELHI BENCH OF T HE TRIBUNAL IN HEADSTRONG SERVICES INDIA PVT. LTD. VS. DCIT (IN ITA NO. 6200/DEL/2012) VIDE ITS ORDER DATED 11.2.2016. THIS CONTENTION IS, THEREFORE, JETTISONED. VI. RULE OF CONSISTENCY 10.1. THE LD. AR LASTLY SUBMITTED THAT THE TPO WAS NOT JUSTIFIED IN DIFFERING WITH THE DETERMINATION OF ALP AS DONE BY THE ASSESSEE FOR THE REASON THAT SIMILAR ADJUSTMENT MADE BY HIM FOR THE IMMEDIATELY PRECEDING ASSESSMENT YEAR, NAMELY, 2010-11, CAME TO BE DELETED BY THE ITA NO.6794/DEL/2015 34 DRP AND NO FURTHER APPEAL WAS FILED BY THE REVENUE. RELYING ON THE PRINCIPLE OF CONSISTENCY, IT WAS CONTENDED THAT SIM ILAR VIEW OUGHT TO HAVE BEEN TAKEN FOR THE YEAR UNDER CONSIDERATION AS WELL. 10.2. WE DO NOT FIND ANY SUBSTANCE IN THE CONT ENTION MADE ON BEHALF OF THE ASSESSEE. DESPITE THE FACT THAT THERE IS NO RES JUDICATA IN INCOME TAX PROCEEDINGS, IT CAN BE SEEN THAT THE TPO FOR TH E ASSESSMENT YEAR 2010-11 DID NOT SEGREGATE PAYMENT OF ROYALTY AND FE ES FOR TECHNICAL SERVICES FROM THE OVERALL INTERNATIONAL TRANSACTION S UNDER THE TNMM. TRANSFER PRICING ADJUSTMENT WAS MADE BY TAKING ALL THE INTERNATIONAL TRANSACTIONS ON A COMBINED BASIS UNDER THE TNMM, W HICH ISSUE STOOD DECIDED IN FAVOUR OF THE ASSESSEE BY THE DRP. AU CONTRAIRE, WE FIND THAT FOR THE YEAR UNDER CONSIDERATION, THE TPO HAS SEPAR ATED THE INTERNATIONAL TRANSACTIONS OF PAYMENT OF ROYALTY AND FEES FOR TEC HNICAL SERVICES FROM OTHER INTERNATIONAL TRANSACTIONS BY TREATING THE RE MAINING AT ALP UNDER THE TNMM. THERE IS A SEA CHANGE IN THE APPROACH AD OPTED BY THE AUTHORITIES IN THE PRECEDING YEAR VIS--VIS THE CURRENT YEAR. THE FACT THAT THE TPO PROCEEDED ON A WRONG PREMISE IN THE PRECEDI NG YEAR WITHOUT ITA NO.6794/DEL/2015 35 CONSIDERING THE INTERNATIONAL TRANSACTIONS OF ROYAL TY AND FEES FOR TECHNICAL SERVICES AS SEPARATE FROM THE OTHERS, CAN NOT GIVE A LICENCE TO THE ASSESSEE TO CLAIM THAT THE SAME WRONG APPROACH BE REPEATED IN THE SUBSEQUENT YEARS AS WELL. IN AN EARLIER PART OF T HIS ORDER, WE HAVE APPROVED THE ACTION OF THE TPO IN SEGREGATING THESE TWO INTERNATIONAL TRANSACTIONS FROM THE REMAINING TRANSACTIONS AND DE TERMINING THEIR ALP SEPARATELY. UNDER SUCH CIRCUMSTANCES, THE ASSESSEE CANNOT SEEK DELETION OF ADDITION ON THE PRINCIPLE OF CONSISTENCY BECAUSE OF A COMPLETELY CHANGED SCENARIO IN THE INSTANT YEAR. SUCH A RULE OF CONSISTENCY, IF AT ALL, COULD HAVE BEEN PLEADED IF THE TPO IN THE PRECEDING YEAR HAD ALSO SEGREGATED SUCH TWO TRANSACTIONS AND BENCHMARKED TH EM SAME SEPARATELY UNDER THE CUP METHOD, WHICH THE DRP WOUL D HAVE OVERTURNED. SINCE NO SUCH EXERCISE WAS DONE BY THE TPO IN THE PRECEDING YEAR WHEN THE PROCEEDINGS WENT ON AN ALTO GETHER DIFFERENT LINE, WE CANNOT APPROVE THE ARGUMENT OF THE LD. AR FOR ACCEPTING THESE TWO INTERNATIONAL TRANSACTIONS AT ALP. ITA NO.6794/DEL/2015 36 11. IN VIEW OF THE FOREGOING DISCUSSION, WE SET A SIDE THE IMPUGNED ORDER AND REMIT THE MATTER TO THE FILE OF AO/TPO FO R A FRESH DETERMINATION OF THE ALP OF THE INTERNATIONAL TRANS ACTION OF PAYMENT OF ROYALTY AND FEES FOR TECHNICAL SERVICES IN CONSONAN CE WITH OUR DECISION ON VARIOUS ASPECTS GIVEN ABOVE. NEEDLESS TO SAY, T HE ASSESSEE WILL BE ALLOWED A REASONABLE OPPORTUNITY OF HEARING IN SUCH FRESH PROCEEDINGS. 12. THE LAST EFFECTIVE GROUND IS AGAINST NOT GRANTI NG CREDIT FOR TAX AMOUNTING TO RS.38,93,400/-. WE DIRECT THE AO TO V ERIFY THIS CONTENTION AND ALLOW THE CREDIT FOR THE ABOVE AMOUNT OR ITS PA RT, IF THE SAME WAS PAID BY THE ASSESSEE, BUT, NOT ADJUSTED. 13. IN THE RESULT, THE APPEAL IS ALLOWED FOR STATIS TICAL PURPOSES. THE ORDER PRONOUNCED IN THE OPEN COURT ON 29.04.201 5. SD/- SD/- [KULDIP SINGH] [R.S. SYAL] JUDICIAL MEMBER ACCOUNTANT MEMBER DATED, 29 TH APRIL, 2015. DK ITA NO.6794/DEL/2015 37 COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT (A) 5. DR, ITAT AR, ITAT, NEW DELHI.