MIKUNI INDIA PRIVATE LIMITED,NEEMRANA, BEHROR V. DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE-1, ALWAR

ITTPA 1/JPR/2021

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Mikuni India Pvt. Ltd., engaged in manufacturing automobile components, appealed against the assessment order for the year 2016-17, which included significant additions to its income based on transfer pricing adjustments and interest income. The primary contention was regarding the method used for transfer pricing adjustments. The assessee preferred CPM, while the TPO adopted TNMM. The Tribunal examined the appropriateness of both methods in the context of the transactions involved, including purchases of raw materials and payment of royalties. The Tribunal found TNMM to be more suitable due to the nature of the transactions and the availability of reliable data, leading to the dismissal of the appeal.

• Counselvise Citation: [2025] 140 COUNSELVISE.COM (IT) 472804 (ITAT-JAIPUR)
• Appeal Type: Income Tax (Transfer Pricing) Appeal
• Pronouncement Date: 23-01-2025
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: B
• Assessment Year: 2016-2017
• Other Referred Cases: DIT (Int. Taxation) vs. Morgan Stanley, Sony Ericsson's Mobile Commission India (P) Ltd. vs. CIT, L.G. Electronics India (P) Ltd. vs. CIT, Magneti Marelli Power Train India vs. DCIT
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: ALKA GAUTAM
• Assessee Lawyers: NAGESHWAR RAO
• Keywords: Set aside; Additional evidence; Transfer pricing; International transaction; Depreciation; Fair market value; Rule of consistency; Arm length price
• Section: 144; 142(1); 143(2); 92CA; 144C; 115JB; 92B; 10B; 92C; 92E; 92F; 92A; 20

Judgement Text

" vk;dj vihyh; vf/kdj.k] t;iqj U;k;ihB] t;iqj IN THE INCOME TAX APPELLATE TRIBUNAL, JAIPUR BENCHES, “B-Bench” JAIPUR Jh xxu xks;y] ys[kk lnL; ,o aJh ujsUn zdqekj] U;kf;d lnL; ds le{k BEFORE: SHRI GAGAN GOYAL, AM& SHRI NARINDER KUMAR, JM IT (TP) A No. 1/JPR/2021 fu/kZkj.k o\"kZ@Assessment Year : 2016-17 Mikuni India Private Limited, SP2-19(A), 20 & 21(A) New Industrial Complex, (Majarakath, Meenrana, Behror, Neemrana, Alwar-301705. v. The DCIT, Circle-1, Alwar. LFkk;h ys[kk la-@thvkbZvkj la-@PAN/GIR No.: AAFCM7409R vihykFkhZ@Appellant izR;FkhZ@Respondent fu/kZkfjrh dh vksjls@Assessee by : Shri Nageshwar Rao, Adv., Shri Abhisekha Agarwal, C.A, Shri Varun Singh, C.A. (V.C.) jktLo dh vksjls@Revenue by: Ms. Alka Gautam, CIT lquokbZ dh rkjh[k@Date of Hearing :26/12/2024 mn?kks\"k.kk dh rkjh[k@Date of Pronouncement: 23/01/2025 vkns'k@ORDER PER: NARINDER KUMAR, JUDICIAL MEMBER . By way of present appeal, assessee-appellant, a private Limited Company, has challenged order dated 09.02.2021, passed by the Assessing Officer, National e-Assessment Centre, Delhi. 2. The matter pertains to the assessment year 2016-17. 2 IT (TP) A No. 1/JPR/2021 Mikuni India Pvt. Ltd. vs. DCIT 3. Dispute between the parties revolves around an addition of Rs. 6,93,04,550/- on account of transfer pricing adjustment, and another addition of Rs. 4,18,312/-,on account of interest income. 4. Vide impugned assessment order, total income of the assessee company has been assessed at Rs. 8, 43,760/-. Assessing Officer has assessed the total income of the assessee as under:- Returned income Nil Losses of current year to be c/f (-) 2,83,42,156/- Add Additions/disallowance as discussed supra Addition on a/c of TPO adjustment after giving effect to DRP’s directions 6,39,04,550/- Addition on a/c of interest income 4,18,312/- Total addition 6,43,22,862/- Gross total income 3,59,80,706/- Brought forwarded losses of earlier years set off 3,51,36,946/- Total income assessed 8,43,760/- Details of brought forwarded losses including absorbed depreciation: A.Y. Losses for the year claimed by the assessee (Rs.) Amount of loss which is allowed to be c/f after scrutiny assessment (Rs.) Amount of loss adjusted with effect of this order Amount of loss which is allowed to be c/f after scrutiny assessment A B C 2010-11 8,58,56,154/- 4,04,82,096/-* 3,51,36,946/- 53,45,150/- 3 IT (TP) A No. 1/JPR/2021 Mikuni India Pvt. Ltd. vs. DCIT 2015-16 5,54,03,450/- 5,54,03,450/- Nil 5,54,03,450/- *This C/F loss is determined while passing order for A.Y. 2010-11 on 21.01.2019” First the Facts 5. The assessee company is engaged in business of manufacturing of Automobile components - carburetors of motorcycles & two wheelers; throttle body for four wheelers and plastic intake manifold for four wheelers. 6. The assessee company was established in India, in September, 2008 with the objective of manufacturing above said automobile components, and it started supply of said components to Indian consumers. The assessee company used to get plastic Intake manifold manufactured from Machino Plastics Ltd. an Indian company. The assessee company has its own manufacturing factory in Neemrana. Manufacturing operations commenced in November, 2009. 7. Briefly put, on 29.11.2016, the assessee company filed return of income declaring its income as “Nil”, but carried forward loss of current year to the tune of Rs. 2,83,42,156/- for MAT. The assessee is stated to have declared book profit u/s. 115JB of the Income Tax Act, 1961 (hereinafter referred to as “the Act”). 4 IT (TP) A No. 1/JPR/2021 Mikuni India Pvt. Ltd. vs. DCIT 8. Case of the assessee company was selected for scrutiny under CASS. On 10.07.2017, notice u/s 143(2) of the Act was served upon the assessee. Then, notice u/s 142(1) of the Act accompanied by a detailed questionnaire was issued on 29.08.2019. In response to said notice, the assessee furnished reply. Another notice u/s. 142(1) of the Act was issued to the assessee company on 16.12.2019. The assessee company furnished reply to the said notice too. 9. On consideration of the reply furnished by the assessee and the material available on record, issues emerged as regards the certain International Transactions. 10. During the previous year relevant to assessment year 2016-17 the assessee is stated to have entered into 'international transactions' and ‘specified domestic transaction' within the meaning of section 92B and 92BA of the Act with its 'Associate Enterprise' (in short “AE”), defined in section 92A of the IT Act, 1961. The assessee furnished the audit report in form No. 3CEB as required u/s. 92E of the Act. To ensure that following 'international transactions and specified domestic transaction' were at 'Arm's Length Price', the case was referred to Transfer Pricing Officer u/s. 92CA of the Act, after obtaining necessary approval of the Pr. Commissioner of Income Tax, Alwar: 5 IT (TP) A No. 1/JPR/2021 Mikuni India Pvt. Ltd. vs. DCIT S. No. Name of AEs Description of International Transaction Amount (Rs.) 1. Mikuni Corporation Purchase of Raw material, components and share parts 74,21,23,717/- 2. Mikuni Corporation Exports Sales 22,50,77,289/- 3. Mikuni Corporation Purchase of fixed assets 5,12,79,433/- 4. Mikuni Corporation License fee for use of know-how 2,25,65,500/- 5. Mikuni Corporation, Japan Payment of supervision fee 97,28,046/- 6. Mikuni Corporation, Japan Payment of royalty 6,08,80,707/- 7. Mikuni Corporation, Japan Reimbursement of expenses 4,70,51,927/- 8. Mikuni Corporation, Japan Interest on external commercial borrowings 29,64,911/- 9. Mikuni Corporation, Japan Fee for provision of guarantee 7,65,422/- 10. Mikuni Indonesia Recovery of expenses 24,97,312/- On receipt of reference, the Transfer Pricing Officer passed order dated 31.10.2019 u/s. 92CA (3) of the 1.T.Act, 1961 after analyzing the facts of the case in detail. The Transfer Pricing officer is stated to have discussed every issue in detail after giving adequate opportunities of being heard to the assessee company. Order was passed by the Dy. Commissioner of Income Tax, Transfer Pricing Officer-2(3) (2), New Delhi. International Transaction of purchase of raw material, components and spare parts:- 11. After notice u/s. 92CA of the Act was issued to the assessee, in the transfer pricing proceedings the assessee company was represented, by its authorized representative. Show-cause notice dated 09.10.2019 was issued to the assessee. The assessee put forth its submissions vide its reply dated 20.10.2019 to the said notice, which revealed that the assessee 6 IT (TP) A No. 1/JPR/2021 Mikuni India Pvt. Ltd. vs. DCIT had taken CPM as the as the Most Appropriate Method (MAM). However, vide order dated 31.10.2019, Ld. Transfer Pricing Officer (TPO) was of the view that CPM could not be considered as the MAM, and that rather TNMM was the most appropriate method (MAM) for benchmarking the transactions relating to purchase of raw material. 12. Learned TPO recorded observations in the order dated 31.10.2019 for arriving at the conclusion that TNMM was the Most Appropriate Method to benchmark said transactions. Ultimately, as regards the above said international transactions of purchase of raw material, Ld. TPO considered following final set of comparables to benchmark the said transactions:- 7 IT (TP) A No. 1/JPR/2021 Mikuni India Pvt. Ltd. vs. DCIT 8 IT (TP) A No. 1/JPR/2021 Mikuni India Pvt. Ltd. vs. DCIT * On the basis of arm’s length median margin 7.21%, Ld. TPO proceeded to recalculate the Arm’s length price of the said transactions. 9 IT (TP) A No. 1/JPR/2021 Mikuni India Pvt. Ltd. vs. DCIT Calculation of adjustment as regards said international transactions, as available in TPO order dated 31.10.2019, reads as under:- Particulars Amount Operating Revenue(A) 229,58,89,647/- OP/Sales of comparables (B) 7.21% Arm's Length Margin C=A*B% 16,55,33,644/- Arm's Length Cost D=(A-C) 213,03,56,003/- Cost shown by the assessee(E) 225,06,98,359/- Difference F=(E-D) 12,03,42,356/- International transaction related to Purchase of Goods 74,21,23,717/- % of Cost of International transaction 32.97% Proportionate adjustment of difference 3,96,80,536/- Accordingly, TPO proposed an adjustment of Rs. 3, 96, 80,536/-. International transactions-Payment of Royalty:- As regards said international transactions i.e. payment of royalty, TPO issued show-cause notice dated 09.10.2019. The assessee company 10 IT (TP) A No. 1/JPR/2021 Mikuni India Pvt. Ltd. vs. DCIT furnished its reply. After considering the reply and the material available on record, TPO made following adjustment:- “5.6 Calculation of Arm’s length price: In view of the above discussion, following four comparable agreements are comparable to the assessee. S. No. Licensor Licensee Royalty rate 1 Environmental Recycling Technologies Plc LBO Capital Inc 3.00% 2 Axion Power International, Inc. LCB International, Inc. 2.00% 3 Newgen Technologies Inc. Newgen Fuel Technologies Ltd. 0.12% 4 Litelfuse, Inc. Pacific Engineering co., Ltd. 2.50% Average 1.905% Based on above, the arm’s length price of the international transaction related to payment of royalty is computed as below using CUP method:- Particulars Amount in INR Total royalty paid by the assessee @ 5% 6,08,80,707/- Arm’s length royalty @ 1.90 2,31,34,669/- Excess royalty paid to AE 3,77,46,038/- 6. Total Adjustment: The cumulative adjustments made in this case are tabulated below S. No. Nature of international transaction Adjustment u/s. 92CA 1. Purchase of raw materials 3,96,80,536/- 2. Payment of Royalty 3,77,46,038/- Total Adjustment u/s 92CA 7,74,26,574/- Conclusion:- Ultimately, vide order dated 31.10.2019 Ld. TPO proposed an amount of Rs. 7,74,26,574/- as an adjustment u/s. 92CA of the Act and 11 IT (TP) A No. 1/JPR/2021 Mikuni India Pvt. Ltd. vs. DCIT directed the Assessing Officer to enhance the income of the assessee by the said amount. Draft Assessment Order:- The matter then came up before the Assessing Officer. Addition is made Vide order dated 20.12.2019, the Assessing Officer, ACIT, Circile-2, Alwar, added the above said amount of Rs. 7,74,26,574/-, by way of an addition to the income of the assessee company. Another Addition is made At the same time, the Assessing Officer, vide same draft assessment order, made addition of Rs. 4,18,312/-, on account of income by way of interest, taking into consideration that the assessee company had revised interest income of Rs. 8,43,755/- from various entities whereas the assessee while in the ITR, the assessee has declared said income of Rs. 4,25,443/-. Objections by the assessee:- The variations proposed vide draft assessment order dated 20.12.2019 were challenged by the assessee company by way of objections. The objections find mentioned at page 1 to 3 of the directions issued by Ld. DRP u/s. 144C (5) of the Act. 12 IT (TP) A No. 1/JPR/2021 Mikuni India Pvt. Ltd. vs. DCIT Ld. DRP considered the objections raised by the assessee company and directed the Assessing Officer to incorporate the findings of the said Panel in respect of various objections, in the final order. Giving effect to the directions of Ld. DRP:- In view of the directions issued by Ld. DRP, vide order dated 28.01.2021, the Assessing Officer made adjustment of the income of the assessee at Rs. 6,39,04,550/- revising the same from Rs. 7,74,26,574/- i.e. adjustment as per order u/s. 92CA of the Act. Present Appeal is filed All this led to the impugned assessment order, which is under challenge by way of present appeal. 13. hence, this appeal against the impugned order passed by the Assessing Officer. 14. Arguments heard. File perused. 15. As noticed above additions have been made vide impugned assessment order, as regards the following two types of international transactions; (i) Purchase of material from Associated Enterprise (in short ‘AE’) 13 IT (TP) A No. 1/JPR/2021 Mikuni India Pvt. Ltd. vs. DCIT (ii) Payment of royalty to Associated Enterprise. Only the said two additions/adjustments are the subject matter of this appeal. Learned AR for the appellant and ld. DR for the department have restricted their arguments only as regards the said additions/adjustments. 16. As noticed above, the assessee selected Cost Plus Method (in short ‘CPM’) as the most appropriate method for transfer pricing, but ld. TPO rejected said method selected by the assessee, and concluded that Transactional Net Margin Method (in short ‘TNMM’), as the most appropriate method. 17. Ld. AR for the appellant has submitted that ld. TPO rejected CPM as most appropriate method only on the ground of non availability of reliable data in the data of the comparable companies, and then proposed 16 companies for consideration of their data as the comparable companies. The contention raised on behalf of the appellant is that TPO has not given any justification for selecting TNMM as against CPM to point out as to how TNMM fulfils the requirements of provisions available under rule 10C of the rules. It has been contended that on incorrect notion and under misconception of law, TPO rejected the adjustments while observing that 14 IT (TP) A No. 1/JPR/2021 Mikuni India Pvt. Ltd. vs. DCIT for the application of comparability adjustments in TNMM, adjustments are required to be carried out in the financials of the comparables. To support his contention, learned counsel has relied on following decisions: 1. IKA India Pvt. Ltd., v. The Deputy Commissioner of Income Tax Circle, (ITA No.2192/Bang/2017; 2. Panega3 & Legal database systems Pvt. Ltd. v. ITO, (ITA No.2128/M/2014. Ld. AR has urged that even Ld. DRP adopted the observations made by TPO, without giving independent findings on rejection of the method adopted by the assessee and appreciating the method selected by TPO, and rejected the objections arbitrarily. It has also been contended that where impact on margin cannot be quantified due to non-availability of data, said companies cannot be considered as uncontrolled transactions for the purposes of comparison. On the other hand, Learned DR for the department has referred to the orders passed by the revenue authorities below and submitted that for 15 IT (TP) A No. 1/JPR/2021 Mikuni India Pvt. Ltd. vs. DCIT the reasons recorded therein, there is no merit in the contentions raised on behalf of the appellant. Discussion 18. The assessee company was established in India, in September, 2008 with the objective of manufacturing above said automobile components, and it started supply of said components to Indian consumers. The assessee company used to get plastic Intake manifold manufactured from Machino Plastics Ltd. an Indian company. The assessee company has its own manufacturing factory in Neemrana. As claimed by the assessee, its manufacturing operations commenced in November, 2009. 19. The assessee had furnished the audit report in form No. 3CEB as required u/s 92E of the Act. To ensure that following 'international transactions and specified domestic transaction' were at 'Arm's Length Price', the case was admittedly referred to Transfer Pricing Officer u/s 92CA of the Act, after obtaining necessary approval of the Pr. Commissioner of Income Tax, Alwar: 16 IT (TP) A No. 1/JPR/2021 Mikuni India Pvt. Ltd. vs. DCIT S. No. Name of AEs Description of International Transaction Amount (Rs.) 1. Mikuni Corporation Purchase of Raw material, components and share parts 74,21,23,717 2. Mikuni Corporation Exports Sales 22,50,77,289 3. Mikuni Corporation Purchase of fixed assets 5,12,79,433 4. Mikuni Corporation License fee for use of know-how 2,25,65,500 5. Mikuni Corporation, Japan Payment of supervision fee 97,28,046 6. Mikuni Corporation, Japan Payment of royalty 6,08,80,707 7. Mikuni Corporation, Japan Reimbursement of expenses 4,70,51,927 8. Mikuni Corporation, Japan Interest on external commercial borrowings 29,64,911 9. Mikuni Corporation, Japan Fee for provision of guarantee 7,65,422 10. Mikuni Indonesia Recovery of expenses 24,97,312 On receipt of reference, the Transfer Pricing Officer passed order dated 31.10.2019 u/s 92CA(3) of the 1.T.Act, 1961 after analyzing the facts of the case in detail. The Transfer Pricing officer is stated to have discussed every issue in detail after giving adequate opportunities of being heard to the assessee company. Ultimately, order was passed by the Dy. Commissioner of Income Tax, Transfer Pricing Officer-2(3)(2), New Delhi. 20. Admittedly, the assessee selected 15 comparable companies for the purpose of comparison of gross profit margins. Ld. TPO observed that the assessee, while calculating gross profit margin, did not clarify as to whether electricity expenses, consumables, loyalty expenses, supervisor fee, testing fee towards cost of production were direct cost or indirect cost. Ld. TPO further observed that while 17 IT (TP) A No. 1/JPR/2021 Mikuni India Pvt. Ltd. vs. DCIT applying CPM, such exercise is required to be done in the case of comparable companies. Ld. TPO further observed that no data of comparable companies was available to so as to explain as to which portion of the indirect expenses was towards rendering of services. Ld. TPO pointed out that the assessee had not made available any details as to which expenses were considered indirect expenses in case of the comparables. There was also no detail provided by the assessee to suggest as to what were the expenses excluded. Ld. TPO also of the view that for the purpose of computing gross profit margin accurate data is required in respect of direct, indirect cost and other costs in respect of all comparables chosen by the assessee. Having regard to the above said observations, ld. TPO rejected CPM selected by the assessee. Ld. TPO also rejected other methods-CUP-RPM-PSM citing non availability of reliable data. Learned TPO then opted to select TNMM as the most appropriate method. In this regard, Learned TPO took into consideration the provisions 18 IT (TP) A No. 1/JPR/2021 Mikuni India Pvt. Ltd. vs. DCIT of rule 10B (1) (e) and the observations made by the Hon’ble Apex Court in the case of DIT (Int. Taxation) vs. Morgan Stanley (291 ITR 416) At page 16 of his order, ld. TPO recorded certain reasons for non application of CPM method to the case of the assessee. Relevant portion thereof is reproduced for ready reference: ““Sec. 92C of the IT Act read with Rule 10B prescribes the different methods to be followed to determine ALP. Rule 10C further prescribes that any one of the 05 methods best suited to the facts and circumstances of the case shall be selected as the most appropriate method. In the TP study the taxpayer has selected CPM as the most appropriate method. The CPM is to be applied as under:- \"10B. (1) For the purposes of sub-section (2) of section 92C, the arms length price in relation to an international transaction shall be determined by any of the following methods, being the most appropriate method, in the following manner, namely: (a)………….. (b)…………… (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 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 (1) are increased by the adjusted profit mark-up arrived at under sub-clause (iii), 19 IT (TP) A No. 1/JPR/2021 Mikuni India Pvt. Ltd. vs. DCIT (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:\" Even, the OECD guidelines say as under in regarding the Cost plus Method- \"Cost plus method A transfer pricing method using the costs incurred by the supplier of property (or services) in a controlled transaction. An appropriate cost plus mark up is added to this cost, to make an appropriate profit in light of the functions performed (taking into account assets used and risks assumed) and the market conditions. What is arrived at after adding the cost plus mark up to the above costs may be regarded as art arm's length price of the original controlled transaction\" “2.36 The cost plus method presents some difficulties in proper application. Particularly in the determination of costs. Although it is true that an enterprise must cover its costs over a period of time to remain in business, those costs may not be the determinant of the appropriate profit in a specific case for any one year. While in many cases companies are driven by competition to scale down prices by reference to the cost of creating the relevant goods or providing the relevant service, there are other circumstances where there is no discernible link between the level of costs incurred and a market price (e.g. where a valuable discovery has been made and the owner has incurred only small research costs in making it). \"2.39 Another important aspect of comparability is accounting consistency. Where the accounting practices differ in the controlled transaction and the uncontrolled transaction, appropriate adjustments should be made to the data used to ensure that the same type of costs are used in each case to ensure consistency. The gross profit mark ups must be measured consistently between the associated enterprise and the independent enterprise. In addition, there may be differences across enterprises in the treatment of costs that affect gross profit mark ups that would need to be accounted for in order to achieve reliable comparability. In some cases it may be necessary to take into account certain operating expenses in order to achieve consistency and comparability; in these circumstances the cost plus method starts to approach a net rather than gross margin. To the extent that the analysis takes into account operating expenses, the 20 IT (TP) A No. 1/JPR/2021 Mikuni India Pvt. Ltd. vs. DCIT reliability of the analysis may be adversely affected, for the reasons set forth in paragraphs 3.29-3.32. Thus, the safeguards described in paragraphs 3.34-3.40 may be relevant in assessing the reliability of such analyses.\" \"2.40 While precise accounting standards and terms may vary, in general the costs and expenses of an enterprise are understood to be divisible into three broad categories. First, there are the direct costs of producing a product or service, such as the cost of raw materials. Second, there are indirect costs of production, which although closely related to the production process may be common to several products or services (e.g. the costs of a repair department that services equipment used to produce different products). Finally, there are the operating expenses of the enterprise as a whole, such as supervisory. general, and administrative expenses. 2.41 The distinction between gross and net margin analyses may be understood in the following terms. In general, the cost plus method will use margins computed after direct and indirect costs of production, while a net margin method will use margins computed after operating expenses of the enterprise as well, it must be recognised that because of the variations in practice among countries, it is difficult to draw any precise lines between the three categories described above. Thus, for example, an application of the cost plus method may in a particular case include the consideration of some expenses that might be considered operating expenses, as discussed in paragraph 2.39. Nevertheless, the problems in delineating with mathematical precision the boundaries of the three categories described above do not alter the basic practical distinction between the gross and net margin approaches.” From the above, the CPM method cannot be applied to the tax payer's case for the following reasons as mentioned in the above OECD guidelines:- 1. The CPM method presents some practical difficulties in identifying the costs incurred for the provision of services like whether an indirect cost is towards rendering services or it is an enterprise level expense. 21 IT (TP) A No. 1/JPR/2021 Mikuni India Pvt. Ltd. vs. DCIT 2. There is no discernible link between the level of costs incurred and a market price in software services as the services are usually compensated on a man hourly basis which may not vary much across the industry for same or similar type of service. So, CPM is not the appropriate method. 3. While applying CPM, the tax payer should have considered all direct and indirect costs incurred in respect of the services rendered by it. But, it is apparent from details given above that the tax payer itself did not include all the direct and indirect costs while computing gross mark up. The details of expense excluded were simply not available Thus it is difficult to say whether the gross profit worked out in the case of the comparables is at the same level as that of the taxpayer. 4. The functional analysis as carried out by the taxpayer is not the only criteria in selecting the most appropriate method. When two enterprises are compared on a cost plus method, the direct and indirect costs of production in connection with such services have to be ascertained pie to pie. But, such information is not available in the public domain in the case of comparables selected either by the taxpayer or by the TPO. Also in the case of taxpayer's case, all costs are apportioned based on approximation. In such a scenario where the taxpayer decides the cost on approximation basis and where such information is not available in the case of comparable companies, Cost Plus Method would not be a reliable method as the results are based on approximations and assumptions. Instead, considering PBIT would be a more reliable measure in the service industry. 5. It is clearly stated that the data used by the company in its own case and in the case of comparable companies while computing the cost is unreliable and thus leading to incorrect comparability. 6. There is no dispute on the point that TNMM and CPM are different methods but when the taxpayer is compensated on all its cost, the most appropriate method is TNMM in the absence of reliable data in the case of comparable companies in regard to the direct and indirect costs of production in connection with rendering of software development services. 7. There is no uniformity in treating certain expenditure as direct and indirect among the companies in India due to the absence of any statutory or regulatory requirements of such disclosures in the case of service providers in India. In the absence of such uniformity in disclosure, it is difficult to arrive at the direct and indirect costs of production in connection with rendering software services and thus CPM cannot be applied. 8. The cost plus method presents some difficulties in proper application, particularly in the determination of costs. Although it is true that an 22 IT (TP) A No. 1/JPR/2021 Mikuni India Pvt. Ltd. vs. DCIT enterprise must cover its costs over a period of time to remain in business, those costs may not be the determinant of the appropriate profit in a specific case for any one year. While in many cases companies are driven by competition to scale down prices by reference to the cost of creating the relevant goods or providing the relevant service, there are other circumstances where there is no discernible link between the level of costs incurred and a market price. In the case of software industry, the price charged based on man-hourly charges does not vary much across the verticals and across the functional lines in respect of same resource with similar level of experience and domain expertise. For example, a C++ programmer with 3-5 years experience is charged same way whether he is working in application development, product development or maintenance across the industry. So, when pricing of services is determined by market forces and it is almost constant across the industry, the cost plus method cannot be the most reliable or appropriate method. Hence, for the above detailed reasons, CPM is rejected as the most appropriate method. When reliable method viz TNMM is available then there is no need to go to CPM especially when the reliable data either in the taxpayer's case or in the comparable cases is not available for ascertaining the direct and indirect cost of production of services. The other methods such as CUP, Resale Price Method and Profit Split Method are also rejected due to non availability of data and non applicability in the facts and circumstances of the case. “ Learned TPO was of the view that TNMM is the most appropriate method in the facts and circumstances of the taxpayer's case. In this regard, following observations were made by Learned TPO: “TNMM is described in Rule 10B (1) (e). The provisions of the rule are broadly based on the OECD guidelines in this regard which are reproduced below: \"ii) Transactional net margin method a) In general 23 IT (TP) A No. 1/JPR/2021 Mikuni India Pvt. Ltd. vs. DCIT 3.26 The transactional net margin method examines the net profit margin relative to an appropriate base (e.g. costs, sales, and assets) that a taxpayer realizes from a controlled transaction (or transactions that are appropriate to aggregate under the principles of Chapter 1). Thus, a transactional net margin method operates in a manner similar to the cost plus and resale price methods. This similarity means that in order to be applied reliably, the transactional net margin method must be applied in a manner consistent with the manner in which the resale price or cost plus method is applied. This means in particular that the net margin of the taxpayer from the controlled transaction (or transactions that are appropriate to aggregate under the principles of Chapter 1) should ideally be established by reference to the net margin that the same taxpayer earned in comparable uncontrolled transactions. Where this is not possible, the net margin that would have been earned in comparable transactions by an independent enterprise may serve as a guide. A functional analysis of the associated enterprise and, in the latter case, the independent enterprise is required to determine whether the transactions are comparable and what adjustments may be necessary to obtain reliable results. Further, the other requirements for comparability, and in particular those of paragraphs 3.34-3.40, must be applied. b) Strengths and weaknesses 3.27 One strength of the transactional net margin method is that net margins (e.g. return on assets, operating income to sales, and possibly other measures of net profit) are less affected by transactional differences than is the case with price, as used in the CPM Method. The net margins also may be more tolerant to some functional differences between the controlled and uncontrolled transactions than gross profit margins; Differences in the functions performed between enterprises are often reflected in variations in operating expenses. Consequently, enterprises may have a wide range of gross profit margins but still earn broadly similar levels of net profits. The taxpayer says that the TPO casually shifted to TNMM as the most appropriate method. In this regard, it is to be stated that CUP, and Profit Split Method cannot be applied due to non-availability of data in the case of uncontrolled transactions or enterprises. The resale price method is not appropriate method in services industry. The Cost plus Method (CPM), though a suitable method, cannot be considered due to the above discussion and also fact that reliable data is not available in the case of independent comparable companies. The act prescribes only five methods viz. CUP, CPM, RPM, PSM 24 IT (TP) A No. 1/JPR/2021 Mikuni India Pvt. Ltd. vs. DCIT and TNMM. When all the above 4 methods cannot be applied, TNMM method can be applied as data on net margins is available in the public domain and also reliable as PBIT on Operating Cost is considered as the PLI (Profit Level Indicator). It is worthwhile to reproduce the observations of the Hon'ble Supreme Court in the case of DIT (Int Taxation) vs. Morgan Stanley (29ITR416), where the court held as under \"The taxpayer is required to compute the arm's length price for a transaction(s) using one of the five methods stipulated in the Income tax Rules. Rule 10C (1) of the Income-tax Rules defines the most appropriate method as the method which is most suited to the facts and circumstances of each particular international transaction. As per rule 10C (2) the most appropriate method has to be selected having regard to a number of factors which are enumerated therein.\" The Apex Court has clearly given primacy to rule 10C (2) for purposes of selecting the most appropriate method, which is wider in scope than rule 108(2) The Hon'ble Court further observed as under: \"...the methods quoted above namely CUP, RPM, CPM, PSM, & TNMM are mentioned in Sec. 92C read with rule 10C. The most appropriate method has to be applied for computation of the arm's length price. It will depend on facts and circumstances of each particular international transaction...\" The Supreme Court has also held TNMM to be the most appropriate method in the case of Service PE \"in our view apart from the orders passed by the TPO/AO the said method (TNMM) is the appropriate method in the case of service PE as the TNMM apportions the total operating profit arising from the transactions on the basis of sales, costs, assets etc...\" Further as per OECD (see TPG paragraphs 2.39-2.55) CPM method probably is most useful where: 1. goods are sold by a manufacturer that does not contribute valuable unique intangible assets or assume unusual risks in the controlled transaction, such as may be the case under a contract or toll manufacturing arrangement, or 25 IT (TP) A No. 1/JPR/2021 Mikuni India Pvt. Ltd. vs. DCIT 1. ii) the controlled transaction is the provision of services for which the provider does not contribute any valuable unique intangible assets or assume unusual risks. In the case of the assessee, he fails to qualify the above discussed situation and from the facts and circumstances of the case TNMM is the MAM. In view of the above discussion, TNMM is considered to be the Most appropriate method for benchmarking of transaction.” The decision cited on behalf of the appellant, and titled as ACIT v. Swatch Group (India) Pvt. Ltd’s case, ITA No.2264/Del/2009, delivered on 30.1.2020 is of no help to the appellant, as therein the assessee, a wholly owned subsidiary of Swatch Group Limited, Switzerland, was distributor of watches manufactured by the Swatch Group brands, in India and the assessee was providing customer services in the nature of after sales services to customers. Swatch Group India had the exclusive license to undertake wholesale operations of the Group brands in India. Therein, a certain sum was excluded from the international transactions for import of watches and spares for resale. Furthermore, therein the method selected by the assessee was found to be correct, but the selection of comparables was not appropriate as regards facts of that case and as product of Swatch India was of unique intangible. In GE India Industrial Pvt. Ltd. v. Dy. CIT, ITA No.1684/Del/2016, decided on 8.10.2020, the assessee was engaged in provision of software 26 IT (TP) A No. 1/JPR/2021 Mikuni India Pvt. Ltd. vs. DCIT development services to its AEs, in the nature of customization of condition monitoring software, to meet specific requirements of customers. Therein, certain companies were found to have accepted as functionally comparable with the appellant, but were disregarded only because of different financial years. Furthermore, therein out of 19 comparable companies selected by the assessee in its TP study, 18 were rejected by TPO as the comparables were mainly engaged in providing security services or travel related services etc., not at all comparable to the segments of the assessee, which was broadly an administrative service segment. It was observed that in the given situation, the TPO had no choice but to work out the ALP on the basis of fresh search. In Dy. C.IT v. Panasonic AVC Networks India Co. Ltd., ITA No.4620/Del/2011, decided on 21.2.2014, by ITAT, Delhi Bench, the assessee had used TNMM with net profit margin on sales as profit level indicator, and said method was accepted by TPO as well, but the TPO did not agree with the assessee on the point of adjustments for capacity utilization and the ground for rejection was that all the comparables were also operating in same economic environment and all were playing same 27 IT (TP) A No. 1/JPR/2021 Mikuni India Pvt. Ltd. vs. DCIT game of price cutting and volume generation, and that any adjustment by way of capacity adjustment and risk adjustment would change the level playing field. Therein, Ld. CIT (A) granted capacity underutilization adjustment in depreciation allowance, by making adjustments in depreciation figures of the tested party as also of the comparables. Ld. CIT (A) had taken note of assessee’s submission that the production of the assessee in the relevant years was much below the installed capacity. Co- ordinate Bench approved the conclusions arrived at by Ld.CIT (A). In IKA India Pvt. Ltd. v. Dy., CIT, IT(TP) No.2192/Bang/2017, decided on 17.9.2018 by ITAT, Bangalore, the product manufactured by the assessee was laboratory and processing equipment and the comparable company was in manufacture of pacemaker for implanting in heart. Same could be categorized as “manufacture of equipment”. Accordingly, it was observed by the Co-ordinate Bench that the comparable company was rightly not excluded for the purpose of comparison on the ground of product different. In IKA’s case (supra), the assessee had pleaded before TPO and CIT (A) to provide an adjustment for idle capacity, but it was not allowed any adjustment. Therein, it was observed that in case appropriate adjustments 28 IT (TP) A No. 1/JPR/2021 Mikuni India Pvt. Ltd. vs. DCIT cannot be made to the uncontrolled transaction due to lack of data, the adjustments should be made on the tested party, in order to read the provisions of transfer pricing regulations in harmony. As far as data of comparable companies on capacity utilization not available in public domain, the Co-ordinate Bench observed that practically it is not possible to obtain data on capacity utilization of comparable companies and consequently compute adjustment on the comparable companies, the operating cost of the tested party is adjusted for capacity utilization adjustment. Ultimately, it was observed that such a benefit cannot be denied to the assessee only for the reason that the data of the comparable companies is not available. In M/s. Infac India Pvt. Ltd. v. Dy. CIT, IT(TP) No.27/Chny/2018, decided by ITAT, ‘D’ Bench, Chennai on 5.10.2018, issue for consideration was inclusion of a company as comparable company, which according to the assessee was not a comparable company with that of the assessee as the assessee was engaged in business of manufacturing and supply of control cable and catering only to four wheeler automobiles, especially car industry Hyundai Motors India, whereas the comparable company was in a diversified business and catering to the needs of not only to four wheeler 29 IT (TP) A No. 1/JPR/2021 Mikuni India Pvt. Ltd. vs. DCIT industry but also to two-wheeler automobile industries, and the assessee was not doing sales to Hyundai Motors, whereas the comparable company used to cater to the needs of all the automobile manufacturers. Therein, segmental details were not available, as claimed by the assessee. The Co-ordinate Bench was of the view that comparable company could be having the segmental details, and as such the matter was remanded to TPO for reconsideration, and ultimately the Assessing Officer was to follow the procedure as laid down in section 144 C of the Act. One of the contentions raised on behalf of Ld. AR for the appellant is that reasons given by ld. TPO in rejecting CPM from being applied to the case of the assessee, and pointed out that in para 2, 7 & 8, ld. TPO referred to software services, market price of said services and price charged in case of software industries, but, the assessee company is not involved in any such software services, and as such, it can safely be said that ld. TPO rejected CPM while taking into consideration by way of misconception that the assessee company has been dealing in software services as well. Therefore, learned AR has urged that the order passed by Learned TPO deserves to be set aside. 30 IT (TP) A No. 1/JPR/2021 Mikuni India Pvt. Ltd. vs. DCIT In response, ld. DR for department has not raised any contention to explain the aspect of referring to software services, when the assessee company is not involved in any software services. 21. No doubt, Ld. TPO in points 2, 7 & 8 at page 16 of the order, made certain observations about the rendering of software services, their market price, direct and indirect costs of production in connection with running of software services and the price charged in case of software industries, but it appears that said paragraphs have inadvertently crept in while referring to the OECD guidelines and discussing non-relevancy of CPM method selected by the assessee. In view of the detailed discussion by Learned TPO, while dealing with the contentions raised on behalf of the assessee on each point, no adverse inference can be drawn when the above observations as regards software industry and rendering of software services have inadvertently crept in the reasons recorded for rejecting CPM method, and said reasons do not come to the aid of the appellant in saying that Ld. TPO, without any reasons, rejected CPM method selected by the appellant. As regards selection of TNMM by Learned TPO, after going through the material available on record, we find that on the point of selection of 31 IT (TP) A No. 1/JPR/2021 Mikuni India Pvt. Ltd. vs. DCIT TNMM, Learned TPO was justified in observing that that for the application of comparability adjustments in TNMM, the adjustments are required to be carried out in the financials of the comparables, but no such comparison was made by the assessee with the relevant factors in the case of comparables; that the assessee was required to maintain documentary evidence in respect of the determination of arm's length price carried out by it and for that required to maintain documentation in respect of such comparability adjustments also, in view of provisions of rule 10D(1)(k) of the Rules, but the assessee had not provided any documentary basis for the assumption taken into account and consequently the adjustments sought by the assessee did not qualify the test of being \"reasonably accurate\"; and that as per the provisions of law the adjustments are to be carried out in the case of comparables and not in the financials of the tested party, but in absence of specific details of the abnormal factors in the case of comparables, no adjustment could be carried out. We uphold said reasoning recorded by Learned TPO in rejecting the contentions raised on behalf of the assessee on these aspects i.e. in rejecting CPM selected by the assessee and in preferring TNMM. 32 IT (TP) A No. 1/JPR/2021 Mikuni India Pvt. Ltd. vs. DCIT 22. We have gone through the order passed by Learned DRP while dealing with the objections raised by the assessee against the draft assessment order. Learned DRP dealt with each objection raised by the assessee giving reasons. We do not find any merit in the contention raised on behalf of the appellant that Learned DRP ignored to record independent findings on the point of method selected and rejected by Learned TPO. It cannot be said that this aspect remained unadjudicated. 23. In the given facts and circumstances of the appeal at hand, the decisions cited on behalf of the appellant do not come to its aid so as to say that the observations made and the conclusions arrived at by Learned TPO in selecting TNMM method be discarded from consideration, or that CPM method selected by the assessee be applied in determination of ALP. A perusal of the final assessment order would reveal that the Assessing Officer considered all the grounds raised by the assessee after the passing of the order by Learned DRP, discussed the same and gave effect to the directions issued by Learned DRP on each point. 33 IT (TP) A No. 1/JPR/2021 Mikuni India Pvt. Ltd. vs. DCIT 24. In view of the discussion, the assessment as regards payments made for purchase of raw material, by way of international transactions, deserves to be upheld. International transactions- pertaining, payment of royalty. 25. As noticed above, on this aspect, separate addition of Rs. 3, 46, 97,608/- has been made. It may be mentioned here that after conducting proceeding u/s. 92CA of the Act, ld. TPO made adjustment of Rs. 3,77,46,038/-. Show-cause notice dated 09.10.2019 issued by ld. TPO to the assessee was to the following effect: \"The assessee benchmarked the transaction relating to Payment of Royalty using Cost plus Method and thus shows that the transaction is at Arm length. The Gross profit to Gross Cost (GP/GC=Gross Cost Plus) ratio is taken as the profit level indicator (PLI) in the CPM analysis. The PLI of the company is arrived at 34.40% on Gross Cost. Where as per the TP document, the Median PLI of the comparables is arrived at 36.26 with the range of 25.63% to 38.60%. During the year under consideration, the assessee has paid running royalty of Rs. 6,08,80,707/- to its AE i.e. Mikuni Corporation, Japan the rate of 5 percent of the Net sales. For benchmarking of this international transaction, assessee has used CPM as the most appropriate method and clubbed with other international transactions related to purchase of raw material, Components and spare parts. In transfer pricing study, the assessee has not conducted any separate analysis of the royalty payments made by it to its associated enterprises. Since, above transaction is a separate class of transaction. Therefore, the royalty payment has to be benchmarked separately. 34 IT (TP) A No. 1/JPR/2021 Mikuni India Pvt. Ltd. vs. DCIT This office has conducted a fresh search was conducted on Royalty Stat database to find out suitable comparable agreement. The search was aimed at identifying royalty rates from comparable technology agreements. From the above exercise, three agreements were found to be comparable to the agreement entered into by the assessee. Accordingly, the following agreements are proposed to be used to benchmark 'Payment of Royalty transaction: 2.2 Since, assessee has paid royalty at the rate of 5 percent of the Net sales of the products or parts however comparables average royalty rate is only 1.53% which is much lower than royalty rate paid by the assessee. Therefore, it is proposed that the AP of the royalty payment will be benchmarked at the rate of 1.53% and adjustment will be made accordingly as per the available details.” 26. In its reply to the above said show-cause notice, main claim of the assessee was that transactions of payment of royalty should be benchmarked as a part of activity of the assessee, and not as a separate transaction, the reason being that the same is intrinsically linked to the manufacturing activities. Ld. TPO, once again, rejected “CPM” applied by the assessee. 35 IT (TP) A No. 1/JPR/2021 Mikuni India Pvt. Ltd. vs. DCIT 27. While referring to the provisions of rule 10B of the Rules, Ld. TPO observed that payment of royalty is a class of transaction of its own and requires separate analysis, and further that said transaction was being analyzed separately under CUP method. Ld. TPO was of the view that benchmarking said transaction under CPM, after aggregating the same with other transaction, was not acceptable, the reason being that such transaction is a separate class of transaction to be bench- marked separately and cannot be aggregated with other transactions particularly when royalty payment transactions and other transactions are not closely linked, and royalty payment transaction are not a significant part of the total cost of the assessee. Ld. TPO observed that the assessee had failed to prove the intrinsic relationship between royalty and other transactions. At the same time, ld. TPO was of the view that under TNMM, it is the net margin realized from international transaction which is to be analysed and not the enterprise level earnings. In this regard, ld. TPO referred to sub-clause (i) of clause (e) of Rule 10B (i) of IT Rules, 1962, which read as under:- 36 IT (TP) A No. 1/JPR/2021 Mikuni India Pvt. Ltd. vs. DCIT “(i) the net profit margin realized 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” Accordingly, ld. TPO was of the view that CMP adopted by the assessee for benchmarking could not be accepted, and that TNMM was the most appropriate method for benchmarking the other transactions, whereas for royalty payment transactions, the most appropriate method was the CUP method. Arm's Length price has been defined in section 92F (ii) of the Act. It means the price which is applied or proposed to be applied in a transaction between persons other than associated enterprises in uncontrolled conditions. The factors and methods incorporated in this section are not exhaustive. CBDT has been empowered to prescribe further factors and methods. Most appropriate method is to be adopted in relation to an international transaction for determination of ALP. In this regard, nature of transaction or class of transaction or class of associated persons or functions performed by such persons or such other relevant factors, as prescribed by CBDT, may be taken into consideration. 37 IT (TP) A No. 1/JPR/2021 Mikuni India Pvt. Ltd. vs. DCIT Aggregation or Segregation approach? For a transaction to be benchmarked at aggregate level, essential condition is that the transaction is so interlinked with other transaction that same cannot be benchmarked separately. Discussion Royalty means payment of any kind received as consideration for the use of or right to use any intangible property like copyright, design or model, secret formula or process, trademark, trade name or for information concerning industrial and commercial experience. Determination of arm's length price in case of royalty payment for transfer of intangible property is not an easy exercise. Provisions pertaining to arm's length price have been enacted to prevent tax evasion and also to ensure that intercompany or intra group transactions are conducted at fair market value. As observed in Sony Ericsson'sMobile Commission India (P) Ltd. v. CIT 55 taxmann.com 240 (Delhi) case, the core object and purpose for undertaking the exercise of transfer pricing analysis is to determine the fair market price of the transaction. 38 IT (TP) A No. 1/JPR/2021 Mikuni India Pvt. Ltd. vs. DCIT In said proceedings, TPO is required to determine that whatever amount has been paid by the assessee to the AE for said services, is an arm length price. TPO is also to find out whether the prices paid by the assessee for availing of the services are at arm’s length price or not. Provisions as contained in Chapter X of the Act, relating to Transfer Pricing provide for determination of arm's length price or cost of an international transaction between two associated enterprises. In Sony Ericsson's case, Hon'ble Delhi High Court has observed that TNM method is equally effective and reliable when applied to closely linked and continuous transactions. In L.G. Electronics India (P) Ltd.'s case (supra), the assessee had benchmarked the international transaction of royalty by clubbing it along with the other international transactions, such as, import of raw material and components, service spares, export of finished goods along with commission, training fee, import of software services etc. All these were benchmarked in a combined manner under TNM method on an entity level. 39 IT (TP) A No. 1/JPR/2021 Mikuni India Pvt. Ltd. vs. DCIT It was held that royalty is not closely linked with other international transactions and hence should be benchmarked separately. Further, it was held that evidently transaction of royalty cannot be considered as closely linked with the other international transactions as were clubbed therein by the assessee. In this way, therein, the ALP of royalty payment required to be determined separately, was determined by Ld.TPO separately, justifying departure from the contrary view taken in the previous year. As a result, therein, the contention of assessee to follow rule of consistency was not accepted. In Magneti Marelli Power Train India's case (supra), Hon'ble Delhi High Court, the assessee had received various intra- group services which were interlinked with the production and sale of the product. Said services were in the nature of import of raw materials, sub-assemblies and components, and transactions of payments pertained to technical assistance, royalty of software and as regards purchase of fixed assets. Therein, for the purposes of arm's length price, all said services were held to be covered by manufacturing of automotive components. Whereas the assessee had invoked TNM method for all the services, collectively, the 40 IT (TP) A No. 1/JPR/2021 Mikuni India Pvt. Ltd. vs. DCIT TPO applied TNM method except as regards payments made by way of fee for technical assistance, but worked out arm’s length price for said fee on an entirely different method-CUP method. In the given facts and circumstances, it was held that once the TPO had applied TNM method as the most appropriate method, it was not open to the TPO to determine arm's length price in respect of the sole element i.e. payment of fee for technical assistance on CUP method. 28. Admittedly, during the year under consideration, the assessee paid running royalty of Rs. 60,880,707/- to its AE i.e. Mikuni Corporation, Japan, at the rate of 5 percent of the Net sales. As claimed by the assessee itself, it paid royalty to its AE for availing of license to manufacture and sell products in India. As further claimed by the assessee, it clubbed the transaction of payment of royalty with other international transactions pertaining to manufacturing segment of the assessee to benchmark the same on an aggregate basis using CPM. It is also admitted that the assessee has used CPM as the most appropriate method and clubbed with other international transactions related to purchase of raw material, components and spare parts. But, in the given situation, the royalty payment was to be benchmarked separately. 41 IT (TP) A No. 1/JPR/2021 Mikuni India Pvt. Ltd. vs. DCIT Therefore; there is merit in the contention raised on behalf of the Revenue that the royalty payment has to be benchmarked separately. Proceeding further, indisputably, in its transfer pricing study, the assessee did not conduct any separate analysis of the royalty payments made by it to its AE. Thereupon, the department proceeded to conduct fresh search to find out suitable comparable agreement, so as to identify royalty rates. As noticed above, Ld. TPO found only following three agreements to be comparable to the agreement entered into by the assessee: As noticed above, the assessee paid royalty at the rate of 5 percent of the Net sales of the products or parts, whereas, Learned TPO found that 42 IT (TP) A No. 1/JPR/2021 Mikuni India Pvt. Ltd. vs. DCIT as per the above data from the comparables, average royalty rate was only 1.53%, much lower than royalty rate paid by the assessee. It was for the assessee to contest the show cause notice issued by the Revenue proposing benchmarking at the rate of 1.53% and making of adjustment as per the available details. In its reply to the above said show-cause notice, main claim of the assessee was that transactions of payment of royalty should be benchmarked as a part of activity of the assessee, and not as a separate transaction, the reason being that the same is intrinsically linked to the manufacturing activities. Ld. TPO rejected “CPM” applied by the assessee. However, from the material available on record, we do not find any merit in the said claim of the assessee that the transactions pertaining to payment of royalty to AE were intrinsically linked to the manufacturing activities, so as to term the same to be separate transactions. After going through the material on record, we find the royalty transactions are integrated simply because the transactions pertaining to manufacturing business collectively drive its business operations and 43 IT (TP) A No. 1/JPR/2021 Mikuni India Pvt. Ltd. vs. DCIT benefit its business as a whole. Assessee could not establish that same could be evaluated on a combined or aggregate basis. Having regard to the material available on record, it can safely be said that said transaction of payment of royalty is a separate class of transaction. Comparable Agreements-Whether same could actually be termed as such? 29. It may be mentioned that in reply to the show cause notice, as regards said transactions of payment of royalty, the assessee had objected to the selection of comparable agreement. Thereupon, ld. TPO examined all the agreements and dealt with said objection by observing in the manner as. 44 IT (TP) A No. 1/JPR/2021 Mikuni India Pvt. Ltd. vs. DCIT 30. The assessee selected 8 comparable agreements to benchmark the transactions pertaining to the payment of royalty using CUP method. After examining the material made available, ld. TPO observed, as regards the newly proposed comparable agreements as under: 45 IT (TP) A No. 1/JPR/2021 Mikuni India Pvt. Ltd. vs. DCIT 46 IT (TP) A No. 1/JPR/2021 Mikuni India Pvt. Ltd. vs. DCIT 47 IT (TP) A No. 1/JPR/2021 Mikuni India Pvt. Ltd. vs. DCIT 48 IT (TP) A No. 1/JPR/2021 Mikuni India Pvt. Ltd. vs. DCIT 31. Ultimately, TPO was of the view that following 4 agreements were comparable to the assessee. 32. Taking into consideration, the average rate of 1.905%, ld. TPO, while using CUP method, computed Arm’s length price in said international transactions, relating to payment of royalty, at Rs. 2,31,34,669/-. 33. When the matter came up before ld. DRP, while deciding objections raised by the assessee, ld. DRP found no merit in the objection that a royalty transaction requires independent and separate approval of the AE 49 IT (TP) A No. 1/JPR/2021 Mikuni India Pvt. Ltd. vs. DCIT can be said to be linked with the license to manufacture for the purpose of being clubbed together and also for benchmarking. With the above observations, ld. DRP did not find any error in the observations made by ld. TPO. However, before Learned DRP it was submitted on behalf of the assessee that there was error committed by ld TPO in computing TP adjustments by considering the tested party royalty rate of 5%, adhoc on complete sales amount and that correct royalty rate of 3% and 5% respectively be considered in computation of the TP adjustments. 34. Ld. DRP reproduced relevant data regarding payment of royalty by assessee to its AE on net sales of its products, in a tabulated form. Said table when reproduced reads as: 50 IT (TP) A No. 1/JPR/2021 Mikuni India Pvt. Ltd. vs. DCIT 35. Accordingly, ld. DRP directed ld. TPO to verify the computation and take necessary action as required, in case said contention was found to be correct. 36. However, while dealing with ground No. 1 relating to the action taken by ld. TPO in considering non comparable royalty agreements, ld. DRP did not find any merit in the distinctive features pointed out by assessee, and observed as under: “3.9.1 it is submitted that the TPO selected following agreements as comparable to the assessee's royalty agreement: 3.9.1.1 Licensor: - Axion Power International Inc. It is a strategic Partnership Agreement for e- energy storage solution of motive and stationary applications such as e-scooters, commercial vehicles, light vehicles, off road vehicles and grid storage. According to the assessee, however, 51 IT (TP) A No. 1/JPR/2021 Mikuni India Pvt. Ltd. vs. DCIT its terms and conditions are completely different from that of the assessee's Agreement. 3.9.1.1.1 The Panel has considered the submission and does not find any error in the action of the TPO. Slight variation in the terms of agreement would not change thefundamental nature of a royalty agreement. The objection on this count is, accordingly, rejected. 3.9.1.2 Licensor-LitteIfuse Inc. Licensee: - Pacific Engineering Co., Ltd. It is a technology license agreement for blade fuse configuration. The assessee contends that its terms and conditions are completely different from that of the assessee’s Agreement. Also, this agreement was not in force during the relevant year i.e. agreement had expired and the assessee has entered into an agreement for India territory whereas the above agreement covers multiple countries in Europe and Asia including Japan, Iran, Germany, North Korea, Spain etc.” 37. While dealing with ground No. 12 relating to rejection of comparable royalty agreements identified by the assessee for benchmarking its transactions, ld. DRP observed in the following manner and rejected the objections raised by the assessee: “3.10 Ground no 12 relates to the rejection of the comparable royalty agreements identified by the assessee for benchmarking its transaction. The assessee merely contested the rejection the following two sets of comparables in its synopsis: 3.10.1 Perpetual Industries Inc. /Motor Sport Country Club Holdings, Inc. It is stated by the TPO that this licensed product is not similar to the product of the assessee and involves technology for manufacture of auto balancing and stabilization of rotating systems. The assessee on the other hand submits the license agreement is towards know-how and technology license to manufacture and sell automatic balancing systems for use in the automotive industry, 52 IT (TP) A No. 1/JPR/2021 Mikuni India Pvt. Ltd. vs. DCIT including internal combustion engines, torsional/transverse balancers for I/C engines. The license agreement is related to manufacture of auto components. 3.10.1.1 The Panel has considered the submission and finds no merit in it. Neither the licensed product nor the technology involved is similar in this case. The TPO, therefore, is right in rejecting this set of comparables. 3.10.2 Feuling Advanced Technologies, Inc. /Klein Engineered Competition Components, Inc. The TPO has stated that the licensed product is not similar to the product of the assessee and also involves technology for manufacture of centre fire two valves cylinder head kits and assemblies for Chevrolet engines. The assessee, on the other hand, states that the license in this case involves license to manufacture and sell center fire two valve cylinder head kits and accessories for Chevrolet big block engines. According to it, the license agreement is related to manufacture of auto components. 3.10.2.1 The Panel has considered the submission. In view of the stark dissimilarity in the product as well as technology, this agreement cannot be included. The Panel, therefore, confirms the exclusion of this comparable by the TPO. The objection, accordingly, stands rejected. “ In Dy. CIT v. Magneti Mareli Powertrain India’s case, cited on behalf of the appellant, the decision of ITAT in respect of transfer pricing adjustments i.e. remand to the TPO to segregate the payment of technical assessment fee and subject the same to independent examination was under challenge. The assessee had applied TNMM to benchmark its international transactions of import of raw materials, sub-assemblies and components, payment of technical assistance fees, payment of royalty, payment of 53 IT (TP) A No. 1/JPR/2021 Mikuni India Pvt. Ltd. vs. DCIT software and purchase of fixed assets. All these were categorized under one head “Manufacturing of automotive components”. Therein, during transfer price proceedings, the assessee was unable to substantiate the need for payment of technical assistance fees to its foreign AE. TPO had also observed that neither any cost benefit analysis nor any benchmarking exercise was undertaken at the time of entering into the agreement. Therein, as regards payment of royalty, TPO had accepted TNMM in respect of payment of royalty as well, but disputed its application for payment of technical assistance and rather CUP method was sought to be applied. Hon’ble High Court held that TNMM had to be applied in respect of the technical fee payment too, TPO having accepted TNMM for other international transactions. Additional Evidence-Whether deserves to be produced here? 38. It may be mentioned here that during pendency of the appeal, on behalf of the appellant, an application for additional evidence came to be filed to bring on record three Royalty agreements as described in the Index prepared on 28.8.2024, for their inclusion in the set of comparables for 54 IT (TP) A No. 1/JPR/2021 Mikuni India Pvt. Ltd. vs. DCIT testing Royalty, in the event it was held that it required separate benchmarking. Rule 46A of IT Rules, 1962 clearly provides that the appellant shall not be entitled to produce any additional evidence except in the circumstances described therein. Rule 29 of the Appellate Tribunal Rules provides as to when additional evidence may be produced before the Tribunal. Here, nothing has been brought to our notice as to why said additional evidence was not produced before the authorities below. It is not case of the appellant that the authorities below decided the case without giving sufficient opportunity to the assessee to adduce evidence. In the given facts and circumstances, we do not find any reason or substantial cause to allow the appellant to bring on record said three royalty agreements. Accordingly, prayer of the appellant in this regard is rejected. 39. In view of the above discussion, we do not find any merit in the contentions raised on behalf of the appellant as regards assessment relating to payments of royalty. 55 IT (TP) A No. 1/JPR/2021 Mikuni India Pvt. Ltd. vs. DCIT 40. As a result, this appeal deserves to be dismissed. Same is hereby dismissed. File consignment to the record room after the needful is done by the office. Order pronounced in the open court on 23/01/2025. Sd/- Sd/- ¼xxu xks;y½ ¼ujsUnzdqekj½ (GAGAN GOYAL) (NARINDER KUMAR) ys[kk lnL; @Accountant Member U;kf;d lnL;@Judicial Member Tk;iqj@Jaipur fnukad@Dated:- 23/01/2025 *Santosh vkns'k dh izfrfyfi vxzsf’kr@Copy of the order forwarded to: 1. The Appellant- Mikuni India Pvt. Ltd. Alwar. 2. izR;FkhZ@ The Respondent- DCIT, Circle-1, Alwar. 3. vk;dj vk;qDr@ The ld CIT 4. foHkkxh; izfrfuf/k] vk;dj vihyh; vf/kdj.k] t;iqj@DR, ITAT, Jaipur 5. xkMZ QkbZy@ Guard File IT(TP) A No. 1/JPR/2021) vkns'kkuqlkj@ By order, lgk;d iathdkj@Asstt. Registrar "