In the case of royalty transactions, the other technique in rule 10AB is the most appropriate method
Fact and issue of the case
The aforesaid appeal has been filed by the assessee against final assessment order dated 28/03/2021 passed u/s.143(3) r.w.s. 144C(13) in pursuance of direction given by the DRP dated 04/03/2021 u/s.144(5).
In the grounds of appeal, assessee has raised the following grounds:-
On the facts and circumstances of the case and in law, the learned Transfer Pricing Officer (TPO)/ the learned Assessing Officer (AO’) under directions of the Hon’ble Dispute Resolution Panel (DRP) erred in making an addition of Rs. 11,17,91,252/-to the total income of the Appellant based on provisions of Chapter X of the Income-tax Act, 1961 (‘the Act’) without appreciating that the Appellant’s transaction of payment for royalty was at arm’s length.
On the facts and circumstances of the case and in law, the learned TPO and the learned AO under directions of the Hon’ble DRP erred in rejecting the Appellant’s benchmarking, which demonstrated that the transaction of payment for royalty was at arm’s length, without appreciating that the Appellant’s methodology meets the provisions laid down in Rule 10AB of the Income-tax Rules, 1962, read with section 92C(1)(f) of the Income-tax Act, 1961, and is the most appropriate method in the present facts.
On the facts and circumstances of the case and in law, the learned TPO and the learned AO under directions of the Hon’ble DRP erred in benchmarking the Appellant’s transaction of payment for royalty by selecting the Comparable Uncontrolled Price (CUP) as the most appropriate method, and have also erred in selecting incorrect comparable instances.
The other grounds raised for initiation of penalty proceedings u/s.271(1)(c) is premature, therefore, same is dismissed.
Facts in brief are that assessee is a wholly owned subsidiary of Nissei ASB Machine Co. Ltd. (ASB Japan’ or ‘AE), was set up as a 100% Export Oriented Unit (‘EOU”). It is engaged in manufacturing of injection stretch blow molding machines, molds and parts, components and subassemblies of machines and molds). The assessee has paid royalty of Rs.20,63,83,848/-as per the agreement dated 01/10/2010. It was stated that royalty payment was in connection with the technology received by M/s. ASB India and ASB Japan provides maintenance and enhancement of technical knowhow to ASB India. The assessee was required to pay royalty @12% and it is payable only in respect of net domestic sales. As per the original TP study report assessee had used overall entity level TNMM approach for benchmarking the royalty payment. Thereafter, assessee adopted ‘Other Method’ in its revised TP study report after explaining it in the following manner:- “ASB International has paid royalty @ 12% of the net sales made by it in its Non-AE segment, to the AE. The Non-AE segment performs two functions –
(i) the manufacturing function, and
(ii) sales function. Accordingly, the ideal rate of royalty payable by ASB International should be the profit earned by the Non-AE segment, as reduced by the profit reasonably attributable to the functions performed by such segment.
In other words: Royalty (Profit of Non-AE segment before royalty) less (Profit reasonably attributable to the functions performed by the Non-AE segment) Since the segmental accounts for Non-AE segment of ASB International could be determined and also since royalty is being paid at 12%, the first figure, i.e. profit before royalty, could be easily determined.
Observation of the court
Thus considering the above facts and circumstances, the method of the assessee can be pigeonholed in the “other method” provided in Rule 10AB r.w.s. 92C (1) and in our opinion this is the MAM in the peculiar facts of the Assessee. Accordingly, we hold that “other method” would be a good substitute for CUP as there is lack of reliable comparables and looking to the fact that the royalty payments have been made for unique intangibles, therefore, we direct the ld. TPO to adopt “other method” as the Most Appropriate Method. However, the working given by the assessee before us as incorporated above needs to be examined afresh by identifying the costs and profits attributable to manufacture and sales to the non-AE and to find out appropriate allocation of the costs and what could be the profits on account of royalty which can be stated to be attributable on account of royalty. The assessee is directed to substitute the working on the basis of “other method”. With this direction, all the grounds raised by the assessee are allowed for statistical purposes.”
Thus, in view of the aforesaid order of the Tribunal, we remand this matter back to the file of the ld. TPO / ld. AO to adopt ‘Other Method’ as the most appropriate method AND similar line of direction is given for this year also and to examine the working given by the assessee. Assessee would be at liberty to file any additional documents / submissions to justify the benchmarking on the basis of ‘Other Method’.
In the result, appeal of the assessee is partly allowed for statistical purposes.
Order pronounced on 25th August, 2023.
In the result, appeal of the assessee is allowed and ruled in favour of the assessee
Read the full order from hereASB-International-Pvt-Ltd-Vs-Additional-Income-Tax-Officer-ITAT-Mumbai-2