Netafim Irrigation India Pvt. Ltd. Vs ACIT (ITAT Mumbai)
Conclusion:
Where TPO was not convinced with the benchmarking of international transaction of assessee, he should have independently benchmarked the arm’s length price of royalty payment by adopting any one of the prescribed methods which he had failed to do and determined arm’s length price at nil on purely ad–hoc basis without assigning any valid and acceptable reason, therefore, the addition made on account of adjustment made to the arm’s length price of royalty payment was to be deleted.
Held:
Assessee had entered into various international transactions with its AE Netafim, Israel, including payment of royalty. It had aggregated all international transactions including payment of royalty and benchmarked them applying CPM as the most appropriate method. TPO accepted the same under CMP except the payment of royalty basically for the reason that assessee failed to provide the details of cost incurred by AE for development of technology and further, it failed to furnish the rates of royalty paid by the other group concerns. TPO also observed that RBI / SIA approvals could not be considered for benchmarking the payment of royalty.Without assigning any reason, TPO determined the arm’s length price of the royalty payment at nil. It was observed that undisputedly, assessee had benchmarked the payment of royalty by applying CPM. If TPO was not convinced with the benchmarking of the assessee, he should have independently benchmarked the arm’s length price of royalty payment by adopting any one of the prescribed methods which he had failed to do. That being the case, the determination of arm’s length price at nil on purely ad–hoc basis without assigning any valid and acceptable reason was legally unsustainable. Therefore, the addition made on account of adjustment made to the arm’s length price of royalty payment was to be deleted. Even assuming that CUP method had been applied by TPO, it was apparent that he had not undertaken the exercise provided under rule 10B(i)(a) for determining the arm’s length price. Tribunal has rejected applicability of CUP method for determining the arm’s length price of royalty payment and had held that TNMM was the most appropriate method to determine the arm’s length price of royalty payment. Tribunal had also held that the rate at which payment of royalty was approved by the RBI/SIA could be considered as arm’s length price.
FULL TEXT OF THE ITAT JUDGEMENT
The aforesaid appeals pertaining to the same assessee have been filed by the Revenue challenging three separate orders passed by the learned Commissioner (Appeals), Mumbai, for the assessment years 2004–05, 2004–05 and 2005–06.
ITA no.3668/Mum./2008 A.Y. 2003–04
2. The only dispute for which the Revenue has preferred this appeal is on account of deletion of addition made towards transfer pricing adjustment to the arm’s length price of the royalty paid by the assessee to its overseas Associated Enterprise (AE)
3. Brief facts are, the assessee, an Indian Company, was formed in pursuance to a joint venture agreement between Netafim Yiftah Irrigation Equipment & Drip systems, Israeal (Netafim, Israel), Excel Industries Ltd. and Jalbindu Agritech Pvt. Ltd. (Jalbindu) on the share holding of 75%, 15% and 10% respectively. The assessee undertakes manufacturing, assembling and marketing in India of Typhoon family of non–pressure compensated Driplines and Botton Drippers and provides technical and extension service according to customers’ needs before, during and after sales. During the previous year relevant to the assessment year under dispute, the assessee had entered into a number of international transactions with its overseas AEs as enlisted below and by aggregating to such transactions the assessee has benchmarked them by applying Cost Plus Method (CPM):–
