ASB International Pvt Ltd Vs Additional Income Tax Officer (ITAT Mumbai)
ITAT Mumbai held that “other method” provided in Rule 10AB r.w.s. 92C (1) would be a good substitute for CUP as there is lack of reliable comparables in case of royalty transactions as royalty payments have been made for unique intangibles
Facts- The assessee is a wholly owned subsidiary of Nissei ASB Machine Co. Ltd. and was set up as a 100% Export Oriented Unit (EOU). It is engaged in the manufacturing of injection stretch blow molding machines, molds and parts, components, and subassemblies of machines and molds. The assessee has paid a royalty of Rs.20,63,83,848/- as per the agreement. It was stated that the royalty payment was in connection with the technology received by M/s. ASB India and ASB Japan provide maintenance and enhancement of technical know-how to ASB India. The assessee was required to pay royalty at 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. The assessee adopted the ‘Other Method’ in its revised Transfer Price (TP) study report.
TPO observed that the ‘Other method’ adopted by the assessee has been rejected by the DRP and has upheld the comparable uncontrolled price (CUP) method as the most appropriate method for benchmarking the transaction of royalty and directed the TPO to take Optokos Corporation and DynEco Corporation by taking the average of royalty payments of these two agreements as CUP.
TPO finally adopted 5.5% as the royalty rate taking comparable companies of Optikos Corporation and DynEco Corporation held that arm’s length price of the royalty transaction would be Rs.9,45,92,597/- and accordingly, adjustment of Rs.11,17,91,252/- was made.
Conclusion- Tribunal in assessee’s own case has held that 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.
Thus, matter remanded 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’.
FULL TEXT OF THE ORDER OF ITAT MUMBAI
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).
2. 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.
2. 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.
3. 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.
3. The other grounds raised for initiation of penalty proceedings u/s.271(1)(c) is premature, therefore, same is dismissed.
4. 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.
The second figure would be an aggregate of profits reasonably attributable to the manufacturing and the sales function. The profits earned by the AE segment (where the sales are made only to the AE, and there are no intangibles involved), could form the basis for determining the manufacturing profits. Since the arm’s length profits of the AE segment is 2.46 % (details provided in Appendix H), the profits reasonably attributable to manufacturing function should be taken as 2.46% for the year under consideration. On the other hand, profits attributable to sales could be taken as 3%, this being the figure accepted and allowed to ASB International for past years for the sales function.
The computation works out as follows:
