M/S. TOYOTA KIRLOSKAR MOTORS PVT LTD.,,BENGALURU vs. DEPUTY COMMISSIONER OF INCOME-TAX, CIRCLE-2(1)(1), BANGALORE

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ITTPA 568/BANG/2024Status: DisposedITAT Bangalore10 October 2024AY 2011-129 pages

In favour of the assessee: the assessee's appeal was allowed. From the AI summary of this appeal.

AI SummaryAllowed

What did the Tribunal hold?

The Tribunal held that the issue is covered by the decision of a coordinate bench in the assessee's own case for AYs 2012-13 & 2014-15. In that decision, it was held that if TNMM is adopted at the entity level, which includes royalty, no separate adjustment is required for royalty payment as a distinct international transaction. The Tribunal noted that the revenue had not placed any material demonstrating that the earlier decision was set aside, stayed, or overruled, nor were there distinguishing features in the facts of the current year compared to earlier years. Therefore, respectfully following the precedent, the Tribunal remitted the issue to the file of the TPO with a direction to consider the royalty payment at the entity level, and consequently, no separate benchmarking of royalty is required. The grounds related to foreign tax credit and interest on refund were set aside to the AO for fresh adjudication. The appeal was allowed for statistical purposes.

What were the facts?

The assessee, M/s Toyota Kirloskar Motor Pvt. Ltd., is an Indian subsidiary of Toyota Motor Corporation-Japan, engaged in manufacturing and selling vehicles. For Assessment Year 2011-12, the assessee paid royalty to its parent company. The assessee, in its transfer pricing study, adopted the Transactional Net Margin Method (TNMM) at the entity level, considering royalty as a closely linked transaction subsumed into expenditure. The Transfer Pricing Officer (TPO) however, separately benchmarked the royalty payment, finding the assessee's 5% royalty rate to be high compared to industry averages (0.82% to 3.2%) and proposed an adjustment. The Dispute Resolution Panel (DRP) confirmed this. The issue had previously reached the ITAT, which set aside the matter for re-computation, directing the TPO to consider transactions as interlinked and aggregate for TP analysis. In set-aside proceedings, the TPO again treated royalty separately, proposing an adjustment of Rs. 26,04,67,200/-. The AO framed the final assessment based on this.

What were the issues?

1. Whether the lower authorities erred in separately benchmarking the royalty payment instead of considering it as part of the entity-level TNMM analysis, as per Section 92C of the Income Tax Act, 1961. Assessee's Contention: The assessee argued that it adopted TNMM at the entity level, where royalty was a closely linked transaction subsumed into expenditure. They contended that the lower authorities failed to appreciate that testing the overall margin at ALP presupposes that components of income and expenditure are also at ALP. They also argued that excluding royalty from operating costs without justification and separately benchmarking it was incorrect. The assessee relied on previous ITAT directions in its own case for earlier assessment years, which directed an aggregate transaction approach. Revenue's Contention: The revenue, through the CIT (DR), did not controvert the assessee's arguments regarding the previous ITAT decision. The judgment notes the TPO's finding that the royalty rate was high and the DRP confirmed the adjustment.

Which sections of the Income-tax Act were involved?

Section 92C,Section 244A

AI-generated summary — verify with the full judgment below

Income Tax Appellate Tribunal, ‘B’ BENCH, BANGALORE

Before: SHRI WASEEM AHMED & SHRI SOUNDARARAJAN K

For Appellant: Shri Padam Chand Khincha, CA
For Respondent: Shri Vilas V Shinde, CIT (DR)
Hearing: 18.07.2024Pronounced: 10.10.2024

PER WASEEM AHMED, ACCOUNTANT MEMBER:

This is an appeal of the assessee against the order passed by the ld. CIT dated 30/01/2024 in DIN No. ITBA/AST/S/143(3)/2023- 24/1060268071(1) for the assessment year 2011-12.

2.

The assessee has raised following grounds of appeal: “GENERAL GROUND 1. The orders passed by learned Deputy Commissioner of Income Tax, central Circle-2(1), Bangalore hereinafter referred as "AO" for short), learned Deputy Commissioner of Income Tax (Transfer Pricing Officer) — 2(2)(2), Bangalore (hereinafter referred as "TPO" for brevity) and the Honourable DRP-2 (hereinafter referred as "DRP" for brevity) ("AO", "TPO" and DRP collectively referred as "lower authorities" for brevity) are bad in law and contrary to ITAT directions and therefore bad in law.

GROUNDS RELATING TO ROYALTY ADJUSTMENT 2. The lower authorities have erred in: a. Not appreciating that the Appellant had adopted TNMM at the entity level, in which process, the royalty payment were considered as closely linked transaction and hence was subsumed into the expenditure; b. Not substantiating how the royalty payment were singled out of the many transactions to be tested on the basis of the ALP; and c. Not appreciating that once the margin is tested on the touchstone of ALP, it pre-supposes that the various components of income and expenditure considered in the process of arriving at the margin are also at ALP; d. Excluding royalty payment from operating cost without any justification; e. Not appreciating that excluding royalty expenditure from operating expense does not justify separate benchmarking of royalty. 3. The lower authorities have erred in;

a. Rejecting external CUT data on unjustified grounds; b. Ignoring the fact that ratio of R&D expenses of TMC was much higher than the effective royalty rate of the Appellant; and c. Ignoring the fact that technical Assistance Agreements were approved by Government authorities and therefore royalty payment should be considered as at arm's length;

Without prejudice to above, the lower authorities have erred in:

a. Considering Sutlej Motors Ltd as comparable for the purpose of computation of arm's length price of royalty payment without appreciating that it is engaged in body building and hence functionally different; b. Adopting inconsistent stand in selection of Maruti Suzuki Ltd and Hyundai Motor India Ltd as comparables, whereby these companies are taken as comparables for margins analysis under TNMM and are rejected as comparables for royalty analysis; c. Adopting single year data for analysis, without appreciating that the business, commercial and technological factors mandate adoption of multi- year data; and d. Not granting adjustment for superior quality of technology in case of Appellant.

OTHER GROUNDS 5. The learned AO has erred in not granting foreign tax credit of Rs.5,82,542/- claimed in the income tax return. 6. The learned AO has erred in not granting interest on refund u/s 244A of the Act. / On the facts and circumstances, the Appellant submits that it is eligible for interest on refund u/s 244A of the Act. The Appellant submits that each of the above grounds/ sub-grounds are independent and without prejudice to one another.

The Appellant craves leave to add, alter, vary, omit, substitute or amend the above grounds of appeal, at any time before or at, the time of hearing, of the appeal, so as to enable the Income-tax Appellate Tribunal to decide the appeal according to law.”

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3.

The ground No. 1 raised by the assessee in its appeal is general in nature. Thus, the same does not require any separate adjudication. Therefore, the same is hereby dismissed as infructuous.

4.

The effective issue raised by the assessee in ground No. 2(a) to 2(e) of its appeal is that the learned DRP/TPO erred in separately benchmarking the royalty payment instead of benchmarking the same transaction at entity level using TNMM.

5.

The facts in brief are that the assessee company, in the present case, is a subsidiary of M/s Toyota Motor Corporation-Japan (hereafter TMC) and engaged into manufacturing and selling of Multi Utility vehicles and passenger cars. The assessee to manufacture cars has acquired license from TMC which was subject to the royalty payment. The assessee has also availed various types of technical and support services from TMC as well as from other AEs and the payment against such services were representing the fees for technical services. The assessee also imported Completely Built-Up cars, spare & parts forming part of cars and spare & parts for sale and after sale services from AEs. Besides, the assessee also exported CUB-Car, part and component and trail parts etc. to its AEs. The various types of transactions entered into by the assessee with the AEs are detailed as under:

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6.

The assessee for TP analysis combined all the transaction and benchmark the transactions at entity level by adopting TNMM as most appropriate method.

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7.

On the other hand, the TPO divided the transactions into 2 segments namely Manufacturing and Trading Segment and found both the segment at arm length. However, the TPO proceeded to benchmark the individual transactions separately and in this process found that the royalty fee paid by the assessee @ 5% is exorbitantly high as compared to royalty rate in automobile industry which varies between 0.82% to 3.2%. Accordingly, the TPO held that in the case of the assessee, the royalty rate at 2% will be appropriate. Thus, the TPO considering royalty rate at 2% proposed to make adjustment of Rs. 107,98,91,825/- which was subsequently confirmed by the learned DRP.

8.

The dispute reached before this Tribunal in assessee’s appeal bearing IT(TP)A 256/Bang/2016. The Bench found that the dispute whether the transactions entered into by the assessee would be segregated into trading and manufacturing segment or would be combined for the purpose of TP analysis was also there in the own case of the assessee for A.Ys. 2003-04, 2007-08, 2008-09 & 2010-11 wherein Tribunal held that the transactions are interlinked and therefore combined/ aggregate transaction approach should be adopted for determining ALP. Further, the TPO itself in the A.Y. 2012-13 admitted that the transaction carried out by the assessee are interlinked therefore, the same needs to be combined for the purpose of determining ALP under TNMM. Thus, the Tribunal in view of the above set aside the issue to the file of the TPO with direction to compute ALP after considering the transaction as interlinked and a combined transaction. As such, the Tribunal found that the royalty transaction should also be considered to be interlinked. Accordingly, the Tribunal set aside the issue to the file of the AO/TPO with the following direction:

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“16. Assessee in transfer pricing study considered royalty as a part of operating expenses in TNMM as most appropriate method. The Ld.AR referring to page 981 of paper book, submitted that comparison of percentage of average royalty in respect of comparables was submitted which comes to 3% and 2.27%. Whereas assessee has paid royalty to its AE at 5%. He submitted that, since average percentage of royalty expenditure on net sales of assessee is much lower than percentage of royalty and R&D expenditure on net sales of proposed comparables, the transaction of royalty payments to AE has to be treated at arm's length. It is also been submitted that, most of the auto parts companies are paying royalty of 3% to 5% and assessee is being royalty at 3% on part sales. He thus submitted that, even if royalty is to be considered independently, the transaction is at arm's length as compared to the comparables considered by Ld.TPO. We agree with the submissions made by Ld. AR insofar as considering the margin of transaction computed by assessee vis-a-vis average margin of comparables. However, in our view this needs to be verified by Ld. AO/TPO.”

8.1 However, the Tribunal in the misc. application filed by the assessee in M.P. No. 21/Bang/2021 in ITA No. 256/Bang/2016 has observed as under: “17. We therefore direct the Ld. TPO to recompute the ALP of the transaction by applying the methods recognized under the Act. The Ld. TPO is directed to carry out fresh search for comparables based on the MAM selected. It may be noted that ALP cannot be computed at `nil'. In the event the average margin of the comparables selected is within 3% to 5% range, no adjustment is warranted. Needless to say that proper opportunity of being heard is to be granted to assessee in accordance with law."

9.

The TPO in the set aside proceedings did not consider the payment of royalty at entity level. As such, the TPO treated the payment of Royalty as a separate transaction. The TPO worked out the average rate of royalty paid by the 6 comparable companies selected by him/her at 2.01% and applying the said rate worked out ALP of Royalty at Rs. 153,93,52,508/- whereas the assessee has paid total royalty for Rs. 179,98,19,708/-. Thus, the TPO proposed to make TP adjustment of Rs. 26,04,67,200/- being difference of the amount discussed above.

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10.

The proposed adjustment by the TPO was subsequently confirmed by the learned DRP and accordingly final assessment order was framed by the AO.

11.

Being aggrieved the of the AO/TPO/DRP, the assessee is in appeal before us.

12.

The learned AR before us contended that the ITAT in the own case of the assessee has combined all the transactions at entity level including the royalty payment to the AE and thereafter directed the TPO for fresh computation of ALP. The ld. AR before us prayed for the similar direction for the year in dispute.

13.

On the other hand, the learned DR before us could not controvert the arguments advanced by the ld. AR for the assessee.

14.

We have heard the rival contentions of both the parties and perused the materials available on record. At the outset, we note that the issue on hand is covered by the decision of the coordinate Bench of this Tribunal in assessee’ own case for the AYs 2012-13 & 2014-15 reported in [2023] 147 taxmann.com 558 (Bang.Trib.) wherein it was held as under: “13. We note that assessee's margins have been computed including royalty payment which is higher than the margin of the comparables. It is also not disputed by the revenue that the comparables in case of the comparables, the royalty, margins are computed after including royalty and research and development expenses. The view taken by the Coordinate Bench of this Tribunal in assessee's own case for A.Y. 2007- 08 has been reproduced hereinabove wherein all these aspects have been considered. This Tribunal for A.Y. 2007-08 has deleted the adjustment made by the Ld.TPO in respect of royalty by separately bench marking the transactions. This has been fortified by the clarification given in a Miscellaneous Petition filed by the department which is also reproduced hereinabove. This view is also supported by various

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decisions of Coordinate Benches of this Tribunal as well as various High courts, Cojoint reading of these orders, we direct the Ld.AO/TPO to delete the adjustment proposed for royalty as a separate international transaction. Respectfully following the above view, we direct the Ld.AO/TPO to delete the adjustment proposed towards royalty as a separate international transaction. Accordingly, ground nos. 10 to 12 raised by assessee stands allowed. 13.1 The ld.DR relied on the order of the lower authorities and he submitted that since the assessee has adopted TNMM and the TPO has also accepted the methods for calculation ALP, the TPO has not made separate adjustment in regard to payment of royalty, therefore, this issue should not be raised by the assessee. 13.2 After hearing both the sides, we observe from the order of the TPO, he has calculated the ALP in regard to royalty payment determined under TNMM of Rs. 154.54 crores however, no separate adjustment of royalty has been proposed by the TPO since the TNMM was adopted at NTT level which includes royalty also. The ld.DRP also expressed his opinion that the TPO has not proposed any adjustment towards royalty payment. Considering the above observations and arguments, we uphold the order of the DRP and no separate adjustment is required for the payment of royalty if the TNMM approach has been adopted at entity level as decided by the coordinate bench of the Tribunal in the assessee's own case noted supra, therefore ground Nos.8 to 15 become academic in nature, accordingly, we allow ground nos.8 to 15.”

14.1 Before us, no material has been placed on record by the Revenue demonstrating that the decision of the Tribunal in own case of the assessee as discussed above has been set aside/stayed or overruled by the Higher Judicial Authorities. Before us, no material was placed on record pointing out any distinguishing feature in the facts of the case of earlier AY and the year under consideration. Thus, respectfully following the order of the tribunal in the own case of the assessee discussed above, we hereby remit the issue to the file of the TPO with direction to consider the payment of royalty at entity level and therefore, no separate benchmarking of the royalty is required to be made. Hence, the grounds of appeal of the assessee are hereby allowed for statistical purposes.

15.

The issues raised by the assessee in ground Nos. 5 and 6 relate to the foreign tax credit not granted by the revenue and interest under

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section 244A of the Act. Regarding these grounds of appeal, the learned AR for the assessee submitted that these issues can be set aside to the file of the AO for fresh adjudication as per the provisions of law. On the other hand, the learned DR before us did not raise any objection if such issues are set aside to the file of the AO for fresh adjudication as per the provisions of law. In view of the above, we set aside the issues to the file of the AO for fresh adjudication as per the provisions of law. Hence the grounds of appeal of the assessee are allowed for statistical purposes.

16.

In the result, the appeal filed by the assessee is allowed for statistical purposes.

Order pronounced in court on 10th day of October, 2024

Sd/- Sd/- (SOUNDARARAJAN K) (WASEEM AHMED) Judicial Member Accountant Member Bangalore Dated, 10th October, 2024 / vms / Copy to: 1. The Applicant 2. The Respondent 3. The CIT 4. The CIT(A) 5. The DR, ITAT, Bangalore. 6. Guard file By order Asst. Registrar, ITAT, Bangalore

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