PRAXAIR INDIA PRIVATE LIMITED,BANGALORE vs. DEPUTY COMMISSIONER OF INCOME TAX, CENTRAL CIRCLE-1(3), BANGALORE

IN THE INCOME TAX APPELLATE TRIBUNAL BENGALURU “B” BENCH, BENGALURU Before Shri George George K., Judicial Member and Ms. Padmavathy S., Accountant Member IT(TP)A No. 915/Bang/2022 (Assessment Year: 2018-19)

M/s. Praxair India Pvt. Ltd. vs DCIT, Circle - 1(3) Level 6, Prestige Khoday Tower Central Revenue Building No. 5, Raj Bhavan Road Queen's Road Bangalore 560001 Bengaluru 560001 PAN – AAACP9993J (Appellant) (Respondent) Assessee by: Shri T. Suryanarayana, Advocate Revenue by: Shri Sunil Kumar Singh, CIT-DR Date of hearing: 27.02.2023 Date of pronouncement: 28.02.2023 O R D E R Per: George George K., J.M. This appeal at the instance of the assessee is directed against the final assessment order dated 29.07.2022 passed under Section 143(3) r.w.s. 1443C(13) of the Income Tax Act, 1961 (the Act). The relevant assessment year is 2018-19.

2 IT (TP)A No. 915/Bang/2022 M/s. Praxair India Pvt. Ltd. Pricing Officer (TPO) to determine the arm's length price (ALP) of the international transactions undertaken by the assessee with its Associated Enterprises (AE). The TPO, vide order dated 30.07.2021 proposed TP adjustments with regard to Royalty payment of a sum of rs.58,50,48,059/- by restricting the ALP on Royalty at 1% (assessee had claimed payment of 4%). On receipt of TPO’s order the Assessing Officer (AO) passed draft assessment order on 29.09.2021 under Section 143(3) r.w.s. 144C of the Act. In the said draft assessment order the AO incorporated the TP adjustment proposed by the TPO and also made certain corporate tax disallowance/additions.

3 IT (TP)A No. 915/Bang/2022 M/s. Praxair India Pvt. Ltd. 5.2. The Ld. AO/ Ld. TPO/ Hon'ble DRP have erred in law and in facts, by not accepting the economic analysis undertaken by the Appellant in accordance with provisions of the Act read with Income-tax Rules, 1962 ("the Rules") and conducting a fresh economic analysis for the determination of the arm's length price in connection with the impugned international transaction of payment of royalty and thereby, holding that the Appellant's international transaction is not at arm's length, consequently making a transfer pricing adjustment. 5.3. The Ld. AO/ Ld. TPO/ Hon'ble DRP erred in arbitrarily restricting the royalty payment by the Appellant to its AE at 1% of net sales and thereby: a. Erred in ignoring the justification of arm's length nature of royalty payment using Comparable Uncontrolled Price Method ("CUP") method as provided in the Transfer Pricing documentation b. Failed to appreciate that the transfer of technology is a continuous process and thereby erred in stating that technology was transferred only during the initial year of operation and the Assessee has not received any new technology which necessitates the payment of royalty. c. Erred in disregarding the external CUT search performed by the Appellant which is provided as a supplementary analysis to demonstrate the arm's length nature of the international transaction pertaining to payment of royalty. d. Erred in disregarding the internal CUT search performed by the Appellant which is provided as a supplementary analysis to demonstrate the arm's length nature of the international transaction pertaining to payment of royalty. e. Erred in restricting royalty payment to 1% of net sales on ad-hoc basis using CUP despite not following the provisions prescribed in clause (a) of the sub-rule (1) of Rule 10B of the Rules for determination of arm's length price in relation to an international transaction under CUP. f. Erred in not appreciating the similar licensing arrangement entered among group companies as these

4 IT (TP)A No. 915/Bang/2022 M/s. Praxair India Pvt. Ltd. agreements provide persuasive value and support that the licensing of intangibles and services has been compensated as per the group policy. g. Erred in not considering the judicial precedent issued by Hon'ble Income Tax Appellate Tribunal ("ITAT"), Bangalore in the Appellant's own case for AY 2009-10, AY 2010-11, AY 2011-12 and AY 2012-13. 5.4. The Ld. TPO erred in disregarding the TNMM analysis provided by the Assessee as a supplementary analysis to demonstrate the arm's length nature of the international transaction pertaining to payment of royalty. 5.5. Without prejudice, the Ld. AO/ Ld. TPO/ Hon'ble DRP erred in not appreciating the fact that aggregation of closely linked transactions while applying TNMM is an appropriate approach that has been suggested by the Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations laid down by the Organisation for Economic Co-Operation and Development ("OECD Guidelines") and referred for guidance in various rulings of Income Tax Appellate Tribunal ("Tribunal"). 6. Grounds of appeal relating to corporate tax matters 6.3 The Ld. AO and Hon'ble DRP erred in making addition of notional income of INR 32,72,532 while computing the total income for AY 2018-19 by disregarding the fact that notional income is not taxable under the provisions of the Act. 6.4 The Ld. AO erred in giving credit of tax collected at source of INR 5,71,912 instead of INR 5,86,229 as claimed in the return of income.” We shall adjudicate the above grounds as under. Ground No. 5 and sub-grounds (TP adjustment) 5. The assessee has benchmarked the payment of Royalty by aggregating it with certain other transactions. The TPO rejected the method adopted by the assessee. The TPO applied CUP as the most appropriate method to determine the ALP of the transaction at 1% (assessee had claimed 4%). Aggrieved, assessee filed objections before the DRP. The DRP rejected the objections of the assessee by relying on the directions issued in assessee’s own case for AY

5 IT (TP)A No. 915/Bang/2022 M/s. Praxair India Pvt. Ltd. 2015-16 (refer page 8 of the DRP directions). Aggrieved the assessee has raised this issue before the Tribunal. The learned A.R. submitted that the issue in question is squarely covered by the orders of the Tribunal in assessee’s own case for AY 2012-13 to 2016-17.

6 IT (TP)A No. 915/Bang/2022 M/s. Praxair India Pvt. Ltd. 11. The ld. DR relied on the written submissions. 12. We have heard the rival submissions and perused the materials on record. We notice that the coordinate bench of the Tribunal in assessee’s own case (Supra) has held that – “7.4 We have heard rival submissions and perused the material on record. The Tribunal in assessee’s own case for assessment year 2009- 2010 in IT(TP)A No.315/Bang/2014 (order dated 31.03.2017) and for assessment year 2010-2011 in IT(TP)A No.361/Bang/2015 (order dated 04.06.2018) had restored the issue of determination of ALP for payment of royalty to the files of the TPO. The TPO, pursuant to the Tribunal’s order, passed orders accepting the payment of royalty at 4% to be at arm’s length. The relevant portion of the TPO’s order for assessment year 2009-2010 reads as follows:- “3. In view of above direction of the ITAT, the assessee was asked to submit the details with respect of all comparables vide letter dated 19.06.2017. In response of the same the submission was filed by the assessee on 11.06.2017 which have been considered. As per submission, assessee has stated that out of the total 17 comparable agreements, the related party relationship between licensor and licensee existed in 07 comparable agreements and remaining 10 comparables agreements have unrelated party relationship for which the average royalty rate is computed at 4.10. Submission of the assessee has been considered. As the average rate of royalty paid by the comparables is more than payment made by the assessee, i.e. at 4%, payment towards royalty is being treated to be at arm’s length.” 7.5 The relevant portion of the TPO’s order for assessment year 2010- 2011, reads as follows:- “6. In view of above direction of the ITAT, the assessee was asked to submit the details with respect of all comparables vide letter dated 27.11.2018. In response of the same the submission was filed by the assessee on 12.12.2018 which have been considered. As per submission, assessee has stated that out of the total 17 comparable agreements, the related party relationship between licensor and licensee existed in 07 comparable agreements and remaining 10 comparables agreements have unrelated party relationship for which the average royalty rate is computed at 4.10%. Submission of the assessee has been considered. As the average rate of royalty paid by the comparables is more than payment made by the assessee, i.e., at 4%, payment towards royalty is being treated to be at arm’s length. Taking all these into consideration, the Royalty payment @ 4% made by the taxpayer to its AE is considered at Arm’s Length, hence no adjustment on account of royalty payment is required to be made 7.6 In view of the above orders of the TPO, accepting the payment of royalty at 4% to be at arm’s length, we hold that the payment of royalty at 4% in the year under consideration is to be treated as being at arm’s length. Accordingly ground 3 is allowed.”

7 IT (TP)A No. 915/Bang/2022 M/s. Praxair India Pvt. Ltd. 13. Considering the decision of coordinate Bench in assessee’s own case (supra) we allow this ground in favour of the assessee and hold that payment of royalty @ 4% is at arm’s length.” 11. In view of the above order of the Tribunal, in assessee’s own case (supra), we hold that payment of royalty at 4% on sale is to be treated at arm’s length. It is ordered accordingly.” 9. In view of the above order of the Tribunal which is identical facts of the instant case (since the agreement for payment of Royalty is the same for earlier years and the relevant AY) we hold that the payment of Royalty at 4% is to treated at ALP. It is ordered accordingly.

Ground No. 6.3 (Corporate Tax) 11. The AO in the draft assessment order had made an addition of Rs.32,72,532/- being notional interest while computing the total income for AY 2018-19. The DRP, vide its directions dated 14.06.2021, had rejected the objections of the assessee. However, the DRP vide corrigendum dated 28.07.2022 directed the AO to re-examine the issue of addition of interest income amounting to Rs.32,72,532/-. The AO, pursuant to the corrigendum issued by the DPR, again made addition of notional interest of Rs.32,72,532/-. The relevant observations of the AO in the final assessment order read as follows: - “8.2.1 A draft assessment order was passed on 29.09.2021 by the assessing officer in ReAC in accordance with the section 144C (1) of the IT Act. Assessee filed objections before DRP on 28.10.2021 against this addition. The DRP has passed order u/s 144C(5) on 14.06.2022 in which no specific direction was given on this issue. On 28/07/2022, the DRP passed a corrigendum which was received in this office on 29/07/2022 which reads as follows: CORRIGENDUDM During the course of DRP proceedings for the A.Y. 2018-19, this panel has issued the directions in the case of M/s Praxair

8 IT (TP)A No. 915/Bang/2022 M/s. Praxair India Pvt. Ltd. India Private Limited, under section 144C(5) of the Income Tax Act. 1961 vide F.No.301/DRP-2-BANG/2021-22 Dated 14/06/2022. Further, it is seen from the order certain mistakes occurred inadvertently. Hence, this panel has decided to issue a corrigendum in this regard as under: On perusal of the draft assessment order, it is seen that disallowance made with respect to income from other source amounting to Rs. 32,72,532/- has been done by the AO. Hence, the AO is directed to take into account of the submissions of the assessee before giving effect to the directions of this panel contained in para 7.2 of the directions. 8.2.2 Hon'ble DRP has directed that the submissions of assessee may be taken into account before giving effect to the directions of the panel. However, it is pertinent to state that the limitation date for final order u/s 144C(13) is 31/07/2022 and 29/07/2022 is the last working day. Due to paucity of time, the relevant submissions of assessee, if any, cannot be verified. Therefore, the final order is being passed sustaining the addition of Rs, 32,72,532.” 12. The learned A.R. submitted that only real income ought to be brought to tax and interest income, if it is notional, the same cannot be brought to tax. The learned A.R. further submitted that the AO in the final assessment order has not examined the issue in detail due to paucity of time, since the final assessment was getting time barred. It is, therefore, submitted that the matter may be examined by the AO afresh.

9 IT (TP)A No. 915/Bang/2022 M/s. Praxair India Pvt. Ltd. 15. Ground No. 6.4: In this ground it is contended that credit of tax collected ought to be given at Rs.5,86,229/- as claimed in the return of income instead of Rs.5,71,912/- granted in the final assessment order. After hearing the rival submission, we direct the AO to examine the claim of the assessee and take decision in accordance with law. It is ordered accordingly.

Sd/- Sd/- (Padmavathy S.) (George George K.) Accountant Member Judicial Member Bengaluru, Dated: 28th February, 2023 Copy to: 1. The Appellant 2. The Respondent 3. The CIT(A) -DRP 4. The CIT - 5. The DR, ITAT, Bengaluru 6. Guard File By Order //True Copy// Assistant Registrar ITAT, Bengaluru n.p.