DEPUTY COMMISSIONER OF INCOME-TAX, CIRCLE - 1(1), PUNE vs. M/S. CARRARO INDIA PVT.LTD, PUNE

आदेश / ORDER PER R.S.SYAL, VP :

These are two cross appeals - one by the assessee and the other by the Revenue - arise out of a common order of CIT(A)-13,

2 ITA Nos.1260 and 1308/PUN/2018 M/s. Carraro India Private Limited

Pune passed on 27-04-2018, inter alia, for the assessment year

2009-10.

the confirmation of addition of Rs.75,41,558/- made by the

Assessing Officer (AO) on account of transfer pricing adjustment

recommended by the Transfer Pricing Officer (TPO). The Revenue

in its appeal is aggrieved by the direction of the ld. CIT(A) to treat

the entire amount of royalty as a revenue expense as against capital

expenditure taken by the AO.

Indian company, was set up in 1997 as a joint venture of Carraro

SpA of Italy (51%) and Carraro International SA. Luxemburg

(49%). The assessee is engaged in the business of designing,

manufacturing and marketing mechanical and transmission

systems for on-road and off-road vehicles and for stationary

application, clutches, hydraulic lifts, axles for agricultural tractors,

transmission for loaders and backhoe and planetary drives for

construction equipments and other off–highway applications. The

assessee reported certain international transactions in Form 3CEB.

The AO referred the matter of determination of the arm’s length

3 ITA Nos.1260 and 1308/PUN/2018 M/s. Carraro India Private Limited

price (ALP) of the international transactions to the TPO. One of

the reported international transactions is payment of “Royalty”

with transacted price at Rs.1,01,87,033/-. The assessee applied

Comparable Uncontrolled Price (CUP) method as the most

appropriate method for demonstrating that the international

transaction was at ALP. The TPO noticed that the assessee entered

into an Agreement dated 15-12-2008 w.e.f. 01-07-2008 with

Carraro SpA, Italy, in terms of which a sum of Rs.75.41 lakh was

paid as royalty @ 0.50% of sales. It was opined that there was no

justification for making new additional claim of royalty when the

earlier royalty agreements were expiring after the period was

getting over. The TPO further observed that the assessee paid

royalty for use of `Carraro’ brand name, which term was part of its

own name and all the products manufactured by it legitimately

carried the same. He still further noticed that most of the

assessee’s customers were Original Equipment Manufacturers

(OEMs) and they did not need to look for any logo on the

components. It was, therefore, held that there was no justification

for a new agreement for the current year pursuant to which royalty

of Rs.75,41,558/- was paid. This is how he determined Nil ALP

of such transaction of royalty payment. When the matter came up

4 ITA Nos.1260 and 1308/PUN/2018 M/s. Carraro India Private Limited

before the AO, he, vide his final order passed u/s. 143(3)

r.w.s.144C(3) of the Income-tax Act, 1961 (hereinafter also called

‘the Act’), came to hold that the knowledge obtained through the

designs/drawings etc. became the property of the assessee

company and hence, it was a capital expenditure. Allowing

depreciation @ 25% on Rs.1,08,81,033/- (as against the correct

amount of total royalty paid by the assessee during the year at

Rs.1,01,81,033/-), he allowed depreciation of Rs.27,20,258/- and

made addition for the remaining sum of Rs.81,60,774/-.

issue. The first, being, determination of ALP on brand royalty by

the TPO at NIL and second, being, the action of the AO in holding

that the brand royalty was a capital expenditure. Relying on the

Tribunal order in the case of the assessee for the A.Yrs. 2003-04 to

2008-09, the ld. CIT(A) held that the brand royalty could not be

considered as a capital expenditure. On the other aspect, he upheld

the action of the TPO in determining the NIL ALP of the

international transaction. Whereas the Revenue is aggrieved by the

direction given by the ld. CIT(A) in treating the royalty payment as

revenue expenditure, the assessee is aggrieved by the upholding of

5 ITA Nos.1260 and 1308/PUN/2018 M/s. Carraro India Private Limited

the determination of Nil ALP of the international transaction of

payment of royalty to the tune of Rs.75,41,558/- by the TPO.

material on record. It is noted above that the assessee paid total

royalty of Rs.1,01,81,033/- in respect of two agreements viz.,

Rs.26,39,475/- pursuant to the agreement dated 05-04-2001, which

was paid @ 2% both for use of technical knowhow and brand

name ; and Rs.75,41,558/- pursuant to the agreement dated

01-07-2008 for use of name and logo of its foreign/associated

enterprise @ 0.5%. On a reference made by the AO, the TPO

determined Nil ALP in respect of Royalty payment of Rs.75.41

lakh pursuant to agreement dated 01-07-2008. Impliedly, he

accepted that payment of Royalty, namely, Rs.26.39 lakh pursuant

to the agreement dated 5.4.2001 was at ALP. When the matter

came up before the AO for finalizing the assessment, he treated

total amount of royalty paid by the assessee under both the

agreements, as capital expenditure. After allowing depreciation

@25%, he made an addition of Rs.81,60,774/-. Thus, it is apparent

that the AO deviated from the order passed by the TPO u/s.

92CA(3) of the Act.

6 ITA Nos.1260 and 1308/PUN/2018 M/s. Carraro India Private Limited

whether the action of the AO in this regard can be treated as valid?

Section 92CA(4), prior to its substitution by the Finance Act 2007

w.e.f. 1.6.2007, provided that on receipt of the order passed by the

TPO, the AO shall proceed to compute the total income of the

assessee having regard to the ALP determined by the TPO. The

Finance Act, 2007 substituted the hitherto sub-section (4) with a

new sub-section w.e.f. 01-06-2007 providing that “on receipt of the

order under sub-section (3), the Assessing Officer shall proceed to

compute the total income of the assessee under sub-section (4) of

section 92C in conformity with the arm’s length price as so

determined by the Transfer Pricing Officer”. A conjoint reading

of the earlier and existing sub-section (4) of section 92CA makes it

explicitly manifest that whereas under the earlier provision, the

report of the TPO was not binding on the AO and he could

compute the total income of the assessee by just having regard to

the ALP determined by the TPO. If the AO was not satisfied with

the TPO’s opinion on any point determined by the latter, he could

deviate from the TPO’s order and proceed in his own way.

However, w.e.f. 01-06-2007, the legal position has undergone

change. Now, the AO is bound by the order passed by the TPO as

7 ITA Nos.1260 and 1308/PUN/2018 M/s. Carraro India Private Limited

he is required to compute total income in conformity with the ALP

determined by the TPO.

TPO, vide his order dated 24.1.2013, accepted payment of

Royalty of Rs.26.39 lakh, pursuant to the earlier agreement, at

ALP, but proposed transfer pricing adjustment at full for the

remaining amount of Rs.75.41 lakh paid pursuant to the new

agreement. The AO, vide his final assessment order dated

29.4.2013, treated the entire royalty payment made by the assessee

pursuant to both the agreements, as capital expenditure. The view

so adopted by the AO, in our considered opinion, is not in

accordance with law. The AO ought to have made a transfer

pricing addition of Rs.75.41 lakh pursuant to the second agreement

only. As the AO proceeded to treat the entire amount as capital

expenditure, including the one in respect of which the TPO did not

propose any TP adjustment to the tune of Rs.26.39 lakh, we

cannot countenance the view of the AO pro tanto.

the assessee paid a sum of Rs.1,01,81,033 (sic Rs.1,08,81,033) to

Carraro SpA, Italy, on account of royalty for use of technical

8 ITA Nos.1260 and 1308/PUN/2018 M/s. Carraro India Private Limited

knowhow and brand name and logo `Carraro’. It has been

mentioned in the order that there were following five agreements :-

Sl.No. Description of items covered Date Rate of Royalty 1 506 Transmissions for 45 to 75 HP, 30-09-1997 5% clutches and hydraulic lifts 2 304 Transmissions for 35 to 40 HP 05-04-2001 5% 3 Steering Axle & Accessories for 35 05-04-2001 2% and 55 HP Tractors 4 Axle for 80HP Tractors and parts 23-10-2003 2% thereof 5 Name, Logo and Trademark 01-07-2008 0.5% Licence

which the assessee was to pay royalty @ 5% on 506 transmissions

for 45 to 75 HP, clutches and hydraulic lifts. Copy of this

agreement is available on page 249 onwards of the paper book.

This agreement provides that the assessee would obtain the design

and trade mark license and would be supplied by designs,

technology, know-how and technical assistance along with use of

the licensed trade mark for a fee determined @ 5% of Net sales

price. The term “Net sales price” has been defined to mean any

sale made by the assessee in the territory of India. It is thus

evident from the clauses of this agreement that the assessee was to

pay royalty @ 5% in lieu of not only technical knowhow for

specific products but also right to use licensed trade mark owned

9 ITA Nos.1260 and 1308/PUN/2018 M/s. Carraro India Private Limited

by Carraro SpA. The ld. AR stated that this agreement expired in

an earlier year and was not relevant for the year under

consideration. On 05-04-2001, the assessee entered into an

agreement with Carraro SpA, Italy, for use of technical knowhow

and trade mark in respect of 304 transmissions for 35 to 40 HP.

Copy of this agreement is available at page 311 onwards of the

paper book. As per the terms of this agreement, the assessee was

supposed to pay royalty @ 5%. This agreement was also stated to

have become redundant during the year as its term expired in an

earlier year. Agreement at Sl. no.4 dated 23-10-2003 for use of

technology and trade mark in respect of axle for 80 HP tractors and

parts thereof, was stated to have never been implemented and no

payment was ever made in pursuance of this agreement.

Agreement at Sl.No.3 was entered into on 05-04-2001. Under this

agreement, the assessee was to pay royalty @ 2% for use of

technical knowhow and trade mark in respect of steering axle and

accessories for 35 and 55 HP tractors. Pursuant to this agreement,

the assessee paid a sum of Rs.26,39,475/- during the year under

consideration. The ld. AR stated that this Agreement remained

operative till 30.6.2008, which was discontinued from 1.7.2008. In

addition to that, the assessee paid a further sum of Rs.75,41,558/-

10 ITA Nos.1260 and 1308/PUN/2018 M/s. Carraro India Private Limited

in terms of the agreement dated 01-07-2008 for use of name, logo

and trade mark, license. A copy of this agreement is available at

page 219 onwards of the paper book. As per this agreement,

assessee was to pay royalty @ 0.5% only for use of brand name

and not technical know-how. Payment made under this agreement

became subject matter of dispute between the assessee and the

TPO. Whereas the TPO determined NIL ALP of payment made

under this agreement, the case of the assessee is that royalty paid

by it is within the range permitted vide Circular No.5, dated

21-07-2003 issued by the Exchange Control Department of the

Reserve Bank of India. We have gone through the copy of the

circular which has been provided at page 245 of the paper book.

As per this circular issued by the Chief General Manager, RBI,

royalty @ 8% on exports and 5% on domestic sales is permitted

under the automatic route, without any restriction on the duration

of royalty payments. Press Note No.9 (2000 series) dated

08-09-2000 issued by the Government of India, Ministry of

Commerce and Industry provides that : “Payment of Royalty upto

2% for exports and 1% for domestic sales is allowed under

automatic route on use of trade mark and brand name of the

foreign collaborator without technology transfer”. It is thus seen

11 ITA Nos.1260 and 1308/PUN/2018 M/s. Carraro India Private Limited

that payment for use of trade mark and brand name, under Press

Note No.9 (2000 series), is allowed under automatic route at 1%

for domestic sales. The case of the assessee is that it paid royalty

@ 0.5% on sales made in India to certain persons other than OEMs

and hence such payment should be construed at ALP.

paid by the assessee for use of trade mark and brand name at 0.5%

is less than 1% prescribed under automatic route as per Press Note

No.9 (2000 series) issued by the Govt. of India, Ministry of

Commerce and Industry, whether such payment can be considered

as at ALP? In this regard, it is observed that the Hon’ble Delhi

High Court in Sony Ericsson Mobile Communications India (P)

Ltd. Vs. CIT (2015) 374 ITR 118 (Delhi) has held that Royalty as

per Reserve Bank of India’s automatic route is not per se at ALP.

On the other hand, the ld. AR has invited our attention towards a

judgment dated 18-11-2015 of Hon’ble Bombay High Court in CIT

Vs. SGS India Pvt. Ltd. (Income Tax Appeal No.1807 of 2013), a

copy placed on record, in which payment of royalty at less than

that prescribed in Press Note No.9 (2000 series) issued by Govt. of

India, Ministry of Commerce and Industry, was held to be at ALP

on that score alone. In that case, the respondent-assessee used trade

12 ITA Nos.1260 and 1308/PUN/2018 M/s. Carraro India Private Limited

mark of its parent company and paid Royalty for the same ranging

between 2.5% to 4% of the revenue generated. For the purpose of

transfer pricing, the assessee contented that 3% of the revenue

generated should be considered as reasonable for use of trade mark

provided by its parent company. In support of such benchmark,

that assessee relied on the approval granted by the Foreign

Investment Promotion Board (FIPB) dated 25-09-2000. The TPO

did not accept the same and placed reliance on the Press Note No.9

(2000 series) issued by Ministry of Commerce and Industry, Govt.

of India, wherein royalty was allowed at 1% of domestic sales and

2% of exports for use of trade mark/brand name of a foreign

collaborator. The TPO reduced the benchmark to less than 3% for

determination of the ALP. When the matter finally came up for

consideration before the Tribunal, it observed that as per FIPB

directive, the assessee could pay royalty between 5% to 8%. The

assessee contended before the Hon’ble High Court that Press Note

No.9 (2000 series) as relied by the Revenue, if properly

appreciated, would entitle the assessee to royalty payment for use

of brand name upto 8% on exports ad 5% on domestic sales in

terms of clause (IV) of the Press Note 9. The ld. DR was directed

to point out if the case was covered by clause (IV) of the Press

13 ITA Nos.1260 and 1308/PUN/2018 M/s. Carraro India Private Limited

Note No.9 (2000 series) dated 08-09-2000. The ld. DR, after

seeking instructions, contended that royalty paid by the assessee at

3%, was at ALP. In view of this position, the Hon’ble Bombay

High Court decided the issue in assessee’s favour dismissing the

appeal by the Department.

jurisdictional High Court, it becomes palpable that if the payment

of royalty is below the rate prescribed under Press Note No.9

(2000 series) issued by the Govt. of India, Ministry of Commerce

and Industry, the same has to be considered at ALP. The ld. DR

has not disputed that the rate of royalty paid by the assessee at

0.5% for use of brand logo, is not more than the rate of royalty as

per Press Note No.9 (2000 series). Respectfully following the

judgment of Hon’ble jurisdictional High Court, which applies in all

fours to the facts of the extant case, we hold, in principle, that the

payment of Royalty at 0.5% for use of name, logo and trade mark

license is otherwise at ALP and does not require any Transfer

Pricing adjustment.

dated 05-04-2001 @ 2% in respect of steering axle and accessories

14 ITA Nos.1260 and 1308/PUN/2018 M/s. Carraro India Private Limited

for 35 and 55 HP tractors both towards use of technical knowhow

and use of trade mark/brand name. It is further noticed that the

assessee paid royalty of Rs.75.41 lakh @ 0.5% on total sales for

use of name, logo and trade mark. Payment of Rs.75.41 lakh, as

accepted by the ld. AR, is also in respect of sales made by the

assessee of the products which were covered under agreement

dated 05-04-2001, being, steering axle and accessories for 35 and

55 HP tractors. Thus, it is manifest that the assessee paid royalty

for use of logo and trade mark in respect of steering, axle and

accessories for 35 and 55 HP tractors, both under the agreement

dated 05-04-2001 and once again under the new agreement dated

1.7.20008, which is plainly not permissible. Deduction can be

allowed for payment of royalty for use of trade mark license etc.

only once and not twice. As royalty for use of trade mark license

in respect of steering axle and accessories for 35 and 55 HP

tractors is covered within the payment of Rs.26.39 lakh, whose

ALP has been determined by the TPO, at the transacted value, the

amount of royalty paid by the assessee for use of trade mark

license once again under the second agreement for which the TPO

proposed TP adjustment of the full amount of Rs.75.41 lakh,

cannot be allowed once again. Thus, royalty paid for use of trade

15 ITA Nos.1260 and 1308/PUN/2018 M/s. Carraro India Private Limited

mark license pertaining to steering axle and accessories for 35 and

55 HP tractors, included in the amount of Rs.75.41 lakh is required

to be disallowed as a duplicate payment. The ld. AR was fair

enough to concede this position. He submitted certain details, as

per which a sum of Rs.4,95,166/- has been calculated as duplicate

amount of royalty that could be disallowed. While making such a

calculation, the ld. AR made a departure from the submission made

on the earlier date as per which royalty paid at the rate of 2% for

use of technical know-how and trade-mark was discontinued w.e.f.

30.6.2008. It was now stated that only royalty for use of brand

name was discontinued w.e.f. 1.7.2008, but royalty for use of

technical know-how continued to be paid even after 1.7.2008. The

AO/TPO is directed to verify this contention of the assessee on the

basis of the relevant documents and then work out the duplicate

amount of royalty paid for use of brand/logo, included in the sum

of Rs.75.41 lakh, which is to be disallowed.

appeal against the direction of the ld. CIT(A) for treating payment

of royalty as a revenue expenditure as against capital expenditure

treated by the AO in the final assessment order.

16 ITA Nos.1260 and 1308/PUN/2018 M/s. Carraro India Private Limited

also for use of technical knowhow and trade mark in pursuance,

inter alia, of three agreements dated 30-09-1997, 05-04-2001 and

05-04-2001. The AO treated such payments as capital expenditure.

The issue reached the Tribunal. Vide order dated

18-02-2013, the Tribunal in ITA No.1384/PN/2010 etc. for the

A.Yrs. 2003-04, 2004-05 and 2005-06, has decided this issue in

favour of assessee by holding payment of royalty is a revenue

expenditure. A copy of such order has been placed on record.

Once again this issue came up before the Tribunal for the A.Y.

2007-08. Following the order for earlier years, the Tribunal

reiterated its view holding the payment of royalty as a revenue

expenditure. Nothing has been brought on record to demonstrate

that the view canvassed by the Tribunal on this issue for the

preceding years has been either reversed or modified in any

manner by the Hon’ble High Court. Respectfully following the

precedent, we do not approve the action of the AO in treating

royalty payment as a capital expenditure. Thus, the grounds taken

by the Revenue in this regard, are dismissed.

17 ITA Nos.1260 and 1308/PUN/2018 M/s. Carraro India Private Limited

Rs.1,01,81,033/- in respect of two agreements, the only amount

which is to be disallowed is a sum to be calculated afresh,

representing duplicate payment in respect of royalty for use of

trade mark towards steering, axle and accessories for 35 and 55 HP

tractors, included in the sum of Rs.75.41 lakh. The AO is directed

to grant relief accordingly.

the transfer pricing addition of Rs.4,35,34,908/-. Facts apropos this

issue are that the assessee reported an international transaction of

payment of Corporate/Management services fee with transacted

value of Rs.4,35,34,910/-. The assessee applied “Cost plus”

method in the transfer pricing documentation for showing that the

international transactions was at ALP. The TPO observed that the

assessee entered into two agreements with Carraro SpA, Italy and

Carraro Drivetech SpA, Italy during this year, both dated

15-12-2008 effective from 01-07-2008. The assessee paid a sum

of Rs.2,87,45,505/- pursuant to agreement with Carraro Drivetech

SpA, Italy, for availing Finance, Human Resource, Legal, IT,

Business Development and Marketing services and also a sum of

Rs.1,47,89,403/- to Carraro SpA, Italy for availing services of

18 ITA Nos.1260 and 1308/PUN/2018 M/s. Carraro India Private Limited

Global Sourcing, Quality Control, Supply Chain management and

Measuring strategy etc. The TPO observed that no agreement was

existing in the past for such services and it was for the first year

that the assessee paid a sum of Rs.4,35,34,908/- on this account.

On being called upon to substantiate the receipt of services, the

assessee failed to provide any evidence of such services. Since the

assessee used its Foreign/AE as a tested party under the “Cost

plus” method and further did not give any comparable uncontrolled

transactions, the TPO rejected the use of foreign/AE as a tested

party and also the method employed. He opined that this

transaction could not be aggregated even under the umbrella of

Transactional Net Margin Method (TNMM). As there was no

evidence of having availed any services under these agreements

and further there was neither any need nor benefit derived by the

assessee from such alleged services, the TPO determined NIL ALP

of this international transaction by applying the CUP as the most

appropriate method. This led to recommendation of transfer

pricing adjustment of Rs.4,35,34,908/-. The AO made addition for

the same. During the course of first appellate proceedings, the

assessee furnished certain additional evidence. The ld. CIT(A)

called for remand report from the TPO. On consideration of the

19 ITA Nos.1260 and 1308/PUN/2018 M/s. Carraro India Private Limited

entire material and facts, the ld. CIT(A) held that the assessee

could not prove conclusively that it had availed services as per the

agreements entered into with Carraro SpA, Italy and Carraro

Drivetech, SpA, Italy. He, therefore, upheld the Nil determination

of ALP of the international transaction, which resulted in

sustenance of addition of Rs.4.35 crore. The assessee is aggrieved

by the sustenance of such an addition.

material on record. It is seen from the assessee’s TP study report

that it employed “Cost plus” method as the most appropriate

method for showing that the international transactions of receipt of

management services was at ALP. The TPO discarded such

method and applied the CUP method. However, Nil ALP was

determined as the assessee, in the opinion of the TPO, did not

avail any services. He further accentuated on the Nil ALP on the

ground that the services, if any, did not provide any benefit to the

assessee and these were in the nature of shareholder services.

services from its AEs pursuant to the two Agreements? We have

gone through the Agreements referred to herein above. Agreement

20 ITA Nos.1260 and 1308/PUN/2018 M/s. Carraro India Private Limited

with Carraro SpA, Italy, refers to a wide range of services to be

provided to the assessee, which have been listed under the heads

Advice on Finance, Administration, Legal and Controlling;

Advice on Human Resources etc.; Advice on Technical Assistance

and Support on IT systems; Advice on strategic planning and

Group consulting for Business consulting and Development

activities; Advice on Business Development and Market

Coordination etc. have been mentioned. Annexure-B to the

agreement gives different mark-ups on cost, namely, 2, 5% on

Human Resources, 10% on Finance and Controlling, 4,7% on IT,

6,3% on Strategic Department, 6,3% on Engineering and 3,10% on

Business Development and sales carrying. Similarly the second

agreement with Carraro Drivetech SpA, Italy, refers to the services

in the nature of Advice on DLEs, Commercial activities; Advice

on Cost Planning; Advice and Services of Global Securing;

Advice and services of Quality Department; Advice on

Manufacturing strategy; and Advice on Supply chain. Mark-ups

on such services have been given in Annexure-B, namely, Sales

Coordination 3,1%; Cost Planning 3,1%; Global Sourcing 4%;

Quality Department 4%; Manufacturing Strategy 6, 3%; and

Supply Chain 6, 3%.

21 ITA Nos.1260 and 1308/PUN/2018 M/s. Carraro India Private Limited

documents including e-mails between the assessee company and

AEs on wide spectrum of the matters to establish that the services

were actually availed. We have gone through some of the e-mails,

which go to prove that the assessee did avail services from its AEs.

In fact, this material was submitted before the ld. CIT(A) also. In

the remand report, though the TPO acknowledged the existence of

such a material, but did not alter his earlier stance on extraneous

reasons. This evidences that the assessee, in fact, availed the

services from its AEs. The TPO favored Nil ALP of the

transaction, inter alia, on the ground that the assessee was not

benefitted by such services. The view point of the TPO that no

benefit was derived by the assessee because of such services and

hence, ALP should be determined at NIL, is bereft of any force.

established, the TPO cannot determine NIL ALP simply by

holding that no benefit was received by the assessee. Having or

not having a benefit from services is one thing, which cannot be

confused with the availing of services, if these are really received.

The TPO cannot turn around the determination of NIL ALP simply

on the ground that no benefit was received by the assessee from

22 ITA Nos.1260 and 1308/PUN/2018 M/s. Carraro India Private Limited

such services. It is for the assessee to decide the way in which it

has to carry on its business. If it feels that services are required to

be availed, the TPO cannot reject the allowability of such payment

simply on the ground that no benefit was derived. It is not

necessary that every incurring of expenditure must necessarily

result in to some benefit. Had it been the situation, then no

businessman would have ever incurred loss, which is a proposition

far away from the stark reality. Once it is proved that the services

were availed by the assessee, then his jurisdiction gets restricted to

determining the ALP of the transaction. We have noticed above

that the assessee did avail services from its AEs. In such a

situation, it is held that the view point of the authorities that NIL

ALP should be determined because the assessee did not get any

benefit out of the services, is rejected. The next question is the

determination of the ALP of such transaction.

transfer pricing documentation by taking foreign/Associated

enterprise as a tested party and did not give any comparable

uncontrolled transactions. This exercise got rejected at the hands of

the TPO. In the remand proceedings, the assessee applied the

TNMM again with the foreign/associated enterprise as a tested

23 ITA Nos.1260 and 1308/PUN/2018 M/s. Carraro India Private Limited

party. The ld. AR submitted that it put forth one more calculation

of the ALP determination under the TNMM with itself as the

tested party. Since the foreign/associated enterprise has been taken

as the tested party not only in the original transfer pricing

documentation, but also during the remand proceedings, we need

to decide if the assessee was justified in doing so.

Chapter X of the Act with the caption "Special Provisions Relating

to Avoidance of Tax" dealing with the computation of income

from international transactions having regard to ALP. Section

92(1) of the Act provides that : 'Any income arising from an

international transaction shall be computed having regard to the

arm's length price'. Thus, this provision applies to income of an

enterprise from an international transaction, which is chargeable to

tax under the Act. The term "international transaction" has been

defined in section 92B to mean 'a transaction between two or more

associated enterprises, either or both of whom are non-residents, in

the nature of .... or provision of services, or ..............'. The

methodology for computation of arm's length price of an

international transaction has been set out in section 92C(1) to be as

per any of the prescribed methods, including the TNMM method.

24 ITA Nos.1260 and 1308/PUN/2018 M/s. Carraro India Private Limited

This method was used by the assessee as the most appropriate

method in the remand proceedings. Sub-section (3) of section 92C

provides that : 'Where during the course of any proceeding for the

assessment of income, the Assessing Officer is, on the basis of

material or information or document in his possession, of the

opinion that--(a) the price charged or paid in an international

transaction has not been determined in accordance with sub-

sections (1) and (2) ; or.............., the Assessing Officer may

proceed to determine the arm's length price in relation to the said

international transaction in accordance with sub-sections (1) and

(2), on the basis of such material or information or document

available with him'. Rule 10B dealing with the determination of

arm's length price under section 92C provides through sub-rule (1)

that for the purposes of sub-section (2) of section 92C, the arm's

length price in relation to an international transaction shall be

determined by any of the following methods, being the most

appropriate method. The mechanism for determining ALP under

the TNMM has been enshrined in clause (e) of rule 10B(1), which

reads as under :

'(i) the net profit margin realised by the enterprise from an international transaction entered into with an associated

25 ITA Nos.1260 and 1308/PUN/2018 M/s. Carraro India Private Limited

enterprise is computed in relation to costs incurred or sales effected or assets employed or to be employed by the enterprise or having regard to any other relevant base ;

(ii) the net profit margin realised by the enterprise or by an unrelated enterprise from a comparable uncontrolled transaction or a number of such transactions is computed having regard to the same base ;

(iii) the net profit margin referred to in sub-clause (ii) arising in comparable uncontrolled transactions is adjusted to take into account the differences, if any, between the international transaction and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect the amount of net profit margin in the open market ;

(iv) the net profit margin realised by the enterprise and referred to in sub-clause (i) is established to be the same as the net profit margin referred to in sub-clause (iii) ;

(v) the net profit margin thus established is then taken into account to arrive at an arm's length price in relation to the international transaction.'

firstly, a transaction between two or more associated enterprises is

called an international transaction; secondly, any income from such

an international transaction is required to be determined at ALP;

26 ITA Nos.1260 and 1308/PUN/2018 M/s. Carraro India Private Limited

thirdly, the ALP in respect of such an international transaction

should be determined by one of the prescribed methods, which also

includes the TNMM. Under this method, the net profit margin

realized by the enterprise from an international transaction entered

into with an associated enterprise is computed in relation to costs

incurred or sales effected or assets employed or to be employed by

the enterprise or having regard to any other relevant base, which is

then compared with the net profit margin realized by the enterprise

or by an unrelated enterprise from a comparable uncontrolled

transaction. The modus operandi of determining ALP of an

international transaction under this method is that firstly, the profit

rate realized or earned by the assessee from a transaction with its

AE is determined (say, profit A), which is then compared with the

rate of profit of comparable cases (say, profit B) so as to ascertain

if profit A is at arm's length vis-à-vis the profit B. If it is not, then,

an addition on account of transfer pricing adjustment, subject to

other provisions, is made in the hands of the assessee having

regard to the difference between the rates of profit A and profit B.

The rate of profit of comparable cases (profit B) may be computed

from internally or externally comparable cases, depending upon the

FAR analysis and the facts and circumstances of each case. Thus

27 ITA Nos.1260 and 1308/PUN/2018 M/s. Carraro India Private Limited

the calculation of profit B may undergo change with the varying

set of comparable cases. However, insofar as calculation of profit

A is concerned, there cannot be any dispute as the same has to

necessarily result only from the transaction between two or more

associated enterprises, as is the mandate of sections 92 read with

92B in juxtaposition to rule 10B. The natural corollary which,

ergo, follows is that under no situation can the calculation of 'profit

A' be substituted with anything other than the profit realized or

earned by the enterprise from the international transaction, that is,

a transaction between the associated enterprises. So, under the

TNMM, it is the profit margin realized by the Indian assessee from

the transaction with its foreign/AE, which is compared with that of

the comparables. There can be no question of substituting the profit

realized by the Indian enterprise with the profit realized by the

foreign AE for the purposes of determining the ALP of the

international transaction of the Indian enterprise with its foreign

AE. Scope of transfer pricing addition under the Indian taxation

law is limited to transaction between the assessee and its foreign/

AE. We fail to comprehend as to how the profit realized by the

foreign/AE can be relevant, when the profit of the Indian enterprise

is sought to be ensured at ALP. The underlying object of the

28 ITA Nos.1260 and 1308/PUN/2018 M/s. Carraro India Private Limited

transfer pricing provisions is, inter alia, to see that there is no

profit shifting from the Indian taxation base by means of the

foreign/AE charging more than that charged by comparable

independent cases, which fact is ensured by determining the ALP

of the international transaction. If foreign AE has, in fact, charged

more, then its profit rate will shoot up and the corresponding profit

of the Indian enterprise will be squeezed. In that scenario, a

comparison of the profit rate of the foreign/AE will run contrary to

the mandate of the provisions. Whereas, we were required to

determine if the profit charged by the foreign AE is not more than

that charged by uncontrolled comparables by seeing the profit rate

of the Indian enterprise, we will end up doing a futile exercise of

rather viewing the profit rate of the foreign/AE. Suppose the

foreign/AE has charged more, then its profit rate will turn out to be

higher, which when compared with the lower rate of profit margin

of foreign comparables, will show the transaction at ALP, calling

for no transfer pricing adjustment. This exercise is not only off the

mark, but also runs counter to the rule and spirit of the transfer

pricing provisions. Essence of the matter is that it is the profit

margin of the Indian enterprise and not that of the foreign AE,

which should be compared with the comparables to see if any

29 ITA Nos.1260 and 1308/PUN/2018 M/s. Carraro India Private Limited

increase in the total income of the enterprise chargeable to tax in

India, is warranted on account of transfer pricing adjustment. The

contention of the ld. AR for considering the profit of the

foreign/AE as 'profit A' for the purposes of comparison with profit

of comparables, being 'profit B', for determining the ALP of

transaction between the assessee and its foreign AE, misses the

wood from the tree by making the substantive section 92 otiose

and the definition of 'international transaction' u/s 92B and rule

10B becoming redundant. This is patently an unacceptable

proposition having no sanction under the Indian transfer pricing

law. The requirement under the Indian law is to compute the

income from an international transaction between two AEs having

regard to its ALP and the same is required to be strictly adhered to

in the manner as prescribed. Thus, is overt that the obligation under

the Indian law is to compute the income from an international

transaction between two AEs having regard to its ALP and the

same is required to be strictly determined as stipulated. The

contention, that the foreign/AE be considered as a tested party for

determining the ALP of the international transaction, having no

statutory sanction, is sans merit and hence jettisoned.

30 ITA Nos.1260 and 1308/PUN/2018 M/s. Carraro India Private Limited

Court in GE Money Financial Services Pvt. Ltd. Vs. Pr. CIT (ITA

No.662/2016) dated 31-08-2016 to contend that foreign/associated

enterprise can be a tested party. We have gone through a copy of

the Tribunal order dated 08-07-2016 rendered in this case in ITA

No.440/Del/2014, a copy of which has also been placed on record

by the ld. AR. The assessee in that case adopted foreign/AE as a

tested party and used certain foreign comparables. When the

matter came up before the Tribunal, it held that the foreign/AE

cannot be considered as a tested party. The matter was taken up by

the assessee before the Hon’ble High Court, a copy of whose

judgment has also been placed on record. In the judgment, the

Hon’ble High Court observed that the issue was about the

correctness of the Tribunal order in which it was held that

Foreign/Associated Enterprises cannot be considered as a tested

party. It further observed that the Tribunal remitted the matter to

the file of AO/TPO for fresh determination of the ALP. The

Hon’ble High Court held in the operative part of its judgment that :

“This court notices that for reconsideration and determination of

the appropriate method as well as appropriate comparables and the

tested party, it would be convenient and appropriate for the TPO to

31 ITA Nos.1260 and 1308/PUN/2018 M/s. Carraro India Private Limited

consider the question which the assessee urges in the present case.

The TPO is therefore directed to overlook and not feel bound by

the observations of the Tribunal and render findings on the merit of

the issue”. Having said so, the Hon’ble High Court held that “ the

court is of the opinion that no question of law arises since the

matter stands remitted, to the TPO”. We are unable to find

anything from the operative part of the judgment, which has the

effect of setting aside of the Tribunal order holding that the

Foreign/associated enterprise cannot be considered as a tested

party. In fact, the Hon’ble High Court has simply remitted the

matter to the TPO for reconsideration and determination, inter alia,

of “the tested party”. The TPO was directed to decide this issue

independently de hors the finding rendered by the Tribunal. No

where a direction has been given that the foreign/associated

enterprise should be considered as tested party. There is a sea

difference in saying that the Tribunal order holding that

Foreign/Associated Enterprise cannot be a tested party, has been

reversed and saying that the matter be examined afresh

independent of the observations of the Tribunal. As the Hon’ble

High Court has held that “no question of law arises since the

matter has been remitted”, in our considered opinion, the ld. AR

32 ITA Nos.1260 and 1308/PUN/2018 M/s. Carraro India Private Limited

cannot legally contend that the Tribunal order in the case of GE

Money Financial Services Pvt. Ltd. holding that the Foreign/

Associated Enterprise cannot be a tested party, has been reversed.

It is still further observed that similar view of not accepting

foreign/AE as a tested party, has been taken in umpteen number of

cases, including the Mumbai Bench of the Tribunal in Onward

Technology Ltd. Vs. DCIT (2013) 36 CCH 46 (Mumbai) holding

that Foreign/ Associated Enterprise cannot be a tested party. Even

the Miscellaneous Application filed against this order came to be

dismissed in M.A. No.203/Mum/13 vide order dated 17-01-2005.

Similar view has been taken in Aurionpro Solutions Ltd. Vs. ACIT

(TS-75-ITAT-2013 (Mum)-TP) - (2013) 27 ITR (Trib) 276

(Mumbai). In the light of the foregoing discussion, we are of the

considered opinion that no exception can be taken to the view

canvassed by the authorities below in rejecting foreign/Associated

Enterprise as a tested party.

in its original transfer pricing documentation, we find it as an

admitted position that no comparable uncontrolled transaction was

cited. Mechanism for determining the ALP under this method has

been given in rule 10B(1)(c), which is as under : -

33 ITA Nos.1260 and 1308/PUN/2018 M/s. Carraro India Private Limited

(i) the direct and indirect costs of production incurred by the enterprise in respect of property transferred or services provided to an associated enterprise, are determined ;

(ii) the amount of a normal gross profit mark-up to such costs (computed according to the same accounting norms) arising from the transfer or provision of the same or similar property or services by the enterprise, or by an unrelated enterprise, in a comparable uncontrolled transaction, or a number of such transactions, is determined ;

(iii) the normal gross profit mark-up referred to in sub-clause (ii) is adjusted to take into account the functional and other differences, if any, between the international transaction and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect such profit mark-up in the open market ;

(iv) the costs referred to in sub-clause (i) are increased by the adjusted profit mark-up arrived at under sub-clause (iii) ;

(v) the sum so arrived at is taken to be an arm’s length price in relation to the supply of the property or provision of services by the enterprise ;

normal gross profit rate of comparable uncontrolled transactions is

applied to the direct and indirect costs incurred by the assessee to

find out the ALP of the international transaction. In the absence of

the availability of adjusted gross profit rate in comparables

uncontrolled transactions, there can be no determination of the

ALP. As the assessee has not given any comparable uncontrolled

34 ITA Nos.1260 and 1308/PUN/2018 M/s. Carraro India Private Limited

transactions, its determination of the ALP under the `Cost plus’

method can be considered as only in vacuum carrying no meaning.

benchmarked the international transaction under the TNMM

considering itself as a tested party albeit in the remand

proceedings. It was prayed that the alternate approach be accepted.

Firstly, we find that there is no discussion in the impugned order

on the correctness or otherwise of such a benchmarking. On a

specific query, it was admitted that the international transaction

under consideration was benchmarked under the TNMM on entity

level by aggregating it with other international transactions.

aggregating the payment for Corporate/Managerial services with

other international transactions and then applying the TNMM on

entity level cannot be accepted. Section 92C(1) of the Act provides

that the ALP in relation to the international transaction shall be

determined by any of the prescribed methods having regard to the

“nature of transaction or clause of transaction”. Rule 10A(d)

defines the term “transaction” as including `a number of closely

linked transactions’. Thus, it is evident that the two or more

35 ITA Nos.1260 and 1308/PUN/2018 M/s. Carraro India Private Limited

transactions can be aggregated for determination of the ALP, if

they are closely linked transactions.

India Pvt. Ltd. Vs. ACIT (2016) 380 ITR 307 (P&H) considered

certain circumstances in which two or more transactions can be

aggregated. It noted that the TNMM may establish the aggregate

price paid for some independent international transactions to be at

ALP. But it would show skewed picture. There may be more

margin from one transaction to set off against the other, but that

does not mean that the other transactions should be automatically

presumed at ALP. Separate ALP should be determined of separate

and independent international transactions. Consequence of the

above observations is that cross-subsidization is impermissible.

Their Lordships held that several transactions between two or more

AEs can form a single composite transaction if they are closely

linked transactions and the onus is always on the assessee to

establish that such transactions are part of an international

transaction pursuant to an understanding between various members

of a group. The Hon’ble High Court observed that in case of a

package deal where each item is not separately valued but all are

given a composite price, these are one international transaction. It

36 ITA Nos.1260 and 1308/PUN/2018 M/s. Carraro India Private Limited

went on to hold that where a number of transactions are priced

differently but on the understanding that the pricing was dependent

upon the assessee accepting all of them together (i.e. either take all

or leave all), then it is also an international transaction. But it will

be on the assessee to prove that although each is priced separately,

but they are provided under one composite agreement. It still

further held that each component may be priced differently also,

but it will have to be shown that they are inextricably linked that

one cannot survive without other. Merely because purchase of

goods and acceptance of services lead to manufacture of final

product, it does not follow that they are dependent transactions. It

is apparent that the case of the assessee does not fall in any of the

above three situations.

Train India Pvt. Ltd. Vs. DCIT (2016) 289 ITR 469 (Delhi) has

held that Royalty and Technical Assistance fees did not form part

of composite transaction and these have to be treated as two

separate transactions for computing the ALP. SLP against this

judgment has since been dismissed in (2017) 399 ITR (St) 14. In

view of the foregoing discussion, we are not satisfied with the

contention put forth on behalf of the assessee that the payment of

37 ITA Nos.1260 and 1308/PUN/2018 M/s. Carraro India Private Limited

Managerial services fee should be aggregated with other

international transactions.

for computation of ALP in respect of its international transaction

of intra-group services by choosing foreign AE as a tested party

under the Cost plus method as well as under the TNMM or by

aggregating this transaction with others under the TNMM cannot

be and is hereby rejected in entirety.

the assessee is not as per law, we now proceed to find out if the

TPO was right in his point of view. It is noticed that he applied the

CUP as the most appropriate method and determined Nil ALP, as

in his opinion no services were received by the assessee. The ld.

AR argued that the TP addition be deleted because the TPO has not

applied any of the prescribed methods. To bolster such a

contention, he relied on the Tribunal order dated 30-04-2013 in

the case of M/s. Kodak India Pvt. Ltd. Vs. ACIT in ITA

No.7349/Mum/12, which has been affirmed by the Hon’ble

Bombay High Court in CIT Vs. M/s. Kodak India Pvt. Ltd. in

Income Tax Appeal No.15 of 2014 vide judgment dated

38 ITA Nos.1260 and 1308/PUN/2018 M/s. Carraro India Private Limited

11-07-2016. Copies of the judgment as well as the order of

Tribunal have been placed on record.

ALP based on worldwide revenue break up amongst countries and

concluded that India accounted for 1.4% thereof. On that basis, the

ALP was determined and adjustment of Rs.79.96 crore was

proposed. The assessee contended before the Tribunal that since

the TPO did not apply any of the recognized methods for

determining the ALP, the addition should be deleted without any

restoration for a fresh exercise, which got concurrence of the

Tribunal. The Hon’ble High Court also upheld the view taken by

the Tribunal. We do not find any application of the ratio of

judgment laid down in the case of M/s. Kodak India Pvt. Ltd.

(supra) to the facts under consideration. In that case, the TPO

determined ALP based on the worldwide break up of revenue

amongst countries and concluded that India accounted for 1.4%

thereof and hence, the TP adjustment was proposed accordingly.

On the contrary, the TPO in the instant case has categorically

mentioned in Para No.8.6 of his order that he was applying the

CUP method, under which the ALP was NIL. In our considered

opinion, there is a vast difference between the two situations, viz.,

39 ITA Nos.1260 and 1308/PUN/2018 M/s. Carraro India Private Limited

one in which a wrong method is applied and the second in which a

correct method is applied but some mistake is committed in

application of such a method. Whereas the case of M/s. Kodak

India Pvt. Ltd. falls in the first category, the extant case falls in the

second category, in which the TPO applied one of the recognized

methods, namely, CUP for determining the ALP of the

international transaction. It is a secondary thing that the

determination under the CUP method was not proper because he

took NIL ALP on the ground that the assessee did not avail any

services and further no benefit was received. In such a scenario,

we are unable to countenance the contention of the ld. AR that the

transfer pricing addition of Rs.4.35 crore should be deleted on this

score alone.

Nil ALP on the reason that the assessee did not avail any services.

We have found out supra that the services were, in fact, availed by

the assessee. Since neither the exercise done by the TPO for

benchmarking the international transaction, either originally or

during the course of the first appellate proceedings, is sustainable

nor the view point of the TPO determining Nil ALP can be

affirmed because of the assessee having actually availed the

40 ITA Nos.1260 and 1308/PUN/2018 M/s. Carraro India Private Limited

services, we are of the considered opinion that the ends of justice

would meet adequately if the impugned order is set aside and the

matter is restored to the file of AO. To sum up, the impugned

order on this issue is set aside and the matter is restored to the file

of AO for determining the ALP of the international transactions of

payment of Corporate/management services afresh as per law after

allowing reasonable opportunity of being heard to the assessee. It

is directed that the AO/TPO will firstly determine the most

appropriate method and then find out the ALP of the international

transaction in accordance with our above observations and

directions. Needless to say, the assessee will be allowed an

opportunity of hearing in such fresh exercise.

Order pronounced in the Open Court on 27th February, 2019.

Sd/- Sd/- (VIKAS AWASTHY) (R.S.SYAL) JUDICIAL MEMBER VICE PRESIDENT पुणे Pune; �दनांक Dated : 27th February, 2019 सतीश

41 ITA Nos.1260 and 1308/PUN/2018 M/s. Carraro India Private Limited

आदेश क� क� क� �ितिलिप क� �ितिलिप �ितिलिप अ�ेिषत �ितिलिप अ�ेिषत अ�ेिषत/Copy of the Order is forwarded to: अ�ेिषत आदेश आदेश आदेश 1. अपीलाथ� / The Appellant; 2. ��यथ� / The Respondent; 3. The CIT(A)-13, Pune 4. The Pr.CIT-1, Pune िवभागीय �ितिनिध, आयकर अपीलीय 5. अिधकरण, पुणे “A” / DR ‘A’, ITAT, Pune; 6. गाड� फाईल / Guard file. // True copy // आदेशानुसार आदेशानुसार आदेशानुसार/ BY ORDER, आदेशानुसार // True Copy // Senior Private Secretary आयकर अपीलीय अिधकरण ,पुणे / ITAT, Pune

ITA Nos.1260 and 1308/PUN/2018 M/s. Carraro India Private Limited

Date 1. Draft dictated on 26-02-2019 Sr.PS 2. Draft placed before author 27-02-2019 Sr.PS 3. Draft proposed & placed JM before the second member 4. Draft discussed/approved JM by Second Member. 5. Approved Draft comes to Sr.PS the Sr.PS/PS 6. Kept for pronouncement on Sr.PS 7. Date of uploading order Sr.PS 8. File sent to the Bench Clerk Sr.PS 9. Date on which file goes to the Head Clerk 10. Date on which file goes to the A.R. 11. Date of dispatch of Order. *