CUMMINS INDIA LIMITED,,PUNE vs. ACIT CIRCLE 1(1), PUNE

आदेश / ORDER

PER R.S. SYAL, VP : This appeal by the assessee is directed against the final assessment order dated 25-10-2019 passed by the Assessing Officer (AO) u/s.143(3) and 144C(13) of the Income-tax Act, 1961 (hereinafter also called ‘the Act’) in relation to the assessment year 2015-16. 2. The first issue raised through six grounds is against the transfer pricing adjustment of Rs.30.28 crore made in the international transaction of `Payment of Royalty for use of technology’.

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Indian company engaged in the business of Manufacture and Sale

of Internal Combustion Engines, Spares, Components (including

bought outs) thereof and Generating sets; Service of Engines and

Gensets; Trading in Power Generating sets and Allied

Equipments; Providing Operation & Maintenance facilities for

Power Generating sets and Allied Equipments; and Providing

Consulting Services in respect of Power Generation and

utilization. The assessee filed return with total income of

Rs.383.80 crore, declaring certain international transactions. The

AO made a reference to the Transfer Pricing Officer (TPO) for

determining the Arm’s Length Price (ALP) of the international

transactions. In the instant appeal, we are concerned only with

the international transaction of `Payment of Royalty for use of

technology’ for which a sum of Rs.62,76,42,650/- was paid by the

assessee to Cummins Inc., its foreign based Associated Enterprise

(AE). The assessee benchmarked this transaction along with

certain other international transactions under the overall

“Manufacturing Segment”. For doing so, it applied the

Transactional Net Margin Method (TNMM) and demonstrated

that all such transactions, including the royalty payment, were at

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ALP. The TPO came to the conclusion that the aggregation

approach adopted by the assessee for determining the ALP of

Royalty payment under the overall Manufacturing segment was

not proper. He further observed that the assessee entered into

Royalty Agreement on 16-09-2010, under which Royalty was

paid to Cummins Inc. at the rates ranging between 1% to 8% on

the value-addition made by it. He still further found that Royalty

was paid on Domestic sales at the rates ranging between 1% to

5% (on both existing and new products) and at the uniform rate of

8% on export sales (of both the existing and new of products). To

put it simply, the assessee paid royalty for the same products at

the rates between 1% to 5% when sold in domestic market to non-

related enterprises and at 8% when sold by way of exports to the

related parties. The TPO noted that the technology provided by

the Associated Enterprises (AE) was same for Domestic as well

as Export sales but there was vast variation in the rates of Royalty

paid by the assessee. He called upon the assessee to furnish the

ALP determination of the Royalty transaction on separate basis.

The assessee computed its own percentage of Royalty to Net sales

at 3.28% by taking the amount of Rs.5,43,00,69,318/- paid as

Royalty to its AEs with the corresponding figure of total sale of

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licensed products at Rs.1653,48,57,041. The assessee also chose

certain comparables and furnished the ALP determination. The

TPO found out the value of domestic sales at Rs.907.73 crore

(with value of net sales at Rs.635.79 crore) on which Royalty of

Rs.8.15 crore was paid; and the value of exports at Rs.752.13

crore (with value of net sale at Rs.577.41 crore) on which Royalty

of Rs.46.16 crore was paid. In view of the fact that the assessee

paid Royalty at varying rates on the same products when sold in

domestic or foreign markets, the TPO came to the conclusion that

payment of such Royalty at different rates was not appropriate.

He segregated the amount of Royalty paid on Domestic sales as

well as Export sales and found out the percentage of Royalty in

case of Domestic sale at 0.89% and in case of Export sales at

6.13%. Without disputing the ALP of royalty payment on the

domestic sales, he took up the determination of the ALP of the

royalty payment on exports. By adding one more comparable to

the list of comparables furnished by the assessee, he worked out

35 percentile at 2.50%; 65 percentile at 3.00%; and median at

2.75% for working out the transfer pricing adjustment at Rs.30.28

crore in respect of the royalty paid on Export sales at the

difference between 6.13% (rate of royalty in percentage terms of

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gross value of exports) and 2.75% (arm’s length rate of royalty

on gross value of exports). The assessee remained unsuccessful

before the DRP, which has brought it before the Tribunal.

relevant material on record. The issue under consideration has

two layers, viz., the justification of the TPO in segregating the

international transaction of payment of Royalty from the other

international transactions gathered by the assessee under the

overall ‘Manufacturing segment’; and segregation of royalty on

domestic and export sales.

payment by the TPO from the overall ‘Manufacturing segment’.

There is no gainsaying on the application of the TNMM as the

most appropriate method by the assessee as well as the TPO. The

assessee clubbed the international transaction of `Payment of

royalty for use of technology’ along with certain other

transactions under the ‘Manufacturing segment’ and applied the

TNMM. The TPO, however, separated Royalty for benchmarking

it de hors the other transactions under the TNMM. The moot

question is whether the aggregation approach adopted by the

assessee in the present facts of the case is justified as per law?

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from an international transaction shall be computed having regard

to the arm’s length price.’ The procedure for computation of

arm’s length price has been set out in section 92C. Sub-section (1)

of section 92C provides that: ‘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 …..’. A

bare reading of section 92C(1) brings out that the ALP is required

to be determined of ‘an’ international transaction. 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

purchase, sale or lease of tangible or intangible property, or

provision of services, or lending or borrowing money, or any

other transaction having a bearing on the profits, income, losses

or assets of such enterprises, …..’. It is discernible from the

above definition of the `international transaction’ given in section

92B that it refers to ‘a transaction’ between two or more

associated enterprises. The term ‘transaction’ has been defined in

section 92F(v) and also in Rule 10A(d) of the Income-tax Rules,

1962. The Rule defines the term ‘transaction’ to include: ‘a

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number of closely linked transactions.’ On going through the

above provisions, it becomes palpable that the arm’s length price

is essentially determined on transaction-by-transaction approach

for each international transaction separately; and for that purpose,

a transaction in singular also includes plural for closely linked

transactions. In other words, where the transactions are not

closely linked, their ALP needs to be determined separately and

such determination of the ALP of ‘an’ international transaction as

per section 92C(1) of the Act should be done as per the most

appropriate method. To put it more simply, each international

transaction is viewed separately and independent of other

international transactions for determining its ALP unless they are

closely linked. It is impermissible to combine more than one

unrelated international transaction for determining their ALP in a

unified manner when they are diverse in nature.

international transactions is impermissible. It is overt from section

92(1) of the Act that if an international transaction is recorded

showing a lower income than its ALP income, then the higher

ALP income is considered for the purpose of computing total

income. Section 92(3) of the Act manifests that the provisions of

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this section shall not apply in a case where the computation of

income having regard to ALP has the effect of reducing income

chargeable to tax. The net effect of section 92(3) is that if the

transacted-value income from an international transaction is more

than its arm’s length income, then, the arm’s length income

should be discarded and the actual income should be considered.

To sum up, it is the higher of actual income or the arm’s length

income from an international transaction, which is taken into

consideration for computing the total income. It, thus, divulges

that the actual more income from one international transaction

(vis-a-vis its lower arm’s length income) cannot be combined with

the more arm’s length income from another transaction (vis-à-vis

its lower actual income), so as to set off the excess income (actual

transacted income minus arm’s length income) from the first

transaction with the income (arm’s length income minus actual

transacted income) arising from the second transaction. When we

consider more than one unrelated transaction under the combined

umbrella of the TNMM, it is quite possible that a probable

addition on account of transfer pricing adjustment arising from

one unrelated international transaction may be grabbed or reduced

by the income from another unrelated international transaction

9 ITA No.2111/PUN/2019 Cummins India Limited

giving higher income on transacted value, throwing the transfer

pricing provisions to winds much against the very concept and

intent of the provisions of Chapter-X of the Act. Such an attempt

of cross subsidization needs to be deprecated.

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

considered the question of aggregation of international

transactions. Their Lordships laid down the principles of

aggregation of international transactions by holding 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. Further, 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 also they have been

held to be taken as one international transaction. But the onus has

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been put on the assessee to prove that although each is priced

separately, but they were 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. In that

case, the assessee raised a contention, similar to the one raised

before us, as discussed in para 40: `that as the services and goods

are utilized by the assessee for the manufacture of the final

product they must be aggregated and considered to be a single

transaction and the value thereof ought to be computed by the

TNMM’. Jettisoning the contention, the Hon’ble High Court held

that: `Merely because the purchase of each item and the

acceptance of each service is a component leading to the

manufacture/production of the final product sold or service

provided by the assessee, it does not follow that they are not

independent transactions for the sale of goods or provision of

services. The end product requires several inputs. The inputs may

be acquired as part of a single composite transaction or by way of

several independent transactions. In the latter case, the sale of

certain goods and/or the provision of certain services from out of

the total goods purchased or services availed of by an assessee

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together can form part of a separate independent international

transaction. In such an event, the AO/TPO must value this group

of sale or purchase of goods and/or provision of services as

separate transactions.’

transaction of payment of Royalty for use of technical support

provided by the AE and other international transactions under the

Manufacturing segment are not under any package deal nor is

there any such understanding or any inextricable link between

these transactions as one not surviving without the other, as has

been spelt out in the case of Knorr- Bremse (supra). The assessee

paid royalty for the use of technology as a separate independent

transaction. Merely because payment of royalty for use of

technical support leads to manufacture of final product, it does not

follow that they both are dependent or closely-linked transactions.

In such circumstances, the ALP of the international transaction of

Payment of Royalty for use of technology cannot be aggregated

with others.

vs. DCIT (2016) 389 ITR 469 (Delhi), similar to the present case,

entered into agreement with its A.E. for acquiring technology

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required for the purpose of manufacturing. It applied the TNMM

to benchmark its international transactions of import of raw

materials, sub-assemblies and components, payment of technical

assistance fees, payment of royalty, payment of software and

purchase of fixed assets. All these transactions were categorized

under one broad head, that is, “Manufacturing of automotive

components” and shown to be at ALP. The TPO rejected the

assessee’s entity level approach applied to benchmark the

international transactions, including, Technical assistance fees

and proceeded to determine the ALP of the Technical assistance

fees separately. The Tribunal approved the TPO’s stand on

segregation of payment of Technical assistance fee. The Hon’ble

Delhi High Court admitted the question in this regard - `Whether

the Income Tax Appellate Tribunal was right in holding that

royalty and technical assistance fee did not form part of a

composite transaction and have to be treated as two separate

transactions for the purpose of benchmarking and computing arms

length price?’ and answered it against the assessee thereby

affirming the view of the Tribunal that aggregation of the

transaction of payment of Technical fees with other international

transactions under the common TNMM was not correct.

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Restoring the matter to the TPO/AO, it held that the TNMM

should be separately applied for determining the ALP of the

international transaction of payment of Technical fee. Reverting

to the facts of the instant case, it is found that the TPO after

rejecting the assessee’s aggregation approach, resorted to the ALP

determination of the Royalty payment transaction separately

under the TNMM only.

of Magneti Marelli (supra) in as much as the assessee therein also

paid royalty to its AE for use of Technical support for the

manufacture of its products, and the Hon’ble High Court did not

approve clubbing of payment of technical fees with other

transactions under the Manufacturing segment. In view of the

foregoing discussion, it is held that the international transaction of

payment of Royalty by the assessee for use of technical support

cannot be clubbed with other international transactions under the

Manufacturing segment.

Tribunal in the assessee’s own case for the A.Y. 2006-07 and

some of the later years in which the contention of the assessee for

aggregation of payment of Royalty with other international

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transactions under the ‘Manufacturing segment’ came to be

accepted. We have gone through the lead order passed for the

A.Y. 2006-07 in which the Tribunal has accepted the assessee’s

contention of aggregation by observing “where the primary

activity of the assessee was to manufacture and sell IC engines

and components both for domestic market and for exports, then

the activity of importing engine parts and components, payment

of Royalty for getting know-how, provision of miscellaneous

service, i.e. procurement support services to the Associated

Enterprises to help the sourcing of components, receipt of IT

support services and payment of technical know-how, fees etc. is

closely linked to the export of manufactured IC engines.” The

fact of the matter is that the Tribunal rendered such decision in

the context of an earlier agreement under which Royalty was paid.

However, the assessee entered into a new agreement on 16-09-

2010 with Cummins Inc., copy placed at page 350 onwards of the

paper book, under which the technical support was received for

which the payment of Royalty was made by the assesee for the

year under consideration. Page 7 para B of the new agreement

provides that the assessee was provided with non-exclusive right

and license and its trade secrets, copyrights and other intellectual

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property etc. in connection with the technical support that the

Cummins Inc., granted to the assessee for making and selling the

licensed products listed in Schedule II in any part of the world.

Three exceptions have been carved out. The assessee has been

prohibited from exporting Cummins products outside India

without prior evaluation/approval from Cummins. The new

agreement, which is relevant for the year in appeal, naturally had

no occasion to come up for consideration before the earlier

Bench.

per se aggregation rule applies in the transfer pricing provisions

and has also been judicially approved as well. However, the

question is that which of the international transactions can be

aggregated for a combined ALP determination approach? The

answer to this question has been given generally in Knorr-Bremse

(supra) by laying down the principles of aggregation and

specifically in Magneti Marelli (supra) disapproving the

aggregation of royalty payment with other international

transactions in the manufacturing segment. The assessee does not

satisfy either the general or the specific rules of aggregation in the

facts and circumstances of the case.

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prior to the Tribunal order for the A.Y. 2006-07, but it was not

brought to the notice of the Bench. However, for the year under

consideration, the TPO has specifically taken recourse to this

judgment in para 8.6 of his order, in addition to certain other

Tribunal orders laying down similar proposition as in Knorr-

Bremse case. There is hardly any need to emphasize that the

lower wisdom has to make a space for the higher wisdom to

prevail. The Tribunal, being, a lower authority cannot continue to

follow the decision taken by its predecessor Bench when the same

issue has been decided otherwise by the Hon’ble High Courts.

Under such circumstances, we are constrained to make a

departure from the view taken by the Tribunal in the assessee’s

own case for the earlier years as the same is not in consonance

with that of the Hon’ble High Courts. As such, the view taken by

the TPO on this score is countenanced and it is held that the

international transaction of payment of Royalty needs to be

separately benchmarked de hors other international transactions

under the ‘Manufacturing segment’.

involves the question of segregation within the transaction of

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Royalty payment. It is seen that the assessee paid Royalty to

Cummins Inc. for certain existing as well as new products. The

Royalty has been paid only on the value addition made by the

assessee, which is uncontroverted. Different rates of Royalty

have been charged by the AE for use of its technical know-how

for the same products - when sold in India to non-AEs and in

foreign countries to the AEs. There is a huge variation in the

rates of such Royalty for use of the same technical know-how.

Whereas Royalty at 1% to 2.5% has been paid by the assessee on

existing range of products and at 5% on new models to be

introduced on domestic sales and the same products, when sold to

AEs in export markets, have been subjected to Royalty at straight

8% both on the existing range of products and also new models.

To put it simply, if product A is sold by the assessee in India to

non-AEs, it pays royalty at 1% and when it is sold to AEs abroad,

it pays royalty at 8%. There is no difference in technology

supplied by Cummins Inc. which is used for manufacturing the

products meant for sale in domestic market and foreign market.

On domestic sales of Rs.907.73 crore, the assessee paid Royalty

of Rs.8.15 crore, which is 0.89%; and on export sales of

Rs.752.13 crore, the assessee paid Royalty amounting to Rs.46.16

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crore, which is 6.13%. Whereas, the view point of the TPO is that

the assessee paid royalty on goods meant for sale to its AEs at

higher rates so as to reduce its income and the consequential tax

incidence in India and accordingly segregated the royalty on

domestic sale and exports for separate benchmarking, the ld. AR

has pitched for aggregating both to be processed as a single

transaction for the ALP determination. The ld. AR submitted that

this issue was also raised before the DRP through objection no.3.

On a perusal of the directions of the DRP, it is seen that the

assessee did take up this issue by means of objection no.3 as has

been mentioned at page 29 of the Direction. The assessee also

tendered its explanation in support of the objection. Though the

DRP decided the larger issue and upheld the TPO’s view in

segregating the Royalty transaction from the others in the overall

Manufacturing segment, but inadvertently omitted to adjudicate

the issue of segregation of domestic sale-based and export-based

royalty payment raised through objection no. 3. Under such

circumstances, we are of the considered opinion that the ends of

justice would meet adequately if the impugned order on this

specific issue is set-aside and the matter is restored to the file of

the DRP for limited purpose of disposing of the assessee’s

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objection no.3. Needless to say, the assessee will be allowed

reasonable opportunity of hearing in such fresh proceedings.

disallowance of expenses u/s.14A of the Act. The assessee

earned long term capital gain and dividend income amounting to

Rs.178.46 crore which was claimed as exempt u/s.10(34), 10(35)

and 10(38) of the Act. The assessee offered disallowance at

Rs.84.57 lakh. The AO, in draft order, after discussing the issue

at length and recording proper satisfaction, rejected the assesee’s

suo motu offer of disallowance and applied Rule 8D(2)(iii) for

working out the disallowance at 0.50% of the average value of

investments, at Rs.1,85,50,000/- Since the assessee had already

offered disallowance at Rs.84.57 lakh, he made further addition of

Rs.1,00,93,000/-. No relief was allowed by the DRP, which led

to the making of the addition in the final assessment order.

material on record, it is observed that similar issue came up for

consideration before the Tribunal in the assessee’s appeal for the

A.Y. 2013-14. A copy of the order dated 19-02-2020 in ITA

No.160/PUN/2018 has been placed at page 787 of the paper book.

Relevant discussion has been made at page 8 onwards of the order

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and eventually the matter has been restored to the file of the AO

for deciding it in conformity with the decision taken by the

Tribunal in the assessee’s own case for the A.Y. 2013-14. As the

facts are admittedly similar, respectfully following the precedent,

we set-aside the impugned order on this score and remit the

matter to the file of the AO for deciding it in conformity with the

directions given by the Tribunal in its order for the A.Y. 2012-13.

depreciation in subsequent year. The assessee claimed additional

depreciation amounting to Rs.78.54 lakh in respect of plant and

machinery acquired in the immediately preceding year, which was

put to use for a period of less than 180 days in the earlier year.

Relying on the second proviso to section 32(1), the AO did not

allow further deduction of 50% of the admissible additional

depreciation to the assessee in the year under consideration on the

plant and machinery acquired in the preceding year. No reprieve

was given by the DRP.

relevant material on record, it is seen that this issue also came up

for consideration before the Tribunal in the case of the assessee

for the A.Y. 2013-14. Relevant discussion has been made at page

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12 of the order. The Tribunal has followed its own order for the

A.Y. 2012-13 in allowing the assessee’s claim in respect of such

additional depreciation. As the facts and circumstances are

mutatis mutandis similar, respectfully following the precedent, we

allow this ground of appeal.

made by the AO u/s.50C of the Act. The facts anent to this issue

are that the assessee sold certain land in Dewas for a

consideration of Rs.8.31 crore. On being called upon to explain

as to why provisions of section 50C should not be applied for

making addition on account of difference between the stamp

value and the declared full value of consideration, the assessee

requested for a reference to the DVO. The AO did make such a

reference. Since the assessment was getting time barred and

report of the DVO was not received till then, the AO made the

addition of Rs.3,50,41,050/- as the long term capital gain subject

to rectification order on the receipt of DVO’s report, if warranted.

The assessee took up the issue before the DRP. In the meantime,

the report of the DVO was received. The assessee raised certain

objections before the DRP in respect of the valuation made by the

22 ITA No.2111/PUN/2019 Cummins India Limited

DVO. The DRP, without dealing with the assessee’s objections,

upheld the addition.

relevant material on record, it is seen that there is, in fact, a

difference between the full value of consideration declared by the

assessee and the stamp value of the land sold by the assessee.

Section 50C, in such circumstances, contemplates that such

difference should be brought to tax. However, an option has been

given to assessee to seek the valuation of the property from the

DVO. The assessee did exercise this option and the DVO

determined the valuation of the land, leading to addition of

Rs.3.50 crore. It is seen that the objections raised by the assessee

before the DVO, though considered by the DVO, but remained to

be adjudicated by the DRP. It goes without saying that the

DVO’s report is not sacrosanct inasmuch as it is open to

adjudication by the higher authorities. If the assessee convinces

the higher authorities that the DVO erred in correctly valuing the

property, the valuation can be suitably adjusted. Turning to the

facts of the instant case, it is seen that though the assessee raised

objections before the DRP about certain

deficiencies/inconsistencies in the DVO’s report, but the same

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were not adjudicated by the DRP. In our considered opinion, it

would be meet the ends of justice if the impugned order on this

count is set-aside and the matter is restored to the file of the DRP

for disposing of the assessee’s objections against the DVO’s

report. Needless to say, a reasonable opportunity of hearing will

be accorded to the assessee.

on Education Cess and Secondary higher education cess has to

fail in view of the statutory amendment carried out to section

40(a) with retrospective effect covering the year under

consideration. The ld. AR was fair enough to accept this position.

This ground is, therefore, not allowed.

premature and hence dismissed.

2022.

Sd/- Sd/- (S.S.VISWANETHRA RAVI) (R.S.SYAL) JUDICIAL MEMBER VICE PRESIDENT पुणे Pune; िदनांक Dated : 28th September, 2022 सतीश

ITA No.2111/PUN/2019 Cummins India Limited

आदेश की �ितिलिप अ�ेिषत/Copy of the Order is forwarded to: अपीलाथ� / The Appellant; 1. ��थ� / The respondent 2. 3. The CIT(A)-13, Pune 4. The PCIT-5, Pune 5. DR, ITAT, ‘C’ Bench, Pune गाड� फाईल / Guard file. 6.

आदेशानुसार/ BY ORDER,

// True Copy //

Senior Private Secretary आयकर अपीलीय अिधकरण ,पुणे / ITAT, Pune

Date 1. Draft dictated on 26-09-2022 Sr.PS 2. Draft placed before author 28-09-2022 Sr.PS 3. Draft proposed & placed before JM the second member 4. Draft discussed/approved by JM Second Member. 5. Approved Draft comes to the Sr.PS 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. *