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Facts
The assessee, M/s. Toyota Kirloskar Motor Pvt. Ltd., paid royalty to its Associated Enterprises (AEs) for technical know-how and license to manufacture vehicles. The Assessing Officer (AO) and Transfer Pricing Officer (TPO) proposed to benchmark this royalty payment separately as a distinct international transaction, arguing that it was not integral to the overall business operations and should not be subsumed within entity-level benchmarking. The assessee contended that royalty payments were inseparable from other transactions and that if the aggregate margin was at arm's length, then individual components should also be considered at arm's length.
Held
The Tribunal, following its own previous decisions, held that no separate benchmarking of royalty payment is required when the Net Profit Margin Method (TNMM) is adopted at the entity level, as this method inherently includes all relevant income and expenditure components. The grounds related to the separate computation of royalty were rendered academic. However, the issue regarding the levy of interest under sections 234B and 234C was to be calculated accordingly. The issue concerning dividend taxation under the India-Japan DTAA was dismissed in favor of the revenue, following a Special Bench decision.
Key Issues
The primary issue was whether royalty payments for technical know-how should be benchmarked separately from other international transactions, or if they could be considered part of the entity-level benchmarking when TNMM was applied. A secondary issue involved the taxability of dividends under the India-Japan DTAA, and the levy of interest under sections 234B and 234C.
Sections Cited
40A(2), 234B, 234C, 115-O
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Income Tax Appellate Tribunal, “B’’ BENCH: BANGALORE
Before: SHRI GEORGE GEORGE K. & SHRI CHANDRA POOJARI
Date of Hearing : 18.01.2024 Date of Pronouncement : 22.01.2024 O R D E R PER CHANDRA POOJARI, ACCOUNTANT MEMBER:
This appeal by assessee is directed against order of CIT(A)-12, Bangalore dated 8.9.2023 for the assessment year 2018-19. 2. Ground Nos.1 & 2 are too general, which do not require any adjudication, which reads as follows:
1. 1. The Order of the learned Commissioner of Income Tax (Appeals)-12 (hereinafter referred to as CIT-(A)) to the extent prejudicial to the Appellant is bad in law.
2. The learned CIT(A) has erred in confirming the action of the AO and TPO in: a. Not appreciating that there is no amendment to the definition of “income” and the charging or computation provision relating to income under the head “Profits & Gains of Business or Profession” do not refer to or include the amounts computed under Chapter X and therefore addition made under Chapter X is bad in law; b. Not appreciating that the provisions of section 40A(2) override the provisions of Chapter X and there being no action under section 40A(2) for royalty expenses, no adjustment under Chapter X can be made. c. Passing the order without demonstrating that the Appellant had any motive of tax evasion.
IT(TP)A No.863/Bang/2023 M/s. Toyota Kirloskar Motor Pvt. Ltd., Bangalore Page 2 of 21
Ground No.3 of the assessee’s appeal reads as follows: “3. The learned CIT(A) and TPO have erred in: a. Not appreciating that the Appellant had adopted TNMM at the entity level, in which process, the royalty payment were considered as closely linked transaction and hence was subsumed into the expenditure; b. Not substantiating how the royalty payment were singled out of the many transactions to be tested on the basis of the ALP; c. Not appreciating that once the margin is tested on the touchstone of ALP, it pre-supposes that the various components of income and expenditure considered in the process of arriving at the margin are also at ALP; and d. Not appreciating that Tribunal in earlier years has held that once the net margins is tested on touchstone of ALP, then royalty should not be separately benchmarked.”
3.1 Facts of the issue are that during the year under consideration, the assessee had paid Rs.646,18,88,517/- as royalty to Toyota Motor Corporation, Japan (henceforth TMC) and Toyota Motor Asia Pacific Pte Ltd., Singapore (subsequently TDEM). The royalty payment was made under the Technical Assistance Agreement between the assessee and its AE. The assessee paid royalty on the net ex-factory sale price of manufacturing sales (both export and domestic) as under: 1. Manufactured vehicles sold in India -6% of LVA 2. Export of manufactured vehicles and Parts -6% of LVA 3. Spares and components 3% of LVA The break-up of royalty paid was as follows: Particulars Nature of Royalty Amount (Rs.) TMC Royalty towards license and 6,35,65,75,520/- technology for manufacture and sale of licensed vehicles and parts and components TDEM Royalty towards license and 6,46,18,88,517/- technology for manufacture and sale of accessories 3.2 During the transfer pricing proceedings, the TPO issued a show-cause notice to the assessee in which he noted that IT(TP)A No.863/Bang/2023 M/s. Toyota Kirloskar Motor Pvt. Ltd., Bangalore Page 3 of 21 royalty should be charged on new technology transfer and not at a constant rate as the assessee had done. He noted that the assessee company had been set up in the late 1990s and was still paying the same royalty as fixed during that period. The TPO further noted that in addition to royalty, the assessee had paid technical know-how fees of Rs.20.68 crores, sales promotion charges to the AE of around Rs. 7 crores and employee training and R&D expenses of Rs. 50 crores. The TPO therefore felt that the assessee should explain the need for paying royalty over and above these expenses. He noted that the quantum of royalty payment of Rs.646.18 crores was substantial as compared to the operating profits of the assessee of Rs. 1,220 crores. The TPO also proposed benchmarking of royalty as a separate transaction, following the decision of the Tribunal in the assessee's own case for A.Y. 2008-09. 3.3 Before the TPO, the assessee submitted that royalty payments are integral to and inseparable to its dealings in the business segments hence it would be impractical and inappropriate to evaluate such payments on an individual and standalone basis. The assessee had aggregated all the international transactions together for determining the arm's length price and evaluated these transactions by adopting TNMM as the most appropriate method. The salient arguments made by the assessee before the TPO are summarized below: The assessee is a licensed manufacture of MUV, SUV and passenger cars. It has got the license to manufacture certain vehicles and other products from TMC. TMC also provided the assessee the necessary technical know-how that was required to manufacture licensed products. The Toyota Group also provides various components and services to the assessee. Considering the fact that IT(TP)A No.863/Bang/2023 M/s. Toyota Kirloskar Motor Pvt. Ltd., Bangalore Page 4 of 21 external benchmarking is being done and there is lack of requisite data at each transaction level, computation of arm's length price or arm's length margin based on separate transaction approach is not possible. The transactions between the assessee and its associated enterprises comprised both purchases, sale of parts and components and services. These transactions are linked and interdependent. The various activities are intertwined and inter-related. The royalty payments are prompted by and are a result of the manufacturing activities. In the peculiar circumstances of the operations involving various types of transactions entered into, towards achievement of a common goal, it is not possible to split the financial data to arrive at the net result from a particular and individual transaction. The data regarding comparable transactions are available only at the entity level and not at the individual transaction level. The net profit at an entity level would broadly justify the intrinsic value of all the underlying transactions particularly when the trading and manufacturing segments are interdependent and integrated. When arm's length price is determined using combined transaction approach under TNM M, an individual item cannot be separately evaluated. Under such circumstances, once the net profit margin is demonstrated to be at arm's length, it pre-supposes that the various components of income and expenditure that have been considered in the process of arriving at the Net Profit are also at arm's length. Therefore, separate evaluation of royalty payments is not required.
IT(TP)A No.863/Bang/2023 M/s. Toyota Kirloskar Motor Pvt. Ltd., Bangalore Page 5 of 21 3.4 The TPO rejected the arguments of the assessee that royalty could not be benchmarked separately, holding as follows: "10.3.1 Though segmental information with respect to manufacturing and trading has been provided separately, analysis of the international transactions of the taxpayer gives a picture of the activities of the taxpayer. It broadly comprises of purchase sale of raw materials, capital goods, sale of CBU, payment of Royalty, payment of technical assistance fees and R&D expenses and Intragroup services which includes, training, travelling, development and sales and promotion. 10.3.2 Royalty as such is a separate transaction on account of separate agreement entered for the technology transfer. This can neither be combined with the transactions pertaining to purchase of spares, which is determined by various other external factors, nor can be compared to travelling ang sales promotion. 10.3.3 Further Royalty is paid by the taxpayer for using its technical knowhow. This technical knowhow is not put to use in trading activity. Trading activity does not require the expertise technology and know-how. Margins of the entity as a whole do not establish the arm’s length nature of the Royalty transaction. Ideally transfer pricing analysis should be made on a transaction by transaction basis."
3.5 The TPO therefore proposed to benchmark royalty payments separately. The TNNM as MAM was not accepted by the TPO, who instead adopted the CUP method as the most appropriate method for benchmarking of royalty. 4.5.2.6 In response to the TPO's proposal, the assessee proposed that even if royalty needed to be benchmarked separately, the external CUT method should be used. The assessee submitted before the TPO that it had collected certain data based on a search in the public domain (i.e. Google, Wikipedia, etc.) wherein the details of royalty paid in uncontrolled comparable transactions was available. As per the agreements with its AEs, the assessee was paying 6% of local value addition (LVA) as royalty. The royalty paid by the assessee worked out to 3.62% of net sales. The assessee justified the ALP of its royalty payment, relying on the decision in the case of Maruti Suzuki vs Addl.
IT(TP)A No.863/Bang/2023 M/s. Toyota Kirloskar Motor Pvt. Ltd., Bangalore Page 6 of 21 CIT [2013] 38.taxmann.com 339 Delhi Trib.) wherein royalty payment below the rate of 5% was held to be at arm's length. The assessee also relied on the decision of the Tribunal in the case of M/s Hyundai Motors India Ltd. Vs DCIT {ITA no. 2353/Mds/2012 which upheld the use of information available in Wikipedia, wherein the average royalty rate in the automotive sector was pegged at 4.7%. The assessee highlighted the fact that TMC incurs R&D expenses to the extent of 3.88% of sales, which was higher than the effective royalty rate paid by the assessee. Therefore, the assessee contended, that even if the royalty payment was separately benchmarked, it would still be at arm's length based on the above external comparable data. 3.6 The TPO rejected the assessee's submission and held that CUP was to be taken as the MAM for benchmarking royalty. The TPO also observed that, apart from the payment of royalty, the assessee was having in-house R&D expenses and making payment for technical know-how also. As these expenses were related to the development/improvement of technical design used for manufacturing activity, the sum of these expenses was considered for benchmarking the transaction. In the case of the comparables, royalty & R&D expenses were considered to benchmark the transaction. Based on this formula, the TPO found the ratio of the assessee's royalty expenses to net sales to be 4.30%. The TPO selected 3 comparables, that had been chosen by the taxpayer itself in the manufacturing segment in its TP study viz. Ashok Leyland Ltd., SML ISUZU Ltd and Force Motors Ltd. He found the average royalty + R&D expenses to net sales ratio to be 2.62% in the case of the 3 comparables. Two other comparables suggested by the assessee, namely M/s. Tata Motors Ltd. and M/s. Mahindra & Mahindra Ltd, were rejected by the TPO on the grounds that these two IT(TP)A No.863/Bang/2023 M/s. Toyota Kirloskar Motor Pvt. Ltd., Bangalore Page 7 of 21 companies failed the RPT filter. The TPO then computed the transfer pricing adjustment w.r.t. royalty as follows: Computation of ALP on Royalty Amount in Rs.(INR) Net sales 16711,53,00,000 Total of R&D, Royalty and 717,68,00,000 Technical know-how expenses Royalty at arm’s length @ 437,84,00,000 2.62% of net sales Difference being adjusted 279,84,00,000 Against this assessee went in appeal before ld. CIT(A).
Ld. CIT(A) has considered the issue for adjudication whether royalty can be benchmarked separately. The TPO in paragraphs 10.3.1 to 10.3.3 of his order (supra) has explained the rationale for treating royalty as a separate transaction. The assessee, on the other hand, has contended that if the margin of aggregated transactions is at arm's length, then it presupposes that the individual expenses including royalty are also at arm's length. He observed that the contention of the assessee cannot be accepted when one looks at the international transactions of the assessee in their entirety. From the details of the international transactions given in paragraph 3 of the TPO's order, it is seen that these include purchase of spares, purchase of OE parts, purchase of capital goods, sales promotion and dealer training expenses, communication expenses, travelling expenses, among others. Though the assessee has claimed that all its international transactions are interlinked, it is fairly evident from the description of these individual transactions that none of them could in any way be impacted by the transfer of technical know-how. Consequently, the payment on royalty has to be looked at as a separate transaction. The assessee has claimed that its manufacturing and trading activities are intertwined and therefore the payment on royalty
IT(TP)A No.863/Bang/2023 M/s. Toyota Kirloskar Motor Pvt. Ltd., Bangalore Page 8 of 21 gets subsumed within the expenses relating to both the segments. However, the definitions given in Article 1 of the Technical Assistance Agreement dated 15.12.2010, which are reproduced below, indicate that the assessee is also purchasing parts, components and materials from third parties, to whom the technical know-how arrangement does not apply. 4.1 The ld. CIT(A) observed that "Outgoing Licensed Parts" means the parts and components exclusive for other vehicles than the Licensed Vehicles, of which the manufacturing license shall be granted to the Licensee under this Agreement, and which may be manufactured or purchased from third parties by the Licensee and sold by the Licensee directly or indirectly lo the Licensor or other third parties as original equipment parts and/or spare parts for such other vehicles. The scope of the Outgoing Licensed Parts and their respective purchasers shall be stipulated in Appendix B attached hereto, which may from time to time be changed by the Licensor.
4.2 "Local Parts" means the parts, components and materials for the Licensed Vehicles or the Outgoing Licensed Parts, which may be manufactured or purchased from third parties by the Licensee by using any technical now-how, information, data, etc. furnished by the Licensor to the Licensee hereunder and with the Licensor's prior written approval under Article 8 hereof.
4.3 "KD Parts" means the parts, components and materials in such knock-down or other form as separately prescribed by the Licensor, wlTtch shall be supplied by it directly or indirectly to the Licensee for the manufacture of the Licensed Vehicles, the Outgoing Licensed Parts or the Local Parts under the terms and conditions separately agreed upon between the parties concerned.
4.4 "Non-Licensed Parts'' means the parts and components, which shall be purchased from third parties by the Licensee for the manufacture
IT(TP)A No.863/Bang/2023 M/s. Toyota Kirloskar Motor Pvt. Ltd., Bangalore Page 9 of 21 of the Licensed Vehicles, the Outgoing Licensed Parts or the Local Parts without using any technical know-how, information, data, etc. furnished by the Licensor to the Licensee hereunder. The scope of the Non-Licensed Parts and their respective suppliers shall be stipulated in Appendix C attached hereto, which may from time to time be changed by mutual agreement between the parties hereto. 4.5 Thus, while the assessee may be availing technical know- how from its AE for manufacturing vehicles or products itself or through third parties, it is evident that there are other aspects of the assessee's manufacturing process and other functions which are in no way connected to the technical know-how. When, for instance, there are components such as KD Parts and Non-Licensed Parts, that are also used by the assessee in its manufacturing operations, the benchmarking of royalty cannot be subsumed within entity-level benchmarking. The assessee has relied on the order of the Hon'ble ITAT, Bangalore 'B' Bench in its own case for the A.Y. 2013-14 to justify its stand that the combined transaction approach should be adopted and margins compared at the entity level. However, he observed that the order of the Tribunal for A.Y. 2013-14 has in turn relied on the order of the Tribunal in the assessee's case for the A.Y. 2007-08, There is a difference as far as the issues examined by the Tribunal in A.Y.2007-08 is concerned, in that decision, the Tribunal had held that the ALP for royalty could not be treated as 'nil' since services had been rendered by the AE to the assessee. In the order that is the subject matter of the present appeal, the TPO has not taken the ALP as nil. Further, the ITAT order for the A.Y. 2007-08 had in turn relied on the Tribunal order for the A.Y. 2003-04 in which the Tribunal had clearly stated that the finding of interlinking of the manufacturing and trading segments has to be case- specific and year-specific. The royalty paid for A.Y. 2018-19 is IT(TP)A No.863/Bang/2023 M/s. Toyota Kirloskar Motor Pvt. Ltd., Bangalore Page 10 of 21 governed by the Technical Assistance Agreement dated 15.12.2010, which was not the case in A.Y. 2007-08. Thus, it is seen that none of the decisions of the Tribunal in the assessee's case for the earlier years have held that royalty cannot be benchmarked as a separate transaction. The order of the Tribunal for A.Y. 2007-08 was upheld by the Hon'ble High Court of Karnataka vide its order dated 13.07.2018. However, in the aforesaid judgment, the Hon'ble High Court had held that no substantial question of law arose in that appeal. The High Court, relying on its decision C/w ITA No. 537/2015 in the case of Pr. CIT&Anr. Vs. M/s. Softbrands India Put. Ltd., had dismissed the Revenue's appeal on the grounds that unless an ex-fade perversity in the findings of the Income Tax Appellate Tribunal is established by the assessee, the appeal at the instance of an assessee or the Revenue under Section 260-A of the Act was not maintainable. Thus, it is clear that the Hont>le High Court has also not ruled against the separate benchmarking of royalty. As noted by the TPO, in the following year i.e. A.Y. 2008-09, the Tribunal had held that royalty is to be benchmarked separately. Further, in the case of M/s. Toyota Kirloskar Auto Parts Pvt. Ltd. us. ACIT(LTU), Bangaloref2014] 52 taxmann.com 171 (Bangalore -Trib.}, the Tribunal had held that where the payment of royalty was exclusively towards the use of know-how in the manufacturing process undertaken by the assessee and was not in any way interlinked with other international transactions, it would not lead to an inaccurate result if the payment of royalty was analysed separately and the arm's length price of such payment can be determined independently. Further, it is also noted that during the Transfer Pricing proceedings, the assessee itself had conducted an exercise of benchmarking its royalty payments. Therefore, it is evident that a separate
IT(TP)A No.863/Bang/2023 M/s. Toyota Kirloskar Motor Pvt. Ltd., Bangalore Page 11 of 21 benchmarking of the royalty payment by the assessee is feasible and the same has been done by both the assessee and the TPO. Based on the above discussion, the TPO's action in benchmarking royalty separately is upheld.
4.6 Having ruled that the separate benchmarking of royalty based on the facts of the present year is in order. Further, the ld. CIT(A) examined the arguments of the assessee against the benchmarking analysis undertaken by the TPO. The assessee has sought for inclusion of Tata Motors Pvt. Ltd. and Mahindra and Mahindra Ltd. It is noted that the assessee itself had rejected these companies in its TP study report on the ground that they failed the 25% RPT filter. In its submissions the assessee has urged that though these companies fail the RPT filter, they incur research and development expenses in-house and these expenses are not with related parties. The ld. CIT(A) found force in the same. When the assessee has itself rejected these companies on account of the RPT, there is no reason 1 to include them in the benchmarking analysis. The TPO's selection of comparables is upheld. 4.7 The ld. CIT(A) further observed that as discussed above, the royalty paid is with respect to the manufacturing operations of the assessee. The trading activities of the assessee and the comparables may or may not be in products manufactured using the technical know-how for which the royalty is paid. The assessee in its submissions has also acknowledged that the royalty/R&D expenditure is primarily related to manufacturing activity in the case of both the assessee and the comparable companies. Therefore, it would be appropriate if the denominator is manufacturing sales in the case of the comparables also. The assessee has also submitted that while computing the royalty ratio, the TPO has adopted gross manufacturing sales, which is inclusive of IT(TP)A No.863/Bang/2023 M/s. Toyota Kirloskar Motor Pvt. Ltd., Bangalore Page 12 of 21 excise duty, as the denominator. The TPO in para 7.1 of the order has accepted the assessee's claim that excise duty is a non-operating item to be reduced from the operating revenue as well as the operating cost. The TPO is directed to compute the royalty ratio of the assessee as well as of the selected comparables, by taking net manufacturing sales, exclusive of excise duty as the denominator.
4.8 In the order u/s 92CA, the TPO had considered R&D expenses of Rs.50.21 crores and Technical Know-how fees paid of Rs.21.32 crores as part of royalty for computing the ratio. The break-up of the payment to the AEs for technical know-how is tabulated below: Sl.No. Associated Amount Nature of International Enterprise Transaction 64,305,921 1 Technical Know-How Fees TMC (Capitalized) 142,508,827 2 TDEM 3 Technical Assistance TDEM 6,422,847 /Support Expenses Total 213,237,595 4.9 The payment for technical know-how was made for the following purposes: • In the F.Y. 2017-18 the assessee prepared and launched the new Innova Touring Sport during May 2017. • During September, 2017 the assessee launched new 'Fortuner TRD Sportivo' vehicles in the Indian Auto market. • The assessee during the year under consideration also launched limited edition of Etios Cross called 'Etios Cross X-Edition.
IT(TP)A No.863/Bang/2023 M/s. Toyota Kirloskar Motor Pvt. Ltd., Bangalore Page 13 of 21 • The Assessee launched the Yaris vehicle in the Indian market in May 2018. For the manufacture and launch of Yaris the assessee availed various technical services such as Jig arrangement, quality standard, assembly instructions, painting process, welding process etc. from its Parent Co. As per the Technical Assistance agreement entered with TMC. Technical Assistance fees was paid based on the man hours spent by TMC engineers at their plant. During the year under consideration the assessee paid Rs.6,43,05,921/- towards technical assistance obtained from TMC after withholding appropriate tax. • The Assessee entered into Production Preparation Support Agreement with TDEM under which TDEM renders certain training, assistance or support concerning the manufacturing facilities and Production preparation for the Products and pilot production of the products.
4.10 The assessee has submitted that the technical assistance fee does not fall within the meaning of royalty. The assessee submitted that the technical fees have been paid as part of general assistance to enable the assessee to carry on its manufacturing activity in India. These payments were capitalized in the books of account of the assessee.
4.11 Regarding the nature of R&D expenses, the assessee has given the following break-up:
IT(TP)A No.863/Bang/2023 M/s. Toyota Kirloskar Motor Pvt. Ltd., Bangalore Page 14 of 21
Nature of Nature of Expenditure Amount Expenses Toyota Motor Corporation 32,37,77,269 Toyota Motor Asia Pacific Pte Ltd 47,00,419 Homologation and Testing Toyota Daihatsu Engineering and 1,00,39,264 Charges Manufacturing Co.Ltd.
Toyota Auto Body Co. Ltd. 1,12,23,112 34,97,40,064 Sub Total (A) Toyota Motor Corporation 6,48,31,938 Software Toyota Motor Asia Pacific Pvt. Ltd. 23,00,054 Expenses Toyota Daihatsu Engineering and 1,42,23,521 Manufacturing Co. Ltd. Sub Total (B) 8,13,55,512 Toyota Motor Corporation 8,62,31,403 Others – Training & Development, Travelling, Toyota Daihatsu Engineering and Membership Manufacturing Co. Ltd. Others 8,62,31,403 Sub Total (C) 51,73,26,979 Total (A+B+C)
4.12 He noted the argument of ld. A.R. that it had availed certain facilities from TMAP for the purpose of accessing and utilizing networking facilities, software and other application in connection with certain business transaction related to overseas sales management and operation system for hardware and software purchase, maintaining the services and monitoring of resources, application, network initiation & backup. The assessee has submitted that despite receiving technology from TMC, it has to carry out testing of critical parts/components to comply with the local regulations. The Product Design & Development (PDD) team is responsible for IT(TP)A No.863/Bang/2023 M/s. Toyota Kirloskar Motor Pvt. Ltd., Bangalore Page 15 of 21 carrying out testing of critical parts and obtaining ARAI certification before the parts are fitted into the vehicle. During the year under consideration, the assessee had imported vehicles and incurred testing expenses totalling to 34.97 Crores. The assessee has submitted that the Technical Know- how fees and R&D expenses are in no way connected to royalty expenses and hence should be excluded while determining the ALP of royalty payment.
4.13 The ld. CIT(A) after considering the submissions of the assessee observed that the Technical Assistance Fee was paid under Article 4 of the Technical Assistance Agreement. Article 4 reads as under: Article 4. - Additional Assistance a) At the Licensee's written request, the Licensor may furnish the Licensee with manufacturing, engineering and other know-how and information relating to the Licensed Products which are not readily available in the Licensor's records but which the Licensor is willing to develop especially for the Licensee, and which shall be furnished through such documents and assistance as designated at the discretion of the Licensor from among those stipulated in Appendix F attached hereto and any other documents and assistance from time to time designated by the Licensor. b) In the event of the preceding paragraph (a), the Licensee shall pay the Licensor all fees, and all costs and expenses incurred by the Licensor in developing and furnishing such know-how, information, documents and/or assistance. c) If the assistance rendered under paragraph (a) hereof is technical assistance or engineering assistance concerning the production preparation for the Licensed Products, such assistance will be provided in accordance with the procedure and conditions set forth in Appendix G attached hereto. 4.14 From the above Article, it is clear that the Technical Assistance Fee is paid for the know-how used in the manufacturing functions of the assessee. The details submitted by the assessee also confirm the same. This amount has rightly been included by the TPO.
IT(TP)A No.863/Bang/2023 M/s. Toyota Kirloskar Motor Pvt. Ltd., Bangalore Page 16 of 21 4.15 With respect to the R&D expenses, it is observed that the homologation and testing charges are directly related to the manufacturing functions of the assessee. The assessee has given the following details of homologation and testing charges: • The assessee has entered into homologation testing service agreement with TMC and under which TMC renders certain services or assistance to TKM to undertake homologation testing of vehicles, parts and components to comply with India specific regulatory requirement. • The assessee paid Rs.47,00,419/- to Toyota Motor Asia Pacific Ptd Ltd (TMAP) for import of Toyota Vios passenger vehicle, Lexus ES vehicle for testing and certification purpose, • The assessee paid testing evaluation expenses of Rs.1,00,39,263/- to TMAP for Etios X cross edition • The Assessee availed the support of Toyota Auto Body Co (TAB) for feasibility study, evaluation of local material quality, evaluation with Toyota global standard etc. of localized parts and components. 4.16 From the above details, he observed that the homologation and testing charges are directly related to the manufacturing activities of the assessee and would therefore have to be included in the computation of the royalty ratio. However, the software expenses of Rs.8,13,55,512/- and Training, Travelling, Membership and other expenses of Rs.8,62,31,403/- which have been characterised as R&D expenses do not involve the use of know-how from the AE. These expenses may therefore be excluded. The TPO is directed to include Technical Know-how fee of Rs.21.32 crores and exclude software expenses of Rs.8,13,55,512/- and other
IT(TP)A No.863/Bang/2023 M/s. Toyota Kirloskar Motor Pvt. Ltd., Bangalore Page 17 of 21 expenses of Rs. 8,62,31.403/- while benchmarking the royalty payment. Against this the assessee is in appeal before us.
We have heard the rival submissions and perused the materials available on record. Similar issue came for consideration before this Tribunal in assessee’s own case in IT(TP)A No.421 & 422/Bang/2023 for the assessment year 2015-16 & 2016-17, the Tribunal vide order dated 21.12.2023 has held as under: “12. After hearing both the sides, perusing the entire material on record and the orders of the lower authorities, we note that this issue is covered by the decision of the coordinate Bench of this Tribunal in assessee’ own case for the for AY 2012-13 & 2014-15 [2023] 147 taxmann.com 558 (Bang.Trib.) where it is held as under:- “13. We note that assessee's margins have been computed including royalty payment which is higher than the margin of the comparables. It is also not disputed by the revenue that the comparables in case of the comparables, the royalty, margins are computed after including royalty and research and development expenses. The view taken by the Coordinate Bench of this Tribunal in assessee's own case for A.Y. 2007- 08 has been reproduced hereinabove wherein all these aspects have been considered. This Tribunal for A.Y. 2007-08 has deleted the adjustment made by the Ld.TPO in respect of royalty by separately bench marking the transactions. This has been fortified by the clarification given in a Miscellaneous Petition filed by the department which is also reproduced hereinabove. This view is also supported by various decisions of Coordinate Benches of this Tribunal as well as various High courts, Cojoint reading of these orders, we direct the Ld.AO/TPO to delete the adjustment proposed for royalty as a separate international transaction. Respectfully following the above view, we direct the Ld.AO/TPO to delete the adjustment proposed towards royalty as a separate international transaction. Accordingly, ground nos. 10 to 12 raised by assessee stands allowed. 13.1 The ld.DR relied on the order of the lower authorities and he submitted that since the assessee has adopted TNMM and the TPO has also accepted the methods for calculation ALP, the TPO has not made separate adjustment in regard to payment of royalty, therefore, this issue should not be raised by the assessee. 13.2 After hearing both the sides, we observe from the order of the TPO, he has calculated the ALP in regard to royalty payment determined under TNMM of Rs. 154.54 crores however, no separate
IT(TP)A No.863/Bang/2023 M/s. Toyota Kirloskar Motor Pvt. Ltd., Bangalore Page 18 of 21 adjustment of royalty has been proposed by the TPO since the TNMM was adopted at NTT level which includes royalty also. The ld.DRP also expressed his opinion that the TPO has not proposed any adjustment towards royalty payment. Considering the above observations and arguments, we uphold the order of the DRP and no separate adjustment is required for the payment of royalty if the TNMM approach has been adopted at entity level as decided by the coordinate bench of the Tribunal in the assessee's own case noted supra, therefore ground Nos.8 to 15 become academic in nature, accordingly, we allow ground nos.8 to 15.”
Following the above decision of the coordinate Bench of the Tribunal, we hold that no separate benchmarking of royalty payment is required and this issue is decided in favour of the assessee and ground No.3 is allowed. Thus, grounds no.4 to 9 relating to ALP computation of royalty has become academic and is left open.”
5.1 Further, same view has been taken by this Tribunal in assessee’s own case for this assessment year also.
Assessment Year ITAT Appeal No and Order date AY 2012-13 and 2014-15 IT(TP)A No.150/Bang/2017 (AY 2012-13) and IT(TP)A No.320/Bang/2019 (AY 2014-15), dated 02.12.2022] AY 2007-08 MP 7/Bang/2015 dated 20.2.2015 5.2 In view of the above, we allow the ground taken by the assessee on similar lines. 6. Ground Nos.4 to 8 of the assessee’s appeal reads as under: “4. The learned CIT(A) and TPO have erred in not appreciating that: a. Royalty represents a recurring payment for a one-time transfer of technology; and b. Technology for some models was received during the year whereas technology for other existing vehicles had been received in earlier years.
5. The learned CIT(A) and TPO have erred in; a. Rejecting external CUT data on unjustified grounds; b. Ignoring the fact that ratio of R&D expenses of TMC was much higher than the effective royalty rate of the Assessee; and c. Ignoring the fact that technical Assistance Agreements were approved by Government authorities and therefore royalty payment should be considered as at arm’s length;
IT(TP)A No.863/Bang/2023 M/s. Toyota Kirloskar Motor Pvt. Ltd., Bangalore Page 19 of 21 6. Without prejudice to above, the learned CIT(A) has erred in confirming the action of the TPO in: a. Adopting a flawed methodology, inappropriate comparison and incorrect figures while arriving at ALP of royalty payment; b. Including technical knowhow fees and R&D expenses (testing charges) while determining royalty payment to net sales ratio in case of Appellant without appreciating that these expenses are not related to technical know-how for manufacturing.
7. Without prejudice to above, the learned CIT(A) has erred in confirming the action of the TPO in: a. Not considering Tata Motors Ltd and Mahindra and Mahindra Ltd as comparable for computation of arm’s length price of royalty payment without appreciating the fact these companies incur R and D expenses with unrelated parties. b. Adopting single year data for analysis, without appreciating that the business, commercial and technological factors mandate adoption of multiyear data and. c. Not granting adjustment for superior quality of technology in case of Appellant.
8. The CIT(A) has erred in stating that the Appellant itself had separately benchmarked royalty payments without appreciating that it had adopted TNMM at entity level in the TP Study and separate benchmarking details of royalty were submitted during assessment proceedings as alternative contention.”
As we decided in ground No.3 in favour of the assessee in earlier para, the ground Nos.4 to 8 relating to computation of royalty have become academic. Accordingly, left it open.
Ground No.9 of the assessee’s appeal which reads as follows: 9. “The CIT(A) has erred in not appreciating that under India Japan DTAA, the dividends are taxable at the rate of 10% and such rate is also applicable for discharge of DDT. The Appellant submits that DDT paid in excess of 10% is liable to be refunded.” 9. This issue came for consideration before Special Bench in the case of Total Oil India Pvt. Ltd. (127 taxmann.com 774) (Mumb-Trib) (SB) in dated 20.4.2023, wherein it answered the following question in favour of the revenue as follows:
IT(TP)A No.863/Bang/2023 M/s. Toyota Kirloskar Motor Pvt. Ltd., Bangalore Page 20 of 21
Q. “Where dividend is declared, distributed or paid by a domestic company to a non-resident shareholder(s), which attracts additional income-tax (tax on distributed profits) referred to in section 115O of the Income-Tax Act, 1961 (in short ‘the Act’), whether such additional income-tax payable by the domestic company shall be at the rate mentioned in Section 115-0 of the Act or the rate of tax applicable to the non-resident shareholder(s) with reference to such dividend income.
Ans. For the reasons give above, we hold that where dividend is declared, distributed or paid by a domestic company to a non-resident shareholder(s), which attracts Additional Income Tax (Tax on Distributed Profits) referred to in Sec. 115-O of the Act, such additional income tax payable by the domestic company shall be at the rate mentioned in Section 115- O of the Act and not at the rate of tax applicable to the non-resident shareholder(s) as specified in the relevant DTAA with reference to such dividend income. Nevertheless, we are conscious of the sovereign's prerogative to extend the treaty protection to domestic companies paying dividend distribution tax through the mechanism of DTAAs. Thus, wherever the Contracting States to a tax treaty intend to extend the treaty protection to the domestic company paying dividend distribution tax, only then, the domestic company can claim benefit of the DTAA, if any. Thus, the question before the Special Bench is answered, accordingly.”
9.1 In view of the above decision of the Special Bench, we are inclined to dismiss the ground taken by the assessee.
Last ground No.10 of the assessee’s appeal which reads as follows: “10. The learned CIT(A) has erred in confirming the action of the AO in levying a sum of Rs 34,00,69,714/- as interest under section 234B and recomputing interest u/s 234C to Rs. 4,33,31,279/-. Interest u/s 234C should be levied considering the returned income and not assessed income. Further, interest charged under section 234B and 234C is excessive and Appellant denies its liability to pay the same.”
IT(TP)A No.863/Bang/2023 M/s. Toyota Kirloskar Motor Pvt. Ltd., Bangalore Page 21 of 21 10.1 This ground is with regard to levy of interest u/s 234B & 234C of the Act, which is consequential and mandatory in nature and to be calculated accordingly.
In the result, appeal of the assessee is partly allowed. Order pronounced in the open court on 22nd Jan, 2024