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Facts
The assessee, a wholly owned subsidiary of Hi-Lex Corporation, Japan, engaged in manufacturing automotive parts, filed an appeal against the Final Assessment Order. The assessment involved international transactions, including royalty payments, which the Transfer Pricing Officer (TPO) benchmarked separately.
Held
The Tribunal held that once the combined benchmarking approach, which included royalty payments as an operating expense and resulted in an arm's length margin, was accepted by the TPO, a separate adjustment for the royalty transaction was not permissible. The Tribunal relied on High Court judgments supporting this view.
Key Issues
Whether royalty payment, if already included as an operating expense in a combined benchmarking approach accepted as arm's length, can be separately adjusted as an international transaction.
Sections Cited
144(3), 144C(13), 144B
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Income Tax Appellate Tribunal, DELHI
Before: SHRI YOGESH KUMAR U.S. & SHRI BRAJESH KUMAR SINGH
(A.Y 2020-21) Hi-Lex India Private Limited Vs. Assessment Unit Income Plot No. 55, Sector 3, IMT Tax Department, Gurgaon, Manesr, Gurgaon, Haryana Haryana PAN: AABCM9648Q Appellant Respondent Assessee by Sh. Ajit Jain, CA (Virtual), Sh. Shreyansh, CA Revenue by Sh. S. K. Jadhav, CIT- DR Date of Hearing 10/11/2025 Date of Pronouncement 28/11/2025 ORDER
PER YOGESH KUMAR, U.S. JM:
The present appeal is filed by the Assessee against the Final Assessment Order dated 24/07/2024 passed under Section 144(3) r.w.Section144C(13)r.w. Section 144B of the Income Tax Act, 1961 ('Act' for short) pertaining to Assessment Year 2020-21.
The grounds of Appeal of the Assessee are as under:-
“1. On the facts and circumstances of the case and in law, the Ld. DRP/Ld. TPO/Ld AO grossly erred in not appreciating the Appellant's business model and not aggregating closely linked transaction of payment of royalty with the transactions benchmarked under manufacturing segment using Transactional Net Margin Method.
2. Without prejudice to the above, on the facts and circumstances of the case and in law, the Ld. TPO/Ld. AO grossly erred in selecting agreements based on inappropriate and unreasonable criteria to benchmark the royalty transaction of the Appellant. In that process, the Ld. TPO/Ld. AO also rejected certain comparable agreements submitted by the Appellant.
3. Without prejudice to any of the above, on the facts and circumstances of the case and in law, the Ld. TPO/Ld. AO/DRP grossly erred in not considering effective royalty rate while making the adjustment.”
Brief facts of the case are that, the Assessee was incorporated on 2nd 1998 as wholly owned subsidiary of Hi-Lex Corporation, Japan, which is engaged in the business of manufacturing of mechanical control cables and window regulators for automobile industries.
Following international transactions were subject to TP assessment for the year under consideration.
International transaction Method Tested Amount (INR) Tested Margin of and party party’s comparable PLI margin companies Purchase of raw materials TNMM Hi-Lex 17,01,95,660 35th percentile: Purchase of spare parts with India 7,33,205 3.41% Sale of goods OP/OR 1,86,80,582 Median:4.65% Purchase of capital goods 5,38,97,280 4.19% 65th Percentile: Payment of 1,78,44,169 5.13% technicalconsultancy fee 11,41,25,406 Payment of royalty 4. It is the specific case of the Assessee that since the aforesaid international transactions formed an integral part of Hi-Lex India manufacturing business which claimed to be principal activity, the transactions were analyzed together using combined transaction approach by adopting TNMM as most appropriate method.
The Ld. TPO rejected economic analysis adopted by the Assessee in its TP report, by modifying the applied filters, rejecting the selected comparable companies, introduced certain other comparable companies. The Ld. TPO rejected Three comparable companies and introduced Seven new companies to bench mark Assessee’s International transactions and proposed transfer pricing addition of Rs. 7,45,79,449/- attributable to manufacturing operations of the Assessee. The TPO has also challenged the Assessee’s approach to bench mark the international transaction of payment of royalty to the AE based on aggregate approach. In response, apart from arguing in favour of use of aggregate approach, without prejudice to Assessee’s contention, justifying the TNMM approach, submitted a CUP analysis to substantiate the payment of royalty. The Assessee identified three comparables independent agreements with average royalty rate of 6.17% of net sales as against 3% of net sales royalty paid in its case.
The Ld. TPO applying the CUP Method, used final set of 5 agreements as comparable with average royalty rate of 2.6% and proposed addition as under:-
Particulars Amount (INR) Royalty paid to AE (A) 11,41,25,406 Royalty as percentage of net 3.00% sales (B) Net sales (C=A/B) 3,80,41,80,200 Arm's length rate of royalty (D) 2.6% Arm's length value of royalty 9,89,08,685 (E=C*D) Adjustment (F=A-E) 1,52,16,721
The Assessee filed objections before the DRP and based on the directions of the DRP, Ld. TPO included two of the rejected companies and excluded two newly introduced comparable companies, use corrected net margins of companies and allowed effect of working capital adjustment to the Assessee pursuant to which the proposed addition of Rs. 7,45,79,449/- was deleted. In so far as intentional transaction of payment of royalty, the Ld. TPO did not appreciate the Assessee’s argument against the approach adopted by Ld. TPO while upholding the adjustment of Rs. 1,52,16,721/-. The Final assessment Order came to be passed on 24/07/2024 by making addition of Rs. 1,52,16,721/- on account of payment of royalty. Aggrieved by the Final Assessment Order dated 24/07/2024, Assessee preferred the present Appeal.
The Ld. Assessee's Representative vehemently submitted that the entry level operating profit margin of 4.19% earned by the Assessee has already been held to be at Arm’s length by the TPO vide order dated 08/07/2024 while passing the order giving effect to the directions of the DRP and the said entry level operating profit margin of 4.19% includes payment of royalty as on operating expense.
Therefore, submitted that once the combined bench marking approach, which PLI includes payment of royalty is accepted by the TPO to be Arm’s Length,separate adjustment pertaining to the concerned intentional transaction ought not to be made to Assessee’s income.
The Ld. Counsel for the Assessee relied on following Judgments in support of his contentions and sought for allowing Ground No. 1 of the Assessee.
a) MagnetiMarelli Powertrain India Private Limited Vs. DCIT (2016) 75 rtaxmann.com 213(Delhi) b) Denso Haryana Pvt Ltd vs DCIT (ITA No. 1310/DEL/2018 [A.Y: 2011-12] [AY 2012-13) c) Control Techniques India (P.) Ltd. vs DCIT, Corporate Circle 1(2) (IT APPEAL No. 2095 (CHNY) OF 2017) d) Hon'ble High Court of Delhi in the case of Cummins India Ltd. vs ACIT ([2023] 153 taxmann.com 223 (Bombay)/[2023] 294 Taxman 619 (Bombay) [28-07-2023) e) Gates India (P.) Ltd. vs ACIT (ITA No 2379 (DELHI) OF 2022[ASSESSMENT YEAR 2018-19] [2024]) f) Goodyear India Ltd. vs DCIT Circle 12(1), New Delhi (ITA Nos. 5650 (Delhi) of 2011, 6240 (Delhi) of 2012 and 916 (Delhi) of 2014 [Assessment years 2007-08 to 2009-10]) g) Toyota Kirloskar Motor (P.) Ltd. vsACIT(LTU) (ITA No. 350 & 836 (BANG.) OF 2014 [ASSESSMENT YEAR 2005- 06]) h) DCIT vs Adcock Ingram Ltd. (ITA No. 2052 & 2053 (BANG) OF 2019 [ASSESSMENT YEAR 2011-12 & 2014- 15])
Per contra, the Ld. Department's Representative submitted that the payment of royalty being a separate international transaction, the authorities below have rightly bench marked the same separately, which cannot be found fault with. Therefore submitted that Ground No. 1 of the Assessee is devoid of merit, thus, sought for dismissal of the Ground No.1.
We have heard both the parties and perused the material available on record. It is not in dispute that the entry level operating profit margin of 4.19% earned by the Assessee has already been held to Arm’s Length by the TPO while giving effect to the directions of the DRP which is reproduced as under:-
“The operating margin of the assessee is 4.19%, which falls within the arm's length range of the comparable. Thus, the earlier adjustment in respect of Manufacturing of auto components is reduced from Rs. 7,45,79,449/- to NIL. The Assessing Officer shall pass the give effect order accordingly.”
The aforesaid entry level operating margin of 4.19% includes payment of royalty as on operating expenses, the relevant extract of computation of margin is reproduced as under:-
Particulars AMOUNT (INR) Revenue from operations (A) 3,98,45,33,609/- Operating Cost (including 3,81,77,25,815/- payment of royalty)(B) Operating Profit (C=A-B) 16,68,07,794/- Operating Profit/Operating 4.19% Income (D=C/A)
In our considered opinion, once the combined bench marking approach, whose PLI includes payment of royalty is accepted by the TPO to Arm’s Length, a separate adjustment pertaining to the concerned international transaction ought not to be made to income of the Assessee.
The Jurisdictional High Court in the case of MagnetiMarelli Powertrain India Private Ltd. Vs. DCIT (2016) 75 taxmann.com 213(Delhi) held as under:-
“17. As far as the second question is concerned, the TPO accepted TNMM applied by the assessee, as the most appropriate method in respect of all the international transactions including payment of royalty. The TPO. however, disputed application of TNMM as the most appropriate method for the payment of technical assistance fee of Rs. 38,58,80,000 only for which Comparable Uncontrolled Price ("CUP") method was sought to be applied. Here, this court concurs with the assessee that having accepted the TNMM as the most appropriate, it was not open to the TPO to subject only one element, ie payment of technical assistance fee, to an entirely different (CUP) method. The adoption of a method as the most appropriate one assures the applicability of one standard or criteria to judge an international transaction by. Each method is a package in itself, as it were, containing the necessary elements that are to be used as filters to judge the soundness of the international transaction in an ALP fixing exercise. If this were to be disturbed, the end result would be distorted and within one ALP determination for a year, two or even five methods can be adopted. This would spell chaos and be detrimental to the interests of both the assessee and the revenue. The second question is, therefore, answered in favour of the assessee; the TNMM had to be applied by the TPO/AO in respect of the technical fee payment too."
The identical ratio has been laid down in plethora of cases relied by the Assessee mentioned as mentioned in previous Para No. 8 of the order.
Considering the above facts and circumstances and following the ratio laid down by the Hon'ble High Court of Delhi in the case of Magneti Marelli Power train India Private Limited (supra) and other judicial precedents, we find merit in the Ground No. 1 of the Assessee and accordingly we delete the addition made by the A.O.
In the result, Appeal of the Assessee is allowed.