|CORAM:||Inturi Rama Rao (AM), Sunil Kumar Yadav (JM)|
|CATCH WORDS:||ALP, TNMM, Transfer Pricing|
|COUNSEL:||Chythanya K. K|
|DATE:||April 21, 2017 (Date of pronouncement)|
|DATE:||April 21, 2017 (Date of publication)|
|FILE:||Click here to download the file in pdf format|
|Transfer Pricing: An international transaction can be clubbed / aggregated with other international transactions if such transactions are closely connected with each other. The onus is on the assessee to establish the justification for clubbing the transactions. If the TPO has not applied TNMM at the entity level and has bench marked the royalty payment on standalone basis and not subjected the cost of production or other transactions to bench marking, the contention that when TNMM is applied at the entity level, there was no necessity of separate bench marking in respect of royalty transactions cannot be accepted|
(i) The only issue that arises for consideration before us is whether the TPO was justified in making the ALP adjustment in respect of royalty payment made to M/s. Falco Limited in the given facts of the present case. The royalty payment is made to M/s. Falco Limited for manufacturing electronic components by using technology, expertise and knowhow of Falco and marketing and selling components under the brand name of Falco in India as well as abroad by the assessee company. In consideration of same, royalty at the rate of 8% of sales was made by the appellant to M/s. Falco Limited. No doubt the law is settled to the extent that an international transaction can be clubbed / aggregated with other international transactions provided such transactions are closely connected with each other. In the cases cited by the ld. counsel for the appellant, this proposition of law was reiterated. But in the present case, the TPO had not applied TNMM at entity level. The TP study report submitted by the assessee company had been rejected by the TPO. This action of the TPO is confirmed by the Hon’ble DRP. But the TPO proceeded to bench mark the transaction of the royalty payment on stand alone basis. In the process, the cost of production or other transactions are not subjected to bench marking by the TPO. Therefore the contention of the ld. counsel that when the TNMM was applied at the entity level, there was no necessity of separate bench marking in respect of royalty transactions cannot be accepted. This submission made by the assessee-company is factually incorrect. On mere perusal of order of the ld. TPO it is manifest that the TPO had picked up the transaction royalty alone for the purpose of bench marking. The statement made by the ld. Counsel for the appellant is nothing but attempt to mislead the court. This conduct on the part of the counsel is highly deplorable. It is a fundamental duty of an advocate / counsel to assist the court in adjudicating the matter before the court in accordance with the law. It is highly unbecoming of counsel to mislead the court. We leave the issue here with these observations.
(ii) Now on the issue of bench marking the transaction of royalty the ld. counsel chosen not to point out any fallacies in the reasoning of the TPO or of the ALP analysis in the working of the ALP adjustment. The ld. counsel also failed to establish that the transaction royalty payment is closely linked with the other transactions carried out with AE. It is trite law that a justification should be shown for clubbing the transactions. In the absence of such justification clubbing other transactions is not possible. The onus always lies on the assessee-company to establish the justification for clubbing and aggregation of the transaction of payment of royalty with other transactions. As mentioned (supra) the assessee-company had failed to discharge such onus, in the circumstances we confirm the orders of the lower authorities in this respect of ALP adjustment on payment of royalty.