TII BRIEF

CBDT takes APA tally to 120 by entering into 3 more

CASE LAW

2017-TII-02-HC-DEL-TP

GRUNER INDIA PVT LTD Vs DIT: DELHI HIGH COURT (Dated: December 20, 2016)

Income Tax - CUP, composite payment, royalty, FTS, Fees for technical services, brand licensing, technical knowhow & technical support.

The assessee entered into an arrangement with the Gruner AG towards licensing of its brand and also for supply of technical know-how. The first agreement was a trademark and technical know-how licensing arrangement which required the assessee to pay a fixed percentage i.e. 8% of the net ex-factory sale price exclusive of excise and other duties, in accordance with the formulae agreed upon by the parties. The second agreement was for the purposes of providing “High Technical Support” on a continuous monitoring basis. In terms of the latter agreement the assessee agreed to the posting of foreign company’s personnel in its unit; their principal/ employer cost to be reimbursed on the basis of a calculation agreed upon in terms of the contract. The consideration was reimbursable on man-hour basis. In the concerned Assessment Year (AY) i.e. AY 2011-12 the assessee’s Transfer Pricing (TP) Report was considered and the two transactions, which were aggregated were considered, and the TPO decided to desegregate the technical support arrangement and the amounts remitted thereunder and applied the Comparable Uncontrolled Price (CUP) method. The assessee’s appeal – to the Dispute Resolution Panel (DRP) and thereafter to the Tribunal, were to no avail.

On appeal, the HC held that,

Whether the issue of aggregation or desegregation of transactions is a largely fact dependent exercise - YES: HC

+ so far as the question of aggregation or desegregation, as the case may be concerned, we notice that there can be no strait jacket or inviolable rule in this regard. The recent judgment of this Court in Sony Ericsson Mobile Communication India (P) Ltd. vs Commissioner of Income Tax 2015-TII-06-HC-DEL-TP stated that aggregation of such transaction is permissible and relied upon the OECD Commentary in this regard. At the same time the observations are not in fact determinative or conclusive. The Court was careful to leave the issue open for examination having regard to the facts of each case. In other words, as to whether the assessee’s claim that aggregation is essential in a given case is an entirely fact dependent exercise to be viewed having regard to the nature of the transaction and the surrounding circumstances. The assessee contends that the amounts paid under the royalty license and technical support agreements had to be viewed along with all other expenses and, therefore, aggregated. The Revenue’s contention, however, is to the contrary;

+ the entire issue as to whether aggregation is warranted in the circumstances, should be gone into afresh in view of the law declared in Sony Ericsson and clarified in Magneti Marelli case;

Whether, for the purpose of determining ALP, TNMM is the most appropriate method in the case of aggregation of international transactions - YES: HC

+ as far as the issue of most appropriate method is concerned, this Court is of the opinion that no definitive ruling ought to be given at this stage. As to whether in the event of de-segregation the CUP method is the most appropriate rather than TNM method should in our opinion be left open for consideration depending on the determination of the issue of aggregation/ de-segregation itself. In other words, that whether in the event of de-segregation, which would be the appropriate method, should be left to the TPO to decide, after hearing counsel for the parties. However, we clarify that in the event it is held that aggregation is permissible in the facts of this case, the findings of the Revenue authorities and the Tribunal that the TNMM method was warranted, would not be disturbed;

+ the appeal is partly allowed. The matter is remitted for re-consideration by the concerned TPO, who shall hear counsel for the parties and render findings on both aspects.

Assessee's appeal partly allowed