Transfer Pricing adjustment made in respect of Royalty Payments

IN THE INCOME TAX APPELLATE TRIBUNAL
“A’’ BENCH: BANGALORE

BEFORE SHRI GEORGE GEORGE K., JUDICIAL MEMBER
AND
SHRI B.R. BASKARAN, ACCOUNTANT MEMBER

 IT(TP)A No.2603/Bang/2018
 Assessment Year : 2013-14

M/s. Toyotetsu India Auto Parts
Private Limited
Onsite Supplier Park,
Building No.7,
Bidadi Industrial Area,
Plot No.1, Bidadi,
Ramanagara District 562 109
PAN NO : AADCT0768L
APPELLANT 

Vs. 

ACIT Circle-3(1)(1)
Bangalore
RESPONDENT

Appellant by : Shri K.R. Vasudevan, A.R.
Respondent by : Shri Kannan Narayan, D.R.

Date of Hearing : 29.03.2021
Date of Pronouncement : 18.06.2021

O R D E R

PER B.R. BASKARAN, ACCOUNTANT MEMBER:

 The appeal filed by the assessee is directed against the order dated 12.7.2018 passed by Ld. CIT(A)-7, Bengaluru and it relates to the assessment year 2013-14. All the grounds urged by the assessee relate to transfer pricing adjustment made in respect of royalty payments. 

2. The facts relating to the issue are stated in brief. The assessee manufactures pressed and wielded components for Toyota Kirloskar Motor parts. Basically, tax payer manufactures auto sheet metal parts that are made of steel alloys and are used as metal body in four wheelers. During the year under consideration, the assessee had entered following international transactions with its A.Es.

We are now concerned with royalty payment of Rs.4.53 crores. The assessee had paid royalty @ 5% as approved by the RBI as per FDI policy. Since the payments have been made in accordance with the FDI policy, the assessee submitted that the same was at arms length. According to the Ld. A.R., RBI approved rate would constitute a “comparable rate” under CUP method.

3. The TPO however took the view that the assessee has not done any bench marking for royalty payment. The TPO took the view that Profit Split Method (PSM) is the appropriate method to determine arms length price of royalty payment made by the assessee. The TPO observed that there are 3 kinds of methods under PSM, viz., Contributory PSM, Comparable PSM and Residual Profit Split Method. He initially proposed to split the profit in the ratio of 80:20 between assessee and the A.E. The TPO determined EBDIT ratio of the assessee, which worked out to 8.57%. Average EBDIT margin of comparable companies worked out to 4.87%. The difference between the two was 3.73%. Then the TPO assigned weights to functions, assets and risk carried out by the assessee and its A.E. According to the said analysis, A.E. should be allotted 75% of the profit. Accordingly, the A.O. worked out 75% of 3.73%, which came to be 2.80%. Accordingly, he made transfer pricing adjustment of Rs.85,34,627/-. The Ld. CIT(A) also confirmed the same. 

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