The Bangalore Bench of the Income Tax Appellate Tribunal (ITAT) rejected the tax department’s adjustment that benchmarked royalty payments to NIL, ruling that Toyota Boshoku Automotive India’s payments to its parent company in Japan were justified and consistent with past assessments.
Toyota Boshoku Automotive India Pvt. Ltd., the assessee, engaged in manufacturing automotive components, paid Rs. 29.43 crore in royalty to its Japanese parent, Toyota Boshoku Corporation, for the use of technical know-how. The Transfer Pricing Officer (TPO) disregarded the payment, stating that the assessee functioned as a contract manufacturer for Toyota Kirloskar Motors Ltd. (TKML), so it should not have incurred royalty costs, which were instead deemed more appropriately payable by TKML.
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The TPO alleged that Toyota Group was shifting royalty burdens from TKML to other Indian group entities to reduce taxable profits. Relying on OECD guidelines, the TPO reclassified the assessee’s profile, benchmarked the royalty payment to NIL, and made a Rs. 45.83 crore transfer pricing adjustment.
Before the Dispute Resolution Panel (DRP), the assessee’s counsel argued that the TPO’s characterization was flawed, especially since the royalty agreement was long-standing and approved by competent authorities. They argued that the use of the TNMM (Transactional Net Margin Method) had been accepted in previous years, and there was no change in facts warranting a deviation. The DRP upheld the TPO’s approach on all counts except for directing a verification of the royalty amount.
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On further appeal, the assessee’s counsel argued that the TPO had overlooked prior ITAT rulings and judicial precedents in its own and sister concerns’ cases, where royalty was allowed and TNMM upheld as the most appropriate method. They submitted that it assumed market risks and the royalty reflected genuine business expenditure.
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The tribunal bench comprising Waseem Ahmed (Accountant Member) and Keshav Dubey (Judicial Member) observed that in earlier years, similar royalty payments were accepted, and TNMM was upheld as the correct method by both ITAT and the Karnataka High Court. The tribunal explained the principle of consistency and found no material change in the assessee’s functions or risk profile.
The tribunal ruled that the benchmarking of royalty at NIL was unjustified. It directed the TPO to determine the Arm’s Length Price using the TNMM, as done in prior years, and allowed the appeal for statistical purposes.
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