Supreme Court dismisses Condonation and SLP against Bombay HC Order regarding Aggregation of Royalty for Technology used [Read Order]

The Supreme Court dismissed the Special Leave Petition (SLP) against the Bombay High Court (HC) order regarding the aggregation of royalty for technology used. The SLP arose out of the the final judgment and order dated 28-07-2023 in ITAL No. 40246/2022 passed by the High Court of Judicature at Bombay. The Income Tax Department filed this petition against Cummins India Limited, the respondent assessee.

The two-judge bench of Justice Sanjay Kumar and Justice Satish Chandra Sharma held that “As special leave petition(s) filed against the very same order have already been dismissed, this special leave petition must meet the same fate. The application for condonation of delay as well as the special leave petition are, accordingly, dismissed.”

The Assessee filed the appeal before the High Court under Section 260A of the Income Tax Act 1961 (the Act) against the order dated 28th September 2022 passed by the Income Tax Appellate Tribunal (ITAT) for A.Y.2015-2016, 2016-2017 and 2017-2018. The issue is in respect of transfer pricing adjustments.

The assessee is engaged in the business of manufacturing and sale of Internal Combustion Engines, Spares, Components (including Bought-Outs) Meera Jadhav thereof & Generating Sets, service of Engines & Gensets / Generating Sets & Allied Equipment, etc. Assessee also has a 100% Export Oriented Unit at Pirangut which is engaged in manufacture and exports of internal combustion engines and its accessories and generating sets and accessories.

Assessee had paid royalty amounting to Rs.54,30,69,318/- for A.Y.2015-2016, Rs.46,99,15,361/- for A.Y.2016-2017 and Rs.51,26,51,778/- for A.Y. 2017-2018 to its Associated Enterprise, i.e., Cummins Inc. for providing technical know-how and technical knowledge for manufacturing of engines to be sold to the customers. For A.Y.-2015-16 Assessee filed its return of income on 30thNovember 2015 declaring total income of Rs.3,83,80,77,530/-.

Assessee's case was taken up for scrutiny and statutory notices under Section 143(1) and Section 142(1) of the Act were issued during the course of assessment proceedings. Respondent No.1 made a reference under Meera Jadhav section 92CA (1) of the Act to the Transfer Pricing Officer, Pune (TPO) to determine the arm's length price (ALP) of the international transactions with the Associated Enterprise(s) of Assessee.

The TPO issued a notice calling upon Assessee to produce relevant evidence supporting the computation of ALP in relation to the international transactions and specified domestic transactions. Assessee furnished all the relevant details / evidence as called for by the TPO. Assessee, in response to one of the points raised relating to royalty paid to Cummins (Inc.), explained that for the use of technology received from Cummins (Inc.) it has paid royalty on the sale of the certain types of internal combustion (IC) engines covered by the technology so provided.

The assessee also provided copies of agreements entered into with its Associated Enterprise and explained that the agreement that was in force for royalty was an agreement dated 16th September 2010. Assessee also explained to the TPO that for benchmarking of royalty transaction, it has aggregated the royalty paid with other transactions relating to the manufacturing of IC engines as these transactions are closely linked transactions.

TPO issued a notice under section 92C(3) of the Act, wherein the aggregation of royalty transactions with other transactions at the entity level was doubted, and the assessee was directed to show cause why the royalty rate used for domestic sales should not be used for benchmarking the royalty on export transactions as well.

The assessee filed the detailed objections before the Dispute Resolution Panel-3, Mumbai (DRP). DRP issued its directions under Section 144(5), rejecting the assessee's contentions and held that the transactions of royalty payment of export sales is to be segregated and benchmarked on a transaction-by-transaction basis as was done by the TPO. Following the directions of DRP, respondent passed the final assessment order under Section 143(3) read with Section 144C(13) of the Act making transfer pricing adjustment on the transfer pricing.

The TPO having accepted that TNMM method applied by Assessee was the most appropriate method in respect of all the international transactions including payment of royalty cannot dispute application of TNMM method as the most appropriate method for the payment of royalty only for which CUP method was sought to be applied.

Once the Tribunal, in its earlier orders, has held that the transaction of payment of royalty for use of technology is inextricably linked with manufacturing activity and should be aggregated with other international transactions in the manufacturing segment for the purposes of benchmarking the same.

The TPO having accepted the aggregating of international transaction of payment of royalty with other international transactions in the manufacturing segment and not drawn any adverse inferences in respect of such aggregation of royalty payment under identical agreement, the Tribunal should have followed the order of the co-ordinate bench rendered under identical facts.

More so, when in a majority of the years from the Assessment Year 2006-07 up to the Assessment Year 2014-15 it was under the very same agreement and the orders were passed after thoroughly scrutinising the international transactions entered into by assessee, the transfer pricing report obtained and the transfer pricing documentation maintained.

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