Bombay High Court rules in favor of Cummins India in Transfer Pricing Dispute

Bombay High Court rules in favor of Cummins India in Transfer Pricing Dispute

The TPO made an upward adjustment to the value of the international transaction concerning royalty payment on export sales

The Bombay High Court has ruled in favor of the assessee, holding that the Income Tax Appellate Tribunal (ITAT) should have adhered to the precedent set by the co-ordinate Bench in the identical factual context.

Cummins India Limited (assessee) manufactures and sells internal combustion engines, spares, components, and generating sets and provides services for these.

It entered various international transactions with its associated enterprise(s). As part of the transactions, Cummins India made royalty payments to its associated enterprise, Cummins Inc., for providing technical know-how and knowledge for manufacturing engines to be sold to customers.

Regarding the royalty payment the Transfer Pricing Officer (TPO) acknowledged that the assessee had received technology from the associated enterprise. However, the TPO dismissed the assessee's proposal to aggregate the royalty payment with other international transactions related to the manufacturing segment for Benchmarking purposes.

Instead, the TPO made an upward adjustment to the value of the international transaction concerning royalty payment on export sales.

The Dispute Resolution Panel (DRP) upheld the TPO's stance, rejecting the assessee's arguments. The DRP determined that the royalty payment transactions associated with export sales needed to be separated and Benchmarked on an individual transaction basis.

Thus, the assessee filed an appeal before the ITAT, which upheld the decisions made by the lower authorities.

The high Court Bench comprising Justice KR Shriram and Justice Firdosh P Pooniwalla noted that the TPO had acknowledged the Transactional Net Margin Method (TNMM) as most appropriate for assessing international transactions, including the payment of royalty. Therefore, he could not challenge the application of TNMM specifically for the royalty payment, where the Comparable Uncontrolled Price (CUP) method was proposed.

The Bench emphasized that selecting a specific transfer pricing method as the most appropriate implied the adoption of a consistent standard to assess international transactions. Altering this could lead to distorted outcomes, permitting the adoption of multiple methods within a single ALP determination for a given year.

The Judges noted that ITAT had overlooked the fact that the royalty agreement for the relevant years remained unchanged. Neither the TPO nor the DRP indicated any variation in their respective orders.

Thus, the Bench held that ITAT’s divergence from its previous stance in the three assessment orders was unjustified. The tribunal’s prior rulings affirmed that the royalty payment (linked to technology usage) intertwined with the manufacturing activity. Consequently, it should be aggregated with other international transactions in the manufacturing segment for the purpose of Benchmarking.