TaxTMI 
TaxTMI 
2013 (11) TMI 194
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....see company. For the year under assessment, the assessee filed its income tax return on October 30, 2002 declaring total income of Rs. 19,44,45,442/-. The return was originally processed under sec. 143(1) of the Income-tax Act, 1961 (the Act) vide intimation dated February 25, 2003 and thereafter was taken up for scrutiny by issue of a notice under section 143(2) dated October 22, 2003. The Ld. Additional Commissioner of Income Tax, Range 10, New Delhi (AO) was pleased to complete the assessment under section 143(3) of the Act vide her order dated March 30, 2005 on a total income of Rs. 27,17,76,470/-. 3. The Assessing Officer made certain additions and disallowances as well as adjustment under the Transfer Pricing Provisions. First Appellate Authority deleted the same. Aggrieved, the Revenue is in appeal before us on the following grounds:- ITA No. 3104/Del/2009 (A.Y. 2002-03): "1. On the facts and in the circumstances of the case and in law the CIT(A) has erred in deleting the addition of Rs. 1,36,31,665/- mode by the A.O. on account of TPO-I's order under Section 92 CA(3) dated 21.02.2005 on account of adjustments in the ALP of international transa....
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.... during the current year is made on the basis of the same agreement that was considered by the Delhi Bench of the Tribunal in the case of the assessee for the A.Y. 2001-02. The Tribunal vide its order dated 20th March, 2008 in ITA No. 4798/Del/2004, has held as under:- "7. With regard to ground taken by the revenue for deleting the addition of Rs. 3.29 crores on account of royalty paid. The issue is squarely covered in favour of the assessee by the order of ITAT in assessee's own case for assessment years 1988-89 to 1997-98. During the year under consideration also, the CIT(A) has rightly deleted the addition after recording finding with reference to the terms of the agreement which were similar to the terms of agreement during the course of earlier years. The Tribunal has deleted the disallowance. Following are the findings of the Tribunal in assessee's own case: "A perusal of the above case law will show that case of the assessee is entirely covered by the above ratios as from the terms and conditions of the agreement it is noted that agreement was for a definite term of ten years liable to be terminated before the end and c....
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....in the case of Tata Robins Frazer Ltd. v. CIT (supra) the amount comes from the circulation of the capital and not from any capital asset. Further we may refer the decision of the Apex Court in the case of Gotan Lime Syndicate v. CIT[1966] 59 ITR 718 in which it was also laid down that the amount of royalty has to be allowed as revenue expenditure, as the said expenditure was in relation with the excavation of raw material. More you take the more royalty you pay. This ratio is again applicable in the case as amount of royalty in the case is directly linked with the volume of contract products. The more assets will produce, the amount of royalty will increase. In case assessee stops manufacturing of contract products the amount of royalty will not be payable. In view of the above ratio the amount of royalty which is linked with the volume of production is allowable as revenue expenditure. On the basis of above discussion the cumulative result is that amount of royalty being paid was allowable as, revenue expenditure in view of the case law referred to by the ld counsel and discussed above and it cannot be treated as capital expenditure. The ground is allo....
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.... it set up a new factory after obtaining know how from its German collaborators, which collaboration was being considered by the High Court. In principle, it would seem to make no difference between a case where an existing company undertakes a totally new line of activity for which it has to establish a new factory, and a case where for manufacturing a new product a new company is constituted or formed. What we have to consider is whether the payment has been made for acquiring an asset of an enduring nature, if know-how has been acquired unrelated to secret or patented processes or the right to use the trade name or trade mark, then the acquirer of that know-how - since that phrase was repeatedly used or emphasized - would seem to acquire no asset of an enduring nature. If the know-how acquired relates to the setting up of the plant or machinery, then perhaps it decide that question in the present reference. If the know-how acquired relates to the process of manufacturing, then the payment made for the same would have to be considered as revenue expenditure, since the acquirer does not obtain by the expenditure any asset of an enduring nature. It is only the acquisition of inform....
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....acturing the products as required. For this purpose whether the company is newly set up or an existing one will not make any difference. The answer is also available in the decision rendered by Hon'ble Bombay High Court in the case of Gannon Norton Metal Diamond Dies Ltd. (supra). The Hon'ble High Court held that if the know-how acquired relates to the process of manufacturing, then the payment made for the sale would have to be considered as revenue expenditure since the acquirer does not obtain any asset of an enduring nature. The Hon'ble Supreme Court in the case of Empire Jute Co. Ltd., 124 ITR 1 = (2002-TIOL-238-SC-IT) held that in a case where expenditure even if incurred for obtaining an advantage of enduring benefit, may, none the less, be on revenue account and the test of enduring benefit may break down. It is not every advantage of enduring nature acquired by an assessee that brings the case within the principle laid down in this test. What is material to consider is the nature of the advantage in a commercial sense and it is only where the advantage is in the capital field that the expenditure would be held as capital expenditure. If the advantage consists merely in fac....
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....sp; (ii) RBI's approval for such agreement was not available. (iii) In the agreement entered into between the two companies, specific charges that were to be charged for this service were not mentioned. He held that the assessee company was not liable to make payments to Denso Haryana Pvt. Ltd. towards sharing of communication network called "NICE-NET" (Nippon Denso Integrated Communication Earth Network). The first appellate authority brought out the arguments of the assessee in Para 10.33 which read as under:- "10.3.3 The appellant in its submission stated that they entered into the agreement with Denso Haryana Pvt Limited for using the NICE - NET network on cost sharing basis for reporting and communication recharged to Denso Group Companies world over. Further, the said expenses were paid to Denso Haryana Pvt Limited, who has shown the said receipts as income during the year under consideration. It is further submitted that Denso Haryana Pvt Ltd. has been assessed under the same jurisdiction. Further, there is no dispute that the services were rendered and actually used by the appellant company during the year under con....
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....e in the hands of the assessee. 12. After hearing rival contentions we find that there is no dispute that the services are rendered and have been actually used by the assessee company during the year under consideration. The net work was being used by Denso group companies in India and cost incurred was shared. We are unable to uphold the finding of the AO that the expenditure in question cannot be allowed, as the cost sharing agreement is a sham agreement. When costs are being shared, we do not understand as to how specific charges or quantification of charges are asked to be mentioned in the agreement. Non-mentioning of the same in the agreement cannot be a ground for disallowance. No R.B.L approval was required or payments were made in India. The Assessing Officers of Denso Haryana Pvt. Ltd. and the assessee are the same. When Denso Haryana Pvt. Ltd. made a payment of Rs. 10,41,434/- to a foreign company, the AO has not doubted that expenditure. When Denso Haryana Pvt. Ltd. is recovering a part of the expenditure from the assessee, cost reduction is accepted but the expenditure is doubted in the hands of the assessee. When an understanding is arrived at between different enti....
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.... available under section 35AB. However, during the course of assessment proceedings the assessee had made a claim u/s 32(1) for depreciation on the said know how fee instead of claiming the same u/s 35AB, as the same is applicable only up to assessment year 1998-99. The CIT(A) has accepted the assessee's contention and allowed the depreciation u/s 32(1) at Rs. 3.08 crores as know how fee paid by treating the same as intangible assets. This verdict of the CIT(A) was accepted by the assessee and no appeal was filed before the Tribunal. 9. With regard to the amount of Rs. 63.46 lakhs the assessee claimed it as revenue expenditure which was disallowed by the Assessing Officer on the plea that it was capital in nature. By the impugned order, the CIT(A) confirmed the action of the Assessing Officer and allowed only depreciation thereof u/s 32(1) which was also accepted. The assessee preferred an appeal before ITAT and the ITAT had allowed the assessee's appeal and allowed the said amount in full as revenue expenditure in ITA. No. 4714/Del/2004. Thus to the extent, the ground taken by the revenue is misconceived. So far as the amount of Rs. 63.46 lakhs is conce....
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.... CIT(A) has erred in deleting the addition of Rs. 5,86,00,000/- made by the AO on account of adjustment in the ALP of International Transactions of the assessee. 6. On the facts and circumstances of the case and in law, the order of the CIT(A) has erred in deleting the addition of Rs. 97,44,630/- made by the AO on account of Arm's length price on raw material purchases from SCJ. 7. On the facts and circumstances of the case and in law, the order of the CIT(A) has erred in deleting the addition of Rs. 4,19,33,498/- made by the AO on account of royalty expenses treating the same as capital expenditure in nature. 8. On the facts and circumstances of the case and in law, the order of the CIT(A) has erred in deleting the addition of Rs. 62,10,292/- made by the AO on account of payment of knowhow fees treating the same capital in nature. 9. On the facts and circumstances of the case and in law, the order of the CIT(A) has erred in deleting the addition of Rs. 13,13,332/- made by the AO on account of NECNET charges paid to Denso Haryana for use of the internet. &n....
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....nbsp; 3. The summary of the international transactions entered into by the assessee during the year are as under:- 4. Methodused by assessee to determine the Arm's length price (ALP) S.No. International Transaction Method Value (in Rs.) 1. Payment of royalty TNMM 39,189,710 2. Reimbursement of short stay expenses. TNMM 13,429,428 3. Purchase of capital goods TNMM 13,799,043 4. Purchases of raw material, components etc. TNMM 4,906,400 5. Payment for technical know-how TNMM 3,780,796 6. Payment of testing fees TNMM 682,08 4. Method used by assessee to determine the Arm's length price (ALP) The assessee has relied upon the entity-wise Transactional Net Margin Method (TNMM) using margin over the total cost as the Profit Level Indicator (PLI) as the most appropriate method to establish that the international transactions entered into by it are at arm's length. The tested party is the assessee itself, i.e., assessee's net profit margin over the cost has been compared with the margin of other comparable co....
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.... that the variation in the price of imports and the impact thereof on the profitability of A.E. can be masked by the impact of variation in the domestic price on aggregate profits of the assessee. He held that in cases where the international transactions constitutes only a small portion of the total cost, it is not possible to separately examine the arm's length nature of the international transaction by looking at the aggregate net profits of the tested party, which is the assessee in this case. He held that TNMM shall not provide the most reliable measure of the arm's length price in relation to this international transaction. He, therefore, rejected TNMM as the most appropriate method. The TPO concluded that (a) the assessee failed to discharge its responsibility as the method relied upon by it is not the most appropriate method; (b) it has failed to give reasonable data i.e. cost of purchase in the hands of SCJ to determine the ALP by Retail Price Method (RPM); (c) it clearly emerges that no method other than the CUP can be applied in this case to determine the ALP of the import of the components from SCJ. 23. As the assessee has not brought out any difference between the q....
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....ringent comparability criteria to be met before being applied in any case. As per the first appellate authority under the CUP method not only the properties of a product but the accompanying circumstances and conditions have to be evaluated for comparison. He listed out 8 parameters of comparability and finally concluded as follows - "8.2.9 In light of all of the above, I hold that: (a) since out of 11 types of components that were imported from Sumitomo Japan, relevant information on localized prices for financial year 2001-02 is available for only 4 types of components; (b) there are significant differences between the characteristics of the transaction of import of raw material and components from Sumitomo Japan and the characteristics of the transaction of procurement of raw material and components from local Indian vendors; and (c) there is absence of a suitable manner/methodology to adjust for such differences; I am of the considered view that the ....
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....d. He strongly disputed the finding of the CIT(A) that there are significant differences in the facts and circumstances between the transaction of import of raw material from Japan vis-a-vis procurement of raw material and components from local Indian vendors. He prayed that the order of the TPO/AO be restored and that of the CIT(A) be reversed. 30. The learned counsel for the assessee on the other hand, submitted that the assessee is carrying out manufacturing activity and that all the international transactions i.e. (1) import of raw material and components; (2) import of capital goods; (3) Payment of royalty; (4) Payment of know-how fee; (5) Payment for short stay expenses; and (6) Payment of testing fee are inextricably interlinked and interrelated to each other, and also to carry out the function relating to manufacture and sale of automotive components. He submitted that the assessee was a full fledged risk bearing automotive component manufacturer which depended on it's AEs for technical expertise and know-how required to carry out its business. The assessee submitted that the Transactional Net Margin Method is the most appropriate method as explained by the CIT(A) in his....
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....of transaction under the TNMM has not been raised by any level i.e. either by the AO or by the TPO or the learned CIT(A) and rather on the contrary the same has been accepted by the TPO and the CIT(A). He argued that in the assessment year 2003-04 the TPO accepted the TNMM approached by the assessee. He relied on the decision of Delhi Bench of ITAT in the case of Ericsson AB v. Dy. DIT[2012] 53 SOT 177 and on the decision of Hon'ble Supreme Court in the case of MCorp Global (P.) Ltd. v. CIT[2009] and contended that new contention cannot be raised and the powers of the Tribunal are confined to the subject matter of appeal before the Tribunal. In other words, he argued that the Tribunal should not go beyond its scope in appeal and raise issues which are not raised either by the AO or by the TPO. He relied on number of decisions where transactional level net margin approach under TNMM has been upheld. The cases are Benetton India (P.) Ltd. v. ITO[2012] 134 ITD 229; UCB India (P.) Ltd. v. Asstt. CIT[2009] 30 SOT 95/121 ITD 131 (Mum.), Serdia Pharmaceuticals (India) (P.) Ltd. v. Asstt. CIT[2011] 44 SOT 391. He submitted that in each of these cases, there are separate business segments/a....
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....g the software 'Prowess' and adopting various filters for elimination of uncomparables as list out by it. The assessee classifies itself as a licensed manufacturer and thus having lesser risks. While so the learned senior Departmental Representative is right in pointing out that the comparables selected by the assessee are not of licensed manufacturers of the similar commodity. The TNMM compares net margins of uncontrolled transactions between independent entities, with those achieved in controlled transactions between related parties. The Tribunal in the case of Aztec Software Technology Services Ltd. (supra) on p. 238 observed as follows: "The TNMM requires establishing comparability at a broad functional level. It requires comparison between net margins derived from the operation of the uncontrolled parties and net margin derived by an associated enterprise on similar operations. Under this method, the net profit margin realized by an AE from an international transaction computed in relation to a particular factor such as costs incurred, sales, assets utilized, etc. The net profit margin realized by an AE is compared with n....
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.... in the open market. Step 4 : The net profit margin realized by the enterprise and referred to in Step 1 is established to be the same as the net profit margin referred in Step 3. Step 5 : The net profit margin thus established is then taken into account to arrive at an arm's length price in relation to the international transaction. 70. Sec. 92C(1) refers to ALP in relation to an international transaction. Rule 10B(1)(e) read with section 92C deals with TNMM, and it refers to only net profit margin realized by an enterprise from an international transaction or a class of such transaction, but not operational margins of enterprises a whole. Para 3.26 of TP Guidelines for Multinational Enterprises and Tax Administrations issued by OECD reads as follows : "3.26 The TNMM examines the net profit margin relative to an appropriate base (e.g., costs, sales, assets) that a taxpayer realizes from a controlled transaction (or transactions that are appropriate to aggregate under the principles of Chapter I). Thus, a TNMM operates in a manner similar to the cost plus and resale price....
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....sfer Pricing Note Book Third Edition by Robert T. Cole at Chapter XXV what is said is that the regulator should also note that segmentation of transaction does not always lead to more reliable results and that the combined effect of two or more separate transactions may be considered, if such transactions are taken as a whole and are so inter-related with consideration of multiple transactions, is the most reliable means of determining the arm's length consideration of the transactions. At para 25.4 the learned author states that OECD Guidelines may also require some segmentation of the inter-company transactions. The issue whether further dis-aggregation is required, depends on practical issues. Such comments cannot be interpreted as permitting entity level comparison. Similarly, Taxman's book on "Law of Transfer Pricing" by D.P. Mittal, Second Edition para 7.9 has been cited and the book "US Transfer Price" by Robert T. Cole para 2.06 was relied upon by Shri Rajan Vora. On a perusal of all these material we find that none of them suggests entity level comparison. Reliance was also placed on para 1.20 of "Transfer Pricing Guidelines" of OECD. From a perusal of this para it is clea....
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....nsaction on stand alone basis, on the ground that there is no statutory requirement to maintain segmental data. Irrespective of the fact whether there is a requirement or not, if the assessee wants to adopt a particular method to demonstrate that the international transaction in question is at arm's length, then it is its duty to maintain and furnish the required data. When the burden of proving that a particular method is the most appropriate method is initially on the assessee, it is for the assessee to demonstrate the same by furnishing adequate records and data, irrespective of the fact whether they are statutory requirement or not. Thus, we are unable to accept the contentions of the assessee. 72. From the above, it is clear that the net margins on the transaction is the basis of comparison. Only in cases where profits of an enterprise are attributable to similar transactions and when an enterprise does not have any other transaction or activity which is not similar, and which distorts the profits, then probably the net margin derived by an enterprise may also be the net margin of a transaction. In other words, when in an enterprise, only similar tr....
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....is Tribunal, speaking through one of us (i.e. the AM), had, inter alia, observed that "While there is no particular order or priority of methods which the assessee must follow, and no method can invariability be considered to be more reliable than others, on a conceptual note, transactional profit methods (i.e., Transactional Net Margin Method and Profit Split Method) are treated as methods of last resort which are pressed into service only when the standard methods, which are also termed as 'traditional methods' (i.e., Comparable Uncontrolled Price Method, Resale Price Method and Cost Plus Method) cannot be reasonably applied". It was noted by the coordinate bench that the OECD Guidelines also recognize this approach, and the bench expressed its considered agreement with this approach. We are in considered agreement with the views so expressed by the coordinate bench. In our considered view, the traditional transaction method have an inherent edge over the traditional profit methods in most of the situations, and, therefore, wherever both the methods can be applied in an equally reliable manner, traditional transaction methods are to be preferred over traditional profit methods. ....
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....traced directly to the commercial and financial relations made or imposed between the associated enterprises, and the arm's length conditions can be established by directly substituting the price in comparable uncontrolled transaction for the price of the controlled transaction. As a result, where, taking into account the criteria established in paragraph 2.2, a traditional transaction method and a tradition profit method can be applied in a equally reliable manner, the traditional transaction method is to be preferred over traditional profit method. Moreover, where, taking into account the criteria established in paragraph 2.2, the comparable uncontrolled price method (CUP) and another transfer pricing method can be applied in a equally reliable manner, the CUP method is to be preferred...." 64. In other words, therefore, even as there may not be any order of preference in which methods of determining the arm's length price must be considered, the traditional transaction methods, and particularly CUP, have an edge in the sense that all things being equal, CUP and traditional transaction methods are preferred over the transaction profit method. We are br....
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....ute prices in independent situations, fail or are incapable of being implemented, as there are large number of situations in which, for a variety of reasons, traditional methods are simply unworkable. 66. As we have seen above, and as clearly discernable even from the OECD approach discussed above and with which we are in considered agreement, whether we proceed on the-basis that there is an order of preference in which transfer pricing methods are to be applied, or whether we proceed without any such priority order, the traditional transaction methods, and particularly CUP, are preferred methods in the sense that all other things being equal, CUP and traditional transaction methods lead to more reliable results vis-a-vis the results obtained by applying transaction profit method. As a result, when CUP method can be reasonably applied in determining the arm's length price of an international transaction in a particular fact situation, and unless another method is proven to be more reliable a method vis-a-vis the fact situation of that particular case, the CUP method is to be preferred. We are, therefore, of the considered view that in case CUP method is ....
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....en whenever customs authorities accept the valuation of goods on imports, then no Transfer Pricing adjustment can be made. Such a proposition is not contemplated under the law. Thus this argument is rejected. 42. The appeal was fixed for fresh hearing, in view of the decision of the Special Bench of the decision in the case of L.G. Electronics India (P.) Ltd. v. Asstt. CIT[2013] 140 ITD 41 for the Assessment Year 2007-08. The assessee filed his written submissions. The earlier arguments were re-iterated. It was submitted that the propositions laid down in the case of LG Electronics India P. Ltd. here not applicable to the assesses case. It was reiterated that the transactions of the assessee could not be analysed on a transaction by transaction basis. It was further submitted that for Assessment Year 2003-04 the TPO has aggregated all the transactions. 42.1 On consideration of these arguments, we find that the Special Bench of the Tribunal in the case of LG Electronics India (P.) Ltd. (supra) on TNMM method held as follows:- "There is a basic fallacy in the assessee's contention that if the TNMM is adopted and the net profit is at ALP, there is no ....
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....wherever required in this regard. Unless the TPO determines the price which an independent Indian entity would have paid for the benefits derived from Suzuki in the form of marketing intangibles, it may not be possible to determine a fair arm's length price, that should have been paid under the agreement between Suzuki and Maruti." 44. As the facts are identical, we set aside the issue to the file of the Assessing Officer with the direction to determine the ALP by trying to ascertain the price at which such components or parts were being exported by Den so Japan outside Japan or the price at which they were sold by the AE in the domestic market, if possible or in any other manner. In our view CUP method is the most appropriate method. 45. Alternatively the TPO may also try to ascertain the price at which the comparable Indian domestic entity would have paid for importing such parts from Denso Japan or some other comparable foreign manufacturer. Suitable adjustments should be made for various factors. With these observations we set aside the issue to the file of the AO for fresh adjudication in accordance with law. 46. We now take up ground Nos. 2 to 6 raised in appeal for ....