TaxTMI 
TaxTMI 
2014 (12) TMI 560
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....ieved by the additions the assessee has raised the following grounds before us:- General: 1."That the impugned order of assessment framed by the assessing officer in pursuance of the directions of the Dispute Resolution Panel (hereinafter referred to as 'DRP') under Section 143(3) read with Section 144C of the Income-tax Act, 1961 ( 'Act'), is bad in law, violative of principles of natural justice and void ab-initio. 1.1 That assessing officer erred on facts and in law in computing the income of the appellant at Rs. 55,57,99,420 against the returned total income of Rs. 37,15,72,026. Transfer Pricing Issues: 2.That the assessing officer erred on facts and in law in making addition to the income of the appellant to the extent of Rs. 9,81, 11,429 on account of the alleged difference in the arm's length price of international transactions. Advertisement, marketing and sales promotion expenses: 3.That the assessing officer erred on facts and in law in making transfer pricing adjustment amounting to Rs. 8,27,61,669 in relation to the advertisement, marketing and sales promotion expenses (hereinafter referred to as 'the AMP expenses') incurred....
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....velopment and promotion of a brand in India directly benefitted the AE also. 3.9 That the assessing officer/DRP erred in deeming an international transaction of provision of service allegedly applying Bright Line Test (BLT) holding that the AMP/Sales ratio of the appellant allegedly exceeds the AMP/Sales ratio of comparable companies: 3.10 That the assessing officer erred on facts and in law in not appreciating that "bright line limit" is not a prescribed method under the purview of section 92C of the Act. 3.11 That the assessing officer erred on facts and in law in not appreciating that the power of the TPO is restricted to the determination of arm's length price of international transactions by applying any of the prescribed method and not to make disallowance of business expenses incurred by the appellant. 3.12 That the assessing officer erred on facts and in law in not appreciating that in absence of specific provision under the Transfer Pricing Regulations in India, adjustment on account of the arm's length price of advertisement and brand promotion expenses could not be made by applying BLT. 3.13 That the assessing officer erred on facts and in law in n....
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....ot appreciating that markup, if at all, had to be restricted to the value added expenses incurred by the appellant for providing the alleged service in the nature of brand promotion. Royalty in respect of exports made to associated enterprises: 4.That the Transfer Pricing Officer erred on facts and in law in holding that arm's length price of international transactions of payment of royalty on exports made to the associated enterprises of Rs. 53,34,000 was nil. 4.1 That the Transfer Pricing Officer erred on facts and in law in holding that the assessee was acting as a contract manufacturer and hence royalty paid as percentage of sale to the associated enterprises is not at arm's length as it amounts to collecting royalty on the sale to itself. 4.2 That the Transfer Pricing Officer erred on facts and in law in holding that where the appellant is making part of its sales to related parties and the benefit of purchasing components is reaped by the associated enterprise, the payment of royalty do not confirm to arm's length price. 4.3 That the TPO/DRP erred in disregarding the comparable uncontrolled transactions of payment of royalty placed on record by the app....
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....rable and exclusive license in favour of the appellant to manufacture and assemble the products and the parts in the territory, and to sell and distribute in the territory the products and the parts so manufactured or assembled or procured. (iv) The assessee can grant indivisible and non-transferable sublicenses to use the know-how to Indian persons, companies or other legal entities exclusive privilege of manufacturing and selling the products. (v) In the event of the expiration of the contract, the appellant may continue to use the know-how and the Industrial property Rights is capital in nature. 6. That the assessing officer erred on facts and in law in disallowing export commission paid to M/s Honda Motor Co. Ltd. of Japan of Rs. 5,19,96,673 invoking section 40 (a) (i) of the Act holding the same to be royalty/fee for technical service on which allegedly the assessee had failed to deduct tax at source as per section 195 of the Act. 6.1 That the assessing officer erred on facts and in law in law in holding that the payments of export commission was towards royalty/fee for technical services as the same was in consideration for (i) right to use trademark, (ii) permiss....
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.... The appellant craves leave to add, amend, alter or vary, any of the aforesaid grounds of appeal before or at the time of hearing of the appeal and consider each of the grounds as without prejudice to the other grounds of appeal." 3.1. Addressing the Grounds, Ld. AR submitted that Ground Nos.-1 & 2 may be treated as general grounds. Addressing Ground No.-3 wherein transfer pricing issues have been raised it was submitted that the assessee had claimed the AMP expenses which were disallowed and adjustment to the extent of Rs. 8,27,61,669/- has been made. The said ground alongwith the various subgrounds it was submitted may be restored to the file of the TPO as neither the TPO nor the DRP have had the benefit of considering the decision of the Special Bench in the case of L.G. Electronics which as per judicial precedent is bound to be considered. 3.2. It was further elaborated that commission on sales, sales discount and sales promotion expenses need to be excluded from the AMP basket of expenses. Reliance is placed on the following decisions:- GlaxosmithKline Consumer Healthcare India ltd. Vs Addl CIT (ITA No 1148/Chd/2011) Canon India Pvt. Ltd. Vs DCIT (ITA no.4602/Del/2....
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....ilable either of the Tribunal or of the Hon'ble High Court as such it need not be specifically so directed. 5. We have heard the rival submissions and perused the material available on record. The record shows that in the year under consideration the assessee incurred an expenditure of Rs. 12,39,19,327/-. As per the assessee's claim it was 4.46% of the sales. The following break up of expenses was provided:- S. No. Name of expenses Amount (Rs. Thousands) 1. Commission on sales 1,22,95,327 2. Advertisement and publicity 6,26,52,000 3. Sales promotion 3,42,80,000 4. Sales discount 1,46,92,000 Total 12,39,19,327 5.1. The TPO considering the 6 companies was of the view that the expenditure was in excess of the bright line by 1.87% which was considered to be for promotion of brand/trade name which was owned by the AE for which suitable the assessee was required to be compensated by the AE, accordingly a markup of 15% was applied. This resulted in an adjustment of Rs. 8,27,61,669/-. The action was upheld by the DRP. 5.2. It is seen that the Special Bench in L.G. Electronics case in para 17.4 has given certain directions on the basis ....
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....s wrongly been considered a contract manufacturer by the Revenue and is infact in regard to the sales to the AE is acting on a principal to principal basis wherein the price is agreed upon by the parties. In the facts of the present case it was submitted the TPO has arbitrarily characterized the assessee as a contract manufacturer without challenging FAR analysis conducted which would clearly establish that the assessee is acting as an entrepreneur in respect of its transactions and the very fact that royalty is a part of input of sale which is recovered when the finished products sold to AE or the non-AE for that matter would demonstrate this fact. The reliance placed upon the decision of Sona Okegawa Precision Forgings Ltd. Vs ACIT by the TPO. It was submitted is incorrect and infact the said decision operates in assessee's favour. Drawing a comparison with its sister group and reading from the order of the Co-ordinate Bench, it was his submission that on account of the similarity of Agreements in the case of sister concern the view taken by the Coordinate Bench deserves to be followed. Relying upon another decision of the Co-ordinate Bench in the case of Bharti Airtel Limited vs....
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....anufactured by using the technical know-how provided by HMCL under the technical know-how agreement dated 02.06.2004. Therefore, royalty is payable on such manufacturing of goods. The contention of the learned TPO that the goods are exported to subsidiaries of the Associate Enterprise i.e. AE of Honda Japan and the assessee also paid export commission, would be no ground for disallowance of the royalty or determining arm's length price of the royalty at nil. The assessee is exporting goods to AE of Honda on principal to principal basis and the price at which export is made is higher than the domestic price. While discussing the disallowance of export commission, we have discussed this issue at length and have noted that even after reducing the export commission, the assessee derived the benefit of Rs. 13.05 crores by export. At the cost of repetition, we would like to mention that the export sale value was more than the domestic sale rate and the assessee has given a detailed working thereof, which is enclosed with this order in the form of Annexure-I. In the above working, the assessee has reduced the export commission. Therefore, by export to the AE of Honda Japan, the assessee h....
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....e paid royalty of Rs. 8,77,14,255/- and technical grounded fee of Rs. 1,74,64,000/- to M/s Honda Motor Company, Japan. The AO held the expenditure to be capital expenditure and disallowed the same. The assessee before the DRP placed reliance upon similar treatment given by the AO in 2007-08 assessment year where he had disallowed 25% of the expenditure on similar facts and circumstances. The expenditure was claimed to be revenue in nature and no portion of which it was submitted could be capitalized. The case law relied upon by the AO was distinguished. However in view of the fact that the dispute was coming from the earlier years the DRP declined to interfere. 10. The Ld. AR relied upon the decision of the Co-ordinate Bench in assessee's own case rendered by the Co-ordinate Bench in 2007-08 assessment year in ITA No.-5713/Del/2011 wherein the Co-ordinate Bench after considering the decision rendered in the case of the sister concern i.e Hero Honda Motors Ltd. Vs DCIT in ITA No.-716/Del/2008 and after making a comparison with the various clauses of the Agreement was pleased to delete the addition made. In the facts of the present case it was submitted that there is no change in ....