TaxTMI 
TaxTMI 
2013 (5) TMI 852
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....f the learned Dispute Resolution Panel u/s 144C(5) of the Income-tax, is erroneous, untenable in law and on facts for the various reasons and not limited to the following:- a) The TPO as well as the DRP and consequently the A.O. has passed in law and on facts and in the circumstances of the case in erroneously determining the ALP of the transaction on account of payment of royalty to the AE of the appellant as NIL. b) The TPO as well as the DRP and consequently the A.O. has erred in law and on facts and in the circumstances of the case in erroneously holding that the appellant has not been able to show that it derived economic benefit from the know how received from the AE. c) The TPO and DRP and consequently the A.O failed to appreciate that royalty was one of the two elements of cost and sales and could have been evaluated under same overall method as had been correctly done by the assessee under TNMM method and royalty payment is not independent of sales and could not be examined on stand alone basis. d) The TPO as well as the DRP and consequently the A.O. has erred in law and on facts and in the circumstances of the case in erroneously exceeding their jurisdiction b....
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....lic Ltd. company when it went public in 1984 and is now listed on both the NSE & BSE. In 1984, the appellant entered into a technical collaboration agreement with Stanley Electric Co. of Japan, a global market leader in the same industry. The appellant had been manufacturing some of its products under the brand name of STANLEY for which it had been paying royalty after seeking necessary approval from SIA & RBI as was required at the relevant point of time. The approval accorded by RBI is continuing and is being renewed by RBI on a year to year basis. The royalty was initially being paid @ 4% on the sale of some of the products produced under the brand name of Stanley which later on was reduced to 3%. Sometime in 1994, Stanley, Japan, acquired small equity stake in the appellant company and in the financial year 2003-04 (relevant to Asstt. Year 2004-05) this stake amounted to 19.41% of the total paid up capital of the appellant company. Stanley Japan also appointed an Executive Director on the Governing Board of appellant and therefore by virtue of Section 92A (2) (e), it became an AE of the appellant. Similarly, the other 100% subsidiaries of Stanley Japan also became AE's of....
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.... provide the relevant information, then it is not for the revenue to conclude in the subsidiary's favour. On the question of benefit derived from the use of the intangible, the taxpayer could have at least done the analysis by following the income approach viz. discounted cash flow method to show as to what was the excepted benefit from the use of the intangible. The taxpayer has not taken pains to do the aforesaid. I am therefore, left with no other alternative but to benchmark the transaction by applying the 'benefit test' which is an internationally accepted method. Under this test it is to be seen as to whether the taxpayer has received any tangible benefit from the use of the intangible which would help it in earning greater economic benefit. In arm's length situation a person would pay royalty only if the use of the technology will give him greater economic benefit. In the present case, as discussed above, despite the use of the intangible the margin of the assessee is lower than the comparables. This clearly shows that the technology has not provided any benefit to the assessee. No independent person in such a situation will pay any royalty. This view is also suppor....
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....eptable. On the basis of TPO's order under section 92CA(3) dated 30.10.2011, an addition of Rs. 5,32,07,016/- is made to the total income of the assessee. The order passed by the Transfer Pricing Officer under section 92CA(3) is annexed herewith and made a part of this assessment order. The assessee filed its objections before the Hon'ble Dispute Resolution Panel - I, New Delhi. The Hon'ble Dispute Resolution Panel - I, New Delhi vide order dated 14.06.2012 held that the conclusion of the TPO was correct and declined to interfere with the proposed adjustments. I am satisfied that the assessee filed inaccurate particulars of its income and thereby concealed its income to the tune of Rs. 5,32,07,016/-. Penalty proceedings under section 271(1)(c) are initiated separately for furnishing inaccurate particulars of income." 7. Before us, it has been contended on behalf of the assessee that the ALP of the transaction of the assessee on account of payment of royalty to its AE has wrongly been determined by the authorities below; that it has wrongly been held that the assessee was not able to show that it had derived economic benefit from the know-how received by it from its AE; tha....
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....lty to the royalty paid, as accepted to be at arm's length, in the aforesaid cases @ 3%; that in all the aforesaid cases, the royalty is related to transfer of technical assistance and know how in the automotive industry; that the technical collaboration agreement of the assessee (copy at APB-I, pages 340-359), which is duly approved by the Government of India, has not been taken into consideration by the authorities below; that the AE of the assessee is paying 40% tax in Japan and so, the observation of the TPO to the effect that there is siphoning off profit from India with minimum incidence of tax, is wrong; that the assessee is paying 30% tax in India; that in the balance sheet for the years ended on 31.03.2008 and 31.03.2007 of assessee's AE (copy at APB-I, page 403), royalty income has been shown; that in the assessee's AE's Note to Consolidated Financial Statements (APB-I, page 412), the expenditure for the year under consideration has been shown at 47 million US $, whereas the income is of 10 million US $, i.e., much less; that this goes to show that if the assessee's AE had filed a return on the royalty under consideration in India, there would have been a loss; that this ....
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....rring the taxing authorities from going into the transaction of payment of royalty. The following case laws have been relied on:- a) 'Delloite Consulting' b) 'Nestle India', 337 ITR 102 (Del) c) 'Interra' d) 'Aztec' (107 ITD 141) e) 'Knorr Bremse' f) 'CMA CGM Global India Pvt. Ltd.' 9. The Ld. DR has further contended that the assessee's contention regarding allowance of the payment u/s 37 of the Act is not at all maintainable, since the Assessing Officer and the TPO were in entirely different situations; that Section 37 of the Act and the Proviso to Section 92 thereof operate in entirely different fields. Reliance has again been sought to be placed on 'Deloitte' (supra). 10. The Ld. DR has further contended that the propositions of law sought to be raised by the assessee are not maintainable before the Tribunal, since they impinge upon the aspect of constitutionality. The decision in 'Interra' (supra) has been relied on. 11. So far as regards the commercial expediency aspect, the Ld. DR has stated that it is true that the Income-tax Authorities cannot dictate to the assessee as to how its business is to be carried on, but he facts in the present case are....
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....than the comparables, which clearly showed that the technology had not provided any benefit to the assessee; and that no independent person in such a situation would pay any royalty. 17. The Assessing Officer made the addition on the basis of the aforesaid findings of the TPO. The DRP declined to interfere with the said proposed adjustment. 18. Therefore, the main reason, rather the only reason recorded by the authorities below for disallowing the royalty payment is that of the alleged inability of the assessee to satisfy the 'benefit test'. In other words, the royalty payment made by the assessee company was disallowed for the alleged inability of the assessee to quantify the benefit which it had obtained from such payment of royalty. 19. In this regard, it is seen that during the year, royalty was paid by the Assessee to its AE on sales made using the trade mark of 'Stanley'; that the assessee is a widely held listed company, a market leader. The payment of royalty was for trade mark, patent and technology. The contract, i.e., the Technical Collaboration Agreement, between the assessee and its AE stood approved by the Government since 1984. Ever since, the assessee had b....
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....ken by the Assessee only to stress that the agreement between the assessee and Stanley was not merely a paper transaction, rather it was approved by the RBI as well, besides other governmental authorities. It has not been shown by the Department to be otherwise. 22. The Ld. DR then contended that the royalty in question was not benchmarked by the assessee, as held by the TPO and that it has not been shown that the payment of royalty was an arm's length transaction. Since the average PLI of the comparables taken by him resulting in 7.05% - OP/sales was within the (+)/(-) 5% range of the assessee's PLI worked out by him at 4.09%, the range between 2.05% to 12.05%, as per the proviso to Section 92C (2) (2A) of the Act. 23. The Ld. DR has further contended that the assessee did not apply the CUP method properly, since such method has been supported by the assessee, based on the approval by the RBI. In this regard, we find that as noted above, the argument regarding the RBI approval was raised by the assessee to buttress the claim of genuineness of its transaction. In the TPO's order, there is not even as much as a mention about RBI. So far as regards the DR's objection that the p....
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.... on the sale price, on transfer of technical knowledge and information, was accepted. 27. In 'Climate Systems India Ltd.' (supra), again, payment of royalty @ 3% on the sale price on transfer of technical knowledge and information was accepted. 28. All the above companies, like the assessee, were in the auto ancillary industry. 29. In 'Praga Tools Ltd.' (supra), which was also in an auto ancillary industry, payment of royalty @ 5% on the sale price, on transfer of technical know how and assistance was accepted. 30. The royalty payment by the above companies is directly comparable with that made by the assessee company. The assessee, as observed, is also an auto ancillary, manufacturing automotive parts for OEMs. In all these cases, as in that of the assessee, the payment of royalty was related to transfer of technical assistance and know-how in the automotive industry. That being so, the CUP method is available apropos the issue of arm's length price qua the payment of royalty. 31. So far as regards other case laws relied on by the Department, the same are also distinguishable on facts, being on general propositions of law relevant to the specific facts present in th....
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...., the assessee raised an argument that transfer pricing adjustment at best cannot exceed the amount of the margin retained by the assessee as well as the AE. This argument did not find favour with the Tribunal. It was also contended that the TPO had not made any adjustment in the earlier years and as such, no adjustment was called for in the year before the Tribunal as well, on the principle of consistency. The Tribunal observed that the assessee had not been able to demonstrate as to which particular conclusion of the previous TPO or Assessing Officer had been reviewed in an opposite manner by the current TPO and that it was a case of non-application of mind by the previous TPO on some issues. It was therefore, that the Tribunal rejected this argument raised by the assessee. This is the background for the Tribunal not having allowed the principle of consistency to be invoked in that case. In the present case, however, it is patent on record that the facts remain identical pre-AE relationship and thereafter, as also that the related payment has been consistently allowed by the department itself in the numerous earlier years, where the arguments were at an exactly similar, nay ident....
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.... purposes. For Assessment Years 2004-05 and 2005-06, such payment of royalty has been allowed by the CIT (A). As per the FEMA Regulations, royalty can be paid on net sales @ 5% on domestic sales and @ 8% on export sales. The royalty payment by the assessee falls within these limits. It also falls within the limits of payment of royalty in the automobile sector, as per the market trend. This payment of royalty is at the same percentage as that paid by other auto ancillaries in the automotive industry. Then, in 'Ekla Appliances' (supra) and in 'Ericsson India Pvt. Ltd. vs. DCIT', 2012-TII-48-ITAT-Del-TP, it has been held that royalty payment cannot be disallowed on the basis of the so-called benefit test and the domain of the TPO is only to examine as to whether the payment based on the agreement adheres to the arm's length principle or not. That being so, the action of the TPO in the present case, to make the disallowance mainly on the ground of the benefit test, is unsustainable in law. 36. Keeping in view all the above factors, the disallowance made on account of royalty is found to be totally uncalled for and it is deleted as such. Accordingly, ground Nos.3 and 4 raised by the....
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....he Assessing Officer has failed to take into consideration the fact that the provision was made by the assessee on a highly scientific basis, based on actual warranty expenses incurred by the assessee for the unexpired warranty period. Reliance has been placed on 'Rotork Controls India Pvt. Ltd.' (supra) and 'CIT vs. Becton Dickinson', 2012-TIOL-962-HC-Del-IT. It has been contended that similar provisions for warranty have not been disallowed in the earlier years, upto Assessment Year 2005-06. A chart in this regard has been filed. 39. The Ld. DR, on the other hand, has placed strong reliance on the impugned order in this regard. 40. In this regard, it is seen that the Assessing Officer made the disallowance on the basis that the provision for warranty was a contingent liability, having no scientific basis. Indeed, undisputedly, the assessee was making the provisions on actual warranty basis for the unexpired warranty period, providing warranty of one year on the products which it was selling. It created provision for warranty for the unexpired period of warranty as at the end of the year, on a percentage of the actual warranty expenses during the immediately prior period, on....
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....resh in accordance with the law, on affording adequate and due opportunity to the assessee. Ground No.6 is, as such, treated as allowed, for statistical purposes. 46. Ground No.7 states that the addition of ` 11,26,737/- on account of disallowance u/s 14A of the Act read with Rule 8D of the IT Rules has wrongly been made. 47. The assessee was found to have made investment, income wherefrom, according to the Assessing Officer, did not form part of the assessee's taxable income. The disallowance was made, observing that separate bank accounts had not been maintained by the assessee in respect of investments and other activities; that there was a common pool of funds and it could not be ascertained whether the investments had been made out of internal accruals or from borrowed funds; that had the assessee company not made the investments, its total borrowings would have been lower, leading to reduction in interest costs; that the assessee had not attributed any administrative expenses towards the earning of exempt income; that the interest expenses of ` 4,92,95,768/- were not directly attributable to any particular income or receipt; and that by maintaining such investments and ....
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....xpenditure by way of interest other than the amount of interest included in clause (1) incurred during the previous year. B = the average of value of investment, income from which does not or shall not form part of the total income appearing in the balance sheet of the assessee, on the last day and the last day of the previous year. C = the average value of total assets as appearing in the balance sheet of the assessee on the first day and the last day of the previous year. A=4,92,95,768/- minus Rs. 3,38,74,081/- (as per the directions of the Hon'ble DRP) = Rs. 1,54,21,687/- B=25,22,01,525/- C=345,18,91,509/- Hence, disallowance = 11,26,737/- 3. An amount equal to on-half per cent of the average of the value of investment, income from which does not or shall not form part of the total income, as appearing in the balance sheet of the assessee, on the first day and the last day of the previous year ½ % of average investment of Rs. 25,22,01,525/- = 12,61,008/- Total disallowance Less disallowance made by the assessee in computation of income Balance net disallowance Rs.48,62,647/- Rs.12,61,008/- Rs.11,26,737/- 49. As such, ....