TaxTMI 
TaxTMI 
2013 (7) TMI 971
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....C(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 erred 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 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 by judging the royalty payments made by the assessee through a benefit test, which is not any of the methods as per Section 92C of the IT Act. 5. The DRP and consequently the A.O. has erred in law and facts and circumstances of case and made additions amounting to Rs. 35,06,410/- on account of disallowance of provisions for warranty u/s 37(1). 6. The DRP as well as A.O. has erred....
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....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 by judging the royalty payments made by the assessee through a benefit test, which is not based on not any of the method prescribed as per Section 92C of the IT Act. 5. The DRP as well as the A.O. has erred in law and facts and circumstances of case and made additions amounting to Rs. 84,48,000/- on account of disallowance of provisions for warranty u/s 37(1) of the IT Act. 6. The DRP as well as A.O. has erred in law and facts and circumstances of the case and made additions amounting to Rs. 1,75,26,309/- on account of disallowance of provisions for leave enca....
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....lty 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 the appellant as per the definition of "associate enterprise" as contained in Section 92A (2) read with its various clauses." 3. Ground Nos.1 and 2 are general. 4. Apropos Ground No.3, the facts are that the assessee company filed its return for the year under consideration, declaring income of Rs. 17,81,88,750/-. This return was processed u/s 143 (1), on 12.09.2009. A draft assessment order u/s 144C of the IT Act was served on the assessee. The assessee filed its objections before the DRP on 26.12.2011. The said objections were disposed of by the DRP....
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.... 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 supported by the ITAT, Delhi's decision in the case of Abhishek Auto (2010-TII-54- ITAT-DEL-TP) wherein the ITAT held as under:- "If the tested party without the use of imported technology and imported raw material can make additional margins, then it would be case the international transactions have demonstratively boosted the profits of the appellant." In view of the above discussion and particularly keeping in view of the fact that the assessee has neither benchmarked this transaction property by applying the most appropriate method a....
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....he 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; that it has not been appreciated that the royalty was one of the two elements of cost and sales and could have been evaluated under the same overall method, as correctly done by the assessee under the TNMM; that it has not been appreciated that the royalty payment was not independent of sales and could not have been examined on a standalone basis; that it was not correct to judge the royalty payment on the yardstick of the benefit test, the same not being based on any of the methods prescribed u/s 92C of the IT Act; that it has wrongly not be....
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....n 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 aspect of the matter has also not been taken into consideration; that further, it is wrong to state that no economic benefit accrued to the assessee vis-a-vis the payment of royalty, since the royalty was paid only in respect of the Japanese customer, i.e., on 43% sale; that as available from APB-I, page 385, i.e., the total of royalty paid by the assessee to its AE, for the period from 1.4.07 to 31.3.08, the royalty is about 2.43% of the net sales of Rs.....
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.... 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 in pari materia with 'Knorr Bremse' (supra), wherein also, the assessee had incurred losses. 12. Addressing the issue as to whether nil ALP could have been allowable, the Ld. DR has submitted that there may be a benefit, but it cannot be a passive and incidental benefit - it has to be a tangible benefit. Here, he places reliance on 'Knorr Bremse' (supra) a....
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....roposed 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 been carrying out the manufacture of some of its products under the brand name of 'Stanley.' For this, the assessee had been paying royalty. Approval in this regard had been pre-obtained from SIA, as required. The RBI had also granted its approval, which was being renewed yearly. Initially, the royalty....
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....n 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 plea of earlier payment to the same party, when it was not the assessee's AE, has not been allowed, is not maintainable, it is to be reiterated here, as above, that the assessee did benchmark its transaction by two methods, i.e., CUP and TNMM and this was taken not....
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....#39; (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 those cases. In the present case, an ALP analysis had been done by the assessee, as above. The assessee applie....
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....nnot 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 identical footing. 33. The TPO has made the disallowance in question mainly on ....
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....ars 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 assesse....
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....owance had been made on the basis that the assessee had not been regularly employing the method employed by it for calculating the provision; and that the disallowance had been upheld by the DRP, but it was hitherto pending before the ITAT. 7. This issue, it is seen, has also been dealt with by us while considering the matter for Assessment Year 2008-09. Therein we have held as follows:- "37. Coming to ground No.5, the assessee contends that addition of Rs. 84,48,000/- on account of disallowance of provisions of warranty u/s 37(1) of the Act has wrongly been made and confirmed. The Assessing Officer noted from Form No.3CD that the assessee had made provision for warranty. The assessee was asked to show cause as to why the same be not disallowed, as it was a contingent liability. The assessee submitted that during the year, it had worked out the amount of net warranty liability by applying a multiplying factor on the total sales made during the year on the basis of past results and had made provisions in its books; that since the provision had been made based on the past factor of actual expenses incurred towards warranty liability, deduction claimed with regard thereto u/s 37(1)....
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....nt 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 the sales made. It has not been shown as to how this basis of making provision for warranty is not scientific. Moreover, similar provision for warranty was not disallowed in the earlier years, upto Assessment Year 2005-06. This position is also supported by the Hon'ble Supreme Court's decision in 'Rotork Controls India Pvt. Ltd.' (supra) and the Hon'ble Delhi High Court decision in 'Becton Dickinson' (supra). Accordingly, this addition is deleted and ground No.5 is allowed. 8. The facts for the year under consideration being similar to those for Assessment Year 2008-09, following our above observations for Assessment Year 2008-09, Ground no.5 is allowed and the addition of Rs. 35,06,410/- is deleted. 9. So far as regards Ground no.6, a disal....
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....ll. It has been pointed out that the Tribunal also, in the Stay Order granted in favour of the assessee, has observed that there has been a double addition in this regard. 44. The Ld. DR, on the other hand, has placed strong reliance on the impugned order. 45. As to whether there has indeed been a double addition, needs to be verified by the Assessing Officer by confirming as to whether or not the assessee had made the disallowance itself and the amount had not been carried to the Profit & Loss Account. For this purpose, the matter is remitted to the file of the Assessing Officer, to be decided afresh 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." 11. Following our above observations for Assessment Year 2008-09, the issue for the year under consideration is also remitted to the file of the Assessing Officer to restrict the disallowance to Rs. 1,51,22,430/- on verifying the payment made, of Rs. 11,77,483/-, in F.Y. 2006-07 and adjusting the same to the disallowance made. Ground No.6 is, as such, treated as allowed, for statistical purposes. 12. So far as ....