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2013 (7) TMI 971
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....r and the directions of 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 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 o....
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.... 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 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 ....
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....d 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 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/-. Th....
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....o 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 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....
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....ed 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; 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....
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....gth, 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 aspect of the matter has also not been....
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....xing 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 c....
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....hat therefore, the transaction had to be benchmarked by applying the benefit test; that in the assessee's case, in spite of the use of the intangible, the margin of the assessee was lower 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 pa....
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....oval sought to be relied on by the assessee is only for the purposes of FEMA/FERA and it does not stop the transaction from being looked into by the Income-tax Authorities for the purpose of the Income-tax Act. Here again, it is seen that this argument has been taken 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....
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.... of net sales and it falls within the range of @ 8% on export sales and 5% on domestic sales as per directions of the RBI, therefore, the payment stands justified under the CUP method. 25. This view was accepted by the Tribunal in 'Sona Okegawa's case for Assessment Year 2004-05 also, as well as in 'Climate Systems' (supra), 'Swaraj Engines Ltd.' (supra) and 'Eicher Motors' (supra). 26. In 'Federal Mogul' (supra), payment of royalty @3% 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 observ....
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....ew circumstance has been pointed out by either of the authorities below to hold that in the years thereafter, the benefit accrued to the assessee by the payment of such royalty has dried up. Therefore, we find that the reliance by the Department on 'Interra' (supra), to support the contention that the rule of consistency should not be applied, is wholly misplaced. It cannot be gainsaid that a judgement has to be, in its entirety, considered in the backdrop of and with reference to the peculiar facts and circumstances doing the rounds therein. In 'Interra' (supra), 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 T....
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....that the so-called benefit test cannot be applied to determine the ALP of royalty payment at nil and that the TPO could apply only one of the methods prescribed under the law. A similar view has been taken in 'Sona Okegawa Precision Forgings Ltd.' (supra) and in 'KHS Machinery Pvt. Ltd. vs. ITO', 53 SOT 100 (Ahm) (URO). 35. It is, thus, seen that the royalty payment @ 3% by the assessee is at arm's length. The Technical Collaboration Agreement stands approved by the Government of India. The royalty payment has been accepted by the department as having been made by the assessee wholly and exclusively for its business 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)....
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.... 3.31 3.31 TOTAL 70.69 42.07 56.99 (21.93) - 77.13 105.75 5. The assessee maintained before the DRP that there was a net liability of Rs. 35,06,410/-, reducing the current year provision for warranty expenses, amounting to Rs. 56,99,275/-, by Rs. 21,92,865/-, the amount utilized for claims received. It was contended that since the warranty expenses were made on the post-factor of actual expenses, they were allowable. Reliance was placed on 'Rotrok Controls India Pvt. Ltd. vs. CIT', 314 ITR 62 (SC). 6. The DRP accepted the assessee's contention that since the amount of Rs. 21,92,865/- had been utilized against provisions, the disallowance ought to be restricted to Rs. 35,06,410/-. It was observed that for Assessment Year 2006-07, when the issue had arisen for the first time, the disallowance 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 Assess....
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....essee has contended before us that while wrongly making the disallowance, the 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 e....
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....9;Exide Industries vs. UOI', 292 ITR 470 (Cal). The Assessing Officer asked the assessee to show cause as to why the amount be not disallowed and added back to the assessee's total income, since the decision in 'Exide Industries' (supra) had been stayed by the Hon'ble Supreme Court. The assessee submitted that during the year, it had made provision for leave encashment amounting to Rs. 1,75,26,309/- as per the actuarial valuation, in compliance of AS-15 of the ICAI and had claimed it as a business expenditure. The Assessing Officer, however, made the disallowance. The DRP upheld the Assessing Officer's action. 43. The assessee's challenge to the action of the Assessing Officer has been on the stated basis that there has been a double addition, since the assessee had itself made the disallowance and the amount had not been taken to the Profit & Loss Account at all. 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 wheth....