TaxTMI 
TaxTMI 
2017 (11) TMI 1472
X X X X Extracts X X X X
X X X X Extracts X X X X
....erence in the arm's length price of the 'international transactions' of payment of royalty and technical fees entered into by the appellant with its associated enterprise, on the basis of the order passed under section 92CA(3) read with section 144C( 5) of the Act by the Transfer Pricing Officer ("the TPO"). 2.1 That the assessing officer / DRP erred on facts and in law in proposing an adjustment of Rs. 22,23,19,866 to the arm's length price of the 'international transactions' of payment of royalty, technical fees and drawing and design fees, on the basis of the order passed under section 92CA(3) of the Act by the TPO. 2.2 That the assessing officer / DRP erred on facts and in law in determining the arm's length price of payment of royalty, technical fees and drawing and design fees at Rs. Nil as against the payment of Rs. 22,23,19,866 made by the appellant. 2.3 That the assessing officer/ DRP erred on facts and in law in concluding that no recognizable benefit is derived by the appellant from payment of royalty, technical fees and drawing and design fees, and hence, the arm's length price of aforesaid payment is determined at Nil. 2.4 Th....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ing shock absorbers and has substantial experience and know-how for manufacture of automobile components. 5. The taxpayer has made payment of Rs. 22,02,48,509/-, Rs. 20,71,357 & Rs. 78,75,944/- totaling Rs. 23,01,95,810/- on account of payment of royalty, technical fees and design & drawing fee respectively to its Associated Enterprises (AE), Showa Corporation. The taxpayer has benchmarked these transactions by adopting Transactional Net Margin Method (TNMM). The taxpayer has also aggregated related transaction as the same are closely linked with other transactions under TNMM and found the same at arm's length. However, the TPO has rejected the TNMM adopted by the taxpayer relating to payment of royalty under TNMM after aggregating the same with other transactions on the ground that the royalty payment being a separate class of transaction requires to be benchmarked separately. However, TPO proposed to apply the Comparable Uncontrolled Price (CUP) method and in case, no such CUP was available then the taxpayer should have benchmarked the transaction by following the well accepted valuation method like income approach viz. Discounted Cash Flow method which could be taken up as CUP.....
X X X X Extracts X X X X
X X X X Extracts X X X X
....y rate paid by other AE or independent persons, what is the industry rate; what is the cost incurred by the AE for developing the intangible; what is expected benefit from the use of the intangible, applied the "benefit test" and proceeded to determine the value of royalty in uncontrolled condition as nil under CUP. 12. Ld. AR for the taxpayer contended that the issue as to payment of royalty and technical fee by the taxpayer to its AE has already been decided in favour of the taxpayer pursuant to the decision rendered by the Tribunal in taxpayer's own case in ITA No.4675/Del/2010 & ITA No.4242/Del/2011 for AYs 2006-07 and 2007-08 respectively. 13. Coordinate Bench of the Tribunal in assessee's own case for AYs 2006-07 and 2007-08 (supra) remitted the case back to the TPO to decide afresh in view of the decision rendered by the Tribunal in taxpayer's own case for AY 1993-94 to 1995-96 and for AYs 2002-03 and 2004-05 by returning the following findings:- "27. Ground 4 to.4:3 relates to the disallowance of royalty and technical fee. 28. The assessee's case is that it had limited right to Use the technology of Showa Japan. The ownership / property rights in technical know h....
X X X X Extracts X X X X
X X X X Extracts X X X X
....of payment of royalty and technical fees respectively, but provided depreciation @ 25% u/s 32 to the tune of Rs. 5,55,79,967/- in case of intangible assets and made addition to the tune of Rs. 16,67,39,899/-. Ld. DRP also upheld the finding returned by AO. 17. Ld. AR for the taxpayer contended that agreement between the taxpayer and Showa, Japan is categoric enough to grant the taxpayer an indivisible and non-transferable non-exclusive right and license to manufacture, assemble, sell and distribute the products and parts during the terms of the agreement within the specified territory. 18. This issue has also been determined in favour of the taxpayer by the Tribunal in assessee's own case for AYs 1993-94 to 1995- 96 which has been affirmed by the Hon'ble Delhi High Court in ITA 56/2009, ITA 85/2009 & ITA 86/2009 Judgment dated 06.09.2010. 19. Hon'ble High Court while deciding the issue in controversy in favour of the taxpayer returned the following findings :- "12. In the case at hand, the know-how was granted by the foreign company solely for the purpose of manufacture, assembly and sale of products during the term of the contract and the licensee was to pay royalty to the li....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e is a mixed pool of funds, presumption has to be raised in favour of the taxpayer. 23. Ld. AR for the taxpayer further contended that the Revenue has failed to prove the nexus between the expenses incurred and income earned and in case of mixed pool of funds, no disallowance can be made. 24. However, on the other hand, ld. DR for the Revenue contended that working made out by the taxpayer was not before the AO to know the surplus fund available with the taxpayer and since it is a case of huge circulatory funds, some disallowance requires to be made as there must be some expenditure incurred by the taxpayer to earn the dividend income. 25. First of all, perusal of balance sheet of the taxpayer, available at page 113 of the paper book, shows that the taxpayer is having share capital of Rs. 7,99,92,500/- and reserves & surplus of Rs. 1,57,29,81,001/- as on March 31, 2009. 26. Now, the next question arises for determination in this case is :- "as to whether the surplus funds have been used to make investment ?" 27. Assessee has provided details of making investment, available at pages 201 to 211 of the paper book. From the details, it is apparent that there has always been a c....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ds and, as such, had no occasion to use borrowed interest bearing funds for that purpose." 31. So, when the AO has failed to establish the direct nexus between the investment made by the taxpayer and the interest expenditure incurred particularly in the face of the fact that the taxpayer has demonstrated that it has sufficient own surplus funds to make the investment to earn dividend. 32. Furthermore in case of mixed pool of funds as in the case of taxpayer, a presumption has to be raised in favour of the taxpayer that surplus funds have been utilized to make an investment. Moreover when perusal of the balance sheet shows that there is no investment by the taxpayer in the end of the year, no disallowance can be made as has been held by Hon'ble Delhi High Court in HT Media Ltd. (supra). 33. Hon'ble Bombay High Court in CIT vs. Reliance Utilities and Power Ltd. - (2009) 313 ITR 340 (Bom.) held that in case the assessee has mixed pool of funds and investment has been made to earn interest free income then a presumption would arise that the investment has been made out of interest free funds generated or available with the company by making following observations :- "Held, dismis....