AI Drafter 
TaxTMI 
TaxTMI 
2017 (12) TMI 1404
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....d in setting aside the adjustment made by the TPO to royalty payment on the ground that there was no consistency in the approach of the A.O. in the intermediate year and subsequent year when in the intermediate A.Y. i.e. A.Y. 04-05 there was no royalty payment and when comparison with subsequent A.Yrs i.e. A.Y. 2006-07 onwards cannot be made due to a separate benchmarking of royalty w.e.f. 1.1.2005. 2. Whether on the facts and circumstances of the case, the Ld. CIT(A) was justified in not going into the merits of the case when the doctrine of res judicata does not apply to income tax proceedings as has been held by the ITAT Mumbai in the case of M/s. Onward Technologies vs. DCIT ITA No.7985/Mum/2010. 4. Briefly, in the facts of the case, the assessee for the year under consideration had furnished return of income declaring Nil income. The assessee was engaged in the manufacture of wheel Rims for light, medium and heavy commercial vehicles. The assessee was jointly promoted by Kalyani Group and Lemmerz Werke Gmbh with 75% : 25% equity. The assessee had acquired Wheel Rim division of Bharat Forge Ltd. and had commenced manufacture of wheel rims from 04.06.1996. On 30.06.1....
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....nts were at arm's length price, hence the total amount of royalty shown as having been paid to associated enterprises amounting to Rs. 33,28,797/- was determined as Nil. The Assessing Officer thereafter, made addition on account of the same at Rs. 33,28,797/-. 5. In assessment year 2005-06, the TPO determined the arm's length price of international transactions of payment of royalty at Nil since the assessee failed to furnish any evidence for the fact that it was in receipt of specific technology for which royalty was paid. The TPO also noted that the assessee did not pay royalty during June, 2002 to December, 2004. Further, the other group companies had not entered into similar agreements at the same time i.e. during 01.01.2005 to 31.03.2005. The TPO also noted that there was no documentation except for correspondence regarding certain updates, which the assessee may have received. The next objection of the TPO was that the assessee has failed to establish how the parent company arrived at the figure of 2% for royalty and how the charge of 2% would recover value of technology and further, what was life cycle of technology. 6. Before the CIT(A), the assessee explained....
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.... observations of CIT(A), where in the intermediate year / subsequent year i.e. assessment year 2004-05, there was no royalty payments. Further objection of the Revenue is that no comparison could be made with subsequent years i.e. assessment years 2006-07 onwards as there was separate benchmarking of royalty w.e.f. 01.01.2005. The Revenue is also aggrieved by the order of CIT(A) in applying doctrine of res judicata which is not applicable to the Income-tax proceedings. 8. The learned Departmental Representative for the Revenue after taking us through factual aspects of the case pointed out that vide original agreement between Bharat Forge and Lemmerz Werke Gmbh dated 17.06.1992, there was an agreement to pay fixed technical fees and royalty fees. Our attention was drawn to the agreement placed at pages 28 to 37 in the Paper Book. He further pointed out that in 1996, both these concerns entered into Joint Venture. That the said JV which commenced on 17.06.1996, was in existence for seven years and the agreement entered into on 17.06.1992 ended on 17.06.2002. In assessment year 2003-04 royalty payment was made for part of the year. In assessment year 2004-05, no royalty payment wa....
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....9;s length price. He placed reliance on the ratio laid down by the Mumbai Bench of Tribunal in Thyassenkrupp Industries India (P) Ltd. Vs. Addl.CIT (2013) 154 TTJ (Mumbai) 689. The learned Authorized Representative for the assessee further pointed out that in assessment year 2005-06 a fresh agreement was entered into, under which the assessee was paying royalty @ 2%. He further stressed that no adjustment on account of payment of royalty was made from assessment year 2006-07 onwards. 11. We have heard the rival contentions and perused the record. The issue which arises in the present appeal is against international transaction of payment of royalty and its benchmarking. The Assessing Officer had made reference to the TPO to benchmark various international transactions undertaken by the assessee and whether the same were at arm's length price. The assessee claims that it had paid the said royalty to its associated enterprises as per terms of the agreement dated 17.06.1992 which was in operation till 17.06.2002. The royalty was being paid to get technical information and updates in the field, from its associated enterprises. The TPO had determined the arm's length price of....
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....mmerz Werke Gmbh and name of German company was changed to M/s. Hayes Lammerz Werke BmbH. In August, 1998, Hayes Corporation, USA acquired 60% holding in the assessee company from Kalyani group and shareholding pattern changed to Kalyani group at 15% and Hayes Corporation holding at 85%. On 17.06.2002, Technical Know-how License Agreement i.e. for payment of royalty entered into on 17.06.1992 expired. The assessee in assessment year 2003-04 paid royalty for part of the year. However, there was no agreement for subsequent period i.e. from July, 2002 to December, 2004 since Hayes Lammerz Werke, was under the process of Chapter XI proceedings and went through re-organization / restructuring. The new Royalty Agreement was entered into between Hayes Lammerz Werke holding and the assessee company w.e.f. 01.01.2005. 13. The first License Agreement between Lammerz Werke BmbH and Bharat Forge Ltd. was entered into on 17.06.1992, which is placed at pages 28 to 49 of the Paper Book. However, the commencement of commercial production by Bharat Forge Ltd. was on 01.03.1996. As per terms of Technology License Agreement entered into on 17.06.1992, payment of royalty was for period of ten years....
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....n facts and in the absence of the same, no adjustment is warranted in the instant assessment year. Further the two parties were independent at the time of signing the agreement for payment of royalty and where payment of royalty was pursuant to such an agreement between independent entities and not associated enterprises; and where the concern become associated enterprise in a later period and where the price paid to associated enterprises was the same as entered when it was an independent entity, then the same has to be considered as uncontrolled transaction. Such was the proposition laid down by the Mumbai Bench of Tribunal in Addl. Director of Income Tax (IT) Vs. Ballast Nedam Dredging (supra). Applying the said principle, we hold that on this count also, there is no merit in making any adjustment on account of the international transactions of payment of royalty. Accordingly, we hold that there is no merit in the order of TPO/Assessing Officer in holding the arm's length price of international transactions of payment of royalty at Nil. We reverse the same. 15. Now, coming to the second aspect of the issue, where the assessee was making payment of royalty to its associate....
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.... 2005-06 64,02,106 Disallowance of Royalty AY 2006-07 2,51,17,638 No disallowance AY 2007-08 3,14,45,703 No disallowance AY 2008-09 3,70,08,034 No disallowance AY 2009-10 2,98,15,224 No disallowance AY 2010-11 2,71,99,126 No disallowance AY 2011-12 5,88,60,983 No disallowance AY 2012-13 6,45,18,221 No disallowance AY 2013-14 6,08,16,072 No disallowance 18. The learned Authorized Representative for the assessee stressed that the said payment of royalty in succeeding years has been accepted to be at arm's length price and no adjustment has been made to the said international transactions of payment of royalty. First of all, the TPO has proposed an adhoc adjustment without following any provisions of the Act, for benchmarking said international transactions of payment of royalty. The objection of TPO in this regard was that the assessee had failed to provide the details of cost of development of technology by its associated enterprises and how the associated enterprises recover or intended to recover the same from third parties or from other group entities. The second objection was that the assessee h....
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....e before the Tribunal in John Deere India (P.) Ltd. Vs. ITO (supra) and the Tribunal vide para 18, it was held as under:- "18. Now, coming to the preset case where reference was made to the TPO under section 92CA(1) of the Act to benchmark the international transactions undertaken by the assessee and whether the same are at arm's length or not. Then, it was incumbent upon the TPO to follow the provisions of the Act in order to benchmark the said transaction of payment of royalty and whether it warrants any adjustment on account of arm's length price. The TPO is at liberty to make any separate adjustment on this account, where adjustment is made in respect of any other international transaction. However, the TPO is not empowered to propose an adhoc adjustment which admittedly, is not as per law. The objection of the TPO was that the assessee is paying royalty to associated enterprises both on old products and new products and as per the TPO, the payment of royalty on old products does not appear to be justified. It is not the role of TPO to determine whether the payment of royalty is justified or not, on adhoc basis but the arm's length price of same has to be d....