TaxTMI 
TaxTMI 
2017 (12) TMI 1751
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....ancement of income by the AO by Rs. 17,100,000/- determined by the CUP method after duly making comparison between the import prices of the assessee transactions with Sumitomo Japan and the prices of similar components subsequently localized . 3. On the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in deleting the disallowance of Rs. 1,194,259/- made by the AO on account of NICNET charges paid to M/s Denso Haryana, ignoring that the internet facilities were wholly & exclusively for the business of M/s Denso Haryana and not for the assessee company." 3. The revenue has raised the following grounds of appeal in ITA No. 4365/Del/2011 for AY 2005-06:- (1) On the facts and circumstances of the case and in law whether the Ld CIT(A) was correct in deleting the addition of Rs. 12,53,92,899/ - made by the A.O. on account of TPO's order under section 92CA(3) on account of adjustments in the ALP of international transactions of the assessee. (2) On the facts and circumstances of the case and in law whether the Ld CIT(A) was correct in deleting the addition of Rs. 87,82,391/-, by holding it as revenue expenses, as against the said Ro....
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....t 6.19% of the assessee. Therefore, the ld TPO proposed an adjustment of Rs. 2.96 crores on account of royalty payment at and Rs. 1.71 crores on account of import of goods. The above adjustments were incorporated by the ld Assessing Officer in the assessment order u/s 143(3) of the Act dated 29.12.2006 determining the total income of the assessee at Rs. 287894828/-. The assessee preferred appeal before the ld CIT (A) who vide order dated 19.01.2011 allowed the appeal of the assessee. Therefore, revenue is in appeal before us. 6. The first ground of appeal is with respect to the adjustment of Rs. 2.96 crores on account of ALP of the royalty. 7. The ld Departmental Representative relied upon the orders of the ld Assessing Officer and TPO. 8. The ld AR relied upon the order of the ld CIT(A) as well as submitted that even if the approach of the TPO or of the ld CIT(A) with respect to PLI is considered the transaction entered into by the assessee falls within (+)/ (-) 5% range and therefore, in view of the Circular No. 12/2011 dated 23.08.2001 no addition can be made. The ld AR submitted a written submission which is as under:- "1. D....
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....patents, technical information on manufacture and sale of products and know how ranging from 3% of net sales and 5% of export sales along with lump sum payment. (Re: Copies of Agreements on page 331 -406 of paper book for AY 2005-06). 1.2. For benchmarking its international transaction of payment of royalty covered under class 1 transactions (Sr. No. 1-5 of Table 1) the respondent adopted the following approach: Particulars Result Page Reference Most Appropriate Method Applied TNMM 50 Profit Level Indicator ('PLI‟) Operating Profit/Total Cost (OP/TC) 50 No. Of Comparables 9 50 Unadjusted / Working Capital Adjusted Margin of Comparables using multiple yeandata 4.12%, 3.38% 50 Respondent's Margin (OP/TC) 6.19% 65 2) Transfer Pricing Assessment Proceedings and Assessment Proceedings 2.1 The Learned Transfer pricing officer ('TPO‟) vide order under section 92CA(3) of the Act dated 15/12/2006 gave the following observations w.r.t. the international transaction of payment of royalty : 2.2 The Ld. TPO disregarded the detailed submissions and formal agreements between the respondent ....
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.... 3.2 The Ld. CIT(A) held that since the transactions of the appellant with its AE's are on the cost side the PLI should have a base which should not be controlled and therefore OP/Sales is the appropriate PLI for benchmarking the international transaction of payment of royalty (Re: Page 443 of paper book). The Ld. CIT(A) also granted benefit of +/- 5% range as mandated u/'s 92C(2) of the Act which had been ignored by the Ld. TPO/AO. 3.3 Thereafter, the Ld. CIT(A) arrived at a set of 6 comparables and determined the arm's length PLI at 6.44% as against the respondent's PLI of 5.83%. S. No. TPO's Comparables OP/Sales % 1 Amforge Industries Limited 8.26 2 Axles India Ltd. 5.38 3 Hi Tech Gears Ltd. 8.07 4 Mahindra Sona Ltd. 12.87 5 Shardlow India Ltd. 0.35 6 Subros Ltd. 3.72 Average 6.44% 3.4 Keeping in view the above, the Ld. CIT(A) held that the respondent's international transaction with AE's met the arm's length test as the OP/Sales of 5.83% earned by the respondent falls within the +/- 5% range allowed as per proviso to section 92C(2) of the Act. (Re: Page 443 of Paper ....
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....n the respondent's international transaction of payment of royalty to its AE's meets the arm's length standard by satisfying both the need and benefit test as well as within +/- 5% range as mandated by the Act. Therefore, the appellant's ground is liable to be dismissed. Re: Ground No. 2 of Grounds of Appeal: Addition on account of Imports from Sumitomo Japan 1) Background of Transaction 1.1. During FY 2003-04, the respondent imported various raw materials, parts and components etc. from Sumitomo Japan. These parts were subsequently localised as per Indian market conditions in the later years. Since, Sumitomo Corp. Japan ('SCJ‟) only held 10.27% share in the respondent company it was not considered to be an associated enterprise of the respondent as it was less than 26% as mandated u/s 92 of the Act and therefore not reported in form 3CEB by the respondent and consequently not separately benchmarked. 2) Transfer Pricing Assessment Proceedings and Assessment Proceedings 2.1. The Ld. TPO did not consider this transaction as an international transaction and did not make a mention of the same in the TP order. However, the Ld. ....
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....bsp; * Manufacturing and other costs incurred by a manufacturer in Japan are far more than the costs that are incurred by any manufacturer in India. All other items of costs such as overheads, transportation facilities and even the cost of factory land and building in Japan are far more than the cost of similar items in India. A far higher income level has the inevitable effect and consequence of generally higher prices for all items in the economy as a whole. * The components imported by DENSO India during the year, which were localised in subsequent financial years, were not at all available in India during the period when imports were made and hence a meaningful comparison is not possible. The majority of the localized components, whose prices the Ld. TPO used as a CUP against the corresponding import prices, were in fact localized in the financial year subsequent to the financial year of import of these components by DENSO India. The use of prices of components localized in the subsequent financial year for comparison by the Ld. TPO is contrary to the Rule 10B(4) of the Indian Income Tax Rules, 1962 (Rules) as per which data for only current year or f....
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....4] the Hon‟ble Delhi High Court upheld the stand taken by the Hon‟ble ITAT in respondent's own case (supra) and held that CUP has been rightly applied by the TPO. In reaching such conclusion the court gave the following observation: "Now, there can be no dispute that the Assessing Officer would normally accept the figures given, if they do not show features that call for his interference. However, his job also extends to critically evaluating materials and in cases which do require scrutiny, go ahead and do so. In the process, at least in this case, the unusual features which remained unexplained by the assessee, influenced the TPO and the Assessing Officer to resort to transfer pricing adjustment and determine ALP by adopting the CUP method for the procurements from Sumitomo." [Re: Para 16 of the order] Therefore, the court did not find an infirmity in this approach and application of CUP method was upheld. However, the respondent reiterates its arguments advanced in para 4(supra), that CUP cannot be applied to this international transaction and the approach of the CIT(A) must be upheld in this regard. Re: Ground No. 3 of Grounds of Appeal....
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....youts, testing and quality control data, production and testing equipment data etc. Denso India has also entered into various agreements with Denso Japan for such information. The royalty pertains to product patents, technical information on manufacture and sale of products and know how ranging from 3% of net sales and 5% of export sales along with lump sum payment. The copy of the agreement furnished before us as per page 331 to 406 of the paper book. The dispute between the PLI adopted by the ld Transfer Pricing Officer as well as of the assessee is OP/TC whereas, the ld CIT(A) has adopted the PLI of OP/Sales. Further, the assessee has shown that it has benefitted by the improved sales of its business. The assessee has also shown that it has earned an operating profit of Rs. 23.45 crores in Assessment Year 2004-05 wherein, royalty payment is Rs. 5.16 crores only. Even otherwise assessee has submitted two comparative charts which shows that if the PLI of OP/TC is adopted then operating profit of the respondent company is 6.19% whereas the operating margin of the comparables companies selected by the TPO is 7.77% and the +/- 5% range is 5.47% to 7.61% . However, the above addition ....
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....riate method and therefore, adjustment is correctly made. It was further stated that the ld CIT(A) did not pin point the differences in the material of the local vendors. He further stated that ld CIT(A) has wrongly held that TNMM is to be used. He referred to para No. 27 and 28 of the order of the ld CIT(A) and submitted that these are general remarks. 12. The ld Authorised Representative submitted the same argument as were raised before the ld CIT(A). It was further stated that identical issue is decided in case of the assessee for Assessment year 2002-03 and 2003-04 wherein it has been held that most appropriate method for import of raw material and component is the CUP method. 13. We have carefully considered the rival contentions and also perused the orders of the lower authorities. The ground No. 2 of the appeal of the revenue is squarely covered by the order of the coordinate bench in assessee's own case wherein, the same was considered in para No. 38 and 39 holding that CUP method is the most appropriate method to be followed with respect to the import of raw material and components. Therefore, we also accordingly, upheld CUP method to be adopted for....
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.... the capital expenditure he followed the decision of the coordinate bench in case of the assessee for earlier years and held that these expenditure are revenue in nature. Aggrieved revenue is in appeal before us. 19. The ld Departmental Representative for all the grounds relied upon the order of the ld Assessing Officer whereas the ld AR has submitted his written submission as under:- "Background 1. DENSO India Limited is a public limited company and is held 47.93% by DENSO Corporation, Japan while the balance is held by other promoters, Institutional Investors, and others (including public). Further, among the aforesaid equity holders, Sumitomo Corporation, Japan (hereinafter referred to as 'Sumitomo Japan‟) held 10.27% shares in the respondent during the assessment year (AY) 2004-05. (Please refer page 8 of paper book for shareholding pattern) 2. DENSO India is engaged in the business of manufacturing and distribution of a wide range of automotive components including Alternators, Starters, Wiper Motors, Fans, Ventilators, Window Washers, Print Motors, Magneto and Capacitor Discharge Ignition (CDI). In addition to the above, it was ....
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....the following approach: Particulars Result Page Reference Most Appropriate Method Applied TNMM 33 Profit Level Indicator ('PLI‟) Operating Profit /Total Cost (OP/TC) 40 No. Of Comparables 14 42 Working Capital Adjusted Margin of Comparables using multiple year data 3.79% 42 Respondent's Margin (OP/TC) 6.84% 59 2) Transfer Pricing Assessment Proceedings and Assessment Proceedings 2.1. The Learned Transfer pricing officer ('TPO‟) vide order dated 23/10/2008 under section 92CA(3) of the Act gave the following observations w.r.t. the international transaction of payment of royalty, technical services fees, know how fee (hereinafter referred as 'royalty and technical services fees‟) etc: 2.2 The Ld. TPO disregarded the detailed submissions and formal agreements between the respondent and its AE's and ruled that the formal agreement between the AE's cannot be a basis for determining the arm's length price of the transactions. Therefore, payment of royalty/technical services and know how fees cannot be justified on the basis of agreement between the respondent and the AE.....
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....,03,150 7 Training fees paid 10,40,286 8,91,197 1,49,089 8 IT cost fees paid 6,19,261 5,30,512 88,749 9 Miscellaneous receipts 19,42,702 16,64,283 36,06,985 Total 14,63,69,926 12,53,92,899 2.8 The Ld. AO incorporated the order of the Ld. TPO in its order and consequently made an addition of Rs. 12.53 crores on account of international transaction of payment of royalty and technical services fees. (Ref: Page 171-173 of Paper book) 3) Respondent's Appeal before the Learned Commissioner of Income Tax (Appeals) ('CIT (A)‟) 3.1. The Ld. CIT(A) accepted the respondent's filter of accepting companies having turnover Rs. 50 cr. and disregarded the TPOs‟ methodology of accepting companies having turnover Rs. 100 crores. (Ref: Page 120 of Paperbook) 3.2. The Ld. CIT(A) held that since the transactions of the appellant with its AE's are on the cost side the PLI should have a base which should not be controlled and therefore OP/Sales is the appropriate PLI for benchmarking the international transaction of payment of royalty (Re: Page 121 of paper book). The Ld. ....
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..... To substantiate the same, the past 5 year's trend of the sales turnover which shows a huge jump in the turnover from March 2000 to March 2005 is as follows: Denso India Ltd. (Sales in Rs. Crores) Mar-2000 Mar-01 Mar-02 Mar-03 Mar-04 Mar 05 197.22 238.94 250.56 256.46 313.83 379 33 Therefore, from the above, it can be established beyond doubt that the respondent has benefitted immensely from the use of intangibles provided by its AE's. It is also worth noting that the Hon‟ble ITAT in the respondent's own case in AY1988- 89 to 1997-98 and later on relied in DCIT vs. Denso India Limited (ITA No. 4798/Del/2004) The Hon‟ble ITAT relying on various judicial precedents held that "the more you take the more royalty you pay". It further held that the more assets the assesse will produce, the royalty will increase as the amount of royalty is directly linked with the volume of contract products. In view of the same it was held that the amount of royalty is a revenue expenditure. It can be seen from the table above that the sales of the respondent have kept on increasing thereby entailing payment of royalty and thus ....
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....oyalty paid 87,82,391 2 Application cost paid 5,12,449 3 Technical fees paid 8,95,625 4 Technical knowhow fees paid 95,03,150 5 Training fees paid 1,49,089 6 IT cost fees paid 88,749 2. Appeal before CIT(A) The Ld. CIT(A) held that the above expenses are revenue in nature and deleted the additions made by the Ld. AO. The reasoning given by the Ld. CIT(A) w.r.t each item of expense is as follows: S.No. International Transactions Reason for Deletion of adjustment Page Reference 1 Royalty paid Relied on the order of the ITAT in respondent's own case in ITA No. 4798/Del/2004 (AY 2001- 127 2 Application cost paid Relied on the order of the ITAT in respondent's own case in ITA No. 4798/Del/2004 (AY 2001- 02) and held that there has been no acquisition of a capital asset. Also, there has been no 02) 129 3 Technical fees paid disallowance in AY 2006Relied on the order of the ITAT in respondent's -07 and 2007-08 by the own case in ITA No. 4798/Del/2004 (AY 2001- 02) 132 4 Technical knowhow fees paid Treated the same as capital in nature and directed the AO to gran....
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....nd held as follows: [Re: Para 4 on Page 45 of Case Law Compendium] "Question No. 1 4. The assessee in terms of its arrangement with parent company-Denso Japan had to remit royalty at different rates. These were sought to be brought to tax on the ground that expenditure was not revenue but it was capital in nature as it would result in enduring benefit. The CIT (Appeals) disagreed and after analyzing the nature of the transaction held that the amounts paid correctly belonged to the revenue stream and for all the previous years the amount was treated as revenue expenditure, i.e. for A Y. 1988-89 to 1997-98. In a previous year i.e. ITA No. 479/Del./2004 decided by the IT AT on 20.03.2008, it was held after an elaborate analysis of case law and agreement on the record that the royalty was revenue expenditure and could not be treated as capital expenditure. The extract of that decision appears in para 6 of the impugned order. It is not disputed that no new fact or development took place or was taken into account by the A.O. Considering that consistently for 12 years identical payments were treated as revenue expenditure and in fact are entitled to be treated as such th....
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.... issue is covered in favour of the assessee by the Tribunal in assessee's own case for the A. Y. 2001-02 wherein it has been held as under:- "10. With regard to deletion of addition of Rs. 1.05 crores, being the expenses incurred for technical services provided by Denso Corporation, Japan, we found that during the course of assessment, the Assessing Officer has disallowed Rs. 12.60 crores, the same was rectified u/s 154 and the same was reduced to Rs. 10.58 lakhs. We found that assessee has Incurred these expenditure for conducting training of its employees in India as it facilitated the assessee's trading and manufacturing operation in India under agreement with Denso Corporation, Japan. After considering the verdict of Hon'ble High Court reported at 159 ITR 673 (2003-TIOL-278-HC-KOL-IT), 160 ITR 35 and 124 ITR 1 (2002- TIOL-238-SC-IT), the CIT(A) deleted the addition and held that assessee has incurred the above expenditure for training of its employees which facilitated the assessee's trading operation to be carried on more efficiently or more profitably. No interference is required in the order of the CIT(A) for deleting the disallowance of expenditure ....
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....eved is in appeal before us. The above ground identical to ground No. 1 of the appeal of the revenue for AY 2004-05 which has been decided by us setting aside the whole issue to the file of the ld AO/TPO, therefore, for similar reasons we set aside this ground of appeal also to file of the AO/TPO for fresh adjudication with similar direction. In the result ground No. 1 of the appeal of the revenue is allowed accordingly. 23. Ground No. 2 of the appeal is against the deletion of the addition of Rs. 8782391/- by the ld CIT(A) holding it as revenue expenditure whereas, the ld Assessing Officer treated the same as capital expenditure. The ld AO/TPO held that the royalty payment of Rs. 61280272/- and treated proportionate adjustment of Rs. 8782391/- as capital expenditure. The above issue has been fairly decided in favour of the assessee by the coordinate bench for AY 1988-89 to AY 1991-92. Further, the Hon'ble Delhi High Court in assessee's own case in ITA No. 767 and 796/Del/2014 vide order dated 13.01.2015 has held that royalty paid by assessee to its parent company was revenue expenditure and cannot be treated as capital expenditure. The Hon'ble Delhi High Cou....