TaxTMI 
TaxTMI 
2017 (12) TMI 1751
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....ermined 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 Royalty expenses being treated as capital expenditure by the AO. (3) O....
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....6 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. DENSO India Limited is a public limited company and is held 47.93% by DENSO Corporation, Japan w....
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....s 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 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 cannot be justified on the basis of agreem....
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....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 book) 4) Respondent's Contentions * Need for payment of royalty * The Ld. TPO ignored the detailed evidentiary information (designs, drawings, product standards, engineering data etc.) submitted by the Respondent to substantiate the arm's length nature of royalty payment to associated enterprises and wron....
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....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. AO considered the same as an international transaction by bringing the same under the ambit of section 92B(2) of the Act by relying on the order of his predecessor for AY 2002-03. (Re: Page 451 of the Paper book). 2.2. Relying upon the methodology adopted by the TPO/AO for preceding year, the Ld. AO determined Comparable Uncontrolled Price ('CUP‟) method to be the most appropriate method for benchmarking the international transaction and ....
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.... 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 for a period not more than previous two years can be used to determine the arm's length price of an international transaction. Hence, the Indian Transfer Pricing legislation does not permit usage of future years‟ data for the purposes of comparability; * The CUP method requires extremely stringent comparability factors to be met, in the absence of which reliable adjustments need to be made to ensure a just and fair comparison. In the instant case, it is not possible to adjust for the various ....
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.... 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: Addition on account of 'NICENET‟ charges paid to Denso Haryana for use of intranet facility 1. Background of Transaction 1.1. During FY 2003-04, the respondent paid an amount of Rs. 11,94,259 towards cost of sharing the intranet facility called NICENET to M/s Denso Haryana. 2) Assessment Proceedings 2.1 The Ld. AO disallowed the expense considering the agreement pursuant to which these charges were paid as a sham agreement on the ground that it was effective with retrospective effect and specific charges that were to be charged for th....
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.... 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 to the Arm's length price is made by the ld Assessing Officer. The ld CIT(A) has deleted it holding that the appellant has paid similar royalty in Assessment Year 2002-03 and no transfer pricing adjustment was proposed and ITAT has allowed the claim of the royalty as revenue expenditure. We do not subscribe to the finding of the ld CIT(A) as allowance of the expenditure operates in altogether different provisions of the law as well as the determination of arm's length price of international transaction operates in different. Further, as in the impugned assessment order the adjustment on account of arm's length price is m....
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.... 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 this year. With respect to the adjustment of Rs. 1.71 crores the coordinate bench has held in para No. 48 and 49, the matter was ultimately set aside to the file of the ld Assessing Officer for fresh adjudication in accordance with the law. The coordinate bench has also given a direction to the ld Assessing Officer vide para No. 44 about the comparability analysis. The above decision of the coordinate bench has further been upheld by the Hon'ble Delhi High Court in 388 ITR 244. Therefore respectfully following the decision of the coordinate bench in assessee's own case for earlier years, we also set aside the whole issu....
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....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 also engaged into resale of spare parts some of which were imported from overseas group entities (Re: page 17-23 of paper book for TP study and page 178 for TP order) 3. During the year under assessment, DENSO India entered into the following international transactions with its associated enterprises (AEs) within the meaning of sections 92 to 92F of the Income Tax Act, 1961 ( Act‟). Sr. No. Transactions entered during the year Amount as per TP Study (Rs.) MAM as per TP Study 1 Purchase of raw material 1,83,337 TNMM CUP 2 Sale of finished goods 51,69,5....
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....d. 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. The real test lies in commensurate economic benefits in which the profits earned by the enterprise over and above the industry average can be considered as income attributable to the payment of royalty and technical services fees. (Re: Page 184,185 of Paper book) 2.3 Consequently, the Ld. TPO applied TNMM using OP/TC as the PLI for benchmarking the international transaction of payment of royalty using single year data and applied turnover filter 100 crores (selection of comparables having turnover greater than 100 crores against the Assessee's turnover filter of Rs. 50 crores) and selected the following comparables: (Ref: Page 188-190 of paper book) 2.4 Thereafter, the Ld. TPO arrived at a set of 6 comparables and determined the arm's length PLI at 10.35% as against the respondent's PLI of 6.84%. S. ....
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....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. 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. (Re: Page 122 of paper book). 3.3. Thereafter, the Ld. CIT(A) arrived at a set of 16 comparables and determined the arm's length PLI at 7.35% as against the respondent's PLI of 6.40%. S. No. CIT(A) Comparables Unadjusted OP/Sales % 1 Amforge Industries Limited 1.77 2 Axles India Ltd. 5.99 3 EL Forge Ltd. 6.76 4 H S I Automotives Ltd. 6.56 5 India Forge and Drop Stampings Ltd. 1.74 6 Kalyani Forge Ltd. 10.55 7 Lumax Automotive Systems 4.19 8 Sona Koya Engineering Systems 7.29 9 Subros Ltd 4.25 10 Lifelong Ltd. 3.75 11 Napino Auto and Electronics Ltd 13.01 12 Turbo Energy Ltd. 15.9 13 ZF Engineering Gear Ltd. 13.85 Average 7.35 3.4. Keeping in view the above, the Ld. CIT(A) held that the respondent's international transaction with AE's falls within the +1-5% range, allo....
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....respondent have kept on increasing thereby entailing payment of royalty and thus satisfying the benefit and need test. The Delhi High Court in CIT vs. Denso India Ltd. (374 ITR 62) also upheld the approach of the ITAT and held royalty to be a revenue expenditure. * Benefit of +/- 5% range as mandated under proviso to section 92C(2) of the Act to be allowed In view of the above, the Respondent request your goodself to uphold the order of CIT(A). Further, without prejudice to the above, in case your goodself upholds the order of the Ld.TPO and allows the benefit of +/- 5% range as mandated under proviso to section 92C(2) of the Act, the Respondents margin would fall within the Arm's length range as per the Indian TP regulations. Conclusion As is evident from the above discussion the respondent's international transaction of payment of royalty and technical fees etc. 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. Attention is also drawn to Circular No. 12/2001, dated 23/08/2001 wherein the CBDT has decided that the Assessing officer shall not make any adjustment to the arm's....
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....5 Training fees paid Relied on the order of the ITAT in respondent's own case in ITA No 4798/Del/2004 (AY 2001- 02) 132 S.No. International Transactions Reason for Deletion of adjustment Page Reference 6 IT cost fees Held the same to be recurring expenses and therefore 141 3. Respondent's Contentions It is humbly submitted that these issues have already been decided in favor by the Hon‟ble ITAT and upheld by the Hon‟ble High Court of Delhi in the appellant's own case The ground wise contentions are as follows: Ground No. 2: Deletion of adjustment amounting to Rs. 87,82,391 on account of royalty by holding the same as revenue expenditure The respondent humbly submits that this issue is squarely covered in favour of the respondent in its own case in DCIT vs. Denso India Limited (ITA No. 4798/Del/2004) (AY 2001-02) and followed in ACIT vs. Denso India Limited (64 SOT 191) wherein the Hon‟ble Delhi ITAT held the same to be a revenue expenditure. The observations of the ITAT are as follows: [Ref: Page 13-14 Para 6 of Case Law Compendium] " Further we may refer the decision of the Apex Court in the case of Gotan Lime Syndicat....
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....ur of the assessee." Hence, it is prayed that the ground of the appellant be summarily dismissed. Ground No. 3: Deletion of adjustment amounting to Rs. 5,12,449 on account of application cost by holding the same as revenue expenditure It is submitted that as per the terms of Application works consignment agreement Denso Japan shall assist in providing application work in relation to modification or application or design work regarding the products required to make the basic underlying technology compatible with the Indian market and customer specific requirements not covered by any of the basic agreement. It is further submitted that the issue is covered in favour of the respondent in its own case in CIT vs. Denso India Limited (344 ITR 566) wherein the Hon‟ble High Court has held the same to be of revenue nature. The observations of the Hon‟ble HC are as follows: [Re: Para 20 on page 56 and Para 23 on page 58 of Case Law Compendium] "20. For the purposes of standardizing the modification to suit the requirement of the clients of the assessee, namely, manufactures of automobiles, technical fee was paid for the services rendered, which payment was described a....
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.... Hence, it is prayed that the ground of the appellant be summarily dismissed. Ground No. 5: Deletion of adjustment amounting to Rs. 88,749 on account of IT Cost fees / Training fees by holding the same as revenue expenditure The above expenditure has been incurred on account of Annual maintenance contract for the software of financial reporting to Denso, Japan. These expenses are recurring annual fees incurred for upkeep and maintenance of existing software and not for acquiring any new equipment. Conclusion: In view of the above discussion, it is prayed that the grounds raised by the appellant be summarily dismissed." 20. The first ground of appeal is pertaining to the addition of Rs. 125392899/- being adjustment on account of TPOs order u/s 92CA(3) with respect to the Arm's length price of international transaction. The assessee has entered into the 11 international transactions with its associated enterprise and except reimbursement the assessee adopted TNMM as the most appropriate method determining the profit level indicator operating profit/ total cost selecting 14 comparables whose working capital adjusted margin adopting multiple year data was worked out....
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....finding of the ld CIT(A) that royalty is revenue expenditure. Ground No. 2 of the appeal of the revenue is dismissed. 24. Ground No. 3 of the appeal of revenue is against deletion of addition of Rs. 512449/- holding it as revenue expenditure being an application cost which was treated by the ld Assessing Officer as capital expenditure. The ld CIT(A) also deleted the above disallowance based on the previous judicial precedents available in case of the assessee. The identical issue is decided in ITA NO. 4798/Del/2004 for AY 2001-02 wherein, the above application cost was allowed as revenue expenditure. Further, it has been stated that there is no disallowance for AY 2006-07 and 2007-08 by the ld Assessing Officer. The above issue in assessee's own case for AY 2001-02 wherein, technical fees paid has been held to be revenue in nature. We do not find any reason to deviate from the same and hence, respectfully following the decision of the coordinate bench, we direct the ld Assessing Officer to treat Rs. 512449/- being technical application cost as revenue expenditure. Accordingly, ground No. 3 of the appeal of the revenue is dismissed. 25. Ground No. 4 and 5 of the appe....