THE COMMISSIONER OF INCOME TAX-II vs. LUMAX INDUSTRIES LIMITED

2015

In 1994 Stanley acquired a 12.61% stake in the Assessee. According to the Assessee, it has been immensely benefitted from its collaboration with Stanley. Its turnover was Rs. 53 crores in AY 1994-95 and Rs. 230.08 crores in AY 2004-05. In AY 2005-06 its turnover was Rs. 294 crores. The Assessee states that it enjoyed a 60% market share of the Indian auto lighting industry. Another fact which has relevance and which has not been disputed is that the expenses incurred by the Assessee on account of payment towards royalties to Stanley for AY 1985-86 to 2003-04 has been allowed by the Revenue under Section 37 (1) of the Act as expenditure incurred wholly and exclusively for the purposes of business of the Assessee.

The Assessee states that during the previous years relevant to AYs 2004-05 and 2005-06, Stanley’s stake amounted to 19.41% which was less than the minimum percentage of 26% which was necessary to make it an Associated Enterprise (‘AE’). During this time the share of Indian promoters in the equity share capital of the Assessee was 39.06%. The remaining shares were held by public and financial institutions. However, on account of the presence of one Executive Director as the representative of Stanley on the Board of the Assessee, by virtue of Section 92A (2) of the Act, Stanley became an AE of the Assessee.

During AYs 2004-05 and 2005-06 the Assessee entered into the following the international transactions:

The Assessee filed its return of income for AY 2004-05 on 29th October 2004 showing income at Rs. 12,36,46,429 which was set off against the unabsorbed depreciation to the extent of Rs. 12,36,46,429. It This is a digitally signed order. The authenticity of the order can be re-verified from Delhi High Court Order Portal by scanning the QR code shown above. The Order is downloaded from the DHC Server on 04/04/2026 at 21:51:39

The TPO by his report dated 15th December 2006 determined the Arms Length Price (‘ALP’) as regards the payment of royalty as Nil. After applying the Transactional Net Margin Method (‘TNMM’), the TPO held that the formal agreement between the Assessee and Stanley could not be the basis for determining the ALP of royalty. It was observed that apart from drawings, the Assessee did not receive any technology. It was observed by the TPO that there was no need for any technology because Stanley’s technical personnel were in full-time employment of the This is a digitally signed order. The authenticity of the order can be re-verified from Delhi High Court Order Portal by scanning the QR code shown above. The Order is downloaded from the DHC Server on 04/04/2026 at 21:51:39

The AO passed an assessment order dated 20th December 2006 on the basis of the aforementioned report of the TPO and made additions both on account of payment of royalty and disallowance of foreign travelling expenses.

The appeal by the Assessee against the said order was disposed of by an order dated 30th September 2010 by the Commissioner of Income Tax (Appeals) [‘CIT (A)’]. For AY 2004-05 the CIT (A) observed that the adjustment made on the basis of net profit margin of Phoenix Lamps Limited (‘Phoenix') was not justified since Phoenix was situated in a Special Economic Zone (‘SEZ’) and as such, was enjoying certain benefits which were not available to the Assessee. It was also noticed that in the current AY 2006-07, the TPO itself did not consider Phoenix as a comparable case. Excluding Phoenix, operating profit of other comparable cases was 4.26% whereas operating profit of the Assessee This is a digitally signed order. The authenticity of the order can be re-verified from Delhi High Court Order Portal by scanning the QR code shown above. The Order is downloaded from the DHC Server on 04/04/2026 at 21:51:39

As regards the disallowance of Rs. 2,59,434 on account of foreign travelling expenses, the CIT (A) held that the Director of the Assessee had undertaken visits for the purpose of business of the Assessee and therefore, the addition made on this ground is also not justified.

For AY 2005-06 also, a similar adjustment pursuant to the order of the TPO dated 10th October 2008 resulted in the CIT (A), by an order dated 26th November 2010, deleting the addition on account of royalty payment.

As regards AY 2007-08 the AO passed an order dated 17th October 2011 making a similar addition regarding payment of royalty on the basis of the report of the TPO as well as the order passed by the Dispute Resolution Panel dated 8th October 2010. This was taken up in appeal before the ITAT by the Assessee by filing ITA No. 5252/Del/2011. As regards AY 2008-09, the Assessee filed ITA No. 4456/Del/2012 before the ITAT against the final assessment order dated 17th July 2012. 14. The appeal for the AY 2008-09 was first decided by the ITAT by This is a digitally signed order. The authenticity of the order can be re-verified from Delhi High Court Order Portal by scanning the QR code shown above. The Order is downloaded from the DHC Server on 04/04/2026 at 21:51:39

A similar approach was adopted by the ITAT in dealing with the appeals related to AYs 2004-05 and 2005-06. It was held that the Assessee had actually received technical assistance from Stanley. Further the employment of the expatriates of Stanley ensured that the technology provided was properly applied by the Assessee to the production of licensed products. Further, no mark-up on remuneration of expatriates This is a digitally signed order. The authenticity of the order can be re-verified from Delhi High Court Order Portal by scanning the QR code shown above. The Order is downloaded from the DHC Server on 04/04/2026 at 21:51:39

On the question of addition made by the AO on account of ALP for the payment of royalty, learned counsel for the Assessee has rightly referred to the decision in Commissioner of Income Tax v. Sony Ericsson Mobile Communication (2015) 374 ITR 118 where the determination of the ALP of the royalty paid as Nil was not approved. The Court's attention has also been drawn to the decision in Commissioner of Income Tax v. EKL Appliances Limited (2012) 345 ITR 241 wherein it was held that Rule 10B (1) (a) did not authorize disallowance of any expenditure on the ground that it was not necessary This is a digitally signed order. The authenticity of the order can be re-verified from Delhi High Court Order Portal by scanning the QR code shown above. The Order is downloaded from the DHC Server on 04/04/2026 at 21:51:39

There is merit in the contention of learned counsel for the Assessee that once the TPO found that no adjustment was called for under the TNMM method, no adjustment could have been made by applying some other method as that would be contrary to Section 92C(1) of the Act.

The Court also finds that there is no justification for the TPO to come to the conclusion that the payment of royalty was not necessary in the present case particularly since the collaboration agreement between the Assessee and Stanley has been continuing since 1984. As held by the ITAT, after a detailed examination of the clauses of the collaboration agreement, the Assessee did receive full technical assistance from Stanley for which the royalty payment was made.

In the circumstances, the Court is not inclined to frame a question on the issue of deletion of the addition sought to be made by the AO for the AYs in question on account of ALP of the payment of royalty.

As regards the adjustment under Section 115JB on account of This is a digitally signed order. The authenticity of the order can be re-verified from Delhi High Court Order Portal by scanning the QR code shown above. The Order is downloaded from the DHC Server on 04/04/2026 at 21:51:39

The CIT (A) has deleted the disallowance of expenses on account of foreign trips of the Director of the Assessee after holding that the visits made to USA and Dubai were for the business purposes. The disallowance by the AO of the said expenses was found to be not justified. Since the above finding turned purely on facts, the order of the CIT (A) as affirmed by the ITAT, does not give rise to any substantial question of law.

On the issue of disallowance of the expenses on account of provision for warranty, the ITAT deleted it since the provision was made by the assessee based on actual warranty expenses incurred for the unexpired warranty period. As rightly pointed out by learned counsel for the Assessee the question is covered in its favour by the decisions in Rotork Controls Pvt. Ltd. v. Commissioner of Income Tax (2009) 314 ITR 62 (SC) and Commissioner of Income Tax v. Becton Disckinsion (2013) 29 This is a digitally signed order. The authenticity of the order can be re-verified from Delhi High Court Order Portal by scanning the QR code shown above. The Order is downloaded from the DHC Server on 04/04/2026 at 21:51:39

On the last issue concerning depreciation on computer peripherals @ 60%, learned counsel for the Revenue does not dispute that the question stands answered in favour of the Assessee by the decision in Commissioner of Income Tax v. BSES Rajdhani Power Limited (2013) 358 ITR 47 (Del).

For the aforementioned reasons, no substantial question of law arises in any of these appeals. They are accordingly dismissed with no order as to costs.