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Income Tax Appellate Tribunal, “C” BENCH : BANGALORE
Before: SHRI N. V. VASUDEVAN & SHRI LAXMI PRASAD SAHU
IN THE INCOME TAX APPELLATE TRIBUNAL “C” BENCH : BANGALORE BEFORE SHRI N. V. VASUDEVAN, VICE PRESIDENT AND SHRI LAXMI PRASAD SAHU, ACCOUNTANT MEMBER IT(TP)A No.301/Bang/2021 Assessment Year : 2016-17 M/s. Toyota Kirloskar Auto Parts Pvt. Ltd., ACIT, Vs. Plot No.21 Bidadi Industrial Area, Circle –2, LTU, Bidadi, Ramanagara, Bengaluru. Bengaluru-562 109. PAN : AABCT 5590 Q APPELLANT RESPONDENT
Assessee by : Shri. K. R. Vasudevan, Advocate Revenue by : Shri. Pradeep Kumar, CIT(DR)(ITAT), Bengaluru. Date of hearing : 19.05.2022 Date of Pronouncement : 23.05.2022 O R D E R Per N V Vasudevan, Vice President
This is an appeal by the assessee against the final Order of Assessment dated 30.04.2021 passed by the ACIT, Circle –2, LTU, Bengaluru (National e-Assessment Centre), under section 143(3) r.w.s. 144C of the Income Tax Act, 1961 (hereinafter called ‘the Act’), in relation to Assessment Year 2016-017.
IT(TP)A No.301/Bang/2021 Page 2 of 12
Grounds 1 and 2 are general in nature and calls for no specific adjudication. In Ground Nos.3 to 14, the assessee has challenged the addition made to the total income of the assessee consequent to determination of Arm’s Length Price (ALP) in respect of an international transaction of payment of royalty to its Associated Enterprise (AE) u/s.92 of the Act.
The first aspect of the ground of challenge relating to determination of ALP is with regard to the adoption of the Most Appropriate Method (MAM)in determining the ALP. The nature of the international transaction between the assessee and his AE is that the assessee is a company engaged in the manufacture of automotive front axle, rear axle and propeller shaft. The assessee is vendor to Toyota Kirloskar Motors Ltd. for their vehicles sold under the brand name 'Qualls' and `Innova' for axles and propeller shafts. One of the international transaction between the assessee and its AE viz., Toyota Motor Corporation, Japan [TMC], was payment of royalty under agreement between the assessee and TMC. TMC was to provide technical know-how, which includes process know-how, designs & drawings to manufacture R-150 and C- 550 transmission units and axles & propellers, shafts and engine assembly. There was an agreement dated 19.12.2012 between TMC and assessee and also another agreement dated 27.4.2012 named as Technical Assistance Agreement for axles and propeller shaft for IMV. As per agreement, assessee was to pay TMC royalty for using technology of which TMC had a right to permit the assessee to use the technology. A sum of Rs.46,56,77,516 was paid as royalty by the assessee in AY 2016-17.
IT(TP)A No.301/Bang/2021 Page 3 of 12
To justify the price paid is at arm’s length, the assessee filed a TP study adopting TNMM as the most appropriate method for determining ALP. This was rejected by the TPO and he proceeded to apply Profit Split Method (PSM) as the MAM to determine ALP. The action of the TPO was upheld by the DRP. Hence this appeal by the assessee before the Tribunal.
In so far as the dispute regarding the MAM is concerned, at the time of hearing, it was agreed by the parties that the issue raised with regard to MAM is identical to the issue considered by the Tribunal in the assessee’s own case for Assessment Years 2013-14 and 2014-15 in IT(TP)A Nos. 1915/Bang/2017 and 3377/Bnag/2018, order dated 18.03.2020. In the aforesaid order, the Tribunal held as follows:
“15. We have considered the rival submissions. We are of the view that the issue with regard to Most Appropriate Method in the case of assessee had already been settled by the Tribunal. The TPO as well as the DRP have not followed the aforesaid decision of the Tribunal on the ground that economic life of the technology had an impact on the MAM and that technology in question was to be used by start-ups and since the assessee was using the technology for a fairly long period of more than 5 years, it would not be proper to adopt the TNMM as the MAM, as the economic life of the technology would no longer exist. In our view, there is no basis for .be TPO as well as the DRP to come to a conclusion that technology in question was to be used by a start-up. There is no basis for the TPO and DRP to come to a conclusion that the Assessee is a start up in manufacture of various parts for automobiles. The technology in question was that of TMC Japan. The technology is being used by the Assessee even today. There is no basis for the TPO/DRP's conclusion that the useful economic life of the technology would be only 5 years. In any event passage of time cannot be the basis to discard TNMM which is already held by the Tribunal and upheld by the Hon'ble High Court as no longer the MAM because
IT(TP)A No.301/Bang/2021 Page 4 of 12 the conditions necessary for PSM as MAM are not met in the case of the Assessee. Even going by Rule 10B(1)(d), there should be contribution by each of the parties to a transaction for earning profits from sale of goods or provision of services. Then the contribution of each of the parties is identified and the profit is split between those parties. In the case of the Assessee the technology is given by TMC, Japan for which royalty is paid. The use of the technology in manufacturing and the sale of the product so manufactured contribute to the profit of the Assessee and TMC, Japan has nothing to do with that. There is therefore absence the first condition for application of PSM as MAM. As submitted by the Assessee PSM is used as MAM only in a case involving transfer of unique intangible or in multiple inter-related international transactions which cannot be valued separately for determining the ALP. The OECD guidelines cited on behalf of the assessee clearly supports the aforesaid approach and the OECD guidelines in this regard reads as follows:- “Further reliance is also placed on OECD Guidelines, which clearly lay down the situations in which the PSM is selected as an appropriate method for benchmarking. The relevant extract from the OECD Guidelines (para 2.109) is as below: "A transactional profit split method may also be found to be the most appropriate method in cases where both parties to a transaction make unique and valuable contributions (e.g. contribute unique intangibles) to the transaction, because in such a case independent parties might wish to share the profits of the transaction in proportion to their respective contributions and a two- sided method might be more appropriate in these circumstances than a one-sided method. In addition, in the presence of unique and valuable contributions, reliable comparables information might be insufficient to apply another method. On the other hand, a transactional profit split method would ordinarily not be used in cases where one party to the transaction performs only simple functions and does not make any significant unique contribution (e.g. contract manufacturing or contract service activities in
IT(TP)A No.301/Bang/2021 Page 5 of 12 relevant circumstances), as in such cases a transactional profit split method typically would not be appropriate in view of the functional analysis of that party". 16. The revised guidance (June 2018) on the application of transactional PSM, provided by the OECD state the importance of delineating the transactions in determining whether the PSM is applicable or not. The relevant extract from the OECD Guidelines is provided below: "2.125. The accurate delineation of the actual transaction will be important in determining whether a transactional profit split is potentially applicable. This process should have regard to the commercial and financial relations between the associated enterprises, including an analysis of what each party to the transaction does, and the context in which the controlled transactions take place. That is, the accurate delineation of a transaction requires a two-sided analysis (or a multi-sided analysis of the contributions of more than two associated enterprises, where necessary) irrespective of which transfer pricing method is ultimately found to be the most appropriate. 2.126. The existence of unique and valuable contributions by each party to the controlled transaction is perhaps the clearest indicator that a transactional profit split may be appropriate. The context of the transaction, including the industry in which it occurs and the factors affecting business performance in that sector can be particularly relevant to evaluating the contributions of the parties and whether such contributions ale unique and valuable. Depending on the facts of the case, other indicators that the transactional profit split may be the most appropriate method could include a high level of integration in the business operations to which the transactions relate and /or the shared assumption of economically significant risks (or the separate assumption of closely related economically significant risks) by the parties to the transactions. It is important to note that the indicators are not mutually exclusive and on the contrary may often be found together in a single case. 2.127. At the other end of the, spectrum, where the accurate delineation of the transaction determines that one party to the transaction performs only simple functions, does not assume economically significant risks in relation to the transaction and does not otherwise make any contribution which is unique and valuable
IT(TP)A No.301/Bang/2021 Page 6 of 12 "2.147. Under the transactional profit split method, the relevant profits are to be split between the associated enterprises on an economically valid basis that approximates the divisi6n of profits that would have been anticipated and reflected in an agreement made at arm's length. In general, the determination of the relevant profits to be split and of the profit splitting factors should: Be consistent with the functional analysis of the controlled transaction under review, and in particular reflect the assumption of the economically significant risks by the parties, and Be capable of being measured in a reliable manner." 17. It is clear from the above OECD guidelines that in 'order to determine the profits to be split, the crux is to understand the functional profile of the entities under consideration. Although the comparability analysis is at the "heart of the application of the arm's length principle", likewise, a functional analysis has always been a cornerstone of the comparability analysis. In the present case the Assessee leverages on the use of technology from the AE and does not contribute any unique intangibles to the transaction. It may be true that the Assessee aggregated payment of royalty with the transaction of manufacturing as it was closely linked and adopted TNMM but that does not mean that the transactions are so interrelated that they cannot be evaluated separately for applying PSM. Further, the Assessee does not make any unique contribution to the transaction, hence PSM in this case cannot be applied. 18. Therefore, we are of the view that TNMM is the Most Appropriate Method in the case of assessee. The decision of the Tribunal in the earlier AY 2008-09 has also been upheld by the Hon'ble High Court of Karnataka in ITA No.104/2015, judgment dated 16.7.2018, which was an appeal of the revenue against the order of Tribunal for AY 2008-09. The Tribunal has upheld TNMM as MAM from AY 2007-08 to 2011-12. In those AYs the dispute was whether TNMM or CUP was the MAM. It is for the first time in AY 2013-14 that the revenue has sought to apply PSM as MAM. In the given facts and circumstances, we are of the view that TNM Method is the Most Appropriate Method and the AO is directed to apply the said method in determining the ALP, after affording opportunity of being heard to the assessee. The grounds of appeal of the assessee are treated as allowed.
IT(TP)A No.301/Bang/2021 Page 7 of 12
The facts in AY 2014-15 are identical and the reasoning given in AY 2013-14 will equally apply to the AY 2014-15 also and the TPO is directed to compute the ALP for AY 2014-15 by applying TNMM as the MAM , after affording due opportunity to the assessee.”
The facts in AY 2016-17 are identical and the reasoning given in AY 2013-14 will equally apply to the AY 2016-17 also. Respectfully following the aforesaid decision, we set aside the question of determination of ALP to the TPO afresh applying TNMM as the most appropriate method as was done in Assessment Years 2013-14 and 2014-15 in the order referred to above. The other issues with regard to determination of ALP under the PSM is academic and does not require adjudication.
The other grounds which require adjudication is ground Nos.15 to 20 with regard to rate of tax on dividend distributed to non-resident shareholders. The said grounds read as follows:
II. Corporate tax 15. The learned AO erred in not providing any reason(s) for not accepting the Company's contention that taxes on dividend paid to the non-resident shareholders should be restricted to the rates mentioned in the relevant tax treaty. Without prejudice to the above 16. The learned AO / Hon' ble DRP erred in not appreciating the fact that Dividend Distribution Tax (`DDT') under section 115-0 of the Act, in case of non-resident shareholders, should be restricted to concessional tax rate on dividends as per the India- Japan Double Tax Avoidance Agreement.
IT(TP)A No.301/Bang/2021 Page 8 of 12 17. The learned AO / Hon'ble DRP erred in concluding that DDT is a tax on the company declaring dividend, without appreciating the fact that DDT is tax on dividend income of shareholders. The learned AO / Hon'ble DRP erred in not appreciating 18. the legislative history of taxes on dividend which clearly indicates that the incidence of tax on dividend was always in the hands of the shareholders. However, only for the purpose of ease of collection of taxes, the company distributing dividend was required to pay DDT. The learned AO / Hon'ble DRP failed to appreciate the 19. fact that the abolishment of DDT by the Government vide Finance Act, 2020 and re-introduction of withholding taxes on dividend, further confirms the intent of the Government that dividend was always taxable in the hands of the recipient. The learned AO/ Hon'ble DRP erred in not appreciating 20. the Hon'ble Delhi ITAT' s ruling in the case of Giesecke & Devrient [India] Pvt Ltd v. A CIT [20201120 taxmann.com 338 where it was held that the tax on dividend should be restricted to the tax rates mentioned in the relevant tax treaty.
During the AY 2016-17, the assessee had paid dividends to its shareholders and paid DDT as follows:
Name of the Country Dividend DDT paid Shareholder (a) 20.925% Toyota Motor Japan 116662033 24411530 Corporation Toyota Industries Japan 47393951 9917184 Corporation Kirloskar India 18228443 3814302 Systems
IT(TP)A No.301/Bang/2021 Page 9 of 12 Limited Total 182284427 38143016 The assessee has raised an objection that the AO ought to have restricted the levy of DDT on the dividends distributed to the non- resident stakeholders to 10 % in terms of Article 10 of the India-Japan DT AA instead of 20. 925 % as DDT is in the nature of tax on income in the form of dividend and hence the beneficial tax rate as per the Act or the. DTAA should be available to assessee. The assessee relied on the decision of the Delhi Bench of ITAT in the case of Gieseck.c & Devrient [India] Pvt Ltd v. ACIT[2020] 120 taxmann.com 338(Delhi- Trib.)
On this issue, the DRP took the view that the issue of applicability 'of tax treaty rate to DDT must be approached after addressing a critical issue whether DDT is a tax on the Company or the Shareholder since the distributable surplus stands reduced to the extent or DDT. In this regard, attention is drawn to the decision of the Bombay High Court in the case of Godrej & Boyce Mfg. Co0. Ltd Vs. Dy. CIT[2010] 194 Taxman 203 / 328 which was rendered in the context of Section 1 4A vis-a-vis, Section 115-0 of the Act. The Court observed that -
"The effect of Section 115-0 is that in addition to the income tax chargeable on the total income of a domestic. Company, additional income tax is charged on profits declared, distributed or paid This tax which is referred to as a tax on distributed profits is what it means, namely a tax OH the profits of the Company. This is not a tax on dividend income. Under Section 115-0, the charge is on a component of the profits of the Company, that component representing
IT(TP)A No.301/Bang/2021 Page 10 of 12 profits declared distributed or paid. The tax under Section 115-0 is not a tax which is paid by the Company on behalf of the shareholder, nor does the Company act as an agent of the shareholder in paying the tax. Provisions contained in Chapter XIII) are special provisions relating to tax on the distributed profits of domestic companies. Even Section 115-0 in Chapter X II-D clearly states that the additiontl income- lax liability there under is on the amount of profits . declared; distributed or paid by a domestic company as dividend. Thus) the additional income tax under Section 115-0 is a tax on profits and not a lax on dividend. The general principle of law is that a company is chargeable to tax on its profits as a distinct taxable entity and has to pay tax in discharge of its own liability and not on behalf of or as an agent of its shareholders. This position of the general law is recognized and incorporated in Section 1 15-0 and is not overridden by the statutory provision". Thus, the Court has unequivocally held that DDT is a tax on the company and not on the shareholder. A similar position has been consistently upheld by the ITAT Mumbai in the case of Sunash Investment Co v. Asstt. CIT[2007] 14 SOT 80 (Mum. -Trib.), Mohananlal M. Shah v. thy. CIT[2007] 105 ITD 669 (Mum) and Asstt. CIT v. Dakshesh S. Shah [2004] 90 I TD 519 (Mum).A similar argument on applicability of tax treaty to DDT was considered and rejected by the South African High Court in the case of Volkswagen of South Africa (Pty) Ltd. CIT South African Revenue Service [Case No.24201/2007" dated 25-4-2008]. The issue before the High Court was whether 'secondary tax on companies' (STC) (akin to DDT) levied as per the South African domestic tax law could be regarded as a tax covered within the ambit or the South Africa-Germany Tax Treaty. Article 7 of the South Africa-Germany provided for a withholding tax
IT(TP)A No.301/Bang/2021 Page 11 of 12 rate of 7.5 % under the Dividend Articles whereas the STC was levied at 12.5%. The High Court held that STC was not a tax on dividends but was a tax imposed on the company declaring the dividends and hence outside the ambit of the tax treaty (unlike in the case of non-resident shareholder tax, which is imposed on the shareholder). In view of the above discussions, we hold that the dividend distribution tax is not a tax on dividends but is a tax imposed on the company declaring the dividends and hence outside the ambit of the tax treaty. Therefore, it needs to be taxed in accordance with the provisions of Income Tax Act. Ground rejected.
The learned counsel for the assessee reiterated the stand of the assessee as reflected in the grounds of appeal filed before the Tribunal. The learned DR relied on the order of the DRP.
We have considered the rival submissions. We find that the ITAT Mumbai Bench in the case of Dy Cit 11 (3)(1), Mumbai vs Total Oil India Pvt Ltd., Mumbai vide order of reference dated 23 June, 2021 in CO No. 57/Mum/2021, and ITA No. 6997/Mum/2019 Assessment year 2016-17 has for identical reasons given by the DRP, made a reference to Special Bench disagreeing with the view of the ITAT Delhi in the case of Gieseck.c & Devrient [India] Pvt Ltd v. ACIT[2020] 120 taxmann.com 338(Delhi-Trib.). Since the issue has not attained finality, we are of the view that it would be just and appropriate to remand the issue to the TPO/AO for fresh consideration in accordance with law. The grounds are treated as partly allowed for statistical purpose.
IT(TP)A No.301/Bang/2021 Page 12 of 12
In the result, the appeal is treated as partly allowed.
Pronounced in the open court on the date mentioned on the caption page.
Sd/- Sd/- (LAXMI PRASAD SAHU) (N.V. VASUDEVAN) Accountant Member Vice President Bangalore, Dated: 23.05.2022. /NS/*
Copy to: 1. Appellants 2. Respondent 3. CIT 4. CIT(A) 5. DR 6. Guard file By order
Assistant Registrar, ITAT, Bangalore.