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Income Tax Appellate Tribunal, ‘D’ BENCH, CHENNAI
Before: SHRI MAHAVIR SINGHAND SHRI MANOJ KUMAR AGGARWAL
आदेश आदेश /O R D E R आदेश आदेश
PER MAHAVIR SINGH, VP:
These cross appeals are arising out of the order of the
Commissioner of Income Tax (Appeals)-8. Chennai in Appeal
No.ITA No.112/17-18, order dated 17.10.2019. The Deputy
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Commissioner of Income Tax, Corporate Circle – 4(2), Chennai
passed the assessment order u/s.143(3) r.w.s.92CA(3) of the
Income Tax Act, 1961 (hereinafter “the Act”) for the
Assessment Year 2014 – 2015 vide order dated 02.02.2018
incorporating the Transfer Pricing proposed by the Transfer
Pricing Officer [TPO] vide order No.F.No.K.550/TPO-
2(1)/A.Y.2014-15; dated 23.10.2017 u/s.92CA(3) of the Act.
The only common issue in these cross appeals of the
Revenue as well as the Assessee is as regards to fixing of
Royalty at an adhoc rate of 1% by the CIT(A) as against the
claim by the Assessee at 5%. For this, the Revenue has raised
the following Ground Nos.2 to 2.2, as under:
“2. The Ld. CIT(A) erred in deleting the Transfer Pricing downward adjustment of Rs.6,21,04,748/- on account of royalty payment fees for the A.Y. 2014-15. 2.1 The Ld. CIT(A) erred in taking the increase in turnover of the company year on year as a justification of royalty paid by the company to the extent of Rs.6.21 crore and taking cognizance of finding of the TPO that the technology for which royalty was paid was developed in house by Global Software Centre of the assessee which was well equipped in terms of personnel and resources. 2.2 The Ld. CIT(A) erred in assuming that the royalty is for use of brand name and not for technical know-how whereas Royalty payment was
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made by the assessee only for access to technical know-how and not for brand name.”
The Assessee has raised the following five grounds, as
under:
“1. The Ld. CIT(A) after having specifically noted that the "Assessee has filed detailed justification for payment of royalty to its parent company" went wrong in summarily passing the order, fixing royalty at an adhoc rate of 1%
The Ld. CIT(A) grossly erred in not appreciating the business model of the Assessee and in wrongly concluding that "the technology contribution of Kone Finland to Kone India would be extremely negligible".
The Ld CIT(A) erred in reclassifying, without any basis, the payment towards 'Know-how Licensing and Technical Assistance' as payment towards brand name.
The Ld. CIT(A) after having specifically noted that "the setting up of Global Software Centre for the provision of Design and IT services by the assessee to the Group" failed to appreciate that the TPO erred in comparing royalty payment in respect of right to use the know-how provided for the manufacture, installation and maintenance of the elevators with the above Design and IT services especially when its income is assessed to tax as an independent transaction.
The Ld. CIT(A) erred in unilaterally reclassifying royalty payment for utilization of the brand name @ an ad hoc rate of 1 % of net sales without applying any Transfer Pricing norms, when we used CUP method and TNMM method confirming arm's length price.”
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The brief facts of the case are that the Assessee
Company is in the business of manufacture and sale of
elevators and escalators. The Assessee Company also has a
software development division to cater to the software service
requirements of its sister concerns and holding company. The
Assessee is an Indian subsidiary of M/s. Kone Corporation,
Finland. The Assessee had claimed a payment of royalty fees to
its holding company to the extent of Rs.31,05,23,739/-. This
royalty payment was subjected to Transfer Pricing study. The
Assessee had justified this royalty payment computed at 5% of
the net sales achieved by the Assessee during the year. The
Assessee had further justified the royalty payment in return for
intellectual property rights received, ‘Kone’ Brand name utilized
and for other design services received from its holding
company. The Assessing Officer disputed the requirement of
royalty payment by the Assessee to its principal. The Assessing
Officer / Transfer Pricing Officer disregarded the Transactional
Net Margin Method [TNMM] for claiming reasonableness of the
royalty paid for the year.
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The Transfer Pricing Officer [TPO] rejected the
contention of the Assessee and arrived at ‘NIL’ Arm's Length
Price [ALP] for the royalty. Aggrieved, the Assessee preferred
an appeal before the CIT(A).
The CIT(A) after considering the segmental statement
of the Revenue and the profit earned over the years, estimated
the adhoc payment of royalty for utilization of the brand name
at 1% of the net sales by observing in paragraph nos.8 & 9, as
under:
“8. As above, it is seen that the Revenue in the business of elevators and escalators has increased from Rs.615 crores in the Assessment Year 2010- 2011 to Rs.1091 crores in the Assessment Year 2014-2015. The Assessee had claimed a royalty payment of 3% of the net sales of all these years. This has not been increased to 5% of the net sales. The Assessee has filed detailed justification for payment of royalty to its parent company. The TPO / Assessing Officer have considered the business existence of the Assessee in India for more than a decade and the setting up of the Global Software Centre by the Assessee in India to cater to the software related requirements of the group. It is further seen that the technology for elevators and escalators has been in existence for more than half a century. The elevators and escalators installed by M/s. Kone India are typically of 3 to 5 storeys. There has been substantial progress made in the elevator technology. There have been fast moving elevators which can take a passenger over 50 to 100 floors in a matter of seconds. However, India has been lagging in the absorption of this technology. Less than 1% of the elevators installed in India would be for moiré than
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10 floors. A large number of the elevators would be for low rise buildings of Ground + 3 floors. The elevator technology required for this has been available world over for more than 50 years. As such, the technology contribution of Kone Finland to Kone India would be extremely negligible.
The Assessee can claim some merit in its desire to pay for the ‘Kone’ brand name. This internationally renowned brand name is expected to help the Assessee in procuring orders as well as for the brand recall. The Assessee would be justified in claiming some amount of payment to its parent company for using the brand name. However, it is seen that the revenue of the company has increased by a substantive number in the last one decade. In fact, there has been a tenfold increase in the turnover achieved by the Assessee as well as the profit generated. As per the international best practices, the royalty payment for utilization of the brand name should not cross 0.5 to 1% of the net sales. The revenue should also keep in mind the possibility of base erosion and profit shifting on account of the payment of any high amount of royalty by the Indian company to its principal abroad. Taking a reasonable and comparative basis, the royalty payment by the Indian subsidiary is allowed at 1% of the net sales. The Assessing Officer is directed to allow royalty payment at Rs.6,21,04,748/- and the downward adjustment of royalty payment to the extent of Rs.24,84,18,997/- is upheld. The grounds are partly allowed.”
Aggrieved, the Assessee as well as the Revenue are in
appeal before the Tribunal. The Assessee is against restricting
the payment at 1% while the Revenue is against allowing the
payment by the CIT(A) at 1%.
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Now before us, the learned Counsel for the Assessee
had filed a petition for admission of the additional evidences
stating that the Assessee has preferred the present appeal
against the order of the Commissioner of Income Tax (Appeals)
dated 17.10.2019 partly allowing the appeal. During the
relevant Assessment Year, the Assessee had made a royalty
payment of 5% of net sales of contracted products on domestic
sales and 8% of the net sales of contracted products on
exports. However the Transfer Pricing Officer determined Arms-
Length Price of Royalty at ‘NIL’. On appeal, the Commissioner of
Income Tax (Appeals) allowed royalty at 1% of net sales for
utilization of the brand name. The Assessee has entered into a
Unilateral Advance Pricing Agreement (hereinafter referred to as
the Agreement) u/s 92CC of the Income Tax Act, 1961 with the
Central Board of Direct Taxes [CBDT] for the previous years
2016-2017 to 2020-2021 relevant to Assessment years 2017-
2018 to 2021-2022.
7.1 As per the Agreement the Arm's Length Price of the
transaction relating to payment of royalty for use of technology
shall be an amount less than or equal to 6% of the net sales
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and the Arm's Length Price of the transaction relating to
payment of royalty for use of trademark shall be an amount less
than or equal to 1% of net sales. The Agreement entered into
by CBDT has considered all the aspects of the manner of
determination of Arm's Length Price which are similar for this
Assessment Year also. Thus, it is imperative to consider this
Agreement while determining the Arm's Length Price for this
Assessment Year. Since the Agreement was entered into on
31.12.2020, the relevant documentary evidence could not be
produced before the Transfer Pricing Officer or the Assessing
Officer and/or the Commissioner of Income Tax (Appeals). The
non-production of the said documents before the lower
authorities were neither wilful nor wanton, but only due to the
reason stated above.
In view of the above, the learned Counsel for the
Assessee sought for admission of the additional evidences, i.e.
Unilateral Advance Pricing Agreement between the Assessee
and the Central Board of Direct Taxes [CBDT] which is in the
Assessee’s paper-book at pages 557 to 618. The learned
Counsel for the Assessee drew our attention to the Unilateral
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Advance Pricing Agreement entered u/s.92CC of the Act and he
took us through the relevant Clause – 3, ‘Covered
Transaction(s)’ which reads as under:
“3. Covered Transaction(s):
The International transactions of:
A. Payment of royalty for use of technology and trademarks;
B. Provision of software development services and provision of engineering design services; (hereinafter collectively called as “ITEC Services”)
C. Provision of shared support services; and
D. Reimbursement of expenses received / paid between the Applicant and its AEs shall be the covered transactions for the Agreement and this Agreement shall apply to these international transactions only.”
The learned Counsel for the Assessee also took us through
the Arm’s Length Price accepted in regard to the royalty at 6%
and he referred to the following Clause – 6, as under:
“6. Arm’s Length Price:
The Arm’s length price (hereinafter referred to as “ALP” of the covered transactions shall be :
i. The ALP of the covered transaction of payment of royalty for use of technology shall be an amount less than or equal to 6% of the net sales. ii. The ALP of the covered transaction of payment of royalty for use of trademark
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shall be an amount less than or equal to 1% of the net sales. iii. The ALP of the covered transactions of provision of software development services shall be a net operating profit margin of not less than 20%. iv. The determination of ALP for the assessment years 2017-2018, 2018- 2019 and 2019-2020 is subject to the condition that the ALP would get modified to the extent that it does not result in reducing the total income or increasing the total loss, as the case may be, of the Applicant as already declared in the returns of income for the said assessment years.”
The learned Counsel for the Assessee stated that after
admitting these evidences, i.e. Unilateral Advance Pricing
Agreement, the matter can be referred back to the Transfer
Pricing Officer and the Assessing Officer for re-adjudicating the
issue in view of the Unilateral Advance Pricing Agreement
entered by the Assessee for the Assessment Years 2017-2018
to 2021-2022. The learned Counsel for the Assessee drew our
attention to a similar proposition dealt with by the Tribunal in
the case of M/s. Lotus Footwear Enterprises Limited (India
Branch), Tiruvannamalai District Vs. The Deputy Commissioner
of Income Tax, Chennai [I.T.A. Nos.779/Mds/2014, I.T.A.
Nos.801/Mds/2015 & 810/Mds/2016; Assessment Years: 2009-
10, 2010-11 & 2011-12; order dated 21st September, 2016];
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wherein the Tribunal has remitted the matter back to the
Assessing Officer / Transfer Pricing Officer for considering
afresh. The relevant findings of the Chennai Bench order in the
case of M/s. Lotus Footwear Enterprises Limited [India Branch]
(supra) reads as under:
“5. We have considered the contentions. In our opinion, the APA has considerable bearing for the years under appeal, since prima facie, the rollback of four years which went to assessment year 2011- 12, was curtailed to three years. Obviously, the curtailment was allowed in the APA after considering the submissions of the assessee that it had become a contract manufacturer only in financial year 2010-11 pursuant to labour upheaval. Ld TPO in the orders for all the impugned assessment years had considered assessee to be a contract manufacturer and in his order for assessment year 2009-10, this is specifically mentioned at page 69 of the order. Nature of business of the assessee would have considerable bearing on the Arm's Length Pricing study of the international transactions with its AEs. The APA having been signed on 24.5.2016, assessee had no occasion to produce it before lower authorities. We are, therefore, of the opinion that the additional evidence has to be admitted. We, therefore, admit the additional evidence, set aside the orders of the lower authorities and remit all the issues back to the Assessing Officer/TPO for consideration afresh in accordance with law. Needless to say all the pleadings taken by the assessee shall remain open.”
Similar proposition was dealt by the Hon’ble Delhi High Court
in the case of Principal Commissioner of Income Tax, Delhi Vs.
Ameriprise India Private Limited in ITA 206/2016, order dated
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23.03.2016; wherein the Hon’ble Delhi High Court went to the
extent that the Advance Pricing Agreement entered between the
Assessee and the Central Board of Direct Taxes [CBDT]
u/s.92CC of the Act on 22.01.2016 will apply for the
Assessment Year 2009-2010.
When these authorities were put up before the learned
CIT-DR, he could not confront on the above factual situation but
had opposed to remit the matter back to the file of the
Assessing Officer / Transfer Pricing Officer.
After hearing the rival contentions and on going through
the facts and circumstances of the case, we are of the view that
let this matter be examined afresh for determining the payment
of royalty in terms of the Advance Pricing Agreement entered
into between the Assessee and the Central Board of Direct
Taxes for the Assessment Years 2017-2018 to 2021-2022. The
Assessing Officer will examine the facts for this Assessment
Year, as to whether the Assessee had entered into an Advance
Pricing Agreement and that the facts of the present year and
accordingly will decide the issue as per the provisions of law. In
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terms of the above, we remit the issue back to the file of the
Assessing Officer / Transfer Pricing Officer to re-decide the issue
after giving a reasonable opportunity of hearing to the
Assessee. Thus, the orders of the lower authorities, i.e. CIT(A)
as well as the Assessing Officer and the Transfer Pricing Officer
are set aside as the matter is being remitted back.
In the result, both the appeals of the Assessee as well
as the Revenue are allowed for statistical purposes. Order pronounced in the court on 11th July, 2022 at Chennai. Sd/- Sd/- (महावीर िसंह ) (मनोज कुमार अ�वाल) (MAHAVIR SINGH) (MANOJ KUMAR AGGARWAL) उपा�य� /VICE PRESIDENT लेखा सद�य/ACCOUNTANT MEMBER
चे�ई/Chennai, �दनांक/Dated, the 11th July, 2022 IA, Sr. PS आदेशकी�ितिलिपअ�ेिषत/Copy to: 1. अपीलाथ�/Appellant 2. ��थ�/Respondent 3. आयकरआयु� (अपील)/CIT(A) 4. आयकरआयु�/CIT 5. िवभागीय�ितिनिध/DR 6. गाड"फाईल/GF