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Income Tax Appellate Tribunal, MUMBAI BENCHES “K”, MUMBAI
Before: SHRI G.S. PANNU (VP) & SHRI RAM LAL NEGI (JM)
O R D E R
PER RAM LAL NEGI, JM
The assessee has filed the present appeal against the assessment order passed by the AO pursuant to the directions dated 21.08.2013 passed by the Ld. Dispute Resolution Panel-1 (for short ‘the DRP) Mumbai, under section 144C (5) of the Income Tax Act, 1961 (for short ‘the Act’) pertaining to the assessment year 2009-10.
The brief facts of the case are that the assessee company engaged in the business of manufacturing and trading in pesticides, Agro Chemicals and Seeds, filed its return of income for the assessment year under consideration declaring the total taxable income of Rs. 80,26,96,315/- along with Return of Investment (ROI) and Accountant’s Reports in accordance with the provisions of section 92E of the Act, reporting the particulars of international transactions 2 Assessment Year: 2009-10 with its Associated Enterprises (AEs). During the course of assessment proceedings, the AO referred the issue relating to international transactions entered into by the assessee to the Transfer Pricing Officer (TPO) u/s 92CA (1) of the Act in order to determine the arm’s length price. The Ld. TPO passed order u/s 92CA (3) of the Act proposing an adjustment of Rs. 61,37,905/- on payment of royalty for use of technical know-how on the ground that the royalty payment made by the assessee to its AE is excessive vis-à-vis royalty payment made by another group enterprise to the same AE. The assessee filed objections before the Ld. DRP, along with Form No. 35-A in respect of the additions proposed to be made by the Ld. TPO in the draft order, inter alia on the grounds that the Ld. AO has erred in considering the lease payments of Rs. 2,95,243/- made to IBM as capital expenditure and the Ld. TPO has wrongly made an adjustment of Rs. 61,37,905/- u/s 92CA(3) of the Act on account of adjustment in arm’s length price of international transactions in respect of payment of royalty made by the assessee. The Ld. DRP decided the issue regarding the lease payment against the assessee by following the direction of the Ld. DRP passed in the assessee’s own case for the AY 2008-09. Similarly, the Ld. DRP confirmed the transfer pricing adjustment proposed by the Ld. TPO holding that the assessee has failed to discharge its onus to show that any outside comparable is available and has merely taken TNMM as MAM. The assessee is in appeal against the assessment order passed by the AO pursuant to the directions passed by the Ld. DRP.
3. The assessee has preferred this appeal before the Tribunal on the following effective grounds:- 1. “On the facts and in the circumstances of the case and in law, the learned Assessing Officer erred in considering lease payments of Rs. 295,243 to IBM as capital expenditure.
2. On the facts and circumstances of the case and in law, the learned Assessing Officer, pursuant to the order of the learned Deputy Commissioner of Income-tax, Transfer Pricing (‘TPO’) has erred in making an adjustment of Rs. 6,137,905 to the total income of the Appellant under Section 92CA (3) of the Act on account of 3 Assessment Year: 2009-10 adjustment in the arm’s length price of the international transaction of payment of royalty.
On the facts and circumstances of the case in law, the learned Assessing Officer/learned TPO erred in not accepting the economic analysis undertaken by the Appellant including the analysis using the Transactional Net Margin Method (‘TNMM’) in accordance with the provisions of the Act read with the Income-tax Rules, 1962 (‘the Rules’) for the determination of the arm’s length price of the international transaction of payment of royalty.
4. The learned Assessing Officer/learned TPO erred in comparing the rate of royalty paid by the Appellant to its AE, Dow Netherlands with the royalty rate paid by Dow UK, another AE of the Appellant to Dow Netherlands which is a ‘controlled transaction’ and which defeats the very purpose of undertaking the transfer pricing analysis.
5. The learned Assessing Officer/ learned TPO erred in disregarding the functional differences in the transactions proposed to be treated as comparable transactions.
The learned Assessing Officer erred in charging excess interest under section 234C of the Act.
7. The learned Assessing Officer erred in law and on facts in initiating penalty proceedings under section 271 (1) (c) of the Act without appreciating the fact that the Appellant has neither concealed nor furnished any inaccurate particulars of income.”
The first issue raised by the assessee relates to disallowance of lease rental paid to IBM for taking computers on lease to the tune of Rs. 2,95,243/-. The assessee company claimed interest portion as expenditure, however, treated the same as operating lease and accordingly claimed entire lease rentals paid by it as revenue expenditure. The revenue officer after hearing the assessee treated the nature of lease as financial lease and disallowed the claim for deduction of principle portion of the lease rental. The Ld. DRP confirmed the findings of the AO.
The Ld. counsel for the assessee submitted before us that the ITAT has dealt with the identical issue in the assessee’s own appeals ITA NO. 7459/Mum/2010 and ITA No. 7695/Mum/2012 for the AYs 2005-06, 2006-07 and 2008-09 respectively and the Tribunal restore 4 Assessment Year: 2009-10 the issue to the file of Assessing Officer to decide the issue afresh after examining the lease agreement in order to ascertain the nature of lease and to take an appropriate decision in accordance with law. Accordingly, the Ld. counsel for the assessee submitted that the issue may be restored to the file of AO for fresh adjudication in terms of the order of the ITAT passed in the assessee’s own case for the earlier years referred above. On the other hand, the Ld. Departmental Representative (DR) did not controvert the submissions made by the Ld. counsel for the assessee, however, supported the assessment order passed by the AO pursuant to the directions of the Ld. DRP. 6. We have gone through the relevant material on record including the order relied upon by the Ld. counsel for the assessee in the light of the rival submissions of the parties. As pointed out by the Ld. counsel for the assessee, the coordinate Bench has dealt with the identical issue raised by the assessee in its appeal for the assessment years 2005-06, 2006-07 and 2008-09 and the coordinate Bench has restored the issue to the file of AO with the direction to examine the lease agreement in order to ascertain the nature of lease and take an appropriate decision in accordance with law. The operative part of the order of the coordinate Bench is reproduced as under:-
6. We have heard the rival contentions and perused the record. As submitted by learned AR, the coordinate Bench of the Tribunal has considered the issue and restored the same to the file of the Assessing Officer with the direction to examine the lease agreement in order to ascertain as to whether lease agreement entered by the assessee is in the nature of financial lease or operating lease. In the instant case also the lease agreement was not examined by the tax authorities. Proper examination will throw light about the nature of lease, which would decide the manner of treatment of lease rental. Accordingly, consistent with the view taken in the case of Dow Chemical International Pvt. Ltd. (supra), we set aside the order passed by learned CIT (A) on this issue and restore the same to the file of the Assessing Officer with the direction to examine the lease agreement in order to ascertain 5 Assessment Year: 2009-10 the nature of lease and take appropriate decision in accordance with law, after affording adequate opportunity of being heard to the assessee.
Since, the coordinate Bench has restored the identical issue to the file of the AO for deciding the same afresh in assessee’s own appeals for the earlier years vide common order dated 20.09.2016 and since the revenue has not brought on record any material change in the facts of the present case, we respectfully following the decision of the coordinate Bench restore this issue to the file of Assessing Officer with the direction to examine the lease agreement in order to ascertain the nature of lease and take an appropriate decision in accordance with law after affording a reasonable opportunity of being heard to the assessee in terms of the order dated 20.09.2016 passed by the coordinate Bench in the assessee’s appeals discussed above.
Vide Ground No. 2 to 5, the assessee has challenged the transfer pricing adjustment made on payment of royalty. The assessee company had entered into a Process Technology Agreement and supplementary agreement with Dow Agrosciences BV (earlier Dow Elanco BV) (Dow Netherlands) to receive a non assignable, non exclusive license to use the process utilizing technology as its manufacturing plant to manufacture the products, use and sell the products and product formulation made from such product in India and export the product and product formulation. The assessee during the previous year has paid royalty @ 5% on domestic sales and 8% on export sales to its AE M/s Dow Netherland. It was noticed that M/s Dow UK has paid the royalty to Dow Netherlands @ 3% on domestic sales and 5% on export sales. Accordingly, the Ld. TPO made the transfer pricing adjustment by adopting rate of 3% and 5% paid by Dow UK. The Ld. counsel for the assessee submitted that identical issue has been dealt with by the Mumbai Bench of the Tribunal in assesee’s own appeals AY 2005-06, ITA No. 7459/Mum/2010, AY 2006-07 and ITA No. 7595/Mum/2012, AY 2008-09 and the Tribunal deleted the transfer pricing adjustment by following the decision of the coordinate Bench in assessee’s own appeal ITA No. 1443/Mum/2011 6 Assessment Year: 2009-10 pertaining to the AY 2004-05. The Ld. counsel for the assessee submitted that since the issue involved in the present case is covered by the order of the Tribunal and since there is no change in the facts of the present case, the transfer pricing adjustment confirmed by the Ld. DRP may be deleted. On the other hand, the Ld. DR did not dispute the factual aspect submitted by the Ld. counsel for the assessee, however, strongly supported the action of the Ld. TPO confirmed by the Ld. DRP.
We have heard the rival submissions and also gone through the entire material on record including the order of the Tribunal relied upon by the Ld. counsel for the assessee. As pointed out by the Ld. counsel, the coordinate Bench of the Tribunal has decided the identical issue in favour of the assessee in the assesse’s own appeal for the AY 2005-06, 2006-07 and 2008-09 by following the decision of the coordinate Bench rendered in the assessee’s own case for the AY 2004-05. The findings of the coordinate Bench read as under:-
“13. We have heard the parties on this issue. We notice that the identical issue was considered by the Coordinate Bench in assessee’s own case for A.Y. 2004-05 (supra) and the same has been decided in favour of the assessee. For the sake of convenience we extract below relevant observations made by the coordinate Bench for A.Y. 2004-05:
“7.1 In order to appreciate the aforesaid, the following discussion is relevant. The royalty paid by the assessee to its associated enterprise i.e. Dow Netherlands has been approved by the Secretariat of Industrial Approval (SIA), Ministry of Industry(Government of India) vide communication dated 07/09/1996 and also by the Reserve Bank of India dated 11/03/1997. Before us, a reference has also been made to Paper Book, wherein the aforesaid communications have been placed as also a communication SIA dated 22/1/1997, which is in continuation to its earlier approval dated 17/09/1996. In terms of such approvals, assessee is permitted to pay its foreign collaborator i.e. Dow Netherlands, royalty @ 5% on domestic sales and 8% on 7 Assessment Year: 2009-10 export sales. In this background, before the TPO assessee asserted that since royalty was paid in terms of the approvals by the Central Government, the payment of royalty was at arm's length rate. In other words, the rate of royalty approved by the Central Government was used as a reliable data for benchmarking the transaction of payment of royalty. In this manner, assessee adopted the Comparable Uncontrolled Price (CUP) method as the most appropriate method to benchmark its international transaction of royalty and the rate approved by the Central Government was used as a reliable CUP data. Similar was the position taken by the assessee in assessment year 2003-04. Apart there-from, assessee had also canvassed that even after application of the Transactional Net Margin Method (TNMM) to test the arm's length nature of its transaction of payment of royalty, no adjustment was necessitated. Be that as it may, the TPO noted that another associate enterprise of the assessee namely, UK King Lynns Plant (in short 'Dow UK') was also paying royalty to Dow Netherlands, which was at lower rates. Based on the above, the TPO determined that the royalty paid by Dow UK was a comparable transaction and accordingly determined the arm's length royalty payment at 3% for domestic as well as 5% for gross export sale, which were the rates at which royalty was paid by DOW UK to DOW Netherlands. In assessment year 2003-04 as also in the instant assessment year, assessee had challenged the aforesaid action of the Transfer Pricing Officer. Firstly, it was canvassed that the rate of royalty payments having been approved by the Government of India, such rates constitute a valid CUP data and no further adjustment was required to the stated value of the royalties paid. Secondly, Ld. Representative for the assessee also pointed out that the comparable transaction adopted by the Transfer Pricing Officer i.e. payment of royalty by Dow UK to Dow Netherlands was a wrong approach inasmuch as comparison could be made only with an uncontrolled transaction, whereas in the case of Dow UK and Dow Netherlands, both were associate enterprises and, therefore, payment of royalty by DOW UK to DOW Netherlands was a controlled transaction and accordingly, the same could not be 8 Assessment Year: 2009-10 considered as a valid CUP data. In so far as the latter plea of adoption of controlled transaction was concerned, the CIT(A) in assessment year 2002-03 has accepted the plea of the assessee. However, with regard to the plea of the assessee based on the rate of royalty approved by the Central Government is concerned, the CIT(A) rejected the same as according to him, such rates could not be considered as valid CUP data. The CIT(A) had however, allowed relief by benchmarking royalty payment under the TNMM whereby, the margins from the manufacturing activities of the assessee were found to be favourable vis-à-vis those of the comparables concerns. The Tribunal in assessment year 2003-04 upheld the ultimate conclusion of the CIT(A) to delete the addition on the ground that the basis on which the royalty was paid by the Dow UK to Dow Netherlands was different than that was paid by assessee to Dow Netherlands in as much as Dow UK was paying royalty as a percentage of gross sales, whereas assessee was paying royalty at net sales, in accordance with Foreign Exchange Control Regulations. The Tribunal found that if the royalty payable was calculated by adopting the same basis, then the royalty being paid by Dow UK was higher than what has been paid by assessee company to Dow Netherlands and, thus, the royalty paid by the assessee was at an arm's length rate, and no adjustment was required. On this basis, the Tribunal affirmed the order of the CIT(A) deleting the addition in assessment year 2003-04. 7.2 Now in the present year, the case of the assessee is that the plea that rate of royalty' approved by the Central Government as also by the Reserve Bank of India constitutes a valid CUP data has been affirmed by the Hon’ble Bombay High Court in the case of CIT vs. SGS India Pvt. Ltd., of 2013 dated 18/11/2015. In this context, the Ld. Representative for the assessee pointed out that before the Hon'ble High Court, the Revenue had relied upon Press Note No.9 (2000 series) issued by Central Government for adopting the rates of royalty prescribed therein for benchmarking royalty payable. In this context, reference was made to para 8 of the order of the Hon'ble High Court, wherein clause(IV) of the Press Note was specifically noted, 9 Assessment Year: 2009-10 which provided for payment of royalty upto 8% on export sales and 5% on domestic sales. The Ld. Representative for the assessee explained that though clause (IV) of Press Note No.9 (2000 series) considered by the Hon'ble High Court related to payment of royalty by a wholly owned subsidiary to its offshore parent company, but similar treatment has been extended even to other entities also vide A.P.(DIR Series) Circular No.5 dated 21/7/2003 issued by Reserve Bank of India, Exchange Control Department, Central Office, Mumbai, a copy of which has been placed on record. The Ld. Representative for the assessee pointed out that before the Hon'ble High Court, Revenue stated the Press Note No.9 (2000 series) dated 08/09/2000 was applicable to examine the reasonableness of the royalty paid while computing the arm's length price. 7.3 On the basis of aforesaid it is canvassed that the royalties paid by the assessee are in terms of the approval granted by SIA as also in terms of Circular No.5 dated 21/7/2003(supra) of the Reserve Bank of India and, therefore the royalty paid @ 8% on export sand 5% on domestic sales are to be considered at arm’s length rate. 7.4 Although the learned Departmental Representative did not dispute the factual matrix, but he has merely relied upon the order of the TPO in support of the case of the Revenue. 7.5 In our considered opinion, following the judgment of Hon'ble Bombay High Court in the case of SGS India Ltd. (supra), the payment of royalty by the assessee to its associated enterprises, Dow Netherlands @ 5% on domestic sales and 8% on export sales is liable to be considered as at an arm’s length rate in view of the Circular No. 5 dated 21/7/2003 (supra). Therefore, the addition made by the Assessing Officer on this count is unsustainable. In the ultimate analysis, we uphold the action of the CIT(A) in deleting the addition, albeit, on a different ground.
Consistent with the view taken in AY 2004-05, we direct the Assessing Officer to delete the addition made on account of transfer pricing adjustment.”
10 Assessment Year: 2009-10
The coordinate Bench has decided the identical issue in favour of the assessee in the assessee’s own case for the earlier assessment years discussed above. Since, there is no material change in the facts of the present case, we respectfully following the decision of the coordinate Bench dated 20.09.2016 rendered in the assessee’s appeals discussed above, allow this ground of appeal
and set aside the findings of the AO confirmed by the Ld. DRP. Accordingly, we direct the AO to delete the addition made on account of transfer pricing adjustment.
11. Vide Ground No. 6, the assessee company has challenged the assessment order on the ground that AO has erred in charging excess interest u/s 234C of the Act. Since, this ground is consequential, we do not deem it necessary to adjudicate the same at this stage. Hence, we restore this issue to the file of AO for deciding the same in by taking into consideration the contention of the assessee.
12. Vide Ground No. 7, the assessee has challenged the order of initiation of penalty proceedings u/s 271 (1) (c) of the Act on the ground that the assessee has neither concealed its income nor furnished inaccurate particulars of its income. Since, this ground of appeal is premature, the same does not require adjudication at this stage. In the result, appeal filed by the assessee for assessment year 2009- 2010 is partly allowed. Order pronounced in the open court on 13th August, 2019. (G.S. PANNU) (RAM LAL NEGI) VICE PRESIDENT JUDICIAL MEMBER म ुंबई Mumbai; दिन ुंक Dated: /08/2019 Alindra, PS आदेश प्रतितिति अग्रेतिि/Copy of the Order forwarded to : 1. अपील र्थी / The Appellant 2. प्रत्यर्थी / The Respondent.
11 Assessment Year: 2009-10