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Income Tax Appellate Tribunal, PUNE BENCH “B”, PUNE
आदेश / ORDER
PER SUSHMA CHOWLA, JM:
The appeal filed by assessee is against order of ACIT, Circle-10, Pune, dated 28.11.2016 relating to assessment year 2012-13 passed under section 143(3) r.w.s. 144C(13) of the Income-tax Act, 1961 (in short ‘the Act’).
The assessee has raised the following grounds of appeal:-
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On the facts and the circumstances of the case and in Law: 1. Against the Transfer Pricing (TP) adjustment Ground of appeal 1 1. The learned DRP and A.O. erred in proposing to confirm upward adjustment of Rs.18,56,30,048/- to the Arm's Length Price (ALP) of the international transaction of royalty paid by the appellant to its Associated Enterprise/s (A.E.) consequent to the order made under Section 92 CA (3) of the Income Tax Act, 1961 by the Additional Commissioner of Income Tax Transfer Pricing Officer -11, Pune (TPO). 2. The learned DRP and AO erred in confirming the adjustment to the transacted value of royalty which had arisen as a consequence of the ALP of royalty determined at nil by the learned TPO by following the order for the preceding A.Y. 2011-12 without appreciating that identical issue had come up before the DRP for the preceding A.Y. 2011-12 and before the Honourable CIT Appeals for the A.Y. 2010-11 and on the backdrop of identical set of facts in respect of the same royalty the upward adjustment made to the royalty were deleted in both the years. 3. The learned DRP in confirming the upward adjustment to the royalty erred in deviating from its own directions issued for the preceding assessment year in appellant’s own case in respect of the same continued agreement for royalty. (Para 2.14 Page 13 of DRP order) 4. The learned DRP and the AO erred in not appreciating the fact that the royalty paid to the A.E. pursuant to Technology Licensing agreement was for use of new and latest licensed technology comprising of technical know-how, information and technical assistance developed during the term of the agreement for the manufacture of new models of light axles, propeller shafts and components thereof and was wholly and exclusively for the legitimate needs of the appellant's business. 5. The learned DRP and the AO failed to appreciate that learned TPO had erred in exceeding the jurisdiction by judging the royalty payments through benefit test, which is not based on any of the method applicable to the relevant previous year as per Section 92C of the Income Tax Act 1961. The learned TPO failed to appreciate that the royalty agreement with AE had resulted into a bundle of benefits viz. know how, technical upgradation, brand, quality testing, product improvements and improvisation, access to global technical information and collaboration and assistance to the appellant and substantial savings in terms of improved productivity, better utilisation of material, manpower and machines over the period. 6. The learned DRP and the AO failed to appreciate that the Appellant had referred to and compared the rates of royalty paid to the AE with that of external uncontrolled comparable's viz. Federal Mogul, Climate Systems India Ltd., Sona Okegawa Precision Forgings Ltd., Eicher Motors Ltd., Swaraj Engines Ltd., Pragya Tools Ltd. that were in the similar business of manufacture of auto components and royalty was paid in those cases for transfer of technical know-how and assistance. 7. The learned DRP and the AO erred in not appreciating that the appellant had paid royalty of 2.85% of net domestic sales pursuant to the SIA approval taken initially and through Automatic Approval of
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Reserve Bank of India for the use of technology and therefore such royalty paid was consistent with the prescribed rates of royalty laid down in the said approvals and therefore at ALP. The learned TPO erred in not appreciating that CUP method in the light of the attendant facts and the circumstances was appropriate method for benchmarking the Arm's Length Price (ALP) of the royalty. 8. Without prejudice to the above said grounds Your appellant's grievance is that the learned DRP and the AO failed to appreciate that said royalty could not be examined on standalone basis divorced from the production and sales where royalty is inextricably linked with the said activities. The DRP and AO further erred in not appreciating the fact that an element of cost of production and sales the royalty had been subsumed in the operating expenses and the operating profit used in the PLI working of OP to Sales and the said operating profit margin was found to be comparable with the mean PLI of external uncontrolled comparable's and consistent with ALP principle and therefore accepted by the TPO under TNMM in benchmarking the international transactions at the entity level. It is prayed that the upward adjustment made to the ALP of the royalty be deleted. 11. Non-TP Corporate issues Ground of Appeal 2: The learned DRP and the AO erred in confirming the disallowance of the entire amount of fees for business support services termed management fees Rs.18,56,30,048/- paid for the various services provided to the appellant by the Indian group co-venturer company. The learned DRP and the AO failed to appreciate that the A.O. in his draft order had erred in questioning the necessity of payment of fees and drew adverse inferences by discrediting the comprehensive documentary evidences furnished before him in substantiation of the appellant's claim of the actual receipt of such services wholly and exclusively and for the legitimate business purposes. The learned DRP and the AO failed to appreciate that learned A.O. in making disallowance of the fees in his draft order had failed to appreciate that the criteria adopted by him in disallowing the entire expenses were not at all relevant and applicable to invoke the provisions of Section 37. It is prayed that the disallowance of the service fees be deleted. Ground of Appeal 3: The learned DRP and the AO erred in confirming the disallowance Rs.56,00,000/- made by the A.O. in his draft order though the warranty provision made in the preceding year/s had been allowed to the appellant on the backdrop of same set of facts. The learned DRP and the AO failed to appreciate that the AO in his draft order had erred in disallowing the said amount of warranty provision allegedly on the ground that the said amount represented provision for unforeseen liability. It is prayed that the disallowance of warranty provision be deleted.
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Ground of Appeal 4: The learned DRP and the AO erred in confirming the disallowance made by the A.O. in his draft order wherein the learned AO in his draft order had not dealt with the claim of the appellant for deduction of the amount of contribution paid as the employer to the employees' superannuation and gratuity funds the approval in respect of which was received from the learned CIT, Akurdi Pune after the due date by which return of income was furnished by the appellant but with retrospective effect from A.Y. 1998-99 for superannuation trust and A.Y. 2001-02 for the Gratuity trust. It is prayed that the employer's contribution to the approved superannuation and gratuity funds Rs.92,03,983/- be allowed to the appellant for the impugned A.Y. 2012-13.
The learned Authorized Representative for the assessee at the outset pointed out that the issues raised in the present appeal are squarely covered by the orders of Tribunal in assessee’s own case starting from assessment year 2009-10 to 2011-12. The learned Authorized Representative for the assessee thereafter, took us through four issues raised in the present appeal and brought to our notice how the same are covered by the orders of Tribunal.
The learned Departmental Representative for the Revenue on the other hand fairly admitted that the Tribunal has decided the issue but vehemently relied on the order/s of Assessing Officer/TPO.
We have heard the rival contentions and perused the record. The first issue raised by assessee vide ground of appeal No.I with sub-grounds of appeal No.1 to 8 is against TP adjustment made of ₹ 18,56,30,048/- in respect of transacted price of royalty paid to associated enterprises. Brief facts relating to the issue are that the assessee was engaged in the business of manufacture and sale of propeller shafts and light axles in the automotive industry segment. The assessee had entered into Technology Licensing Agreement with its associated enterprises AE Dana Corporation USA. Royalty was paid @ 2.85% of net sales by the assessee for the use of licensed technology in the
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manufacture of the said products pursuant to the renewal of the licensing agreement on 30.03.2007 for light axles and 14.06.2008 for propeller shafts, for a period of five years. The Transfer Pricing Officer (TPO) following earlier years, made the aforesaid upward adjustment in the hands of assessee, which was confirmed by Dispute Resolution Panel (DRP) and final assessment order was issued by the Assessing Officer, against which the assessee is in appeal.
We find that similar issue arose before the Tribunal in assessee’s own case for assessment years 2009-10 to 2011-12 in respect of transfer pricing adjustment on account of royalty paid under the Technology Licensing Agreement and the issue has been decided by the Tribunal vide para 50 with order in assessment year 2009-10 in ITA Nos.251/PUN/2014, 1327/PUN/2014 and CO No.06/PUN/2015, dated 10.02.2017 and the said proposition has been followed in assessment year 2010-11 in ITA Nos.1321/PUN/2015 & 1350/PUN/2015, order dated 27.10.2017 and in assessment year 2011-12 in ITA No.376/PUN/2016 & 826/PUN/2016, order dated 09.02.2018. Since the issue has already been decided in favour of assessee and the TPO had made additions following earlier years and also the DRP had confirmed the order of TPO not following its order in earlier years to keep the issue alive, we find no merit in the aforesaid additions. Following the same parity of reasoning as in earlier years, we allow the claim of assessee. Consequently, sub-grounds of appeal No.1 to 8 in ground of appeal No.I are allowed.
Now, coming to sub-ground of appeal No.2 in ground of appeal No.II, where corporate issues have been raised. The first issue raised is against disallowance of management fees of ₹ 18,56,30,048/-. The assessee paid management service fees @ 2.85% of net sales for the receipt of specific
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services for identified and legitimate business needs related to its vital functions viz. HR training, performance appraisal, productivity improvement, value engineering, technical advice, environmental protection, financial budgeting, foreign currency management, etc. The services were provided pursuant to Corporate Services Agreement dated 14.12.2004 entered into with Asia Investments P. Ltd.
The Tribunal in assessee’s own case had allowed the said issue in favour of assessee in assessment year 2009-10 vide para 24 at pages 16 and 17 of the order dated 10.02.2017, which has been followed in assessment years 2010-11 and 2011-12. The said findings of Tribunal in assessment year 2009-10 are as under:- “24. In the facts of the present case, the assessee was paying Royalty to Dana Corporation @ 2.85% and was also paying management fees to AIPL for rendering several types of services at remuneration which was equivalent to the amount of Royalty i.e. 2.85% of sales. The perusal of agreement reflects the nature of services to be provided and the fees to be charged for providing the said services. The majority of support services are being rendered by the said concern to the assessee and the perusal of expenses debited by the assessee reflects that no major expenses have been incurred by the assessee and the benefits flow from AIPL to the assessee. The said benefits were for smooth carrying on of the business by the assessee and were incurred for the purpose of business. The assessee is the best judge to decide the expenditure it needs to incur for smooth carrying on of its business. The Assessing Officer cannot sit in judgment of businessman position in incurring any expenditure. The Hon’ble Supreme Court in Hero Cycles (P) Ltd. Vs. CIT (supra) have applied the ratio laid down by the Apex court in S.A. Builders Ltd. Vs. CIT(A) and another (2007) 288 ITR 1 (SC) and upheld the scope of commercial expediency, wherein it was held that The expression "commercial expediency" is an expression of wide import and includes such expenditure as a prudent businessman incurs for the purpose of business. The expenditure may not have been incurred under any legal obligation, but yet it is allowable as a business expenditure if it was incurred on grounds of commercial expediency. Where there is nexus between the expenditure incurred and the purpose of business, then the revenue cannot put itself in the arm chair of the businessman to decide how much of the expenditure is reasonable. Applying the above said proposition laid down by the Hon’ble Supreme Court, we hold that the expenditure incurred by the assessee on management fees in order to facilitate smooth running of its business is an allowable expenditure in the hands of assessee. Similar expenditure has been allowed in the hands of assessee in preceding year. Another aspect of the issue is that the said management fees is to be taxed in the hands of recipient and even the service tax has been paid by the recipient, evidence of which is placed in the Paper Book. Once the commercial expediency of expenditure is established, then the
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same is to be allowed as business expenditure in the hands of assessee. We hold so. The ground of appeal No.5 raised by the assessee is thus, allowed.”
Since the issue has been covered in favour of assessee and there is no change in factual aspects, we find no merit in the orders of authorities below. Accordingly, we direct the Assessing Officer to delete the addition made on account of disallowance of management service fees. The sub-ground of appeal No.2 in ground of appeal No.II is thus, allowed.
Now, coming to sub-ground of appeal 3 in ground of appeal No.II, which is against disallowance of provision made for warranty of ₹ 56 lakhs, which has been made in the hands of assessee.
Brief facts relating to the issue are that the assessee was engaged in the business of manufacture, assembly and sale of Axles, Propeller Shafts and components thereof that are finally used by the Original Equipment Manufacturers (OEMs) in the manufacture of vehicles in the automotive industry segment. The sale order raised by the customer on assessee to ensure that the Axles, Propeller Shafts and components thereof are fully operational as per the requirements and specifications laid down by the customer and desired performance is given to the customer. The cost of goods sold necessarily include warranty cost. The product/performance warranty period spans 18 months from the date of sale of the products. On the basis of its past experience based on statistical information and technical assessments and review thereof, company creates warranty provision in its books. Since the liability undertaken by the assessee to carry out the repairs, replacements of damaged part of goods sold by it during the warranty period was an existing accrued liability at the time of sale, the same was claimed as a deduction.
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We find that similar issue of claim of provision for warranty had arisen before the Tribunal in assessee’s own case in assessment year 2011-12 (supra) and the Tribunal vide para 8 in turn, relying on the decision of the Apex Court in the case of Rotork Controls India P. Ltd. Vs. CIT reported in 314 ITR 62 (SC), allowed the claim of assessee. The issue raised in the present appeal is similar where the assessee is following systematic manner of creating provision for warranty and there is no change in factual aspects, hence, we find no merit in the orders of authorities below in not allowing the claim of assessee. Accordingly, we direct the Assessing Officer to delete the addition of ₹ 56 lakhs. The sub-ground of appeal No.3 in ground of appeal No.II is thus, allowed.
Now, coming to the last issue of claim of deduction for employer’s contribution to the employees’ superannuation and gratuity funds at ₹ 92,03,983/-. The assessee had applied for approval from the Commissioner of Employees Superannuation Fund and Employees Gratuity Fund. The said approval was sought by the assessee from the Commissioner in respect of group gratuity fund on 01.07.2001 and for employees’ superannuation fund on 31.03.1998. The assessee did not receive the said approval, hence it suo motu disallowed the employer’s contribution to employees’ Superannuation and Gratuity funds of ₹ 92,03,983/- in computing its total income at the time of filing the return of income being contribution paid to funds which were not approved at that point of time. Subsequently, the assessee received approvals from the Commissioner with retrospective effect in respect of Gratuity Fund from assessment year 1998-99 and Superannuation Fund from assessment year 2001-02. The said communications are placed at pages 54 and 55 of Paper Book. Hence, before the DRP it took the plea that the said Contributions paid
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by the assessee, be allowed in its hands. The DRP in view of the ratio laid down by the Hon'ble Supreme Court in Goetze India Ltd Vs CIT (2006) 284 ITR 323 (SC), rejected the claim of assessee and plea of assessee before us is that since the approval of the funds has been given with retrospective effect, then it is entitled to claim the aforesaid deduction for the impugned assessment year. It has been held by various Courts that the decision in the case of Goetze India Ltd Vs CIT (supra) does not impeach on the power of Tribunal under section 254 of the Act to entertain a claim for deduction involving point of law. So, he stated that the said disallowance be allowed. We find merit in the plea of assessee since after respective trusts were created, the approval was sought from the Commissioner in time. However, the said approval was granted later but from retrospective effect. So, once the approval has been given by the Commissioner by passing orders dated 25.11.2014 / 19.11.2014 in respect of Group Gratuity Fund and Employees’ Superannuation Fund, then contribution made by the assessee to the aforesaid funds is to be allowed in its hands as deduction. Accordingly, we hold so and direct the Assessing Officer to allow the same. Hence, sub-ground of appeal No.4 in ground of appeal No.II is thus, allowed.
In the result, the appeal of assessee is allowed.
Order pronounced on this 11th day of December, 2018.
Sd/- Sd/- (ANIL CHATURVEDI) (SUSHMA CHOWLA) ऱेखा सदस्य / ACCOUNTANT MEMBER न्याययक सदस्य / JUDICIAL MEMBER ऩुणे / Pune; ददनाांक Dated : 11th December, 2018. GCVSR
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आदेश की प्रयतलऱपप अग्रेपषत/Copy of the Order is forwarded to : The Appellant; 1. The Respondent; 2. The DRP, Pune; 3. The DIT (TP/IT), Pune; 4. The DR ‘B’, ITAT, Pune; 5. Guard file. 6. आदेशािुसार/ BY ORDER, सत्यापऩत प्रतत //True Copy// वररष्ठ तनजी सचिव / Sr. Private Secretary आयकर अऩीऱीय अचधकरण ,ऩुणे / ITAT, Pune