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Income Tax Appellate Tribunal, DELHI BENCH “I-2”, NEW DELHI
Before: SHRI R. K. PANDA & SHRI KULDIP SINGH
IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH “I-2”, NEW DELHI BEFORE SHRI R. K. PANDA, ACCOUNTANT MEMBER AND SHRI KULDIP SINGH, JUDICIAL MEMBER ITA No.6961/Del/2014 Assessment Year : 2010-11 Lumax Industries Ltd., JCIT, Range- 4, B-85/86, Mayapuri Industrial New Delhi. Vs. Area, Phase-1, New Delhi. PAN : AAACL1126D (Appellant) (Respondent)
Assessee by : Shri Pradeep Dinodia, Adv. Department by : Shri H. K. Choudhary, CIT-DR Date of hearing : 07-09-2017 Date of pronouncement : 05-12-2017
O R D E R PER R. K. PANDA, AM : This appeal filed by the assessee is directed against the order dated 13.11.2014 passed by the Addl.CIT, Range- 4, New Delhi u/s 143(3) r.w.s. 144C(5) of the I.T. Act for the assessment year 2010-11. 2. Facts of the case, in brief, are that the assessee is a manufacturing concern specializing in the automobile lighting business. It deals in various high quality automotive lighting equipments, which include headlamps, tail lamps, auxiliary lamps, sundry lamps and accessories for two wheelers and four wheelers. It filed its return of income on 29.09.2010 declaring total income of Rs.5,22,87,390/-. The Assessing Officer referred the matter to the TPO for determination of the arm’s length price of the international transactions carried
2 ITA No.6961/Del/2014
on by the assessee. The TPO during the course of TP assessment proceedings
observed that the assessee has entered into the following international
transactions during the year :-
S.No. Nature of international transaction Amount (INR) Most appropriate method 1 Purchase of raw material, components, 123,087,886 Transactional Sub-assembly and spare parts Net Margin Method (“TNMM”) 2 Sale of Raw Materials, consumables or 14,855 Comparable any other supplies Uncontrolled Price Method (“CUP”) 3 Purchase of finished goods 855,723 Resale price method (“RPM”) 4 Purchase of Tangible Movable property 4,990,745 TNMM 5 Payment of royalty 91,945,174 CUP/TNMM 6 Design, Drawing & Testing Charges 85,468,409 TNMM 7 Absence fees 42,312,547 TNMM 8 Homologation Charges Received 3,909,318 CUP 9 Reimbursement of Travelling and other 3,545,413 TNMM ancillary expenses 10 Write off debit note issued for air freight 1,160,855 TNMM reimbursement
The TPO accepted all the transactions to be at arm’s length price except
the payment of royalty amounting to Rs.91,945,174/-. The assessee in its TP
study report had used CUP method to benchmark the royalty payment made to
its AE. For application of CUP, the royalty paid by M/s Maruti Suzuki India
Limited during the financial year 2009-10 was adopted as a comparable
uncontrolled transaction. However, the Assessing Officer was not satisfied with
the CUP method followed by the assessee for determination of the arm’s length
price of royalty payment. According to him, the arm’s length rate for payment
of royalty mainly depends on the premium the intangible commands in the
3 ITA No.6961/Del/2014
market, the uniqueness of the intangible and also the period for which the
uniqueness remains. An independent party would determine the royalty rate by
seeing how the uniqueness contributes to its cash flows over the period in which
the uniqueness continues. Beyond the period of uniqueness, the independent
party would not pay royalty even if it gets good profits. In view of the above
and after rejecting the various explanations given by the assessee, the Assessing
Officer rejected the CUP method adopted by the assessee for determination of
the arm’s length price of the international transactions of royalty payment due to
the following reasons :-
“a. External CUP applied by the assessee cannot be taken as a comparable uncontrolled transaction as CUP method requires strict standard of comparability. b. The assessee has not carried a detailed benchmarking analysis detailing the search strategy after applying qualitative/quantitative filters for benchmarking the said transaction. c. Royalty has not been benchmarked appropriately using fundamental principles of transfer pricing. d. The assessee has been unable to show that the transaction of royalty payment is at arm’s length. e. Assessee has in effect stated that the TPO cannot question why transactions are being made. f. However, for the reasons highlighted above, mere production of an agreement without any underlying basis cannot form the sole reason for royalty payment.”
As payment of royalty is a class of transaction of its own the TPO was of
the opinion that it requires separate analysis. Thus for TP study, the royalty
transaction was analyzed by him separately under CUP method. According to
him, the Act does not preclude the TPO to apply appropriate method for each
4 ITA No.6961/Del/2014
class of transactions like payments for intangible in the form of royalty and also
apply TNMM at the enterprise level.
The TPO also did not accept the CUP used by the taxpayer as the
taxpayer compared the payment of royalty with the royalty paid by Maruti
Suzuki Ltd. on the ground that external CUP requires strict standard of
comparability and Maruti Brand cannot be compared on an adhoc basis, because
Maruti was paying royalty for obtaining licence for manufacturing a finished
product i.e. Automobile whereas the taxpayer had obtained a licence for
manufacturing automobile lighting equipment and accessories. The TPO also
held that royalty payment depends on the premium the intangible commands in
the market, the uniqueness of the intangible and also the period for which
uniqueness remains. Since, the taxpayer had not carried a detailed
benchmarking analysis after applying qualitative and quantitative filters and
fundamental principle of transfer pricing, therefore, the taxpayer’s method for
benchmarking was not accepted by the TPO.
Relying on various decisions and rejecting the explanation given by the
assessee, the TPO held that the arm’s length price of the royalty payments by
the taxpayers for using of knowhow is Nil because of the following :-
“1. That taxpayer did not produce any evidence/ documentation on how the royalty rate fixed. At an arm’s length, party receiving technology would like to see the profitability from future revenue streams before fixing a royalty rate. 2. The taxpayer did not produce any cost benefit analysis at the time of entering into the agreement with its AE showing that the royalty rate is not fixed based on expected benefit. 3. There is no proof that the other group concerns or third parties are also charged identical royalty.
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The taxpayer has also not been able to show that it derived any economic benefit from the alleged know how received the AE. 5. The profitability is below the arithmetical mean margin of the comparable companies considered by the TPO. 6. The profit that accrues to the licensee may not arise solely through the engine of the technology. There are returns from the mix of assets it employs such as fixed and working capital and the returns from intangible assets such as distribution systems, trained workforce, etc. Allowance need to be made for them. In the absence of any data provided by the taxpayer, it is impossible to know what percentage of profits the licensee would like to share at an arm’s length after removing the returns from assets employed and other economic factors which may not arise solely through the engine of the technology. 7. The assessee has not carried a detailed benchmarking analysis detailing the search strategy after applying qualitative/quantitative filters for benchmarking the said transaction.”
The TPO accordingly made an upward adjustment of Rs.9,19,45,174/- on
account of payment of royalty u/s 92CA of the I.T. Act. The Assessing Officer
passed the draft assessment order accordingly by making upward adjustment of
Rs.9,19,45,174/-. The Assessing Officer in the draft assessment order also
made addition of Rs.14,13,027/- on account of provision of warranty,
Rs.8,59,277/- on account of provisions of Leave Encashment, Rs.6,17,968/- on
account of interest/penalty paid, Rs.2,68,662/- on account of personal expenses
(Director’s credit card payments), Rs.10,200/- being personal expenses incurred
due to Marriage Shagun to employees and Rs.16,000/- on account of deduction
of TDS of improper rate.
The assessee approached the DRP, who vide order dated 25.09.2014
upheld the action of the TPO in holding the arm’s length price of the
international transactions for payment of royalty to be at Rs.Nil and proposing
the adjustment of Rs.9,19,45,174/-.
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So far as disallowance of Rs.6,17,968/- is concerned, the DRP allowed
only an amount of Rs.3,64,937/- as admissible and confirmed the balance of
Rs.2,53,031/-. The DRP also deleted the disallowance of Rs.16,000/- made by
the Assessing Officer u/a 40(a)(ia) of the I.T. Act. However, the various other
additions made by the Assessing Officer were sustained by the DRP. The
Assessing Officer accordingly passed the order u/s 143(3) r.w.s. 144C(5) on
13.11.2014 determining the total income of the assessee at Rs.16,63,14,520/-.
Aggrieved with such order of the Assessing Officer, the assessee is in
appeal before the Tribunal by raising the following grounds :-
“1) That the learned DRP and consequently the A.O. have erred in law and on facts in making an addition of Rs. 9,47,49,368/- on wholly illegal, erroneous and untenable grounds. 2) That the order of assessment is bad in law and on facts of the appellant's case. 3) That the Ld. TPO and Ld. DRP and consequently the Ld. AO have erred in law, on facts and in the circumstances of the case in making addition on account of arm's length price under section 92CA(3) of the Income-tax Act amounting to Rs. 9,19,45,174/- on wholly illegal, erroneous and untenable grounds. 4) That the Hon'ble DRP and consequently the AO have grossly erred in law and facts and in circumstances of the case in not following the judgement of Hon'ble Delhi ITAT in assessee's own case in earlier years where the payment of Royalty to the AE has been decided in favour of the assessee in identical facts. 5) That the order of the Ld. AO based on the findings of the Ld. TPO and the directions of the Ld. DRP u/s 144C(5) of the Income-tax Act, is erroneous, untenable in law and on the facts and in the circumstances of the case in: 1. Determining the ALP of the transaction on account of payment of royalty to the AE of the appellant as NIL, 2. Rejecting the internal & external CUP applied by the appellant for the payment of Royalty, 3. Rejecting the benchmarking done for the payment of Royalty under the overall internal & external TNMM by the appellant, 4. Exceeding their jurisdiction by judging the Royalty payments made by the assessee through the "benefit test", which is not a prescribed method u/s 92C of the IT Act. 5. Holding that the appellant has not been able to show that it derived economic benefit from the know how licensed from the AE, 6) That the Hon'ble DRP and consequently the AO have grossly erred in law and facts and in circumstances of the case in not allowing expenses on account of
7 ITA No.6961/Del/2014
provision of warranty to the extent of Rs. 14,13,027/- as per normal provisions of the Income Tax Act treating the same to be without any scientific method and being unascertained liability. 7) That the Hon'ble DRP and consequently the AO have grossly erred in law and on the facts of the appellant's case in confirming the addition on account of interest paid for delayed payment of indirect taxes, such as sales-tax, excise, etc of Rs. 253,031/- which is compensatory in nature. 8) That the Hon'ble. DRP and consequently the AO have grossly erred in making disallowance on account of sales promotion expenses of Rs. 2,68,662/- and staff welfare expenses of Rs. 10,200/- by treating the same to be personal in nature. 9) That the Hon’ble DRP and consequently the AO have grossly erred in law in: 1. not restricting the disallowance u/s 14A to Rs. 2,87,053/- based on the DRP's own order in earlier years as against Rs. 10,15,149/- offered by the assessee in the return, but revised amount claimed during the assessment proceedings before the AO. 2. holding that no claim can be allowed unless the appellant had filed the revised return. 10) That the Hon'ble DRP and consequently the AO have grossly erred in law and on the facts of the appellant's case in: 1. not allowing relief on account of depreciation on UPS etc @ 60%. 2. not considering the judgement of Hon’ble Delhi ITAT in assessee's own case in earlier years where the issue of charging depreciation @ 60% has been decided in favour of the assessee in identical facts. 11) The DRP and consequently the A.O. have erred in law, on the facts and in the circumstances of the case in charging interest under section 234-B of Rs. 9,00,493/- and under section 234-C of Rs. 6,75,842/- of the Income Tax Act, 1961 on wholly erroneous, illegal and untenable grounds. 12) That the Hon’ble DRP and consequently the AO have grossly erred in law and on the facts of the appellant’s case in : 1. Disallowance the provision for warranty and leave encashment as unascertained liabilities under section 115JB of the Income Tax Act (MAT Provisions). 2. Not appreciating that clause (c) of section 115JB is not applicable to provisions for warranty and leave encashment as they are ascertained liabilities. 13) That each ground in independent of and without prejudice to the other grounds raised herein. PRAYER The appellant-assessee prays that the relief as per grounds of appeal above, may kindly be allowed to it and the appellant may also allowed to add, delete, amend or substitute any ground(s) of appeal either at or before the date of hearing.”
Grounds no.1, 2 and 13 being general in nature are dismissed.
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Ld. counsel for the assessee at the time of hearing did not press the
ground no.8 for which the ld. DR has no objection. Accordingly, the ground
no.8 is dismissed as not pressed.
So far as ground no.3 to 5 are concerned, ld. counsel for the assessee
submitted that the Tribunal in assessee’s own case for assessment year 2008-09
has held that the circumstances before and after coming into existence of the AE
relationship between the assessee and Stanley are identical and there is no
change in the facts. Therefore, the issue stands covered in favour of the
assessee.
The ld. DR on the other hand heavily relied on the order of the Assessing
Officer/TPO/DRP.
We have heard the rival arguments made by both the sides, perused the
orders of the authorities below and the Paper Book filed on behalf of the
assessee. We find identical issue had come up before the Tribunal in assessee’s
own case in the immediately preceding assessment years. We find the Tribunal
vide ITA No.6212/Del/2013 order dated 22.04.2016 has decided the issue in
favour of the assessee by observing as under :-
“10. We have carefully considered the rival contentions. The Assessee has entered into technical assistance agreement with Stanley Electric Company Japan on 01.04.2007 for grant of nonexclusive and nontransferable license without a right to sub-license, to manufacture and sale license product in India using the technical information of Stanley Electric Company. Since 1990 the royalty is being paid by the Assessee to Stanley @3% of sales. During the period from 1990 to 1994 the two parties were unrelated party hence the royalty contract was made under uncontrolled conditions and the payment of royalty by the Assessee to AE can be considered as comparable uncontrolled price for the purpose of bench marking the royalty payment for the year. Accordingly, Assessee in its TP Study report has said that the payment of royalty is at Arm’s length price as the agreement is in accordance with industrial
9 ITA No.6961/Del/2014
policy of the Govt. Further in its TP study report assessee applying the TNMM method and submitted that the above transaction is also conducted at an ALP. On the identical facts and circumstances in the case of the assessee in ITA No.102/2014 dated 28.10.2015 has not admitted the appeal of the revenue with respect to the determination of ALP of royalty relying on the decision of CIT Vs. EKL Appliances Ltd. 345 ITR 241 and CIT Vs. Sony Ericson Mobile Communication 374 ITR 118. The coordinate bench for AY 2008-09 in ITA No.4456/Del/2012 in assessee’s own case has held as under:- “19. In this regard, it is seen that during the year, royalty was paid by the Assessee to its AE on sales made using the trade mark of ‘Stanley’; that the assessee is a widely held listed company, a market leader. The payment of royalty was for trade mark, patent and technology. The contract, i.e., the Technical Collaboration Agreement, between the assessee and its AE stood approved by the Government since 1984. Ever since, the assessee had been carrying out the manufacture of some of its products under the brand name of ‘Stanley’. For this, the assessee had been paying royalty. Approval in this regard had been pre-obtained from SIA, as required. The RBI had also granted its approval, which was being renewed yearly. Initially, the royalty had been paid @ 4% on the sale of some of the products produced under the brand name ‘Stanley”. Later, it was reduced to 3%. In F.Y. 2003-04, Stanley Electric Company of Japan acquired the status of the AE of the assessee. Thus, it was right from 1984, that technical assistance got started being given by Stanley Electric Company, Japan to the assessee, with regard to the manufacture of automotive lightingequipment. As available from para 1.4 of the agreement in the year under consideration (copy at APB-I, 340-359, relevant portion at page 342), a non-exclusive license had been granted by Stanley, Japan to the assessee, only for India. As per the conditions thereof, the assessee was to pay royalty on its net sales, after deduction from the net sale price of the licensed products sold by Lumax in India. The basis of calculation of payment of royalty, as agreed to, is contained in Article 4 of the Agreement (APB-I, page 345). Such payment was to be@ 4% on the net sales. However, during the year, royalty was paid @2.43% on the sale of licensed products, amounting to Rs.218.08 crores, as available at APB-I, page 385. This was so, since the cost of standard imported components, standard local components and certain other deductions had been deducted from the net sales of Rs.218.08 crores. 20. The Ld. DR has contended that just because the assessee and its AE are publicly listed companies, this is no reason for the requirements of ALP to be flouted. However, the assessee‟s contention regarding both the entities being listed companies, it is seen, is not at all to support any violation of the ALP provisions. This argument, in fact, has been taken to bolster the assertion regarding benefits of the transactions and the genuineness thereof. 21. The next contention of the Department has been that the RBI approval sought to be relied on by the assessee is only for the purposes of FEMA/FERA and it does not stop the transaction from being looked into by the Income-tax Authorities for the purpose of the Income-tax Act. Here again, it is seen that this argument has been taken by the Assessee only to stress that the agreement between the assessee and Stanley was not merely a paper transaction, rather it was approved by the RBI as well, besides other governmental authorities. It has not been shown by the Department to be otherwise.
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The Ld. DR then contended that the royalty in question was not benchmarked by the assessee, as held by the TPO and that it has not been shown that the payment of royalty was an arm’s length transaction. Since the average PLI of the comparables taken by him resulting in 7.05% - OP/sales was within the (+)/(-) 5% range of the assessee’s PLI worked out by him at 4.09%, the range between 2.05%to 12.05%, as per the proviso to Section 92C (2) (2A) of the Act. 23. The Ld. DR has further contended that the assessee did not apply the CUP method properly, since such method has been supported by the assessee, based on the approval by the RBI. In this regard, we find that as noted above, the argument regarding the RBI approval was raised by the assessee to buttress the claim of genuineness of its transaction. In the TPO’s order, there is not even as much as a mention about RBI. So far as regards the DR’s objection that the plea of earlier payment to the same party, when it was not the assessee’s AE, has not been allowed, is not maintainable, it is to be reiterated here, as above, that the assessee did benchmark its transaction by two methods, i.e., CUP and TNMM and this was taken note of by the TPO himself. Apropos the reliance by the Department on ‘CGM Global’ (supra), it is correct that therein, the internal CUP was held to be not applicable, since the transaction was with an AE having related party transactions and it was held that there was no external CUP for making any comparison in the relevant year, as the earlier Agency Agreement with the third party had expired and rates applicable in the earlier years could not be made applicable during the relevant year. However, this decision does not have any adverse effect on the case of the assessee. The facts herein are entirely at variance with those of ‘CGM Global’. Herein, as opposed to the facts in ‘CGM Global’, the same Royalty Agreement and the same license has been in continuance from 1984 till the year under consideration, the license being renewed from year to year, albeit on the same terms and conditions. Moreover, the following decisions are instances of the external CUP having been employed and this has not been disputed by the Department:- 1. ‘Sona Okegawa Precision Forgings Ltd. vs. ACIT’ (ITANo.4781/Del/2010) 2. ‘ACIT vs. Sona Okegawa Precision Forgings Ltd.’ (ITANo.260/Del/2010. 3. ‘CIT vs. Federal Mogul TPR India Ltd.’ (ITA No.398/2012) 4. ‘Climate Systems India Ltd. vs. CIT’ (2009) 319 ITR 113(Delhi) 5. ‘CIT vs. Eicher Motors Ltd.’ (2007) 293 ITR 464 (MP) 6. ‘Praga Tools Ltd. vs. CIT’ (1980) 123 ITR 773 (A&P) 7. ‘Ekl Appliances (2012-TII-01-HC-DEL-TP) 8. ‘Ericsson India Pvt. Ltd. vs. DCIT’ (2012-TII-48-ITAT-Del-TP) 16 ITA No.4456/Del/2012 24. In ‘Sona Okegawa Precision Forgings Ltd.’ (supra), it has been held that since the royalty paid by the Indian company was 3% of net sales and it falls within the range of @ 8% on export sales and 5% on domestic sales as per directions of the RBI, therefore, the payment stands justified under the CUP method. 25. This view was accepted by the Tribunal in ‘Sona Okegawa’s case for Assessment Year 2004-05 also, as well as in ‘Climate Systems’(supra), ‘Swaraj Engines Ltd.’ (supra) and ‘Eicher Motors’ (supra). 26. In ‘Federal Mogul’ (supra), payment of royalty @3% on the sale price, on transfer of technical knowledge and information, was accepted.
11 ITA No.6961/Del/2014
In ‘Climate Systems India Ltd.’ (supra), again, payment of royalty@ 3% on the sale price on transfer of technical knowledge and information was accepted. 28. All the above companies, like the assessee, were in the auto ancillary industry. 29. In ‘Praga Tools Ltd.’ (supra), which was also in an auto ancillary industry, payment of royalty @ 5% on the sale price, on transfer of technical knowhow and assistance was accepted. 30. The royalty payment by the above companies is directly comparable with that made by the assessee company. The assessee, as observed, is also an auto ancillary, manufacturing automotive parts for OEMs. In all these cases, as in that of the assessee, the payment of royalty was related to transfer of technical assistance and know-how in the automotive industry. That being so, the CUP method is available apropos the issue of arm’s length price qua the payment of royalty. 31. So far as regards other case laws relied on by the Department, the same are also distinguishable on facts, being on general propositions of law relevant to the specific facts present in those cases. In the present case, an ALP analysis had been done by the assessee, as above. The assessee applied the CUP method and the TNMM. The TPO, however, despite being legally bound to do so, did not apply any method. 32. Apropos the decision of the Delhi Bench of the Tribunal in the case of ‘Interra Information Technology (I) Pvt. Ltd. vs. DCIT’, 2012-TIOL-142- ITAT-DEL-TP (supra), it is seen that here also, the facts are at a complete variance with those of the assessee’s case, wherein payment of royalty for supply of technology and knowhow to manufacture licensed products was held to be for the benefit of the assessee and the same rate of royalty payment was allowed as allowed in the years when the parties were not in an AE relationship, but were having identical transactions as those in the year under consideration before the Tribunal. It was held that the royalty payment was a revenue expenditure incurred wholly and exclusively for the benefit of the assessee. The part of the payment disallowed as capital expenditure was held by the Hon’ble Delhi High Court to be revenue expenditure. It is as such that the invocation of the rule of consistency has been sought on behalf of the assessee and, in our considered opinion correctly so, contending that since the circumstances before and after the coming into existence of the AE relationship between the assessee and Stanley are identical inter se, it cannot at all be said that though in the earlier years, the royalty payment was for the benefit of the assessee, since the inception of the AE relationship, it ceased to be so, due to which, the application of the benefit test by the TPO is entirely uncalled for. Payment of royalty was being claimed and allowed right from 1984 to Assessment Year 2003-04, as business expenditure of the assessee and no new circumstance has been pointed out by either of the authorities below to hold that in the years thereafter, the benefit accrued to the assessee by the payment of such royalty has dried up. Therefore, we find that the reliance by the Department on ‘Interra’ (supra), to support the contention that the rule of consistency should not be applied, is wholly misplaced. It cannot be gainsaid that a judgment has to be, in its entirety, considered in the backdrop of and with reference to the peculiar facts and circumstances doing the rounds therein. In ‘Interra’ (supra), the assessee raised an argument that transfer pricing adjustment at best cannot exceed the amount of the margin retained by
12 ITA No.6961/Del/2014
the assessee as well as the AE. This argument did not find favour with the Tribunal. It was also contended that the TPO had not made any adjustment in the earlier years and as such, no adjustment was called for in the year before the Tribunal as well, on the principle of consistency. The Tribunal observed that the assessee had not been able to demonstrate as to which particular conclusion of the previous TPO or Assessing Officer had been reviewed in an opposite manner by the current TPO and that it was a case of non-application of mind by the previous TPO on some issues. It was therefore, that the Tribunal rejected this argument raised by the assessee. This is the background for the Tribunal not having allowed the principle of consistency to be invoked in that case. In the present case, however, it is patent on record that the facts remain identical pre-AE relationship and thereafter, as also that the related payment has been consistently allowed by the department itself in the numerous earlier years, where the arguments were at an exactly similar, nay identical footing. 33. The TPO has made the disallowance in question mainly on the basis of the benefit test. In this regard, it is seen that the payment of royalty cannot be examined divorced from the production and sales. Royalty is inextricably linked with these activities. In the absence of production and sale of products, there would be no question arising regarding payment of any royalty. Rule 10A(d) of the ITAT Rules defines ‘transaction’ as a number of closely linked transactions. Royalty, then, is a transaction closely linked with production and sales. It cannot be segregated from these activities of an enterprise, being embedded therein. That being so, royalty cannot be considered and examined in isolation on a standalone basis. Royalty is to be calculated on a specified agreed basis, on determining the net sales which, in the present case, are required to be determined after excluding the amounts of standard bought out components, etc., since such net sales do not stand recorded by the assessee in its books of account. Therefore, it is our considered opinion that the assessee was correct in employing an overall TNMM for examining the royalty. The TPO worked out the difference in the PLI of the outside party (the assessee) at 4.09% and the comparables at 7.05%. This has not been shown to fall outside the permissible range. 34. The decision of the Tribunal in ‘Ekla Appliances’, 2012-TII-01- HC Del-TP, has been sought to be distinguished by the TPO, observing that the facts in that case are not in pari materia with those of the assessee’s case. However, therein also, the benefit test had been applied by the TPO, as in the present case. The matter was carried inappeal before the Hon’ble High Court. The Hon’ble Delhi High Court has held that the so-called benefit test cannot be applied to determine the ALP of royalty payment at nil and that the TPO could apply only one of the methods prescribed under the law. A similar view has been taken in ‘Sona Okegawa Precision Forgings Ltd.’ (supra) and in ‘KHS Machinery Pvt. Ltd. vs. ITO’, 53 SOT 100 (Ahm) (URO). 35. It is, thus, seen that the royalty payment @ 3% by the assessee is at arm’s length. The Technical Collaboration Agreement stands approved by the Government of India. The royalty payment has been accepted by the department as having been made by the assessee wholly and exclusively for its business purposes. For Assessment Years 2004-05 and 2005-06, such payment of royalty has been allowed by the CIT (A). As per the FEMA Regulations, royalty can be paid on net sales @ 5% on domestic sales and @ 8% on export sales. The royalty payment by the assessee falls within these limits. It also falls
13 ITA No.6961/Del/2014
within the limits of payment of royalty in the automobile sector, as per the market trend. This payment of royalty is at the same percentage as that paid by other auto ancillaries in the automotive industry. Then, in ‘Ekla Appliances’ (supra) and in ‘Ericsson India Pvt. Ltd. vs. DCIT’, 2012-TII-48- ITAT-Del-TP, it has been held that royalty payment cannot be disallowed on the basis of the so-called benefit test and the domain of the TPO is only to examine as to whether the payment based on the agreement adheres to the arm’s length principle or not. That being so, the action of the TPO in the present case, to make the disallowance mainly on the ground of the benefit test, is unsustainable in law. 36. Keeping in view all the above factors, the disallowance made on account of royalty is found to be totally uncalled for and it is deleted as such. Accordingly, ground Nos.3 and 4 raised by the assessee are accepted.” 11. In view of the of Honorable Jurisdictional high court in assesse’s own case we incline to follow that decision over the decision cited by the ld. DR in case of COMMISSIONER OF INCOME TAX, FARIDABAD Vs M/s KNORRBREMSE INDIA PVT LTD. However we would like to quote para no 29 of the decision where in honourable court has held as under :- “29. We hasten to add that in the case before us the assessee has, in fact, contended that it has benefited from the international transactions entered into by it with its AEs. However, even assuming that this has not been established, it would make no difference.” 12. In view of the above facts and respectfully following the decision of Hon'ble Delhi High Court in case of assessee for earlier years wherein the decision coordinate bench of ITAT in assessee’s own case is upheld we direct the ld. TPO/AO to delete the adjustment of Rs.66957682/- made on account of ALP of royalty payments.”
Since the facts of the instant appeal are identical to the facts of the case
decided by the Tribunal in assessee’s own case in the immediately preceding
assessment year, therefore, respectfully following the decision of the Tribunal in
assessee’s own case and in absence of any contrary material brought to our
notice, we set-aside the order of the Assessing Officer/TPO/DRP on the issue of
royalty and direct the Assessing Officer to delete the addition of
Rs.9,19,45,174/- made on account of arm’s length price of royalty payment.
Ground no.6 by the assessee relates to addition on account of provision of
warranty of Rs.14,13,027/-.
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After hearing both the sides, we find the Assessing Officer disallowed the
provision for warranty on the ground that this amount has been claimed without
any scientific method and is contingent in nature. Further, he also relied on the
order of his predecessor where such disallowance was made. The addition was
upheld by the DRP and the Assessing Officer in the final order. It is the
submission of the ld. counsel for the assessee that the Tribunal in assessee’s
own case in assessment years 2006-07, 2007-08 and 2008-09 has deleted the
warranty provision amounting to Rs.42,07,000/-, Rs.35,06,410/- and
Rs.84,48,000/- respectively. The appeal filed by the Revenue was not admitted
by the High Court on this issue for assessment year 2008-09. It is also the
submissions of the ld. counsel for the assessee that in subsequent years, the
Assessing Officer has not made any addition on this count. Relying on the
decision of the Hon’ble Delhi High Court in the case of Excel Industries
reported in 358 ITR 195, he submitted that Rule of consistency should be
followed. He also relied on the decision of the Hon'ble Supreme Court in the
case Rotork Controls India Pvt. Ltd. vs. CIT reported in 314 ITR 62 to the
proposition that no addition can be made on account of provision for warranty.
Ld. DR on the other hand heavily relied on the order of the lower
authorities.
After hearing both the sides, we find identical issue had come up before
the Tribunal in assessee’s own case in the assessment year 2008-09. The
15 ITA No.6961/Del/2014
Tribunal vide ITA No.4456/Del/2012 order dated 31.05.2013 decided the issue
in favour of the assessee by observing as under :-
“40. In this regard, it is seen that the Assessing Officer made the disallowance on the basis that the provision for warranty was a contingent liability, having no scientific basis. Indeed, undisputedly, the assessee was making the provisions on actual warranty basis for the unexpired warranty period, providing warranty of one year on the products which it was selling. It created provision for warranty for the unexpired period of warranty as at the end of the year, on a percentage of the actual warranty expenses during the immediately prior period, on the sales made. It has not been shown as to how this basis of making provision for warranty is not scientific. Moreover, similar provision for warranty was not disallowed in the earlier years, upto Assessment Year 2005-06. This position is also supported by the Hon’ble Supreme Court’s decision in ‘Rotork Controls India Pvt. Ltd.’ (supra) and the Hon’ble Delhi High Court decision in ‘Becton Dickinson’ (supra). Accordingly, this addition is deleted and ground No.5 is allowed.”
Respectfully following the decision of the Tribunal in assessee’s own
case for assessment year 2008-09, we direct the Assessing Officer to delete the
addition of Rs.14,13,027/- made on account of provision for warranty. The
ground raised by the assessee is accordingly allowed.
Ground no.7 relates to the action of the Assessing Officer in sustaining
the addition of Rs.2,53,031/- being interest on delayed payment of indirect
taxes.
Ld. counsel for the assessee submitted that the assessee had claimed
expenses on account of interest paid on belated payment of excise, services tax,
custom duty etc. of Rs.6,17,968/-. The DRP allowed only an amount of
Rs.3,64,937/- for which documentary evidences were given and sustained the
balance amount of Rs.2,53,031/- for which the details could not be filed at that
time. He submitted that the balance amount is also of similar nature which has
16 ITA No.6961/Del/2014
been allowed by the DRP. He produced certain challans out of the amount
sustained by the DRP of Rs.2,53,031/- and submitted that the same may be
restored to the file of the Assessing Officer for verification of the challans.
He further submitted that the interest on account of delayed payment of
indirect taxes is compensatory in nature and is not for infraction of any law and,
therefore, is an allowable expenditure u/s 37 of the I.T. Act. For the above
proposition, he relied on the decision of the Hon’ble Supreme Court in the case
of (i) Prakash Cotton Mills Pvt. Ltd. vs. CIT reported in 201 ITR 684, (ii)
Lachmandas Mathuradas vs. CIT reported in 254 ITR 799 and various other
decisions as mentioned in the Paper Book.
Ld. DR on the other hand heavily relied on the order of the Assessing
Officer/TPO/DRP.
After hearing both the sides, we find the assessee had claimed expenses
on account of interest paid on belated payment of excise, service tax, custom
duty etc. of Rs.6,17,968/- which was disallowed by the Assessing Officer in the
draft assessment order. Before the DRP, the assessee could only produce
documentary evidences of Rs.3,64,937/- for which the DRP directed the
Assessing Officer to delete such disallowance. However, due to non-production
of full details, the DRP sustained the addition of Rs.2,53,031/-. It is the
submission of the ld. counsel for the assessee that if an opportunity is given to
the assessee, he will produce the balance documentary evidence to substantiate
that the balance payment also is of similar nature and is not on account of
17 ITA No.6961/Del/2014
infraction of law. Further, it is his submission that the interest on belated
payment is compensatory in nature and not for any infraction of law.
Considering the totality of the facts of the case and in the interest of justice, we
deem it proper to restore this issue to the file of the Assessing Officer/TPO with
a direction to grant another opportunity to the assessee to substantiate with
evidence to his satisfaction regarding the allowability of such interest on belated
payment of indirect taxes to the extent of Rs.2,53,031/-. The ground raised by
the assessee is accordingly allowed for statistical purposes.
Ground no.9 by the assessee relates to the disallowance u/s 14A of
Rs.10,15,149/- as against Rs.2,87,053/-.
Ld. counsel for the assessee submitted that the assessee had voluntarily
offered total disallowance of Rs.10,15,149/- considering all the loans for
calculation as per Rule 8D(2)(ii), considering the litigation in earlier years
regarding the interest component. However, the DRP in assessee’s own case for
assessment year 2008-09 has held that only working capital loan has to be
considered for calculation as per Rule 8D(ii). In view of the above, the assessee
revised its claim on account of disallowance u/s 14A during the assessment
proceedings before the Assessing Officer according to which, the disallowance
shall remain only Rs.2,87,053/- if the order of the DRP is for assessment year
2008-09 is followed. He submitted that the Assessing Officer rejected the claim
of the assessee by relying on the decision of the Hon'ble Supreme Court in the
case of Goetze India Ltd. reported in 284 ITR 323 according to which, the
18 ITA No.6961/Del/2014
assessee can make any new claim only by filing a revised return. He submitted
that the decision of the Hon’ble Supreme Court does not bar the assessee for
making any claim before the Tribunal, which was not there in the return of
income. Relying on various decisions including the decision of the Hon’ble
Supreme Court in the case of National Thermal Power Company Ltd. vs. CIT
reported in 229 ITR 383 and the decision of the Delhi Bench of the Tribunal in
the case of CIT vs. Maruti Udyog Ltd. reported in (2013) TIOL-08-ITAT-DEL,
he submitted that the request of the assessee to restrict the claim of disallowance
u/s 14A to Rs.2,87,053/- should be accepted. Referring to the decision of the
Hon’ble Bombay High Court in the case of Everest Kento Cylinders Ltd.
reported in 378 ITR 57, he submitted that the Hon'ble High Court in the said
decision has held that the assessee is not bound by the original disallowance
offered u/s 14A and restriction of disallowance subsequently is justified.
Referring to the decision of the Hon’ble Madras High Court in the case of CIT
vs. Abhinitha Foundation Pvt. Ltd. vide ITA No.811 of 2016, he submitted that
the Hon'ble High Court has held that even if the claim made by the assessee
does not form part of the original return or even the revised return, it could still
be considered, if the relevant material was available on record. Referring to the
decision of the Hon’ble Delhi High Court in the case of Joint Investments Pvt.
Ltd. reported in 372 ITR 694, he submitted that the Hon'ble High Court in the
said decision has held that disallowance u/s 14A cannot exceed exempt income.
He submitted that the assessee during the impugned assessment year has earned
19 ITA No.6961/Del/2014
dividend income of Rs.1,76,320/-, therefore, the disallowance u/s 14A in any
case should not exceed beyond Rs.1,76,320/- whereas the assessee is offering
disallowance of Rs.2,87,053/-. He accordingly submitted that the disallowance
u/s 14A should be restricted to Rs.1,76,320/-.
Ld. DR on the other hand heavily relied on the order of the Assessing
Officer/TPO/DRP.
We have considered the rival arguments made by both the sides, perused
the material available on record and the various decisions relied on by both the
sides. We find the assessee has voluntarily offered disallowance of
Rs.10,15,149/- considering all the loans for calculation as per Rule 8D(2)(ii).
However, during the assessment proceedings, the assessee, on the basis of the
order of the DRP for assessment year 2008-09, revised its claim of disallowance
u/s 14A at Rs.2,87,053/- on the ground that the interest only on working capital
loan has to be considered for Rule 8D(ii). We find the Assessing Officer
rejected the claim of the assessee on the ground that such a new claim may be
claimed by filing a revised return only. For the above proposition, the
Assessing Officer relied on the decision of the Hon’ble Supreme Court in the
case of Goetze India Ltd. (supra). It is the submission of the ld. counsel for the
assessee that the above decision of the Hon'ble Supreme Court does not bar the
assessee for making any claim before the Tribunal which was not there in the
return of income. We find merit in the above submissions of the ld. counsel for
the assessee. It has been held in various decisions that the ratio of the decision
20 ITA No.6961/Del/2014
in the case of Goetze India Ltd. (supra) is limited to the powers of the Assessing
Officer and did not impinge the powers of the appellate authorities. Therefore,
the assessee can always make a new claim before the appellate authorities, if it
was not claimed by filing a revised return. Further, in a recent decision, the
Hon’ble Delhi High Court in the case of Joint Investments Pvt. Ltd. (supra) has
held that disallowance u/s 14A cannot exceed the exempt income. All these
decisions were not available before the Assessing Officer or the DRP. Further,
the earning of exact amount of dividend has also not verified by the lower
authorities. Considering the totality of the facts of the case and in the interest of
justice, we deem it proper to restore the issue to the file of the Assessing Officer
with a direction to decide the issue afresh in the light of the decisions cited
(supra). Needless to say, the Assessing Officer shall decide the issue afresh and
in accordance with law after giving due opportunity of being heard to the
assessee. We hold and direct accordingly. The ground no.9 raised by the
assessee is allowed for statistical purposes.
Ground no.10 by the assessee relates to depreciation on UPS at the rate of
60% of Rs.8,073/-.
After hearing both the sides, we find the assessee during the assessment
proceedings requested the Assessing Officer to allow the depreciation on UPS at
the rate 60% instead of 15% as claimed by him in the return of income on the
ground that the order of the Tribunal in assessee’s own case was known to him
only after the return was filed in which the Tribunal allowed the claim of
21 ITA No.6961/Del/2014
depreciation on UPS at the rate 60%. However, the Assessing Officer did not
accept the claim of the assessee for such higher rate of depreciation on the basis
of the decision of the Hon’ble Delhi High Court in the case of BSES Yamuna
Power Ltd. reported in (2010) TIOL-636-HC-DEL. The Assessing Officer
further referred to the decision of the Hon'ble Supreme Court in the case of
Goetze India Ltd. (supra) according to which, any new claim must be claimed
by filing a revised return only. Ld. counsel for the assessee referred to the
various decisions relied earlier regarding the power of the Tribunal to entertain
the claim which was not made by filing a revised return. Since the courts are
consistently holding that the ratio of Goetze India Ltd. (supra) was limited to the
powers of the Assessing Officer and did not impinge the power of the appellate
authorities and since the decision of the Tribunal in assessee’s own case was
known to the assessee only after the original return was filed and since the
assessee had made a claim of higher depreciation before the Assessing Officer
during the course of assessment proceedings, therefore, we are of the considered
opinion that the higher rate of depreciation at 60% on UPS should have been
allowed by the Assessing Officer. In view of the above discussion, we allow
the claim of the assessee of higher rate of depreciation on UPS. The ground
raised by the assessee is accordingly allowed.
Ground no.11 relates to charging of interest u/s 234B and 234C.
22 ITA No.6961/Del/2014
After hearing both the sides, we are of the opinion that charging of
interest under the above provisions are mandatory in consequential in nature.
Therefore, the above ground is dismissed.
Ground no.12 relates to disallowance of warranty provision and leave
encashment u/s 115JB of the I.T. Act.
After hearing both the sides, we find the Assessing Officer disallowed the
above provision and added back the same to the book profit u/s 115JB of the
I.T. Act by treating the same as unascertained liabilities. It is the submission of
the ld. counsel for the assessee that the assessee makes these provisions
consistently year after year on the basis of past actual results. It is also his
submission that treating provision for warranty and leave encashment as
unascertained liabilities and thereby adding back the same u/s 115JB is not
correct since section 115JB is a code in itself and only such adjustments are to
be made which are permitted under the law. We find merit in the above
argument of the ld. counsel for the assessee. We find the Hon'ble Supreme
Court in the case of Rotork Controls India P. Ltd. vs. CIT reported in 314 ITR
62 has observed as under :- “Liability is defined as a present obligation arising from past events, the settlement of which is expected to result in an outflow from the enterprise of resources embodying economic benefits.”
We find the Hon’ble Delhi High Court in the case of CIT vs. Becton
Dickinson India Pvt. Ltd. reported in (2013) 29 taxmann.com 80 has held as
under :-
23 ITA No.6961/Del/2014
“In the facts of the present case too this Court is of the opinion that the reasoning adopted by the Tribunal cannot be found fault with. The considerations which weighed with the Supreme Court in Rotork Controls India P. Ltd. (supra) in concluding such warranty provisions were not contingent liabilities would apply with greater force to negate the claim by the revenue that such provisions are made for diminution in the value of any asset, so as to be covered by Explanation 1(i) to Section 115JB of the Act. In these circumstances, the Court is satisfied that no substantial question of law arises for consideration.”
We find the Hon'ble Supreme Court in the case of Bharat Earth Movers
vs. CIT reported in 245 ITR 428 and the Hon’ble Punjab & Haryana High Court
in the case of CIT vs. Majestic Auto Ltd. reported in 150 taxmann.com 460
have also held similar view. The Delhi Bench of the Tribunal in the case of
Sony India P. Ltd. vs. DCIT vide ITA no.1181/Del/2005 has held as under :-
“We, therefore, hold that the decision of Hon’ble Punjab & Haryana High Court in the case of Majestic Auto Ltd. on a similar issue is squarely applicable in the present case and respectfully following the same, we uphold the impugned order of the learned CIT(A) allowing the deduction claimed by the taxpayer on account for provision for warranty holding the same to be an ascertained liability. Similarly, we also uphold his impugned order deleting the addition made by the AO of the said amount while computing the book profit of the taxpayer company u/s 115JB.”
We find the Hon’ble Himachal Pradesh High Court in the case of CIT vs.
HP Tourism Development Corp. Ltd. reported in (2013) 35 taxmann.com 450
relying on the decision in the case of Bharat Earth Movers (supra) held that
since provision made towards leave encashment of employees was in respect of
ascertained and definite liability, same would not be added while computing
book profit for purpose of levy of MAT under section 115JB.
In view of the decisions cited above, we find that treating provision for
warranty and leave encashment as unascertained liabilities and adding back the
24 ITA No.6961/Del/2014
same u/s 115JB is not in consonance with the provisions in view of the
judgement that section 115JB is a code in itself and only such adjustments are to
be made as are permitted under the laws. The ground raised by the assessee is
accordingly allowed.
In the result, the appeal filed by the assessee is partly allowed for
statistical purposes. Order pronounced in the open Court on this 05th day of December, 2017.
Sd/- Sd/- (KULDIP SINGH) (R. K. PANDA) JUDICIAL MEMBER ACCOUNTANT MEMBER Dated: 05-12-2017.
Sujeet Copy of order to: - 1) The Appellant 2) The Respondent 3) The DRP-I, New Delhi 4) The DR, I.T.A.T., New Delhi By Order //True Copy// Assistant Registrar ITAT, New Delhi