M/S. HONDA MOTOR INDIA PVT. LTD.,UTTAR PRADESH vs. DCIT, NOIDA

The first issue raised in this appeal is against the transfer pricing addition in relation to the international transaction of purchase and sale of goods from the Associated Enterprise (AE).

Briefly stated, the facts of the case are that the assessee is a wholly owned subsidiary of Honda Motor Co. Ltd., Japan. It was incorporated in September, 2006 to support independent spare parts business of Honda Group’s Indian subsidiaries operating in automotive (both two- wheelers and four-wheelers) and power product industry. The assessee is engaged in the distribution of spare parts, accessories and other ancillary products for various Honda products in India for servicing. It entered into agreement with Honda Siel Car India Ltd. for doing the business of spare parts relating to cars manufactured and/or sold by Honda Siel Car India Ltd. In the same way, the assessee entered into similar agreements with Honda Motorcycles and Scooters India Ltd. and Honda Siel Power Products Ltd. It reported eight international transactions in Form No. 3CEB. The Assessing Officer referred the matter of determination of arm’s length price (ALP) of these international transactions to the TPO. The TPO observed that the assessee applied TNMM to demonstrate that the international transactions were at ALP. Not convinced with the assessee’s method, the TPO applied Resale Price Method (RPM) as the most appropriate method and determined the amount of transfer pricing adjustment at Rs.27,01,51,919/-. The assessee remained unsuccessful before the Dispute Resolution Panel (DRP). That is how, the transfer pricing addition of Rs.27.01 crore came to be made in the final assessment order, against which the assessee has come up in appeal before the Tribunal.

We have heard the rival submissions and perused the relevant material on record. It is observed that the Assessing Officer discarded the assessee’s version of applying the TNMM and resorted to the application of RPM by being influenced with the view taken by him for the immediately preceding two assessment years. His orders came up for consideration before the Tribunal in and 6807/Del/2014. Vide its combined order dated 07.01.2016 for the assessment years 2009-10 and 2010-11, the Tribunal did not accept the assessee’s contention of being only a manufacturer. Its contention of placing orders for manufacturing, did not weigh with the Tribunal to hold the assessee as a manufacturer. The assessee was considered as predominantly a Distributor. It was, however, noticed in para 6.3 of the order, whose copy is placed in the paper book, that the facts and functions of the assessee were not clearly reported by it and, hence, could not be properly adjudicated by the TPO. It was further noticed that: ‘the function of Distributor has to be treated differently from the function of job order manufacturer of spare of spare or cases where there is value addition.’ That is how, the matter was sent back for re- 4 examining the functional profile of the assessee and for determining the correct ALP afresh. As regards the application of the most appropriate method, the Tribunal upheld the RPM as the most appropriate method for Distributor/trading segment and in cases where procurement was done by placing job work orders, fresh adjudication was directed to be done de novo for determining the most appropriate method. The order of the Tribunal was challenged by the assessee before the Hon'ble High Court. Vide judgment dated 20.07.2016, the Hon'ble High Court has held that when the matter was remanded, the authority who has to consider the matter of remand, should be free to look into the entire matter without being influenced by any observations in the Tribunal order etc. Crux of the litigation for the immediately preceding two years, therefore, boils down to the restoration of the question of determination of ALP of the international transaction to the file of TPO/Assessing Officer for a fresh redo, without there being any direction from a higher forum for application of a specific method as the most appropriate method. That is exactly the case of the Revenue.

The ld. AR contended that the facts for the instant year have undergone some change inasmuch as the assessee entered into an Agreement with Honda Motor Co., Japan, under which it was given Licence to use the intellectual property rights and technical information for or in connection with the manufacture by itself or through third parties etc. On a specific query, it was admitted that the manufacturing was got done from local manufacturers as was being done in the preceding two years. We find that the only difference which has arisen in the instant year is that whereas royalty was earlier paid by Original equipment manufacturers (OEMs) like, Honda Siel Car India Ltd., etc. to the ultimate holding company Honda Motor Company Ltd., Japan, for the use of technical information etc. in the manufacture of goods by the Local manufacturers, has now fallen on the assessee for payment.

The only other issue in this appeal is against the transfer pricing addition of Rs.10,87,61,442/- in respect of international transaction of payment of Royalty. The facts apropos this issue are that the assessee paid royalty to Honda Motor Co. Ltd., Japan @ 3.5% on domestic sales and 5% on exports pursuant to Agreement dated 01.09.2010 effective from 01.04.2010 for the use of technical information as discussed in the foregoing paras. The TPO determined Nil ALP of this international transaction by opining that the Licence agreement was signed only to transfer profits to its parent company. That is how, the transfer pricing adjustment of Rs.10.87 crore was proposed. The assessee remained unsuccessful before the DRP and the Assessing Officer made the transfer pricing addition equal to the amount of royalty payment. The assessee is aggrieved against such addition.

We have heard the rival submissions and perused the relevant material on record. It is clear from the facts that the TPO determined Nil ALP of the international transaction of payment of Royalty, which has been adopted by the AO as such, without any further examination. The Hon'ble Delhi High Court in CIT v. Cushman & Wakefield (India) (P.)

When we advert to the facts of the instant case, it turns out that the TPO proposed the transfer pricing adjustment equal to the stated value of transaction of royalty payment with Nil ALP by holding that no benefit etc. was received by the assessee because of the intra-group services received by it and hence no payment on this account was warranted. The AO in his draft order has taken ALP of this international transaction at Nil on the basis of recommendation of the TPO without carrying out any independent investigation as to the deductibility or otherwise of such a payment in terms of section 37(1) of the Act. This addition has been made by the AO in his final assessment order giving effect to the direction given by the DRP and not by invoking section 37(1) of the Act. As per the ratio decidendi in Cushman & Wakefield India (P.) Ltd. (supra), the TPO was required to simply determine the ALP of the international transaction unconcerned with the fact, if any benefit accrued to the assessee and thereafter, it was for the AO to decide the deductibility of this amount u/s 37(1) of the Act. As the TPO in the instant case initially determined Nil ALP by holding that no benefit etc. accrued to the assessee because of Royalty payment and the AO made the addition without examining the applicability of section 37(1) of the Act, we find the actions of the AO/TPO running in contradiction to the ratio laid down in Cushman & Wakefield (supra).

In the result, the appeal is allowed for statistical purposes.