PR COMMISSIONER OF vs. M/S LUWA INDIA PRIVATE LIMITED

1 IN THE HIGH COURT OF KARNATAKA AT BENGALURU DATED THIS THE 29TH DAY OF JUNE 2021 PRESENT THE HON’BLE MR. JUSTICE ALOK ARADHE AND THE HON’BLE MR.JUSTICE HEMANT CHANDANGOUDAR I.T.A. NO.296 OF 2017 BETWEEN: 1. PR. COMMISSIONER OF INCOME TAX-4

BMTC COMPLEX, KORAMANGALA

BANGALORE. 2. THE ASST. COMMISSIONER OF INCOME TAX

CIRCLE-11(5), BANGALORE.

... APPELLANTS (BY SRI. T.N.C. SRIDHAR, ADV.) AND: M/S. LUWA INDIA PRIVATE LIMITED NO.95, INDUSTRIAL SUB-URB 2ND STAGE, TUMKUR ROAD YESHWANTHPURA BANGALORE-560022 PAN: No. AAA CL3106 B.

... RESPONDENT (BY SRI. SURYANARAYANA T, ADV.,) - - - THIS I.T.A. IS FILED UNDER SECTION 260-A OF I.T.ACT, 1961 ARISING OUT OF ORDER DATED 26.08.2016 PASSED IN IT(TP)A NO.581/BANG/2012 &

2 C.O.No.31/B/2015, FOR THE ASSESSMENT YEAR 2007-08, PRAYING TO: I. DECIDE THE FOREGOING QUESTION OF LAW AND/OR SUCH OTHER QUESTIONS OF LAW AS MAY BE FORMULATED BY THE HON'BLE COURT AS DEEMED FIT AND. II. SET ASIDE THE APPELLATE ORDER DATED 26.08.2016 PASSED BY THE INCOME TAX APPELLATE TRIBUNAL 'A' BENCH, BANGALORE, IN APPEAL PROCEEDINGS IN IT(TP)A No.581/B/2012 & C.O.No.31/BANG/2015 FOR ASSESSMENT YEAR 2007-08 AS SOUGHT FOR IN THIS APPEAL AND TO GRANT SUCH OTHER RELIEF AS DEEMED FIT IN THE INTEREST OF JUSTICE. THIS I.T.A. COMING ON FOR HEARING, THIS DAY, ALOK ARADHE J., DELIVERED THE FOLLOWING: JUDGMENT This appeal under Section 260-A of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’, for short) has been filed by the revenue. The subject matter of the appeal pertains to the Assessment Year 2007-08. The appeal was admitted by a Bench of this Court on the following substantial question of law: "Whether on the facts and in the circumstances of the case, the Tribunal was right in holding that the Transfer Pricing Officer/Assessing Authority is not right in treating Arms length Price for royalty payment as 'NIL' eventhough the TPO had clearly established that

3 assessee had not derived any benefit out of royalty payment?" 2. Facts leading to filing of this appeal briefly stated are that the assessee filed the return of income for the Assessment Year 2007-08 declaring a total income of Rs.3,87,19,390/-. The Assessing Officer initiated proceeding under Section 148 of the Act. As the assessee had entered certain international transactions, the Assessing Officer made a reference to the Transfer Pricing Officer for determination of Arms Length Price of the transactions. One of the international transactions entered into by the assessee was with its associated enterprises in respect of payment of Rs.4,30,33,562/- being royalty. The assessee, in its transfer pricing study, bench marked the international transaction of payment of royalty along with other international transactions at entity level by choosing the transactional net margin method as the most appropriate method. In this behalf, the Transfer Pricing Officer picked up the international transaction of payment of royalty for determination of Arms Length Price and rejected the method adopted by the

4 assessee of aggregating all the transactions in an independent manner. On the basis of the application of comparable uncontrolled price method, the Transfer Pricing Officer determined the Arms Length Price of the said transaction as NIL and held that the assessee has not shown any proof that other group concerns or third parties are charging identical royalty and that the assessee had not derived any economic benefit from the transaction. The Transfer Pricing Officer determined the transfer pricing adjustment of Rs.4,30,33,562/-. The Assessing Officer thereupon passed an order on 17.02.2011 by incorporating the aforesaid adjustment. The assessee thereupon filed an appeal before the Commissioner of Income Tax (Appeals), who by an order dated 28.02.2012, deleted the adjustment by holding that the method adopted by the assessee of bench marking the international transaction at entity level by adopting the net margin method is correct.

The Commissioner of Income Tax (Appeals) determined the adjustment on the aggregated international transaction. Being aggrieved by the aforesaid order passed by the Commissioner of Income Tax (Appeals), the revenue filed an

5 appeal before the Tribunal. The assessee also filed the cross-objection in the appeal. 3. The Tribunal, by a common order dated 26.08.2016 dismissed the appeal preferred by the revenue and affirmed the order of the Commissioner of Income Tax (Appeals) to the extent of bench marking the transaction of payment of royalty along with other transactions by applying the transactional net margin method. The Tribunal further held that the Arms Length Price cannot be determined as NIL as the evidence establishes that the royalty payment was made against the use of or right to use the technical know-how which was produced before the Commissioner of Income Tax (Appeals) and the Assessing Officer and the Transfer Pricing Officer does not have jurisdiction to examine the allowability of the claim by applying the benefit test or the conditions as provided under Section 37 of the Act. Accordingly, the appeal preferred by the revenue was dismissed and the cross-objection filed by the assessee was disposed of. In the aforesaid factual background, this appeal has been filed.

6 4. Learned counsel for the revenue submitted that the Tribunal erred in holding that the Transfer Pricing Officer is not right in treating the Arms Length Price of royalty as NIL even though the Transfer Pricing Officer had clearly established that the assessee had not derived any benefit out of royalty payment. It is further submitted that the Tribunal ought to have appreciated that the Assessing Authority / Transfer Pricing Officer had rightly held that the assessee had failed to prove that it had obtained the benefit by receiving the tangible / know-how against the payment of royalty. It is also pointed out that the copy of the agreement was neither produced before the Assessing Officer nor before the Tribunal and the assessee did not derive any benefit from the payment of royalty. It is contended that the order passed by the Tribunal is therefore, liable to be set aside. 5. On the other hand, learned counsel for the assessee submitted that the finding recorded by the Tribunal that the international transaction of payment of royalty ought to be bench marked in a correct manner at entity level of application of net margin method, has not been challenged

7 by the revenue before this Court. It is further submitted that since the revenue has accepted the aforesaid finding, the issue involved in this appeal is rendered academic. It is also submitted that the Tribunal, while recording the aforesaid finding, has relied on a decision of co-ordinate bench of the Tribunal in 'DCIT Vs. TOYOTA KIRLOSKAR MOTORS PVT. LTD.' i.e. order dated 30.06.2016 passed in IT(TP)A No.16/Bang/2015. It is also pointed out that the aforesaid order was challenged by the revenue in ITA No.25/2017 and a Bench of this Court by a judgment dated 27.08.2018 passed in ITA No.25/2017 has dismissed the appeal preferred by the revenue. It is also submitted that the issue that the Transfer Pricing Officer can only determine the Arms Length Price of an international transaction in the manner prescribed under the Act and the Rules framed thereunder is no longer res integra and is covered by the decisions of High Court of Delhi and Bombay in 'CIT Vs. EKL APPLIANCES LTD.' and 'CIT Vs. LEVER INDIA EXPORTS LTD.'. It is also submitted that concurrent finding of fact has been recorded by the authorities which has not been demonstrated to be perverse.

8 6. We have considered the submissions made on both sides and have perused the record. The issue whether the Transfer Pricing Officer, while exercising the jurisdiction under Section 92KA(3) of the Act, can only determine the Arms Length Price of an international transaction, is no longer res integra and the same has already been adjudicated by the decisions of Delhi and Bombay High Courts respectively in 'CIT Vs. EKL APPLIANCES LTD.' and 'CIT Vs. LEVER INDIA EXPORTS LTD', supra. The aforesaid issue is no longer res integra and is covered by the decision of aforesaid High Courts. The Transfer Pricing Officer cannot derive any benefit from the transaction. The relevant extract of the decision of High Court of Bombay in LEVER INDIA EXPORTS LTD. is reproduced below for the facility of reference. "7. We note that the Tribunal has recorded the fact that the respondent assessee has launched new products which involved huge advertisement expenditure. The sharing of such expenditure by the respondent assessee is a strategy to develop its business. This results in improving the brand

9 image of the products, resulting in higher profit to the respondent assessee due to higher sales. Further, it must be emphasized that the TPO's jurisdiction was to only determine the ALP of an International Transaction. In the above view, the TPO has to examine whether or not the method adopted to determine the ALP is the most appropriate and also whether the comparables selected are appropriate or not. It is not part of the TPO's jurisdiction to consider whether or not the expenditure which has been incurred by the respondent assessee passed the test of Section 37 of the Act and/or genuineness of the expenditure. This exercise has to be done, if at all, by the Assessing Officer in exercise of his jurisdiction to determine the income of the assessee in accordance with the Act. In the present case, the Assessing Officer has not disallowed the expenditure but only adopted the TPO's determination of ALP of the advertisement expenses. Therefore, the issue for examination in this appeal is only the issue of ALP as determined by the TPO in respect of advertisement expenses. The jurisdiction of the TPO is specific and limited i.e. to determine the ALP of an International Transaction in terms of Chapter X of the Act read with Rule 10A to 10E of the Income Tax Rules.

10 The determination of the ALP by the respondent assessee of its advertisement expenses has not been disputed on the parameters set out in Chapter X of the Act and the relevant Rules. In fact, as found both by the CIT(A) as well as the Tribunal that neither the method selected as the most appropriate method to determine the ALP is challenged nor the comparables taken by the respondent assessee is challenged by the TPO. Therefore, the ad-hoc determination of ALP by the TPO dehors Section 92C of the Act cannot be sustained." 7. Besides that, the finding recorded by the Tribunal that the international transaction of payment of royalty ought to be bench marked in an aggregated manner at entity level on application of transactional net margin method has not been challenged by the revenue before this Court. Therefore, the issue involved in this appeal is covered by the decisions of Bombay as well as Delhi High Court.

11 8. For the aforementioned reasons, the substantial question of law is answered in favour of the assessee and against the revenue. We do not find any merit in the appeal. The same fails and is hereby dismissed. Sd/- JUDGE Sd/- JUDGE RV