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Facts
The assessee, Tata Cummins Pvt. Ltd., incurred R&D expenses for adapting engine technology to Indian market requirements, including emission norms. The Transfer Pricing Officer (TPO) treated these expenses as an international transaction and made an adjustment, suggesting the R&D benefits accrued to the Associated Enterprise (AE), Cummins Inc. The assessee contended that the R&D was for its own business, aimed at localizing products for the Indian market, and did not create any new technology or benefit the AE.
Held
The Tribunal held that the R&D expenditure incurred by the assessee for adapting and localizing engine technology for the Indian market did not constitute an international transaction. The expenses were incurred for the assessee's own business purposes to meet local emission norms and cater to the Indian market, and any incidental benefit to the AE was not sufficient to characterize it as an international transaction. The Tribunal also noted that the assessee had already made arm's length payments for the technical know-how from Cummins Inc.
Key Issues
Whether R&D expenditure incurred by the assessee for adapting existing technology to the Indian market constitutes an international transaction and is subject to transfer pricing adjustment.
Sections Cited
Section 35(1)(i), Section 92B, Chapter X
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Income Tax Appellate Tribunal, RANCHI BENCH, RANCHI
Before: SHRI GEORGE MATHAN & SHRI RATNESH NANDAN SAHAY
Assessee represented by Sri Ketan Ved, A.R. Department represented by Smt. Rinku Singh, CIT-DR Date of hearing 12/06/2025 Date of pronouncement 12/06/2025 O R D E R PER: BENCH 1. This is an appeal filed by the assessee against the order of the learned Transfer Pricing Officer (TPO) wherein on the basis of direction of the Dispute Resolution panel-2, New Delhi (Dispute Resolution Panel), the TPO has treated the Research & Development (R&D) expenses incurred by the assessee as an Arm's Length Price (Arms Length Price) adjustment that was supposed to be done in regard to the transactions with the AEs of the assessee. The assessee Tata Cummins Pvt. Ltd. is engaged in manufacturing and assembly of high speed diesel engines which is primarily for automotive applications. The assessee had entered into an agreement with Cummins incorporated on 20/01/2020.
Shri Ketan Ved, ld A.R. is represented on behalf of the assessee and Smt. Rinku Singh, ld. CIT-DR is represented on behalf of the revenue. It was submitted by the ld. AR that the Transfer Pricing Officer was of the view that the license granted by Cummins to the assessee included any R&D development done by Tata Cummins Vs DCIT the assessee on the engine technology and the patents which was owned by Cummins and therefore, the R&D developments that has been done by the assessee was owned by Cummins Incorporated. It was a submissions that consequently, the TPO treated the same as liable to be included in the ALP and in respect of a total expenditure of ₹ 10,90,71,239/- held that there was a short fall of ₹ 13,17,25,335/- and consequently, made an adjustment in respect of the short fall. The ld. AR drew our attention of the various clauses of the agreement which were shown from pages 198 of the paper book. He further drew our attention to the reply filed by the assessee to the DRP at page 320 to 328 of the paper book. He drew our attention to para 9 of the objections which reads as follows: "9. Objection 8— Expenditure on in-house R&D is not an international transaction. 9.1 Your goodself in the show cause notice has mentioned that as per the Royalty Agreement between TCPL and Cummins Inc., if there is any improvement or change in the technology either by Cummins Inc. or TCPL then the right, title, interest of the changed technology or improvement shall vest with Cummins Inc. Merely on the basis of this clause mentioned in the agreement, your goodself has questioned as to why the R&D expenditure incurred by the Assessee on research activities should not be remunerated by the AE and accordingly why no income be calculated for R&D activity. 9.2 In response to the said show cause issued by your goodself, the Assessee wishes to submit as follows: Background of R&D activity of TCPL 9.3 The Company established a state-of-art engineering facility in 1995 at Jamshedpur. The technology partner of the joint venture contributed with the base- level BS-I technology for use in manufacture of engines. The Company's technological journey began with work on CNG Engines and BS-I and II products. However, the base engine technology always flowed from Cummins Inc. USA. Thus since 1995 onwards, Company's R&D team worked in adapting Base four-cylinder 413 3.9 litres Euro I engine technology from Cummins US to develop BSI & II compliant engines for various MCV and HCV models in 75 HP to 100 HP range. Simultaneously, R&D work was also carried out to develop CPCB II compliant engines for Gen set applications in 9.4 Subsequent periods saw rapid changes in environmental / emission norms putting a serious demand on R&D. By 2005, the Assessee's R&D was involved in adapting Base six cylinder 613 5.9 litres Euro I engine technology from Cummins Inc. USA to develop BSII & III compliant engines for larger, multi axle / trailer vehicles that required higher power and cleaner engines in 130 HP to 210 HP range.
9.5 By 2008, the Indian customers requested for still larger engines complying with BSIII norms. This was required to integrate the fuel efficiency with the power train. The Company responded by developing ISBe 6.7 engines in 235HP to 285HP range. It was developed over Base engine platform of ISBe 6.7 litres electronic control engine from Cummins Inc. USA. The new engine found its way on heavy duty tippers, trailers and buses. 2011 saw BSIV version of this engine - assuring cleaner environment to the nation. 9.6 With demand for a smaller, cheaper but more environment friendly BSIV engine, Company's R&D team revisited 5.9 litre engine and developed BSIV compliant engine over the BSIII variant in 130HP to 215HP range. The Company's R&D efforts on fuel efficiency has led perceptible improvements in fuel consumption of Company's BS- 111 and BSIV engines. For example, a new Turbo Charger was integrated with 5.9 litres LCCR engine leading to best in competition engine in terms of fuel efficiency and weight / power ratio.
9.7 Thus, as enumerated above, due to sustained, innovative and painstaking efforts, the Company's R&D team has made available high performance, cheap and clean engines to its customers which in-turn enabled them to stay ahead of competition. Today, these engines cater to major transport requirements like Buses, Trucks, Trailers, Excavators and Tippers made by Tata Motors, Asia Motor Works, Eicher, Komatsu and others. They also help Indian army with armoured trucks and Missile carriers. Facts for the year under consideration 9.8 The Company has incurred in house R&D expenditure of INR 10,90,71,239/- Lakhs. The said R&D expenses incurred by the Assessee are in the nature of testing expenses, salaries and wages of the personnel involved, travel etc. The details of R&D expenditure debited to P&L are tabulated below: Nature of Expense Amount (In Lakhas) Salareis & Wages 220 Material, Spares and 73 Consumables Testing Expenses 798 Total 1,091 Tata Cummins Vs DCIT 9.9 In the automobile market, existing engine technology always needs adaptation, testing and indigenization to fruitfully deploy for specific end needs of customers. Localization is the need of the hour since imported technology always proves to be expensive and the only strategic recourse available for survival in the market is to adaptation or product localization to suit the Indian market. This requires design and rigorous testing of various items that go into the final offerings to local customers. 9.10 The R&D activity is primarily undertaken for localisation of the product, i.e. engine, for the Indian market and also to customise the engines manufactured, as per the clients' requirements. It also includes the testing activities like testing of the emission capacity of the engine and receiving its certification from Automotive Research Association of India ('ARAI'), checking the validation and reliability of the engines produced, etc. 9.11 It is evident from the above that technology / base engines had always procured from Cummins Inc., however the same technology / base engines could not be utilised in the Indian market in as is form and required appropriate localisation and customisation to meet Indian market emission norms and other suitability factors. The R&D efforts undertaken by the Assessee has been towards this localisation and customisation without which the engines could not saleable under the Indian market. These customised local engines are of no use or can be sold only in India and are not saleable in US considering that US has different regulatory norms. Hence, the Assessee has been incurring this expenditure on its own account with no flowing benefit to the AE and hence there is no service given to the AE.
9.12 As it is evident from the above, the details of expenditure on R&D itself will not lead creation of any right/title/interest vested with Cummins Inc.
Expenditure on in-house R&D is not an international transaction 9.13 R&D expenditure incurred by TCPL is not an international transaction under the explanation to section 928 of the Act inserted by the Finance Act 2012 The explanation to section 928 as inserted by the finance act 2012 read as follows: "(i) the expression "international transaction" shall include— ……………………………. (b) the purchase, sale, transfer, lease or use of intangible property, including the transfer of ownership or the provision of use of rights regarding land use, copyrights, patents, trademarks, licences, franchises, customer list, marketing channel, brand, commercial secret, know-how, industrial property right, exterior design or practical and new design or any other business or commercial rights of similar nature; Clause (ii) of the said Explanation reads as follows- Tata Cummins Vs DCIT (ii) the expression intangible property" shall include— (b) technology related intangible assets, such as, process patents, patent applications, technical documentation such as laboratory notebooks, technical know-how .................... 9.14 At the very outset, it would be seen that under the definition of the term international transaction the purchase, sale, transfer, lease or use of intangible property has been classified as an international transaction. Intangible property has been defined to include technology related intangible assets such as process patents, technical know-how, etc. Thus, where two AEs engage in a transaction, which involves the purchase, sale, transfer lease or use of intangible property, the same shall be classified as an international transaction. In the present case the admitted facts are that TCPL is using the technical know-how of Cummins Inc. and has already made the arm's length royalty payments for the same. That is the extent of the applicability of the definition of international transaction in the present case. 9.15 Thus, it would be seen that even under the said provisions, the R&D expenses incurred by TCPL for its own business operations still would not partake the character of an international transaction under the law. TCPL wishes to further highlight that the R&D expenses incurred by TCPL does not result in creation of any technology related intangible which benefits Cummins Inc. and hence can in no way be considered as an international transaction between TCPL and its AE. The provisions do not cover such a situation. 9.16 Further, as mentioned earlier the Assessee had always procured technology / base engines from Cummins Inc., however the same technology / base engines could not be utilised in the Indian market in as is form and required appropriate localisation and customisation to meet Indian market emission norms and other suitability factors. The R&D efforts undertaken by the Assessee has been towards this localisation and customisation without which the engines could not saleable under the Indian market. These customised local engines are of no use or can be sold only in India and are not saleable in US considering that US has different regulatory norms. Hence, the Assessee has been incurring this expenditure on its own account with no flowing benefit to the AE and hence there is no service given to the AE. 9.17 Therefore, the R&D expenditure incurred by TCPL cannot be held for use of intangible property as for the use of the intangible property TCPL had made arm's length payment to Cummins Inc. R&D expenses incurred by TCPL are expenses incurred in- house and/ or payments made to third party domestic service providers and thus, cannot be held to be covered by the definition of Section 92B of the Act. 9.18 In this regard, the Assessee has placed reliance on the following judicial precedents: i. Himalaya Drug Company [20211 124 taxmann.com 252 (Bangalore - Trib.)
Tata Cummins Vs DCIT "21. Respectfully following the ratio of the decision of the Hon'ble Delhi High Court in the above cases, we hold that no TP adjustment can be made by deducing from the difference between AMP expenditure incurred by assessee-company and AMP expenditure of comparable entity, if there is no explicit arrangement between the assessee-company and its foreign AE for incurring such expenditure. The fact that the benefit of such AMP expenditure would also endure to its foreign AE is not sufficient to infer existence of international transaction. The onus lies on the revenue to prove the existence of international transaction involving AMP expenditure between the assessee- company and its foreign AE. We also hold that that in the absence of machinery provisions to ascertain the price incurred by the assessee-company to promote the brand values of the products of the foreign entity, no TP adjustment can be made by invoking the provisions of Chapter X of the Act." ii. Colgate-Palmolive (India) Ltd. [2020] 118 taxmann.com 399 (Mumbai - Trib.)
"17.1 In the above-mentioned decisions, it has categorically been held that in the absence of agreement between the assessee and its AE obliging the assessee to incur AMP expenditure on behalf of its AE, no international transaction can be presumed. Even if some indirect benefit has accrued to the AE by aforesaid expenditure, it could not be held that the some was incurred to promote the brand of foreign AE.
Facts being identical, we follow the above order of the Co-ordinate Bench in appellant's own case for AYs 2005-06 & 2007-08 and delete the upward adjustment of Rs. 572,554,441/- made by the AO. Thus the 4th ground of appeal is allowed." iii. Vodafone India Services Pvt. Ltd vs Union Of India [2014] 50 taxmann.com 300 (Bombay)
The relevant extracts are as follows: "24. A plain reading of Section 92(1) of the Act very clearly brings out that income arising from on International Transaction is a condition precedent for application of Chapter X of the Act. This has already been so held by the order dated 29 November 2013 of this Court in Vodafone-Ill." "39. In tax jurisprudence, it is well settled that following four factors are essential ingredients to a taxing statute: - (a) subject of tax; (b) person liable to pay the tax;] (c) rate at which tax is to be paid, and (d) measure or value on which the rate is to be applied. Thus, there is difference between a charge to tax and the measure of tax (a) & (d) above. This distinction is brought out by the Supreme Court in Bombay Tyres India Ltd. Vs. Union of India reported in 1984 (1) 5CC 467 wherein it was held that the charge of excise duty is 6 Tata Cummins Vs DCIT on manufacture while the measure of the tax is the selling price of the manufactured goods. In this case also the charge is on income as understood in the Act, and where income arises from an International Transaction, then the measure is to be found on application of ALP so for Chapter X of the Act is concerned. The arriving at the transactional value/ consideration on the basis of ALP does not convert non-income into income. The tax can be charged only on income and in the absence of any income arising, the issue of applying the measure of ALP to transactional value/consideration itself does not arise ...... .. "45. Chapter X of the Act is a machinery provision to arrive at the ALP of a transaction between AEs. The substantive charging provisions are found in Sections 4, 5, 15 (Salaries), 22 (Income from house property), 28 (Profits and gains of business), 45 (Capital gain) and 56 (Income from other Sources). Even Income arising from International Transaction between A.E. must satisfy the test of Income under the Act and must find its home in one of the above heads i.e. charging provisions..... iv. Dana Corporation [2010] 186 Taxman 187 (MR) The relevant extracts are as follows: "8. ............ It must be noted that Section 92 is not an independent charging provision. As the Section heading itself shows, it is a provision dealing with "Computation of income from international transactions". The opening part of Section 92 says that "any income arising from an international transaction shall be computed having regard to the arm's length price". The expression 'income arising' postulates that the income has arisen under the substantive charging provisions of the Act. In other words% the income referred to in Section 92 is nothing but the income captured by one or the other charging provisions of the Act. In such a case, the computation aspect is taken care of by Section 92 and other related provisions in Chapter X. It must be noted that the income chargeable under the Act is divided into various heads under Section 14. The heads of income specified in that Section are: 14. Heads of Income A-Salaries B [Omitted by the Finance Act, 1988] C - Income from house property D - Profits and gains of business or profession E - Capital gains F - Income from other sources 8.1. The income in the present case, if at all, is traceable to 'Capital gains' which is one of the heads of income. If by application of the provisions of Section 45 read with Section 48 which are integrally connected with each other, the income cannot be said to arise, Section 92 of the Act does not come to the aid of Revenue, even though it is an international transaction. The expression 'income' in Section 92 is not used in a sense wider than or different from its scope and connotation elsewhere in the Act. Section 92 7 Tata Cummins Vs DCIT obviously is not intended to bring in a new head of income or to charge the tax on income which is not otherwise chargeable under the Act. The interpretation sought to be placed by Revenue would amount to reading words into S.92. I hove, therefore no hesitation in rejecting the Revenue's contention. 8.2. In the case of Vanenbury Group By., In re8, this Authority while referring to the provisions in Chapter X, observed: "These are again machinery provisions which would not apply in the absence of liability to pav tax"
8.3. The learned counselfor the Revenue has relied on a recent decision of this Authority" v. Maruti Suzuki India Ltd v. CIT [2015] 64 taxmann.com 150 (Delhi) The relevant extracts are as follows:
"76. As explained by the Supreme Court in CIT v. B.C. Srinivasa Setty (1979) 128 ITR 294 (SC) and PNB Finance Ltd. vs. CIT (2008) 307 ITR 75 (SC) in the absence of any machinery provision, bringing an imagined international transaction to tax is fraught with the danger of invalidation. In the present case, in the absence of there being an international transaction involving AMP spend with an ascertainable price, neither the substantive nor the machinery provision of Chapter X are applicable to the transfer pricing adjustment exercise" "89. To answer the questions framed by the orders dated 29th October 2014 and 10th September 2015 in of 2014 and 710 of 2015 respectively:............. …………..(ii) Question No.2 is answered in the negative i.e. in favour of the Assessee and against the Revenue. In other words, it is held that AMP expenses incurred by MSIL cannot be treated and categorised as an international transaction under Section 928 of the Act. (iii) Since answer to Question No.2 is in favour of the Assessee, the question of the TPO making any transfer pricing adjustment in respect of such transaction Chapter X does not arise and therefore, question (3) is answered in the negative and in favour of the Assessee and against the Revenue." vi. Bausch & Lomb Eyecare India Pvt Ltd [ITA 63/2014] The relevant extract for the same is as follows: "There is merit in the contention of the Assessee that a distinction is required to be drown between a 'function' and a 'transaction' and that every expenditure forming port of the function Cannot be construed as a 'transaction'. Further, the Revenue's attempt at re-characterising the AMP expenditure incurred as a transaction by itself when it has neither been identified as such by the Assessee or legislatively recognised in the Explanation to Section 92 B runs counter to legal position explained in CIT v. EKL vii. Essilor India (P.) Ltd. v. DCII [2016] 68 taxmann.com 311 (Bangalore - Trib.) The Bangalore Tribunal has relied on the decision in the case of Bausch & Lomb Eyecare (India) Pvt. Ltd. Vs. ACIT (2016) 381 117 (Del) and held that, "no TP adjustment can be made by deducing from the difference between AMP expenditure incurred by assessee-company and AMP expenditure of comparable entity, if there is no explicit arrangement between the assessee -company and its foreign AE for incurring such expenditure. The fact that the benefit of such AMP expenditure would also endure to its foreign AE is not sufficient to infer existence of international transaction. The onus lies on the revenue to prove the existence of international transaction involving AMP expenditure between the assessee-company and its foreign AE. We also hold that that in the absence of machinery provisions to ascertain the price incurred by the assessee- company to promote the brand values of the products of the foreign entity, no TP adjustment can be made by invoking the provisions of Chapter X of the Act." viii. Honda Siel Power Products Ltd. (2015) 64 taxmann.com 328 (Delhi)
"Additionally it was held both in MSIL (supra) as well as Whir/pool of India Limited (supra) that in terms of the law explained by the Supreme Court in CIT v.
C. Srinivas Setty (1981) 128 ITR 294 (SC) - and PNB Finance Limited v. CIT (2008) 307 ITR 75 (SC), in the absence of any machinery provision, bringing an imagined international transaction to tax is fraught with the danger of invalidation. In the present case, in the absence of there being on international transaction involving AMP spend with on ascertainable price, even if such price were to be nil, neither the substantive nor the machinery provision of Chapter X are applicable to the transfer pricing adjustment exercise." ix. Vijai Electricals Limited [2013] 36 Taxman 386 (AAR) "The learned counsel relied upon the decision in the case of Dana Corpn., In re [2010] 321 ITR 178/186 Taxman 187 (MR-New Delhi) wherein it has been held as follows: Section 92 is not an independent charging provision. The expression 'income arising' in the opening words of section 92 postulates that income has arisen under the substantive charging provisions of the Act. If by application of the provisions of section 45 read with section 48, which are integrally connected one with the other, income cannot be said to arise, section 92 does not come to the aid of the Revenue even though it is an international transaction. Section 92 obviously is not intended to bring in a new head of income or to charge tax on income which is not otherwise chargeable under the Act."
Tata Cummins Vs DCIT 9.19 Therefore, from the above it can be concluded that the R&D expenses incurred by TCPL cannot be brought within the ambit of definition of international transaction as per section 92B of the Act.
Objection 9 -Expenditure on in-house R&D is not a service to Cummins Inc. and is incurred solely for the benefit of TCPL 10.1 Cummins Inc. provides TCPL the technical know-how (i.e. methodology) to produce certain category (like Cummins B, ISBe, ISLe) of engines. However, the engines produced by TCPL, using the technology of Cummins Inc., is generally not completely compatible with the requirements of the Indian Market. Considering the same, TCPL is required to make certain changes / modification in the ancillary parts of the engines produced with no specific change in the engine technology. Considering the application in which the engine is used, changes are required to be made.
10.2 Once the relevant changes/ modification are done, the engines are then tested for different variants (like emission capacity, fuel efficiency, reliability) before the same is delivered to the targeted customer. 10.3 Accordingly, for making the engines suitable as per the Indian Market, TCPL requires its R&D unit to cater to these requirements. Hence, this substantiates that the R&D activity undertaken by the said R&D unit is not a service to Cummins Inc. It neither results in any change in the design of the engine nor any improvement. The engines modified are solely for the Indian market and Cummins Inc. is not being benefitted out of the modified engines. 10.4 Thus, it is evident that the elements of R&D undertaken by TCPL is a pre-requisite for the business of the Company as the TCPL primarily caters to the Indian Market and is solely for its own purpose and benefit and for making the sale of the engine in the Indian market which has to meet Indian emission requirements. Hence the same is not required to be remunerated by Cummins Inc. as no service is being rendered to the AE. 10.5 R&D expenditure incurred by TCPL was purely for its own business and for selling the products in the Indian market specifically to meet/comply with Indian emission norms - BS Ill, BS IV etc. The R&D activity has not benefitted Cummins Inc. The prima-facie objective of the R&D activity was to customise the engines as to suit Indian environment and market. Also, if any benefit is accruing to Cummins Inc (though not accepting this aspect) on account of the R&D activity undertaken by TCPL then the same is purely incidental in nature for which no compensation is required to be received by TCPL. 10.6 The following extracts from India's chapter forming part of the United Nations Transfer Pricing Manual on the issue of incidental benefit are presented for your reference:
Tata Cummins Vs DCIT "10.4.94. Identification of the services requiring an arm's length remuneration is one of the main challenges for the Indian transfer pricing administration. India believes that shareholder services. duplicate services and incidental benefit from group services do not give rise to intro-group services requiring arm's length remuneration." This view of the Indian Tax Administration that incidental benefit does not require any compensation has been upheld by various Courts in India. 10.7 The Hon'ble High Court in the writ petition filed by Maruti Suzuki India Limited (2010) 328 ITR 210 (Delhi) has held that in case the licensed affiliate feels the need to use a foreign brand/logo on its product due to which the buyer would give its product a preference over other products, the benefit which the owner of foreign brand/logo gets in the form of increased awareness and goodwill in domestic market is purely incidental. No payment is expected to be made by the owner of foreign brand/logo for such benefit. 10.8 Further, in the case of Nestle India Ltd. vs. DCIT (111 TTJ 498) issued by Delhi ITAT, it was held that. "7.12 There are some cases where an intra-group service performed by a group member such as a shareholder or coordinating centre relates only to some group members but incidentally provides benefits to other group members. Examples could be analysing the question whether to reorganise the group, to acquire new members, or to terminate a division. These activities could constitute intra-group services to the particular group members involved,. For example those members who will make the acquisition or terminate one of their divisions, but they may also produce economic benefits for other group members not involved in the object of the decision by increasing efficiencies economics of scale, or other synergies. The incidental benefits ordinarily would not cause these other group members to be treated as receiving an intro-group service because the activities producing the benefits would not be ones for which on independent enterprise ordinarily would be willing to pay." 10.9 Thus, it is evident that apart from organizations like the OECD, even the Indian tax administration and Indian courts, hold the view that there can be no compensation for incidental benefit. 10.10 Further, it may also be noted that the incurrence of R&D expenditure has benefitted TCPL and not Cummins Inc. The R&D expenditure was done by TCPL for meeting Indian emission norms BS Ill, BS IV etc. increasing its sales in the Indian markets and for its own business purposes. The customisation of engines were a kind of selling strategy to meet the customers' demands and requirements. 10.11 In this regard, reliance is placed on the judgment of Sony India (Private) Limited's (114 ITD 448), wherein it was held that the expenditure incurred by the taxpayer to promote the sales of its products and if purely for the purpose of its business is an 11 "Moreover, the said expenditure was incurred by the taxpayer company to promote the soles of the products dealt with by it in India and the some thus having been incurred wholly and exclusively for the purpose of its business, it was fully deductible as an allowable business expenditure irrespective of any direct or indirect benefit which might have accrued to its parent company."
10.12 Reliance is also placed on the decision of the Hon'ble Delhi HC in the case of Bausch & Lomb Eyecare India Pvt Ltd [ITA 63/ 20141, wherein the Hon'ble Court held that even if a function or expenses gives incidental benefit to the foreign AE it cannot be considered that the said expenses were incurred for that AE. The relevant extract is as follows:
"As already mentioned, merely because there is an incidental benefit to the foreign AE, it cannot be said that the AMP expenses incurred by the Indian entity was for promoting the brand of the foreign AE. As mentioned in Sassoon J David (supra) "the fact that somebody other than the Assessee is also benefitted by the expenditure should not come in the way of an expenditure being allowed by way of a deduction under Section 10 (2) (xv) of the Act (Indian income Tax Act, 1922) if it satisfies otherwise the tests laid down by the law"
10.13 It may be noted that the above-mentioned view has further also been highlighted and reiterated by the Delhi High Court in the decision of Whirlpool Of India Ltd [ITA 610/ 2014] and Honda Siel Power Products Ltd [ITA 346/ 2015]. The relevant extract from the Honda Siel (supra) judgement is as follows:
"The OECD Transfer Pricing Guidelines, para 7.13 emphasises that there should not be any automatic inference about an AE receiving an entity group service only because it gets on incidental benefit for being part of a larger concern and not to any specific activity performed" 10.14 In addition, the Assessee further submits that the commercial expediency/ business rationale of a particular expenditure incurred for functioning and furtherance of its business is the business' prerogative. Further, the reasonableness of the expenditure has to be judged from the point of view of the business owner and not of Revenue authorities. Reliance in this regard can be placed on the following judicial precedents which have held that commercial expediency of an expenditure incurred for the purpose of business is to be examined from the business perspective: i. In Cinestaan Entertainment (P.) Ltd. f2019 (106 taxmann.com 300), the Delhi Tribunal has held as follows.
Tata Cummins Vs DCIT "31. The Courts have held that Income Tax Department cannot Sit in the armchair of businessman to decide what is profitable and how the business should be carried out. Commercial expediency has to be seen from the point of view of businessman. Here in this case if the investment has made keeping assessee's own business objective of projection of films and media entertainment, then such commercial wisdom cannot be questioned." ii. In CIT v Panipat Woolen and General Mills (103 ITR 66), the Supreme Court has held that held that the test of commercial expediency cannot be reduced in the shape of a ritualistic formula, nor can it be put in a water-tight compartment so as to be confined in a straight-jacket. The test merely means that the court will place itself in the position of a businessman and find out whether the expenses incurred cou1d be said to have been laid out for the purpose of the business or the transaction was merely a subterfuge for the purpose of sharing or dividing the profits ascertained in a particular manner. The court held that in the ultimate analysis the matter would depend on the intention of the parties as spelt out from the terms of the agreement or the surrounding circumstances, the nature or character of the trade or venture, the purpose for which the expenses are incurred and the object which is sought to be achieved for incurring those expenses. iii. In ClTv Dhanajgirji Raja Narasingirji (91 ITR 544), the Supreme Court has held as follows: "It is not open to the department to prescribe what expenditure an Appellant Company should incur and in what circumstances he should incur that expenditure. Every businessman knows his interest best." Thus, whether or not a particular expenditure has to be incurred, depends on the perception of the businessman! Assessee, and this business perception cannot be substituted by the revenue's perception of whether or not such expenditure should have been incurred." It was a submission that in para 9.15, the assessee had specifically mentioned that the R&D expenses incurred by the assessee did not result in the creation of any technology related intangibles which benefitted Cummins International. He further drew our attention to para 10.3 wherein it was categorically mentioned that "the engines were made suitable as per the Indian market and for this purpose the assessee had incurred the R&D, the said R&D did not give any service to the AE Cummins Incorporated and that there was neither any change in the design in the engine or any improvement and that Cummins did not get Tata Cummins Vs DCIT any benefit out of the said modified engines". The assessee has also relied upon the decision of the Hon'ble Delhi High court in the case of Maruti Suzuki India Ltd. reported in 328 ITR 210 wherein it had been held that the intangible expenses in the form of advertisement expenses did not give any benefit to the AEs. The ld. AR further drew our attention to the order of the DRP at para 2.3 of the order under 92CA(3) dated 19/10/2023 wherein the TPO had brought out the activities of the assessee. He further drew our attention to para 3.4 in regard to the intangible assets. It was a submission that the TPO has specifically recorded that "TCPL does not own any non-routine intangibles and accordingly does not own trade secrets or undertake research and development activities of its own that would lead to the development of the non-routine intangibles. Whereas the AE owns the technical knowhow relating to manufacturing of engines". It was a submission that the TPO himself agrees that the R&D development done by the assessee did not give any benefit to the AE. It was a submission that the adjustment of the ALP subsequently without considering the submissions of the assessee is liable to be deleted.
In reply, the ld. CIT-Departmental Representative vehemently supported the order of the Assessing Officer. It was a submission that the adjustment as made is valid in so far as the expenditure incurred by the assessee under R&D was claimed under Section 35(1)(i). It was a submission that the said R&D led to modifications so as to meet the local emission requirements and as per the agreement the said modifications also belonged to the AE being Cummins Incorporated.
Tata Cummins Vs DCIT 4. We have considered the rival submissions. A specific query was raised to the ld. Authorised Representative as to whether the engines which have been built/modified for the Indian conditions whether such engines are exported at the instance of the AE to any country to which the AR submitted vehemently that no engines have been exported to any of the associated AE companies or directions of the AEs. To this query, the ld. Authorised Representative ansered in the negative. We have considered the rival submissions. A perusal of the details of the R&D done by the assessee is also extracted in the Transfer Pricing Officer's order. These as also in the reply filed by the assessee to the DRP. The R&D is basically formeeting the local emission norms and the territorial conditions. The similar conditions are not available where the regular Cummins Incorporated unmodified base engines are used. The assessee exports automobiles installed with the said modified engines to countries which have emission norms which are lower than that of India. These exports are done by the assessee only and has no association with the AE. It is only in respect of the base structure of the engine for which the assessee has the agreement with Cummins and for that the assessee is paying the royalty. As the assessee has not transferred nor has any patent been recorded in the name of Cummins as a result of the R&D which has been done by the assessee obviously it cannot be said that there is transfer of any technology to the AE or that the R&D has generated any benefit for the AE in any manner whatsoever. It may also be worthwhile to mention here that the TPO in his order in para 3.4 categorically admits that no intangible benefits has been generated or owned by TCPL. When the assessee itself does not own any intangible non-routine items, how can the Tata Cummins Vs DCIT assessee transfer the same to the AE as there is no patent or technology developed and held by the assessee on account of the R&D done by the assessee, we are of the view that the ALP adjustment as done in the case of the assessee is unsubstantiated and consequently deleted the same. In the result, ground No. 2 of the assessee's appeal stands allowed.
Coming to ground No. 4 of assessee's appeal, it is noticed that the issue is in regard to the disallowance of expenditure incurred on club facilities. It was fairly agreed by both the sides that the issue is squarely covered by the decision of the Coordinate Bench of this Tribunal in the assessee's own case for the A.Y. 2002-03 wherein in para 7A and 8, the Coordinate Bench has held as follows: "7A In the assessment year 2005-06 of the assessee's appeal, the only ground remains for our adjudication is the disallowance of club expenditure to the extent of Rs. 78,640/-. The Assessing Officer noted that the assessee has debited a sum of Rs.3,14,551/- in respect of payment made to the club. He disallowed 25% of such expenditure on the ground that element of personal use of such facility by Sr. Officers of the company could not be ruled out which was confirmed by the ld. CIT(A).
8. We heard the rival submissions and carefully considered the same. We noted that in the earlier years and subsequent year, no such disallowance was made by the Assessing Officer.. Even disallowance had been made merely on Adhoc basis. These expenses, in our opinion, cannot be regarded to be the personal expenses of the company as the company is not a human being. At the most, the Assessing Officer can take these expenses as perquisite. If the expenses personally related to the offices of the company, our aforesaid view is duly supported by the decision of the Hon'ble High Court in 239 ITR 237 and Madras High Court 240 ITR 335 (Mad). Thus, this ground stands allowed. This disposes off all the appeals taken by the assessee."
Respectfully following the judicial precedent in assessee's own case, this issue of the club expenses disallowed by the Assessing Officer stands deleted.