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Before: SHRI N. K. SAINI & MS SUCHITRA KAMBLE
These two appeals are filed by the Revenue for Assessment Year 2007-08 & 2008-09 against the order of the CIT(A) dated 25/11/2011 & 6/9/2012. 2. The grounds of appeal are as under:-
“1. That the Ld.CIT(A) has erred on facts and in law by deleting the additions of Rs.1,87,11,248/- on account of inflated purchases determined by the TPO/A.O in respect of international transactions as per provision of Section 92 of I.T. Act, 1961. Hence, the order of Ld.CIT(A) be cancelled and the order of the A.O be restored.
That the Ld.CIT(A) has erred on facts and in law by deleting the additions of Rs.67,37,508/- on account of inflated royalty determined by the TPO/A.O in respect of international transactions. Hence, the order of Ld.CIT(A) be cancelled and the order of that A.O be restored.
3. That the Ld.CIT(A) has erred on facts and in law by deleting the additions of Rs.8,93,339/- on account of addition in respect of suppressed sale of scrap. Hence, the order of Ld.CIT(A) be cancelled and the order of the A.O be restored.
4. Therefore, the order of Ld.CIT(A) be cancelled and the order of the A.O may be restored.”
The grounds of appeal
are as under:-
1. That the Ld.CIT(A) has erred on facts and in law by deleting the additions of Rs.28,45,435/- on account of royalty determined by the TPO/A.O in respect of International transactions.
2. That the Ld.CIT(A) has erred on facts and in law by deleting the additions of Rs.5,00,000/- on account of addition in respect of suppressed sale of scrap.
3. That in the facts and circumstances of the case, the order of Ld.CIT(A) is a perverse order and therefore, the order of the Ld.CIT(A) be cancelled or set-aside and the order of the A.O may be restored.”
The Assessee company is engaged in the business of manufacturing of Auto Parts and Components. Substantial sale of the assessee company was made to the associate/group/subsidiary concern of HONDA, Japan operating in India. Return declaring income of Rs.1,82,80,020/- was e-filed on 30/10/2007. The case was covered under the norms of compulsory scrutiny as per guidelines issued by the CBDT, New Delhi, hence statutory notice u/s 143(2) was issued on 22/9/2008 and duly served upon the assessee. Further notice u/s 142(1) along with detailed questionnaire was issued on 23/09/2009. In response to these notices authorized representative of the assessee attended the proceedings and filed necessary details/explanation with supporting evidences as called for from time to time. The books of accounts produces, have been test checked. The case was discussed with him in length. The Assessing Officer observed from the return of income of the assessee that during the year M/s Progressive Tools had international transaction because it has made purchase from M/s F. Tech Inc., Japan and made sales to Honda Seil India Ltd. Since, F. Tech Inc. Japan has share holding more than 26% in M/s Progressive Tools & Components, therefore, it becomes an associated concern of the assessee. As the assessee company had made purchases and other transaction from M/s F. Tech Inc., which is associated concern therefore, as per Section 92(1) & (2) it became necessary to determine Arm’s Length Price.”
The Assessing Officer made an addition on account of inflated purchases in respect of international transactions in the Assessment Year 2007-08. The Assessing Officer has also made addition on account of TP adjustment by taking the ALP of royalty and addition by applying the average rate of cost of suppressed sale of scrap. The Assessee filed appeal before the CIT(A) and the CIT(A) deleted the additions made by the Assessing Officer.
The Ld. AR submitted that the issue of inflated purchases in respect of international transactions is covered by the order of the Tribunal being Assessment Year 2005-06 dated 10/3/2017 wherein the Tribunal has remitted this issue to the file of the Assessing Officer /TPO for a fresh determination of the ALP of the international transaction. Therefore, the Ld. AR requested to send back this issue to the file of Assessing Officer /TPO for a fresh determination of ALP of the international transaction in this year itself. The Ld. DR agrees to these submissions.
As regards other two issues, the Ld. DR submitted that the Assessing Officer has rightly made an addition in respect of royalty as there are no documents submitted as to transfer of technology knowhow. The price of scrap sale is also not proved by the assessee. The Ld. AR relied on the order of the CIT (A) and submits that all the documents were before the Assessing Officer, therefore, the CIT(A) has rightly deleted the said additions.
We have heard both the parties and perused the records. As regards the first issue, as both the parties agreed and in the light of the ITAT order for Assessment Year 2005-06 wherein the said issue is remitted to the file of Assessing Officer /TPO. In this year also the issue is remanded back to the file of the Assessing Officer/TPO. Needless to say, the assessee will be given reasonable opportunity of hearing in such fresh proceedings.
9. The Assessing Officer also made an addition on account of inflated royalty and suppressed sale of scrap. These two issues are common in Assessment Year 2007-08 & 2008-09. The Ld. CIT(A) held as under:
“8. Ground no.3-against addition of Rs. 6737508/-:
8.1 The TPO has made the above TP adjustment by taking the ALP of royalty amounting to Rs.6737508/- paid by assessee to its AE at NIL. The TPO erred that assessee could not establish any worthwhile transfer of technology, he could not explain the difference between the payment of royalty of Rs. 2845435/- & the figure of Rs. 6737508/- in form 3CEB, Honda Motor India in a similar business & Hindustan Motors are not paying any royalty for technology used by them & there are various OEMs who are supplying parts to Honda Siel Cars and are getting technology from them but are not paying any royalty.
8.2 On the other hand, Counsel of the assessee submitted that the assessee has entered into a technical assistance agreement on 29.11.96 & a shareholder agreement on 22.01.97 duly approved by Govt, of India vide sanction dated according to which this royalty is payable to its AE. He pointed out various clauses of the above agreements & Govt, approval regarding transfer of technology & consideration to be paid to its AE. He also pointed out that Govt, has specifically approved the payment of royalty by mentioning rates of royalty as well & that the duration of validity of Govt, approval is valid for the year under consideration also & as such the payment of royalty was binding on the assessee as per collaboration agreement duly approved by Govt, of India. Regarding transfer of technology, he argued that the design/drawings of various components manufactured by the assessee during the year were supplied by AE M/S F-Tech Inc. He specifically drawn my attention to Article 2, 3, 4 & 9 of technical assistance agreement & argued that assessee did not become the owner technical know-how but was merely granted indivisible & non transferable e right & license for the period of agreement containing confidentiality with obligation to return all the documents & tangible properties on ration. He further argued that the assessee’s entire business related to Honda Siel Car India Ltd. is because of the technology provided by AE M/S F- tech Inc., which is apparent from the profitability of unit-2 of the assessee amounting to Rs. 206.78 lacs & that the sale rate of the assessee is inclusive of royalty paid by the assessee, resulting into no actual cost to the assessee & became revenue neutral. The necessary evidence in this regard was enclosed in .ne paper book. Thus he argued that it is not correct to disregard the agreement without assigning any cogent reasons except challenging the commercial need of for such arrangement which is in the domain of businessman & not of the revenue authorities. The counsel of the assessee also argued that the Id. TPO has not brought on records anything against with regard to various facts submitted by assessee including- (a) technical know how provided by F- Tech Inc. is not available to any other manufacturer in India and as such the assessee company is the only supplier of these specific components to HSCI. (b) As far as life of these intangibles are concerned, the same are directly related to the life of model of a particular car. (c) These intangibles or substitutes thereof are not available in the open market (d) The company providing intangible do not have any other AE in India other than the assessee and as such the question of payment of royalty by any AE from India does not arise (e) No independent party is paying royalty for similar technology to M/S F- Tech Inc. in India (f) The intangible property in question has been exclusively developed/ created by the AE of the assessee Viz. M/S F- Tech Inc. Japan, (g) Since the company is not paying royalty to any other party (either controlled or uncontrolled) and thus it is not possible to compare the uncontrolled transactions.
8.3. I also agree with the following assertions of the appellant:-
(a) The payments of royalty made by assessee is duly accepted by AO/TPO during the assessment proceedings of A.Y.2005-06, (b) The figures of Rs. 2845435/- & Rs. 6737508/- pertains to two different years & this was simply a procedural mistake made by TPO while framing the order & the said mistake was accepted by AO in his order after verification.
(c) Honda Motor India is not in similar business, it is not a manufacturing company & deals in delivery of spare parts to customers & as such is not comparable. The fact was also accepted by TPO in his order itself.
(d) ‘Hindustan Motors is also not in similar business & is manufacturing cars whereas assessee is manufacturing automobile components & as such cannot be a comparable case. Further the TPO has not brought or. records any evidence that it is not paying any royalty but on the other hand assessee has given the necessary evidence to TPO during the proceedings regarding going industry rate of royalty which is capped at 5% of domestic sales & 8% of exports.
(e) Regarding other OEMs, nothing has been brought on records by TPO- not even their names & if he was aware of such OEMs, he should have compared the results of them while determining the ALP of material purchase in Ground No. 2 discussed above.
(f) M/s Munjal Showa Ltd., one of the comparables selected by TPO while determining ALP of the material purchase in Ground No. 2 above is continuously paying royalty to its foreign collaborator.
(g) The change of technology in automobile components is a continuous process as it is directly related to change/up-gradation in modes of cars.
8.4 Now coming to the question of determination of ALP in the present, I agree with the contention of assessee that the TPO can make addition to the total income of the assessee on the basis of difference in royalty rate calculated with regard to ALP with that paid by the assessee . As regards the adequacy of profits vis-a-vis ordinary profits in respect of royalty payment, this can be found only when exercise is undertaken to compare the royalty expenses of the assessee with royalty expenses of other comparable enterprises in India. Since the Id. AO/TPO did not undertake this exercise and bring on record any comparable case to find out the rate of royalty in this type of business, there is no justification to determine the ALP at NIL on the basis that no worthwhile recurring technology has been transferred.
In the case of ACIT V. Sona Okegawa Precision Forgings ltd. (2010) 47 DTR 187 (Del) Hon’ble Tribunal observed that fees paid under technology agreement comprised an integral part of the cost of production, which was recovered from the sale price-This being so, such fee become revenue neutral & transactions were at ALP. In Abhishek Auto Industries ltd. V. DC1T(2011) 136 TTJ 530 (Dei) Hon’ble Tribunal observed that Collaboration agreement has been duly approved by RBI & other regulatory agencies - Very existence of this business dependent upon the joint venture agreement- Thus TPO & the CIT(A) were not justified in challenging the commercial need for such arrangement and disregarding tie agreement without assigning any cogent reasons. Further in the case of DCIT V. VINAROM LTD. (2007) 108 TTJ 51 (Bang) Hon’ble Tribunal observed that as the foreign company provided know how on which the appellant company had reaped commercial profits and assessee made payment in consideration thereof as agreed under the licensing agreement, the transaction was clearly at arm’s length and for commercial agreement.
8.5. Thus in view of the factual & legal position discussed above, in view of the fact when the TPO has not discharged the required onus & particularly when such payment is accepted by TPO at ALP during previous assessment & the fact that payment is revenue neutral , I conclude that there appears to be no reasons for making any adjustments in the results declared by the assessee company on the basis of made by TPO. Accordingly I delete the addition of Rs. 6737508/-made by AO.
Ground No. 4 against addition of Rs.893339/-:
9.1. The A.O has made the above addition by applying the average rate of cost of purchases made by the assessee to the total quantity of scrap sold during the year and thus estimating the scrap sales of the assessee, by assuming that market rate of scrap is 50% of total cost, at Rs.5448476/- as against Rs.4555137/- disclosed by the assessee. While estimating A.O has given reference to assessments of certain other cases where the same percentage have been assessed & accepted by parties.
9.2. The counsel of the assessee, who appeared before me, argued that the assessee has maintained regular books of accounts on day to day basis including quantitative details. Both the units of the assessee are covered under central excised & are subject to their separate verification & audit on regular basis. The books of accounts are duly audited by independent auditors under the Companies Act as well as under the provisions of Sec 44AB of the Income Tax act besides the regular checks made separately by Excise Deptt, & assessment by Sales Tax Deptt and none of the above verifying authorities i.e Company Auditors, Tax Auditors, Excise Deptt, or Sales Tax Authorities have ever pointed out any defect in the books of accounts maintained by the assessee and even the A.O has not doubted the correctness of books of accounts including stock records maintained by the assessee. He also argued that except one party to whom just 4.75% sales made to the total sales of scrap during the year, payments from all other parties were received through A/C payee cheques only, therefore without any independent verification of the sale rate of scrap of the assessee from the respective parties in spite of the name and complete addresses of the parties were available in the file of A.O, it is not justifiable to estimate the amount of scrap sales. Regarding the names of certain parties given by A.O in Assessment order, he argued that assessee was neither confronted with them during the course of assessment proceedings nor the AO has brought anything on records relating to the nature of scrap generated by these parties etc. He also argued that the AO has also not brought anything on records that assessee has earned any extra income as undisclosed income justifying the estimation of sales. 9.3 During the course of appellant proceedings, when a specific query was raised regarding the scrap rates of any other party located in the nearby locality of the nature of scrap generated by the assessee company, assessee has submitted the copy of certain invoices of another company, which clearly shows that the sale rate of scrap shown by the assessee company are rather better than the shown by the said company.
9.4. Thus looking to the entire set of facts discussed above, I conclude that there is no justification for disbelieving the amount of sale of scrap shown by the assessee in the absence of even single evidence that the assessee has suppressed its sale rate and therefore I delete the addition of Rs.893339/- made by the A.O.”
The CIT (A) has categorically discussed both these issues in its order and given a proper finding to that extent. There is no need to interfere into the order of the CIT (A). Hence, the issue of royalty and suppressed sale of scrap are dismissed.
In result, appeals of the Revenue are partly allowed for statistical purpose.
Order pronounced in the Open Court on 15th MAY, 2017.