M/S HONDA MOTORCYCLE AND SCOOTER INDIA PRIVATE LTD.,,GURGAON vs. DCIT, GURGAON

First issue raised in this appeal is against the addition of Rs.22,85,36,863/- made by the AO on account of transfer pricing adjustment in relation to the international transaction of ‘Payment of export commission.’

Briefly stated, the facts of the case are that the assessee is engaged in the business of manufacture and sale of motorcycles and scooters in India.

We have heard the rival submission and perused the relevant material on record. It is observed that the assessee applied the TNMM as the most appropriate method with the Profit level indicator (PLI) of Operating Profit/Operating Revenue. The international transaction of `Payment of export commission’ has been considered along with other international transactions. As per the Agreement, the assessee availed assistance from its parent AE for promoting sales of its products in the designated countries by providing cooperation in implementing the sales programmes and policies and providing necessary assistance to advertise, publicise within the designated countries, so that the assessee may achieve good sales target. In lieu of that, the assessee paid commission @ 5% on two- wheeler and spare parts relating to two-wheelers and 5% on three-wheelers and spare parts relating to three-wheelers. It is this amount of Rs.22.85 crore paid as commission by the assessee, for which addition has been made on the basis of the TPO determining ALP at Nil.

Their Lordships in CIT v. Cushman & Wakefield (India) (P.) Ltd. (2014) 367 ITR 730 (Del), have held that the authority of the TPO is limited to conducting transfer pricing analysis for determining the ALP of an international transaction and not to decide if such services exist or benefits did accrue to the assessee. Such later aspects have been held to be falling in the exclusive domain of the AO. In that case, it was observed that the e-mails considered by tribunal from Mr. Braganza and Mr. Choudhary dealt with specific interaction and related to benefits obtained by assessee, providing a sufficient basis to hold that benefit accrued to assessee. As the details of specific activities for which cost was incurred by both AEs (for activities of Mr. Braganza and Mr. Choudhary), and attendant benefits to assessee were not considered, the Hon'ble High Court remanded the matter to file of concerned AO for an ALP assessment by TPO, followed by AO's assessment order in accordance with law considering the deductibility or otherwise as per section 37(1) of the Act.

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 at Rs.22.85 crore with Nil ALP of `Payment of export commission’ by holding that no benefit was received by the assessee as a result of the payment of commission 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 in terms of the deductibility or otherwise of such 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 of `Payment of export commission’ 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 accrued to the assessee 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). Respectfully following the precedent, we set aside the impugned order and remit the matter to the file of AO/TPO for deciding this issue in conformity with the law laid down by the Hon'ble jurisdictional High Court in the case of Cushman & Wakefield (India) (P.) Ltd. (supra).

Reliance of the ld. DR on certain decisions including Bombardier Transportation India Pvt. Ltd. vs. Deputy Commissioner of Income Tax in I.T.A. No.-1626/Del/2015 impressing upon us to sustain the addition is misconceived because in such decisions the tribunal found as a fact that no services were, in fact, received by those assesses requiring payment of consideration. On the contrary, we are confronted with a situation in which such an analysis is yet to be done by the AO/TPO. It is only after doing this exercise that the factum of the AE having rendered some or no services will come to the fore, requiring the making or not making of any addition.

It is further found that the tribunal in assessee’s own case for the AYs 2008-09, 2009-10 and 2010-11 has restored the matter to the file of the AO/TPO for deciding the issue in the light of the judgment in the case of Cushman (supra). Nothing has been brought on record to demonstrate that such a view has been disturbed by the Hon’ble High Court in any manner.

Second issue raised in this appeal is against the addition of Rs.8,60,70,816/- on account of transfer pricing adjustment from the international transaction of ‘Payment of royalty for exports to AEs.’ The facts apropos this issue are that the assessee paid royalty amounting to Rs.404.65 crore to its AE. The TPO observed that royalty was paid to Honda, Japan and some exports were made to the subsidiaries or group companies of Honda, Japan only. Apart from that, the assessee was also found to have paid export commission to Honda, Japan @ 5% for exports made to its AEs. In view of these facts, the TPO opined that the assessee was a ‘Contract manufacturer’ with regard to manufacturing of goods for its AEs inasmuch as such goods were manufactured in India by the assessee and, then, part of its was exported to various AEs. Considering the facts that no independent party would pay royalty under such circumstances in respect of exports made to AEs, the TPO determined ALP of the international transaction of exports made to its AE at Nil, which led to the eventual addition of Rs.8.6 crore by the AO in his final order. The assessee is aggrieved against this addition.

We have heard the rival submissions and perused the relevant material on record. It is noticed that the assessee paid royalty in respect of domestic sales as well as export sales to AEs and non-AEs for a sum of Rs.404.65 crore. The TPO simply considered royalty paid in respect of exports to its AEs for the purposes of disallowance by considering other royalty as deductible. It is undisputed that royalty was paid by the assessee in respect of exports to AEs at the same rate at which it was paid for sales made to non-AEs. Firstly, we find the view point of the TPO to the effect that assessee is a `Contract manufacturer’, as clearly untenable because the assessee purchased raw material, did manufacturing and, then, sold the goods at its own. Throughout the process of purchasing the goods, manufacturing and selling the same, the transactions, wherever with AEs, have been on principal-to-principal basis. It is the assessee who has been responsible for risks and rewards of manufacturing. Not only exports were made to AEs, but, payments were also received against the sale consideration. Thus, we cannot countenance the view point of the AO/TPO of the assessee being a contract manufacturer.

We are not able to appreciate the view point of the TPO in allowing royalty payment in respect of goods sold to non-AEs and disallowing the same in respect of sales to AEs. Accepting royalty payment to AE in respect of sales to non-AEs goes to show that the ALP of royalty payment stood accepted by the Revenue. Nil ALP has been determined only of the royalty paid in respect of exports made to AEs. Royalty is payable on the basis of manufacturing of goods and not on the sales made. As the rate of royalty paid in respect of exports to AEs is equal to that in respect of sales to non-AEs, which has been accepted by the TPO at ALP, we fail to see as to how royalty paid in respect of exports to AEs is not at ALP. We further find that similar issue came for consideration before the Tribunal in the assessee’s own case for earlier three years starting from assessment year 2008-09 up to 2010-11. In its first order for the AY 2008-09, the Tribunal, considering identical payment of royalty allowed by the Tribunal in the case of its sister concern, namely, Hero Motor Corp Ltd. (ITA No.5130/Del/2010), chose to delete the addition so made by the TPO in identical circumstances. Similar view has been reiterated by the Tribunal in the assessee’s own case for the AYs 2009-10 and 2010-11. In the light of the fact that the Tribunal has consistently deleted the addition in respect of royalty payment by considering the same to be at ALP, we are disinclined to accept the stand of the ld. DR for restoring the matter to the file of 11 AO/TPO for a fresh determination of the ALP of this international transaction. This issue is decided in the assessee’s favour.

Last ground of the appeal is against the grant of depreciation u/s 32 @ 15% on Moulds used for plastic components as against 30% claimed by the assessee.

Briefly stated, the facts of this ground are that the assessee claimed depreciation @ 30% and 50% on moulds used in plastic goods factories.

After considering the rival submissions and perusing the relevant material on record, we find that the AO reduced the depreciation rate on plastic moulds by following the view taken by him in the preceding years.

In the result, the appeal is partly allowed.