Appeal details
Counselvise Citation
[2018] 123 COUNSELVISE.COM (IT) 3625 (ITAT-PUNE)
Assessee PAN
Bench
Appeal Number
Duration Of Justice
3 year(s) 11 month(s)
Appellant
Respondent
Appeal Type
Cross Objection
Pronouncement Date
21-03-2018
Appeal Filed By
Assessee
Order Result
Partly Allowed
Bench Allotted
A
Next Hearing Date
14-02-2018
Assessment Year
2004-2005
Appeal Filed On
21-04-2014
Judgement Text
IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH, PUN E , , !' # $ , % BEFORE SHRI ANIL CHATURVEDI, AM AND SHRI VIKAS AWAS THY, JM '. / ITA NOS.1108 & 1109/PUN/2013 ' (' / ASSESSMENT YEARS: 2003-04 & 2004-05 THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE-9, PUNE. ....... / APPELLANT ) / V/S. MERCEDES BENZ I PVT. LTD. (FORMERLY KNOWN AS DAIMLER CHRYSLER I PVT. LTD) SECTOR 15 A, CHIKHLI, PUNE-411 018 PAN : AABCM1789L / RESPONDENT *+% '. /CO.NO.59/PUN/2014 ' (' /ASSESSMENT YEAR: 2004-05 (ARISING OUT OF ITA NO.1109/PUN/2013) MERCEDES-BENZ INDIA PRIVATE LIMITED, (FORMERLY KNOWN AS DAIMLER CHRYSLER INDIA PRIVATE LIMITED), E-3, MIDC CHAKAN, PHASE-III, CHAKAN INDUSTRIAL AREA, KURULI & NIGHOJE, TAL : KHED, PUNE-410 501 PAN : AABCM1789L .. / CROSS OBJECTOR ) / V/S. THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE-9, PUNE. / RESPONDENT 2 ITA NOS.1108 & 1109/PUN/2013 CO. NO.59/PUN/2014 A.YS.2003-04 & 2004-05 ASSESSEE BY : SHRI RANJAN. R. VOHRA & SHRI NIKHIL MUTHA REVENUE BY : SHRI RAJEEV KUMAR, CIT. / DATE OF HEARING : 16.03.2018 / DATE OF PRONOUNCEMENT : 21.03.2018 , / ORDER PER VIKAS AWASTHY, JM THESE TWO APPEALS I.E. ITA NO.1108/PUN/2013 FOR ASSESSME NT YEAR 2003-04 AND ITA NO.1109/PUN/2013 FOR ASSESSMENT YEAR 2004-05 ARE FILED BY THE REVENUE. THE CROSS APPEALS OF THE ASSESSEE FOR T HE SAID ASSESSMENT YEARS IN ITA NO.1081/PN/2013 FOR ASSESSMENT YEAR 2003- 04 AND ITA NO.1082/PN/2013 FOR ASSESSMENT YEAR 2004-05 AND CROSS OBJECTIONS IN CO. NO.58/PN/2014 FOR ASSESSMENT YEAR 2003-04 AND CO. NO.5 9/PN/2014 FOR ASSESSMENT YEAR 2004-05 WERE DECIDED BY THE TRIBUNAL V IDE ORDER DATED 30.09.2016. THEREAFTER, THE ASSESSEE FILED MISCELLANEOUS APPLICATION U/S. 254(2) OF THE INCOME TAX ACT, 1961 (HEREINAFTER REFERRED TO AS TH E ACT) SEEKING RECTIFICATION IN THE ORDER OF TRIBUNAL DATED 30.09.2016. THE TRIBUNAL VIDE ORDER DATED 27.12.2017 IN MA NO.18/PUN/2017 RECALLED THE FINDINGS OF TRIBUNAL IN GROUND NOS. 1, 2 AND 5 RAISED IN THE APPEAL BY DEPARTMENT IN ITA NO.1108/PUN/2013 FOR ASSESSMENT YEAR 2003-04. IDE NTICAL GROUNDS WERE RAISED BY THE DEPARTMENT IN ITA NO.1109/PUN/2013 FOR ASSESSMENT YEAR 2004-05. ACCORDINGLY, IN MA NO.19/PUN/2017 FOR ASSES SMENT YEAR 2004-05, THE FINDINGS OF TRIBUNAL WITH RESPECT TO GROUND NO S. 1, 2, 3 AND 5 WERE RECALLED. 3 ITA NOS.1108 & 1109/PUN/2013 CO. NO.59/PUN/2014 A.YS.2003-04 & 2004-05 2. THE ASSESSEE IN CO.NO.59/PUN/2014 FOR ASSESSMENT YEA R 2004-05 HAS RAISED ADDITIONAL GROUND CORRESPONDING TO GROUND NO. 1 RAISED IN APPEAL BY THE DEPARTMENT IN ITA NO.1109/PUN/2013. ACCORDINGL Y, THE FINDINGS OF TRIBUNAL WITH REGARD TO ADDITIONAL GROUND NO.3 IN CO. NO.59 /PUN/2014 WAS ALSO RECALLED. 3. NOW, THE GROUNDS TO BE ADJUDICATED IN PRESENT PROCE EDING IN ITA NO. 1108/PUN/2013 FOR ASSESSMENT YEAR 2003-04 ARE AS UNDER: ON THE ISSUE OF USE OF CONTROLLED TRANSACTION 1. WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF TH E CASE AND IN LAW, THE LD. CIT(A) WAS CORRECT IN LAW, I) WHEN HE IMPLICITLY REJECTED THE DIRECT METHOD OF COMPARABLE UNCONTROLLED PRICE UNDER RULE 10B(1) A) FOR THE EVA LUATION OF THE INTERNATIONAL TRANSACTION OF THE PAYMENT OF ROYALTY & SEEMS TO HAVE PREFERRED AGGREGATED TRANSACTION NET MARGIN METHOD UNDER RULE 10B(1)(E), A INDIRECT METHOD WHILE EVALU ATING THE ARMS LENGTH PRICE, WHICH WAS REJECTED BY HIM FOR A.Y.200 5-06 ( AND IN A.Y.2008-09 AS PART OF THE DISPUTE RESOLUTION PANEL ); II) BY REJECTING THE CUP, A DIRECT METHOD FOR WORKI NG OUT THE ARMS LENGTH OF THE INTERNATIONAL TRANSACTION AND UNCONTR OLLED TRANSACTION; WHICH PROVIDES FOR INSTANT COMPARISON OF THE PRICE S OF THE PRODUCTS/SERVICES; III) WHEN THE OECD GUIDELINES IN PARA 1.70 CLEARLY SUGGESTS THAT AN ATTEMPT SHOULD BE MADE TO REACH A REASONABLE ACCOMM ODATION KEEPING IN MIND THE IMPRECISION OF THE VARIOUS METH ODS AND THE PREFERENCE FOR HIGHER DEGREES OF COMPARABILITY AND A MORE DIRECT AND CLOSER RELATIONSHIP TO THE TRANSACTION? ON THE ISSUE OF CONSISTENCY . 2. WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF TH E CASE AND IN LAW, THE LD. CIT(A) WAS CORRECT IN LAW, I) WHEN THE ASSESSEE COMPANY ITSELF HAS PROVIDED SE PARATE BENCHMARKING AND DETAILED INFORMATION REGARDING THE ROYALTY PAYMENT IN THE LATER YEARS; II) WHEN EACH YEAR SHOULD BE TREATED SEPARATELY BAS ED ON THE FACTS AND DOCUMENTATION SUBMITTED; ( AS PER THE RATIO LAI D DOWN IN THE 4 ITA NOS.1108 & 1109/PUN/2013 CO. NO.59/PUN/2014 A.YS.2003-04 & 2004-05 CASE OF M/S. ONWARD TECHNOLOGIES VS. DCIT DATED 30. 04.2013, APPEAL NO. ITA NO.7985/MUM/2010 OF ITAT MUMBAI) 5. WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE CA SE AND IN LAW, THE CIT(A) WAS JUSTIFIED IN DELETING ADDITION MADE ON A CCOUNT OF HOMOLOGATION EXPENSES, WITHOUT CALLING FOR SUCH DET AILS IN SUPPORT OF ITS CLAIM AND REMANDING THE MATTER TO THE A.O. ITA NO. 1108/PUN/2013 ( A.Y. 2003-04) 4. THE GROUND NO. 1 AND 2 RAISED IN APPEAL BY THE DEPART MENT ARE WITH RESPECT TO TRANSFER PRICING ADJUSTMENT ON PAYMENT OF ROYALTY. 4.1 SHRI RANJAN R. VORA APPEARING ON BEHALF OF THE ASSESSE E SUBMITTED THAT IDENTICAL ISSUE HAS BEEN DECIDED BY THE TRIBUNAL IN A PPEAL FILED BY ASSESSEE IN ITA NO.1080/PUN/2013 FOR THE ASSESSMENT Y EAR 2002-03. THE FACTS IN THE PRESENT ASSESSMENT YEAR I.E. 2003-04 ARE IDE NTICAL. THE AGREEMENT UNDER WHICH THE ROYALTY HAS BEEN PAID IS SAME WHICH WAS THE SUBJECT MATTER OF DISPUTE IN ASSESSMENT YEAR 2002-03. S INCE, THE AGREEMENT WAS EXECUTED IN THE PERIOD RELEVANT TO THE ASSESSMENT YEAR 2002-03 AND THE SAME WAS VALID FOR THE PERIOD UP TO TEN YEARS, THUS, THER E HAS BEEN NO CHANGE IN THE FACTS AND CIRCUMSTANCES IN THE PRESENT APPEAL. 5. SHRI RAJEEV KUMAR REPRESENTING THE DEPARTMENT FAIRLY ADMITTED THAT THE ISSUE RELATING TO TRANSFER PRICING ADJUSTMENT ON PAYM ENT OF ROYALTY HAS BEEN ADJUDICATED BY THE TRIBUNAL IN ASSESSEES OWN CASE IN IMMEDIATELY PRECEDING ASSESSMENT YEAR I.E. ASSESSMENT YEAR 2002-03. 6. WE OBSERVE THAT IN ITA NO.1107/PN/2013 FOR ASSESSME NT YEAR 2002- 03, GROUND NOS. 2 AND 3 RAISED BY THE DEPARTMENT WITH RESPECT TO PAYMENT OF ROYALTY ARE IDENTICAL TO GROUND NO. 1 & 2 OF THE PRESEN T APPEAL. THE TRIBUNAL DECIDED THE ISSUE IN FAVOUR OF ASSESSEE BY UPHOLDIN G TRANSACTIONAL 5 ITA NOS.1108 & 1109/PUN/2013 CO. NO.59/PUN/2014 A.YS.2003-04 & 2004-05 NET MARGIN METHOD (TNMM) ADOPTED BY ASSESSEE AS THE MOST APPROPRIATE METHOD FOR BENCHMARKING ITS INTERNATIONAL TRANSACTION INCLU DING PAYMENT OF ROYALTY AND ALSO EMPHASIZED ON THE RULE OF CONSISTENCY. T HE RELEVANT EXTRACT OF THE FINDINGS OF TRIBUNAL ON THIS ISSUE ARE AS UNDER: 73.WE HAVE CONSIDERED THE RIVAL ARGUMENTS MADE BY B OTH THE SIDES, PERUSED THE ORDERS OF THE AO AND CIT(A) AND THE PAP ER BOOK FILED ON BEHALF OF THE ASSESSEE. WE HAVE ALSO CONSIDERED TH E VARIOUS DECISIONS CITED BEFORE US. WE FIND THE ASSESSEE IN THE INSTA NT CASE HAD ENTERED INTO AN AGREEMENT DATED 12-12-1994 WITH DCAG TO PAY ROYALTY FOR TECHNICAL KNOWHOW RECEIVED FROM DCAG IN THE FOLLOWI NG MANNER : (A) LUMPSUM PAYMENT OF DM 56.6 MILLION, NET OF TAXE S PAYABLE IN 4 INSTALMENTS PERIODICALLY FROM 1995 TO 1998. (B) RUNNING ROYALTY @2.75% ON VALUE ADDITION IN IND IA. 74. WE FIND THE ASSESSEE AND DCAG AMENDED THE ORIGI NAL AGREEMENT TO PAY ROYALTY FOR TECHNICAL KNOWHOW RECEIVED FROM DCA G. THE COPY OF THE REVISED AGREEMENT DATED 21-12-1999 IS ENCLOSED AT PAPER BOOK PAGE 557 TO 586 ACCORDING TO WHICH RUNNING ROYALTY @5% ON VALUE ADDITION IN INDIA TO BE PAID AND WAIVING OF THE REM AINING 2 INSTALMENTS OF LUMPSUM ROYALTY PAYMENT AS PER THE FIRST AGREEME NT AMOUNTING TO DM 19 MILLION. FOR THE IMPUGNED ASSESSMENT YEAR TH E ASSESSEE HAS PAID ROYALTY @5% TO DCAG AMOUNTING TO RS.4,61,06,32 8/- FOR THE TECHNICAL KNOWHOW RECEIVED. THE ASSESSEE ADOPTED C OMBINED APPROACH AND SELECTED TNMM AS THE MOST APPROPRIATE METHOD TO BENCHMARK ITS INTERNATIONAL TRANSACTION INCLUDING T HE PAYMENT OF ROYALTY IN ITS TP STUDY REPORT. FOR THE APPLICATIO N OF TNMM, THE ASSESSEE HAD CONDUCTED SEARCH FOR COMPARABLE COMPAN IES ON WIDELY RECOGNIZED COMMERCIAL INFORMATION DATABASE FOR OBTA INING PUBLICLY AVAILABLE FINANCIAL INFORMATION. FOR THE PURPOSE O F MARGIN OF COMPUTATION, IN ADDITION TO FINANCIAL DATA FOR THE RELEVANT FINANCIAL YEAR, THE ASSESSEE ALSO USED DATA FOR 2 PREVIOUS FI NANCIAL YEARS AS PER THE TP STUDY CONDUCTED ON THE SEARCH OF COMPARABLE. THE WEIGHTED AVERAGE MARGIN OF COMPARABLE COMPANIES WAS 2.48% WH EREAS THE MARGIN OF THE ASSESSEE COMPANY WAS 4.30%. SINCE THE NET PROFIT MARGIN EARNED BY THE ASSESSEE WAS HIGHER THAN THE W EIGHTED AVERAGE MARGINS OF COMPARABLE COMPANIES, THE ASSESSEE CONCL UDED THAT THE TRANSACTIONS INCLUDING PAYMENT OF ROYALTY ARE AT AR MS LENGTH. WE FIND THE TPO DID NOT ACCEPT THE APPLICATION OF TNM METHO D FOR BENCHMARKING THE PAYMENT OF ROYALTY TRANSACTION AND CONSIDERED C UP AS THE MOST APPROPRIATE METHOD TO BENCHMARK THE TRANSACTION BY COMPARING ROYALTY PAYMENT MADE BY THE ASSESSEE @5% WITH THE ROYALTY P AYMENT MADE BY MARUTI UDYOG LTD. TO SUZUKI, JAPAN @3%. ACCORDI NG TO THE TPO THE LETTER RECEIVED FROM DCAG SUBMITTED DURING THE ASSE SSMENT PROCEEDINGS REFERRED TO ROYALTY RATE OF 3% AND ANOT HER 5%. FURTHER MARUTI UDYOG LTD. IS PAYING ROYALTY @3%. THE NET P ROFIT MARGIN EARNED BY THE ASSESSEE COMPANY IS LESS THAN THE AVERAGE NE T PROFIT MARGIN EARNED BY THE COMPARABLE COMPANIES. THE AO/TPO FUR THER HELD THAT THE ROYALTY RATES CHARGED FROM OTHER ASSOCIATED ENT ERPRISES BY DCAG WAS NOT SUBMITTED. ACCORDINGLY, THE TPO MADE DOWNW ARD ADJUSTMENT 6 ITA NOS.1108 & 1109/PUN/2013 CO. NO.59/PUN/2014 A.YS.2003-04 & 2004-05 OF RS.1,84,42,531/- FOR THE YEAR UNDER CONSIDERATIO N. 75. WE FIND THE LD.CIT(A) DELETED THE ABOVE ADJUSTM ENT MADE BY THE TPO ON THE GROUND THAT THE TPO HAS COMPARED THE ROY ALTY PAID BY MARUTI UDYOG LTD. WHICH IS A CONTROLLED TRANSACTION . ACCORDING TO HIM, THE TRANSFER PRICE DETERMINED BY BENCHMARKING CONTR OLLED TRANSACTION WITH ANOTHER CONTROLLED TRANSACTION CANNOT BE CONSI DERED THE ARMS LENGTH PRICE BECAUSE THE ARMS LENGTH SIGNIFIES TRA NSFER PRICE WITHOUT THE POSSIBILITY OF IT BEING INFLUENCED BY THE ASSOC IATED ENTERPRISE. FURTHER, HE NOTED THAT THE TPO IS INCONSISTENT IN H IS APPROACH ON THIS ISSUE. HE OBSERVED THAT DURING ASSESSMENT YEAR 200 7-08 AND 2008-09 ROYALTY PAYMENT @5% WAS HELD TO BE AT ARMS LENGTH W HICH IS PAID AT THE SAME RATE AS THAT FOR THE YEARS UNDER CONSIDERA TION. 76. WE DO NOT FIND ANY INFIRMITY IN THE ABOVE FINDI NG OF THE LD.CIT(A). FROM THE VARIOUS DETAILS FURNISHED BY THE ASSESSEE IN THE PAPER BOOK WE FIND IN CONSIDERATION OF THE USE OF TECHNOLOGY A ND TECHNICAL INFORMATION RECEIVED FROM DCAG FOR MANUFACTURING AC TIVITY THE ASSESSEE HAS TO PAY RUNNING ROYALTY @5% OF THE NET VALUE ADDED FOR EACH CONTRACTUAL VALUE. THE ROYALTY IS COMPUTED BY CONSIDERING THE NET SALES PRICE OF THE LICENCED VEHICLES, WHICH IS EXCL USIVE OF EXCISE DUTY AND COST OF STANDARD BROUGHT OUT COMPONENTS AND LAN DED COST OF THE IMPORTED MATERIALS USED FOR THE MANUFACTURING PROCE SS. THE ROYALTY IN THE INSTANT CASE IS INEXTRICABLY LINKED WITH PRODUC TION AND SALES ACTIVITY. IN ABSENCE OF PRODUCTION AND SALES AND SA LE OF PRODUCTS THERE WOULD BE NO QUESTION ARISING REGARDING PAYMENT OF R OYALTY. WE FIND FORCE IN THE SUBMISSION OF THE LD. COUNSEL FOR THE ASSESSEE THAT SINCE THE ROYALTY PAYMENT IS NOT INDEPENDENT OF SALES AND THEREFORE CANNOT BE EXAMINED ON STANDALONE BASIS. THEREFORE, THE AS SESSEE HAS ADOPTED COMBINED TRANSACTION APPROACH USING TNM MET HOD AS THE MOST APPROPRIATE METHOD TO BENCHMARK ITS INTERNATIONAL T RANSACTION INCLUDING PAYMENT OF ROYALTY. 77. WE FIND THE DELHI BENCH OF THE TRIBUNAL IN THE CASE OF LUMAX INDUSTRIES LTD. VS. ACIT VIDE ITA NO.5252/DEL/2011 HAS OBSERVED AS UNDER : 33. THE TPO HAS MADE THE DISALLOWANCE IN QUESTION MAINLY ON THE BASIS OF THE BENEFIT TEST. IN THIS RE GARD, IT IS SEEN THAT THE PAYMENT OF ROYALTY CANNOT BE EXAMINED DIVORCED FROM THE PRODUCTION AND SALES. ROYALTY IS INEXTRICABLY LINKED WITH THESE ACTIVITIES . IN THE ABSENCE OF PRODUCTION AND SALE OF PRODUCTS, THERE WOULD BE NO QUESTION ARISING REGARDING PAYMENT OF ANY ROYALTY. RULE 10A(D) OF THE IT RULES DEFINES 'TRANSACTION' AS A N UMBER OF CLOSELY LINKED TRANSACTIONS. ROYALTY, THEN , IS A TRANSACTION CLOSELY LINKED WITH PRODUCTION AND SALES. IT CANNOT BE SEGREGATED FROM THESE ACTIVITIES OF AN ENTE R PRISE, BEING EMBEDDED THEREIN. THAT BEING SO, ROYALTY CANNOT BE CONSIDERED AND EXAMINED IN ISOLATION ON A STANDALON E BASIS. ROYALTY IS TO BE CALCULATED ON A SPECIFIED A GREED BASIS, ON DETERMINING THE NET SALES WHICH, IN THE P RESENT CASE, ARE REQUIRED TO BE DETERMINED AFTER EXCLUDING THE AMOUNTS OF STANDARD BOUGHT OUT COMPONENTS, ETC., SI N CE SUCH NET SALES DO NOT STAND RECORDED BY THE ASSESSE E I N ITS BOOKS OF ACCOUNT. THEREFORE, IT I S OUR CONSIDERED OPINION THAT THE ASSESSEE WAS CORRECT IN EMPLOYING AN 7 ITA NOS.1108 & 1109/PUN/2013 CO. NO.59/PUN/2014 A.YS.2003-04 & 2004-05 OVERALL TNMM FOR EXAMINING THE ROYALTY. THE TPO WOR KED OU T T HE DIFFERENCE IN THE PLI OF THE OUTSIDE PARTY (THE ASSESSEE) AT 4.09% AND THE COMPARABLES AT 7.05%. TH I S HA S NOT BEEN SHOWN TO FALL OUTSIDE THE PERMISSIBLE RA NGE. 78. WE FIND THE HONBLE DELHI HIGH COURT IN THE CAS E OF SONI ERICSSON MOBILE COMMUNICATIONS PVT. LTD. (SUPRA) WHILE DECID ING ON THE ISSUE OF BUNDLING OF TRANSACTIONS AND USE OF TNM METHOD HAS OBSERVED THAT TH E EXPRESSION CLASS OF TRANSACTION, FUNCTIONS PERFO RMED BY THE PARTIES IN SECTION 92C(1) OF THE ACT ILLUSTRATES THAT THE M EANING OR DEFINITION OF THE EXPRESSION TRANSACTION DOES NOT PROHIBIT CLUB BING OF CLOSELY CONNECTED OR CONTINUOUS TRANSACTIONS. THE HONBLE HIGH COURT HAS HELD THAT IN CASE THE TAX PAYER IS ENGAGED IN SINGLE LIN E OF BUSINESS, THERE IS NO BAR OR PROHIBITION FROM APPLYING THE TNMM ON ENT ITY LEVEL BASIS. IT HAS FURTHER BEEN HELD THAT ONCE THE COMPARABLES PAS S THE FUNCTIONAL ANALYSIS TEST AND PROFIT MARGINS MATCHES WITH THE C OMPARABLES, IT LEADS TO AN AFFIRMATION OF THE TRANSFER PRICE AS THE ARM S LENGTH PRICE. AFTER THIS IT IS NOT PERMISSIBLE TO MAKE A COMPARISON OF A PARTICULAR ITEM OF COSTS WITHOUT SEGREGATION OF PROFITS. 79. WE FURTHER FIND FORCE IN THE SUBMISSION OF THE LD. COUNSEL FOR THE ASSESSEE THAT FOR APPLICATION OF CUP IT IS NECESSAR Y THAT TRANSACTIONS BEING COMPARED SHOULD BE CONTROLLED. IN THE INSTAN T CASE THE TPO HAS COMPARED THE ROYALTY PAID BY MARUTI UDYOG LTD. TO S UZUKI, VIS-A-VIS, ROYALTY PAID BY THE ASSESSEE TO DCAG. HOWEVER, MAR UTI UDYOG LTD. AND SUZUKI ARE ASSOCIATED ENTERPRISES AND A CONTROL LED TRANSACTION CANNOT BE USED FOR BENCHMARKING ARMS LENGTH PRICE. 80.WE FIND THE PUNE BENCH OF THE TRIBUNAL IN THE CA SE OF M/S. BOBST INDIA PVT. LTD. VS. DCIT VIDE ITA NO.1380/PN/2010 ORDER DATED 09-10- 2014 HAS OBSERVED AS UNDER : 7.9 ..... WITHOUT PREJUDICE TO ABOVE WE FIND THAT ACCORDING TO TPO / AO HAS NOT GIVEN COGENT REASONING FOR REJECTING T NMM IDENTIFIED-BY THE APPELLANT AS THE MOST APPROPRIATE METHOD FOR BENCHMARKING ITS INTERNATIONAL TRANSACTIONS PERTAIN ING TO DOMESTIC OPERATIONS. THE APPROACH ADOPTED BY THE TP O I.E. USING CONTROLLED TRANSACTION OF THE APPELLANT ITSELF (REC EIPT OF COMMISSION ON MARKETING, OF SPARES) FOR BENCHMARKIN G THE INTERNATIONAL TRANSACTION PERTAINING TO RECEIPT OF COMMISSION FOR MARKETING OF MACHINES IS NOT APPROPRIATE AS PER THE INDIAN TP REGULATIONS. ACCORDINGLY INTERNATIONAL TRANSACTION OF THE APPELLANT PERTAINING TO RECEIPT OF COMMISSION FOR MARKETING O F MACHINES BENCHMARKED BY ASSESSEE BY AGGREGATING THE SAME WIT H OTHER INTERNATIONAL TRANSACTIONS PERTAINING TO DOMESTIC O PERATIONS USING TNMM SHOULD NOT BE-REJECTED.' 81. THE VARIOUS OTHER DECISIONS RELIED ON BY THE AS SESSEE ON THIS ISSUE ALSO SUPPORT ITS CASE TO THE PROPOSITION THAT TNM M ETHOD APPLIED BY THE ASSESSEE IS THE APPROPRIATE METHOD AND THE CUP METH OD APPLIED BY THE TPO IS NOT CORRECT WHERE HE HAS USED A CONTROLLED T RANSACTION TO BENCHMARK THE PAYMENT OF ROYALTY. WE FURTHER FIND THE ASSESSEE HAS OBTAINED APPROVAL FROM THE FOREIGN INVESTMENT PROMOT ION BOARD FOR THE ORIGINAL AS WELL AS REVISED AGREEMENT. IT HAS ALSO OBTAINED SPECIFIC APPROVAL FROM DEPARTMENT OF INDUSTRIAL POLICY AND P ROMOTION (DIPP) FOR THE PAYMENT OF ROYALTY AS ROYALTY PAYMENT MADE BY M B INDIA IS NOT 8 ITA NOS.1108 & 1109/PUN/2013 CO. NO.59/PUN/2014 A.YS.2003-04 & 2004-05 COVERED UNDER THE AUTOMATIC ROUTE. IT HAS BEEN HELD IN VARIOUS DECISIONS THAT FIPB APPROVAL, GOVERNMENT OF INDIA, RBI APPROV AL ETC FOR THE ROYALTY RATES ITSELF IMPLIES THAT THE PAYMENTS ARE AT ARMS LENGTH . 82. THE MUMBAI BENCH OF THE TRIBUNAL IN THE CASE OF M/S. THYSSENKRUPP INDUSTRIES PVT. LTD. VS. ACIT VIDE ITA NO.6460/MUM/2012 ORDER DATED 27-02-2013 FOR A.Y. 20 08-09 HAS HELD THAT WHEN A PAYMENT IS MADE AFTER OBTAINING DU E APPROVAL FROM RBI, THEN SUCH PAYMENT HAS TO BE CONSIDERED AT ALP. THE RELEVANT OBSERVATION OF THE TRIBUNAL AT PARA 14.3 OF THE ORD ER READS AS UNDER : 14.3. AFTER CONSIDERING THE RIVAL SUBMISSIONS AND PERUSING THE RELEVANT MATERIAL ON RECORD, WE FIND THAT THE ASSES SEE ENTERED INTO COLLABORATION AGREEMENT WITH ITS AE FOR PAYMEN T OF 2% OF CONTRACT VALUE FOR MANUFACTURING, DRAWING AND ENGIN EERING SERVICES AND 5% OF THE SELLING PRICE AS ROYALTY. TH E ASSESSEE APPLIED TO THE RBI SEEKING APPROVAL IN RESPECT OF P AYMENT OF ROYALTY AND TECHNICAL FEE THROUGH CENTRAL BANK OF I NDIA. A COPY OF LETTER ADDRESSED BY THE CENTRAL BANK OF INDIA TO THE RBI DATED 26.03.2008 IS AVAILABLE ON PAGE 240 OF THE PAPER BO OK. THROUGH THIS LETTER, THE CENTRAL BANK OF INDIA FORWARDED RE LEVANT DOCUMENTS ALONG WITH A COPY OF THE AGREEMENT. THE R BI VIDE ITS LETTER DATED 21.04.2008 REQUESTED CENTRAL BANK OF I NDIA TO CONSIDER THE ASSESSEES CASE IN ACCORDANCE WITH ITS AP(DIR SERIES) NO.76 DATED 24.02.2007. IT IS IN PURSUANCE TO THE DEEMED APPROVAL BY RBI UNDER THE AUTOMATIC APPROVAL SCHEME THAT THE ASSESSEE MADE PAYMENT OF ROYALTY AND TECHN ICAL FEE TO ITS AE. IT IS RELEVANT TO NOTE THAT SUCH PAYMENT HA S BEEN APPROVED OR DEEMED TO HAVE BEEN APPROVED BY THE RBI . WHEN A PAYMENT IS MADE AFTER OBTAINING DUE APPROVAL FROM T HE RBI, HOW ITS ALP CAN BE COMPUTED AT `NIL, IS ANYBODYS GUESS . THE FACT OF APPROVAL OF THE PAYMENT BY THE RBI HAS BEEN SUCCINC TLY RECORDED BY THE TPO IN HIS ORDER AS WELL. HE STILL CHOSE TO PROPOSE ADJUSTMENT IN RESPECT OF FULL PAYMENT. IN OUR CONSI DERED OPINION, WHEN THE RATE OF ROYALTY PAYMENT AND FEE FOR DRAWIN GS ETC. HAS BEEN APPROVED OR DEEMED TO HAVE BEEN APPROVED BY TH E RBI, THEN SUCH PAYMENT HAS TO BE CONSIDERED AT ALP. WE, THEREFORE, DIRECT TO DELETE ADDITION OF RS.4.29 CRORE MADE BY THE A.O. IN THIS REGARD. 83. WE FURTHER FIND IN SUBSEQUENT YEARS ALSO THE RO YALTY PAYMENT HAS BEEN BENCHMARKED CONSIDERING COMBINED TRANSACTION A PPROACH IN TNM METHOD. NO SEPARATE BENCHMARKING WAS UNDERTAKEN TO DETERMINE THE ALP OF ROYALTY. IN A.Y. 2007-08 TILL A.Y. 2011-12 THE PAYMENT OF ROYALTY WAS HELD TO BE AT ALP. WE THEREFORE FIND ME RIT IN THE SUBMISSION OF THE LD. COUNSEL FOR THE ASSESSEE THAT IN VIEW OF THE RULE OF CONSISTENCY THE CIT(A) WAS JUSTIFIED IN REJECTING T HE CUP METHOD ADOPTED BY THE AO AND ACCEPTING THE TNM METHOD FOL LOWED BY THE ASSESSEE. 84.IN VIEW OF THE ABOVE DISCUSSION AND IN VIEW OF T HE DETAILED REASONING GIVEN BY THE CIT(A) WE FIND NO INFIRMITY IN HIS ORDER. ACCORDINGLY, THE SAME IS UPHELD AND THE GROUNDS RAI SED BY THE REVENUE ON THIS ISSUE ARE DISMISSED. 9 ITA NOS.1108 & 1109/PUN/2013 CO. NO.59/PUN/2014 A.YS.2003-04 & 2004-05 SINCE, THE ISSUES RAISED IN THE PRESENT APPEAL BY THE D EPARTMENT ARE IDENTICAL IN FACTS TO ASSESSMENT YEAR 2002-03, THE GROUND NOS. 1 AND 2 RAISED BY THE DEPARTMENT IN APPEAL ARE DISMISSED FO R SIMILAR REASONS . 7. IN GROUND NO. 5 OF THE APPEAL, THE DEPARTMENT HAS ASS AILED DELETING THE ADDITION MADE ON ACCOUNT OF HOMOLOGATION EXPENSES. 7.1 THE LD. AR SUBMITTED THAT THE ASSESSEE IS ENGAGED IN MANUFACTURING AND SALE OF PASSENGER CARS. AS PER CENTRAL MOTOR VEHICLE S RULE, IT IS MANDATORY FOR THE ASSESSEE TO SEEK APPROVAL FROM AUTOM OTIVE RESEARCH ASSOCIATION OF INDIA (ARAI), AN AGENCY DESIGNATED BY GOVER NMENT OF INDIA, BEFORE INTRODUCTION OF ANY TECHNICAL CHANGE IN THE EXISTING MODEL OR BEFORE INTRODUCING NEW VEHICLE. THE WHOLE PROCESS OF GETTING AN AP PROVAL FROM ARAI IS KNOWN AS HOMOLOGATION OF VEHICLE. AFTER TESTING THE VE HICLE AS WELL AS ITS PARTS, ARAI ISSUES CERTIFICATE OF HOMOLOGATION FOR THE PARTIC ULAR VEHICLE. THE MATERIAL RETURNED BY ARAI TO THE ASSESSEE IS IN THE FORM OF SCRAP. THE COST OF MATERIALS CONSUMED IN THE ABOVE PROCESS IS DEBITED TO P ROFIT AND LOSS ACCOUNT UNDER THE HEAD HOMOLOGATION EXPENSES. IN ASS ESSMENT YEAR 2002- 03, THE ASSESSEE HAD INCURRED AN EXPENDITURE OF RS.77.74 LACS TOWARDS HOMOLOGATION. OUT OF ABOVE EXPENDITURE, RS.54.94 LACS WAS WITH RESPECT TO MATERIAL SUPPLIED TO ARAI. THE ASSESSING OFFICER IN THE ABSE NCE OF COMPLETE DETAILS OF EXPENDITURE ON HOMOLOGATION MADE DISALLOWANCE OF RS. 37,99,831/-. IN THE ASSESSMENT YEAR 2003-04, THE AS SESSEE HAD PROVIDED COMPLETE DETAILS OF HOMOLOGATION CHARGES. HOWEVER, THE AS SESSING OFFICER MADE AD-HOC DISALLOWANCE OF RS.10,00,000/- ON ACCOUNT OF N ON PRODUCTION OF SUPPORTIVE EVIDENCE. A PERUSAL OF THE ASSESSMENT ORDER WOULD REVEAL THAT DISALLOWANCE HAS BEEN MADE MERELY ON PRESUMPTION. THE A SSESSING OFFICER HAS NOT TAKEN PAIN TO EXAMINE THE DETAILS FURNISHED BY AS SESSEE. THE 10 ITA NOS.1108 & 1109/PUN/2013 CO. NO.59/PUN/2014 A.YS.2003-04 & 2004-05 COMMISSIONER OF INCOME TAX (APPEALS) DELETED THE ADDITION O N THE GROUND THAT THE ASSESSING OFFICER HAS FAILED TO SPECIFY THE EXTENT OF EXPENDITURE FOR WHICH ASSESSEE HAS FAILED TO FURNISHED THE DETAILS OF EXPENDITURE. 7.2 ON THE OTHER HAND, THE LD. DR SUBMITTED THAT THE ISSU E CAN BE REMITTED BACK TO THE FILE OF THE ASSESSING OFFICER FOR FRESH A DJUDICATION AFTER CONSIDERING EVIDENCES FILED BY THE ASSESSEE IN RESPECT OF HOMOLOGATION EXPENDITURE. 8. BOTH SIDES HEARD. AS PER CONTENTION OF THE LD. AR, THE A SSESSEE HAD FURNISHED DETAILS OF EXPENDITURE IN RESPECT OF HOMOLOGATION. T HE SAID DETAILS HAVE BEEN FURNISHED BY ASSESSEE BEFORE US AT PAGE 690 TO 692 OF THE PAPER BOOK. A PERUSAL OF THE ASSESSMENT ORDER SHOWS THAT THE ASSE SSING OFFICER MERELY ON THE BASIS OF FINDINGS IN ASSESSMENT YEAR 2002-0 3 HAS PRESUMED THAT SOME DISALLOWANCE HAS TO BE MADE IN ASSESSMENT YE AR 2003-04, AS WELL. THUS, AD-HOC DISALLOWANCE OF RS.10,00,000/- WAS MADE BY TH E ASSESSING OFFICER ON ACCOUNT OF HOMOLOGATION EXPENDITURE. THE ASSESS ING OFFICER WAS UNDER OBLIGATION TO EXAMINE DETAILS OF EXPENDITURE FURNISHED BY ASSESSEE. IT IS NOT THE CASE OF REVENUE THAT THE ASSESSEE HAD NOT FURNISHED DETAILS OF EXPENDITURE OR HAS FURNISHED PART DETAILS OF EXPENDITURE. THE ASSESSING OFFICER WITHOUT EXAMINING THE DETAILS FURNISHED BY THE ASSESS EE HAS MADE AD-HOC DISALLOWANCE OF RS.10,00,000/- MERELY ON THE BASIS T HAT DISALLOWANCE WAS MADE IN ASSESSMENT YEAR 2002-03, THEREFORE, SOME DIS ALLOWANCE HAS TO BE MADE IN ASSESSMENT YEAR 2003-04, AS WELL. THIS REASONIN G IS CERTAINLY NOT ACCEPTABLE FOR MAKING DISALLOWANCE, EVEN IF, IT IS ON ESTIMATION BASIS. ONCE 11 ITA NOS.1108 & 1109/PUN/2013 CO. NO.59/PUN/2014 A.YS.2003-04 & 2004-05 HAVING MISSED THE OPPORTUNITY TO EXAMINE MATERIAL AVAILABLE TO THE ASSESSING OFFICER DURING ASSESSMENT PROCEEDINGS, SECOND INNINGS CANNO T BE GRANTED TO THE ASSESSING OFFICER TO EXAMINE THE SAME. THEREFORE, WE FIN D NO INFIRMITY IN THE ORDER OF COMMISSIONER OF INCOME TAX (APPEALS) IN DELETING AD-HOC DISALLOWANCE OF RS.10,00,000/- WITH RESPECT TO HOMOLOGATION C HARGES. ACCORDINGLY, GROUND NO. 5 RAISED IN APPEAL BY THE REVENUE IS DIS MISSED BEING DEVOID OF ANY MERIT . ITA NO. 1109/PUN/2013 ( A.Y. 2004-05) CO. NO. 59/PUN/2014 ( A.Y. 2004-05) 9. THE GROUNDS OF APPEAL BEFORE US FOR ADJUDICATION IN ITA NO.1109/PUN/2013 READS AS UNDER: 1.WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE CAS E AND IN LAW, THE CIT(A) WAS JUSTIFIED IN GIVING DIRECTIONS TO THE A. O. TO VERIFY AND DECIDE THE ADMISSIBILITY OF THE CLAIM OF EXPENDITURE OF CA PITALIZED CARS AS GIVEN IN GROUND NO. 6 OF A.Y.2002-03, WHEN THE FACTS FOR THE GIVEN ASSESSMENT YEAR ARE DIFFERENT FROM THAT IN A.Y.2002-03. ON THE ISSUE OF USE OF CONTROLLED TRANSACTION 2. WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF TH E CASE AND IN LAW, THE LD. CIT(A) WAS CORRECT IN LAW, I) WHEN HE IMPLICITLY REJECTED THE DIRECT METHOD OF COMPARABLE UNCONTROLLED PRICE UNDER RULE 10B(1) A) FOR THE EVA LUATION OF THE INTERNATIONAL TRANSACTION OF THE PAYMENT OF ROYALTY & SEEMS TO HAVE PREFERRED AGGREGATED TRANSACTION NET MARGIN METHOD UNDER RULE 10B(1)(E), A INDIRECT METHOD WHILE EVALU ATING THE ARMS LENGTH PRICE, WHICH WAS REJECTED BY HIM FOR A.Y.200 5-06 ( AND IN A.Y.2008-09 AS PART OF THE DISPUTE RESOLUTION PANEL ); II) BY REJECTING THE CUP, A DIRECT METHOD FOR WORKI NG OUT THE ARMS LENGTH OF THE INTERNATIONAL TRANSACTION AND UNCONTR OLLED TRANSACTION; WHICH PROVIDES FOR INSTANT COMPARISON OF THE PRICE S OF THE PRODUCTS/SERVICES; III) WHEN THE OECD GUIDELINES IN PARA 1.70 CLEARLY SUGGESTS THAT AN ATTEMPT SHOULD BE MADE TO REACH A REASONABLE ACCOMM ODATION KEEPING IN MIND THE IMPRECISION OF THE VARIOUS METH ODS AND THE 12 ITA NOS.1108 & 1109/PUN/2013 CO. NO.59/PUN/2014 A.YS.2003-04 & 2004-05 PREFERENCE FOR HIGHER DEGREES OF COMPARABILITY AND A MORE DIRECT AND CLOSER RELATIONSHIP TO THE TRANSACTION? ON THE ISSUE OF CONSISTENCY . 3. WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF TH E CASE AND IN LAW, THE LD. CIT(A) WAS CORRECT IN LAW, I) WHEN THE ASSESSEE COMPANY ITSELF HAS PROVIDED S EPARATE BENCHMARKING AND DETAILED INFORMATION REGARDING THE ROYALTY PAYMENT IN THE LATER YEARS ; II) WHEN EACH YEAR SHOULD BE TREATED SEPARATELY BAS ED ON THE FACTS AND DOCUMENTATION SUBMITTED; ( AS PER THE RATIO LAI D DOWN IN THE CASE OF M/S. ONWARD TECHNOLOGIES VS. DCIT DATED 30. 04.2013, APPEAL NO. ITA NO.7985/MUM/2010 OF ITAT MUMBAI) 5. WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE CA SE AND IN LAW, THE CIT(A) WAS JUSTIFIED IN DELETING ADDITION MADE ON A CCOUNT OF HOMOLOGATION EXPENSES, WITHOUT CALLING FOR SUCH DET AILS IN SUPPORT OF ITS CLAIM AND REMANDING THE MATTER TO THE A.O. 9.1 THE ASSESSEE IN CO.NO.59/PUN/2014 FOR ASSESSMENT YEA R 2004-05 HAS RAISED AN ADDITIONAL GROUND NO. 3 CORRESPONDING TO G ROUND NO. 1 RAISED BY THE DEPARTMENT, THE SAME READS AS UNDER: THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) H AS ERRED IN NOT DELETING THE AD-HOC DISALLOWANCE MADE BY THE LEARNE D ASSESSING OFFICER IN RESPECT OF CERTAIN EXPENSES INCURRED ON CAPITALI ZED CARS AND INSTEAD REMANDING BACK THE MATTER TO THE LEARNED ASSESSING OFFICER. 10. IN GROUND NO. 1 OF APPEAL, THE REVENUE HAS IMPUGNED THE ACTION OF COMMISSIONER OF INCOME TAX (APPEALS) IN REMITTING THE ISSUE B ACK TO ASSESSING OFFICER TO EXAMINE ADDITIONAL EVIDENCE FURNISHED BY ASSESSEE AND THEREAFTER, DECIDE ADMISSIBILITY OF CLAIM OF EXPENDITURE OF CAPIT ALIZED CARS. WE DO NOT FIND ANY ERROR IN THE FINDINGS OF COMMISSIONER OF INCO ME TAX (APPEALS) IN REMITTING THE MATTER BACK TO THE FILE OF ASSESSIN G OFFICER FOR CONSIDERING ADDITIONAL EVIDENCES FILED BY THE ASSESSEE. THE FINDINGS OF COMMISSIONER OF INCOME TAX (APPEALS) ON THIS ISSUE ARE WELL REASONED & JUSTIFIED. THE ASSESSING OFFICER SHALL DECIDE THIS ISSUE AFRESH AFTER TAKING INTO 13 ITA NOS.1108 & 1109/PUN/2013 CO. NO.59/PUN/2014 A.YS.2003-04 & 2004-05 CONSIDERATION THE ADDITIONAL EVIDENCES FURNISHED BY ASSESSE E AND AFTER AFFORDING REASONABLE OPPORTUNITY OF HEARING TO THE ASSESSE E, IN ACCORDANCE WITH LAW. THUS, GROUND NO. 1 RAISED IN APPEAL BY THE DEPAR TMENT AND ADDITIONAL GROUND NO. 3 RAISED IN CROSS OBJECTION BY ASSES SEE FOR THE ASSESSMENT YEAR 2004-05 ARE ALLOWED FOR STATISTICAL PURPOSES. 11. WE FIND THAT THE GROUND NOS. 2 AND 3 RAISED IN APPEA L BY THE DEPARTMENT IN ASSESSMENT YEAR 2004-05 ARE IDENTICAL TO GROUND NOS. 1 AND 2 RAISED IN APPEAL FOR ASSESSMENT YEAR 2003-04. BOTH SID ES HAVE ADMITTED THAT THE FACTS IN ASSESSMENT YEAR UNDER APPEAL I.E. ASSE SSMENT YEAR 2004-05 ARE IDENTICAL TO ASSESSMENT YEAR 2003-04. THUS, THE FINDIN GS GIVEN BY US WHILE DECIDING GROUND NO. 1 AND 2 IN ASSESSMENT YEAR 200 3-04 WOULD MUTATIS MUTANDIS APPLY TO GROUND NO. 2 AND 3 RAISED IN APPEAL BY DEPARTMENT FOR ASSESSMENT YEAR 2004-05. FOR THE REASO NS GIVEN IN ASSESSMENT YEAR 2003-04, THE GROUND NOS. 2 AND 3 RAISED IN APPEAL FOR ASSESSMENT YEAR 2004-05 BY THE DEPARTMENT ARE DISMI SSED . 12. IN GROUND NO. 5, THE REVENUE HAS ASSAILED DELETING A DDITION MADE ON ACCOUNT OF HOMOLOGATION EXPENSES. THE GROUND NO. 5 IS IDE NTICAL TO GROUND NO. 5 RAISED IN APPEAL FOR ASSESSMENT YEAR 2003-04. WE HA VE GIVEN DETAILED FINDINGS WHILE DECIDING GROUND NO. 5 IN APPEAL FOR ASSESSMENT YEAR 2003-04. SINCE THE FACTS ARE SAME AND AD-HOC DISALLOWANCE HAS BEE N MADE BY THE ASSESSING OFFICER IN THE PRESENT ASSESSMENT YEAR I.E. ASSES SMENT YEAR 2004- 05 ON THE BASIS OF PRESUMPTION AS WAS MADE IN ASSESSMEN T YEAR 2003-04, THE FINDINGS GIVEN BY US WHILE DECIDING THE GROUND NO. 5 IN A SSESSMENT YEAR 2003-04 WOULD MUTATIS MUTANDIS APPLY TO GROUND NO. 5 RAISED IN APPEAL BY 14 ITA NOS.1108 & 1109/PUN/2013 CO. NO.59/PUN/2014 A.YS.2003-04 & 2004-05 REVENUE FOR ASSESSMENT YEAR 2004-05. ACCORDINGLY, GROUND NO. 5 RAISED IN APPEAL BY THE DEPARTMENT IS DISMISSED . 13. IN THE RESULT, APPEAL OF THE REVENUE FOR ASSESSMENT YEAR 2003-04 IS DISMISSED AND APPEAL OF THE REVENUE AND CROSS OBJECTION OF ASSESSEE FOR ASSESSMENT YEAR 2004-05 ARE PARTLY ALLOWED FOR STATISTICAL PURPO SES. ORDER PRONOUNCED ON WEDNESDAY, THE 21 ST DAY OF MARCH, 2018. SD/- SD/- ( /ANIL CHATURVEDI) ( # $ /VIKAS AWASTHY) / ACCOUNTANT MEMBER ! / JUDICIAL MEMBER / PUNE; '# / DATED : 21 ST MARCH, 2018. SB , - *.# /#( / COPY OF THE ORDER FORWARDED TO :- 1. / THE APPELLANT. 2. / THE RESPONDENT. 3. THE CIT (APPEALS)-13, PUNE. 4. THE CIT-IT/TP, PUNE. 5. &'( !!)* , + )* , ,-. , / DR, ITAT, A BENCH, PUNE. 6. (/0 12 / GUARD FILE. // & ! // TRUE COPY // +3 / BY ORDER, !4 ). / PRIVATE SECRETARY + )* , / ITAT, PUNE.
