DCIT, Circle-3(1), Hyd, Hyderabad V. RAK Ceramics India Pvt Ltd, Hyderabad, Secunderabad

ITA 1225/HYD/2015

• Counselvise Citation: [2016] 132 COUNSELVISE.COM (IT) 6427 (ITAT-HYDERABAD)
• Duration Of Justice: 7 month(s) 28 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 17-06-2016
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: A
• Next Hearing Date: 16-06-2016
• Assessment Year: 2011-2012
• Appeal Filed On: 20-10-2015
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: S MAHARANA
• Assessee Lawyers: DINESH BAFNA
• Keywords: Transfer pricing; Wholly owned subsidiary
• Section: 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCHES A : HYDERABAD BEFORE SHRI J. SUDHAKAR REDDY, ACCOUNTANT MEMBER AND SMT. P. MADHAVI DEVI, JUDICIAL MEMBER ITA.NO.1225/HYD/2015 ASSESSMENT YEAR 2011-2012 THE DCIT, CIRCLE - 3(1), HYDERABAD. VS. M/S. RAK CERAMICS INDIA P. LTD., SECUNDERABAD. PAN AACCR6424N (APPELLANT) (RESPONDENT) FOR REVENUE : MR. S . MAHARANA FOR ASSESSEE : MR. DINESH BAFNA DATE OF HEARING : 16.06.2016 DATE OF PRONOUNCEMENT : 17 .06.2016 ORDER PER J. SUDHAKAR REDDY, A.M. THIS IS AN APPEAL FILED BY THE REVENUE, DIRECTED AGAINST THE ORDER OF THE A.O. UNDER SECTION 143(3) READ WI TH SECTION 144C OF THE I.T. ACT, 1961 ON THE FOLLOWING GROUNDS : 1. THE LEARNED DRP ERRED IN BOTH IN LAW AND ON FACTS OF THE CASE. 2. THE LEARNED DRP ERRED NOT IN UPHOLDING THE DETERMIN ATION OF ROYALTY PAYMENT AT 2% BY THE TPO, AGAINST THE CLAIM OF 3% MADE BY THE ASSESSEE, ON THE GROUND THAT IT IS NOT IN CONFORMITY WITH RULE 10B(1)(A) OF THE ACT, THOUGH T HE ASSESSEE FAILED TO SATISFY THE BENEFIT TEST ON THE PAYMENT OF ROYALTY AT 3% ON NET SALES TO ITS ASSOCIATE ESTABLI SHMENT. 3. THE LEARNED DRP ERRED IN ACCEPTING THE CLAIM OF ROY ALTY PAYMENT OF 3% IGNORING THE REASONS GIVEN BY THE TPO . 4. ANY OTHER GROUND(S) THAT MAY BE URGED AT THE TIME O F HEARING. 2 ITA.NO.1225/HYD/2015 M/S. RAK CERAMICS INDIA P. LTD., SECUNDERABAD. 2. THE ASSESSEE R.A.K. CERAMICS INDIA P. LTD., IS A COMPANY WHICH IS ENGAGED IN THE MANUFACTURE OF VITR IFIED TILES AND SANITARYWARES. IT IS A WHOLLY OWNED SUBSIDIARY OF R AS AGRICULTURAL LANDS KHAIMAH CERAMICS PSC, UNITED ARAB EMIRATES. T HE ISSUE BEFORE US IS WHETHER THE ROYALTY PAID BY THE ASSE SSEE TO THE A.E. IS AT ARMS LENGTH. 3. AFTER HEARING THE RIVAL CONTENTIONS, WE FIND TH AT IN ASSESSEES OWN CASE IN ITA.NO.1452/HYD/2014 FOR THE A.Y. 2010- 2011 VIDE ORDER DATED 04.02.2015 THE TRIBUNAL AT PA RA-11 HAS HELD AS FOLLOWS : 11. SIMILAR VIEW HAS ALSO BEEN EXPRESSED IN THE OT HER DECISIONS RELIED UPON BY LD. A.R. AT THE COST OF RE PETITION, IT NEEDS REITERATION, ASSESSEE HAS BENCHMARKED THE ROYALTY PAYMENT BY BRINGING COMPARABLES BOTH UNDER TNMM AS WELL AS CUP. WHEREAS, TPO HAS REJECTED THE ANALYSIS DONE BY ASSESSEE UNDER BOTH THE METHODS WITHOUT ANY REASONABLE BASIS NOR HAS BROUGHT A SING LE COMPARABLE TO JUSTIFY ALP OF ROYALTY AT 2%. UNFORTUNATELY, ID. DRP HAS APPROACHED THE ENTIRE IS SUE IN RATHER MECHANICAL MANNER WITHOUT EXAMINING WHETH ER APPROACH OF THE TPO IS IN ACCORDANCE WITH STATUTORY MANDATE. THEREFORE, DETERMINATION OF ALP OF ROYALTY AT 2% CANNOT BE SUPPORTED, HENCE, DESERVES TO BE STRUC K DOWN. MOREOVER, THEORY OF BENEFIT TEST APPLIED BY T PO ALSO FALLS FLAT CONSIDERING THE FACT THAT TPO DOES NOT QUESTION THE NECESSITY OF PAYING ROYALTY BUT ONLY O BJECTS TO THE QUANTUM. FURTHER, QUANTUM INCREASE IN SALE W ITH NO APPARENT INCREASE IN PRODUCTION, MINIMAL PRODUCT RECALLS, LOW AFTER SALES MAINTENANCE COST CERTAINLY GOES TO PROVE ASSESSEE'S CLAIM THAT THESE COULD BE ACHIE VED DUE TO UTILIZATION OF ADVANCED TECHNICAL KNOW-HOW TRANSFERRED BY AE. THE TPO HAS NOT BEEN ABLE DISPRO VE THESE FACTS WITH ANY SOUND ARGUMENT. CONSIDERING TH E TOTALITY OF FACTS AND CIRCUMSTANCES, WE ARE OF THE OPINION, REDUCTION OF RATE OF ROYALTY BY TPO FROM 3% TO 2% I S WITHOUT ANY BASIS, HENCE, CANNOT BE ACCEPTED. 3 ITA.NO.1225/HYD/2015 M/S. RAK CERAMICS INDIA P. LTD., SECUNDERABAD. ACCORDINGLY, WE DELETE THE ADDITION MADE ON ACCOUNT OF T.P. ADJUSTMENT TO ROYALTY PAYMENT. GROUNDS RAISED ARE ALLOWED. 4. THE DRP, IN OUR VIEW, AT PAGE-6, PARA-6, HAS R IGHTLY FOLLOWED THE DECISION OF THE TRIBUNAL AND ADJUDICAT ED THE ISSUE IN FAVOUR OF THE ASSESSEE. WE FIND NO INFIRMITY IN THE ORDER. 5. IN THE RESULT, APPEAL OF THE REVENUE IS DISMIS SED. PRONOUNCED IN THE OPEN COURT ON 17.06.2016. SD/- SD/- (SMT. P. MADHAVI DEVI) (J.SUDHAKAR REDDY) JUDICIAL MEMBER ACCOUNTANT MEMBER HYDERABAD, DATED 17 TH JUNE, 2016. VBP/- COPY TO 1. THE DCIT, CIRCLE - 3(1), ROOM NO.722, B BLOCK, 7 TH FLOOR, I.T.TOWERS, MASAB TANK, HYDERABAD 500 004. 2. M/S. RAK CERAMICS INDIA P. LTD., FLAT NO.105, H.NO. 9 - 1 - 164, 1 ST FLOOR, AMSRI PLAZA, S.D. ROAD, SECUNDERABAD. 3. DISPUTES RESOLUTION PANEL, RASHTROTHANA PARISHAD BH AVAN, 6 TH FLOOR, NO.14/3A, NRUPAT HUNGA ROAD, BENGALURU - 560001. 4. DCIT (TRANSFER PRICING) - II, 3 RD FLOOR, D - BLOCK, I.T. TOWERS, A.C. GUARDS, HYDERABAD 500 004. 5. D.R. ITAT A BENCH, HYDERABAD 6. GUARD FILE