Johnsom Matthey India Pvt. Ltd., New Delhi V. ACIT, New Delhi

ITA 2493/DEL/2014

• Counselvise Citation: [2018] 126 COUNSELVISE.COM (IT) 2832 (ITAT-DELHI)
• Duration Of Justice: 3 year(s) 10 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 16-03-2018
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: I2
• Next Hearing Date: 13-07-2017
• Assessment Year: 2008-2009
• Appeal Filed On: 23-04-2014
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: SANSAY KUMAR YADAV
• Keywords: Related party transaction; Transfer pricing; Business expenditure; International transaction; Rule of consistency; Question of law; Capital receipt; Commercial expediency
• Section: 143(3); 37(1); 10B

Judgement Text

INCOME TAX APPELLATE TRIBUNAL DELHI BENCH I-2: NEW DELHI BEFORE SHRI AMIT SHUKLA, JUDICIAL MEMBER AND SHRI O.P. KANT, ACCOUNTANT ME MBER ITA NOS.:-1817/DEL 2014; 2493/DEL/2014; & 3755/DEL/ 2015 ASSESSMENT YEARS: 2007-08; 2008-09; & 2009-10 ITA NOS. 2072/DEL/2014; 2710/DEL/2014; & 3890 /DEL/2015 ASSESSMENT YEARS 2007-08; 2008-09 & 20 09-10 DCIT CIRCLE 13(2), C.R. BUILDING NEW DELHI. VS. JOHNSON MATTHEY INDIA PVT. LTD. C/O LUTHRA & LUTHRA LAW OFFICES, 103, ASHOKA ESTATE, BARAKHAMBA ROAD, NEW DELHI 110 002 PAN AAACJ2919A (APPELLANT) (RESPONDENT) JOHNSON MATTHEY INDIA PRIVATE LTD. C/O LUTHRA & LUTHRA LAW OFFICES, 103, ASHOKA ESTATE, BARAKHAMBA ROAD, NEW DELHI 110 002 PAN AAACJ2919A VS. DCIT CIRCLE 4(1) NEW DELHI. (APPELLANT) (RESPONDENT) ASSESSEE BY: SHRI VIKAS SRIVASTAVA, ADVOVATE SHRI SUMIT MANGAL, ADVOCATE SHRI SAKSHAM SINGHAL, CA DEPARTMENT BY : SHRI SANSAY KUMAR YADAV, SR. DR DATE OF HEARING 23/11/2017, 14/3/2018 DATE OF PRONOUNCEMENT 16/03/2018 2 O R D E R PER AMIT SHUKLA, J.M. THE AFORESAID CROSS APPEALS HAVE BEEN F ILED BY THE ASSESSEE AS WELL AS BY THE REVENUE AGAINST; FIRSTLY , ORDER DATED 22.1.2014, PASSED BY LD. CIT (APPEALS) XX NEW DELHI FOR THE QUANTUM OF ASSESSMENT PASSED U/S 143(3) R.W.S. 144C FOR THE ASSESSMENT YEAR 2007-08; SECONDLY , ORDER DATED 18.2.2014, PASSED BY LD. CIT (APPEALS ) XX FOR THE QUANTUM OF ASSESSMENT PASSED U/S 143(3) R.W.S. 144 C FOR THE ASSESSMENT YEAR 2008-09 ; AND LASTLY , ORDER DATED 10.3.2015, PASSED BY LD. CIT (APPEALS)44 U/S 143(3) R.W.S 144C FOR TH E ASSESSMENT YEAR 2009-10. SINCE THE ISSUES INVOLVED IN ALL THE APPEAL S ARE COMMON ARISING OUT OF IDENTICAL SET OF FACTS, THEREFORE, SAME W ERE HEARD TOGETHER AND ARE BEING DISPOSED OF BY WAY OF THIS CONS OLIDATED ORDER. 2. WE WILL FIRST TAKE UP CROSS APPEALS FOR THE ASSESSMENT YEAR 2007-08. IN THE ASSESSEES APPEAL, THE ASSESSEE IN VA RIOUS GROUNDS OF APPEAL HAS CHALLENGED MAINLY:- I) THAT THE LD. CIT (A) HAS ERRED IN LAW AND ON FACT S IN NOT ACCEPTING TNMM AS THE MOST APPROPRIATE METHOD CONSIDERING THE BU SINESS MODEL AND TRANSACTION OF THE ASSESSEE AND THEREBY UPHOL DING THE ACTION OF THE TPO IN SEPARATELY ANALYSING THE PAYMENT M ADE FOR VARIOUS INTRA GROUP SERVICES BY APPLYING CUP METHOD. 3 II). LD. CIT(A) HAS ERRED IN LAW AND ON FACTS I N HOLDING THAT NO BENEFIT WAS DERIVED BY THE ASSESSEE IN RESPECT OF VAR IOUS INTRA GROUP SERVICES LIKE; (A) SALES COMMISSION OF RS. 1, 08,48,310/- TO JOHNSON MATTHEY, JAPAN; (B) COST SHARING CHARGES OF R S. 73,36,991/- TO JOHNSON MATTHEY INORGANICS, MALAYSIA ; AND (C) SAP MAINTENANCE CHARGES OF RS. 27,12,007/- TO JOHNSON MAT THEY SDN BHD, MALAYSIA; AND THEREBY HOLDING THAT THE ARMS LE NGTH PRICE OF THESE INTERNATIONAL TRANSACTIONS IS TO BE TAKEN AS NIL. III) LD. CIT(A) HAS ERRED IN LAW IN HOLDING THAT SALES TAX SUBSIDY AMOUNTING TO RS. 2,41,93,000/- RECEIVED BY THE ASSESSE E DURING THE FINANCIAL YEAR 2006-07 IS A REVENUE RECEIPT WHICH IS TAXABLE U/S 28(IV) OF THE ACT. 3. IN THE REVENUES APPEAL, ONLY GROUND RAISED RELATES TO DELETION OF ADDITION ON ACCOUNT OF TP ADJUSTMENT OF RS. 2,45,57,629 /- MADE BY THE AO/TPO ON ACCOUNT OF ROYALTY PAID TO JOHNSON MATTH EY UK, AE. 4. THE BRIEF FACTS AND BACKGROUND OF THE CASE A RE THAT THE JOHNSON MATTHEY GROUP IS A UK BASED GROUP WHICH IS CHEMICAL COMPANY AND MANUFACTURES CATALYSTS, PRECIOUS METALS AND FINE CHE MICALS. THE ASSESSEE COMPANY, JOHNSON MATTHEY INDIA PVT. LTD. IS ENGAGED IN MANUFACTURING OF AUTO EXHAUST CATALYST WITH ITS MANUFA CTURING FACILITIES LOCATED AT MANESAR IN HARYANA USING TECHNO LOGY AND KNOWHOW PROVIDED BY JOHNSON MATTHEY UK (AE). THE AS SESSEE HAS 4 CLASSIFIED ITSELF AS A CONTRACT MANUFACTURER. THE JOH NSON MATTHEY GROUP IS MAINLY INVOLVED IN MANUFACTURING OF PRODUCTS LIKE: AUTO CATALYSTS AND POLLUTION CONTROL SYSTEM, CATALYSTS AND COM PONENTS FOR FUEL CELLS, PHARMACEUTICAL COMPOUNDS, PROCESS CATALYS TS AND SPECIALTY CHEMICALS; COLOURS AND COATING FOR THE CERAMIC FOR THE CERAMIC, GLASS, PAINT AND PLASTICS INDUSTRIES. THE ASSESSEE IN FORM 3CEB HAS REPORTED FOLLOWING INTERNATIONAL TRANSACTIONS WITH ITS A ES:- S.NO. DESCRIPTION OF TRANSACTION METHOD VALUE (IN RS.) 1. EXPORTS OF GOODS TO AE TNMM 1,22,42,185 2. IMPORT OF RAW MATERIAL TNMM 1,26,09,54,934 3. PURCHASE OF FINISHED GOODS FROM AE TNMM 4,87,429 4. ROYALTY PAID TNMM/CUP 2,45,57,629 5. TESTING CHARGES PAID TNMM 3,07,869 6. SERVICE CHARGES PAID TNMM 9,88,483 7. SALES COMMISSION PAID TO AE TNMM 1,08,48,310 8. SAP MAINTENANCE CHARGES PAID TNMM 27,12,007 9. SALE OF SCRAP TO AE TNMM/CUP 66,63,223 10 COST SHARING ARRANGEMENTS PAID TNMM 73,36,991 11 REIMBURSEMENT OF EXPENSES PAID ACTUALS 8,45,403 5. FOR THE PURPOSE OF BENCHMARKING THE INTERNA TIONAL TRANSACTION UNDERTAKEN BY THE ASSESSEE WITH ITS AE, THE ASSESSEE HA S SELECTED 5 TNMM AS THE MOST APPROPRIATE METHOD BY TAKING OP/SALES A S A BASE AND PLI AS OP / TC. AFTER EXCLUDING THE COST OF RAW MA TERIALS THE PLI WAS ARRIVED AT 122.03%. THE ASSESSEE HAD SELECTED 31 COMPARABLES AND THE AVERAGE PLI OF ALL THE COMPARABLES WERE ARRIV ED AT 43.49% AND ACCORDINGLY, IT WAS REPORTED THAT SINCE ASSESSEES MAR GIN WAS HIGHER THAN THAT OF THE COMPARABLES, THE INTERNATIONAL TRANSACTIO N ENTERED WITH THE AE WERE AT ARMS LENGTH PRICE. FOR THE PAYMENT OF ROYALTY AND INTRA GROUP SERVICES (AS MENTIONED AT SL. NOS. 5 TO 11 OF THE AFORESAID TABLE), THE ASSESSEE SUBMITTED THAT ALL THE TRAN SACTIONS SHOULD BE AGGREGATED AND SHOULD BE BENCHMARKED UNDE R TNMM. LD. TPO FROM THE TP STUDY REPORT, FIRST OF ALL NOTED THAT ASSESSEE HAD EXCLUDED THE COST OF RAW MATERIAL FOR THE PURPOSE OF C OMPUTATION OF PLI AND ALSO THE PURCHASE OF COMPONENTS FROM THE AE W HICH WAS HIGHER THAN THE SALES OF AE, ACCORDINGLY, ASSESSEE W AS REQUIRED TO COMPUTE OPERATING PROFIT TO OPERATING REVENUE OF THE TES TED PARTY AND THE COMPARABLES. IN RESPONSE, THE ASSESSEE SUBMITTED THE CALCULATION OF OP/OR AT 11.19% AND THOSE COMPARABLES AT 9.44%. HOW EVER, TPO OBSERVED THAT ASSESSEE HAD INCLUDED OTHER INCOME ALSO IN THE CALCULATION OF OP/OR AND IF THE SAME IS EXCLUDED THEN PLI WOULD BE ARRIVED IN THE FOLLOWING MANNER:- 1. SALES (EXCLUDING OTHER INCOME) : RS. 162,76,20,000 2. TOTAL COST (EXCLUDING FINANCE COST) : RS. 147,11,66,000 3. OPERATING PROFIT : RS. 15,64,54,000 4. OP/TC : 10.63% 5. OP/SALES : 9.61% 6 6. THE LD. TPO THEREAFTER PROCEEDED TO ANALYSE T HE PAYMENT OF ROYALTY AND OTHER INTRA GROUP PAYMENTS SEPARATELY F OR THE PURPOSE OF ASCERTAINING THE ALP OF THESE TRANSACTIONS. HE NOTED THAT ASSESSEE COMPANY HAS PAID ROYALTY OF RS. 2,45,57,629/- TO ITS AE, JM-UK FOR USE OF TECHNOLOGY, TRADE MARK AND PATENTS AT THE RATE O F 8% OF THE NET SALES VALUE. THE TPO ISSUED A DETAILED SHOW-CAUSE N OTICE TO THE ASSESSEE TO SUBSTANTIATE THE PAYMENT OF ROYALTY MADE TO ITS AE AND WHAT TANGIBLE AND DIRECT BENEFIT HAD ACCRUED TO THE ASSE SSEE BY WAY OF SUCH PAYMENT. ASSESSEES DETAILED REPLY IN RESPONSE TO THE POINT WISE QUERY RAISED AND ALSO THE OBSERVATION OF THE TPO WITH REGARD TO REPLY SUBMITTED BY THE ASSESSEE HAS BEEN INCORPORATED IN THE TR ANSFER PRICING ORDER FROM PAGES 6 TO 9. THE TPO OBSERVED THA T, FIRSTLY , ROYALTY HAS NOT BEEN BENCHMARKED SEPARATELY; SECONDLY, ASSESSEE HAS BEEN UNABLE TO SHOW THAT TRANSACTION OF ROYALTY PAYMENT IS A T ARMS LENGTH; AND LASTLY , NO COST BENEFIT ANALYSIS HAS BEEN DONE BY THE ASSESS EE COMPANY. AS REGARDS ASSESSEES CONTENTION THAT ROYALT Y TRANSACTION HAS BEEN AGGREGATED UNDER TNMM AND SINCE UNDER THESE TRANSACTIONS ARE AT ARMS LENGTH, THEREFORE, NO SEPARATE ADJUSTMENT F OR ROYALTY SHOULD BE MADE AS IT IS CLOSELY LINKED WITH OTHER TRAN SACTIONS AND SAME HAS BEEN AGGREGATED UNDER TNMM, THE SAME WAS RE JECTED BY THE TPO. LATER ON IN THE COURSE OF TP PROCEEDINGS THE AS SESSEE SUBMITTED THAT CUP METHOD CAN BE APPLIED AND FOR COMPARING THE RA TE OF ROYALTY, THE RATES PRESCRIBED AND APPROVED BY RBI AND FIPB FO R THE PAYMENTS 7 OF ROYALTY SHOULD BE TAKEN AS BENCHMARK. THE TPO F IRST OF ALL HELD THAT UNDER THE FACTS AND CIRCUMSTANCES OF THE CASE, ROYAL TY HAS TO BE RECKONED AS SEPARATE TRANSACTION WHICH NEEDS TO BE SEP ARATELY BENCHMARKED AND IN SUPPORT, HE REFERRED TO VARIOUS D ECISIONS OF THE TRIBUNAL AS ILLUSTRATED AT PAGES 11 AND 12 OF HIS OR DER. THE TPO INSTEAD OF EXAMINING THE PAYMENT OF ROYALTY UNDER CU P WHICH THOUGH HE HELD AS A MOST APPROPRIATE METHOD FOR THE PAYMENT OF ROYALTY, BUT HELD THAT BENEFIT TEST HAS TO BE SEEN. AFTER DISCUSS ING IN DETAIL WHETHER ANY KIND OF BENEFIT HAS ARISEN TO THE ASSESSEE OR NOT, HE CAME TO THE CONCLUSION THAT ALP OF THE ROYALTY PAYMENT SHOU LD BE DETERMINED AS NIL FOR THE FOLLOWING REASONS:- 1. THE TAXPAYER DID NOT PRODUCE ANY EVIDENCE/DOCUM ENTATION ON HOW THE ROYALTY RATE FIXED. AT AN ARMS LENGTH, PAR TY RECEIVING TECHNOLOGY WOULD LIKE TO SEE THE PROFITABILITY FROM FUTURE REVENUE STREAMS BEFORE FIXING A ROYALTY RATE. 2. THE TAXPAYER DID NOT PRODUCE ANY COST BENEFI T ANALYSIS AT THE TIME OF ENTERING INTO THE AGREEMENT WITH ITS AE SHO WING THAT THE ROYALTY RATE IS NOT FIXED BASED ON EXPECTED BENEFIT . 3. THERE IS NO PROOF THAT THE OTHER GROUP CONCE RNS OR THIRD PARTIES ARE ALSO CHARGED IDENTICAL ROYALTY. 4. THE TAXPAYER HAS ALSO NOT BEEN ABLE TO SHOW THAT IT DERIVED ANY ECONOMIC BENEFIT FROM THE ALLEGED KNOW HOW RECEIVED THE AE. 5. THE PROFITABILITY IS BELOW THE ARITHMETICAL ME AN MARGIN OF THE COMPARABLE COMPANIES CONSIDERED BY THE TPO. 6. THE PROFIT THAT ACCRUES TO THE LICENSEE MAY NO T ARISE SOLELY THROUGH THE ENGINE OF THE TECHNOLOGY. THERE ARE RET URNS FROM THE MIX OF ASSETS IT EMPLOYS SUCH AS FIXED AND WORKING CAPITAL AND THE RETURNS FROM INTANGIBLE ASSETS SUCH AS DISTRIBU TION SYSTEM, TRAINED WORKFORCE, ETC. ALLOWANCES NEED TO BE MADE FOR THEM. IN 8 THE ABSENCE OF ANY DATA PROVIDED BY THE TAXPAYER, I T IS IMPOSSIBLE TO KNOW WHAT PERCENTAGE OF PROFITS THE L ICENSEE WOULD LIKE TO SHARE AT AN ARMS LENGTH AFTER REMOVI NG THE RETURNS FROM ASSETS EMPLOYED AND OTHER ECONOMIC FAC TORS WHICH MAY NOT ARISE SOLELY THROUGH THE ENGINE OF THE TECH NOLOGY. 7. THE TAXPAYER DID NOT GIVE THE DETAILS OF ROYA LTY IN THE INDUSTRY. THUS THE ARMS LENGTH PRICE OF ROYALTY IS DETERMINE D AT RS. NIL. A. PAYMENT OF ROYALTY RS. 2 ,45,57,629/- B. ARMS LENGTH PRICE UNDER CUP RS. NIL C. ADJUSTMENT U/S 92CA RS. 2,45 ,57,629/- THE ABOVE AMOUNT OF RS. 2,45,57,629/- IS TREATED AS ADJUSTMENTS U/S 92CA AS THE VALUE OF ROYALTY TRANSACTIONS IN UNCONT ROLLED CONDITIONS IS TREATED AS RS. NIL UNDER CUP AND IN THE ABSENCE OF ANY SUBSTANTIATION TO SHOW THAT SUBSTANTIAL BENEFIT IS ACCRUED TO THE TAXPAYER. 7. SO FAR AS THE VARIOUS PAYMENTS MADE TO DIFFE RENT AES FOR INTRA GROUP SERVICES, HE ISSUED A DETAILED SHOW CAUSE NO TICE TO SUBMIT VARIOUS DETAILS SO AS TO ANALYSE THE NATURE OF TRANSACTIO N AND TO SEE WHETHER ANY TANGIBLE OR DIRECT BENEFIT HAS BEEN DERIVED BY THE ASSESSEE IN PAYING THE SAID AMOUNT TO THE AE. IN RESPO NSE, ASSESSEE FILED ELABORATE EXPLANATION, DETAILS AND EVIDENCES W HICH HAVE BEEN HIGHLIGHTED BY THE TPO FROM PAGES 16 TO 20 OF HIS OR DER, WHEREIN HE HAS ALSO SUMMARISED HIS OBSERVATIONS WITH REGARD TO THE POINT WISE REPLY AND DETAILS FILED BY THE ASSESSEE. AFTER REFERR ING TO OECD GUIDELINES WITH REGARD TO THE INTRA GROUP SERVICES A ND ON PERUSAL OF THE DETAILS FURNISHED BY THE ASSESSEE, HE CAME TO THE CO NCLUSION THAT ASSESSEE IS NOT ABLE TO PROVE THAT HE HAS ACTUALLY RECE IVED SERVICES OF SOME VALUE THAT CALLED FOR SUCH A HUGE PAYMENT. THE A SSESSEE HAS NOT 9 BEEN ABLE TO GIVE A SEPARATE BENCHMARKING FOR EACH O F THE SERVICES WHICH IT HAS RECEIVED. AFTER REFERRING TO THE DECISIO N OF THE ITAT MUMBAI BENCH IN THE CASE OF STAR INDIA PVT. LTD. VS. AC IT AND ALSO REFERRING TO VARIOUS INTERNATIONAL RULINGS, HE HELD TH AT ASSESSEE IS NOT ABLE TO SHOW THAT ANY TANGIBLE BENEFIT HAS ACTUALLY PAS SED ON TO IT AND NO INDEPENDENT PARTY WOULD HAVE MADE A PAYMENT IN AN UNCONTROLLED CIRCUMSTANCES. AFTER APPLYING CUP METHOD, HE HELD THAT TRANSACTION OF PAYMENT OF SERVICE FEE HAS TO BE DETERMINED AT NIL A ND THEREBY HE MADE TRANSFER PRICING ADJUSTMENT ON THE ENTIRE PAYMENT O F RS. 2,08,97,308/-. 8. BEFORE THE LD. CIT (A), THE ASSESSEE SUBMITTED TH AT ROYALTY AGREEMENT ENTERED WITH JM UK WAS DULY APPROVED BY R BI AND FOREIGN INVESTMENT PROMOTION BOARD (FIPB) AND AS PER THE TERMS O F THE AGREEMENT, ROYALTY WAS REQUIRED TO BE PAID FOR THE PER IOD OF 10 YEARS FROM THE DATE OF COMMENCEMENT OF THE COMMERCIAL PRODUC TION OR FOR A PERIOD OF 13 YEARS FROM THE DATE OF GRANT OF APPROVAL FROM THE RBI. ACCORDINGLY, THE ROYALTY WAS PAYABLE FOR THE PERIOD B ETWEEN FINANCIAL YEAR 1999-2000 TO FINANCIAL YEAR 2008-09. SO FAR AS THE BENEFIT DERIVED TO THE ASSESSEE UNDER THE ROYALTY AGREEMENT FOL LOWING FACTS WAS STATED:- I) ACCESS TO LATEST TECHNOLOGY IN RELATION TO MANU FACTURE OF AUTO-CATALYSTS IN ACCORDANCE WITH THE LATEST EMISSION N ORMS PRESCRIBED IN THE RELEVANT COUNTRY; 10 II) AUTOMATIC RIGHT TO RECEIVE UPDATES RELATING TO THE TECHNOLOGY OF MANUFACTURE AND RELATED PROCESSES FOR AUTO-CATALYSTS BUSINESS; III) TRAINING OF EMPLOYEES OF THE APPELLANT IN RELATI ON TO THE USE OF EQUIPMENT AND TECHNOLOGY PROVIDED BY JMUK; IV) RIGHT TO USE THE WORLD RENOWNED AND ESTABLISHED B RAND NAME JOHNSON MATTHEY IN ORDER TO SELL ITS PRODUCTS; IT WAS SUBMITTED THAT ENTIRE BUSINESS OF THE ASSESSEE WAS DEPENDENT UPON ITS COLLABORATION WITH JM UK DUE TO SUPPLY OF TECHN OLOGY, KNOWHOW, BRAND NAME, ETC. THE PAYMENT BY WAY OF ROYAL TY WAS AT THE FOLLOWING RATES:- A) 5% OF NET SALES VALUE; B) 3% OF NET SALES VALUE SUBJECT TO A MAXIMUM OF RS. 633 LACS. ACCORDINGLY, ROYALTY WAS PAID @ 8% OF ITS NET SALES. IT WAS FURTHER SUBMITTED THAT THE RATE OF 5% TO 8% ON NET SALES IS A RE ASONABLE PAYMENT OF ROYALTY FOR USE OF TECHNOLOGY, KNOW HOW, BRAND NAME ETC. AND IN SUPPORT DECISION OF TRIBUNAL IN THE CASE OF L UMAX INDUSTRIES LTD. WAS CITED. APART FROM THAT IT WAS ALSO SUBMITTED THAT RB I/FIPB APPROVAL IS AN IMPORTANT FACTOR FOR DETERMINING THE ARM S LENGTH PRICE AND SINCE THERE IS A RBI APPROVAL OF 8%, SAME SHOULD BE TREATED AS ARMS LENGTH. LASTLY, REGARDING TREATING THE ALP OF R OYALTY AT NIL, RELIANCE WAS PLACED ON THE JUDGMENT OF HONBLE DELHI HIGH COURT IN THE CASE OF CIT VS. EKL APPLIANCES LTD. (2012) 345 ITR 241 (DEL HI) TO CONTEND THAT AO/TPO CANNOT DECIDE WHAT PAYMENTS ARE RE QUIRED TO 11 BE MADE FOR THE PURPOSE OF BUSINESS AND ALP CANNOT BE TAKEN AT NIL. ON THE ISSUE OF SIGNIFICANT BENEFITS WHICH HAS BEEN AP PROVED IN LIEU OF PAYMENT OF ROYALTY, DETAILED SUBMISSIONS HAVE BEEN MA DE WHICH HAVE BEEN INCORPORATED FROM PAGES 13 TO 15 OF THE APPELLATE ORDER. 9. LD. CIT (A) AFTER ANALYSING THE TECHNICAL CO LLABORATION AGREEMENT (TCA) AND THE BENEFITS DERIVED BY THE ASSESSE E FROM SUCH AN AGREEMENT HELD THAT THE ROYALTY CANNOT BE DETERMINE D AT NIL AND ROYALTY OF 5% TO 8% IS AS PER INDUSTRY STANDARDS FOR A UTO/AUTO ANCILLARY INDUSTRY. WHILE COMING TO THIS CONCLUSION, LD. CIT (A) TOO REFERRED TO THE DECISION OF ITAT DELHI BENCH IN THE C ASE OF LUMAX INDUSTRIES LTD. HE ACCEPTED THAT RBI/FIPB APPROVAL HAS SUBSTANTIVE PERSUASIVE VALUE UPON THE DETERMINATION OF THE ALP. HE FURTHER REFERRED TO VARIOUS OTHER DECISIONS, WHICH HAS BEEN R EFERRED BY HIM AT PAGE 17 OF HIS ORDER. ACCORDINGLY, HE HELD THAT ALP OF THE ROYALTY PAYMENT CANNOT BE TAKEN AT NIL AND DIRECTED THE AO /TP O TO DELETE THE ENTIRE ADDITION. AGAINST THIS FINDING OF THE LD. CIT (A), REVENUE IS IN APPEAL BEFORE US. 10. SO FAR AS ISSUE RELATING TO INTRA GROUP SERVI CES, THE ASSESSEE SUBMITTED THAT THE BENEFIT TEST APPLIED BY THE LD. TPO TO CONCLUDE THAT NO DIRECT BENEFIT HAS BEEN RECEIVED BY THE ASSESSEE THROUGH SUCH SERVICES CANNOT BE UPHELD AS THESE SERVICES WERE REC EIVED WHOLLY AND EXCLUSIVELY FOR THE BUSINESS PURPOSE AND IF SUCH SER VICES WERE TO BE 12 RECEIVED FROM INDEPENDENT THIRD PARTIES, ASSESSEE HAD TO MAKE THE PAYMENTS. IT WAS REITERATED THAT ARMS ALP ANALYSIS HAS BEEN CARRIED OUT BY THE ASSESSEE BY SELECTING TNMM AS A MOST APPROPR IATE METHOD AND IN RESPECT OF ALL THE INTERNATIONAL TRANSACTIONS; A ND ACCORDINGLY, TP REPORT DEMONSTRATING THE ENTIRE TRANSACTION UNDER TP ANALYSIS AND WHY AGGREGATION HAS BEEN DONE SHOULD BE ACCEPTED. RE GARDING NATURE AND PERFORMANCE OF THE INTRA GROUP SERVICES, FOLLOWIN G SUBMISSIONS HAVE BEEN MADE, WHICH FOR THE SAKE OF UNDERSTANDING O F FACTS AND THE NATURE OF SUCH SERVICES THE SAME ARE REPRODUCED HEREU NDER :- THE DETAILS REGARDING THE VARIOUS INTRA GROUP SERVI CES RECEIVED BY THE APPELLANT FROM ITS ASSOCIATED ENTERPRISES IS PR OVIDED HEREUNDER:- PAYMENT OF SALES COMMISSION RS. 1,08,48,310/-: THE APPELLANT HAD ENTERED INTO AN AGREEMENT DATED M ARCH 16, 2004, WITH ITS ASSOCIATED ENTERPRISE (VIZ. JMJ)) A COPY OF WHICH IS ENCLOSED HEREWITH AS ANNEXURE 10. IN ACCORDANCE WIT H THE TERMS OF THE SAID AGREEMENT, JMJ IS REQUIRED TO PROVIDE F OLLOWING SERVICES TO THE APPELLANT: MARKETING AND LIAISON SERVICES WITH JAPANESE CUSTOM ERS IN RESPECT OF SALES BY THE APPELLANT TO ALL JAPANESE C USTOMERS; FEEDBACK ON ORGANIZATIONAL AND PERSONNEL CHANGES IN JAPANESE CUSTOMERS, IN RELATION TO BUSINESS OF THE APPELLANT ; INPUTS ON DESIGN AND MODEL CHANGES BASED ON JAPANES E CUSTOMERS REQUIREMENTS AND PLANS FOR ALL JAPANESE C USTOMERS; 13 FEEDBACK ON OTHER ASPECTS OF THE ACTIVITIES OF JAPA NESE CUSTOMERS THAT HAVE IMPACT ON THE BUSINESS OF APPELLANT IN IN DIA IN RESPECT OF THE AGREEMENT BETWEEN THE APPELLANT A ND JMJ, IT IS PERTINENT TO NOTE THAT MAJOR CUSTOMER OF THE APPELL ANT IS MARUTI SUZUKI INDIA LIMITED, THE HOLDING COMPANY OF WHICH IS SUZUKI MOTOR CORPORATION. THEREFORE, THE APPELLANT REQUIRE S PRESENCE IN JAPAN TO LIAISE WITH SUZUKI MOTOR CORPORATION AND A LSO TO MARKET THE PRODUCTS MANUFACTURED BY THE APPELLANT AND PROC URE THE ORDERS. THE SERVICES PERFORMED BY JMJ INCLUDE, INTER ALIA, LIAISON, COMMUNICATION AND SALES SUPPORT FUNCTIONS WITH THE OBJECTIVE OF IMPROVING THE LEVEL OF SERVICE AND COMMITMENT TO JA PANESE AUTOMOTIVE MANUFACTURERS. JMJ PERFORMS MARKETING SE RVICES IN JAPAN OF OPERATION (AS PER THE AGREEMENT), IN RESPE CT OF SALES BY THE APPELLANT TO ITS CUSTOMERS. IT ALSO PROVIDES, F ROM TIME TO TIME, FEEDBACK ON ORGANIZATION AND PERSONNEL CHANGES IN R ELATION TO THE BUSINESS OF THE APPELLANT AND ALSO PROVIDES INPUTS ON DESIGN AND MODEL CHANGES BASED ON AUTOMOTIVE MANUFACTURERS' RE QUIREMENTS AND PLANS FOR ALL AUTOMOTIVE MANUFACTURERS. FOR THE SERVICES TO BE RENDERED, THE APPELLANT HAS TO PAY JMJ A FEE AT THE RATE OF 40 CENTS PER UNIT SOLD BY THE AP PELLANT TO ALL JAPANESE CUSTOMERS INCLUDING THEIR INDIA SUBSIDIARI ES, IF ANY. DURING THE RELEVANT PERIOD THE APPELLANT PAID RS. 1 ,08,48,310 (USD 239,174.80 I.E. 5,97,937 UNITS X 0.40) AT THE RATE OF 40 CENT PER UNIT SOLD TO JAPANESE CUSTOMERS INCLUDING ITS I NDIAN SUBSIDIARIES TO JMJ FOR THE SERVICES RENDERED PURSU ANT TO THE AGREEMENT ENTERED INTO WITH THE APPELLANT. IN SUPPORT OF THE SAME, COPIES OF THE INVOICES RAIS ED BY JMJ IN RESPECT OF THE SALES COMMISSION PAID DURING THE REL EVANT PERIOD 14 (ALREADY SUBMITTED BEFORE LD. TPO) ARE ENCLOSED HER EWITH AS ANNEXURE 11. PAYMENT MADE UNDER COST SHARING ARRANGEMENTS RS. 73,36,991/-: DURING THE YEAR UNDER CONSIDERATION, THE APPELLANT REPORTED AN AMOUNT OF RS.73,36,991 (USD 168,665) TO ITS ASSOCIA TED ENTERPRISE (VIZ. JMIM) UNDER COST SHARING ARRANGEME NT OF THE JOHNSON MATTHEY GROUP. THE ASIAN REGION HEAD QUARTER OF JOHNSON MATTHEY GR OUP WAS LOCATED AT MALAYSIA. THE SAID HEADQUARTER WAS MANAG ED BY THE PERSONNEL APPOINTED BY JOHNSON MATTHEY GROUP AND DE PUTED AT HEADQUARTER. DURING THE YEAR UNDER CONSIDERATION, T HE FOLLOWING WERE DEPUTED AT HEADQUARTER TO MANAGE THE ASIA REGI ON: MANAGING DIRECTOR ASIAN REGION FINANCE DIRECTOR ASIAN REGION SALES DIRECTOR ASIAN REGION COMMON SECRETARY TO MANAGING DIRECTOR/FINANCE DIREC TOR & SALES DIRECTOR OF ASIA REGION. THE SALARY OF THESE EMPLOYEES AND OTHER EXPENDITURE INCURRED ON THESE EMPLOYEES WAS ALLOCATED TO THE GROUP COMPANIE S LOCATED IN ASIA REGION I.E. INDIA, JAPAN, CHINA AND MALAYSIA. THE BASIS FOR ALLOCATION OF THE EXPENSES INCURRED T O MANAGE ASIA REGION IS THE NET REVENUE OF RESPECTIVE COUNTRIES L OCATED IN ASIA REGION I.E. THE ALLOCATION OF EXPENSE IS BASED ON T HE RATIO OF FIGURES ARRIVED AT AFTER REDUCING FROM THE TURNOVER OF EACH COUNTRY THE COST OF THE RAW MATERIAL IMPORTED. 15 WITH RESPECT TO THE ABOVE MENTIONED COST ALLOCATION ARRANGEMENT, IT IS SUBMITTED THAT SUCH ARRANGEMENTS ARE REQUIRED IN ORDER TO HAVE THE BENEFIT OF EXPERT GUIDANCE FOR THE APPELLA NT WITH MINIMUM COSTS. IN THE ABSENCE OF SUCH AN ARRANGEMEN T, EITHER THE APPELLANT WOULD HAVE TO EMPLOY SUCH EXPERTS OR WILL HAVE TO ENGAGE OUTSIDE CONSULTANTS. HOWEVER, THAT ARRANGEME NT MAY NOT BE COST EFFICIENT AS COMPARED TO THE PRESENT ARRANG EMENT WHERE EXPERT GUIDANCE IS AVAILABLE TO THE APPELLANT WITH ONLY SOME PROPORTION OF THE TOTAL EXPENSES BEING BORNE BY THE APPELLANT. PAYMENT OF SAP MAINTENANCE CHARGES RS. 27,12,007/-: DURING THE YEAR UNDER CONSIDERATION, THE APPELLANT REPORTED AN AMOUNT OF RS. 27,12,007 (USD 61,292.67) TO ITS ASSO CIATED ENTERPRISE (VIZ. JMM) FOR SAP MAINTENANCE. THE ASIAN REGION HEAD QUARTER OF THE JOHNSON MATTHE Y GROUP LOCATED IN MALAYSIA IMPLEMENTS THE SAP PROGRAM FOR THE ASIAN REGION. FOR THIS PURPOSE, A SERVER OWNED BY AN INDE PENDENT VENDOR HAS BEEN SET UP IN CHENNAI. THE COST OF OPER ATING AND MAINTAINING THE SERVER IS BEING INCURRED BY JMM WHI CH IS SUBSEQUENTLY RECOVERED FROM THE GROUP ENTITIES LOCA TED IN THE REGION I.E. INDIA, JAPAN, CHINA AND MALAYSIA EQUALL Y. IN SUPPORT OF THE SAME, COPIES OF INVOICES AND DEBI T NOTES RAISED ON JMM BY INDEPENDENT VENDORS IN RESPECT OF SAP MAI NTENANCE CHARGES (ALREADY SUBMITTED BEFORE LD. TPO) ARE ENCL OSED HEREWITH AS ANNEXURE 13. ON THE BASIS OF THE ABOVE, IT IS EVIDENT THAT THE A RRANGEMENT BETWEEN THE APPELLANT AND THE ASSOCIATED ENTERPRISE S RELATING TO THE PROVISION OF VARIOUS INTRA GROUP SERVICES PRO VIDES THE APPELLANT WITH THE FOLLOWING BENEFITS:- 16 STREAMLINING THE PROCESSES OF THE APPELLANT IN AC CORDANCE WITH THE STANDARDS OF THE JOHNSON MATTHEY GROUP; ENABLING UNIFORM USE OF SYSTEMS FOR ACCOUNTING, ADMINISTRATION ETC., FACILITATING EASE OF COMMUNICA TION AND CO-ORDINATION AMONGST THE MEMBERS OF THE GROUP; PROVIDING COST-EFFICIENT EXPERTISE AND MANAGEMENT PERSONNEL FOR THE COMPANIES OF THE JOHNSON MATTHEY GROUP IN T HE ASIA REGION; ENGAGING RELIABLE GROUP COMPANIES TO PROVIDE FOR SERVICES LIKE MARKETING AND SALES, CUSTOMER RELATIONSHIP MANAGEMENT, SERVER SUPPORT ETC.; ON THE BASIS OF THE ABOVE, IT IS CLEARLY EVIDENT TH AT SUBSTANTIAL- BENEFITS ARE DERIVED BY THE APPELLANT, BOTH IN TERM S OF COST AND EFFICIENCY, THROUGH CENTRALISATION OF CERTAIN BACK- END OPERATION AT GROUP LEVEL AND ALLOCATING THE SAME AMONGST GROUP C OMPANIES BASED ON REASONABLE ALLOCATION KEYS. THUS, THE ARGUMENT OF THE LD. TPO THAT THE APPELLAN T HAS NOT DERIVED ANY BENEFIT FROM THE INTRA GROUP SERVICES R ECEIVED FROM ITS ASSOCIATED ENTERPRISES IS WHOLLY INCORRECT AND UNSU STAINABLE. IN THIS REGARD, IT IS FURTHER IMPORTANT TO NOTE THA T THE LD. TPO HAS COMPLETELY LOST SIGHT OF THE BUSINESS MODEL AND THE NATURE OF INTRA GROUP SERVICES AVAILED BY THE APPELLANT. THE SERVIC ES PROVIDED BY THE ASSOCIATED ENTERPRISES (SUCH AS MARKETING, TEST ING, SERVER SUPPORT, PERSONNEL SUPPORT ETC.) BY THEIR VERY NATU RE ARE INTANGIBLE. THUS, IT IS NOT POSSIBLE TO PROVIDE FOR PROOF REGARDING THE RECEIPT OF SUCH SERVICES. FURTHER, THE APPELLAN T HAS DULY SUBMITTED BEFORE THE LD. TPO, COPIES OF THE AGREEME NTS BETWEEN THE APPELLANT AND ITS ASSOCIATED ENTERPRISES ALONG WITH COPIES OF INVOICES / DEBIT NOTES RAISED BY THE ASSOCIATED ENT ERPRISES IN 17 RESPECT OF SUCH SERVICES. THEREFORE, CONSIDERING TH E NATURE OF SERVICES PROVIDED BY THE ASSOCIATED ENTERPRISES, TH E SUPPORTING DOCUMENTS SUBMITTED BEFORE THE LD. TPO SHOULD CONST ITUTE SUFFICIENT EVIDENCE OF RECEIPT OF SUCH SERVICES BY THE APPELLANT. THUS, CONSIDERING THE FACTS AND CIRCUMSTANCES OF TH E CASE, THE ARGUMENT OF THE LD. TPO THAT THE APPELLANT HAS NOT SUBMITTED PROOF OF RECEIPT OF SUCH INTRA GROUP SERVICES IS UN REASONABLE AND UNTENABLE. 11. LD. CIT (A), REJECTED THE ASSESSEES CONTENTI ON AND HELD THAT THE TPOS ACTION IN TREATING THE SAID PAYMENT AT NIL IS CORR ECT ON FACTS HIS RELEVANT OBSERVATION AND THE FINDING ARE AS UNDER:- AS REGARDS THE PAYMENT OF SALES COMMISSION, THE AP PELLANT HAD ENTERED INTO AN AGREEMENT DATED MARCH 16, 2004, WIT H ITS ASSOCIATED ENTERPRISE (VIZ. JMJ), IN ACCORDANCE WIT H THE TERMS OF THE SAID AGREEMENT, JMJ IS REQUIRED TO PROVIDE VARI OUS SERVICES TO THE APPELLANT. DURING THE RELEVANT PERIOD THE APPEL LANT PAID RS. 1,08,48,310 (USD 239,174.80 I.E. 5,97,937 UNITS X 0 .40) AT THE RATE OF 40 CENT PER UNIT SOLD TO JAPANESE CUSTOMERS INCLUDING ITS INDIAN SUBSIDIARIES TO JMJ FOR THE SERVICES RENDERE D PURSUANT TO THE AGREEMENT ENTERED INTO WITH THE APPELLANT. ALL THE CUSTOMERS OF THE APPELLANT ARE LOCATED IN INDIA. THE APPELLANT H +-AS FAILED TO PROVE WITH EVIDENCE THAT JMJ HAS ACTUALLY RENDERED ANY SERVICES TO THE APPELLANT DURING THE YEAR. THUS THE APPELLAN T HAS FAILED TO JUSTIFY THE PAYMENT OF SALES COMMISSION TO JMS. AS REGARDS THE PAYMENT MADE UNDER COST SHARING ARRA NGEMENTS, THE APPELLANT HAS SUBMITTED THAT IT HAS PAID AN AMO UNT OF RS. 73,36,991 (USD 168,665) TO ITS ASSOCIATED ENTERPRIS E (VIZ. JMIM) UNDER COST SHARING ARRANGEMENT OF THE JOHNSON MATTH EY GROUP. 18 THE ASIAN REGION HEAD QUARTER OF JOHNSON MATTHEY GR OUP WAS LOCATED AT MALAYSIA. THE SAID HEAD QUARTER WAS MANA GED BY THE PERSONNEL APPOINTED BY JOHNSON MATTHEY GROUP AND DE PUTED AT HEADQUARTER. THE SALARY OF THESE EMPLOYEES AND OTHE R EXPENDITURE INCURRED ON THESE EMPLOYEES WAS ALLOCATED TO THE GR OUP COMPANIES LOCATED IN ASIA REGION I.E. INDIA, JAPAN, CHINA AND MALAYSIA. AS REGARDS THE PAYMENT MADE UNDER COST SH ARING ARRANGEMENTS, THE APPELLANT HAS FAILED TO PROVE WIT H EVIDENCE THAT IT HAS ACTUALLY RECEIVED ANY SERVICES FROM JMIM DUR ING THE YEAR. THUS THE APPELLANT HAS FAILED TO JUSTIFY THE PAYMEN T MADE UNDER COST SHARING ARRANGEMENTS TO JMIM. AS REGARDS THE PAYMENT OF SAP MAINTENANCE CHARGES, THE APPELLANT HAS SUBMITTED THAT IT HAS PAID AN AMOUNT OF RS. 27,12,007 (USD 61,292.67) TO ITS ASSOCIATED ENTERPR ISE (VIZ. JMM) FOR SAP MAINTENANCE. THE ASIAN REGION HEAD QUARTER OF THE JOHNSON MATTHEY GROUP LOCATED IN MALAYSIA IMPLEMENT S THE SAP PROGRAM FOR THE ASIAN REGION. FOR THIS PURPOSE, A S ERVER OWNED BY AN INDEPENDENT VENDOR HAS BEEN SET UP IN CHENNAI. T HE COST OF OPERATING AND MAINTAINING THE SERVER IS BEING INCUR RED BY JMM WHICH IS SUBSEQUENTLY RECOVERED FROM THE GROUP ENTI TIES LOCATED IN THE REGION I.E. INDIA, JAPAN, CHINA AND MALAYSIA EQ UALLY. HOWEVER, THE APPELLANT HAS FAILED TO DEMONSTRATE AS TO HOW THE SETTING UP A SERVER IN CHENNAI BY AN INDEPENDENT VE NDOR HAS BENEFITTED THE APPELLANT. 12. LD. CIT (A) ALSO REFERRED TO THE FOLLOWING J UDGMENTS OF THE TRIBUNAL: - I) GEMPLUS INDIA PVT. LTD. VS. ACIT IN IT A NO. 352/BANG/2009 A.Y. 2003-04; II) KNORR-BREMSE INDIA PVT. LTD. VS. CIT (2012) 27 TAXMANN. COM 16 (DELHI). 19 13. THUS, SO FAR AS THE TRANSFER PRICING ADJUS TMENT IS CONCERNED, THE LD. CIT (A) DELETED THE ADJUSTMENT MADE ON ACCOUNT O F ROYALTY BUT CONFIRMED THE ADJUSTMENT ON ACCOUNT OF INTRA GROUP SERV ICES. 14. NOW COMING TO THE ISSUE OF TREATING THE SALES TA X SUBSIDY OF RS. 2,41,93,000/- AS REVENUE RECEIPT TAXABLE U/S 28(4) OF THE ACT, THE AO NOTED THAT SALES TAX SUBSIDY WAS GRANTED BY THE HARYANA G OVERNMENT FOR THE PURPOSE OF PROMOTING INVESTMENT IN CERTAIN ARE AS IN HARYANA AND DURING THE YEAR ASSESSEE HAS CLAIMED DEDUCTION OF RS. 2,41,93,000/-. AFTER ANALYSING THE HARYANA GENERAL SALES TAX RULES, THE AO NOTED FOLLOWING FACTS:- (A) IN THE ABOVE QUOTED CASE, THE SUBSIDY SCHEME WA S FORMULATED IN VIEW OF THE RECOMMENDATIONS OF THE COMMITTEE WHI CH WAS SPECIFICALLY LOOKING INTO THE PROBLEMS BEING FACED IN SETTING UP NEW SUGAR FACTORY. IN CASE OF THE ASSESSEE, THE SUB SIDY'S SCHEME OF HARYANA GOVERNMENT IS NOT SECTOR SPECIFIC. (B) ON THE IDENTIFICATION OF THE FACT THAT THE FINA NCIAL INSTITUTIONS DID NOT COME FORWARD TO ADVANCE LOANS TO THE ENTREP RENEURS OF NEW SUGAR FACTORY, IT WAS SPECIFIC CONDITION IN THE SUBSIDY SCHEME THAT THE BENEFIT OF THE SCHEME HAD TO BE UTILIZED O NLY FOR THE REPAYMENT OF TERM LOANS. THE HARYANA GOVERNMENT HAS NOT IMPOSED ANY SUCH CONDITION ON THE UTILIZATION OF TH E BENEFITS OF THE SCHEME ON THE ASSESSEE IN THE PRESENT CASE. (C) THE ISSUE OF FREEDOM TO USE THE MONEY IN ITS BU SINESS TO THE ASSESSEE HAS BEEN HIGHLIGHTED IN THE ABOVE REFERRED CASE AND HERE A REFERENCE HAS BEEN MADE TO THE DECISION OF T HE HON'BLE SUPREME COURT IN THE CASE OF SAHNEY STEEL AND PRESS WORKS LTD. 20 VS. CIT (1997) 228 ITR 253. THE ABOVE REFERRED CASE HAS BEEN DISTINGUISHED FROM THE CASE OF SAHNEY STEEL AND PRE SS WORKS LTD. ON THIS ISSUE. HOWEVER, THE FACTS OF THE ASSESSEE'S CASE ARE COVERED BY SAHNEY STEEL AND PRESS WORKS LTD VS. CIT . (D) ON PERUSAL OF RULE 28-C OF HARYANA GENERAL SALE S TAX RULES, 1975, IT IS OBSERVED THAT 'NEW INDUSTRIAL UNIT' MEA NS A UNIT WHICH HAS BEEN SET UP ON THE STATE OF HARYANA AND HAD COM E INTO COMMERCIAL PRODUCTION DURING THE OPERATIVE PERIOD O F THIS POLICY OR HAVING COME INTO COMMERCIAL PRODUCTION UNDER RULE 2 8-A OR 28-B HAS NOT STARTED AVAILING ANY TAX CONCESSION UNDER T HE SAID RULE. THUS, THE SUBSIDY SCHEME BECOMES APPLICABLE ONCE A UNIT HAS STARTED COMMERCIAL PRODUCTION. FURTHER, ON PERUSAL OF RULE 28C, IT IS OBSERVED THAT THE SCHEME IS AVAILABLE NOT ONLY T O NEW UNITS BUT ALSO TO EXISTING UNITS WHICH CONTINUE PRODUCTION AT THE SAME LEVEL AFTER EXPANSION. CLEARLY, THE INTENTION HERE IS TO PROMOTE A SET UP UNIT ARID NOT TO SUBSIDIZE THE SETTING UP OF A NEW UNIT AS CLAIMED BY THE ASSESSEE. THUS, THE SUBSIDY CANNOT BE TERMED AS BEING CAPITAL IN NATURE. (E) THE 'FIXED CAPITAL INVESTMENT' FOR THE PURPOSE S OF THE SCHEME MENTIONED BY THE ASSESSEE IS ONLY A SET OF CONDITIO NS FOR GRANT OF SUBSIDY TO WHICH THE 'ASSESSEE IS ELIGIBLE AND THIS CANNOT GIVE IT THE COLOUR OF CAPITAL RECEIPT. THE TREATMENT OF A R ECEIPT AS REVENUE OR CAPITAL HAS TO BE SEEN WITH REFERENCE TO THE ACT UAL APPLICATION BEING MADE BY THE RECIPIENT AND NOT BY ANY PARTICUL AR TERMINOLOGY USED TO DESCRIBE THE AMOUNT. 15. AFTER RELYING UPON THE JUDGMENT OF HONBLE S UPREME COURT IN THE CASE OF SAHNEY STEEL AND PRESS WORKS LTD. VS. CIT (1997) 22 8 ITR 253 HELD THAT SUBSIDY IS TO BE TREATED AS REVENUE RECEIPT. BEFORE 21 THE LD. CIT(A), DETAILED SUBMISSIONS HAVE BEEN MADE A ND RELIANCE WAS PLACED ON CATENA OF DECISIONS INCLUDING THAT OF THE SUP REME COURT IN THE CASE OF CIT VS. PONNI SUGAR & CHEMICALS LTD. REPORTED IN (2008) 306 ITR 392 (SC) . 16. THE LD. CIT(A), RELYING UPON THE JUDGMENT OF HONBLE P & H HIGH COURT IN THE CASE OF CIT VS. ABHISHEK INDUSTRIES LTD. (2006) 156 TAXMAN 257 , UPHELD THE ACTION OF THE AO AND HELD THAT SUBSIDY HAS RIGHTLY BEEN TREATED AS REVENUE RECEIPT. 17. BEFORE US LD. COUNSEL FOR THE ASSESSEE, FIR ST OF ALL SUBMITTED THAT SO FAR AS THE ISSUE OF SALES TAX SUBSIDY IS CONCER NED, WHETHER IT IS REVENUE RECEIPT OF CAPITAL IN NATURE, SAME HAS ALREADY BEEN DECIDED IN FAVOUR OF THE ASSESSEE BY THE TRIBUNAL AND ALSO BY TH E HONBLE DELHI HIGH COURT IN THE ASSESSMENT YEAR 2006-07, WHEREIN THE HONBLE HIGH COURT HAS HELD THAT SALES TAX SUBSIDY RECEIVED BY THE AS SESSEE UNDER THE SALES TAX SUBSIDY OF HARYANA STATE IS A CAPITAL REC EIPT NOT CHARGEABLE TO TAX. HE FURTHER POINTED OUT THE JUDGMENT OF HONBLE HIGH COURT HAS NOT BEEN CHALLENGED BY THE REVENUE BEFORE THE HONBLE SUPREME COURT. THUS, WHEN THE SAME SUBSIDY AND UNDER THE SAME SCHEME HAS BEEN TREATED AS CAPITAL RECEIPT IN THE EARL IER YEAR AND ALSO IN THIS YEAR, THEN SAME HAS TO BE TREATED AT PAR AND THE MATTER SHOULD DECIDE IN FAVOUR OF THE ASSESSEE FOLLOWING THE BINDIN G JUDICIAL PRECEDENCE. HIGHLIGHTING THE MAIN PURPOSE OF THE SUBS IDY GRANTED BY 22 THE GOVT OF HARYANA, THE LD. COUNSEL SUBMITTED THAT THE I NDUSTRIAL POLICY OF HARYANA OF 1999, CLEARLY STATES THAT THE PUR POSE OF THE SCHEME WAS TO PROMOTE INDUSTRY GROWTH IN THE CONTEXT OF OVERALL ECONOMIC DEVELOPMENT AND OBJECTIVES OF THE POLICY WERE TO INCREASE EMPLOYMENT AND ATTAIN SUSTAINABLE DEVELOPMENT. SECTION 2 5A OF THE HARYANA GENERAL SALES TAX ACT, 1973 PROVIDES THAT ST ATE GOVERNMENT CAN DIFFER PAYMENT OF TAX IN THE INTEREST OF INDUSTRIAL D EVELOPMENT OF THE STATE AND RULE 28C OF HARYANA GENERAL SALES TAX RULES 1975 CLEARLY PROVIDES THAT SUBSIDY PROVIDED UNDER THE RULE IS A CAPITAL SUBSIDY AND METHOD TO COMPUTE THE SUBSIDY HAS ALSO BEEN ELABORATED. A DETAIL WRITE UP ON THIS ISSUE WAS ALSO FILED BY THE L D. COUNSEL. 18. ON THE OTHER HAND LD. CIT (DR) SUBMITTED THAT IN THE LATEST DECISION OF ITAT DELHI BENCH IN THE CASE OF MARUTI SUZUKI INDIA VS. CIT IN ITA NO. 6021/DEL/2012 VIDE ORDER DATED 9.11. 2017 HAS HELD SIMILAR SALES TAX SUBSIDY GIVEN BY THE HARYANA S TATE GOVERNMENT HAS BEEN HELD TO BE REVENUE RECEIPT. WHILE COMING TO THIS CONCLUSION, THE HONBLE BENCH HAS RELIED UPON THE JUDGMENT OF HON BLE DELHI HIGH COURT IN THE CASE OF CIT VS. BHUSHAN STEEL LTD. ITA NO. 315/2003 AND OTHERS, (JUDGMENT DATED 13.7.2017) THE TRIBUNAL FOLLOWING THE SAID JUDGMENT OF THE HONBLE HIGH COURT AND AFTER DISCU SSING THE PRINCIPLES LAID DOWN BY THE HONBLE SUPREME COURT IN THE CASE OF SAHNEY STEEL AND PRESS WORKS LTD. VS. CIT (SUPRA) AND PONNI SUGAR & 23 CHEMICALS LTD. HAVE HELD THAT SALES TAX SUBSIDY GRANTED UNDER THE POLICY OF HARYANA STATE GOVERNMENT IS A REVENUE RECEIP T. IN THIS JUDGMENT DETAILED ANALYSIS HAS BEEN DONE WITH REGARD TO THE SAME VERY SCHEME AND ALSO THE LAW AND THE PRINCIPLES LAID DOWN ON THE GRANT OF SUBSIDY. LD. CIT (DR) FURTHER SUBMITTED THAT IF THERE IS ANY SUBSEQUENT JUDGMENT OF HONBLE DELHI HIGH COURT AND I F IT HAS TAKEN A DIFFERENT VIEW, THEN THE JUDGMENT OF THE HIGH COURT IN T HE CASE OF ASSESSEE CANNOT BE RELIED UPON. IN FACT, HE POINTED O UT THAT THERE ARE TWO JUDGMENTS OF HONBLE DELHI HIGH COURT WHICH ARE I N THE FAVOUR OF THE REVENUE ON THIS POINT, ONE IS, CIT VS. BHUSHAN STE EL (SUPRA) AND OTHER ONE IS CIT VS. BOUGAINVILLEA MULTIPLEX ENTERTAINMENT CENTR E PVT. LTD. 373 ITR 14 . THUS, THE LATEST JUDGEMENTS SHOULD BE FOLLOWED. ACCORDINGLY, HE SUBMITTED THAT THIS ISSUE HAS TO BE DECI DED IN FAVOUR OF THE REVENUE. 19. IN THE REJOINDER, THE LD. COUNSEL FOR THE ASSE SSEE POINTED OUT THAT, NOW THE HONBLE SUPREME COURT HAS STAYED THE OPERATION OF THE ORDER OF THE HONBLE DELHI HIGH COURT IN THE CAS E OF BHUSHAN STEEL IN SLP NO. 307832/2017, VIDE ODER DATED 20.11.2017 AND THEREFORE, THE SAID JUDGMENT DOES NOT HAVE ANY BINDING PRECEDENT. WHEN IN ASSESSEES OWN CASE IN THE IMMEDIATE PRECEDIN G ASSESSMENT YEAR THERE IS A JUDGMENT OF HONBLE DELHI HIGH COURT I N THE CASE OF THE SAME SUBSIDY WHICH HAS ATTAINED FINALITY, THEN SAME N EEDS TO BE 24 FOLLOWED AND NOT THE JUDGMENTS WHICH ARE, FIRSTLY , BASED ON DIFFERENT SCHEME OF STATE OF UP; AND SECONDLY , THE WHEN THE ORDER OF THE HIGH COURT AS RELIED HEAVILY BY THIS TRIBUNAL IN MARUTI SU ZUKI CASE HAS BEEN STAYED BY THE HONBLE SUPREME COURT, THEN IT LOSES ITS BINDING PRECEDENCE. 20. ON THE ISSUE OF TRANSFER PRICING ADJUSTMENT ON ACCOUNT OF ROYALTY AND INTRA GROUP SERVICES, LD. COUNSEL A T THE OUTSET SUBMITTED THAT APPELLANT HAS BEEN UNDERTAKING INTERNATIONAL TRANS ACTIONS WITH ITS AES SINCE THE COMMENCEMENT OF COMMERCIAL PRODUCTIO N IN THE A.Y. 2002-03 AND HAS BEEN BENCHMARKING ALL THE TRANSACTION UNDER TNMM. THIS METHOD HAS BEEN ACCEPTED IN THE EARLIER YE ARS AND SUCH A BENCHMARKING OF ALL THE TRANSACTIONS UNDER TNMM HAS NO T BEEN DISPUTED UPTILL A.Y. 2006-07. THEREFORE, AS A MATTER O F CONSISTENCY THE SAME APPROACH SHOULD BE FOLLOWED WITHOUT THERE BEING ANY CHANGE IN FACTS OR IN LAW. THUS, THERE WAS NO BASIS FOR THE TPO TO SEPARATELY BENCHMARK THE TRANSACTIONS IN THIS YEAR RELATING TO ROY ALTY OR THE INTRA GROUP SERVICES UNDER CUP AND REJECTING THE TNM M AS MAM. HE SUBMITTED THAT BEING A MANUFACTURER OF AUTO EXHAUST CATA LYSTS, THE ASSESSEE UTILIZES SUPPORT IN THE FORM OF TECHNOLOGY, KNOWHOW AND VARIOUS SUPPORT SERVICES FROM ITS AES WHICH OVERALL H ELPS AND STRENGTHENS ITS MANUFACTURING FUNCTIONS. THE TRANSACTION S OF ROYALTY AND INTRA GROUP SERVICES ARE INEXTRICABLY LINKED WI TH THE CORE 25 BUSINESS OF MANUFACTURING OF THE CATALYSTS, AS THE SUP PLY OF TECHNOLOGY AND SERVICES GIVES COMPETITIVELY ADVANTAGEO US POSITION IN ITS SECTOR AND THEREFORE, SUCH TRANSACTIONS CANNOT BE ANA LYSED IN ISOLATION. IN SUPPORT OF SUCH AGGREGATION OF THE TRANSAC TIONS UNDER TNMM HE RELIED UPON THE FOLLOWING JUDGMENTS:- DELHI HC - MAGNETI MARELLI POWERTRAIN INDIA (P.) LT D. V. DCIT [2016] 75 TAXMANN.COM 213 (DELHI); DELHI ITAT - COMING SAS INDIA BRANCH OFFICE V. DDLT [2017] 82 TAXMANN.COM 444; DELHI HC - SONY ERICSON MOBILE COMMUNICATIONS INDIA (P.) LTD. V. CIT [2015] 374 ITR 118; DELHI ITAT - LUMAX INDUSTRIES LTD. V. ACIT, ITA NO . 4456 / DEL /2012, DATED MAY 31,2013. 21. HE FURTHER SUBMITTED THAT TPO HAS SOUGHT TO APPL Y CUP METHOD TO BENCHMARK ROYALTY AND INTRA GROUP SERVICES BUT NO COMPARABLE DATA WAS IDENTIFIED AND HAS MERELY APPLIED BENEFIT TES T AND THEREBY DETERMINING THE ALP AT NIL WHICH IS AGAINST THE SETTL ED LEGAL POSITION UNDER THE TRANSFER PRICING LAW, WHICH ENVISAGES THAT I DENTIFICATION OF COMPARABLE DATA IS MANDATORY TO BENCHMARK THE ALP. I N SUPPORT OF, HE RELIED UPON THE FOLLOWING JUDGMENTS TO CANVASS THAT INTRA GROUP SERVICES AND ROYALTY CANNOT BE DETERMINED AT NIL:- I) CIT V. EKL APPLIANCES LTD, [2012] 345 ITR 241 (DELH I) II) SC ENVIRO AGRO INDIA LTD. V. DC1T, [2013 ] 143 ITD 195 (MUMBAI - TRIB) III) MCCANN ERICKSON INDIA P. LTD. V. ACIT, 2 0 I 2-TLI-59-ITAT-DEL-TP, 24 TAXMAN 21. 26 22. LASTLY, HE SUBMITTED THAT BENEFIT TEST IS NOT A PRES CRIBED METHOD FOR WHICH HE REFERRED TO THE JUDGMENT OF HONBLE DELHI HIGH COURT IN THE CASE OF SONY ERICSON MOBILE COMMUNICATIONS INDIA (P) LTD. V S. CIT(2015) 374 ITR 118; AND CIT VS. CUSHMAN AND WAKEFIELD (INDIA) (P.) LTD. (2014) 46 TAXMANN.COM 317 AND OTHER DECISIONS. 23. ON THE ISSUE OF VARIOUS COMPONENTS OF INTRA GR OUP PAYMENTS, ASSESSEE HAS GIVEN FOLLOWING SUBMISSIONS AND REFERE NCE TO CORRESPONDING DOCUMENTS TO SUBSTANTIATE THE PAYMENT:- S. NO. PAYMENT NATURE OF PAYMENTS BENEFITS DERIVED BY THE APPELLANT RELEVANT DOCUMENTS A. SALES COMMISSION JAPAN PAID TO JOHNSON MATTHEY JAPAN (JM JAPAN) FOR LIAISON AND MARKETING ACTIVITIES UNDERTAKEN BY IT IN JAPAN WITH SUZUKI DUE TO WHICH THE APPELLANT SECURED ORDERS FROM MARUTI SUZUKI IN INDIA. UK PAID TO JM UK (ONLY IN AY 2009-10) FOR LIAISON AND MARKETING ACTIVITIES UNDERTAKEN BY IT FOR POTENTIAL CUSTOMERS IN IRAN. IRAN BUSINESS WAS NEWLY ADDED. THE SALES COMMISSION PAID TO JM UK IN RESPECT OF SALES TO CUSTOMERS IN IRAN WAS SIMILAR TO THE COMMISSION PAID TO AN INDEPENDENT THIRD PARTY AGENT WHICH WAS APPOINTED BY THE APPELLANT IN SUBSEQUENT YEAR. JAPAN THE APPELLANT DERIVED SIGNIFICANT BENEFITS IN THE FORM OF BUSINESS FROM MARUTI SUZUKI IN INDIA. FURTHER, THE SALES COMMISSION PAID TO AE AS % OF SALES TO JAPANESE CUSTOMER (2.98%, 2.49% AND 0.45% RESPECTIVELY FOR AYS 2007-08, 2008-09 AND 2009-10) WAS MUCH LESSER THAN THE MARKETING COSTS INCURRED LOCALLY AND INTERNALLY BY THE APPELLANT AS % OF SALES TO NON- JAPANESE CUSTOMERS 8.15%, 5.39% AND 2.20% RESPECTIVELY FOR AYS 2007- 08, 2008-09 AND 2009-10) UK IN LIEU OF PAYMENT MADE TO JMUK (ONLY IN AY 2009-10), APPELLANT DERIVED SIGNIFICANT BENEFITS IN THE FORM OF NEW CUSTOMERS IN IRAN. IN 2011, SUCH ACTIVITY WAS OUTSOURCED TO AN INDEPENDENT THIRD PARTY WHICH CLEARLY SUBSTANTIATES THE BUSINESS EXIGENCY TO HAVE A LOCAL AGENT IN IRAN TO JAPAN SERVICE AGREEMENT BETWEEN APPELLANT AND JM JAPAN IS ON PAGE 456 OF PAPER BOOK FOR AY 2007-08 (VOL. II). COPIES OF INVOICES RAISED BY JM JAPAN ARE ON PAGE 463 OF PAPER BOOK FOR AY 2007-08 (VOL. III) COMPARISON OF MARKETING COST FOR JAPANESE AND NON- JAPANESE CUSTOMERS; AY 2007-08 IN VOL. II PG.552 AY 200809 IN VOL. II PG. 596 AY 2009-10 IN VOL. II- PG. 363 UK SERVICE AGREEMENT BETWEEN APPELLANT AND JMUK IS ON PG. 658 OF PAPER BOOK FOR AY 2009-10 (VOL. II) COPIES OF 27 DEVELOP CUSTOMERS AND TO PROVIDE LIAISON ACTIVITIES IN RELATION TO THE EXISTING CUSTOMERS IN IRAN. INVOICES RAISED BY JUMK ARE ON PG. 664 OF PAPER BOOK FOR AY 20-09-10 (VOL. II). B. SERVER CHARGES (ONLY IN AY 2008-09 AND 2009-10) PAID TO JOHNSON MATTHEY HONG KONG FOR MAINTAINING A CENTRALIZED SERVER FOR THE ASIA REGION, WHICH SERVES AS A COMMON EMAIL AND COMMUNICATIONS PLATFORM. COST WAS ALLOCATED AMONG JM ASIA ENTITIES, AND SUCH ARRANGEMENT WAS MORE COST EFFECTIVE. PRINCIPLE OF CONSISTENCY THIS PAYMENT WAS NOT SEPARATELY BENCHMARKED IN AY 2007-08 AND ALLOWED BUT ALP WAS DETERMINED AT NIL FOR SUBSEQUENT YEARS WITHOUT ANY CHANGE IN FACTS AND CIRCUMSTANCES OF THE CASE. IN THE ABSENCE OF SUCH PAYMENT, APPELLANT WOULD NOT BE ABLE TO ACCESS THE CENTRALISED SYSTEM SET UP FOR THE ASIA REGION, WHICH SERVES AS A COMMON E-MAIL AND COMMUNICATION PLATFORM FOR GROUP ENTITIES. CONSIDERING THE CO- DEPENDENCE BETWEEN GROUP ENTITIES, LACK OF ACCESS TO SUCH SYSTEM WOULD BE PREJUDICIAL. ADDITIONALLY, IF THE APPELLANT WERE TO APPOINT AN INDEPENDENT ENTITY, IT WOULD HAVE INCURRED SIGNIFICANT COSTS. AFFIDAVIT BY JOHNSON MATTHEY HONG KONG IN RESPECT OF SERVER CHARGES PG. 567 OF THE PAPER BOOK FOR AY 2008-09 (VOL. II) C. SAP MAINTENANCE CHARGES (ONLY FOR AY 2007-08) PAID TO JM MALAYSIA (JMM) FOR COSTS ON SAP PROGRAM FOR THE ASIA REGION. AN INDEPENDENT THIRD PARTY WAS APPOINTED FOR THIS PURPOSE AND COPIES OF INVOICES RAISED BY SUCH INDEPENDENT PARTY WERE SUBMITTED BEFORE LOWER AUTHORITIES. COST WAS ALLOCATED AMONG JM ASIA ENTITIES, AND SUCH ARRANGEMENT WAS MORE COST EFFECTIVE. THE ASIAN REGION HEAD QUARTER OF THE JOHNSON MATTHEY GROUP LOCATED IN MALAYSIA IMPLEMENTED THE SAP PROGRAM FOR THE ASIAN REGION. FOR THIS PURPOSE, A SERVER OWNED BY AN INDEPENDENT VENDOR WAS SET UP IN CHENNAI. THE COST OF OPERATING AND MAINTAINING THE SERVER WAS INCURRED BY JMM WHICH WAS SUBSEQUENTLY RECOVERED FROM GROUP ENTITIES LOCATED IN THE REGION I.E. INDIA, JAPAN, CHINA AND MALAYSIA EQUALLY. COPY OF DEBIT NOTES RAISED BY JMM ON THE APPELLANT FOR ALLOCATED COSTS ALONG WITH THIRD PARTY VENDOR INVOICES FOR THE FULL COST PG. 477 TO 510 OF THE PAPER BOOK FOR AY 2007- 08 (VOL. II) D. COST SHARING CHARGES DIVISIONAL COST : PAID TO JMM FOR SALARY COSTS OF GROUP HEAD THAT WERE INVOLVED IN STRATEGIC AND OPERATIONAL ROLES, AND WERE DEPUTED TO DIVISIONAL COSTS AND SAP ERP SYSTEM COST : THESE COSTS PROVIDED ACCESS TO SIGNIFICANT EXPOSURE AND EXPERTISE TO APPELLANT. SUCH DIVISIONAL COSTS: DEBIT NOTES RAISED BY JMM- PG. 475 & 476 OF THE PAPER BOOK FOR AY 2007- 28 MANAGE THE ASIA REGION THROUGH THE REGIONAL HEADQUARTERS IN MALAYSIA. SAP ERP SYSTEM COST : AY 2009-10, COST WAS CAPITALIZED AS CAPITAL WORK-IN-PROGRESS (SCHEDULE 4 OF FINANCIAL STATEMENTS) AND NOT CLAIMED AS EXPENSE IN P & L BUT THE SAME WAS STILL DISALLOWED PAYMENT REPRESENTED COST ALLOCATED TO APPELLANT BY JMM, FOR COMMON ERP SYSTEM IMPLEMENTED FOR ASIA REGION IN 2007 TO STANDARDIZE FINANCE AND IT SYSTEMS. SUCH STANDARDIZED SYSTEM RESULTED IN GREATER EFFICIENCY, RISK MITIGATION, AND SIGNIFICANT FINANCIAL SAVINGS TO APPELLANT. THE ARRANGEMENT BETWEEN APPELLANT AND ITS ASSOCIATED ENTERPRISES RELATING TO PROVISION OF VARIOUS INTRA GROUP SERVICES PROVIDED THE APPELLANT WITH THE FOLLOWING BENEFITS : STREAMLINING THE PROCESS OF THE APPELLANT IN ACCORDANCE WITH THE STANDARDS OF THE JOHNSON MATTHEY GROUP; ENABLING UNIFORM USE OF SYSTEMS FOR ACCOUNTING, ADMINISTRATION ETC. FACILITATING CASE OF COMMUNICATION AND CO- ORDINATION AMONGST THE MEMBERS OF THE GROUP; PROVIDING COST-EFFICIENT EXPERTISE AND MANAGEMENT PERSONNEL FOR THE COMPANIES OF THE JOHNSON MATTHEY GROUP IN THE ASIA REGION; ENGAGING RELIABLE GROUP COMPANIES TO PROVIDE FOR SERVICES LIKE MARKETING AND SALES, CUSTOMER RELATIONSHIP MANAGEMENT, SERVER SUPPORT ETC. THE APPELLANT DERIVED SUBSTANTIAL BENEFITS BOTH IN TERMS OF COST AND EFFICIENCY, THROUGH CENTRALIZATION OF CERTAIN BACK-END OPERATIONS AT GROUP LEVEL AND ALLOCATING THE SAME AMONGST GROUP COMPANIES BASED ON REASONABLE ALLOCATION KEYS. 08 (VOL. II). AFFIDAVIT BY JMM REGARDING ALLOCATION OF SUCH COSTS PG. 570 OF THE PAPER BOOK FOR AY 2008- 09 (VOL. II) E. TESTING CHARGES PAYMENT OF TESTING CHARGES TO JM BRUSSELS FOR TESTI NG OF SAMPLE CATALYSTS FOR THEIR CONFORMITY WITH THE EVOLVING ENVIRONMENTAL ST ANDARDS. CIT (A) DELETED TRANSFER PRICING ADDITIONS IN RESPECT OF TESTING CH ARGES AND REVENUE HAS NOT FILED AN APPEAL ON THIS ISSUE BEFORE THE HONBLE TR IBUNAL. 29 24. ON THE OTHER HAND LD. CIT (DR) ON THE BOTH TH E ISSUE OF ROYALTY AND INTRA GROUP SERVICES, SUBMITTED THAT THE ARGUMENTS OF THE LD. COUNSEL THAT BOTH CANNOT BE ANALYSED IN ISOLATIO N BUT SAME HAVE TO BE AGGREGATED, CANNOT BE ACCEPTED IN VIEW OF THE DECISION OF THE TRIBUNAL IN THE CASE OF GRUNER INDIA (P.) LTD. VS . DIT (2017) 77 TAXMANN.COM 311 (DELHI), WHEREIN THE TRIBUNAL AFTER DETAILED DISCUSSION OF THE VARIOUS PROVISION OF THE LAW AND A LSO THE JUDGMENT OF HONBLE JURISDICTIONAL HIGH COURT IN THE CASE OF SONY ERICSSON MOBILE COMMUNICATION INDIA (P) LTD. AND OTHER JUDGMENTS HAVE L AID DOWN THAT SEGREGATION OF INTERNATIONAL TRANSACTION OF PAYMENT OF ROYALTY AND FEES FOR TECHNICAL SERVICES IS JUSTIFIED AS THESE AR E NOT LINKED WITH IMPORT OF RAW MATERIAL ETC. THUS, HE SUBMITTED THAT ROYALT Y CANNOT BE AGGREGATED WITH OTHER TRANSACTIONS BECAUSE IT IS A SEPAR ATE AND DISTINCT TRANSACTION HAVING A SEPARATE AGREEMENT FOR WH ICH ASSESSEE IS REQUIRED TO PAY ON THE NET SALES. HE ALSO POINTED OUT THAT THE JUDGMENT OF GRUNER INDIA (P.) LTD. HAS BEEN UPHELD BY THE HONBLE DELHI HIGH COURT. 25. ON THE ISSUE OF INTRA GROUP SERVICES, HE MADE F OLLOWING SUBMISSIONS:- SALES COMMISSION : SALES COMMISSION PAID TO THE AE JOHNSON MATHEY JAPAN AS PER SERVICE AGREEMENT ON PA PER BOOK II PAGE NO. 456 FOR AY 2007- 08. 30 THE ASSESSEE HAS PAID TO JM JAPAN SALES COMMISSION FOR LIAISON AND MARKETING ACTIVITIES UNDERTAKEN BY JM J APAN WITH SUZUKI DUE TO WHICH THE APPELLANT SECURED ORDERS FR OM MARUTI SUZUKI IN INDIA. THIS CONTENTION OF THE ASSESSEE IS NOT TENABLE IN VIEW OF THE FACT THAT BOTH SUZUKI JAPAN AND MARU TI SUZUKI ARE INDEPENDENT COMPANY. FURTHER MARUTI SUZUKI IS L OCATED IN INDIA AND ANY LIAISON ACTIVITIES WITH THE MARUTI CA N BE CARRIED DIRECTLY WITH IT IN INDIA ESPECIALLY MARUTI BEING A N INDEPENDENTLY RUN COMPANY. ALSO THE AGREEMENT IS NO T CLEAR IN LANGUAGE ABOUT THE KIND OF ACTIVITIES BEING UNDE RTAKEN BY JM JAPAN VIS A VIS SUZUKI JAPAN. ALSO THE AGREEMENT TALKS ABOUT THE AUTO CATALYST PROVIDE TO JAPANESE CUSTOME RS. THE ASSESSEE HAS NOT PROVIDED THE LIST OF CUSTOMERS AND HAS NOT GIVEN ANY FIGURES OF EXPORTS TO THESE JAPANESE CUST OMERS. THE ASSESSEE IS CONTRADICTING ITSELF BY MAKING STATEMEN TS SUCH AS 'SECURING ORDERS FROM MARUTI SUZUKI IN INDIA' WHILE THE TERMS OF THE AGREEMENT TALKS ABOUT THE SUPPLY OF THE AUTO CATALYST TO JAPANESE CUSTOMERS WHO HAVE NOT BEEN DISCLOSED BY T HE ASSESSEE. REFERRING TO CLAUSE 4 OF THE SAID AGREEME NT WHICH TALK ABOUT THE SERVICE FEE FOR SERVICES RENDERED BY THE JM JAPAN AS SERVICE PROVIDER UNDER THIS AGREEMENT JMIP L SHALL PAY A FEE AT RATE OF 40 CENTS PER UNIT SOLD BY JMIP L TO ALL JAPANESE CUSTOMERS IS IN CONTRADICTION TO THE CLAIM AS PER SUBMISSION DATED NOVEMBER SO' WHEREIN THE ASSESSEE CLAIMED THAT THE SALES COMMISSION WAS PAID FOR 'SECURING OR DERS FROM MARUTI SUZUKI IN INDIA'. BOTH CLAIMS BEING CONTRADI CTORY THE PAYMENT OF SALES COMMISSION IS NOT CORROBORATED BY DOCUMENTS. JUST RAISING OF THE RECEIPT /INVOICES DO ES NOT PROOF 31 THE PAYMENTS WERE MADE FOR BUSINESS PURPOSES. HENCE SALES COMMISSION IS LIABLE TO BE DISALLOWED FOR ALL THE Y EARS AY2007- 08, 2008-09 AND 2009-10. FURTHER THE ASSESSEE HAS PAID TO JM UK COMMI SSION OF RS 52,78522/- AS PER AGREEMENT DATED MARCH 16 2008. IN THIS CASE THE ASSESSEE HAS NOT DISCLOSED THE CUSTOMERS I N IRAN TO WHOM THE AUTO CATALYSTS WERE EXPORTED. THE CLAIM OF THE ASSESSEE OF THE SAID EXPORT THUS NOT VERIFIED. JUST RAISING OF THE INVOICE TO ITS AE LE ECT ROYSTON (AS PER INVOIC E RAISED) DOES NOT PROVE THE SERVICE BEING PASSED ON TO THE A SSESSEE. IN ABSENCE OF ANY EVIDENCE OF SUCH EXPORT TO UNKNOWN I RANIAN CUSTOMERS TO WHOM THE AUTO CATALYST WERE EXPORTED T HE SAME IS LIABLE TO BE DISALLOWED. B. SERVER CHARGES : PAID TO JM HONG KONG FOR MAINTAINING A CENTRALIZED SERVER FOR THE ASIA REGION WHICH SERVES AS A COMMON EMAIL AND COMMUNICATION PLATFORM. COST WAS ALLOCATED AMONG JM ASIA ENTITIES AND SUCH ARRANGE A RE MORE COST EFFECTIVE. THIS TOO IS LIABLE TO BE DISALLOWED AS THE ASSESSEE HAS FAILED TO SHOW THAT ANY SERVICE HAS AC TUALLY BEEN PASSED TO IT. C. SAP MAINTENANCE : PAID TO JM MALAYSIA FOR COST ON SAP PROGRAM FOR ASIA REGION. AN INDEPENDENT THIRD PARTY WAS APPOINTED FOR THIS PURPOSE. FOR THIS PURPOSE A SERV ER OWNED BY AN INDEPENDENT VENDOR WAS SET UP IN CHENNAI. THE COST OF OPERATING AND MAINTAINING THE SERVER WAS INCURRED B Y JM MALAYSIA WHICH WAS SUBSEQUENTLY RECOVERED FROM GROU P ENTITIES LOCATED IN THE REGION. THE ASSESSEE HAS NO T EXPLAINED 32 THE BUSINESS RATIONAL BEHIND SETTING UP ANOTHER SER VER IN CHENNAI FOR THE ASIA REGION FOR SAP IMPLEMENTATION WHEN IT ALREADY HAS A SERVER IN HONG KONG DOING PRETTY MUCH THE SAME FUNCTION. IT SEEMS TO BE A DUPLICATION OF FUNC TION PERFORMED WHEN THERE IS ALREADY A SERVER IN HONG KO NG CARRYING ON THE SAME FUNCTION FOR THE ASSESSEE FOR WHOM THE ASSESSEE IS ALREADY PAYING THE SERVER CHARGES WHICH IS LESS THEN WHAT HAS BEEN PAID UNDER THE GUISE OF SAP MAIN TENANCE CHARGE TO JM MALAYSIA. HENCE THE SAME IS LIABLE TO BE DISALLOWED. IN THIS REGARD REFERENCE IS MADE TO OEC D TP GUIDELINES IN CHAPTER VII ON SPECIAL CONSIDERATION ON INTRA - GROUP SERVICES PARA 7.11 7.11 IN GENERAL/ NO INTRA- GROUP SERVICE SHOULD BE FOUND FOR ACTIVITIES UNDERTAKEN B Y ONE GROUP MEMBER THAT MERELY DUPLICATE A SERVICE THAT ANOTHER GROUP MEMBER IS PERFORMING FOR ITSELF, OR THAT IS BEING P ERFORMED FOR SUCH OTHER GROUP MEMBER BY A THIRD PARTY. AN EXCEPT ION MAY BE WHERE THE DUPLICATION OF SERVICES IS ONLY TEMPOR ARY/ FOR EXAMPLE/ WHERE AN MNE GROUP IS REORGANISING TO CENT RALISE ITS MANAGEMENT FUNCTIONS. ANOTHER EXCEPTION WOULD BE WH ERE THE DUPLICATION IS UNDERTAKEN TO REDUCE THE RISK OF A W RONG BUSINESS DECISION (E.G. BY GETTING A SECOND LEGAL O PINION ON A SUBJECT). D. COST SHARING CHARGES : AS PER THE TP STUDY OF THE ASSESSEE COST SHARING ARRANGEMENT AS A PART OF THE COST OF FOUR EMPLOYEES RESPONSIBLE FOR ASIA REGION. *MANAGING DIRECTOR -ASIAN REGION * FINANCE DIRECTOR- ASIA REGION * SALES DIRECTOR -ASIAN REGION 33 * COMMON SECRETARY TO MANAGING DIRECTOR I FINANCE DIRECTOR AND SALES DIRECTOR OF ASIAN REGION. AS PER ASSESSEE THE SALARIES OF THESE EMPLO YEES AND EXPENDITURE INCURRED BY THESE EMPLOYEES WHILE TRAVE LLING ON BUSINESS INCLUDING BOARDING AND LODGING ARE ALLOCAT ED TO GROUP COMPANIES IN INDIA JAPAN CHINA AND MALAYSIA. THE CONTENTION OF THE ASSESSEE IS NOT TE NABLE AS THE ASSESSEE HAS NOT CITED ANY AGREEMENT FOR SUCH COST SHARING ARRANGEMENT. ALSO THE ASSESSEE HAS NOT BROUGHT OUT THE KIND OF THE WORK PERFORMED BY THESE EMPLOYEES AND THE VA LUE ADDITION TO THE COMPANY THAT THESE EMPLOYEES MAY HA VE PERFORMED. ALSO NUMBER OF DAYS SPENT BY THE EMPLOYE ES IN INDIA PERFORMING THESE ACTIVITIES HAS NOT BEEN FURN ISHED. THIS INTRA GROUP CHARGE IS IN NATURE OF THE SHAREHOLDING ACTIVITY OR DUPLICATION OF ACTIVITIES AS THESE ACTIVITIES ARE A LREADY PERFORMED BY SOMEONE FROM JM INDIA OR IN ITS CAPACI TY AS SHAREHOLDER IN ABSENCE OF ANY TANGIBLE BENEFIT ACCR UING TO THE ASSESSEE. THE ASSESSEE HAS FAILED TO CORROBORATE WI TH FACTS THE BENEFIT THAT HAS ACCRUED TO THE ASSESSEE. ALSO THE SAME SET OF FUNCTIONS PERFORMED BY THESE SAME FOUR PEOPLE FOR O THER GROUP ENTITIES IN INDIA JAPAN CHINA AND MALAYSIA INDICATE S THESE ACTIVITIES BEING PERFORMED IN CAPACITY AS SHAREHOLD ER. IN THIS REGARD REFERENCE IS MADE TO THE OECD GUIDELINES 201 0 CHAPTER VII PARA 7.9 7.9 A MORE COMPLEX ANALYSIS IS NECESSARY WHERE AN ASSOCIATED ENTERPRISE UNDERTAKES ACTIVITIES THAT RE LATE TO MORE THAN ONE MEMBER OF THE GROUP OR TO THE GROUP AS A W HOLE. IN A NARROW RANGE OF SUCH CASES, AN INTRAGROUP ACTIVITY MAY BE 34 PERFORMED RELATING TO GROUP MEMBERS EVEN THOUGH THO SE GROUP MEMBERS DO NOT NEED THE ACTIVITY (AND WOULD N OT BE WILLING TO PAY FOR IT WERE THEY INDEPENDENT ENTERPR ISES). SUCH AN ACTIVITY WOULD BE ONE THAT A GROUP MEMBER (USUAL LY THE PARENT COMPANY OR A REGIONAL HOLDING COMPANY) PERFO RMS SOLELY BECAUSE OF ITS OWNERSHIP INTEREST IN ONE OR MORE OTHER GROUP MEMBERS, I.E. IN ITS CAPACITY AS SHAREHOLDER. THIS TYPE OF ACTIVITY WOULD NOT JUSTIFY A CHARGE TO THE RECIP IENT COMPANIES. IT MAY BE REFERRED TO AS A 'SHAREHOLDER ACTIVITY', DISTINGUISHABLE FROM THE BROADER TERM 'STEWARDSHIP ACTIVITY' USED IN THE 1979 REPORT. STEWARDSHIP ACTIVITIES COV ERED A RANGE OF ACTIVITIES BY A SHAREHOLDER THAT MAY INCLU DE THE PROVISION OF SERVICES TO OTHER GROUP MEMBERS/ FOR E XAMPLE SERVICES THAT WOULD BE PROVIDED BY A COORDINATING C ENTRE. THESE LATTER TYPES OF NON-SHAREHOLDER ACTIVITIES CO ULD INCLUDE DETAILED PLANNING SERVICES FOR PARTICULAR OPERATION S/ EMERGENCY MANAGEMENT OR TECHNICAL ADVICE (TROUBLE S HOOTING), OR IN SOME CASES ASSISTANCE IN DAY-TO-DAY MANAGEMEN T. 7.10 THE FOLLOWING EXAMPLES (WHICH WERE DESCR IBED IN THE 1984 REPORT) WILL CONSTITUTE SHAREHOLDER ACTIVITIES / UNDER THE STANDARD SET FORTH IN PARAGRAPH 7.6: A) COSTS OF ACTIVITIES RELATING TO THE JURIDICAL ST RUCTURE OF THE PARENT COMPANY ITSELF, SUCH AS MEETINGS OF SHAREHOL DERS OF THE PARENT/ ISSUING OF SHARES IN THE PARENT COMPANY AND COSTS OF THE SUPERVISORY BOARD; B) COSTS RELATING TO REPORTING REQUIREMENTS OF THE PARENT COMPANY INCLUDING THE CONSOLIDATION OF REPORTS; 35 C) COSTS OF RAISING FUNDS FOR THE ACQUISITION OF IT S PARTICIPATIONS. IN CONTRAST/ IF FOR EXAMPLE A PARENT COM PANY RAISES FUNDS ON BEHALF OF ANOTHER GROUP MEMBER WHICH USES THEM TO ACQUIRE A NEW COMPANY/ THE PARENT COMPANY WOULD GEN ERALLY BE REGARDED AS PROVIDING A SERVICE TO THE GROUP MEM BER. THE 1984 REPORT ALSO MENTIONED 'COSTS OF MANAGERIAL AND CONTROL (MONITORING) ACTIVITIES RELATED TO THE MANAGEMENT A ND PROTECTION OF THE INVESTMENT AS SUCH IN PARTICIPATI ONS'. WHETHER THESE ACTIVITIES FALL WITHIN THE DEFINITION OF SHAREHOLDER ACTIVITIES AS DEFINED IN THESE GUIDELIN ES WOULD BE DETERMINED ACCORDING TO WHETHER UNDER COMPARABLE FA CTS AND CIRCUMSTANCES THE ACTIVITY IS ONE THAT AN INDEPENDE NT ENTERPRISE WOULD HAVE BEEN WILLING TO PAY FOR OR TO PERFORM FOR ITSELF. 26. BY WAY OF REJOINDER, LD. COUNSEL POINTED OUT THAT THE DECISION OF ITAT DELHI BENCH AS HEAVILY RELIED UPON BY THE LD. DR HAS NOT BEEN UPHELD, ALBEIT THE DELHI HIGH COURT [SINCE REPORTED IN (2017) 77 TAXMANN.COM 311 (DELHI)] HAS SET ASIDE THE TRIBUNAL OR DER AND MATTER HAS BEEN REMANDED BACK TO THE FILE OF THE TPO TO EXAMIN E THE AGGREGATION UNDER TNMM. 27. WE HAVE HEARD THE RIVAL SUBMISSIONS, PERU SED THE RELEVANT FINDING GIVEN IN THE IMPUGNED ORDERS AS WELL AS THE M ATERIAL REFERRED TO BEFORE US ON ALL THE ISSUES DISCUSSED ABOVE. FIRST OF ALL, WE SHALL 36 DEAL WITH THE ISSUE OF SALES TAX SUBSIDY AMOUNTING TO RS. 2,42,93,000/- WHICH HAS BEEN TAXED AS REVENUE RECEIP T. BEFORE US, LD. COUNSEL HAD POINTED OUT THAT ON SIMILAR SUBSIDY ISSUE, MATTER HAD BEEN DECIDED IN THE FAVOUR OF THE ASSESSEE BY THE TRIB UNAL IN ASSESSMENT YEAR 2006-07, WHICH HAS BEEN AFFIRMED BY THE HONBLE DELHI HIGH COURT IN REVENUES APPEAL IN A VERY ELAB ORATE AND SPEAKING ORDER, VIDE JUDGMENT DATED 13.3.2015, WHEREIN THE HON BLE HIGH COURT AFTER RELYING UPON THE JUDGMENT OF HONBLE SUPREME CO URT IN THE CASE OF CIT VS. PONNI SUGAR AND CHEMICALS (306 ITR 392) HAD HELD THAT THE AMOUNT OF SUBSIDY IS A CAPITAL RECEIPT AND THUS, ISSUE STANDS SETTLED IN FAVOUR OF THE ASSESSEE. THUS, ON SAME SALES TAX SU BSIDY WHICH IS A SUBJECT MATTER OF ISSUE IN THIS YEAR ALSO, NO DIFFERE NT VIEW CAN BE TAKEN. ON THE OTHER HAND THE CASE OF THE LD. CIT (DR) IS THAT, POST THE JUDGMENT OF THE HONBLE HIGH COURT IN THE CASE OF THE ASSESSEE, THERE IS ANOTHER DECISION OF HONBLE DELHI HIGH COURT IN TH E CASE OF CIT VS. BHUSHAN STEELS (SUPRA) WHEREIN THE HONBLE HIGH COURT ON SIMILAR TYPE OF SCHEME OF UP GOVERNMENT HAD DECIDED IN FAVOU R OF THE DEPARTMENT HOLDING IT TO BE REVENUE RECEIPT. FURTHER THIS TRIBUNAL IN THE CASE OF MARUTI SUZUKI INDIA LTD. ON SAME HARYANA G OVT. SCHEME OF SUBSIDY HAS FOLLOWED THE JUDGMENT OF BHUSHAN STEELS AN D HELD THAT SALES TAX SUBSIDY IS TO BE TAXED AS REVENUE, THEREFORE, THE EARLIER JUDGMENT OF THE HONBLE HIGH COURT IN THE CASE OF THE A SSESSEE SHOULD NOT BE FOLLOWED. FROM THE FACTS ON RECORD IT IS SEEN THA T IN PURSUANCE 37 OF THE INDUSTRIAL POLICY OF GOVT. OF HARYANA, SALES TA X SUBSIDY SCHEME WAS LAUNCHED TO PROMOTE INDUSTRIAL GROWTH IN THE CONTEXT O F OVERALL ECONOMIC DEVELOPMENT. THE OBJECTIVES OF THE POLICY WE RE TO INCREASE EMPLOYMENT AND ATTAIN SUSTAINABLE DEVELOPMENT. SECTION 25 A OF HARYANA GENERAL SALES TAX ACT PROVIDED THAT STATE GOVERN MENT CAN DEFER PAYMENT OF TAX IN THE INTEREST OF INDUSTRIAL DEV ELOPMENT; AND RULE 28C HARYANA GENERAL SALES TAX RULES CLEARLY STI PULATED THAT THE SUBSIDY PROVIDED UNDER THE RULE IS A CAPITAL SUBSIDY. THE CURRENT ASSESSMENT YEAR 2007-08 IS THE LAST YEAR OF THE SUBSID Y AND IN ALL THE EARLIER YEARS IT STANDS ALLOWED AS CAPITAL RECEIPT. IN THE A.Y.2006-07 SIMILAR SCHEME OF SUBSIDY HAS BEEN ANALYSED AND ALL OWED BY THE TRIBUNAL WHICH HAS BEEN AFFIRMED BY THE HONBLE JURI SDICTIONAL HIGH COURT IN ASSESSEES OWN CASE AFTER OBSERVING AND HOL DING AS UNDER :- THE QUESTIONS INVOLVED IS WHETHER THE SUM OF RS.2,00,64,000/- RECEIVED BY THE ASSESSEE AS SALES TAX SUBSIDY PURSUANT TO HARYANA GOVERNMENT'S SCHEME, WAS TO BE TREATED AS REVENUE RECEIPT OR ONE FALLING IN THE CAPITAL SCHEM E. THE RELEVANT FACTS ARE THAT THE ASSESSEE, A MANUFACTURER OF CATALYSTS FOR THE AUTO INDUSTRIES, WAS RECIPIENT OF SALES TAX SUBSIDY TO THE TUNE OF RS. 2,OO,64,0001- FOR A.Y. 2 006-07. THIS WAS PURSUANT TO 50% SALES TAX EXEMPTION SCHEME PUT IN PLACE BY THE GOVERNMENT OF HARYANA AS A SUBSIDY TO PROMOTE L OCAL INDUSTRY. THE AO WAS OF THE OPINION THAT THE AMOUNT HAD TO BE TREATED AS REVENUE RECEIPT. THE ASSESSEE'S APPEAL L IKEWISE WAS UNSUCCESSFUL. THE CIT(A), AFTER CONSIDERING THE NAT URE OF THE 38 SCHEME AND VARIOUS DECISIONS, INCLUDING THE ONE REN DERED BY THE SUPREME COURT IN SAHNEY STEEL AND PRESS WORKS LTD. V. CIT 1997 (228) ITR 253, CONFIRMED THE ORDER OF THE AO. THE ITAT REVERSED THESE CONCURRENT FINDI NGS AFTER TAKING NOTE OF THE SALIENT FEATURES OF THE SALES TAX EXEMP TION SCHEME AS WELL AS THE JUDGMENT OF THE SUPREME COURT IN CIT V. PONNI SUGARS AND CHEMICALS LTD. - REPORTED AS 306 ITR 392. THE R EVENUE IS, THEREFORE, IN APPEAL. AT THE OUTSET, IT IS URGED THAT THE STATE HAD BY ORDER DATED 07.06.2007 WITHDRAWN THE SALES TAX EXEMPTION, I.E. SUBSIDY SCHEME AND THIS WAS AN IMPORTANT FACTOR WHICH SHOUL D BE TAKEN NOTE OF. IN RESPONSE, THE REVENUE PLACES ON RECORD A COPY OF THE DECISION OF THE PUNJAB AND HARYANA HIGH COURT DATED 27.11.2007 IN CWP 12075/2007 JOHNSON MATTHEY INDIA PVT. LTD V. STATE OF HARYANA AND ORS. WHERE EVEN WHILE HOLDING THAT THE WITHDRAWAL OF SUBSIDY WAS JUSTIFIED, THE STATE OF HARYANA WAS DIRECTED TO RECONSIDER THE MATTER. URGING THAT THIS DECISION ST ANDS EVEN THOUGH THE SUPREME COURT SUBSEQUENTLY REMITTED THE MATTER TO THE HIGH COURT WHICH IN TURN CONFIRMED ITS PREVIOUS OPI NION AND REQUIRED CONSIDERATION OF THE MATTER BY THE STATE G OVERNMENT, THE REVENUE URGES THAT IN THE PRESENT CASE, THE SALES T AX SUBSIDY INDEPENDENTLY TOO CANNOT BE TREATED AS CAPITAL RECE IPT BUT SHOULD BE BROUGHT TO TAX AS PROPOSED BY THE AO. LEARNED COUNSEL HEAVILY RELIED UPON SAHNE Y STEEL (SUPRA), PARTICULARLY THE OBSERVATIONS AND JUDGMENT, REFERRI NG TO CERTAIN HIGH COURT DECISIONS WHERE SUBSIDY SCHEMES OF DIFFE RENT STATE GOVERNMENTS TO REIMBURSE OR FINANCE PARTICULAR PROJ ECTS WAS DISCUSSED. 39 THIS COURT HAS CONSIDERED THE SUBMISSIONS AND IS O F THE OPINION THAT THE ITAT'S IMPUGNED ORDER HAS NOTED TH E RELEVANT LAW. CRUCIALLY, PONNI SUGARS (SUPRA) IS A LATER DEC ISION OF THE SUPREME COURT WHICH HAD GONE TO DEAL WITH VARIOUS A UTHORITIES, INCLUDING SAHNEY (SUPRA). THE SUPREME COURT HAS EMP HASIZED IN EACH CASE THE PURPOSE FOR WHICH SUBSIDY OR ASSISTANC E IS GIVEN BY THE STATE GOVERNMENT OR A PUBLIC AGENCY. IF THAT IS TO PROMOTE AN INDUSTRY, ESPECIALLY WITH SPECIAL INTEREST OF DEVELOPMENT OF CAPITAL INFRASTRUCTURE, THE AMOUNTS RECEIVED ARE TO BE TREATED AS CAPITAL AND NOT REVENU E. THIS COURT TOO HAD THE OCCASION TO DEAL WITH THE ISSUES IN CIT V. BOUGAINVILLEA MULTIPLEX ENTERTAINMENT CENTRE PVT. LTD. ( ITA 586/2013, DECIDED ON 30.01.2015) WHERE THE DECISION IN PONNI SUGARS (SUPRA) AND PREVIOUS AUTHORITIES WERE DISCUSSED AND APPLIED IN GIVEN FACTS OF THE CASE. WE ARE OF THE OPINION THAT THE IMPUGNED OR DER OF THE ITAT DOES NOT DISCLOSE ANY INFIRMITY. NO SUBSTANTIAL QUESTION OF LAW ARISES. IT IS ACCORDINGLY DISMISSED. [EMPHASIS ADDED IS OURS] 28. THUS, WHEN IN ASSESSEES OWN CASE ON EXACTL Y SIMILAR SET OF FACTS WHICH ARE PERMEATING IN THIS YEAR ALSO AND SAME SALES TAX SUBSIDY HAS BEEN TREATED AS CAPITAL RECEIPT, THEN IN TH IS YEAR NO DIFFERENT VIEW CAN BE TAKEN BY US, AS ASSESSEES OWN CASE BY THE JURISDICTIONAL HIGH COURT SETS A BINDING JUDICIAL PREC EDENCE AND UNLESS THERE IS ANY CHANGE IN THE MATERIAL FACTS OR LA W, NO DIFFERENT VIEW CAN BE TAKEN. IT HAS BEEN POINTED OUT BY THE LD. C OUNSEL BEFORE US THAT THE JUDGMENT OF THE HONBLE HIGH COURT IN THE C ASE OF THE 40 ASSESSEE HAS ATTAINED FINALITY AS NO SLP AGAINST THE J UDGMENT WAS FILED BY THE REVENUE BEFORE THE HONBLE SUPREME COURT. THOUGH IN A SUBSEQUENT JUDGMENT, HONBLE DELHI HIGH COURT IN THE C ASE OF CIT VS. BHUSHAN STEELS (SUPRA) HAS TAKEN A DIFFERENT VIEW UND ER A SIMILAR NATURE OF SCHEME OF UP GOVERNMENT, BUT THE SAID DECISI ON WILL NOT HAVE ANY BINDING PRECEDENCE, BECAUSE, FIRSTLY , THE JUDGMENT OF IN THE CASE OF THE ASSESSEE, I.E., CIT VS. JOHNSON MATTHEY INDIA PVT. LTD. IN ITA 193/2015 (ORDER DATED 13.3.2015) HAS NEITHER BEEN REFERRED NOR HAS BEEN DISTINGUISHED IN BHUSHAN STEELS; AND SECONDLY , MOST IMPORTANTLY, IT HAS BEEN BROUGHT ON RECORD THAT THE JUDGME NT OF HONBLE DELHI HIGH COURT IN THE CASE OF CIT VS. BHUSH AN STEELS (SUPRA) HAS BEEN STAYED BY THE HONBLE SUPREME COURT IN SLP NO. 30728- 30732/2017 VIDE JUDGMENT DATED 20.11.2017 . WHENCE JUDGMENT OF BHUSHAN STEELS HAS BEEN STAYED, THEN THE SAID JUDGMENT C ANNOT HAVE A BINDING PRECEDENCE ESPECIALLY WHEN THERE IS ALREAD Y A JUDGMENT IN FAVOUR OF THE ASSESSEE BY THE SAME HIGH COURT IN THE C ASE OF THE ASSESSEE ITSELF AGAINST WHICH NO SLP HAS BEEN FILED A ND THAT JUDGMENT HAS ATTAINED FINALITY. THUS, WITHOUT ENTERING INTO THE S EMANTICS AS TO WHETHER THE SUBSEQUENT ORDER OF THE TRIBUNAL IN THE CASE OF MARUTI SUZUKI (SUPRA) WHICH IN TURN HAS RELIED UPON THE RATI O LAID DOWN BY THE HONBLE JURISDICTIONAL HIGH COURT IN THE CASE OF BH USHAN STEEL WILL HAVE PERVASIVE VALUE, WE HOLD THAT THE BINDING PRECE DENT OF JUDGMENT OF HONBLE HIGH COURT IN THE CASE OF ASSESSEE WILL HO LD; AND 41 ACCORDINGLY, THE SALES TAX SUBSIDY AMOUNTING TO RS. 2, 41,93,000/- IS TO BE TREATED AS CAPITAL RECEIPT NOT CHARGEABLE TO TAX. TH US, GROUND NO. 6 RAISED BY THE ASSESSEE IS ALLOWED. 29. NOW COMING TO THE ISSUE WHETHER THE PAYMENT O F ROYALTY SHOULD BE BENCHMARKED SEPARATELY OR THE SAID TRANSACT ION SHOULD BE AGGREGATED AT ENTITY LEVEL UNDER TNMM AND GET SUBSUMED IN THE PLI / OVERALL PROFIT MARGIN. AS DISCUSSED ABOVE, THE ASSESS EE COMPANY IS ENGAGED IN MANUFACTURING OF AUTO CATALYSTS USING TECH NOLOGY PROVIDED BY JM-UK. VARIOUS INTERNATIONAL TRANSACTIONS UNDERTAKEN BY THE ASSESSEE WITH ITS AE HAVE BEEN HIGHLIGHTED IN THE EARLI ER PART OF THE ORDER AND ONE SUCH TRANSACTION IS AN ACCOUNT OF PAYMEN T OF ROYALTY TO THE AE OF RS. 2,45,57,629/-. ASSESSEE COMPANY AND JM -UK HAVE ENTERED INTO A TECHNICAL COLLABORATION AGREEMENT (TCA ) ON 23 RD SEPTEMBER, 1998 AND SUCH AN AGREEMENT WAS AMENDED FR OM TIME TO TIME. UNDER THE TCA, ASSESSEE WAS ALLOWED TO USE JOHN SON MATTHEY TRADE NAME AND THE TECHNICAL INFORMATION LIKE PATENTED PRODUCT SPECIFICATIONS AND DESIGNS, FORMULAE, PROCESSES AND SECRET METHODS ETC., WHICH WERE OWNED BY JM-UK. AS PER THE TCA, THE A SSESSEE REQUIRED TO PAY JM-UK, 5% OF NET SALES VALUE AND ADDI TIONAL 3% OF THE NET SALES VALUE SUBJECT TO MAXIMUM OF RS. 633 LACS. TH E ARRANGEMENT WAS VALID FOR 10 YEARS AND THE NET SALE VALUE WAS ME ANT AS EX-FACTORY SALES PRICE OF THE PRODUCTS EXCLUSIVE OF EXCISE DUTY, SALES TAX AND COST 42 OF STANDARD BROUGHT OUT COMPONENTS AND MATERIAL, LANDED COST OF IMPORTED COMPONENTS AND MATERIAL IRRESPECTIVE OF SOUR CE OF PROCUREMENT INCLUDING INSURANCE, FREIGHT AND CUSTOM D UTIES ETC. THE AMOUNTS DUE ARE CREDITED TO THE ACCOUNT OF JM-UK AT THE END OF EACH MONTH. UNDER THE TERMS OF TCA FOLLOWING TECHNICAL KNO WHOW, INFORMATION, ETC., ARE PROVIDED TO ASSESSEE BY JM-UK:- THE TRADEMARK AND PATENTS; LICENSE TO PRODUCE PATENTED PRODUCTS; THE TECHNICAL INFORMATION FOR RUNNING THE MANUFACTU RING UNIT INCLUDING; LIST OF MASTER PARTS; DRAWINGS; DESIGN AND QUALITY STANDARDS; INSPECTION STANDARD FOR COMPLETED PRODUCTS; PROCESS STANDARDS, WHICH SPECIFY AND GIVE TECHNICAL EXPLANATION OF THE PROCESS OF MANUFAC TURING TRAINING TO THE EMPLOYEES; PROVISIONS FOR CONTINUOUS TECHNICAL SUPPORT, IMPRO VEMENTS IN THE PRODUCTION TECHNOLOGY RESULTING FROM RESEARCH BEING CARRIED ON IN THE UNITED KINGDOM. 30. FROM THE NATURE OF PAYMENT AS WELL AS TERMS O F TCA IT IS QUITE EVIDENT THAT IT IS A PAYMENT MADE TO THE AE FOR USE OF TR ADEMARK AND PATENT, LICENCE TO PRODUCE PATENTED PRODUCTS AND HOST OF TECHNICAL INFORMATION FOR WHICH ASSESSEE AT THE OUTSET WAS REQUIRE D TO PAY CERTAIN PERCENTAGE OF THE NET SALES VALUE. THE TCA UNDE R WHICH ROYALTY HAS BEEN PAID TO THE AE IS A SEPARATE TRANSACTION ALL TOGETHER AND IT IS 43 NEITHER LINKED OR INTERTWINED OR INTERCONNECTED WITH AN Y OTHER TRANSACTIONS. THE ASSESSEE HAS CARRIED OUT SEPARATE TRA NSACTIONS FOR THE IMPORT OF RAW MATERIAL AND FOR THE PROVISION OF SER VICES WITH ITS AES UNDER VARIOUS HEAD OF INTRA GROUP SERVICES. T HE ROYALTY PAID IS NEITHER LINKED WITH THE PAYMENT OF IMPORT OF RAW MATERIAL , NOR WITH THE INTRA GROUP SERVICES OR EXPORT OF GOODS TO AE OR ANY OTHER TRANSACTIONS HIGHLIGHTED ABOVE. THE TRANSACTION OF ROY ALTY IS EXCLUSIVE OF ANY OTHER TRANSACTIONS. THE QUESTION OF AGGREGATION OF ALL THE TRANSACTIONS ARE ONLY DESIRABLE IF THE NATURE OF TRANSAC TIONS TAKEN AS A WHOLE ARE SO INTERRELATED AND INTERCONNECTED THAT EACH TRANSACTION LOSES HIS CHARACTER OF BEING SEPARATELY BENCHMARKED SO AS TO GIVE PROPER ARMS LENGTH PRICE FOR THE CONTROLLED TRANSACTION S. WHEN SEPARATE TRANSACTIONS ARE SO INTERTWINED AND LINKED THA T IT IS IMPOSSIBLE TO EVALUATE ON SEPARATE BASIS, THEN AGGREG ATION WILL GET THE DESIRED RESULT OF ALP CONSIDERATION. ON THE OTHER HAND, IF THE TRANSACTIONS ARE CLUBBED WHICH BY THEMSELVES ARE SEPA RATE AND DISTINCT, THEN DETERMINING THE ARMS LENGTH PRICE FOR THE TRANSACTIONS WILL DEFEAT THE ENTIRE PURPOSE OF TRANSFER PRICING. H ONBLE DELHI HIGH COURT IN THE CASE OF SONY ERICSON MOBILE COMMUNICATION INDIA (P.) LTD. (2015) 374 ITR 118, HAS DISCUSSED THIS ISSUE OF AGGREGATION OF VARIOUS TRANSACTIONS IN A VERY DETAILED MANNER AND OP INED THAT THOUGH THE NUMBER OF CLOSELY LINKED TRANSACTIONS CAN B E AGGREGATED BUT THE TRANSACTIONS WHICH ARE NOT CLOSELY RELATED TO E ACH OTHER WOULD 44 DEFINITELY REQUIRE DETERMINATION IN SEGREGATED MANNER . HONBLE PUNJAB & HARYANA HIGH COURT IN THE CASE OF KNORR-BREMSE INDIA (P) LTD. VS. ACIT, (2016) 380 ITR 307 HELD THAT:- IN THE CASE OF A PACKAGE DEAL WHERE EACH ITEM IS N OT SEPARATELY VALUED, BUT, ALL ARE GIVEN A COMPOSITE PRICE, THIS SHOULD BE CONSIDERED AS ONE INTERNATIONAL TRANSACTION AND PRO CESSED ACCORDINGLY FOR THE TRANSFER PRICING PURPOSE. IT FU RTHER HELD THAT WHERE A NUMBER OF TRANSACTIONS ARE PRICED DIFFERENT LY, BUT, ON THE UNDERSTANDING THAT THE PRICING WAS DEPENDENT UPON T HE ASSESSEE ACCEPTING ALL OF THEM TOGETHER (I.E., EITHER TAKE A LL OR LEAVE ALL), THEN ALSO, THE SEPARATE TRANSACTIONS BE CONSIDERED AS ON E INTERNATIONAL TRANSACTION. IN SUCH CIRCUMSTANCE, BURDEN HAS BEEN PLACED ON THE ASSESSEE TO PROVE THAT ALTHOUGH EACH TRANSACTION IS PRICED SEPARATELY, BUT, THEY WERE PROVIDED UNDER ONE COMMO N UNDERSTANDING. IT FURTHER LAID DOWN EMPHATICALLY TH AT, THE CONTENTION THAT AS THE SERVICES AND GOODS ARE UTILI ZED BY THE ASSESSEE FOR THE MANUFACTURE OF THE FINAL PRODUCT T HEY MUST BE AGGREGATED AND CONSIDERED TO BE A SINGLE TRANSACTIO N AND THE VALUE THEREOF OUGHT TO BE COMPUTED BY THE TNMM IS N OT ACCEPTABLE. MERELY BECAUSE THE PURCHASE OF EACH ITE M AND THE ACCEPTANCE OF EACH SERVICE IS A COMPONENT LEADING T O THE MANUFACTURE/PRODUCTION OF THE FINAL PRODUCT SOLD OR SERVICE PROVIDED BY THE ASSESSEE, IT DOES NOT FOLLOW THAT T HEY ARE NOT 45 INDEPENDENT TRANSACTIONS FOR THE SALE OF GOODS OR P ROVISION OF SERVICES. THE END PRODUCT REQUIRES SEVERAL INPUTS. THE INPUTS MAY BE ACQUIRED AS PART OF A SINGLE COMPOSITE TRANSACTI ON OR BY WAY OF SEVERAL INDEPENDENT TRANSACTIONS. IN THE LATTER CAS E, THE SALE OF CERTAIN GOODS AND/OR THE PROVISION OF CERTAIN SERVI CES FROM OUT OF THE TOTAL GOODS PURCHASED OR SERVICES AVAILED OF BY AN ASSESSEE TOGETHER CAN FORM PART OF A SEPARATE INDEPENDENT IN TERNATIONAL TRANSACTION. IN SUCH AN EVENT, THE AO/TPO MUST VALU E THIS GROUP OF SALE OR PURCHASE OF GOODS AND/OR PROVISION OF SE RVICES AS SEPARATE TRANSACTIONS. 31. AGAIN THE ISSUE OF AGGREGATION HAD COME UP FOR CONSIDERATION BEFORE THE HONBLE JURISDICTIONAL HIGH COURT IN THE CAS E OF MAGNETI MARELLI POWERTRAIN INDIA (P) LTD. VS. DCIT, JUDGMEN T DATED 25.1.2016 REPORTED IN (2016) 75 TAXMANN.COM). IN THIS CASE THE PRECISE QUESTION OF LAW WHICH WAS REQUIRED TO BE ANSW ERED BY THEIR LORDSHIPS WAS AS UNDER:- 1. WHETHER THE INCOME TAX APPELLATE TRIBUNAL WAS R IGHT IN HOLDING THAT ROYALTY AND TECHNICAL ASSISTANCE FEE D ID NOT FORM PART OF A COMPOSITE TRANSACTION AND HAVE TO BE TREATED A S TWO SEPARATE TRANSACTIONS FOR THE PURPOSE OF BENCHMARKING AND CO MPUTING ARMS LENGTH PRICE? THE HONBLE COURT AFTER REFERRING TO THE JUDGMENT OF S ONY ERICSSON MOBILE COMMUNICATIONS INDIA (P) LTD. AND JUDGMENT OF DENSO INDIA 46 LTD. VS. CIT (2016) 240 TAXMAN 713 , ANSWERED THE QUESTION AGAINST THE ASSESSEE. THOUGH WHILE ANSWERING THE SECO ND QUESTION WHICH WAS THAT, WHETHER TRIBUNAL WAS JUSTIFIED IN HOL DING THAT TNMM SHOULD BE APPLIED FOR BENCHMARKING THE TRANSACTION RE LATING TO TECHNICAL ASSISTANCE FEE, THE HONBLE COURT HELD THAT IF THE TPO HAD ACCEPTED TNMM AS A MOST APPROPRIATE METHOD THEN FOR ON E ELEMENT PAYMENT OF TECHNICAL ASSISTANCE FEE SHOULD NOT BE BENC HMARKED BY APPLYING DIFFERENT ((CUP) METHOD. HOWEVER, ONE OF THE RATIO AS CULLED OUT FROM THE SAID JUDGMENT IS THAT THE AGGREGATION OR SE GREGATION OF A TRANSACTION DEPENDS UPON THE FACT OF THE EACH CASE AND IF THE TRANSACTION ITSELF LIKE TECHNICAL ASSISTANCE FEE IS I NTER LINKED WITH OTHER TRANSACTION WHICH HAS BEEN BENCHMARKED UNDER TNMM, THE N PROPOSED DIFFERENT METHOD SHOULD NOT BE APPLIED BY SE GREGATING ONE PART OF THE TRANSACTION. 32. FROM THE RATIO DECIDENDI OF THE ABOVE REFERRED JUDGMENTS, ONE FUNDAMENTAL PRINCIPLE WHICH PERMEATES THROUGH I S THAT, ALTHOUGH CLOSELY RELATED TRANSACTIONS CAN BE AGGREG ATED, BUT, UNCONNECTED TRANSACTIONS CANNOT BE CLUBBED FOR DETE RMINING ALP ON A COMBINED BASIS. THE RELEVANT CRITERIA TO DETER MINE WHETHER CERTAIN TRANSACTIONS IS TO BE CONSIDERED AS ONE INT ERNATIONAL TRANSACTION OR NOT HAS TO BE JUDGED FROM THE ANGLE, WHETHER SUCH TRANSACTIONS WERE ENTERED BY THE PARTIES ENTERING I NTO THE 47 CONTROLLED TRANSACTIONS AS A PACKAGE DEAL OR ARE SO CLOSELY LINKED THAT ONE TRANSACTION CANNOT STAND WITHOUT THE OTHER . IF THE SAID CRITERION IS SATISFIED, THEN, TWO OR MORE RELATED T RANSACTIONS CAN BE CONSIDERED AS ONE INTERNATIONAL TRANSACTION FOR THE PURPOSE OF AGGREGATION AND THEREBY DETERMINING THEIR ALP. ON T HE CONTRARY, IF THE SUCH A CRITERIA IS NOT SATISFIED, THEN, OSTE NSIBLY THESE TRANSACTIONS ARE TO BE VIEWED SEPARATE FROM EACH OT HER AND, ACCORDINGLY, THEIR ALP SHOULD ALSO BE DETERMINED IN A DISTINCT AND SEPARATE MANNER AS IF THESE ARE TWO SEPARATE IN DEPENDENT TRANSACTIONS. THE MERE FACT THAT THE TRANSACTION OF ROYALTY AND OTHER INTRA-GROUP SERVICES AND GOODS ARE UTILIZED BY THE ASSESSEE FOR THE MANUFACTURE OF THE FINAL PRODUCT, IT CANNOT BE RECKONED AS DECISIVE FACTOR TO CONSIDER SUCH SEPARATE TRANSACTI ONS AS A SINGLE TRANSACTION. 33. HERE IN THIS CASE, THE TRANSACTION OF PAYMENT OF ROYALTY IS FLOWING FROM A SEPARATE AGREEMENT AND HAS TO BE PAID TO JM-UK IRRESPECTIVE OF ANY SERVICES OR GOODS RECEIVED AND I S ENTIRELY A SEPARATE TRANSACTION HAVING NO REMOTE CONNECTION WITH THE OTHER TRA NSACTIONS; AND THEREFORE, BUNDLED APPROACH FOR AGGREGATION TO TR ANSFER ALL THE TRANSACTION UNDER TNMM WOULD NOT BE DESIRABLE ON THE FACTS OF THE PRESENT CASE. ACCORDINGLY, WE REJECT THE CONTENTION OF T HE LD. COUNSEL 48 BEFORE US THAT PAYMENT OF ROYALTY SHOULD BE AGGREGAT ED WITH THE OTHER TRANSACTIONS AND NEEDS TO BE BENCHMARKED UNDER TNMM. 34. NOW COMING TO THE ISSUE AS TO WHETHER THE PAYME NT OF ROYALTY SHOULD BE TAKEN AS NIL AS DONE BY THE TPO ON THE GRO UND THAT NO BENEFIT HAS ARISEN TO THE ASSESSEE ON PAYMENT OF SUCH R OYALTY. THE CASE OF THE REVENUE IS THAT NO COST BENEFIT ANALYSIS HA S BEEN DONE BY THE ASSESSEE AND HOW THE BENEFIT HAS DERIVED FROM SUC H A PAYMENT OF ROYALTY TO ITS AE. THE ASSESSEE COMPANY IS INTO MANU FACTURING OF SPECIALISED CATALYSTS USING TECHNOLOGY PROVIDED BY ITS AE WHICH ARE USED IN AUTOMOTIVE INDUSTRY. ONE OF THE KEY DRIVERS IN SUCH SPECIALISED AUTOMOTIVE COMPONENTS INDUSTRY IS QUALITY A ND TECHNOLOGY BRAND NAME ETC. ASSESSEE HAS SHOWN TOTAL TURNOVER OF RS. 189.2 CRORES FROM SALE OF SAID COMPONENTS. THE ENTIRE COMPO NENT HAS BEEN MANUFACTURED BY THE ASSESSEE AFTER USING THE TRADE NAM E AND PATENT OF ITS AE AND LICENSE TO PRODUCE THE PATENTED PRODUCTS AND HOST OF OTHER TECHNICAL INFORMATION. IF ASSESSEE HAS USED A TR ADE NAME, LICENCES AND TECHNICAL INFORMATION FOR CARRYING OUT ITS MANUFACTURING UNIT, AT THE OUTSET IT CANNOT BE HELD THAT NO BENEFIT HAS DE RIVED TO THE ASSESSEE BY ENTERING INTO TCA WITH AE. IN FACT THE ENT IRE EXISTENCE OF ASSESSEES BUSINESS IS DEPENDENT UPON ITS COLLABORATIO N WITH AE AND THE SUPPLY OF TECHNOLOGY, KNOW HOW, BRAND NAME ETC. T HE TPO CANNOT BRUSH ASIDE THE ROYALTY PAYMENT OF USE OF SUCH TECHNOL OGY KNOW HOW 49 BRAND NAME ETC. ON THE GROUND THAT ASSESSEE HAS TO GIVE COST BENEFIT ANALYSIS AND WHETHER ANY PROFIT HAS BEEN DERIVED BY I T. THOUGH HE HAS APPLIED CUP, HOWEVER HE DETERMINED THE ALP AT NIL O N THE GROUND THAT IT FAILS THE BENEFIT TEST. WE ARE UNABLE TO APPRECIA TE SUCH A CONTENTION OF THE DEPARTMENT THAT, EVEN IF THERE IS A DIRE CT TECHNICAL COLLABORATION AND USE OF TECHNOLOGY FROM WHICH ASSESS EE IS MANUFACTURING A HIGH END TECHNICAL PRODUCT FROM WHICH IT HAS GENERATED HUGE REVENUE, IT IS OF NO CONSEQUENCE AND THEREFORE, IT SHOULD DETERMINE AT NIL. IF THE TPO HAS DETERMINED THE ARMS LENGTH PRICE AT NIL, THEN HE SHOULD HAVE ATLEAST ANALYSED SO ME COMPARABLE CASES TO DEMONSTRATE THAT SUCH KIND OF HIGH END TECHNOLO GICAL AID RECEIVED BY AN INDEPENDENT THIRD PARTY, NO ROYALTY WOULD HAVE BEEN PAID UNDER A COMPARABLE UNCONTROLLED TRANSACTION SCEN ARIO. WITHOUT BRINGING ANY SUCH DATA OR MATERIAL ON RECORD, THE ALP OF THE PAYMENT OF ROYALTY CANNOT BE DETERMINED AT NIL. HONBLE DELHI HIGH COURT IN THE CASE OF CIT VS. EKL APPLIANCE LTD. (2012) 345 ITR 241 HELD THAT RULE 10B (1(A) DOES NOT AUTHORISE DISALLOWANCE OF A NY EXPENDITURE ON THE GROUND THAT IT WAS NOT NECESSARY OR PRUDENT FOR THE ASSESSEE TO HAVE INCURRED THE SAME OR THAT IN VIEW OF THE REVENUE, THE EXPENDITURE WAS NOT NECESSARY BECAUSE OF THE CONTINUED LOSSES SUFFERED BY THE ASSESSEE IN ITS BUSINESS OR HE COULD HAVE FARED BETTER HAD HE NOT INCURRED SUCH EXPENDITURE. THESE ARE COMPL ETELY IRRELEVANT 50 CONSIDERATION. THE RELEVANT OBSERVATION AND THE FINDIN G OF THE HIGH COURT IN THIS REGARD READ AS UNDER:- 20. IN THE CASE OF SASSOON J. DAVID & CO. PVT. LTD. V. CIT, (1979) 118 ITR 261 (SC), THE SUPREME COURT REFERRED TO THE LEGISLATIVE HISTORY AND NOTED THAT WHEN THE INCOME TAX BILL OF 1961 WAS INTRODUCED, SECTION 37(1) REQUIRED THAT TH E EXPENDITURE, SHOULD HAVE BEEN INCURRED 'WHOLLY, NECESSARILY AND EXCLUSIVELY' FOR THE PURPOSES OF BUSINESS IN ORDER TO MERIT DEDU CTION. PURSUANT TO PUBLIC PROTEST, THE WORD 'NECESSARILY' WAS OMITT ED FROM THE SECTION. 21. THE POSITION EMERGING FROM THE ABOVE DECISIONS IS THAT IT IS NOT NECESSARY FOR THE ASSESSEE TO SHOW THAT ANY LEGITIM ATE EXPENDITURE INCURRED BY HIM WAS ALSO INCURRED OUT O F NECESSITY. IT IS ALSO NOT NECESSARY FOR THE ASSESSEE TO SHOW THAT ANY EXPENDITURE INCURRED BY HIM FOR THE PURPOSE OF BUSI NESS CARRIED ON BY HIM HAS ACTUALLY RESULTED IN PROFIT OR INCOME EI THER IN THE SAME YEAR OR IN ANY OF THE SUBSEQUENT YEARS. THE ONLY CO NDITION IS THAT THE EXPENDITURE SHOULD HAVE BEEN INCURRED 'WHOLLY A ND EXCLUSIVELY' FOR THE PURPOSE OF BUSINESS AND NOTHIN G MORE. IT IS THIS PRINCIPLE THAT INTER ALIA FINDS EXPRESSION IN THE OECD GUIDELINES, IN THE PARAGRAPHS WHICH WE HAVE QUOTED ABOVE. 22. EVEN RULE 10B (1) (A) DOES NOT AUTHORISE DIS ALLOWANCE OF ANY EXPENDITURE ON THE GROUND THAT IT WAS NOT NECESSARY OR PRUDENT FOR THE ASSESSEE TO HAVE INCURRED THE SAME OR THAT IN T HE VIEW OF THE REVENUE THE EXPENDITURE WAS UN-REMUNERATIVE OR THAT IN VIEW OF THE CONTINUED LOSSES SUFFERED BY THE ASSESSEE IN HI S BUSINESS, HE COULD HAVE FARED BETTER HAD HE NOT INCURRED SUCH EX PENDITURE. THESE ARE IRRELEVANT CONSIDERATIONS FOR THE PURPOSE OF RULE 10B. WHETHER OR NOT TO ENTER INTO THE TRANSACTION IS FOR THE ASSESSEE TO 51 DECIDE. THE QUANTUM OF EXPENDITURE CAN NO DOUBT BE EXAMINED BY THE TPO AS PER LAW BUT IN JUDGING THE ALLOWABILITY THEREOF AS BUSINESS EXPENDITURE, HE HAS NO AUTHORITY TO DISALL OW THE ENTIRE EXPENDITURE OR A PART THEREOF ON THE GROUND THAT TH E ASSESSEE HAS SUFFERED CONTINUOUS LOSSES. THE FINANCIAL HEALTH OF ASSESSEE CAN NEVER BE A CRITERION TO JUDGE ALLOWABILITY OF AN EX PENSE; THERE IS CERTAINLY NO AUTHORITY FOR THAT. WHAT THE TPO HAS D ONE IN THE PRESENT CASE IS TO HOLD THAT THE ASSESSEE OUGHT NOT TO HAVE ENTERED INTO THE AGREEMENT TO PAY ROYALTY/BRAND FEE , BECAUSE IT HAS BEEN SUFFERING LOSSES CONTINUOUSLY. SO LONG AS THE EXPENDITURE OR PAYMENT HAS BEEN DEMONSTRATED TO HAVE BEEN INCUR RED OR LAID OUT FOR THE PURPOSES OF BUSINESS, IT IS NO CONCERN OF THE TPO TO DISALLOW THE SAME ON ANY EXTRANEOUS REASONING. AS P ROVIDED IN THE OECD GUIDELINES, HE IS EXPECTED TO EXAMINE THE INTERNATIONAL TRANSACTION AS HE ACTUALLY FINDS THE SAME AND THEN MAKE SUITABLE ADJUSTMENT BUT A WHOLESALE DISALLOWANCE OF THE EXPE NDITURE, PARTICULARLY ON THE GROUNDS WHICH HAVE BEEN GIVEN B Y THE TPO IS NOT CONTEMPLATED OR AUTHORISED. 35. SIMILARLY IN THE CASE OF KNORR-BREMSE INDIA PVT. LTD. HONBLE P & H HIGH COURT ADMITS SIMILAR OBSERVATION WHICH READS AS UNDER:- 20. A READING OF THE ORDERS OF THE TPO, THE DR P AND OF THE TRIBUNAL MAKES IT CLEAR THAT ONE OF THE MAIN REASON S FOR NOT ACCEPTING THE ASSESSEE'S CASE WAS THAT THE ASSESSEE HAD NOT BEEN ABLE TO SUBSTANTIATE THAT THE PAYMENT FOR THE SERVI CES HAD ACTUALLY INCREASED ITS PROFITS. AS WE NOTED EARLIER, THE TPO , IN FACT, FURTHER HELD THAT THE ASSESSEE SHOULD HAVE BEEN ABLE TO SHO W THE LEVEL OF INCREASE IN PROFIT POST THE SAID TRANSACTIONS. 52 21. WE ARE UNABLE TO AGREE WITH THIS FINDING. TH E ANSWER TO THE ISSUE WHETHER A TRANSACTION IS AT AN ARM'S LENGTH P RICE OR NOT IS NOT DEPENDENT ON WHETHER THE TRANSACTION RESULTS IN AN INCREASE IN THE ASSESSEE'S PROFIT. THIS WOULD BE CONTRARY TO TH E ESTABLISHED MANNER IN WHICH BUSINESS IS CONDUCTED BY PEOPLE AND BY ENTERPRISES. BUSINESS DECISIONS ARE AT TIMES GOOD A ND PROFITABLE AND AT TIMES BAD AND UNPROFITABLE. BUSINESS DECISIO NS MAY AND, IN FACT, OFTEN DO RESULT IN A LOSS. THE QUESTION WH ETHER THE DECISION WAS COMMERCIALLY SOUND OR NOT IS NOT RELEVANT. THE ONLY QUESTION IS WHETHER THE TRANSACTION WAS ENTERED INTO BONA FI DE OR NOT OR WHETHER IT WAS SHAM AND ONLY FOR THE PURPOSE OF DIV ERTING THE PROFITS. 36. THUS, FOLLOWING THE PROPOSITION LAID DOWN IN THE AFORESAID JUDGMENTS, WE HOLD THAT THE PAYMENT OF ROYALTY CANNOT BE DETERMINED AT NIL. 37. NOW COMING TO THE ISSUE WHETHER ANY ADJUSTMEN T CAN BE MADE ON THE FACTS OF THE PRESENT CASE OR NOT. LD. CIT (A) HAS DELETED THE ADJUSTMENT MADE ON ACCOUNT OF ROYALTY ON THE GROUND THA T, FIRSTLY , ITAT DELHI BENCH IN THE CASE OF LUMAX INDUSTRIES LTD. HAS ACCEPTED THE ROYALTY RATE OF 5% TO 8% OF NET SALES; AND SECONDLY , RBI/FIPB APPROVAL ON THE RATE FIXED BY THE RBI IN THE CASE OF ROYALTY SHOULD BE TAKEN FOR THE PURPOSE OF ARMS LENGTH ANALYSIS, BECAUS E, IT HAS HUGE PERVASIVE VALUE AND FOR COMING TO THIS CONCLUSION, HE AGAIN REFERRED TO CERTAIN DECISIONS, CITED IN HIS ORDER. 53 38. UNDER THE TRANSFER PRICING REGULATIONS AS AP PEARING IN CHAPTER X UNDER THE INCOME TAX ACT AS WELL AS IN RULE 10B, I T IS IMPERATIVE THAT AN INTERNATIONAL TRANSACTION HAS TO BE BENCHMARKED BY USING APPROPRIATE METHOD AS PRESCRIBED UNDER THE RULES. A JU DGMENT OR THE DECISION OF A TRIBUNAL RENDERED ON PARTICULAR FACTS O F THE CASE, WHEREBY A CERTAIN BROAD RANGE OF ALP HAS BEEN GIVEN, THEN SAME CANNOT BE FOLLOWED IN A BLANKET MANNER IN ALL THE CAS ES, AS BENCHMARKING HAS TO BE DONE FOR THE RELEVANT FINANCIAL YEAR USING A DATA FOR IDENTIFYING COMPARABLE ENTITIES AVAILABLE IN P UBLIC DOMAIN. FURTHER THE QUOTE GIVEN BY RBI OR RATES APPROVED BY R BI UNDER AUTOMATIC ROUTE IS MEANT FOR THE PURPOSE OF REGULATING THE FLOW OF FOREIGN EXCHANGE UNDER THE FEMA AND DOES NOT LAY DOWN ANY ARMS LENGTH PRICE FOR A PARTICULAR INTERNATIONAL TRANSACTION . THE RBI AT THE TIME OF GIVING PERMISSION FOR QUOTING A RATE NEITHER TA KE INTO CONSIDERATION THE TRANSFER PRICING PROVISION UNDER THE INCOME TAX ACT NOR ITS QUOTE OVERRIDE THE ALP DETERMINATION MECHANISM AND IT CANNOT BE RECKONED AS SACROSANCT, BECAUSE TPO/ AO CAN ALWA YS EXAMINE AND ANALYSE THE TRANSACTION TO ASCERTAIN ITS ALP OR THE ARMS LENGTH CONDITIONS BETWEEN THE RELATED PARTY TRANSACTIONS. TH E RBI ONLY PROVIDES THE MAXIMUM PERMISSIBLE RATE OF ROYALTY WHI CH CAN BE PAID BUT SUCH RATE CANNOT BE MADE APPLICABLE ACROSS ALL THE INDUSTRY, BECAUSE, TECHNICAL KNOWHOW REQUIRED FOR MANUFACTURI NG ELECTRONIC GOODS, AUTOMOBILE COMPONENTS OR HEAVY INDUSTRIAL EQUI PMENTS VARIES 54 LARGELY DEPENDING UPON THE INDUSTRY NORMS. THE PARTIES NEGOTIATE THE RATES DEPENDING UPON THE COMPLEXITY EXISTING IN PARTIC ULAR INDUSTRY, NATURE OF TECHNICAL KNOWHOW AND KEEPING OTHER RELEVAN T ECONOMIC FACTORS. THE RATES GIVEN BY THE RBI, WHICH ARE QUITE O FTEN FLUCTUATING, CANNOT CONSTITUTE A COMPARABLE DATA FOR EXTERNAL CUP, AS IT MERELY GIVES THE RANGE OF THE ROYALTY RATE FOR THE MONEY WHIC H CAN BE REMITTED TO A FOREIGN ENTITY. THUS, WE ARE OF THE OPINION THAT RATE PRESCRIBED BY RBI UNDER FEMA REGULATION CANNOT BE RECKONED AS AN EXTERNAL CUP FOR THE PURPOSE OF BENCHMARKING. 39. NOW THE ISSUE IS, UNDER WHICH METHOD THE RO YALTY SHOULD BE BENCHMARKED. SINCE, WE HAVE ALREADY REJECTED THE AS SESSEES CONTENTION THAT THE TRANSACTION OF ROYALTY CANNOT BE AGG REGATED UNDER TNMM, THEREFORE, IN OUR OPINION THE CUP METHOD WOULD B E THE MOST APPROPRIATE METHOD FOR DETERMINING THE ALP OF PAYMENT O F ROYALTY. THE CUP METHOD UNDER RULE 10B (1) (A) HAS BEEN PRESC RIBED IN THE FOLLOWING MANNER:- (A) COMPARABLE UNCONTROLLED PRICE METHOD, B Y WHICH,- (I) THE PRICE CHARGED OR PAID FOR PROPERTY TRANSFE RRED OR SERVICES PROVIDED IN A COMPARABLE UNCONTROLLED TRANSACTION, OR A NUMBER OF SUCH TRANSACTIONS, IS IDENTIFIED; (II) SUCH PRICE IS ADJUSTED TO ACCOUNT FOR DIFFEREN CES, IF ANY, BETWEEN THE INTERNATIONAL TRANSACTION AND THE COMPA RABLE UNCONTROLLED TRANSACTIONS OR BETWEEN THE ENTERPRISE S ENTERING INTO SUCH TRANSACTIONS, WHICH COULD MATERIALLY AFFECT TH E PRICE IN THE OPEN MARKET; 55 (III) THE ADJUSTED PRICE ARRIVED AT UNDER SUB-CLAUS E (II) IS TAKEN TO BE AN ARM'S LENGTH PRICE IN RESPECT OF THE PROPERTY TRANSFERRED OR SERVICES PROVIDED IN THE INTERNATIONAL TRANSACTION; ' 40. THE MANDATE OF CUP METHOD IS THE PRICE CHAR GED OR PAID FOR THE SERVICES PROVIDED IN COMPARABLE UNCONTROLLED TRANS ACTION AND ITS ADJUSTED PRICE PAID FOR AVAILING SERVICES WHICH CONS TITUTES THE BENCHMARK FOR COMPARISON WITH PRICE PAID FOR AVAILIN G OF ANY SERVICES IN AN INTERNATIONAL TRANSACTION. IF THE PRICE PAID FOR A VAILING THE SERVICE IN A COMPARABLE UNCONTROLLED TRANSACTION IS COMPARED WITH PRICE PAID IN AN INTERNATIONAL TRANSACTION, THEN IT IS RECKONED TO B E AT ALP. SINCE, THERE IS NO INTERNAL CUP, I.E., THERE IS NO SIMILAR PA YMENT OF ROYALTY TO AN INDEPENDENT THIRD PARTY, THEREFORE, IT WOULD BE DES IRABLE THAT EXTERNAL CUP IS TO BE APPLIED. HERE IN THIS CASE NEI THER THE ASSESSEE NOR THE AO HAS SEARCHED FOR ANY EXTERNAL CUP; AND T HEREFORE, WE DEEM FIT THAT THE ISSUE OF BENCHMARKING OF ROYALTY PAYMENT SHOULD BE REMANDED BACK TO THE FILE OF THE AO/TPO TO BENCHMARK ROYALTY PAYMENT SEPARATELY BY USING EXTERNAL CUP. THE DATA FRO M ROYALTY STAT AVAILABLE FOR AUTOMOTIVE INDUSTRY CAN BE USED FOR SE ARCH OF EXTERNAL COMPARABLES AND THE PAYMENT OF ROYALTY PAI D FOR USE OF TECHNICAL KNOWHOW FOR MANUFACTURING OF AUTOMOTIVE COM PONENTS CAN BE USED FOR THE PURPOSE OF BENCHMARKING. THE ONUS WO ULD BE ON THE ASSESSEE TO CARRY OUT THE FRESH SEARCH PROCESS AND AFT ER SELECTING EXTERNAL COMPARABLES AND CARRYING OUT COMPARABILITY ANALYSIS MAY PRESENT THE SAME TO THE TPO, WHO SHALL ANALYSE THE EXTER NAL 56 COMPARABLES AND BENCHMARK THE ROYALTY PAYMENT OF THE A SSESSEE. WITH THIS DIRECTION THE ISSUE OF ROYALTY PAYMENT IS SET ASIDE TO THE FILE OF THE AO/TPO AND THE TPO WHO SHALL GIVE APPROPRIATE OPPORTUNITY OF HEARING TO THE ASSESSEE TO SUBSTANTIATE THE ALP OF THE SAI D TRANSACTION. 41. AS REGARDS THE INTRA GROUP SERVICES, THE ASS ESSEE IN ITS FORM 3CEB HAS SHOWN FOLLOWING PAYMENTS TO VARIOUS AES:- A) TESTING CHARGES: RS. 3,07, 869/- B) SALES COMMISSION: RS. 1,08,48,310 /- C) SERVER CHARGES: RS. 9,8 8,483/- D) SAP MAINTENANCE CHARGES: RS. 27,12,007/- E) COST SHARING CHARGES: RS. 73,36,991/ - 42. SO FAR AS TESTING CHARGES AND SERVER CH ARGES ARE CONCERNED, TPO HAS NOT MADE ANY ADDITION OR ADJUSTMENT AND HAS AC CEPTED TO BE AN ALP THOUGH THESE ISSUES HAVE BEEN RAKED UP BY THE TPO IN ASSESSMENT YEAR 2008-09, WHEREIN THE ENTIRE PAYMENT HAS BEEN ADJUSTED AND ADDITION HAS BEEN MADE. FOR INTRA GROUP SERVICES THE ASSESSEE HAS SUBMITTED THAT, SINCE THESE CHARGES ARE PA RT OF THE OPERATING COST AND INTERCONNECTED WITH THE OVERALL TRAN SACTIONS, THEREFORE, ALL THESE TRANSACTIONS NEED TO BE AGGREGATED UNDER TNMM. DURING THE COURSE OF THE TRANSFER PRICING PROCEEDINGS THE TPO HAD 57 REQUIRED THE ASSESSEE TO SUBMIT COPIES OF INVOICES RAI SED BY EACH OF THE AES ALONGWITH THE DOCUMENTARY EVIDENCES TO SHOW THAT THE SAID SERVICE HAS ACTUALLY BEEN RENDERED BY THE AE AND ALS O TO SHOW THE WHAT TANGIBLE BENEFIT HAS BEEN DERIVED BY THE ASSESSEE IN PAYING THE SAID AMOUNT TO THE AES. IN RESPONSE THE ASSESSEE DID F ILED COPIES OF INVOICES FOR CERTAIN SERVICES AS PER THE DETAILS INCOR PORATED IN THE TPOS ORDERS FROM PAGES 16 TO 20. THE TPO, AS DISCUS SED ABOVE HAS HELD THAT THERE IS NO BENEFIT ARRIVED TO THE ASSESSEE F OR MAKING SUCH PAYMENT AND THEREFORE, THE ENTIRE PAYMENTS TO AE UNDER THE HEAD INTRA GROUP SERVICES HAVE BEEN ADJUSTED AND ADDITIO N HAS BEEN MADE. LD. CIT (A) TOO HAS CONFIRMED THE FINDING OF THE TPO. THE NATURE OF INTRA GROUP SERVICES, BENEFIT DERIVED BY THE ASSE SSEE, THE RELEVANT DOCUMENTS FOR THESE SERVICES, HAS ALREADY BEEN SUMMAR ISED AND INCORPORATED ABOVE. 43. TO EXAMINE THE INTRA GROUP SERVICES UNDER TH E ARMS LENGTH PRINCIPLE, IT HAS TO BE SEEN VIS--VIS THE ACTIVITY PROVIDED BY THE RESPECTIVE GROUP MEMBER WITH ECONOMIC AND COMMERCIAL VALUE TO ENHANCE ITS COMMERCIAL POSITION; AND WHETHER AN INDE PENDENT ENTERPRISE IN A COMPARABLE UNCONTROLLED CIRCUMSTANCES WOULD HAVE BEEN WILLING TO PAY FOR THE ACTIVITIES TO PERFORM BY AN Y INDEPENDENT ENTERPRISE OR WOULD HAVE PERFORM THE ACTIVITY BY ITS ELF. IF SUCH AN INDEPENDENT ENTERPRISE IS NOT WILLING TO PERFORM FOR B Y ITSELF OR FOR THE 58 OTHERS, THEN SUCH AN ACTIVITY ORDINARILY SHOULD NOT BE CONSIDERED AS INTRA GROUP SERVICES UNDER THE ARMS LENGTH PRINCIPL E. ONE NEEDS TO IDENTIFY THE ARRANGEMENTS BETWEEN THE RELATED PARTIES AN D WHETHER ANY TANGIBLE SERVICES HAVE BEEN PROVIDED WHICH CAN B E EASILY IDENTIFIED. OFTEN COST ALLOCATION AND APPORTIONMENT METHO DS WHICH HAS SOME DEGREE OF REMOTE APPROXIMATION CAN BE TAKEN AS A BASIS FOR CALCULATING ARMS LENGTH CHARGE WHICH CAN BE BENCHMA RKED UNDER INDIRECT CHARGE METHOD, FOR EXAMPLE, UNDER THE TNMM THE RELEVANT CONSIDERATION SHOULD BE THE VALUE OF THE SERVICES TO THE RECIPIENT AND HOW MUCH A COMPARABLE INDEPENDENT ENTERPRISE WOULD B E PREPARE TO PAY FOR THAT SERVICE IN COMPARABLE CIRCUMSTANCES AS WE LL AS THE COST TO THE SERVICE PROVIDER UNDER THE GIVEN FACT. EVEN THE US E OF CUP OR CPM CAN BE APPLIED FOR PRICING OF INTRA GROUP SERVICE, BUT THAT CAN ONLY BE SEEN WHEN EACH SERVICES CAN BE IDENTIFIED SEPARATELY AND NOT SEPARATELY WHICH ARE NOT INEXTRICABLY LINKED WITH OVER ALL ACTIVITIES OF THE TESTED PARTY. HERE IN THIS CASE THE INTRA GROUP SE RVICES LIKE SERVER CHARGES, SAP MAINTENANCE CHARGES AND COST SHARING CH ARGES IS AN OPERATING COST FOR OVERALL MANUFACTURING ACTIVITIES CARR IED OUT BY THE ASSESSEE, BECAUSE THESE EXPENSES ARE QUITE ESSENTIAL F OR ANY INDEPENDENT ENTERPRISE AND ALSO FOR EFFICIENCY FOR TH E BUSINESS ACTIVITIES. REGARDING COST SHARING CHARGES, WE WILL EN DEAVOUR TO EXAMINE THE NATURE OF VARIOUS INTRA GROUP SERVICES, AS TO WHETHER ACTUALLY SUCH SERVICES AT ALL HAS BEEN RENDERED WHIC H CAN SAID TO BE 59 PART OF THE OPERATING COST AND WHETHER ASSESSEE HAS DE RIVED SOME BENEFIT WHILE CARRYING OUT ITS MANUFACTURING / BUSINES S ACTIVITIES OR NOT. 44. FIRST OF ALL, IN THE CASE OF SALES COMMISS ION, WE FIND THAT ASSESSEE HAD ENTERED INTO AN AGREEMENT DATED 16 TH MARCH, 2004 WITH ITS AE, JM JAPAN FOR PROVIDING FOLLOWING SERVICES TO THE ASSESSEE :- MARKETING AND LIAISON SERVICES WITH JAPANESE CUSTOMERS IN RESPECT OF SALES BY THE APPELLANT TO ALL JAPANESE CUSTOM ERS; FEEDBACK ON ORGANIZATIONAL AND PERSONNEL CHANGES IN JAPANESE CUSTOMERS, IN RELATION TO BUSINESS OF THE APPELLANT; INPUTS ON DESIGN AND MODEL CHANGES BASED ON JAPANES E CUSTOMERS REQUIREMENTS AND PLANS FOR ALL JAPANESE CUS TOMERS; FEEDBACK ON OTHER ASPECTS OF THE ACTIVITIES OF JAPANES E CUSTOMERS THAT HAVE IMPACT ON THE BUSINESS OF APPELLANT IN INDIA. ONE IMPORTANT FACT WHICH IS TO BE NOTED HERE IS THAT, THE ASSESSEES MAJOR CUSTOMER IS MARUTI SUZUKI INDIA LIMITED (MSIL) , IN INDIA AND FOR ITS MARKETING AND LIAISIONING SERVICES AND FOR ALL SU CH OTHER ACTIVITIES, ASSESSEE HAS INCURRED EXPENDITURE IN INDIA. THE ASSE SSEES CONTENTION HAS BEEN THAT, SINCE SUZUKI MOTOR CORPORATION JAPAN IS THE HOLDING COMPANY OF MISL AND THEREFORE, IT REQUIRES PRESENCE IN JAPAN TO LIAISE WITH SUZUKI MOTOR CORPORATION AND ALSO TO MARKET THE PRODUCTS MANUFACTURED BY THE ASSESSEE IN JAPAN AND FOR PROCUR ING THE ORDERS 60 FOR RENDERING OF SERVICES, ASSESSEE HAS TO PAY JM JA PAN, FEE @ 40% PER MONTH BY THE ASSESSEE TO ITS JAPANESE CUSTOMERS. DURIN G THE COURSE OF HEARING, WE SPECIFICALLY REQUIRE THE LD. COUNSEL TO SHOW AS TO WHETHER ANY SERVICE HAS BEEN RENDERED BY THE AE JM J APAN TO ANY JAPANESE CUSTOMER OR THERE IS ANY KIND OF EVIDENCE TO SHOW THAT THESE SERVICES HAVE BEEN RENDERED FOR ANY CUSTOMER IN JAP AN. HOWEVER, NEITHER BEFORE US NOR BEFORE THE AUTHORITIES BELOW ANY SUCH EVIDENCE HAS BEEN FILED. EXCEPT FOR THE AGREEMENT NOTHING IS BOR NE OUT FROM THE RECORDS THAT AE JAPAN HAS CARRIED OUT ANY SUCH SERVICE S TO ASSESSEE OR HAS ASSISTED OR BENEFITED ASSESSEE IN GETTING THE OR DERS FOR ANY CUSTOMER IN JAPAN AND THE BASIS FOR WHICH THE FEE HA S BEEN CALCULATED. THE LD. COUNSEL ALSO COULD NOT BROUGHT ON RECORD AS TO WHEN THE PRODUCT MANUFACTURED BY THE ASSESSEE IN INDI A HAVE BEEN SOLD TO ANY INDEPENDENT CUSTOMERS IN JAPAN FOR WHICH IT HAS TO CARRY OUT ANY MARKETING AND LIAISIONING SERVICES AND OTHER INPUTS REQUIRED FROM JAPANESE CUSTOMERS. IN ABSENCE OF ANY SUCH DETAI LS IT CAN BE PRESUMED THAT NO PRODUCTS HAVE BEEN SOLD TO ANY JAPANE SE CUSTOMERS. THE SALES COMMISSION FOR SALE OF PRODUCTS IN INDIA TO MISL HAS BEEN SEPARATELY DEBITED IN THE BOOKS OF ACCOUNTS A S ALL ITS PRODUCTS HAVE BEEN SOLD HERE IN INDIA. WHAT KIND OF L IAISIONING WORK JM JAPAN HAS DONE FOR SUZUKI MOTORS CORPORATION HAS NOT BEEN BROUGHT ON RECORD? FOR MAKING A PAYMENT TO AE THE ONU S IS HEAVILY UPON THE ASSESSEE TO SHOW THAT SOME KIND OF BENEFIT HA S ARRIVED TO THE 61 ASSESSEE FOR MAKING SUCH A PAYMENT AND THERE IS ACTUAL RENDERING OF SERVICES. EVEN IF THERE IS NO BENEFIT DERIVED ATLEAST IT HAS TO BE DEMONSTRATED THAT THERE IS ACTUALLY RENDERING OF SERVICES BY THE AE JAPAN IN TERMS OF UNIT SOLD TO ANY JAPANESE CUSTOMERS. NOT ONLY THAT, IT HAS NOT BEEN BROUGHT ON RECORD THAT JM JAPAN HAS CARR IED OUT ANY MARKETING ACTIVITIES IN INDIA TO PROMOTE SALES OR CARR Y OUT ANY SIMILAR SERVICES WITH MISL. UNDER THESE FACTS AND CIRCUMSTANCES IT IS VERY DIFFICULT TO HOLD THAT THE PAYMENT OF SALES COMMISSION TO AE JAPAN IS EITHER FOR THE PURPOSE OF BUSINESS OR FOR ANY COMMERC IAL EXPEDIENCY. UNDER THE ARMS LENGTH SCENARIO NO INDEPENDENT ENTERPR ISE WILL PAY TO A THIRD PARTY IN A FOREIGN COUNTRY WHERE IT HAS NOT BEE N ABLE TO SHOW THAT ANY SALE HAS BEEN MADE TO THE CUSTOMERS OR ANY SUCH SERVICES HAS RENDERED FOR THE CUSTOMERS IN THAT FOREIGN COUNTRY. FOR BENCHMARKING SUCH A PAYMENT ONE HAS TO SEE, WHETHER AN Y INDEPENDENT INDIAN PARTY WOULD PAY TO A FOREIGN ENTITY WHEN NEITHER IT HAS IT ANY CUSTOMERS NOR HAS IT BEEN ESTABLISHED THAT A NY SUCH SERVICES HAVE BEEN RENDERED BY THE FOREIGN ENTITY WHI CH CAN HAVE SOME COMMERCIAL EXPEDIENCY BENEFITTING THE INDIAN COMPANY. THUS, UNDER ARMS LENGTH CONDITIONS ALSO SUCH A PAYMENT DOES NOT ST AND THE TEST OF ALP; AND ACCORDINGLY, WE CONFIRM THE ORDER OF THE TPO THAT THE PAYMENT OF SALES COMMISSION TO AE IS NOT MEANT EITHER FOR BUSINESS PURPOSE OR UNDER THE ARMS LENGTH CONDITIONS SUCH A PA YMENT IS JUSTIFIED. ACCORDINGLY, THE AMOUNT OF RS. 1,08,48,310/ - IS CONFIRMED. 62 45. SO FAR AS SAP MAINTENANCE CHARGES ARE C ONCERNED, THE FACTS WHICH EMERGES FROM THE MATERIAL PLACED ON RECORD IS THAT, THE ASIAN REGION HEADQUARTER OF JOHNSON MATTHEY GROUP LOCATED I N MALAYSIA, IMPLEMENTS THE SAP PROGRAMME FOR THE ENTIRE ASIAN REG ION. FOR THIS PURPOSE, A SERVER OWNED BY AN INDEPENDENT VENDOR HAS BEEN SET UP IN CHENNAI AND THE COST OF OPERATING AND MAINTAINING THE S ERVER IS INCURRED BY JM MALAYSIA WHICH IS SUBSEQUENTLY RECOVE RED FROM THE GROUP ENTITIES LOCATED IN INDIA, JAPAN, CHINA AND MAL AYSIA IN EQUAL PROPORTION. IN SUPPORT THE ASSESSEE HAS PLACED COPIES OF INVOICES AND DEBIT NOTES RAISED BY THE JMM BY INDEPENDENT VENDOR IN RESPECT OF SAP MAINTENANCE CHARGES. A DETAILED EXPLANATION HAS B EEN GIVEN BY THE ASSESSEE IN THIS REGARD WHICH WE HAVE ALREADY INC ORPORATED IN THE EARLIER PART OF THE ORDER. THERE IS NO REBUTTAL BY THE REVENUE OR ANYTHING CONTRARY HAS BEEN BROUGHT ON RECORD THAT PAYME NT OF SAP MAINTENANCE CHARGES HAVE NOT BEEN EQUALLY ALLOCATED TO VARIOUS GROUP ENTITIES AND THE ASSESSEE HAS BEEN ALLOCATED/ LOADED WI TH EXTRA EXPENSES OR THE INVOICES AND DEBIT NOTES ARE NON-GENUI NE. SUCH SAP MAINTENANCE CHARGES IS LINKED WITH CARRYING OUT THE BU SINESS ACTIVITIES IN A SMOOTH AND EFFICIENT MANNER AND ALSO TO MAINTAIN QUALITY STANDARD UNIFORMLY ALL ACROSS THE JM GROUP FO R UNIFORM USE OF SYSTEM OF ACCOUNTING, ADMINISTRATION, MARKETING, SALES, ETC. THUS, THIS PAYMENT BEING A PART OF THE OPERATING COST HAS TO BE AGG REGATED UNDER THE TNMM. HERE IN THIS CASE IT IS NOT IN DISPUTE THAT, AS SESSEES PROFIT 63 MARGIN VIS--VIS THE COMPARABLES UNDER TNMM IS HIGHE R AND THEREFORE, NO SEPARATE ADJUSTMENT IS REQUIRED ON THIS E XPENSE. 46. SIMILARLY FOR THE COST SHARING CHARGE, THE ASSESSEE HAS STATED THAT ASIAN REGION HEADQUARTER OF JOHNSON MATTHEY GROUP WAS LOCATED IN MALAYSIA WHICH WAS MANAGED BY PERSONNEL APPOINTED BY JMM GROUP AND DEPUTED AT HEADQUARTERS, WHO ARE MANAGING THE ASIA REGION, LIKE MANAGING DIRECTOR, FINANCE DIRECTOR, SAL ES DIRECTOR, COMMON SECRETARY ETC. THE SALARY OF THESE EMPLOYEES A ND OTHER EXPENDITURE INCURRED ON THESE EMPLOYEES HAVE BEEN ALL OCATED TO THE GROUP COMPANIES LOCATED IN ASIA REGION, I.E., INDIA, JAPAN, CHINA AND MALAYSIA; AND THE BASIS FOR ALLOCATION OF THE EXPENSES INCURRED TO MANAGE ASIA REGION IS THE NET REVENUE OF RESPECTIVE C OUNTRIES LOCATED IN ASIA REGION. THE ALLOCATION OF EXPENSE IS BASED ON RATIO OF FIGURES ARRIVED AT AFTER REDUCING FROM THE TURNOVER OF EACH CO UNTRY AND SUCH PAYMENT MADE TO SUCH HIGH LEVEL SENIOR PERSONNEL, DEF INITELY HAS TO BE RECKONED TO BE PART OF BUSINESS REQUIREMENT AND OVERAL L MANAGEMENT IN THE ADMINISTRATION OF VARIOUS GROUP ENTITIES IN THE A SIAN REGION COUNTRIES, NOT ONLY TO SUPERVISE BUT ALSO CARRY OUT VARI OUS OTHER FUNCTIONS. SUCH COST SHARING ARRANGEMENTS HAS TO BE TRE ATED AS PART OF THE OPERATING COST OF THE ASSESSEE COMPANY AND THEREFORE , UNDER TNMM NO SEPARATE BENCHMARK SHOULD BE DONE FOR THIS S ERVICE AS IT CAN BE FACTORED IN ARRIVING AT NET PROFIT MARGIN. ACCOR DINGLY, WE HOLD 64 THAT NO SEPARATE ADDITION SHOULD BE MADE ON COST SHAR ING CHARGES. THUS, IN VIEW OF OUR FINDING GIVEN ABOVE, TPO IS DI RECTED TO GIVE EFFECT AND DETERMINE THE ARMS LENGTH PRICE ACCORDINGLY. IN THE RESULT APPEAL OF THE ASSESSEE AS WELL AS OF THE DEPARTMENT FOR ASSESS MENT YEAR 2007- 08 IS PARTLY ALLOWED FOR STATISTICAL PURPOSES. 47. FOR THE ASSESSMENT YEARS 2008-09 AND 2009-10, THE ISSUES INVOLVED IN REVENUES APPEAL IS SAME, THAT IS, DELETIO N OF ADJUSTMENT ON ACCOUNT OF ROYALTY PAYMENT BY THE CIT(A); AND IN ASS ESSEES APPEAL, THE ISSUE RAISED ARE ON ACCOUNT OF ADJUSTMENT OF INTRA G ROUP SERVICES. FOLLOWING CHART WILL GIVE THE GLIMPSE OF THE ISSUES RA ISED; AMOUNT DISALLOWED BY THE TPO AND LD. CIT (A)S FINDING:- S. NO. ADDITION BY TPO AMOUNT DISALLOWED BY TPO AY 07-08 AY 08-09 AY 09-10 CIT(A)S FINDING CURRENT APPEALS 1 PAYMENT OF ROYALTY 2,45,57,629 3,18,10,000 2,76,88,088 ADDITION DELETE D IN ALL YEARS JMIPL FOUND TO HAVE DERIVED SIGNIFICANT BENEFITS REVENUE HAS CHALLENGED THIS BEFORE ITAT FOR ALL THREE YEARS 2. PAYMENT FOR INTRA GROUP SERVICES A. TESTING CHARGES TPO ACCEPTED PAYMENT TO BE AT ALP NO ADDITION 15,58,390 6,56,878 ADDITION DELETED IN BOTH THE YEARS JMIPL FOUND TO HAVE DERIVED SIGNIFICANT BENEFITS REVENUE HAS NOT CHALLENGED THIS BEFORE ITAT B. SALES COMMISSION 1,08,48,310 (TO JM JAPAN) NO PAYMENT TO JMUK 1,34,90,396 (TO JM JAPAN) NO PAYMENT TO JMUK 1,46,66,704 (TO JM JAPAN) 52,78,522 (TO JM UK) ADDITION SUSTAINED ADDITION SUSTAINED JMIPL HAS CHALLENGED THIS BEFORE ITAT 65 C. SERVER CHARGES TPO ACCEPTED PAYMENT TO BE AT ALP NO ADDITION 8,28,530 8,44,175 ADDITION SUSTAINED JMIPL HAS CHALLENGED THIS BEFORE ITAT D. SAP MAINTENANCE CHARGES 27,12,007 COST NOT INCURRED COST NOT INCURRED ADDITION SUSTAINED JMIPL HAS CHALLENGED THIS BEFORE ITAT E. COST SHARING CHARGES 73,36,991 51,34,032 1,14,99,776 1,78,96,168 (CAPITALISED SAP ERP SYSTEM COST) 3,60,845 (DOUBLE DISALLOW- ANCE) ADDITION SUSTAINED ADDITION SUSTAINED DELETED JMIPL HAS CHALLENGED THIS BEFORE ITAT 48. SO FAR AS THE ISSUE OF PAYMENT OF ROYALTY I S CONCERNED, WE HAVE ALREADY SET ASIDE THE MATTER TO THE FILE OF TPO FOR CAR RYING OUT AFRESH ANALYSIS UNDER EXTERNAL CUP; AND THEREFORE, OUR FINDI NG AND DIRECTION GIVEN ABOVE WILL APPLY MUTATIS MUTANDIS IN THE APPEAL FOR ASSESSMENT YEARS 2008-09 AND 2009-10. ACCORDINGLY, THE REVENUE S APPEALS ARE TREATED AS PARTLY ALLOWED FOR STATISTICAL PURPOSES. SO FAR AS PAYMENT OF SALES COMMISSION, SAP MAINTENANCE AND COST SHARING CH ARGES ARE CONCERNED, OUR FINDING GIVEN ABOVE IN A.Y. 2007-08 WILL ALSO APPLY FOR THE ASSESSMENT YEARS 2008-09 AND 2009-10. HOWEVER, IN RESPECT OF SALE COMMISSION IN ASSESSMENT YEAR 2009-10, THERE I S A PAYMENT MADE OF RS. 52,78,522/- TO JM-UK FOR CARRYING OUT SA LES. ON SUCH PAYMENT ALSO NO CREDIBLE EVIDENCE OR DOCUMENT HAVE BE EN FILED TO 66 SUBSTANTIATE BUSINESS PURPOSE OR ANY KIND OF COMMERCI AL EXPEDIENCY; OR WHETHER ANY KIND OF ACTUAL SERVICES HAVE BEEN REND ERED BY THE AE OR NOT. HENCE IN VIEW OF OUR FINDING GIVEN IN RESPE CT OF SIMILAR PAYMENT TO JM-JAPAN, SUCH A PAYMENT OF RS.52,78,522/- IS ALSO CONFIRMED. SO FAR AS TESTING CHARGES IS CONCERNED, TPO HAS THOUGH MADE THE ADDITION WHICH BEEN DELETED BY THE LD. CIT (A), BUT N O APPEAL HAS BEEN FILED BY THE REVENUE, HENCE IT IS NOT AN ISSUE BEFORE US. LASTLY, ON THE ISSUE OF SERVER CHARGES, ADDITION OF RS. 8,28,530/ - AND RS. 8,44,175/- MADE BY THE TPO HAS BEEN SUSTAINED BY THE LD. CIT(A), EVEN THOUGH NO SUCH ADDITION WAS MADE IN A.Y. 2007-0 8. IN THE SERVER CHARGES ALSO THE ASSESSEE STATED THAT IT HAS PAID TO JM-U K FOR MAINTAINING A CENTRALISED SERVER FOR THE ASIA REGION, WHICH SERVES AS A COMMON EMAIL AND COMMUNICATIONS PLATFORM. COST HAS BE EN ALLOCATED AMONG JM ASIA ENTITIES PROPORTIONATELY AND SUCH AN ARRA NGEMENT WAS MADE FOR THE PURPOSE OF BEING COST EFFECTIVE AND FOR E FFICIENCY OF BUSINESS OF ALL GROUP ENTITIES. IT HAS BEEN STATED THAT W ITHOUT ANY PAYMENT ASSESSEE WOULD NOT BE ABLE TO ACCESS THE CENTRA LISED SYSTEM SET UP FOR THE ASIA REGION WHICH IS REQUIRED FOR COMM ON E-MAIL AND COMMUNICATING PLATFORM FOR GROUP ENTITIES AND EVEN IF A N INDEPENDENT ENTITIES WAS APPOINTED, THEN ALSO SIGNIFICANT COST WOULD HAVE BEEN INCURRED. LOOKING TO THE FACTS AND THE NATURE OF PAYME NT, WE HOLD THAT SERVER CHARGES IS DEFINITELY INEXTRICABLY LINKED WITH THE BUSINESS ACTIVITIES AND IS AN OPERATING COST OF THE ASSESSEE, THE REFORE, NO 67 SEPARATE BENCHMARKING IS REQUIRED AS THE SAME WILL B E AGGREGATED UNDER TNMM. ACCORDINGLY, NO SEPARATE ADDITION OR ADJ USTMENT IS WARRANTED. THUS, APPEAL FOR THE ASSESSMENT YEAR 2008-0 9 AND 2009- 10 ARE TREATED AS PARTLY ALLOWED. 49. IN THE RESULT APPEALS OF THE ASSESSEE AS WELL A S OF THE DEPARTMENT FOR A.Y. 2007-08 ARE PARTLY ALLOWED FOR STATISTICAL PUR POSES AND APPEALS FOR THE ASSESSMENT YEAR 2008-09 AND 2009-10 A RE TREATED AS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 16 TH MARCH, 2018. SD/- SD/- (OP KANT) (AMIT SHUKLA) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED: 16/03/2018 VEENA COPY FORWARDED TO 1. APPLICANT 2. RESPONDENT 3. CIT 4. CIT (A) 5. DR:ITAT ASSISTANT REGISTRAR ITAT, NEW DELHI