M/s. Spicer India Limited, Pune V. Assistant Commissioner of Income-tax,

ITA 251/PUN/2014

• Counselvise Citation: [2017] 128 COUNSELVISE.COM (IT) 7152 (ITAT-PUNE)
• Duration Of Justice: 3 year(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 10-02-2017
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 28-06-2016
• Assessment Year: 2009-2010
• Appeal Filed On: 10-02-2014
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Keywords: Business income; Transfer pricing; Business expenditure; Rectification of order; International transaction; Difference of opinion; Commercial expediency; Revised return; Change of opinion
• Section: 92C; 143(3); 234B; 37(1); 10B; 154

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH A , PUNE , , BEFORE MS. SUSHMA CHOWLA, JM AND SHRI ANIL CHATURVEDI, AM . / ITA NO. 2 51 /P U N/20 14 / ASSESSMENT YEAR : 20 0 9 - 1 0 M/S. SPICER INDIA LIMITED, 29 MILESTONE, PUNE NASHIK HIGHWAY, VILLAGE KURULI, TAL. KHED., PUNE 410501 . / APPELLANT PAN: AA ECS1869C VS. THE ASST . COMMISSIONER OF INCOME TAX, CIRCLE 10 , PUNE . / RESPONDENT . / ITA NO. 1327 /P U N/20 14 / ASSESSMENT YEAR : 20 0 9 - 1 0 THE ASST. COMMISSIONER OF INCOME TAX, CIRCLE 10, PUNE . / APPELLANT VS. M/S. SPICER INDIA L IMITED, 29 MILESTONE, PUNE NASHIK HIGHWAY, VILLAGE KURULI, TAL. KHED., PUNE 410501 . / RESPONDENT PAN: AAECS1869C ITA NO. 251 /P U N/20 14 ITA NO.1327/P U N/2014 CO NO.06/P U N/2015 2 . / CO NO. 06 /P U N/201 5 / ASSESSMENT YEAR : 20 09 - 10 (OUT OF ITA NO.1327/PN/2014) M/S. SPICE R INDIA LIMITED, 29 MILESTONE, PUNE NASHIK HIGHWAY, VILLAGE KURULI, TAL. KHED., PUNE 410501 / CROSS OBJECT OR PAN: AAECS1869C VS. THE ASST. COMMISSIONER OF INCOME TAX, CIRCLE 10, PUNE . / RESPONDENT ASSESSEE BY : S /S HRI M.P. LOHIA AND RAJENDRA AGIWAL REVENUE BY : SHRI RAJIV KUMAR, CIT / DATE OF HEARING : 20 . 12 . 201 6 / DATE OF PRONOUNCEMENT: 10 . 0 2 .201 7 / ORDER PER SUSHMA CHOWLA, J M : THE APPEAL FILED BY THE AS SESSEE IS AGAINST ORDER OF A CIT , CIRCLE - 10, P UNE , DATED 3 1 . 1 2 .20 13 RELATING TO ASSESSMENT YEAR 20 0 9 - 1 0 PASSED UNDER SECTION 143(3) R.W.S. 144C(13) OF THE INCOME - TAX ACT , 1961 (IN SHORT THE ACT ) . THE APPEAL FILED BY THE REVENUE IS AGAINST THE ORDER OF AC IT, CIRCLE - 10, PUNE DATED 31.12.2013 UNDER RULE 13 OF THE INCOME - TAX (DRP) RULES, 2009. THE ASSESSEE ALSO FILED CROSS OBJECTIONS AGAINST THE APPEAL OF REVENUE. 2 . T HE APPEALS FILED BY THE ASSESSEE AND THE REVENUE AND CROSS OBJECTIONS FILED BY THE ASSESSE E WERE HEARD TOGETHER AND ARE BEING DISPOSED OF BY THIS CONSOLIDATED ORDER FOR THE SAKE OF CONVENIENCE. ITA NO. 251 /P U N/20 14 ITA NO.1327/P U N/2014 CO NO.06/P U N/2015 3 3. THE ASSESSEE IN ITA NO.2 51 /PN/20 14 HAS FILED MODIFIED GROUNDS OF APPEAL , WHICH READ AS UNDER : - GROUNDS OF APPEAL PERTAINING TO TRANSFER PRICING ADJU STMENT: 1 . INAPPROPRIATELY MAKING TRANSFER PRICING ADJUSTMENT EVEN THOUGH THE PRICING OF ALL INTERNATIONAL TRANSACTIONS OF THE APPELLANT WAS AT ARM'S LENGTH ERRED IN MAKING CONFIRMING THE TRANSFER PRICING ADJUSTMENT TO THE INTERNATIONAL TRANSACTIONS OF TH E APPELLANT PERTAINING TO PURCHASE OF MACHINED COMPONENTS, SALE OF MACHINED COMPONENTS AND PAYMENT OF ROYALTY TO ASSOCIATED ENTERPRISES ( ' AES') AND CONCLUDING THAT THE VALUE OF THE INTERNATIONAL TRANSACTIONS ARE NOT AT ARM'S LENGTH 2. INAPPROPRIATE NON A CCEPTANCE OF THE APPROACH AND ANALYSIS PROVIDED BY THE APPELLANT IN ITS TRANSFER PRICING STUDY REPORT ERRED BY NOT ACCEPTING THE APPROACH AND ANALYSIS UNDERTAKEN PROVIDED BY THE APPELLANT IN ITS TRANSFER PRICING STUDY REPORT FOR BENCHMARKING ITS INTERNAT IONAL TRANSACTIONS. 3. INAPPROPRIATELY CONSIDERING SHANTHI GEARS LIMITED AND INTERNATIONAL COMBUSTION (INDIA) LIMITED AS COMPARABLE FOR AY 2009 - 10 ERRED BY CONCLUDING THAT SHANTHI GEARS LIMITED AND INTERNATIONAL COMBUSTION (INDIA) LIMITED ARE COMPARABL E TO THE APPELLANT FOR ARRIVING AT THE ARM'S LENGTH PRICE IN RELATION TO THE INTERNATIONAL TRANSACTIONS 4. INAPPROPRIATE NON CONSIDERATION OF THE CORRECT OPERATING PROFIT MARGINS OF THE APPELLANT FOR AY 2009 - 10 ERRED BY NOT CONSIDERING THE CORRECT OPERA TING PROFIT MARGINS OF THE APPELLANT FOR AY 2009 - 10 COMPUTED BASED ON THE AUDITED FINANCIAL STATEMENTS OF THE AP PELLANT FOR AY 2009 - 10. GROUNDS OF APPEAL PERTAINING TO CORPORATE TAX ADJUSTMENT: 5. INAPPROPRIATE DISALLOWANCE OF MANAGEMENT FEES AMOUNTING TO RS . 8,11,62 , 596/ - PAID BY THE APPELLANT ERRED BY DISALLOWING THE MANAGEMENT FEES AMOUNTING TO RS . 8,11,62,596/ - PAID BY THE APPELLANT UNDER SECTION 37(1) OF THE ACT THEREBY IGNORING THE FACT THAT APPELLANT HAD INCURRED THE EXPENDITURE FOR AVAILING VARIO US SERVICES WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF ITS BUSINESS. 6. INAPPROPRIATELY CONSIDERING INCOME TAX REFUND WHILE RAISING DEMAND ON THE APPELLANT FOR AY 2009 - 10 ERRED ON THE FACTS AND IN CIRCUMSTANCES OF THE CASE BY CONSIDERING INCOME TAX REFUN D AND THEREBY INTEREST UNDER SECTION 234D OF THE ACT WHILE RAISING DEMAND ON THE APPELLANT AND THEREFORE IGNORING THE FACT THAT NO SUCH REFUND HAD ACTUALLY BEEN GRANTED TO THE APPELLANT. OTHER GROUNDS O(APPEAL: 7. ERRONEOUS LEVY OF INTEREST UNDER SECTIO N 234B OF THE ACT ITA NO. 251 /P U N/20 14 ITA NO.1327/P U N/2014 CO NO.06/P U N/2015 4 WITHOUT PREJUDICE TO THE ABOVE GROUNDS OF APPEAL, EVEN IF THE TRANSFER PRICING ADJUSTMENT IS SUSTAINED, THE LEARNED AO HAS ERRED IN LEVYING INTEREST UNDER SECTION 234B OF THE ACT, WITHOUT CONSIDERING THE FACT THAT THE ADDITION ON ACCOUN T OF TRANSFER PRICING ADJUSTMENT IS DUE TO DIFFERENCE OF OPINION AND AS AT THE DUE DATE OF PAYMENT OF ADVANCE TAX BY NO MEANS THE APPELLANT COULD HAVE ESTIMATED SUCH ADJUSTMENTS AND CONSEQUENTIAL TAX ON SUCH ADJUSTMENT. 8. ERRONEOUS LEVY OF PENALTY UNDER SECTION 271(1)(C) OF THE ACT WITHOUT PREJUDICE TO THE ABOVE GROUNDS OF APPEAL EVEN IF THE TRANSFER PRICING ADJUSTMENT IS SUSTAINED, THE LEARNED AO HAS ERRED IN PROPOSING TO LEVY PENALTY UNDER SECTION 271(1)(C) OF THE ACT, WITHOUT CONSIDERING THE FACT TH AT ADJUSTMENT TO TRANSFER PRICE IS JUST ON ACCOUNT OF DIFFERENCE OF OPINION OF OPINION WHICH HAS CONSEQUENTLY RESULTED IN AN ADJUSTMENT TO INCOME. 4 . THE GROUNDS OF APPEAL NO.1 AND 2 RAISED BY THE ASSESSEE ARE GENERAL IN NATURE, HENCE THE SAME ARE DISMISS ED. 5 . BY WAY OF GROUND OF APPEAL NO.3, THE ASSESSEE IS AGGRIEVED BY THE ADDITION ON ACCOUNT OF ARM'S LENGTH PRICE IN RELATION TO INTERNATIONAL TRANSACTIONS. THE CONTENTION OF ASSESSEE IN THIS REGARD IS THAT SHANTHI GEARS LIMITED AND INTERNATIONAL COMBU STION (INDIA) LTD. ARE FUNCTIONALLY NOT COMPARABLE TO THE ASSESSEE, HENCE THE SAME SHOULD NOT BE PICKED UP FOR BENCHMARKING THE INTERNATIONAL TRANSACTIONS. 6 . BRIEFLY, IN THE FACTS OF THE CASE, THE ASSESSEE IS JOINT VENTURE COMPANY BETWEEN THE ANAND AUT OMOTIVE SYSTEMS , HAVING EQUITY OF 24.1% AND FOREIGN COMPANY DANA CORPORATION, USA , HAVING EQUITY OF 75.90%. THE ASSESSEE WAS PRIMARILY ENGAGED IN THE BUSINESS OF MANUFACTURE AND SALE OF DRIVE TRAIN COMPONENTS NAMELY PROPELLER SHAFTS, UNIVERSAL JOINTS, AXL ES AND COMPONENTS THEREOF , WHICH CONSTITUTE HEART OF THE TRANSMISSION SYSTEM. THE ASSESSEE HAD SET UP ITS UNIT TO MANUFACTURE COMPONENTS OF PROPELLER SHAFTS AT JODALLI, ASSEMBLING OF PROPELLER SHAFTS AT HOSUR AND SATARA, MANUFACTURING OF AXLES AT CHAKAN A ND DRIVESHAFT ASSEMBLY PLANT AT PANTNAGAR. THE ASSESSEE HAD FILED ITA NO. 251 /P U N/20 14 ITA NO.1327/P U N/2014 CO NO.06/P U N/2015 5 REVISED RETURN OF INCOME DECLARING TOTAL INCOME OF RS. 9,56,666/ - . DURI NG THE YEAR UNDER CONSIDERATION, THE ASSESSEE HAD ENTERED INTO INTERNATIONAL TRANSACTIONS WITH ITS ASSOCIATED ENTERPRI SES AND HENCE, THE ASSESSING OFFICER MADE REFERENCE TO THE TRANSFER PRICING OFFICER (IN SHORT THE TPO ) FOR BENCHMARKING THE INTERNATIONAL TRANSACTIONS. THE ASSESSEE HAD APPLIED MODIFIED C P M METHOD IN ORDER TO BENCHMARK ITS INTERNATIONAL TRANSACTIONS OF PURCHASE OF MACHINED COMPONENTS OF RS. 29,32,27,007/ - , SALE OF MACHINED COMPONENTS OF RS.118,18,97,136/ - , PAYMENT OF ROYALTY OF RS.8,11,62,596/ - AND REIMBURSEMENT OF FREIGHT / SORTING CHARGES OF RS.1,29,23,310/ - . THE TPO REJECTED THE APPROACH ADOPTED BY TH E ASSESSEE FOR BENCHMARKING ARM'S LENGTH PRICE OF ITS INTERNATIONAL TRANSACTIONS AND HE CONSIDERED TN M M METHOD AS MOST APPROPRIATE METHOD. HE FINALLY SELECTED TEN COMPANIES, WHICH ARE LISTED IN PARA 12.15 OF THE ORDER OF TPO. THE COMPANIES AT SR.NO.1 TO 6 WERE AS PICKED UP BY THE ASSESSEE AND SR. NO.7 TO 10 WERE PICKED UP BY THE TPO. THE PLI ADOPTED WAS OP/OR AND THE ARITHMETIC MEAN OF COMPARABLES WORKED OUT TO 12.39%. THE TPO ADOPTED THE OP/OR OF ASSESSEE INITIALLY AT 3. 30 % AND THEN LATER AT 3.25%. 7 . THE ASSESSEE BY WAY OF GROUND OF APPEAL NO.3 IS IN APPEAL AGAINST INCLUSION OF SHANT H I GEARS LTD. A ND INTERNATIONAL COMBUSTION (INDIA) LTD. 8 . THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE POINTED OUT THAT THE ACTIVITY UNDERTAKEN BY SHANTHI GEARS LTD. WAS THOUGH MANUFACTURE OF GEAR AND GEAR BOXES BUT THE SAME WAS NOT IN AUTOMOTIVE INDUSTRY. THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE POINTED OUT THAT ON THE OTHER HAND, THE ACTIVITY UNDERTAKEN BY THE ASSESSEE WAS FOR THE MANUFACTUR E OF AXLE S, PROPELLER SHAFTS , ETC. FOR AUTOMOTIVE SECTOR. THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE IN THIS REGARD POINTED OUT THAT INCLUSION OF TWO ITA NO. 251 /P U N/20 14 ITA NO.1327/P U N/2014 CO NO.06/P U N/2015 6 CON CERNS M/S RAUNAQ AUTOMOTIVE COMPONENTS LTD. AND M/S RSB TRANSMISSIONS INDIA LTD . WAS REJEC TED BY THE TPO, WHEREAS DURING THE DRP PROCEEDINGS OF RECTIFICATION, THE ASSESSEE POINTED OUT THAT THESE NEED TO BE INCLUDED. THOUGH THE DRP DID NOT DIRECT THEIR INCLUSION IN THE ORIGINAL DIRECTIONS BUT IN THE RECTIFIED DIRECTIONS UNDER SECTION 13 OF DRP RULES, DIRECTED THAT THE TWO CONCERNS MAY BE INCLUDED. IN RESPECT OF SECOND CONCERN INTERNATIONAL COMBUSTION (INDIA) LTD. , THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE POINTED OUT THAT THEY WERE ENGAGED IN MINING INDUSTRIES. HE REFERRED TO THE DOCUMENTS PLACED AT PAGES 95 TO 102 OF THE PAPER BOOK AND POINTED OUT THAT SEGMENTAL REPORT WAS GIVEN IN RESPECT OF MINING INDUSTRY AND THE MANUFACTURE OF GEAR BOXES AND GEARED MOTORS. HE STRESSED THAT SEGMENTAL DETAILS WERE AVAILABLE, THEN ONLY THE RESUL TS OF MANUFACTURE OF GEAR AND GEARED BOXES SHOULD BE TAKEN. OUR ATTENTION WAS DRAWN TO THE WORKING OF OP/OC OF THE SAID CONCERN AT PAGE 100 OF THE PAPER BOOK, WHEREIN IT WORKED OUT AT 0.17% . HE STRESSED THAT SINCE THE SAID CONCERN WAS NOT ENGAGED IN AUTO MOTIVE INDUSTRY, THE RESULTS OF SAID CONCERN INDUSTRIAL COMBUSTION (INDIA) LTD. SHOULD NOT BE ADOPTED FOR BENCHMARKING INTERNATIONAL TRANSACTIONS OF THE ASSESSEE AND IN CASE, THE SAME IS TO BE INCLUDED, THEN AT BEST THE SAME IS TO BE TAKEN AT 0.17% . 9 . T HE LEARNED DEPARTMENTAL REPRESENTATIVE FOR THE REVENUE IN THIS REGARD PLACED RELIANCE ON THE ORDERS OF AUTHORITIES BELOW. 1 0 . WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE RECORD. THE ASSESSEE HAD ENTERED INTO VARIOUS INTERNATIONAL TRANSACTIONS WIT H ITS ASSOCIATED ENTERPRISES. THE ASSESSEE WAS ENGAGED IN THE BUSINESS OF MANUFACTURE AND SALE OF DRIVE TRAIN COMPONENTS NAMELY PROPELLER SHAFTS, UNIVERSAL JOINTS, AXLES AND COMPONENTS THEREOF WHICH CONSTITUTE HEART OF THE TRANSMISSION SYSTEM . THE ITA NO. 251 /P U N/20 14 ITA NO.1327/P U N/2014 CO NO.06/P U N/2015 7 ASSESS EE HAD SET UP UNITS TO MANUFACTURE DIFFERENT COMPONENTS AT DIFFERENT PLACES. THE ASSESSEE HAD ENTERED INTO INTERNATIONAL TRANSACTIONS AND HAD APPLIED MODIFIED CPM METHOD IN ORDER TO BENCHMARK ITS INTERNATIONAL TRANSACTIONS. HOWEVER, THE TPO REJECTED THE METHOD ADOPTED BY ASSESSEE AND APPLIED TNMM METHOD TO BENCHMARK THE INTERNATIONAL TRANSACTIONS OF ASSESSEE WITH ITS ASSOCIATED ENTERPRISES. THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE DURING THE COURSE OF HEARING ADMITTED THAT THE ASSESSEE WAS NOT CHALLENGING T HE APPLICATION OF TNMM METHOD . ON FINAL ANALYSIS, THE TPO SELECTED TEN COMPANIES AS COMPARABLES AS LISTED BELOW: - SR NO NAME OF THE COMPANY OP/OR FOR FY 2008 - 09 AS PER THE TP ORDER 1 TALBORS ENGG. LTD. 6.55% 2 GKN DRIVELINE LTD. 8.92% 3 BHARAT GEARS LTD. 3.72% 4 HI TECH GEARS LTD. 7.04% 5 JMT AUTO LTD. 13.44% 6 MAHINDRA SONA LTD. 14.10% 7 GUJRAT AUTOMOTIVE GEARS LTD. 15.97% 8 INTERNATIONAL COMBUSTION (INDIA) LTD. 14.13% 9 MAHINDRA GEARS & TRANSMISSION PVT. LTD. 9.84% 10 SHANTHI GEARS LTD. 30.23% ARITHMETIC MEAN 12.39% 1 1 . THE CONCERNS AT SR.NOS.1 TO 6 WERE ALSO SELECTED BY THE ASSESSEE DURING ITS TP ANALYSIS . FURTHER, THE ASSESSEE ADMITTEDLY, HAS NO OBJECTION TO SELECTION OF CONCERNS AT SR.NO.7 I.E. GUJARAT AUTOMOTIVE GEARS LTD. AND AT SR.NO.9 I.E. MAHINDRA GEARS & TRANSMISSION PVT. LTD. THE ASSESSEE BY WAY OF GROUND OF APPEAL NO.3 IS IN APPEAL AGAINST SELECTION OF TWO CONCERNS I.E. INTERNATIONAL COMBUSTION (INDIA) LTD. AND SHANTHI GEARS LTD. THE PLEA OF ASSESSEE IS THAT T HE SAID TWO CONCERNS ARE ENGAGED IN ACTIVITY WHICH IS AT VARIANCE WITH THE ACTIVITY UNDERTAKEN BY THE ASSESSEE AND HENCE, THE SAID CONCERNS ARE FUNCTIONALLY NOT COMPARABLE. THE ASSESSEE HAS PLACED ON RECORD THE WEBSITE EXTRACT OF THE CONCERN SHANTHI GEARS LTD. AT PAGE 684 OF THE PAPER BOOK. THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE POINTS OUT THAT THE SAID CONCERN WAS ITA NO. 251 /P U N/20 14 ITA NO.1327/P U N/2014 CO NO.06/P U N/2015 8 ENGAGED IN THE MANUFACTURE AND SALE OF GEARS AND GEARED BOXES WHICH ARE USED IN TEXTILE MACHINERY, POWER SECTOR I.E. COAL MILL S, PASSENGER LIFTS, CRANES, ETC. THE PRODUCTS MANUFACTURED BY SHANTHI GEARS LTD. WERE NOT USED IN AUTOMOTIVE COMPONENTS INDUSTRIES. WHILE ADMINISTERING THE TP INDIAN REGULATIONS, IT IS INCUMBENT UPON THE TPO TO SELECT THE CONCERNS WHICH ARE FUNCTIONALLY SIMILAR AND APPLY THE FINANCIALS OF SUCH CONCERNS IN ORDER TO BENCHMARK THE ARM'S LENGTH PRICE OF INTERNATIONAL TRANSACTIONS UNDERTAKEN BY THE ASSESSEE. TH E OECD GUIDELINES ALSO EMPHASIZE THE NEED TO APPLY THE TEST OF FUNCTIONAL ANALYSIS IN ORDER TO BENCH MARK THE INTERNATIONAL TRANSACTIONS. THE BARE PERUSAL OF WEBSITE DETAILS OF THE SAID CONCERN WHICH LIST OUT THE ACTIVITIES UNDERTAKEN BY IT AND THE RANGE OF APPLICATIONS OF ITEMS MANUFACTURED BY IT , CLEARLY SHOWS THAT THE ITEMS MANUFACTURED BY SHANTHI GEA RS LTD. ARE NOT UTILIZED FOR AUTOMOTIVE INDUSTRIES . AS REFERRED TO BY US IN THE PARAS HEREINABOVE, THE ASSESSEE IS ENGAGED IN THE MANUFACTURE AND SALE OF DRIVE TRAIN COMPONENTS, WHICH CONSTITUTE THE HEART OF TRANSMISS ION SYSTEM OF THE AUTOMOBILES AND HAS NO APPLICATION IN THE FIELDS IN WHICH THE ITEMS MANUFACTURED BY SHANTHI GEARS LTD. ARE APPLIED. ACCORDINGLY, WE FIND NO MERIT IN THE ORDER OF TPO IN INCLUDING THE SAID CONCERN SHANTHI GEARS LTD. AS COMPARABLE . WE DIRECT THE TPO / ASSESSING OFFICER TO EXC LUDE THE SAME AND RE - COMPUTE THE ARITHMETIC MEAN OF FINALLY SELECTED COMPARABLES. 1 2 . NOW, COMING TO NEXT CONCERN I.E. INTERNATIONAL COMBUSTION (INDIA) LTD. THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE IN THIS REGARD REFERRED AGAIN TO THE WEBSIT E EXTRACT OF THE SAID CONCERN WHICH IS PLACED AT PAGES 685 TO 688 OF THE PAPER BOOK AND POINTED OUT THAT THE SAID CONCERN IS ENGAGED IN THE MANUFACTURE AND SALE OF PREMIUM QUALITY EQUIPMENTS AND HAS THREE DIVISIONS I.E. HEAVY ENGINEERING, POLYMER AND BAUER . THE SAID CONCERN WAS ALSO ENGAGED IN CAPITAL GOODS MANUFACTURING SEGMENT. THE LEARNED AUTHORIZED REPRESENTATIVE ITA NO. 251 /P U N/20 14 ITA NO.1327/P U N/2014 CO NO.06/P U N/2015 9 FOR THE ASSESSEE FURTHER POINTED OUT THAT IT WAS NOT ENGAGED IN THE BUSINESS OF MANUFACTURE AND SALE OF AUTO COMPONENTS. THE PERUSAL OF DET AILS FILED BY THE ASSESSEE AT PAGE 685 OF THE PAPER BOOK REFLECTS THE DECLARATION BY THE SAID CONCERN THAT IT HAD STARTED ITS MANUFACTURING ACTIVITIES IN 1961 AND PRESENTLY HAD THREE BUSINESS DIVISIONS I.E. HEAVY ENGINEERING, BAUER AND PROJECT PLANT SYSTEM S. IT HAS FURTHER STATED THAT THE COMPANY SERVES MAJOR CORE INDUSTRIES WITH SPECIALIZED RANGE OF PRODUCTS WHICH INCLUDE VIBRATING SCREENS AND FEEDERS, CANE CRUSHERS, BULK MATERIAL HANDLING EQUIPMENT, MINDING HAULAGES, RAYMOND GRINDING MILLS, AIR CLASSIFIE RS AND FLASH DRYING SYSTEMS AND GEARED MOTORS AND GEAR BOXES. IN THIS REGARD, THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE POINTED OUT THAT THOUGH THE SAID CONCERN WAS IN MANUFACTURE OF GEAR AND GEARED BOXES BUT THE SAME WAS NOT IN THE AUTOMOTIV E INDUSTRIES. THE WEBSITE DETAILS OF THE SAID CONCERN AT PAGE 686 REFLECTS THAT THE GEARED BOXES AND GEAR MOTORS ARE APPLIED FOR BULK MATERIAL HANDLING EQUIPMENT, CRUSHING AND GRINDING MILLS AND GEARED MOTORS. THOUGH IT IS USED IN SEVERAL INDUSTRIES AS L ISTED THEREIN BUT IS NOT USED FOR MANUFACTURE OF AUTOMOTIVE COMPONENTS. APPLYING THE SAME PRINCIPLE AS IN THE CASE OF SHANTHI GEARS LTD., WE FIND THAT THE CONCERN INTERNATIONAL COMBUSTION (INDIA) LTD. IS NOT FUNCTIONALLY COMPARABLE TO THE ASSESSEE AND HEN CE, THE SAME IS TO BE EXCLUDED FROM THE FINAL LIST OF COMPARABLES. WE HOLD SO. THE MODIFIED GROUND OF APPEAL NO.3 RAISED BY THE ASSESSEE IS THUS, ALLOWED. 1 3 . THE ISSUE IN GROUND OF APPEAL NO.4 IS AGAINST WORKING OF OPERATING PROFIT MARGINS OF THE ASSES SEE. SINCE THE ASSESSEE HAD APPLIED MODIFIED CPM AS THE MOST APPROPRIATE METHOD TO BENCHMARK ITS INTERNATIONAL TRANSACTION, WHILE APPLYING THE TNMM METHOD, THE TPO WORKED OUT THE PLI OF ASSESSEE AS UNDER: - ITA NO. 251 /P U N/20 14 ITA NO.1327/P U N/2014 CO NO.06/P U N/2015 10 PARTICULARS AMOUNT IN INR CRS NET SALES A 52 8.37 OI B 87.31 OR C=A+B 615.68 COGS MFG D 547.79 OTHER EXPENSES E 47.88 COGS WITH OTHER EXPENSES F=D+E 595.67 NET OPERATING MARGIN G=F - CIT(A) 20.01 NET OPERATING MARGIN % TO SALES H=G/C 3.25% 1 4 . THE ASSESSEE OBJECTED TO THE SAID APPROACH AND POI NTED OUT THAT AT ENTITY LEVEL, IT HAD EARNED 3.66% , A S PER AUDITED SEGMENTAL FINANCIALS WHICH WAS AS UNDER: - PARTICULARS REFERENCE AMOUNT (RS CRORES) / % NET SALES A 528.38 OTHER INCOME B 8.52 TOTAL INCOME C=A+B 536.90 LESS: NON - OPERATING INCOME INTEREST RECEIVED D 3.02 GAIN ON SALE OF FIXED ASSETS E 0.01 OPERATING INCOME F=C - D - E 533.87 TOTAL EXPENSES G 514.74 LESS: NON - OPERATING EXPENSES INTEREST PAID H 0.40 OPERATING EXPENSES I = G - H 514.34 OPERATING PROFITS J = F - I 19.53 OPERATING PRO FIT / OPERATING REVENUE K=J/F*100 3.66% 1 5 . THE DISPUTE RESOLUTION PANEL (IN SHORT THE DRP ) DID NOT COMMENT ON THE REPORT OF TPO WHILE DISPOSING THE OBJECTIONS RAISED BY THE ASSESSEE. THEREAFTER, THE ASSESSEE FILED RECTIFICATION APPLICATION DATED 03. 02.2015. THE DRP IN THE RECTIFIED DIRECTIONS DATED 14.02.2015 DIRECTED THE ASSESSING OFFICER TO EXAMINE THE WORKING OF OPERATING PROFIT MARGINS FURNISHED BY THE ASSESSEE AND RE - WORK THE NET OPERATING PROFIT MARGIN CONSIDERING DRAFT SAFE HARBOUR RULES. CO NSEQUENT THERETO, THE TPO FILED RECTIFICATION APPLICATION DATED 20.03.2014 BEFORE THE DRP MENTIONING THE FACT THAT THE ASSESSEE HAD REQUESTED ONLY TO CONSIDER THE CORRECT OPERATING PROFIT MARGIN AND NOT REQUESTED TO CONSIDER FOREIGN EXCHANGE GAIN / LOSS AS NON - OPERATING IN NATURE. CONSIDERING THE SAME, THE DRP VIDE ITS RECTIFIED ITA NO. 251 /P U N/20 14 ITA NO.1327/P U N/2014 CO NO.06/P U N/2015 11 DIRECTIONS DATED 22.05.2014 DISPOSED OF THE RECTIFICATION APPLICATION FILED BY THE TPO MENTIONING THAT CONTENTION OF THE TPO IS CORRECT AND RECTIFIED DIRECTIONS ARE BEYOND JURISDIC TION AS ITS RECTIFIED DIRECTIONS RESULT IN DECIDING THE ISSUE WHICH WAS NOT RAISED BEFORE IT. THE ASSESSEE BY WAY OF GROUND OF APPEAL NO.4 HAS AGITATED THE SAID ISSUE AND REQUESTED FOR DIRECTION TO THE ASSESSING OFFICER TO CONSIDER THE CORRECT OPERATING M ARGINS OF THE ASSESSEE ON OPERATING REVENUE AT 3.66%. THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE POINTED OUT THAT THE TPO WHILE WORKING OUT NET OPERATING MARGINS HAD BY AN ERROR ADOPTED THE OTHER INCOME AT RS.87.31 CRORES AS AGAINST CORRECT FI GURE OF RS.8.52 CRORES. THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE POINTED OUT THAT UNDER RULE 13 OF DRP RULES, ANY MISTAKE APPARENT FROM THE RECORD CAN BE RECTIFIED BY THE DRP AND THERE WAS NO MERIT IN THE RE - RECTIFIED ORDER PASSED BY THE DRP ACCEPTING THE CONTENTION OF TPO THAT NO RECTIFICATION PROCEEDINGS CAN BE UNDERTAKEN BY THE DRP. 1 6 . THE LEARNED DEPARTMENTAL REPRESENTATIVE FOR THE REVENUE ON THE OTHER HAND, FAIRLY ADMITTED THAT IN CASE THERE IS CALCULATION ERROR, THEN THE SAME CAN BE RECTIFIED. 1 7 . WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE RECORD. THE ISSUE WHICH ARISES VIDE PRESENT GROUND OF APPEAL IS AGAINST CALCULATION OF OPERATING MARGINS. THE TPO HAD WORKED OUT THE NET OPERATING MARGINS PERCENTAGE TO SALE AT 3.25% BY ADOPTING THE OTHER INCOME AT 87.31%. HOWEVER, THE PLEA OF ASSESSEE BEFORE US IS THAT THE OTHER INCOME WAS ONLY TO THE EXTENT OF RS.8.52 CRORES AND OPERATING PROFIT / OPERATING REVENUE THUS, WORKS OUT TO 3.66%. WE FIND MERIT IN THE PLEA OF ASSESSEE. THE DRP HAD NOT IN THE INITIAL PROCEEDINGS COMMENTED ON THE CLAIM OF ASSESSEE, HOWEVER, ON A LATER DATE PASSED RECTIFICATION ORDER DATED 14.02.2014 WHICH IS PLACED AT PAGE 400 OF THE PAPER ITA NO. 251 /P U N/20 14 ITA NO.1327/P U N/2014 CO NO.06/P U N/2015 12 BOOK. THEREAFTER, THE TPO MOVED AN APPLICATION BEFORE THE DRP THAT NO RECTIFICATION IS POSSIBLE BECAUSE OF SAFETY HARBOUR RULES, THEN CONSEQUENT RE - RECTIFICATION ORDER WAS PASSED BY THE DRP ON 21.05.2014 WHICH IS PLACED AT PAGE 420 OF THE PAPER BOOK. THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE POINTED OUT THAT T HE ASSESSING OFFICER IN VIEW OF THE EARLIER ORDER OF RECTIFICATION PASSED BY THE DRP ON 14.02.2014 HAD PASSED RECTIFICATION ORDER UNDER SECTION 154 READ WITH RULE 13 OF THE INCOME - TAX (DRP) RULES , 2009 AND DETERMINED THE INCOME OF THE ASSESSEE AND ALSO WOR KED OUT THE REFUND DUE TO THE ASSESSEE. THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE POINTED OUT THAT REFUND OF RS.1.37 CRORES HAS NOT BEEN ISSUED TO THE ASSESSEE TILL DATE. IN VIEW OF OUR DECISION IN HOLDING THAT THE RE IS A MISTAKE IN WORKING OUT THE PLI OF ASSESSEE COMPANY, WE DIRECT THE ASSESSING OFFICER TO ADOPT THE FIGURE AS ADOPTED IN ORDER PASSED UNDER SECTION 154 READ WITH RULE 13 OF THE DRP RULES DATED 26.09.2014 . THE ASSESSING OFFICER IS DIRECTED TO VERIFY THE SAID CLAIM OF ASSESSEE A ND DETERMINE THE REFUND DUE TO THE ASSESSEE ALONG WITH INTEREST AS PER THE ACT. THE GROUND OF APPEAL NO.4 RAISED BY THE ASSESSEE IS THUS, ALLOWED. 1 8 . NOW, COMING TO THE ISSUE IN GROUND OF APPEAL NO.5 I.E. CORPORATE ISSUE OF DISALLOWANCE OF MANAGEMENT FE ES. THE ASSESSING OFFICER IN THE DRAFT ASSESSMENT ORDER PASSED UNDER SECTION 143(3) R.W.S. 144C(1) OF THE ACT NOTED THAT THE ASSESSEE HAD PAID MANAGEMENT FEES OF RS. 8.11 CRORES TO AIPL . 19 . BRIEFLY, THE FACTS RELATING TO THE ISSUE ARE THAT THE CORPORAT E SERVICES AGREEMENT DATED 14.12.2004 WAS ENTERED INTO BETWEEN THE ASSESSEE AND AIPL WHICH WAS ENGAGED IN PROVIDING PROFESSIONAL AND MANAGEMENT SERVICES. THE CLAIM OF ASSESSEE IS THAT UNDER THE SAID AGREEMENT, IT AVAILED VARIOUS SERVICES WHOLLY AND EXCLUS IVELY FOR THE PURPOSE OF ITS BUSINESS IN RELATION TO HUMAN ITA NO. 251 /P U N/20 14 ITA NO.1327/P U N/2014 CO NO.06/P U N/2015 13 RESOURCES, DESIGNING AND IMPLEMENTING PERFORMANCE MANAGEMENT SYSTEM, EMPLOYEE RELATIONSHIP ADMINISTRATION AND TRAINING, MARKETING AND SALES, FINANCE, STRATEGIC PLANNING, GOVERNANCE IN TERMS OF CODE OF CONDUCT, AUDIT AND ADMINISTRATION, CORPORATE RELATIONS AND COMMUNICATION, SUPPORT AND ASSISTANCE IN OTHER CORPORATE AREAS. AIPL ALSO SUPPORTED THE ASSESSEE TO PREPARE STRATEGIC SALES PLANS AND FORECASTS BASED ON THE KNOWLEDGE OF LATEST DEVELOPMENT AND COMPETITION ALL OVER THE WORLD. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE ASSESSEE WAS ASKED TO FURNISH THE DETAILS AND EVIDENCE TO PROVE THE GENUINENESS OF PAYMENTS MADE TO AIPL. THE COPY OF CORPORATE SERVICES AGREEMENT BETWEEN THE PARTIES WAS F ILED AND LIST OF MANAGEMENT SERVICES AVAILED FROM THE SAID CONCERN WAS FILED ALONG WITH DECLARATION FROM AIPL FOR BUSINESS INCOME RECEIVED FROM ASSESSEE . THE ASSESSEE ALSO FILED DETAILED DOCUMENTATION I.E. EMAIL COMMUNICATIONS, MANUALS, ARTICLES, ETC. TO DEMONSTRATE THE BENEFITS RECEIVED BY A IPL IN VARIOUS AREAS BY MAKING PAYMENT OF MANAGEMENT FEES TO IT . THE SAID DOCUMENTS ARE PLACED AT PAGES 645 TO 651 OF PAPER BOOK . THE ASSESSING OFFICER HOWEVER, DISALLOWED THE MANAGEMENT FEES PAID TO AIPL ON THE SURM ISE THAT THE ASSESSEE HAD FAILED TO DEMONSTRATE THE BENEFITS TO IT BY MAKING PAYMENT OF MANAGEMENT FEES TO AIPL AND THEREFORE, THE SAME IS NOT ALLOWABLE TO THE ASSESSEE UNDER SECTION 37(1) OF THE ACT. THE ASSESSING OFFICER ALSO CHALLENGED THE COMMERCIAL E XIGENCY OF THE SAID TRANSACTION HOLDING THAT THE SAME WAS NOT BUSINESS EXPENDITURE. THE DRP UPHELD THE DECISION OF ASSESSING OFFICER MENTIONING THAT NONE OF THE ARGUMENTS WERE FRESH AND NEW. 2 0 . THE ASSESSEE IS IN APPEAL BEFORE US AGAINST THE FINAL ASS ESSMENT ORDER PASSED BY THE ASSESSING OFFICER APPLYING THE DIRECTIONS OF DRP. ITA NO. 251 /P U N/20 14 ITA NO.1327/P U N/2014 CO NO.06/P U N/2015 14 2 1 . THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE POINTED OUT THAT THE ASSESSEE WAS PAYING ROYALTY TO DANA CORPORATION @ 2.85% OF SALES EXCEPT THE SALES TO DANA CORPORA TION. FURTHER, THE ASSESSEE WAS ALSO PAYING MANAGEMENT FEES TO AIPL FOR RENDERING SEVERAL TYPES OF SERVICES BUT THE REMUNERATION WAS EQUIVALENT TO ROYALTY AMOUNT I.E. 2.85% OF SALES. THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE REFERRED TO THE COPY OF AGREEMENT DATED 14.12.2004 PLACED AT PAGE 462 OF THE PAPER BOOK AND POINTED OUT THAT IN EARLIER YEARS, THERE IS NO DISALLOWANCE. HE POINTED OUT THAT DURING THE LAST YEAR, ROYALTY WAS PAID TO THE TUNE OF RS.8.9 CRORES AND THIS YEAR ROYALTY WAS PAID AT RS. 8.60 CRORES. THE MANAGEMENT FEES TO AIPL LAST YEAR WAS PAID AT RS. 8.51 CRORES AND THIS YEAR AT RS.8.11 CRORES. THE ASSESSING OFFICER HAS DISALLOWED RS.8.11 CRORES OF MANAGEMENT FEES. OUR ATTENTION WAS DRAWN TO VARIOUS TERMS OF THE AGREEMENT FOR P ROVIDING SERVICES , WHICH ARE PLACED AT PAGES 463 TO 466 OF THE PAPER BOOK. HE FURTHER REFERRED TO THE DETAILED NOTE FILED OF SERVICES PROVIDED BY AIPL WHICH ARE PLACED AT PAGES 472 TO 478 OF THE PAPER BOOK. THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE A SSESSEE POINTED OUT THAT THE ASSESSEE HAS NOT CLAIMED ANY MAJOR EXPENSES AND THE EXPENDITURE OF MANAGEMENT FEES WAS NOT DISTURBED IN ANY OF THE YEARS. HE FURTHER POINTED OUT THAT THE MANAGEMENT FEES WAS TAXED IN THE HANDS OF RECIPIENT AND EVEN THE SERVIC E TAX WAS PAID BY THE RECIPIENT, ACKNOWLEDGEMENT OF WHICH IS PLACED AT PAGE 646 OF THE PAPER BOOK. HE FURTHER STRESSED THAT COMMERCIAL EXIGENCY OF ANY EXPENDITURE HAS TO BE SEEN FROM THE BUSINESSMAN POINT OF VIEW AND THE ASSESSING OFFICER CANNOT SIT IN JUD GMENT. RELIANCE WAS PLACED ON THE RATIO LAID DOWN BY THE HON BLE SUPREME COURT IN HERO CYCLES (P) LTD. VS CIT IN CIVIL APPEAL NO.514 OF 2008 , JUDGMENT DATED 05.11.2015 , COPY OF THE SAME IS PLACED AT PAGES 719 TO 716 OF THE PAPER BOOK AND ON THE DECISION O F T HE DELHI BENCH OF ITA NO. 251 /P U N/20 14 ITA NO.1327/P U N/2014 CO NO.06/P U N/2015 15 TRIBUNAL IN STUDY OVERSEAS GLOBAL PVT. LTD. IN ITA NO.5661/DEL/2011, ORD ER DATED 31.10.2014. 2 2 . THE LEARNED DEPARTMENTAL REPRESENTATIVE FOR THE REVENUE PLACED RELIANCE ON THE ORDER PASSED BY THE ASSESSING OFFICER AND POINTED OUT THAT PRINCIPLE OF RES - JUDICATA DO NOT APPLY TO THE INCOME TAX PROCEEDINGS. 2 3 . WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE RECORD. THE CORPORATE ISSUE RAISED BY THE ASSESSEE IS AGAINST THE DISALLOWANCE OF MANAGEMENT FEES PAID BY THE ASSESSEE. THE AS SESSEE HAD ENTERED INTO AN AGREEMENT WITH AIPL DATED 14.12.2004 . THE SAID CONCERN WAS ENGAGED IN PROVIDING PROFESSIONAL AND MANAGEMENT SERVICES TO THE ASSESSEE. THE ASSESSEE HAS ENLISTED BENEFITS RECEIVED BY IT BY MAKING THE SAID PAYMENT OF MANAGEMENT FE ES TO AIPL WHICH ARE AS UNDER: - HUMAN RESOURCE : AIPL CONSISTENTLY PROVIDED HUMAN RESOURCE SERVICES LIKE EDUCATION / TRAININGS SERVICES WITH THE INTENTION OF DEVELOPING A TALENT POOL, BY EDUCATING, TRAINING, AND DEVELOPING A CHAIN OF EMPLOYEES WHO ARE SLAT ED TO TAKE OVER THE BATON OF FUTURE LEADERSHIP. FURTHER, AIPL ADVISED SIPL BASED ON SURVEY OUTPUT LIKE COMPENSATION SURVEY, SUPPORTED IN FORMING HR POLICIES LIKE PERFORMANCE MANAGEMENT SYSTEM ETC., SUPPORTED ON SETTING - UP AND DEPLOYING THE OPERATING ENGINE ERING MODEL CONCEPT ACROSS S I PL. BUSINESS DEVELOPMENT, MARKETING AND DISTRIBUTION : SERVICES LIKE CONDUCTING PRESENTATIONS ON LATEST TECHNOLOGIES AT CLIENT LOCATION, MEETING WITH KEY CUSTOMERS TO GENERATE OPPORTUNITIES FOR SIPL, SUPPORTING IN PARTICIPA TION AT VARIOUS BUSINESS EVENTS ETC. THIS SUPPORT FROM AIPL RESULTED IN INCREASED TURNOVER YEAR ON YEAR AS WELL AS BOOST IN AFTERMARKET SALES AS PROVIDED VIDE SUBMISSION DATED 26 MARCH 2013 BEFORE THE LEARNED AO . FINANCE : AIPL'S STRONG CORPORATE RELATIO NSHIP WITH LEADING LENDING INSTITUTIONS, COMMERCIAL BANKS, INSURANCE COMPANIES SUPPORTED SIPL IN ARRANGING AND AVAILING LONG TERM FUNDS AND SHORT TERM WORKING CAPITAL NEEDS AT COMPETITIVE RATES, COVERING FOREIGN EXCHANGE EXPOSURE RISK, NEGOTIATING QUOTES F OR INSURANCE AS WELL AS REVIEWING AND ADVISING FOR RISK COVERAGE ETC. LEGAL AND TAXATION : IN ACCORDANCE WITH FREQUENT CHANGES IN VARIOUS ACTS AND RULES IN DIRECT AND INDIRECT TAX LAWS AND VARIOUS OTHER LAWS, AIPL SUPPORTED IN ADVISING FROM TIME TO TIME W ITH REGARD TO CHANGES WHICH HELPED SIPL TO COMPLY WITH ALL THE LAWS AND REGULATIONS. OPERATIONAL OVERVIEW : AIPL CONDUCTED PERIODIC OPERATION REVIEW MEETINGS TO DRIVE THE PERFORMANCE OF SIPL AND SUPPORTED FOR EXCEL L ING THE OPERATIONS. IN ITA NO. 251 /P U N/20 14 ITA NO.1327/P U N/2014 CO NO.06/P U N/2015 16 ADDITION TO THAT, ADVISORS DRAWN FROM DIVERSE FIELDS WERE AVAILABLE FOR ADVISING SIPL IN THE MATTERS OF STRATEGIC ISSUES, KEY BUSINESS DECISIONS, ORGANIZATIONAL MARKET DEVELOPMENT AND GLOBAL TREND. OPERATIONAL EXCELLENCE DRIVE : AS THE MAIN FOCUS WAS ON COMPETENCE WITH GL OBAL BENCHMARK, AIPL INITIATED VARIOUS PROGRAMS WITH AN OBJECTIVE WHICH DIRECTLY BENEFITED SIPL TO MANUFACTURE BASED ON THE REQUIREMENT OF MARKET/ CUSTOMERS, FOCUS FLOW, STABLE PRODUCTION ACROSS ALL TIERS, LESS FLUCTUATED DELIVERY REQUESTS ETC. FACILITIE S : SIPL USED FACILITY SET UP OF AIPL WHICH IS WELL EQUIPPED FOR THEIR BOARD MEETINGS AND MEETINGS WITH OVERSEAS VISITORS AND ALSO OTHER FACILITIES LIKE TRANSIT FACILITIES FOR THE STAY OF EMPLOYEES OF CLIENT COMPANIES ETC. SUPPORT IN NEW MANUFACTURING FAC ILITY SET - UP AND EXPANSIONS : AIPL SUPPORTED IN SETTING UP NEW FACILITIES FOR SIPL IN TERMS OF PREPARATION OF FEASIBILITY STUDY, EFFECTIVE PLANNING AND EXECUTION FOR NEW PROJECT / MANUFACTURING FACILITY, MONITORING CONTROLLING ON CAPITAL SPENT AND IN EXECUT ING COST EFFECTIVE CONTRACTS, ETC. GOVERNMENT LIASON : ASSISTED SIPL TO HAVE EFFECTIVE INTERACTION WITH VARIOUS GOVERNMENT AGENCIES, MINISTRY AND TRADE CHAMBERS OF COMMERCE ETC. CORPORATE RELATIONS AND COMMUNICATIONS : CONTINUOUS CORPORATE COMMUNICATION D EPARTMENT WITH CONTRACTS WITH MEDIA AND BROUGHT OUT A QUARTERLY CORPORATE PUBLICATION WHICH HELPED SIPL IN BRANDING AND PUBLICITY. STRATEGIC SOURCING : SUPPORTED IN VENDOR DEVELOPMENT AND DEFINING STRATEGY FOR SOURCING COMMODITIES OR MATERIALS THROUGH VAR IOUS ACTIVITIES. ENVIRONMENT, HEALTH AND SAFETY : AIPL SUPPORTED IN FORMING GROUP ENVIRONMENT POLICIES WHICH LAID DOWN THE ACTIONS EXPECTED FROM EMPLOYEES AND VARIOUS GREEN INITIATIVES. STANDARDS OF SERVICES WITH BUSINESS CODE OF CONDUCT: AIPL DEPLOYED BUSINESS CODE OF CONDUCT IN CONFIRMATION WITH STANDARDS OF SERVICES AND MADE AVAILABLE ETHICS HELPLINE TO REPORT NON - COMPLIANCES. 2 4 . IN THE FACTS OF THE PRESENT CASE, THE ASSESSEE WAS PAYING ROYALTY TO DANA CORPORATION @ 2.85% AND WAS ALSO PAYING MANAGE MENT FEES TO AIPL FOR RENDERING SEVERAL TYPES OF SERVICES AT REMUNERATION WHICH WAS EQUIVALENT TO THE AMOUNT OF ROYALTY I.E. 2.85% OF SALES. THE PERUSAL OF AGREEMENT REFLECTS THE NATURE OF SERVICES TO BE PROVIDED AND THE FEES TO BE CHARGED FOR PROVIDING T HE SAID SERVICES. THE MAJORITY OF SUPPORT SERVICES ARE BEING RENDERED BY THE SAID CONCERN TO THE ASSESSEE AND THE PERUSAL OF EXPENSES DEBITED BY THE ASSESSEE REFLECTS THAT NO MAJOR EXPENSES HAVE BEEN INCURRED BY THE ASSESSEE AND THE ITA NO. 251 /P U N/20 14 ITA NO.1327/P U N/2014 CO NO.06/P U N/2015 17 BENEFITS FLOW FROM AIP L TO THE ASSESSEE. THE SAID BENEFITS WE RE FOR SMOOTH CARRYING ON OF THE BUSINESS BY THE ASSESSEE AND WE RE INCURRED FOR THE PURPOSE OF BUSINESS. THE ASSESSEE IS THE BEST JUDGE TO DECIDE THE EXPENDITURE IT NEEDS TO INCUR FOR SMOOTH CARRYING ON OF ITS BUSIN ESS. THE ASSESSING OFFICER CANNOT SIT IN JUDGMENT OF BUSINESSMAN POSITION IN INCURRING ANY EXPENDITURE. THE HON BLE SUPREME COURT IN HERO CYCLES (P) LTD. VS. CIT (SUPRA) HAVE APPLIED THE RATIO LAID DOWN BY THE APEX COURT IN S.A. BUILDERS LTD. VS. CIT(A) AND ANOTHER (2007) 288 ITR 1 (SC) AND UPHELD THE SCOPE OF COMMERCIAL EXPEDIENCY, WHEREIN IT WAS HELD THAT THE EXPRESSION 'COMMERCIAL EXPEDIENCY' IS AN EXPRESSION OF WIDE IMPORT AND INCLUDES SUCH EXPENDITURE AS A PRUDENT BUSINESSMAN INCURS FOR THE PURPOSE O F BUSINESS. THE EXPENDITURE MAY NOT HAVE BEEN INCURRED UNDER ANY LEGAL OBLIGATION, BUT YET IT IS ALLOWABLE AS A BUSINESS EXPENDITURE IF IT WAS INCURRED ON GROUNDS OF COMMERCIAL EXPEDIENCY . WHERE THERE IS NEXUS BETWEEN THE EXPENDITURE INCURRED AND THE PURP OSE OF BUSINESS, THEN THE REVENUE CANNOT PUT ITSELF IN THE ARM CHAIR OF THE BUSINESSMAN TO DECIDE HOW MUCH OF THE EXPENDITURE IS REASONABLE. APPLYING THE ABOVE SAID PROPOSITION LAID DOWN BY THE HON BLE SUPREME COURT, WE HOLD THAT THE EXPENDITURE INCURRED BY THE ASSESSEE ON MANAGEMENT FEES IN ORDER TO FACILITATE SMOOTH RUNNING OF ITS BUSINESS IS AN ALLOWABLE EXPENDITURE IN THE HANDS OF ASSESSEE. SIMILAR EXPENDITURE HAS BEEN ALLOWED IN THE HANDS OF ASSESSEE IN PRECEDING YEAR. ANOTHER ASPECT OF THE ISSUE IS THAT THE SAID MANAGEMENT FEES IS TO BE TAXED IN THE HANDS OF RECIPIENT AND EVEN THE SERVICE TAX HAS BEEN PAID BY THE RECIPIENT, EVIDENCE OF WHICH IS PLACED IN THE PAPER BOOK. ONCE THE COMMERCIAL EXPEDIENCY OF EXPENDITURE IS ESTABLISHED, THEN THE SAME IS TO BE ALLOWED AS BUSINESS EXPENDITURE IN THE HANDS OF ASSESSEE. WE HOLD SO. THE GROUND OF APPEAL NO.5 RAISED BY THE ASSESSEE IS THUS, ALLOWED. ITA NO. 251 /P U N/20 14 ITA NO.1327/P U N/2014 CO NO.06/P U N/2015 18 2 5 . THE GROUNDS OF APPEAL NO.6 TO 8 RAISED BY THE ASSESSEE ARE NOT PRESSED AND HENCE, THE SAME ARE DISMISSED AS NOT PRESSED. THE GROUNDS OF APPEAL RAISED BY THE ASSESSEE ARE THUS, PARTLY ALLOWED. 2 6 . NOW, COMING TO THE APPEAL FILED BY THE REVENUE AGAINST ORDER OF DRP UNDER RULE 13 OF THE DRP RULES . THE GROUNDS OF APPEAL RAISED BY THE REVENUE ARE AS UNDER: - 1A . WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE DRP WAS JUSTIFIED IN RE - ADJUDICATING THE ISSUES WHICH WERE REJECTED IN ITS EARLIER ORDER CONFIRMING PROPOSED TP ADJUSTMENTS AND WHERE DIFFERING VIEWS WERE POSSIBLE? 1B. WHETHER IT WAS OPEN FOR TH E DRP TO REVISE ITS ORDER UNDER THE GARB OF RECTIFICATION, WHICH IS NOT PERMISSIBLE UNDER LAW? 2. WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE DRP ERRED WHEN IT GAVE RELIEF FOR PROPORTIONATE ADJUSTMENT WHEN INDIAN TRANSFER PRICING DOES NOT CONCEPTUALLY ALLOW IT, AS IT PRE - SUPPOSES THAT THE NET MARGIN IN AE AND NON - AE TRANSACTION ARE SAME, WHICH ORDINARILY IS NOT THE SAME AND ITTPL DOES NOT PERMIT FURTHER ADJUSTMENT TO ADJUSTMENT? 3A. WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE DRP ERRED IN HOLDING THAT COMPANIES M/S RAUNAQ A UTOMOTI VE COMPONENTS LTD. AND M/S RS B TRANSMISSION S INDIA LTD., W ERE COMPARABLE, WHEN IT WAS CLEARLY PO INTED OUT IN REMAND REPORT, THAT THESE COMPANIES WERE NOT AT ALL COMPARABLE WITHIN MEANING OF RULE 10 B (2 ) AND RULE 10 B (3)? 3B. WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE DRP ERRED IN HOLDING M/S RAUNAQ AUTOMOTIVE COMPONENTS LTD. AS COMPARABLE COMPANY WHEN IT WAS ALREADY REJECTED BY THE ASSESSEE IN THE SEARCH MATRIX SUBMITTED IN TP AUDIT ON 11 .1.2013, ON THE BASIS THAT IT HAD 'DIFFERENT FUNCTIONALITY'? 4. WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE DRP ERRED, WHEN IT HELD IN RECTIFICATION ORDER THAT PLI BE CALCULATED USING SAFE HABOUR RULES, 2013 WHEN ASSESSEE HAS BEEN CONSISTENTL Y TREATING FOREIGN EXCHANGE FLUCTUATION AS OPERATING WHICH HAS BEEN ACCEPTED BY REVENUE? 5. WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE DRP ERRED IN GRANTING WORKING CAPITAL ADJUSTMENT TO THE ASSESSEE; A ) WHEN IT HAD NOT BEEN DEMONSTRATED OR PR OVED THAT THE PRICING OF THE PRODUCT AND SERVICES IN CASE OF COMPARABLES OR EVEN IN CASE OF THE ASSESSEE COMPANY WAS ACTUALLY DETERMINED IN THE BASIS OF THE WORKING CAPITAL? B ) WHEN COMPARABLES HAVE BEEN IDENTIFIED FOLLOWING VIGOROUS SEARCH PROCESS FOLLOWI NG THE PROVISIONS OF RULE 10A(A), RULE 10 B (2), RULE 10 B (3) AND RULE 10 B (1) COMPARING FUNCTIONS, ASSETS AND RISKS, WHEREIN THERE IS NO CASE FOR ANY ADJUSTMENTS, WHICH NEEDS TO BE MADE TO THE FINANCIAL RESULTS OF EITHER ASSESSEE COMPANY OR THE ITA NO. 251 /P U N/20 14 ITA NO.1327/P U N/2014 CO NO.06/P U N/2015 19 COMPARABLE S AS THE FACTORS WHICH EFFECT THE PRICES OF THE PRODUCTS AND SERVICES ARE ALREADY TAKEN CARE IN THE QUALITATIVE AND QUANTITATIVE SEARCH CRITERIA AND THE ASSESSEE HAS NOT ASKED NOR WORKED OUT ANY WORKING CAPITAL ADJUSTMENT IN THE TRANSFER PRICING DOCUME NTATION? C ) WHEN IT HAS NOT CONSIDERED THE FACT THAT THE PROFIT LEVEL INDICATOR USED FOR COMPARISON WAS OPERATING PROFIT BEFORE INTEREST AND THUS ANY IMPACT OF CREDIT POLICY ON INTEREST COST WAS AUTOMATICALLY EXCLUDED FROM THE CASE OF THE ASSESSEE COMPANIES AND THE COMPARABLES? D ) WHEN IT ALLOWED THE CLAIM OF THE ASSESSEE IN ROUTINE MANNER DESPITE THE FACT THAT THE OECD GUIDELINES IN GENERAL AND SPECIFICALLY IN PARA 3.47 TO 3.54 DO NOT CONSIDER SUCH ADJUSTMENTS TO BE APPLIED IN A AUTOMATIC AND ROUTINE MATTER? 2 7 . THE FIRST ISSUE RAISED BY WAY OF GROUND OF APPEAL NO.1 IS AGAINST THE ORDER OF DRP IN PASSING THE RECTIFICATION ORDER UNDER RULE 13 OF DRP RULES. THE LIMITED ISSUE WHICH ARISES BY WAY OF GROUND OF APPEAL NO.1 RAISED BY THE REVENUE IS AGAINST FIRST R ECTIFICATION ORDER PASSED BY THE DRP, UNDER WHICH CERTAIN ISSUE WHICH WAS NOT ADJUDICATED BY THE DRP WHILE DISPOSING OF THE OBJECTIONS OF ASSESSEE WERE DIRECTED TO BE RECTIFIED. THE TPO AFTER THE SAID RECTIFICATION ORDER HAD MOVED AN APPLICATION AND THE D RP HAS MODIFIED ITS EARLIER ORDER. HOWEVER, THE REVENUE IS IN APPEAL AGAINST THE RECTIFICATION ORDER PASSED BY THE DRP. 2 8 . THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE POINTED OUT THAT THE OBJECTION WAS TO THE FACT AS TO WHETHER THE SAFE HARBO UR RULES WERE TO BE APPLIED OR NOT TO APPLY. THE DRP BY WAY OF SECOND RECTIFICATION ORDER DATED 21.05.2014 HAS DELETED THE REFERENCE TO SAFE HARBOUR RULES AND CONSEQUENT TO WHICH, THE ASSESSING OFFICER HAS PASSED THE RECTIFICATION ORDER. 29 . THE LEARNE D DEPARTMENTAL REPRESENTATIVE FOR THE REVENUE ON THE OTHER HAND, REFERRED TO THE RECTIFICATION ORDER AND POINTED OUT THAT THE ORDER PASSED BY ITA NO. 251 /P U N/20 14 ITA NO.1327/P U N/2014 CO NO.06/P U N/2015 20 THE DRP WAS NOT RECTIFYING ANY MISTAKE APPARENT FROM THE RECORD BUT WAS ALLOWING THE CLAIM OF ASSESSEE ON THE BASI S OF CHANGE OF OPINION. 3 0 . THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE POINTED OUT THAT THE TPO HAD MADE ADJUSTMENT AT ENTITY LEVEL OF RS.57 CRORES, WHEREAS INTERNATIONAL TRANSACTION WAS ONLY OF RS.24%. THE DRP ORIGINALLY HAD NOT ADJUDICATE D THE SAID GROUND AND HENCE, THE ORDER PASSED UNDER SECTION 154 WAS CORRECT. IN RESPECT OF SECOND CLAIM OF THE REVENUE THAT THE DRP HAD HELD THAT M/S RAUNAQ AUTOMOTIVE COMPONENTS LTD. AND M/S RSB TRANSMISSIONS INDIA LTD. WERE COMPARABLE, THE LEARNED AUTHO RIZED REPRESENTATIVE FOR THE ASSESSEE POINTED OUT THAT NO SUCH DIRECTION HAS BEEN GIVEN BY THE DRP AND HENCE, RECTIFICATION APPLICATION BEFORE THE DRP. THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE POINTED OUT THAT THIS WAS THE ADDITIONAL GROUND OF APPEAL RAISED BEFORE THE DRP AND SINCE THAT WAS NOT ADJUDICATED IN THE FIRST ROUND, RECTIFICATION WAS POSSIBLE AGAINST IT. THE DRP ASKED FOR REMAND REPORT. FURTHER, CLAIM WAS RAISED IN RESPECT OF GROUNDS OF APPEAL NO.13 AND 14, WHICH WAS ADDITIONAL GR OUND OF APPEAL. FURTHER, THE DRP HAS NOT ADJUDICATED THE GROUND OF OBJECTION NO.12 I.E. CLAIM OF DEDUCTION UNDER SECTION 10B OF THE ACT WHICH WAS NOT ORIGINALLY ALLOWED TO THE ASSESSEE. 3 1 . THE FIRST ISSUE WHICH ARISES BY WAY OF GROUND OF APPEAL NO.1 I S AGAINST THE POWER OF DRP IN PASSING THE RECTIFICATION ORDER. RULE 13 OF INCOME TAX (DRP) RULES , 2009 READS AS UNDER: - AFTER THE ISSUE OF DIRECTIONS UNDER RULE 10, IF ANY, MISTAKE OR ERROR IS APPARENT IN SUCH DIRECTION, THE PANEL MAY, SUO MOTO OR AN APP LICATION FROM THE ELIGIBLE ASSESSEE OR THE ASSESSING OFFICER, RECTIFY SUCH MISTAKE OR ERROR, AND ALSO DIRECT THE ASSESSING OFFICER TO MODIFY THE ASSESSMENT ORDER ACCORDINGLY. 3 2 . IN VIEW OF CLEAR - CUT PROVISIONS OF THE RULES, ANY MISTAKE OR ERROR WHI CH IS APPARENT FROM THE RECORD IN SUCH DIRECTION S ISSUED BY THE DRP AND ONCE THE ITA NO. 251 /P U N/20 14 ITA NO.1327/P U N/2014 CO NO.06/P U N/2015 21 SAME IS BROUGHT TO THE KNOWLEDGE OF DRP, IT CAN DIRECT THE ASSESSING OFFICER TO MODIFY THE ASSESSMENT ORDER ACCORDINGLY. HENCE, WE FIND NO ERROR IN EXERCISE OF POWER BY THE DRP UN DER RULE 13 OF DRP RULES. 3 3 . NOW, COMING TO THE MISTAKE WHICH HAS BEEN ALLOWED BY THE DRP UNDER THE SAID RECTIFICATION ORDER. THE GROUND OF APPEAL NO.2 RAISED BY THE REVENUE IS IN ALLOWING THE PROPORTIONATE ADJUSTMENT IN NOT MAKING ADJUSTMENT AT ENTITY LEVEL AS DONE BY THE TPO. WE FIND THAT VARIOUS BENCHES OF TRIBUNAL HAVE TAKEN VIEW THAT THE ADJUSTMENT, IF ANY, ON ACCOUNT OF ARM'S LENGTH PRICE OF INTERNATIONAL TRANSACTION IS TO BE RESTRICTED TO THE VALUE OF INTERNATIONAL TRANSACTION ONLY AND NOT TO BE MADE AT ENTITY LEVEL. THE PUNE BENCH OF TRIBUNAL IN DEMAG CRANES & COMPONENTS (INDIA) PVT. LTD. VS. DCIT IN ITA NO.120/PN/2011, RELATING TO ASSESSMENT YEAR 2006 - 07, ORDER DATED 04.01.2012 HAVE TAKEN VIEW THAT ONLY PROPORTIONATE ADJUSTMENT HAS TO BE MADE O F INTERNATIONAL TRANSACTION AND NOT AT ENTITY LEVEL PROFITS. THE DRP ORIGINALLY HAD NOT DECIDED THE SAID ISSUE WHICH WAS DECIDED BY WAY OF ORDER UNDER RULE 13 OF DRP RULES. WE FIND NO ERROR IN THE EXERCISE OF JURISDICTION BY DRP IN THIS REGARD. ACCORDIN GLY , WE HOLD THAT THE DIRECTIONS OF DRP IN THIS REGARD ARE TO BE UPHELD. 3 4 . NOW, COMING TO THE NEXT OBJECTION I.E. GROUND OF APPEAL NO.3 WHICH HAVE BEEN DECIDED BY THE DRP I.E. HOLDING THAT THE COMPANIES M/S RAUNAQ AUTOMOTIVE COMPONENTS LTD. AND M/S RS B TRANSMISSIONS INDIA LTD. WERE COMPARABLE . THE PLEA OF THE ASSESSEE BY WAY OF RECTIFICATION APPLICATION WAS THAT THE TPO HAD NOT COMMENTED ON THE FUNCTIONAL COMPARABILITY OF THE SAID CASES AND HAD REJECTED THE SAID CONCERNS ON OTHER GROUNDS. THE DRP VID E RECTIFICATION ORDER HELD THAT THE SAID COMPANIES WERE FUNCTIONALLY COMPARABLE TO THE ASSESSEE AS IT ALSO DEALT IN AUTOMOTIVE PARTS AND DIRECTED THE ASSESSING ITA NO. 251 /P U N/20 14 ITA NO.1327/P U N/2014 CO NO.06/P U N/2015 22 OFFICER TO APPLY OTHER FILTERS USED BY THE TPO AND SELECT THE ABOVE CONCERNS AS COMPARABLE, IF I T MEETS ALL THE FILTERS. 3 5 . THE REVENUE IS AGGRIEVED BY THE ABOVE SAID DIRECTIONS OF DRP SINCE THE CONCERNS WERE NOT COMPARABLE BECAUSE OF VARIOUS FACTORS. WE FIND NO MERIT IN THE SAID GROUND OF APPEAL RAISED BY THE REVENUE, WHERE THE ISSUE HAS BEEN R EMITTED BACK TO THE ASSESSING OFFICER / TPO TO VERIFY THE CLAIM OF ASSESSEE AND ALSO TO APPLY THE FILTERS USED BY THE TPO. THE DRP S CONCLUSION WAS THAT THE SAID CONCERNS ARE FUNCTIONALLY COMPARABLE TO THE ASSESSEE AS THE SAME ALSO DEALS IN AUTOMOTIVE PAR TS , H OWEVER, THE ASSESSING OFFICER IS DIRECTED TO APPLY OTHER FILTERS SELECTED BY THE TPO. WE MODIFY THE ORDER OF DRP TO THE EXTENT THAT THE TPO IS TO DETERMINE THE FUNCTIONAL COMPARABILITY OF THE SAID CONCERNS AND ALSO APPLY THE OTHER FILTERS TO DECIDE W HETHER THE SAID CONCERNS WERE TO BE INCLUDED IN THE FINAL LIST OF COMPARABLE . THE DRP WHILE EXERCISING THE POWERS OF RECTIFICATION CAN AT BEST DECIDE WHETHER THE ISSUE IS RECTIFIABLE OR NOT BUT THE MERITS OF THE ISSUE NEED TO BE LOOKED INTO BY THE TPO. A CCORDINGLY, THE GROUND OF APPEAL NO.3 RAISED BY THE REVENUE IS THUS, ALLOWED FOR STATISTICAL PURPOSES. 3 6 . COMING TO THE GROUND OF APPEAL NO.4 RAISED BY THE REVENUE, WHEREIN THE DRP WHILE PASSING THE ORDER UNDER RULE 13 OF THE DRP RULES HAS MADE REFERENCE TO SAFE HARBOUR RULES , HAS BEEN EXPUN G ED BY THE DRP IN THE SECOND RECTIFICATION ORDER PASSED, HENCE, WE ALLOW THE GROUND OF APPEAL NO.4 RAISED BY THE REVENUE IN THIS REGARD. 3 7 . THE ISSUE IN GROUND OF APPEAL NO.5 IS WHETHER THE DRP HAD ERRED IN GRANTING WORKING CAPITAL ADJUSTMENT TO THE ASSESSEE IN THE RECTIFICATION ORDER. THE ISSUE WHICH ARISES IN THE PRESENT GROUND OF APPEAL RAISED BY THE REVENUE IS ITA NO. 251 /P U N/20 14 ITA NO.1327/P U N/2014 CO NO.06/P U N/2015 23 WHETHER SUCH GROUND COULD BE ALLOWED WHEN NOT ORIGINALLY DECIDED . THE FACTUAL ASPECTS IN THIS REGARD AR E THAT THE WORKING CAPITAL ADJUSTMENT WAS ASKED FOR BY THE ASSESSEE BEFORE THE TPO WHICH WAS NOT ALLOWED BY THE TPO. THE ASSESSEE FURNISHED THE REQUISITE DETAILS OF WORKING CAPITAL ADJUSTMENT BEFORE THE DRP. HOWEVER, THE PLEA OF THE ASSESSEE WAS REJECTED BY THE DRP AND THE ORDER OF TPO WAS UPHELD A S ALL THE ARGUMENTS OF THE ASSESSEE WERE CONSIDERED. THE ASSESSEE MOVED RECTIFICATION APPLICATION AGAINST THE SAME BEFORE THE DRP AND POINTED OUT THAT THIS PLEA OF THE ASSESSEE HAS NOT BEEN EXAMINED. THE DRP V IDE RECTIFICATION ORDER DIRECTED THE ASSESSING OFFICER TO EXAMINE THE COMPUTATION OF WORKING CAPITAL ADJUSTMENT PROVIDED BY THE ASSESSEE AND TO ADOPT CORRECT OPERATING MARGINS OF COMPARABLE COMPANIES AFTER WORKING CAPITAL ADJUSTMENT. 38. THE REVENUE IS AGGRIEVED BY THE SAID DIRECTIONS OF DRP. WE FIND NO MERIT IN THE GROUND OF APPEAL RAISED BY THE REVENUE, WHERE THE ISSUE WAS RAISED BEFORE THE TPO AND ALSO BEFORE THE DRP IN THE ORIGINAL PROCEEDINGS WHICH HAS NOT BEEN ADJUDICATED BY THE DRP. HENCE, THE M ISTAKE HAS CREPT IN THE ORDER OF DRP WHICH HAS BEEN RECTIFIED BY THE DRP UNDER RULE 13 OF THE DRP RULES. UPHOLDING THE SAME, GROUND OF APPEAL NO.5 RAISED BY THE REVENUE IS DISMISSED. THE GROUNDS OF APPEAL RAISED BY THE REVENUE ARE THUS, PARTLY ALLOWED. 3 9 . THE ASSESSEE BY WAY OF CROSS OBJECTIONS HAS RAISED THE FOLLOWING ISSUES. 1. ERRED IN MAKING ADDITION OF ENTIRE ROYALTY PAID TO THE AE RS.8,11,62,596/ - IN THE ABSENCE OF ANY DIRECTION OF DRP THEREOF AND BY DRAW I NG AN UNWARRANTED INFERENCE THAT THE SAID ADDITION WAS SOMEHOW REQUIRED TO BE SUSTAINED AS THE UPWARD ADJUSTMENT INITIALLY MADE BY THE A . O . IN THE ORDER U/S 144C READ WITH SECTION 92CA OF THE INCOME TAX ACT UNDER TNMM DUE TO LOWER PLI OF OP TO OR HAD GONE DOWN BELOW ROYALTY DUE TO HON ' BLE DRP UPHO LDING THE CONTENTION OF THE CROSS OBJECTOR TO RESTR I CT THE INITIAL ADJUSTMENT IN PROPORTION TO THE VALUE OF INTERNATIONAL TRANSACTIONS ONLY. 2. ERRED IN NOT CONSIDERING THE ROYALTY PAID TO AE PURSUANT TO A VALID AGREEMENT, AT ARM ' S LENGTH AND IGNORING TH E FACT THAT THE CROSS ITA NO. 251 /P U N/20 14 ITA NO.1327/P U N/2014 CO NO.06/P U N/2015 24 OBJECTOR HAD DEMONSTRATED THE BENEFITS RECEIVED BY IT FROM ROYALTY PAYMENTS TO I TS AE . 3. FAILED TO APPRECIATE THAT ROYALTY CANNOT BE EXAMINED ON A STAND - ALONE BASIS IN I SOLATION FROM PRODUCTION AND SALES SINCE ROYALTY IS INEXTRICABLY LINKED WITH THESE ACTIVITIES AND WAS APPROPRIATELY EVALUATED ALONG WITH THE SAME UNDER TRANSACTIONAL NET MARGIN METHOD (TNMM) ANALYSIS. 4. ERRED IN NOT APPRECIATING THE FACT THAT ROYALTY AGREEMENT ENTERED INTO BY THE RESPONDENT WITH ITS AE RESULTED INTO A BUNDLE OF BENEFITS AND SUBSTANTIAL SAVINGS IN TERMS OF IMPROVED PRODUCTIVITY, BETTER UTILIZATION OF MATERIAL, MANPOWER AND MACHINES OVER THE PERIOD. FURTHER, ERRED IN EVALUATING ROYALTY PAYMENT USING A METHOD WHICH IS NOT PRESCRIBED IN INDIAN TRANSFER P RICING REGULATIONS UNDER SECTION 92C OF THE INCOME - TAX ACT, 1961. 5. FAILED TO APPRECIATE THE EXTERNAL BENCHMARK I.E. PERCENTAGE AT WHICH ROYALTY HAS BEEN PAID BY AN INDIAN COMPARABLE, SONA OKEGAWA, WHICH WAS ENGAGED IN SIMILAR BUSINESS OF MANUFACTURING A UTO COMPONENTS AND THE WORKING OF NET PRESENT VALUE OF FUTURE EARNINGS (INCREMENTAL PROFITS) BASED ON WELL RECOGNIZED AND ACCEPTED METHODO LOGY OF DISCOUNTED CASH FLOW. 40 . THE ASSESSEE IS AGGRIEVED BY THE ORDER OF ASSESSING OFFICER / TPO IN MAKING ADJUSTM ENT TO THE AMOUNT OF ROYALTY PAID TO ASSOCIATE ENTERPRISES BY TAKING ARM'S LENGTH PRICE OF ROYALTY AT NIL. 4 1 . BRIEFLY, IN THE FACTS OF THE CASE, THE ASSESSEE HAD PAID ROYALTY OF RS.8.11 CRORES TO M/S. DANA CORPORATION, THE TPO NOTED THAT THE ASSESSEE HA D MADE SIMILAR PAYMENTS AS MANAGEMENT FEES TO AIPL AND THE ASSESSEE WAS ISSUED SHOW CAUSE NOTICE VIS - - VIS WHETHER THE ROYALTY PAYMENTS TO DANA CORPORATION.. WERE AT ARM'S LENGTH PRICE. THE CASE OF ASSESSEE BEFORE THE TPO WAS THAT THE ASSESSEE HAD ENTERED INTO TECHNOLOGY LICENSING AGREEMENT WITH DANA CORPORATION ON 10.08.1993, UNDER WHICH THE ASSESSEE WAS GRANTED LICENSE, PATENTS, DESIGN INFORMATION IN RESPECT OF DRIVE SHAFTS. THE TPO WHILE BENCHMARKING INTERNATIONAL TRANSACTIONS OF THE ASSESSEE WITH ITS ASSOCIATE ENTERPRISES ALSO TOOK UP THE ISSUE OF PAYMENT OF ROYALTY TO ASSOCIATE ENTERPRISES. THE ASSESSEE HAD PAID ROYALTY @ 3% ON DOMESTIC SALES IN THE EARLIER YEARS BUT FOR THE YEAR UNDER CONSIDERATION, THE ROYALTY WAS PAID ONLY @ ITA NO. 251 /P U N/20 14 ITA NO.1327/P U N/2014 CO NO.06/P U N/2015 25 2.85% ON THE NET SALES OF LICENCE PRODUCTS. THE CLAIM OF ASSESSEE WAS THAT THE SAID ROYALTY PAYMENTS WERE AT ARM'S LENGTH PRICE AS THE SAME WERE APPROVED BY SIA AND RESERVE BANK OF INDIA. 4 2 . IT WAS POINTED OUT THAT AS PER DECISION OF DELHI BENCH OF TRIBUNAL IN THE CASE OF SONA OKEGAWA PRECISION FORGINGS LTD. VS. ADDL. CIT, ORDER DATED 06.12.2011 , THE RATE OF 2.85% WAS AT ARM'S LENGTH PRICE. THE TPO ISSUED SHOW CAUSE NOTICE TO THE ASSESSEE TO EXPLAIN ITS BOOKING TO TWO EXPENSES I.E. ONE UNDER THE HEAD ROYALTY AND SIMILAR PAYMENT UNDER THE HEAD MANAGEMENT FEES . THE ASSESSEE WAS ALSO ASKED TO EXPLAIN THE BASIS FOR QUANTIFYING THE RATE OF PAYMENT OF ROYALTY AND MANAGEMENT FEES. THE TPO WAS OF THE VIEW THAT ROYALTY TRANSACTIONS NEEDED TO BE TAKEN AT AN ARM'S LENGTH PRICE O N NIL. IN REPLY, THE ASSESSEE EXPLAINED THAT IT WAS PAYING ROYALTY NOT @ 3% BUT @ 2.85% AS PER AUTOMATIC ROUTE PROVIDED FOR SUCH PAYMENT BY THE RESERVE BANK OF INDIA. THE ASSESSEE ALSO PROVIDED COPIES OF DOCUMENTS RECEIVED FROM ASSOCIATE ENTERPRISES FOR PRODUCT DEVELOPMENT. THE TPO REJECTED THE CLAIM OF ASSESSEE HOLDING THAT NO PROPER DOCUMENTATION WAS ON RECORD FOR THE PAYMENT OF RS.16 CRORES OF ROYALTY AND MANAGEMENT FEES . THE TPO FURTHER OBSERVED THAT WHERE THE PAYMENTS WERE BEING MADE FOR THE LAST 1 5 YEARS AND THERE WAS NO REQUIREMENT TO CONTINUE TO PAY SUCH AMOUNTS . THE TPO FURTHER NOTED THAT THE ASSESSEE HAS NOT MADE ANY PROFITS IN THE DOMESTIC SEGMENTS BUT IN FACT WAS MAKING LOSS, WHICH WAS DUE TO PAYMENT OF ROYALTY AND EQUIVALENT AMOUNT OF MANAG EMENT FEES TO THE DOMESTIC ASSOCIATE ENTERPRISES. THE TPO WAS OF THE VIEW THAT SUM OF RS.16 CRORES WAS SPENT ON SERVICES WHICH WERE DOUBTFUL. ANOTHER POINT RAISED BY THE TPO WAS THAT THE ASSESSEE HAS NOT BEEN ABLE TO QUANTIFY THE DETAILS OF SERVICES RECE IVED FROM ASSOCIATE ENTERPRISES OR AIPL . S INCE IT WAS IMPERATIVE ON THE PART OF ASSESSEE TO ESTABLISH THAT THE PAYMENTS ITA NO. 251 /P U N/20 14 ITA NO.1327/P U N/2014 CO NO.06/P U N/2015 26 WERE MADE COMMENSURATE TO THE VOLUME AND QUALITY OF TECHNICAL SERVICES AND AS THERE WAS NO COGENT EVIDENCE WITH REGARD TO THE PURPOSE O F TECHNICAL ASSISTANCE AVAILABLE WITH RESPECT TO THE NATURE OF SERVICES RENDERED BY ASSOCIATE ENTERPRISES TO THE ASSESSEE AND WHERE THE ASSESSEE HAD NOT PROVED THE COMMENSURATE BENEFITS AGAINST THE PAYMENT OF SERVICE FEES TO THE ASSOCIATE ENTERPRISES, THE SAID EXPENDITURE WAS HELD TO BE NOT ALLOWABLE IN THE HANDS OF ASSESSEE. THE TPO CONCLUDED BY HOLDING AS UNDER: - 39. IN VIEW OF THE FACTS OF THE CASE, DISCUSSION AS ABOVE, IT IS ARRIVED AT THAT THOUGH AN AMOUNT OF RS.8,11,62,569/ - HAS BEEN PAID BY THE ASS ESSEE TOWARDS THE INTERNATIONAL TRANSACTION OF THE PAYMENT OF ROYALTY TO THE AE DANA USA, THE PAYMENT MADE, DOES NOT SUPPORT THE FACT THAT PAYMENTS HAVE BEEN MADE EITHER TOWARDS THE QUANTUM OF TECHNICAL SERVICES RECEIVED, OR ANY SERVICES RECEIVED AT ALL. THE ENTIRETY OF DETAILS WHICH HAVE BEEN BROUGHT OUT IN THE FOREGOING POINTS ARE CLEAR INDICATORS OF THE FACT THAT FOR HAVING MADE PAYMENT TOWARDS THE RECEIPT OF SO CALLED TECHNICAL ASSISTANCE SERVICES, ASSESSEE COULD NOT DEMONSTRATE WITH EITHER FACTS OR WI TH FIGURES OR ANY OTHER EVIDENCE THAT IT ACTUALLY RECEIVED ANY SERVICES OR BENEFIT. UNDER THE CIRCUMSTANCES, THE ARM'S LENGTH PRICE OF THIS INTERNATIONAL TRANSACTION RELATING TO PAYMENT FOR INTERNATIONAL TRANSACTION OF THE PAYMENT OF ROYALTY IS DETERMINED AT NIL AND ACCORDINGLY, AN ADJUSTMENT OF RS.8,11,62,569/ - IS MADE TO THE VALUE OF THE INTERNATIONAL TRANSACTION IN ORDER TO ARRIVE AT THE ARM'S LENGTH PRICE OF THIS INTERNATIONAL TRANSACTION. WITH THIS ADJUSTMENT THE TOTAL INCOME OF THE ASSESSEE SHALL BE INCREASED BY RS.8,11,62,569/ - . 40. TO CONCLUDE LOOKING AT THE FACTS OF THE CASE AND CONSIDERING THE DETAILS FILED, TP ADJUSTMENT OF RS.8,11,62,569/ - IS MADE TO THE INTERNATIONAL TRANSACTION OF PAYMENT OF ROYALTY TO DANA CORP. USA TAKING ALP AT NIL UNDER CUP. CONSEQUENT TO THIS ADJUSTMENT, THE TOTAL INCOME OF THE ASSESSEE SHALL GO UP BY RS.8,11,62,56/ - . 4 3 . THE TPO FURTHER VIDE PARA 41 OBSERVED THAT ADJUSTMENT AT THE ENTITY LEVEL OF RS.56.27 CRORES IN RELATION TO INTERNATIONAL TRANSACTION HAS BEEN MADE. THE TP AD JUSTMENT ON ACCOUNT OF INTERNATIONAL TRANSACTION OF REIMBURSEMENT OF ROYALTY PAYMENT OF RS.8.12 CRORES WOULD GET SUBSUMED IN OVERALL TP ADJUSTMENT OF RS.56.27 CRORES AND NO OTHER ADJUSTMENT WAS MADE ON ACCOUNT OF ROYALTY PAYMENT. 4 4 . BEFORE THE DRP, THE ASSESSEE CLAIMED THAT IT FILED SEPARATE APPLICATION ALONG WITH ADDITIONAL SUBMISSIONS WHICH WERE FORWARDED TO THE TPO. HOWEVER, ITA NO. 251 /P U N/20 14 ITA NO.1327/P U N/2014 CO NO.06/P U N/2015 27 THE TPO IN THE REMAND REPORT FILED BEFORE THE DRP MENTIONED THAT THE ROYALTY PAYMENT TO ASSOCIATE ENTERPRISES WAS NOT HING BUT A CAREFULLY CRAFTED DISTRIBUTION OF PROFIT ARRANGEMENT AND SHOULD BE DISALLOWED. IN VIEW THEREOF, THE DRP VIDE DIRECTIONS DATED 30.12.2013 HELD THAT THE ARGUMENTS OF ASSESSEE WERE NOT JUSTIFIED AND THE OBJECTIONS RAISED BY THE ASSESSEE WERE REJEC TED. 4 5 . THE ASSESSEE HAS FILED CROSS OBJECTIONS AGAINST THE SAID DIRECTIONS OF DRP / ASSESSING OFFICER. 4 6 . BEFORE US, THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE POINTED OUT THAT SIMILAR PAYMENT OF ROYALTY TO DANA AUTOMOTIVE SYSTEMS LLC WA S ACCEPTED TO BE AT ARM'S LENGTH PRICE FOR ALL THE YEARS STARTING FROM ASSESSMENT YEAR 2005 - 06 TO ASSESSMENT YEAR 2008 - 09. FOR THE YEAR UNDER CONSIDERATION I.E. ASSESSMENT YEAR 2009 - 10, THE ARM'S LENGTH PRICE WAS TAKEN AT NIL BY THE TPO. HOWEVER, IN ASSE SSMENT YEAR 2010 - 11, THE SAME WAS ACCEPTED TO BE AT ARM'S LENGTH PRICE BY THE CIT(A) AND IN ASSESSMENT YEAR 2011 - 12, THE SAME WAS ACCEPTED TO BE ARM'S LENGTH PRICE BY THE DRP ITSELF. THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE IN THIS REGARD, P LACED ON RECORD THE COPIES OF ORDERS OF TPO PASSED UNDER SECTION 92CA(3) OF THE ACT RELATING TO ASSESSMENT YEARS 2005 - 06 TO 2008 - 09. THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE FURTHER POINTED OUT THAT THE ROLE OF TPO WHILE BENCHMARKING ARM'S L ENGTH PRICE OF INTERNATIONAL TRANSACTION WAS ONLY TO DETERMINE THE ARM'S LENGTH PRICE OF THE TRANSACTION AND NOT TO DECIDE THE ADMISSIBILITY OF EXPENDITURE. RELIANCE IN THIS REGARD WAS PLACED ON THE RATIO LAID DOWN BY BANGALORE BENCH OF TRIBUNAL IN M/S. I NTEVA PRODUCTS INDIA AUTOMOTIVE PVT. LTD. VS. DCIT IN ITA NO.83/BANG/2015, RELATING TO ASSESSMENT YEAR 2010 - 11, ORDER DATED 20.07.2016 . HE FURTHER POINTED OUT THAT THE ROYALTY HAD BEEN PAID AS PER SIA APPROVAL, COPY ITA NO. 251 /P U N/20 14 ITA NO.1327/P U N/2014 CO NO.06/P U N/2015 28 OF WHICH IS PLACED AT PAGE 128 OF THE P APER BOOK. HE ALSO REFERRED TO THE AGREEMENT BETWEEN THE PARTIES PLACED AT PAGE 118 OF THE PAPER BOOK, WHEREIN EARLIER THERE WAS AN UNDERSTANDING OF PAYMENT OF ROYALTY @ 3%, WHICH WAS REDUCED TO 2.85%, SINCE THERE WAS AUTOMATIC APPROVAL BY THE RBI. OUR A TTENTION WAS DRAWN TO THE PRESS RELEASE IN THIS REGARD, WHICH WAS CONTENTED TO BE APPLICABLE TO ALL FOREIGN COMPANIES. RELIANCE WAS PLACED ON THE RATIO LAID DOWN BY THE HON BLE BOMBAY HIGH COURT IN CIT VS. SGS INDIA PVT. LTD. IN INCOME TAX APPEAL NO.1807 OF 2013, JUDGMENT DATED 18.11.2015 AND THE MUMBAI BENCH OF TRIBUNAL IN ACIT VS. M/S. DOW AGROSCIENCES INDIA PVT. LTD. IN ITA NO.1443/MUM/2011, RELATING TO ASSESSMENT YEAR 2004 - 05, ORDER DATED 10.08.2016 . HE FURTHER STRESSED THAT THE BENEFIT TEST OF SAID R OYALTY PAYMENT WAS EXAMINED BY THE CIT(A) IN ASSESSMENT YEAR 2010 - 11 AND THE SAME WAS ACCEPTED. HE ALSO POINTED OUT THAT THE ASSESSEE HAD FURNISHED DETAILED NOTE ON THE SERVICES PROVIDED BY THE ASSOCIATE ENTERPRISES AGAINST WHICH THE ROYALTY WAS BEING PAI D AND ALL THE DOCUMENTS EVIDENCED THAT TECHNICAL SUPPORT WAS GIVEN BY THE ASSOCIATE ENTERPRISES. 4 7 . THE LEARNED DEPARTMENTAL REPRESENTATIVE FOR THE REVENUE PLACING RELIANCE ON THE ORDER OF TPO POINTED OUT THAT ELABORATE SHOW CAUSE NOTICE WAS GIVEN TO T HE ASSESSEE AND AFTER CONSIDERING THE REPLY OF THE ASSESSEE AND SINCE THE ASSESSEE HAD NOT BEEN ABLE TO ESTABLISH THE QUANTUM OF SERVICES RENDERED BY ASSOCIATE ENTERPRISES, THE AFORESAID TP ADJUSTMENT WAS MADE. RELIANCE WAS PLACED ON THE ORDER OF TPO IN T HIS REGARD. 4 8 . WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE RECORD. THE ASSESSEE HAD ENTERED INTO A DRIVE SHAFT TECHNOLOGY LICENCING AGREEMENT AND TECHNOLOGY LICENCE AGREEMENT FOR AXLES ALONG WITH SUPPLEMENTARY AGREEMENT ITA NO. 251 /P U N/20 14 ITA NO.1327/P U N/2014 CO NO.06/P U N/2015 29 WITH DANA CORPORATION, UN DER WHICH FOR THE SERVICES AND ASSISTANCE PROVIDED BY ASSOCIATE ENTERPRISES, THE ASSESSEE WAS TO PAY ROYALTY INITIALLY @ 3% AND THEREAFTER, @ 2.85%. THE COPIES OF AGREEMENTS ARE PLACED AT PAGES 116 TO 158 OF THE PAPER BOOK. THE ASSESSEE ALSO PROVIDED DOC UMENTATION, UNDER WHICH THE ASSESSEE HAD RECEIVED THE BENEFIT S AND ASSISTANCE FROM ITS ASSOCIATE ENTERPRISES IN RELATION TO THE ROYALTY TRANSACTION ON ACCOUNT OF TECHNICAL ASSISTANCE, DESIGN, PROCESS REVIEW AND TECHNICAL KNOW - HOW, WHICH ARE PLACED AT PAGES 201 TO 210 OF THE PAPER BOOK. IT WAS POINTED OUT THAT ASSOCIATE ENTERPRISES SUPPORTS THE ASSESSEE IN TECHNOLOGY UPGRADATION BY BRINGING THE LATEST TECHNOLOGY IN DRIVE TRAIN SYSTEMS TO INDIA. THE ASSESSING OFFICER REFERRED THE ISSUE OF COMPUTATION OF ARM 'S LENGTH PRICE OF THE SAID INTERNATIONAL TRANSACTION TO THE TPO, WHO IN HIS ORDER TREATED THE ARM'S LENGTH PRICE AT NIL. 4 9 . IN THE FACTS AND CIRCUMSTANCES OF THE PRESENT CASE, THE ROYALTY PAID BY THE ASSESSEE TO ITS ASSOCIATE ENTERPRISES HAD BEEN APPR OVED BY THE SECRETARIAT OF INDUSTRIAL APPROVAL, MINISTRY OF INDUSTRY, GOVERNMENT OF INDIA, VIDE LETTER DATED 28/31.01.2003 AND INITIALLY BY THE RBI @ 3%. HOWEVER, SUBSEQUENTLY, THE RBI VIDE COMMUNICATION DATED 21.07.2003 ACCORDED AUTOMATIC APPROVAL ROUTE TO MAKE THE ROYALTY PAYMENT AT 8% ON EXPORTS AND 5% ON DOMESTIC SALES WITHOUT ANY RESTRICTION ON THE DURATION OF ROYALTY PAYMENTS. THEREAFTER, THIS RATE WAS REDUCED TO 2.85% BY THE RBI. THE CASE OF THE ASSESSEE BEFORE THE TPO WAS THAT SINCE THE ROYALTY P AYMENTS WERE IN TERMS OF APPROVAL GRANTED BY SIA AND RBI, THE SAME WERE AT ARM'S LENGTH PRICE AND THE ASSESSEE PLACED RELIANCE ON CUP METHOD FOR BENCHMARKING THE SAID TRANSACTION OF PAYMENT OF ROYALTY IN THIS REGARD. THE PLEA OF ASSESSEE THAT THE RATE APP ROVED BY THE SIA AND RBI WAS TO BE USED AS RELIABLE CUP DATA, WAS NOT ACCEPTED BY THE TPO. THE TPO ON THE OTHER HAND, REJECTING THE EXPLANATION OF ASSESSEE OF TECHNOLOGY SUPPORTS ITA NO. 251 /P U N/20 14 ITA NO.1327/P U N/2014 CO NO.06/P U N/2015 30 PROVIDED BY ASSOCIATE ENTERPRISES TO THE ASSESSEE , FURTHER HELD THAT SIA / R BI WERE NOT RELATED TO TRANSFER PRICING. THE TPO STRESSED THAT NO PROPER DOCUMENTATION HAD BEEN BROUGHT ON RECORD TO JUSTIFY THE BENEFITS RECEIVED BY THE ASSESSEE AGAINST PAYMENT OF ROYALTY AND HENCE, THE ROYALTY TRANSACTION WAS HELD TO BE NOT AT ARM'S LE NGTH. THE FIRST ISSUE WHICH HAS BEEN RAISED BEFORE US IS AGAINST JUSTIFICATION OF ROYALTY PAYMENT VIS - - VIS BENEFITS RECEIVED BY THE ASSESSEE AND WHETHER IT WAS BEYOND THE SCOPE OF TPO WHILE DETERMINING THE ARM'S LENGTH PRICE OF SAID TRANSACTIONS. THE SE COND ISSUE RAISED BEFORE US WAS THAT THE TRANSACTIONS UNDERTAKEN BY THE ASSESSEE ON ACCOUNT OF ROYALTY PAYMENT W ERE AT ARM'S LENGTH OR NOT . 50. THE FIRST ASPECT OF THE ISSUE IS THAT THE ASSESSEE HAS BEEN PAYING THE SAID ROYALTY PAYMENT FROM YEAR TO YEAR , WHICH HAS BEEN ALLOWED IN THE HANDS OF ASSESSEE BY THE TPO WITHOUT MAKING ANY ADJUSTMENT IN ASSESSMENT YEARS 2005 - 06 TO 2008 - 09 . THE ASSESSING OFFICER HAD ALSO ALLOWED THE CLAIM OF ASSESSEE. FURTHER, IN ASSESSMENT YEAR 2010 - 11, IT HAS BEEN ALLOWED BY T HE CIT(A) AND IN ASSESSMENT YEAR 2011 - 12, ALLOWED BY THE DRP. THE SECOND ASPECT IS THAT WHETHER THE RATE OF ROYALTY APPROVED BY SIA / RBI WOULD CONSTITUTE CUP DATA AND THE TRANSACTION IS AT ARM'S LENGTH PRICE . THE HON BLE BOMBAY HIGH COURT IN CIT VS. SGS INDIA PVT. LTD. (SUPRA) HAS HELD SO. THE SAID PROPOSITION HAS ALSO BEEN LAID DOWN BY THE MUMBAI BENCH OF TRIBUNAL IN ACIT VS. M/S. DOW AGROSCIENCES INDIA PVT. LTD. (SUPRA) AND IT HAS BEEN HELD THAT WHERE THE ROYALTIES WERE PAID IN TERMS OF APPROVAL GRANT ED BY SIA / RBI, THEN THE SAME ARE TO BE CONSIDERED AT ARM'S LENGTH RATE. FOLLOWING THE SAID PROPOSITION LAID DOWN BY THE HON BLE BOMBAY HIGH COURT IN CIT VS. SGS INDIA PVT. LTD. (SUPRA) AND MUMBAI BENCH OF TRIBUNAL IN ACIT VS. M/S. DOW AGROSCIENCES INDIA PVT. LTD. (SUPRA) , WE HOLD THAT WHERE THE PAYMENT OF ROYALTY BY THE ASSESSEE TO ITS ITA NO. 251 /P U N/20 14 ITA NO.1327/P U N/2014 CO NO.06/P U N/2015 31 ASSOCIATE ENTERPRISE DANA CORPORATION IS @ 2.85%IS LIABLE TO BE CONSIDERED AT ARM'S LENGTH RATE AND NO ADDITION IS WARRANTED ON THIS COUNT. ACCORDINGLY, THE CLAIM OF ASSE SSEE IS THUS, ALLOWED. IN ANY CASE, THE JURISDICTION AND POWER OF TPO IS TO DETERMINE ARM'S LENGTH PRICE OF ROYALTY AND THE ORDER OF TPO HOLDING THAT THE ASSESSEE HAD NOT DERIVED ANY BENEFIT UNDER THE SAID AGREEMENT IS BEYOND THE SCOPE OF TPO WHILE BENCHMARKING THE INTERNATIONAL TRANSACTION FOR THE PURPOSE OF DETERMINING ARM'S LENGTH PRICE. ACCORDINGLY, WE HOLD SO. THE GROUNDS OF OBJECTIONS RAISED BY THE ASSESSEE ARE THUS, ALLOWED. 51 . IN T HE RESULT, BOTH THE APPEALS OF ASSESSEE AND THE REVENUE ARE PARTLY ALLOWED AND THE CROSS OBJECTIONS OF ASSESSEE ARE ALLOWED. ORDER PRONOUNCED ON THIS 10 TH DAY OF FEBRUARY , 201 7 . SD/ - SD/ - ( ANIL CHATURVEDI ) (SUSHMA CHOWLA) / ACCOUNTANT MEMBER / JUDICIAL MEMBER / PUNE ; DATED : 10 TH FEBRUARY , 201 7 . GCVSR / COPY OF THE ORDER IS FORWAR DED TO : 1. THE APPELLANT ; 2. THE RESPONDENT; 3. THE CIT(A) - IT/TP, PUNE ; 4. THE DIT (TP/IT), PUNE ; 5. THE DR A , ITAT, PUNE; 6. GUARD FILE . / BY ORDER, // TRUE COPY // / ASSISTANT RE GISTRAR, , / ITAT, PUNE