M/s Munjal Showa Ltd., Gurgaon V. DCIT, New Delhi

ITA 293/DEL/2016

• Counselvise Citation: [2019] 117 COUNSELVISE.COM (IT) 6847 (ITAT-DELHI)
• Duration Of Justice: 3 year(s) 3 month(s) 8 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 29-04-2019
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: I
• Assessment Year: 2011-2012
• Appeal Filed On: 20-01-2016
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Assessee Lawyers: S S TOMAR S; SSH VISHAL KLARA ANKIT SAHNI
• Keywords: Capital asset; Transfer pricing; Opportunity of being heard; International transaction; Revenue expenditure
• Section: 143(3); 10B

Judgement Text

IN THE INCOME-TAX APPELLATE TRIBUNAL, DELHI BENCH I-2, NEW DELHI BEFORE : SHRI AMIT SHUKLA, JUDICIAL MEMBER AND SHRI L.P. SAHU, ACCOUNTANT MEMBER ITA NO. 293/DEL/2016 ASSESSMENT YEAR: 2011-12 MUNJAL SHOWA LTD., 9 - 11, MARUTI INDL. AREA, GURGAON. PAN- AAACM0070D (APPELLANT) VS. DCIT, CIRCLE 17(1), NEW DELHI. (RESPONDENT) APPELLANT BY S/SH. VISHAL KLARA, ANKIT SAHNI & S.S. TOMAR, ADVOCATES RESPONDENT BY SH. H.K. CHOUDHARY, CIT/DR ORDER PER L.P. SAHU, A.M.: THIS IS AN APPEAL FILED BY THE ASSESSEE AGAINST TH E ORDER PASSED BY THE ASSESSING OFFICER U/S. 143(3) READ WITH SEC. 144C(1 ) OF THE IT ACT DATED 31.12.2015 ON THE FOLLOWING GROUNDS : 1. THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE ORDERS PASSED BY THE LEARNED ASSESSING OFFICER ('AO'), LEA RNED TRANSFER PRICING OFFICER ('TPO') AND HON'BLE DISPUTE RESOLUTION PANE LS ('DRP') ARE BAD IN LAW AND VOID AB-INITIO WHEREIN THE RETURNED INCOME OF INR 446,451,010 OF APPELLANT WAS ASSESSED AT INR 832,024,020. TRANSFER PRICING GROUNDS 2. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE REFERENCE MADE BY THE AO SUFFERS FROM JURISDICTIONA L ERROR AS THE AO HAS DATE OF HEARING 11.04.2019 DATE OF PRONOUNCEMENT 29.04.2019 ITA NO. 293/DEL/2016 2 NOT RECORDED ANY REASONS IN THE ASSESSMENT ORDER BA SED ON WHICH HE REACHED THE CONCLUSION THAT IT WAS 'EXPEDIENT AND N ECESSARY' TO REFER THE MATTER TO THE TPO FOR COMPUTATION OF THE ARMS LENGT H PRICE, AS IS REQUIRED UNDER SECTION 92CA(1) OF THE INCOME TAX ACT, 1961 (' ACT'). 3. THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF TH E CASE, THE AO/ TPO/ DRP ERRED ON FACTS AND IN LAW IN DETERMINING TH E ARM'S LENGTH PRICE OF THE INTERNATIONAL TRANSACTIONS OF ROYALTY, TECHN ICAL FEE AND DESIGN AND DRAWING FEE OF THE APPELLANT AS NIL BY NOT TAKING C OGNIZANCE OF THE BUSINESS OPERATIONS OF THE APPELLANT AND WITHOUT CO NSIDERING THE BENEFITS DERIVED FROM THE TECHNICAL ASSISTANCE RECEIVED AND UNDERLYING EVIDENCE THEREOF AND HENCE, CHALLENGING THE COMMERCIAL WISDO M OF THE APPELLANT'S BUSINESS OPERATIONS. 4. THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF TH E CASE, THE AO/ TPO/ DRP ERRED ON FACTS AND IN LAW IN DETERMINING TH E ARM'S LENGTH PRICE OF THE INTERNATIONAL TRANSACTION OF PAYMENT OF ROYA LTY AMOUNTING TO INR 338,946,167 AS NIL. THE AGGREGATION OF TRANSACTION A S CLOSELY LINKED AND INTRINSIC TO THE BUSINESS OPERATIONS (FAR) OF THE A PPELLANT AND APPLICATION OF TNMM AS HAS BEEN WRONGLY REJECTED. 5. THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF TH E CASE, THE AO/ TPO/ DRP ERRED ON FACTS AND IN LAW IN DETERMINING TH E ARM'S LENGTH PRICE OF THE INTERNATIONAL TRANSACTION OF PAYMENT OF TECHN ICAL SERVICE FEE AMOUNTING TO INR 2,140,724 AS NIL. THE AGGREGATION O F TRANSACTION AS CLOSELY LINKED AND INTRINSICTO THE BUSINESS OPERATI ONS (FAR) OF THE APPELLANT AND APPLICATION OF TNMM AS HAS BEEN WRONGL Y REJECTED. 6. THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF TH E CASE, THE AO/TPO/ DRP ERRED ON FACTS AND IN LAW IN DETERMINING THE AR M'S LENGTH PRICE OF THE INTERNATIONAL TRANSACTION OF PAYMENT OF DESIGN AND DRAWING AMOUNTING TO INR 44,486,115 AS NIL. THE AGGREGATION OF TRANSACTIO N AS CLOSELY LINKED AND INTRINSIC TO THE BUSINESS OPERATIONS (FAR) OF T HE APPELLANT AND APPLICATION OF TNMM AS HAS BEEN WRONGLY REJECTED. 7. THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF TH E CASE, THE AO/TPO/ DRP ERRED ON FACTS AND IN LAW IN DETERMINING THE AR M'S LENGTH PRICE OF THE INTERNATIONAL TRANSACTIONS OF ROYALTY, TECHNICAL FE E, DESIGN AND DRAWING FEE OF THE APPELLANT AS NIL BY ERRONEOUS APPLICATIO N OF COMPARABLE ITA NO. 293/DEL/2016 3 UNCONTROLLED PRICE METHOD WITHOUT FURNISHING DATA/D ETAILS OF PRICE CHARGED IN ANY COMPARABLE UNCONTROLLED TRANSACTION WHICH IS IN CONTRAVENTION OF THE PROVISIONS OF RULE 10B OF THE RULES. 8. THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF TH E CASE, THE AO/ TPO/ DRP ERRED ON FACTS AND IN LAW IN DETERMINING TH E ARM'S LENGTH PRICE OF THE INTERNATIONAL TRANSACTIONS OF ROYALTY, TECHN ICAL FEE, DESIGN AND DRAWING FEE OF THE APPELLANT AS NIL BY NOT TAKING C OGNIZANCE OF OUR DETAILED SUBMISSIONS/ COST BENEFIT ANALYSIS/ WORKIN GS MADE TO THE TPO FROM TIME TO TIME DURING THE TP ASSESSMENT PROCEEDIN GS. CORPORATE TAX GROUNDS 9. THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF TH E CASE, THE DRP ERRED ON FACTS AND IN LAW IN CONSIDERING THE EXPEND ITURE ON ACCOUNT OF ROYALTY AND TECHNICAL FEE OF INR 34,10,86,891 AS CA PITAL EXPENDITURE. 10. THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF T HE CASE, THE AO HAS ERRONEOUSLY MADE AN ADDITION AMOUNTING TO INR 385,5 73,006 INSTEAD OF INR 341,086,891, IGNORING THE FACT THAT THE DIFFERE NCE AMOUNTING TO INR 44,486,115, RELATING TO DESIGN AND DRAWING FEE, HAS BEEN CAPITALIZED BY THE APPELLANT. 11. THAT IN THE FACTS AND CIRCUMSTANCES OF THE CASE , THE ABOVE FACT PATTERN HAS ALREADY BEEN ACKNOWLEDGED BY THE AO IN HIS DRAFT ASSESSMENT ORDER WHEREIN, THE AO MADE AN ADDITION AMOUNTING TO INR 341,086,891, AS OPPOSED TO INR 385,573,006. 12. THE AO ERRED IN FACTS AND IN LAW IN CHARGING AN D COMPUTING INTEREST UNDER SECTION 234D OF THE ACT. 13. THAT ON FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE AO/ DRP HAS ERRED IN INITIATING PENALTY PROCEEDINGS U/S 271(L)(C) OF THE ACT MECHANICALLY AND WITHOUT RECORDING ANY ADEQUATE SAT ISFACTION FOR SUCH INITIATION. THE ABOVE GROUNDS OF APPEAL ARE MUTUALLY EXCLUSIVE A ND WITHOUT PREJUDICE TO EACH OTHER. ITA NO. 293/DEL/2016 4 2. THE BRIEF FACTS OF THE CASE ARE THAT THE APPELLA NT, MUNJAL SHOWA LIMITED WAS ESTABLISHED IN 1985 IN TECHNICAL AND FINANCIAL COLLABORATION WITH SHOWA CORPORATION, JAPAN, THE PIONEER AND LEADER IN THE W ORLD OF SHOCK ABSORBERS. THE JOINT VENTURE WAS BROUGHT TO INDIA, A WORLD OF EXPERTISE IN DESIGN AND MANUFACTURING OF SHOCK ABSORBERS FOR ALL LEADING TW O WHEELERS AND FOUR WHEELERS. SHOWA IS ONE OF THE LARGEST SUPPLIERS OF SHOCK ABSORBERS TO MAJOR AUTO GIANTS IN JAPAN, USA, GERMANY UK AND OTHER DEV ELOPED MARKETS. COMPANYS PRODUCTS CONFORM TO THE HIGHEST STANDARDS OF QUALITY, SAFETY, COMFORT AND DEPENDABILITY. COMPANYS PRODUCT ENJOY WIDE PATRONAGE WHILE SERVING AS ORIGINAL EQUIPMENT TO VEHICLES LIKE MARU TI 800CC, OMNI VAN, ALTO, ESTEEM, HONDA CITY CAR, COMPLETE RANGE OF HERO HOND A MOTOR CYCLES, KINETIC HONDA SCOOTER, HERO PUCH, HERO WINNER, HERO MAJESTI C AND UNICORN. 2.1. FOR THE ASSESSMENT YEAR 2011-12, ASSESSEE FIL ED THEIR RETURN OF INCOME ON 24.11.2011 DECLARING A TOTAL INCOME OF RS.44,64, 51,010/-. THE CASE WAS SELECTED FOR SCRUTINY AND STATUTORY NOTICES WERE IS SUED. DURING SCRUTINY PROCEEDINGS, THE LEARNED AO FOUND THAT THE ASSESSEE HAS PAID A SUM OF RS.33,89,46,187/- TOWARDS ROYALTY, RS.21,40,724/- T OWARDS TECHNICAL FEE AND RS.4,44,86,115/- TOWARDS DESIGN AND DRAWING FEE PUT TOGETHER RS.38,55,73,006/- AS ROYALTY, TECHNICAL FEES AND DR AWING AND DESIGN FEE TO ITS ASSOCIATE ENTERPRISE (AE). FOR DETERMINATION OF TH E ARMS LENGTH PRICE THEREOF, LEARNED AO REFERRED THE ISSUE TO THE LEARN ED TRANSFER PRICING OFFICER. 2.2. LD. TPO HELD THAT NO TANGIBLE BENEFIT WAS PASS ED TO THE ASSESSEE AND THE ARMS LENGTH PRICE OF THE ABOVE TRANSACTIONS WAS RE DUCED TO NIL. CONSEQUENTLY, ASSESSMENT ORDER WAS PASSED BY MAKING ADDITION OF RS.38,55,73,006/- ON ACCOUNT OF TRANSFER PRICING IS SUE. ITA NO. 293/DEL/2016 5 2.3. ASSESSEE FILED OBJECTIONS BEFORE THE LEARNED D ISPUTE RESOLUTION PANEL (DRP). LEARNED DRP, HOWEVER, AFFIRMED THE ORDER PA SSED BY THE ASSESSING OFFICER THROUGH DIRECTION DATED 24.11.2015, THEREBY REJECTING THE OBJECTIONS MADE BY THE ASSESSEE. 3. THE ASSESSEE, THEREFORE, PREFERRED THIS APPEAL O N AS MANY AS 13 GROUNDS. GROUND NOS. 1 IS GENERAL IN NATURE. GROUND S NOS. 2 TO 8 RELATE TO THE TRANSFER PRICING ISSUE AND GROUNDS NOS.9 TO 11 RELA TE TO THE TREATMENT OF EXPENDITURE ON ACCOUNT OF ROYALTY AND TECHNICAL FEE WHETHER REVENUE OR CAPITAL IN NATURE. GROUND NOS.12 & 13 RELATE TO INT EREST AND PENALTY WHICH ARE CONSEQUENTIAL AND PREMATURE IN NATURE. 4. FIRST, TAKING THE TRANSFER PRICING ISSUE, AS HAS BEEN STATED ABOVE, IT RELATES TO THE DETERMINATION OF ARMS LENGTH PRICE OF INTERNATIONAL TRANSACTIONS OF ROYALTY, FEE FOR TECHNICAL SERVICES AND FEE PAID FOR DESIGN AND DRAWING FEE TO THE TUNE OF RS.38,55,73,006/-. AT THE OUTSET, IT I S SUBMITTED BY THE LEARNED AR THAT A SIMILAR ISSUE HAD ARISEN IN THE AYS 2007-08 TO 2009-10 BEFORE THE TRIBUNAL AND FOR ALL THESE YEARS THE ISSUE WAS ANSW ERED IN FAVOUR OF THE ASSESSEE AND EFFECTS WAS GIVEN TO THE ORDERS OF THE TRIBUNAL. THE LD. AR FURTHER SUBMITTED THAT THE SAME ISSUE HAS ALSO BEEN DECIDED BY THE TRIBUNAL IN FAVOUR OF ASSESSEE IN A.Y. 2010-11 VIDE ORDER DATED 27.06. 2018. LEARNED DR DOES NOT DISPUTE THIS FACT. 5. WE HAVE GONE THROUGH THE RECORD WHICH INCLUDES T HE ORDERS OF THE TRIBUNAL FOR THE AYS 2006-07 TO 2009-10 AND A.Y. 20 10-11. HAVING GONE THROUGH THESE ORDERS, WE FIND THAT THE ISSUES INVOL VED IN THIS APPEAL, AS NOTED ABOVE, ARE SQUARELY COVERED IN FAVOUR OF THE ASSESS EE BY THE DECISION OF CO- ITA NO. 293/DEL/2016 6 ORDINATE BENCHES FOR A.YRS. 2006-07 TO 2010-11. THE RELEVANT FINDINGS OF THE TRIBUNAL REACHED IN A.Y. 2010-11 ARE REPRODUCED BEL OW FOR READY REFERENCE : 8. WE HAVE GONE THROUGH THE RECORD WHICH INCLUDES THE ORDERS OF THE TRIBUNAL FOR THE AYS. 2006-07 TO 2009-10 IN ITA NO. 1030/DEL/201 4. FOR AY 2009-10, A COORDINATE BENCH OF THIS TRIBUNAL DEALT WITH THIS I SSUE VIDE GROUND NOS. 2 TO 2.6 AND WHILE REFERRING TO THE ORDERS IN ASSESSEES OWN CAS E IN ITA NO.4675/DEL/2010 AND 4242/DEL/2011 FOR AYS 2006-07 AND 2007-08 RESPECTIV ELY AT PARAS 27 TO 39 OF THE SAID EARLIER YEAR ORDERS, IT WAS OBSERVED THAT THIS ISSUE WAS DECIDED IN FAVOUR OF THE ASSESSEE FOR AYS 2002-03 TO 2004-05 ALSO BY THE TRI BUNAL, APPEAL AGAINST SUCH ORDER PREFERRED BY THE REVENUE BEFORE THE HONBLE DELHI H IGH COURT WAS DISMISSED AND IN ACCORDANCE WITH SUCH ORDERS, THE MATTER HAD TO BE R EMITTED TO THE TPO TO DECIDE AFRESH AFTER PROVIDING AN OPPORTUNITY OF BEING HEAR D TO THE ASSESSEE. 9. IN THE ORDER FOR THE AYS 2006-07 AND 2007-08, A COORDINATE BENCH OF THIS TRIBUNAL OBSERVED AS FOLLOWS: 28. THE ASSESSEES CASE IS THAT IT HAD LIMITED RIG HT TO USE THE TECHNOLOGY OF SHOWA JAPAN. THE OWNERSHIP / PROPERTY RIGHTS IN TECHNICA L KNOW HOW CONTINUE TO BE VESTED IN SHOWA AND THE APPELLANT HAS NO AUTHROISED APPROV AL OF COMPANY TO TRANSFER THE KNOW HOW OR ANY TECHNICAL INFORMATION TO ANY THIRD PARTY. THERE IS NO EXPLICIT OR IMPLICIT AUTHORITY TO TRANSFER OR CREATE OWNERSHIP IN THE TECHNOLOGY, KNOW HOW/TECHNICAL INFORMATION IN THE APPELLANT. THE EX PENDITURE OF ROYALTY OR TECHNICAL FEE DID NOT RESULT WITH CAPITAL ASSET OR A BENEFIT O F ENDURING NATURE MUCH LESS IN THE CAPITAL FIELD. THE APPELLATE TRIBUNAL IN THE CASE O F THE ASSESSEE FOR THE ASSTT. YEAR 1993-94 TO 1995-96 AND FOR ASSTT. YEAR 2002-03 AND 2004-05 HAVE DELETED THE SIMILAR DISALLOWANCE. REVENUE APPEAL FOR ASSTT. YEAR 2002- 03 AND 2004-05 STANDS DISMISSED BY THE DELHI HIGH COURT VIDE ITS ORDER DATED 6.9.20 10 IN ITA NO. 94, 95 & 96/DEL/2014. 29. HEARD PARTIES. IN THE PECULIAR FACT-SITUATIO N AND THE JUDGMENT OF THE HONBLE DELHI HIGH COURT IN THE EARLIER YEARS IN ASSESSEES OWN CASE OF WHICH, THE AO DID NOT HAVE BENEFIT AT THE TIME WHEN HE PASSED THE ORDER, W E CONSIDER IT APPROPRIATE TO REMIT THE MATTER BACK TO HIM AND TAKE DECISION AFRESH, IN ACCORDANCE WITH LAW BY HAVING REGARD TO THE AFORESAID JUDGMENT. NEEDLESS TO SAY THE ASSESSEE MAY BE GRANTED EFFECTIVE OPPORTUNITY OF BEING HEARD. 10. RESPECTFULLY FOLLOWING THE SAME, WE REMAND THE CASE TO THE TPO TO DECIDE AFRESH IN TUNE WITH THE EARLIER YEAR ORDERS. GROUND NOS. 2 TO 8 ARE ANSWERED ACCORDINGLY. 6. COMING TO GROUND NOS. 9 TO 11 PERTAINING TO TREA TMENT OF EXPENDITURE INCURRED ON ACCOUNT OF ROYALTY AND TECHNICAL FEE OF RS.34,10,86,891/- WHETHER CAPITAL OR REVENUE IN NATURE, WE FIND THAT THIS ISS UE DOES NOT EMERGE FROM THE ITA NO. 293/DEL/2016 7 FINAL ASSESSMENT ORDER, AS THE ASSESSING OFFICER HA S NOWHERE IN THE FINAL ORDER DECIDED THIS ISSUE NOR MADE ANY ADDITION ON THIS SC ORE. THEREFORE, THERE REMAINS NOTHING TO CHALLENGE BEFORE US ON THIS SCOR E BY THE ASSESSEE. 7. HOWEVER, BEFORE PARTING, WE FIND SUBSTANCE IN TH E CONTENTION OF THE ASSESSEE THAT THE AO IN THE FINAL ASSESSMENT ORDER DID NOT MAKE ANY DISALLOWANCE OF EXPENDITURE ON ACCOUNT OF ROYALTY A ND TECHNICAL FEE. THE SAME WAS, HOWEVER, MADE IN DRAFT ASSESSMENT ORDER WHICH WAS UPHELD BY DRP. THE CONTENTION OF THE ASSESSEE HAS ALSO BEEN THAT EVEN OTHERWISE THIS ISSUE IS ALSO COVERED BY THE AFORESAID DECISION OF COORDINATE BEN CH FOR A.Y. 2010-11 WHEREBY IN THE IDENTICAL FACTS IT HAS BEEN HELD THA T ROYALTY AND TECHNICAL FEE PAID IS TO BE TREATED AS REVENUE EXPENDITURE. IN VI EW OF ATTENDING FACTS AS NOTED ABOVE, IN OUR CONSIDERED OPINION, THESE CONTE NTIONS CANNOT BE CONSIDERED AT THIS STAGE ONCE NO SUCH ISSUE OR DISA LLOWANCE IN RELATION THERETO WAS MADE IN THE IMPUGNED ORDER. 8. IN VIEW OF WHAT HAS BEEN DISCUSSED ABOVE, THE A PPEAL OF THE ASSESSEE DESERVES TO BE PARTLY ALLOWED. 9. IN THE RESULT, THE APPEAL IS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 29.04.2019. SD/- SD/- (AMIT SHUKLA) (L.P. S AHU) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED: 29.04.2019 *AKS*