India Yamaha Motor Pvt. Ltd., New Delhi V. ACIT (LTU), New Delhi

ITA 297/DEL/2015

• Counselvise Citation: [2018] 126 COUNSELVISE.COM (IT) 3543 (ITAT-DELHI)
• Duration Of Justice: 3 year(s) 29 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 12-02-2018
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: I
• Assessment Year: 2010-2011
• Appeal Filed On: 14-01-2015
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: SANJAY KUMAR YADAV SENIOR
• Keywords: Transfer pricing; Business expenditure; International transaction

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL (DELHI BENCH I-2 : NEW DELHI) BEFORE SHRI B.P. JAIN, ACCOUNTANT MEMBER AND SHRI KULDIP SINGH, JUDICIAL MEMBER ITA NO.297/DEL./2015 (ASSESSMENT YEAR : 2010-11) M/S. INDIA YAMAHA MOTOR PRIVATE LTD., VS. ACIT, LTU , FIRST FLOOR, THE GREAT EASTERN CENTRE, NEW DELHI. 70, NEHRU PLACE, BEHIND IFCI TOWER, NEW DELHI 110 019. (PAN : AABCI7552F) (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI VED JAIN, ADVOCATE MS. RANO JAIN, ADVOCATE SHRI ASHISH GOYAL, CA REVENUE BY : SHRI SANJAY KUMAR YADAV, SENIOR DR DATE OF HEARING : 09.01.2018 DATE OF ORDER : 12.02.2018 O R D E R PER KULDIP SINGH, JUDICIAL MEMBER : THE APPELLANT, M/S. INDIA YAMAHA MOTOR PVT. LTD. (HEREINAFTER REFERRED TO AS THE TAXPAYER) BY FILI NG THE PRESENT APPEAL SOUGHT TO SET ASIDE THE IMPUGNED ORDER DATED 17.12.2014, PASSED BY THE AO IN CONSONANCE WITH THE ORDERS PASS ED BY THE LD. DRP/TPO UNDER SECTION 143 (3) OF THE INCOME-TAX ACT , 1961 (FOR ITA NO.297/DEL/2015 2 SHORT THE ACT) QUA THE ASSESSMENT YEAR 2010-11 ON THE GROUNDS INTER ALIA THAT :- 1. ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE ORDER PASSED BY THE LEARNED ASSESSING OFFICER IS BA D, BOTH IN THE EYE OF LAW AND ON THE FACTS. 2. ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LEARNED A.O. HAS ERRED, BOTH ON FACTS AND IN LAW, I N ASSESSING THE LOSS OF THE ASSESSEE AT RS.238,92,49, 906/- AS AGAINST LOSS OF RS.263,71,10,5311- DECLARED BY T HE ASSESSEE. 3. ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LEARNED DRP HAS ERRED, BOTH ON FACTS AND IN LAW, IN CONFIRMING ADDITION TO THE EXTENT OF RS.24,78,07,52 51- AS DIFFERENCE IN ARM'S LENGTH PRICE CLAIMED BY THE ASSESSEE. 4(I) ON THE FACTS AND CIRCUMSTANCES OF THE CASE, T HE LEARNED DRP HAS ERRED, BOTH ON FACTS AND IN LAW, IN CONFIRMING ADJUSTMENT ON ACCOUNT OF ARM'S LENGTH PR ICE OF RS.24,78,07,525 ON ACCOUNT OF ROYALTY PAID BY TH E ASSESSEE. (II) ON THE FACTS AND CIRCUMSTANCES OF THE CASE, T HE DRP HAS ERRED, BOTH ON FACTS AND IN LAW IN IGNORING THE CONTENTION OF THE ASSESSEE THAT IT HAS BEEN ABLE TO GET TANGIBLE BENEFIT IN THE FORM OF MANUFACTURING MOTOR CYCLES BY MAKING THIS ROYALTY PAYMENT. (III) ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE DRP HAS ERRED, BOTH ON FACTS AND IN LAW IN REJECTIN G THE CONTENTION OF THE ASSESSEE THAT ROYALTY PAYMENT IS NOT RELATED TO AND HAS NO RELEVANCE WITH THE PROFIT OR LOSS THE ASSESSEE MAY MAKE BY USE OF THE SAID TECHNOLOGY . (IV) ON THE FACTS AND CIRCUMSTANCES OF THE CASE, T HE DRP HAS ERRED IN ACCEPTING THE TPO'S CONTENTION THA T THE ASSESSEE IS MAKING THREE SEPARATE PAYMENTS FOR THE SAME SET OF SERVICES, WITHOUT APPRECIATING THE FACT S OF THE CASE. ITA NO.297/DEL/2015 3 5. ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE DETERMINATION OF THE ARM'S LENGTH PRICES OF ROYALTY AT RS. NIL IS WITHOUT BENCHMARKING AND WITHOUT APPLYIN G ANYONE OF THE APPROVED METHOD OF DETERMINATION OF T HE ARM'S LENGTH PRICE. 6. ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE DRP HAS ERRED, BOTH ON FACTS AND IN LAW IN REJECTIN G THE CONTENTION OF THE ASSESSEE THAT RULE 10B(1)(A) DOES NOT AUTHORIZE DISALLOWANCE OF ROYALTY EXPENDITURE ON TH E GROUND THAT IT WAS NOT NECESSARY OR PRUDENT FOR THE ASSESSEE TO INCUR THE SAME. 7. THE ASSESSEE CRAVES LEAVE TO ADD, AMEND OR ALTER ANY OF THE GROUNDS OF APPEAL. 2. BRIEFLY STATED THE FACTS NECESSARY FOR ADJUDICAT ION OF THE CONTROVERSY AT HAND ARE : THE TAXPAYER IS INTO MANU FACTURING MOTORCYCLES UNDER YAMAHA BRAND NAME AND ITS SPARE PARTS. DURING THE YEAR UNDER ASSESSMENT, THE TAXPAYER ENTE RED INTO INTERNATIONAL TRANSACTIONS WITH ITS ASSOCIATED ENTE RPRISES AS UNDER:- S.NO. NATURE OF TRANSACTION METHOD ARMS LENGTH PRICE (AS PER THE ASSESSEE) (INR) (I) IMPORT OF COMPONENTS/SPARE PARTS FROM AES CPM 2,04,59,04,263 (II) IMPORT OF CAPITAL GOODS CPM 1,36,37,40,983 (III) EXPORT OF SPARE PARTS CPM 5,82,41,276 (IV) EXPORT OF MOTORCYCLES RPM 1,17,43,01,910 (V) ROYALTY CUP 18,77,26,589 (VI) MODEL FEE CUP 20,11,65,967 (VII) TECHNICAL GUIDANCE FEE CUP 16,98,99,424 (VIII) INTEREST ON SHORT TERM FINANCING CUP 36,91,245 (IX) REIMBURSEMENT OF WARRANTY CLAIMS TO AES - 42,12,004 (X) REIMBURSEMENT/SUPPORT RECEIVED - 11,51,64, 916 ITA NO.297/DEL/2015 4 3. THE TRANSFER PRICING OFFICER (TPO) ON THE BASIS OF TRANSFER PRICING STUDY SUBMITTED BY THE TAXPAYER FOUND ALL T HE INTERNATIONAL TRANSACTIONS MADE BY THE TAXPAYER WITH ITS AE AT AR MS LENGTH EXCEPT TRANSACTION RECORDED AT SL.NO.(V) AS TO PAYM ENT OF ROYALTY AND MADE ADJUSTMENT AT ALP AS UNDER :- SL. NO. NATURE OF INTERNATIONAL TRANSACTION ALP DETERMINED BY ASSESSEE (INR) ALP DETERMINED BY THIS OFFICE (INR) ADJUSTMENT U/S 92CA (NR) 1. PAYMENT OF ROYALTY 24,78,07,525/ - NIL 24,78,07,525/ - TOTAL 24.78 CRORES 4. THE TAXPAYER CARRIED THE MATTER BEFORE THE LD. D RP BY FILING OBJECTIONS WHO HAS DISPOSED OF THE OBJECTIONS. FEE LING AGGRIEVED, THE TAXPAYER HAS COME UP BEFORE THE TRIBUNAL BY WAY OF FILING THE PRESENT APPEAL. 5. WE HAVE HEARD THE LD. AUTHORIZED REPRESENTATIVES OF THE PARTIES TO THE APPEAL, GONE THROUGH THE DOCUMENTS R ELIED UPON AND ORDERS PASSED BY THE REVENUE AUTHORITIES BELOW IN T HE LIGHT OF THE FACTS AND CIRCUMSTANCES OF THE CASE. GROUNDS NO.1 & 2 6. GROUNDS NO.1 & 2 ARE GENERAL IN NATURE MORE SPEC IFICALLY ELABORATED IN THE SUBSEQUENT GROUNDS, NEED NO ADJUD ICATION. ITA NO.297/DEL/2015 5 GROUNDS NO.3 TO 6 7. THE LD. TPO, BY APPLYING THE CUP METHOD, DETERMI NED THE ALP OF INTERNATIONAL TRANSACTION QUA PAYMENT OF ROY ALTY CAME TO THE CONCLUSION THAT THE TAXPAYER HAS NOT PROVED ANY REAL TANGIBLE ECONOMIC BENEFIT THAT HAS BEEN PASSED TO HIM BY THE TECHNOLOGY RECEIVED FROM AE NOR IT HAS PROVIDED COMPARABLE CAS ES WHERE INDEPENDENT PARTIES ARE MAKING PAYMENT FOR ROYALTY UNDER SIMILAR CIRCUMSTANCES AND HAS ALSO DECLINED TO FOLLOW DECIS ION RENDERED BY THE HONBLE HIGH COURT IN CIT VS. EKL APPLIANCES LT D. (2012) 345 ITR 241 AND PROCEEDED TO PROPOSE THE ALP AT RS.24,78,07,535/-. 8. LD. AR FOR THE TAXPAYER CONTENDED THAT THE ISSUE IN CONTROVERSY HAS BEEN COVERED BY THE DECISION OF THE COORDINATE BENCH OF THE TRIBUNAL IN TAXPAYERS OWN CASE FOR AY 2009-10 VIDE ITA NO.1720/DEL/2014 ORDER DATED 27.04.2017. HOWEVER, ON THE OTHER HAND, THE LD. DR FOR THE REVENUE RELIED ON TH E ORDERS OF THE AUTHORITIES BELOW. 9. UNDISPUTEDLY, THERE IS NO CHANGE IN THE BUSINESS MODEL OF THE TAXPAYER. IT IS ALSO NOT IN DISPUTE THAT ROYAL TY HAS BEEN PAID AT A PRE-DETERMINED RATE ON THE BASIS OF NUMBER OF UNITS OF PARTICULAR MODELS SOLD BY THE TAXPAYER. ITA NO.297/DEL/2015 6 10. UNDISPUTEDLY, THE TPO HAS DISALLOWED THE ROYALT Y PAYMENT ON THE GROUND THAT THE TAXPAYER HAS NOT BEEN ABLE T O PROVE ANY REAL TANGIBLE BENEFIT THAT HAS PASSED TO HIM BY TECHNOLO GY RECEIVED FROM ITS AE. THIS REASONING OF THE TPO AS WELL AS DRP HAS NOT BEEN UPHELD BY THE COORDINATE BENCH OF THE TRIBUNAL IN TAXPAYERS OWN CASE FOR AY 2009-10 AND DELETED THE PROPOSED AD JUSTMENT ON ACCOUNT OF ROYALTY PAYMENT OF RS.18.78 CRORES BY RE TURNING THE FOLLOWING FINDINGS :- 14. ON GOING THROUGH THE FACTS, WE NOTE THAT THIS ROYALTY HAS BEEN PAID BY THE ASSESSEE TO ITS AE I.E. YAMAHA MOTOR CO . LTD., JAPAN WHICH HAS GRANTED AN EXCLUSIVE, NON-TRANSFERABLE AN D NON-DIVISIBLE LICENSE TO USE THE TECHNICAL INFORMATION FOR MANUFA CTURE OR PROCESS LOCALLY MANUFACTURED PARTS AT ITS FACTORY PREMISES AND TO SUB-CONTRACT THE SAME TO MANUFACTURE MOTORCYCLES AT ITS FACTORY PREMISES, RIGHT TO USE YAMAHA TRADEMARK AND PERMIT THE COMPANY DEALE RS TO USE YAMAHA TRADEMARK IN THE COURSE OF MARKETING ACTIV ITIES IN INDIA, NEPAL AND BHUTAN. THE TECHNOLOGY PROVIDED BY THE A E HAS BEEN DEVELOPED SPECIFICALLY FOR THE ASSESSEE AND SIMILAR TECHNOLOGY IS NOT AVAILABLE WITH NON-AE. THIS ROYALTY IS BEING PAID AT A PREDETERMINED RATE ON THE BASIS OF NUMBER OF UNITS OF PARTICULAR MODEL SOLD BY THE ASSESSEE COMPANY. 15. THE LEARNED TPO HAD DISALLOWED THE PAYMENT OF R OYALTY ON THE ALLEGATION THAT THERE IS NO RATIONALE FOR MAKIN G PAYMENT OF ROYALTY WHEN AE IS NOT PASSING ANY ECONOMIC BENEFIT TO THE ASSESSEE AS ASSESSEE IS NOT ABLE TO MAKE ANY PROFIT OUT IT. IN RESPONSE TO THE ALLEGATION OF THE TPO, THE ASSESSEE HAD SUBMITTED A DETAILED REPLY VIDE LETTER DATED 05.11.2012 GIVING THE NATURE AND DESCRIPTION OF THE INTANGIBLE LICENSED BY ITS AE I.E. YAMAHA MOTOR CO. LTD. , JAPAN TO THE ASSESSEE COMPANY WHICH READS AS UNDER:- 1. NATURE & DESCRIPTION OF INTANGIBLES LICENSED YAMAHA MOTOR CO. LTD., JAPAN (YMC) HAS GRANTED THE COMPANY AN EXCLUSIVE, NON-TRANSFERABLE AND NON-DIVI SIBLE TO USE THE TECHNICAL INFORMATION - TO MANUFACTURE OR PROCESS LOCALLY MANUFACTURED PA RTS AT ITS FACTORY PREMISES AND TO SUB-CONTRACT THE SAM E; - TO PROCURE LOCAL PARTS AND IMPORT IMPORTED PARTS ; - TO MANUFACTURE MOTORCYCLES AT ITS FACTORY PREMIS ES; ITA NO.297/DEL/2015 7 - TO SELL, DISTRIBUTE, MARKET AND SERVICE MOTORCYCL ES AND PARTS IN INDIA, NEPAL AND BHUTAN; - TO EXPORT MOTORCYCLES AND PART; AND - RIGHT TO USE YAMAHA TRADEMARK FOR THE PURPOSE O F DOING ABOVE-STATED ACTIVITIES, AND PERMIT THE COMPANYS DEALERS TO USE THE YAMAHA TRADEMARK IN THE COURSE OF MARKETING ACTIVITIES IN INDIA, NEPAL & BHUTAN. - TECHNICAL INFORMATION HERE MEANS THE TECHNICAL INFORMATION CONTAINED IN BELOW DOCUMENTS, WHICH SHALL BE PROVIDED BY YMC TO THE COMPANY:- - MASTER PART LISTS WITH RESPECT TO MOTORCYCLES; - DRAWINGS WITH RESPECT TO MOTORCYCLES AND PARTS THEREOF; - YAMAHA DESIGN STANDARDS AND YAMAHA QUALITY STANDARDS SPECIFIED IN THE DRAWINGS; - INSPECTION STANDARDS FOR COMPLETED MOTORCYCLES AN D PARTS THEREOF; - PROCESS STANDARDS, WHICH SPECIFY AND GIVE TECHNIC AL EXPLANATION OF THE BASIC MANUFACTURING METHODS AND PROCESSES REQUIRED FOR MANUFACTURE OF LOCALLY MANUFACTURED PARTS FOR THE MOTORCYCLES. 2. WHEN WAS THE TECHNOLOGY DEVELOPED THE TECHNOLO GY IS DEVELOPED FROM TIME TO TIME DEPENDING ON THE COM PANYS REQUIREMENTS TO INTRODUCE NEW PRODUCTS IN THE MARKE T, WHICH AGAIN DEPENDS ON VARIOUS FACTORS, INCLUDING CURRENT MARKET DEMAND. 3. THE NATURE OF TECHNICAL COLLABORATION BETWEEN TH E ASSESSEE AND YMC DOES NOT NECESSITATE OBTAINING UPG RADES OR MODIFICATIONS. HOWEVER, WHENEVER ANY SUPPORT IS RE QUIRED BY THE ASSESSEE IN CONNECTION WITH THE TECHNICAL COLLA BORATION AGREEMENTS, THE SAME IS DULY PROVIDED BY YMC. 4. THE TECHNICAL AND OTHER INFORMATION LICENSED BY YMC TO THE ASSESSEE ARE UNIQUE IN THE SENSE THAT THE SA ID INFORMATION IS NOT READILY AVAILABLE IN THE OPEN MA RKET, AND IS DEVELOPED BY YMC SPECIFICALLY FOR THE ASSESSEE. TH ERE IS NO RESTRICTION ON THE PERIOD UP TO WHICH THESE INTANGI BLES CAN BE USED BY THE ASSESSEE. THE ASSESSEE CAN CONTINUE TO USE THESE INTANGIBLES FOR AN UNLIMITED PERIOD. 5. AS STATED ABOVE, THE TECHNOLOGY PROVIDED BY YMC IS DEVELOPED SPECIFICALLY FOR THE ASSESSEE. ACCORDING LY, THE SAID TECHNOLOGY IS NOT USABLE FOR YMC FOR ANY OTHER PURP OSE. 6. IT MAY BE NOTED THAT SIMILAR TECHNOLOGY IS NOT A VAILABLE WITH NON-AES AND IS NOT READILY AVAILABLE IN THE OP EN MARKET, AND IS DEVELOPED BY YMC SPECIFICALLY FOR THE ASSESS EE. 7. THE PAYMENTS FOR TECHNOLOGY PROVIDED BY YMC ARE MADE BY THE COMPANY IN TWO MODES:- - PAYMENT TOWARDS LUMP SUM TECHNICAL KNOW-HOW FEES EQUIVALENT TO 50% OF THE VARIABLE RESEARCH AND DEVE LOPMENT ITA NO.297/DEL/2015 8 COST INCURRED BY YMC FOR THE DEVELOPMENT OF NEW MOD ELS OF MOTORCYCLES; AND - ROYALTY AT A PRE-DETERMINED RATE ON THE BASIS OF NUMBER OF UNITS OF THE PARTICULAR MODEL SOLD BY THE COMPANY. THE ROYALTY IS PAID TOWARDS THE BALANCE COST INCURR ED BY YMC FOR DEVELOPMENT OF NEW MODELS OF MOTORCYCLES. 8. NO COST BENEFIT ANALYSIS IS DONE AT THE TIME OF TECHNOLOGY TRANSFER. IT MAY BE APPRECIATED THAT TH E ROYALTY IS REQUIRED TO BE PAID BY THE ASSESSEE TO YMC ONLY ON SALE OF MOTORCYCLES AND NOT ON PRODUCTION. IF THERE WILL B E NO SALE, THERE WILL BE NO ROYALTY PAYMENTS. 9. AS MENTIONED ABOVE NO COST BENEFIT ANALYSIS IS D ONE AND HENCE THIS QUESTION IS NOT APPLICABLE. 10. IT MAY BE NOTED THAT SIMILAR TECHNOLOGY IS NOT AVAILABLE WITH NON-AES AND IS NOT READILY AVAILABLE IN THE OP EN MARKET, AND IS DEVELOPED BY YMC SPECIFICALLY FOR THE ASSESS EE. ACCORDINGLY IT IS NOT POSSIBLE TO UNDERTAKE ANY BEN CHMARK ANALYSIS TO COMPARE PAYMENT OF ROYALTY WITH ANY NON -AES AT THE TIME OF EXECUTION OF AGREEMENT FOR ROYALTY. 11. THE BENEFIT DERIVED BY THE ASSESSEE FROM USE OF TECHNOLOGY PROVIDED BY YMC IS VERY WELL EVIDENCED B Y THE FACT THAT THE ASSESSEE IS ABLE TO MANUFACTURE MOTORCYCLE S BY USING THE SAID TECHNOLOGY. WITHOUT THE TECHNOLOGY PROVID ED BY YMC, THE ASSESSEE CANNOT MANUFACTURE MOTORCYCLES. SIMILARLY, THE GRANT OF LICENSE FOR USING THE TRADE MARKS ENABLES THE ASSESSEE TO SELL THE PRODUCTS MANUFACTU RED BY THE ASSESSEE. WITHOUT A KNOWN TRADEMARK, THE ASSESSEE WILL NOT BE ABLE TO SELL ITS PRODUCTS. 12. AS MENTIONED ABOVE, THE GRANT OF TECHNOLOGY AND LICENSE FOR USE OF TRADEMARKS ENABLE THE ASSESSEE T O MANUFACTURE, AS WELL AS, SELL ITS PRODUCTS. IN VIEW OF THE SAME, IT MAY BE APPRECIATED THAT WHA TEVER SALES ARE MADE BY THE COMPANY CAN BE ATTRIBUTED TO TECHNO LOGY LICENSED BY YMC TO THE ASSESSEE. IT IS NOT POSSIBLE TO QUANTIFY THE BENEFIT DERIVED BY THE ASSESSEE BY PAYMENT OF ROYALTY TO YMC AS REQUIRED B Y YOU IN VIEW OF THE FACT THAT THE ASSESSEE HAS INCURRED SUB STANTIAL LOSSES. 13. YMC HAS BEEN CHARGING THE ROYALTY FROM ITS OTHE R AES AT SIMILAR RATES. IN THIS RESPECT, WE INVITE YOUR KIND ATTENTION TOWA RDS THE TRANSFER PRICING ANALYSIS REPORT. YMC HAS ENTERED INTO A SIMILAR TECHNICAL COLLABORATION AGREEMENT WITH DAWOOD YAMAHA LTD., PAKISTAN (DYL). AS PER THE TERMS OF AGREEMENT ENTERED INT O BETWEEN YMC AND DYL FOR PROVISION OF TECHNICAL KNOW-HOW BY THE FORMER, YMC CHARGES ROYALTY FROM DYL AS PER THE FOLLOWING RATE:- 3% OF NET WHOLESALE PRICE ITA NO.297/DEL/2015 9 WHERE, NET WHOLESALE PRICE = (EX-FACTORY PRICE) (SALES TAX) (CKD LANDED COST) SINCE YMC IS CHARGING ROYALTY FROM THE ASSESSEE AT AN AVERAGE RATE OF 2.94%, IT MAY BE APPRECIATED THAT T HE TRANSACTION OF PAYMENT OF ROYALTY HAS BEEN CARRIED OUT AT AN ARMS LENGTH. 16. IN THIS LETTER IT WAS FURTHER CLARIFIED THAT RO YALTY IS BEING PAID SINCE THE YEAR 1984 WHEN YML ENTERED INTO TECHNICAL COLLABORATION AGREEMENT WITH ESCORTS LIMITED. FROM 1984 TO 1999, BY USING THE TECHNOLOGY PROVIDED BY YML, THE ESCORTS LIMITED AND SUBSEQUENTLY YAMAHA MOTOR INDIA PRIVATE LIMITED MADE SUBSTANTIAL PROFITS. 17. IT WAS FURTHER CLARIFIED THAT THE TECHNOLOGY PR OVIDED CANNOT BE THE BASIS FOR THE LOSSES INCURRED BY THE COMPANY SI NCE PAYMENT OF ROYALTY AND THE ASSESSEE INCURRING LOSSES ARE TWO S EPARATE INDEPENDENT MATTERS. JUST BECAUSE THE ASSESSEE COM PANY IS RUNNING INTO LOSSES IT CANNOT REFUSE TO PAY ROYALTY FOR THE USE OF THE INTANGIBLES FROM ITS AE. 18. WE NOTE THAT THE TPO IN ITS ORDER HAS ARBITRARI LY REJECTED THE ABOVE EXPLANATION SUBMITTED BY THE ASSESSEE BY SAYI NG THAT ASSESSEES CLAIMS ARE PREPOSTEROUS TO SAY THE LEAST. THE TPO FURTHER HAS ARBITRARILY STATED THAT THE TECHNICAL INFORMATION P ASSED ON BY THE AE TO THE ASSESSEE COMPANY IS OF NO USE TO THE ASSESSE E. WE ARE OF THE VIEW THAT THIS OBSERVATION OF THE TPO IS INCORRECT AND UNSUSTAINABLE. THERE IS NO DENIAL TO THE FACT THAT THE ASSESSEE CO MPANY IS USING THE TECHNOLOGY PROVIDED BY ITS AE FOR MANUFACTURE OR PR OCESS LOCALLY MANUFACTURED PARTS. IT IS USING THE TRADEMARK YAM AHA. THE INTANGIBLES, AS STATED HEREINABOVE, HAVE BEEN USED BY THE ASSESSEE COMPANY AND AS SUCH IT CANNOT BE SAID THAT THESE AR E OF NO USE TO THE ASSESSEE. 19. THE NEXT ALLEGATION OF THE TPO IS THAT THE INTR ODUCTION OF THE TECHNOLOGY HAS SIGNALLED THE BEGINNING OF A PHASE O F SPIRALLING LOSSES FOR THE ASSESSEE. FIRSTLY IT IS INCORRECT OBSERVAT ION AND EVEN OTHERWISE LOSSES CANNOT BE A GROUND FOR NOT PAYING ROYALTY FOR THE SERVICES AVAILED FROM THE AE. 20. THE REASONING OF THE TPO THAT IN THIS COMPETITI VE MARKET, THE MERE PRESENCE OF A BRAND NAME IS NOT ENOUGH TO ENSU RE COMMERCIAL SUCCESS AND THE QUALITY OF THE PRODUCT WILL BE ONE OF THE FACTORS THAT WILL PLAY A DECISIVE ROLE IN THE CASE OF THE ASSESS EE, THAT FACTOR IS MISSING AND THE ASSESSEE WAS NOT SUPPOSED TO PAY TH E ROYALTY TO AE, WE ARE OF THE VIEW THAT THIS REASONING OF THE TPO I S ALSO UNSUSTAINABLE. IF ONE ENTITY USES THE BRAND NAME O F ANOTHER ENTITY IT IS SUPPOSED TO MAKE PAYMENT FOR THE USE OF THE BRAN D NAME TO THE OTHER ENTITY. THE BRAND NAME PER SE MAY NOT BE ENO UGH TO ENSURE COMMERCIAL SUCCESS. IT IS ALSO A FACT THAT ASSESSE E COMPANY HAS USED THE TRADEMARK YAMAHA AND THAT TRADEMARK BELONGS T O YAMAHA ITA NO.297/DEL/2015 10 MOTOR CO. LTD., JAPAN. IF THAT BE SO, THEN ASSESSE E COMPANY IS REQUIRED TO PAY FOR USE OF THE TRADEMARK YAMAHA. THE TPO WAS REQUIRED TO MAKE OUT A COMPARATIVE ANALYSIS SO AS T O DETERMINE THE ARMS LENGTH PRICE IN THE FACTS AND CIRCUMSTANCES, TAKING INTO CONSIDERATION THE THREE FACTORS I.E. FUNCTION PERFO RMED, ASSETS DEPLOYED AND RISKS ASSUMED. IN THE PRESENT CASE, F ROM THE FACTS, IT IS EVIDENT THAT THE ROYALTY HAS BEEN PAID FOR THE INTA NGIBLE LICENSE WHICH HAS BEEN GRANTED BY THE AE TO THE ASSESSEE COMPANY AND ACCORDINGLY THE ASSESSEE IS REQUIRED TO MAKE PAYMENT OF THE SAM E. 21. THIS ISSUE IS SQUARELY COVERED BY THE JUDGMENT OF THE HONBLE JURISDICTIONAL DELHI HIGH COURT RELIED UPON BY THE LEARNED AR, IN THE CASE OF CIT VS. EKL APPLIANCES LTD. [2012] 345 ITR 241 DATED MARCH 29, 2012 WHEREIN THE HONBLE HIGH COURT HAS H ELD AS UNDER:- 22. EVEN RULE 10B(1)(A) DOES NOT AUTHORISE DISALL OWANCE OF ANY EXPENDITURE ON THE GROUND THAT IT WAS NOT NECES SARY OR PRUDENT FOR THE ASSESSEE TO HAVE INCURRED THE SAME OR THAT IN THE VIEW OF THE REVENUE THE EXPENDITURE WAS UNREMUN ERATIVE OR THAT IN VIEW OF THE CONTINUED LOSSES SUFFERED BY THE ASSESSEE IN HIS BUSINESS, HE COULD HAVE FARED BETTER HAD HE NOT INCURRED SUCH EXPENDITURE. THESE ARE IRRELEVANT CONSIDERATIONS FOR THE PURPOSE OF RULE 10B. WHETHER OR NOT TO ENTER INTO THE TRANSACTION IS FOR THE ASSESSEE TO D ECIDE. THE QUANTUM OF EXPENDITURE CAN NO DOUBT BE EXAMINED BY THE TPO AS PER LAW BUT IN JUDGING THE ALLOWABILITY THER EOF AS BUSINESS EXPENDITURE, HE HAS NO AUTHORITY TO DISALL OW THE ENTIRE EXPENDITURE OR A PART THEREOF ON THE GROUND THAT THE ASSESSEE HAS SUFFERED CONTINUOUS LOSSES. THE FINANC IAL HEALTH OF ASSESSEE CAN NEVER BE A CRITERION TO JUDGE ALLOW ABILITY OF AN EXPENSE; THERE IS CERTAINLY NO AUTHORITY FOR THAT. WHAT THE TPO HAS DONE IN THE PRESENT CASE IS TO HOLD THAT TH E ASSESSEE OUGHT NOT TO HAVE ENTERED INTO THE AGREEMENT TO PAY ROYALTY/ BRAND FEE, BECAUSE IT HAS BEEN SUFFERING LOSSES CON TINUOUSLY. SO LONG AS THE EXPENDITURE OR PAYMENT HAS BEEN DEMO NSTRATED TO HAVE BEEN INCURRED OR LAID OUT FOR THE PURPOSES OF BUSINESS, IT IS NO CONCERN OF THE TPO TO DISALLOW THE SAME ON ANY EXTRANEOUS REASONING. AS PROVIDED IN THE OECD GUIDE LINES, HE IS EXPECTED TO EXAMINE THE INTERNATIONAL TRANSAC TION AS HE ACTUALLY FINDS THE SAME AND THEN MAKE SUITABLE ADJU STMENT BUT A WHOLESALE DISALLOWANCE OF THE EXPENDITURE, PA RTICULARLY ON THE GROUNDS WHICH HAVE BEEN GIVEN BY THE TPO IS NOT CONTEMPLATED OR AUTHORISED. 22. THE ABOVE VIEW HAS ALSO BEEN UPHELD BY THE HON BLE PUNJAB & HARYANA HIGH COURT IN THE CASE OF M/S KNORR-BREMS E INDIA PVT. LTD. VS. ACIT, ITA NO. 182 (2013) DATED 6 TH NOVEMBER, 2015 WHERE THE COURT HELD AS UNDER:- ITA NO.297/DEL/2015 11 20. A READING OF THE ORDERS OF THE TPO, THE DRP AN D OF THE TRIBUNAL MAKES IT CLEAR THAT ONE OF THE MAIN REASON S FOR NOT ACCEPTING THE ASSESSEES CASE WAS THAT THE ASSESSEE HAD NOT BEEN ABLE TO SUBSTANTIATE THAT THE PAYMENT FOR THE SERVICES HAD ACTUALLY INCREASED ITS PROFITS. AS WE NOTED EARLIER , THE TPO, IN FACT, FURTHER HELD THAT THE ASSESSEE SHOULD HAVE BE EN ABLE TO SHOW THE LEVEL OF INCREASE IN PROFIT POST THE SAID TRANSACTIONS. 21. WE ARE UNABLE TO AGREE WITH THIS FINDING. THE A NSWER TO THE ISSUE WHETHER A TRANSACTION IS AT AN ARMS LENG TH PRICE OR NOT IS NOT DEPENDENT ON WHETHER THE TRANSACTION RES ULTS IN AN INCREASE IN THE ASSESSEES PROFIT. THIS WOULD BE CO NTRARY TO THE ESTABLISHED MANNER IN WHICH BUSINESS IS CONDUCTED B Y PEOPLE AND BY ENTERPRISES. BUSINESS DECISIONS ARE AT TIMES GOOD AND PROFITABLE AND AT TIMES BAD AND UNPROFITABLE. BUSIN ESS DECISIONS MAY AND, IN FACT, OFTEN DO RESULT IN A LO SS. THE QUESTION WHETHER THE DECISION WAS COMMERCIALLY SOUN D OR NOT IS NOT RELEVANT. THE ONLY QUESTION IS WHETHER THE T RANSACTION WAS ENTERED INTO BONA FIDE OR NOT OR WHETHER IT WAS SHAM AND ONLY FOR THE PURPOSE OF DIVERTING THE PROFITS. 22. THE TPO OBSERVED THAT REGULAR INCREASE IN PROFI TS IS A NORMAL INCIDENCE IN BUSINESS. THIS IS ENTIRELY INCO RRECT. ALL BUSINESSES ARE NOT PROFITABLE. ALL DECISIONS DO NOT ENHANCE PROFITABILITY. LOSSES ARE ALSO AN INCIDENCE OF BUSI NESS. MANY ARE THE FAILED BUSINESS VENTURES OF PEOPLE AND ENTE RPRISES. 23. ENTERPRISES, BUSINESSMEN AND PROFESSIONALS CONS TANTLY EXPERIMENT WITH DIFFERENT BUSINESS MODELS, THEORIES AND VENTURES. THE AIM INDEED IS TO FURTHER THE BUSINESS , TO ENHANCE THEIR PROFITS. SO LONG AS THAT IS THE AIM, IT IS SUFFICIENT FOR THE PURPOSE OF THE INCOME TAX ACT. I N A GIVEN CASE, PROFIT MAY NOT EVEN BE THE MOTIVE. EVEN SO IT WOULD NOT INDICATE THAT THE TRANSACTIONS IN QUESTION ARE NOT AT AN ARMS LENGTH PRICE. WHETHER A TRANSACTION IS ENTERED INTO AT AN ARMS LENGTH PRICE OR NOT MUST DEPEND UPON THE FACT S OF EACH CASE RELATING TO THE TRANSACTION PER SE, I.E., THE TRANSACTION ITSELF. PROFIT IS ONLY A POSSIBILITY AND A DESIRED RESULT WITH OR WITHOUT THE AID OF AN INTERNATIONAL TRANSACTION. EV ERY BUSINESS VENTURE IS NOT NECESSARILY PROFITABLE OR S UCCESSFUL. ALL BUSINESS VENTURES DO NOT SUCCEED EQUALLY OR UNI FORMALLY. INDEED, IF AN ASSESSEE IS ABLE TO ESTABLISH FINANCI AL OR OTHER COMMERCIAL BENEFITS ARISING FROM A TRANSACTION, IT WOULD FURTHER STRENGTHEN ITS CASE. BUT IF IT CANNOT DO SO , IT DOES NOT WEAKEN IT. 24. THE PROFIT EARNED BY AN ASSESSEE COULD BE FOR R EASONS OTHER THAN THOSE RELATING TO THE INTERNATIONAL TRAN SACTIONS OR BY VIRTUE OF INTERNATIONAL TRANSACTIONS AS WELL AS BY VIRTUE OF OTHER FACTORS. IN THAT EVENT, THE ASSESSEE HAVING P ROFITED FROM ITA NO.297/DEL/2015 12 THE VENTURE INVOLVING THE INTERNATIONAL TRANSACTION S, OBVIOUSLY, WOULD NOT ESTABLISH THAT THE ARMS LENGT H PRICE WAS CORRECT OR JUSTIFIED. 25. IT WOULD MAKE NO DIFFERENCE EVEN IF THE PROFIT IS ENTIRELY ON ACCOUNT OF THE INTERNATIONAL TRANSACTION. IN FAC T, EVEN IF IT IS ESTABLISHED THAT ON ACCOUNT OF AN INTERNATIONAL TRANSACTION AN ASSESSEES VENTURE HAS PROFITED, IT DOES NOT NEC ESSARILY ESTABLISH THAT THE TRANSACTION WAS ENTERED INTO AT AN ARMS LENGTH PRICE. MERE PROFITABILITY DOES NOT INDICATE THAT THE TRANSACTION WHICH WAS RESPONSIBLE FOR THE ENHANCEME NT OF THE PROFITS WAS AT AN ARMS LENGTH PRICE. THAT AN INTER NATIONAL TRANSACTION HAS ENABLED AN ASSESSEE TO EARN PROFIT IS ONE THING AND THE PRICE PAID FOR THE SAME IS ANOTHER THING AL TOGETHER. PROFIT IS A MOTIVE AND THE AIM OF A VENTURE. THE FA CTORS THAT ARE INVOLVED IN ACHIEVING THIS OBJECTIVE ARE THE ME ANS OF ACHIEVING THIS END. ABSENT ANY SPECIAL TERM IN THE CONTRACT, THE SELLER OF GOODS OR THE PROVIDER OF SERVICES IS NOT CONCERNED WHETHER ITS PURCHASER PROFITS FROM THE USE THAT THE GOODS OR SERVICES ARE PUT TO. IT IS CONCERNED WITH THE SAME ONLY IN SO FAR AS THE USEFULNESS OF ITS PRODUCTS AND SERVICES ENHANCES THE VALUE THEREOF AND CONSEQUENTLY FURTHERS ITS OWN COM MERCIAL INTERESTS. MERELY BECAUSE AN ASSESSEE PROFITS BY TH E USE OF THE GOODS SUPPLIED OR THE SERVICES RENDERED, IT DOES NO T FOLLOW THAT THE SAME WERE SOLD OR SUPPLIED AT AN ARMS LENGTH P RICE. CONVERSELY, MERELY BECAUSE AN ASSESSEE DOES NOT PRO FIT FROM THE USE OF THE GOODS OR SERVICES IT DOES NOT FOLLOW THAT THEY WERE NOT SOLD AT AN ARMS LENGTH PRICE. 26. A VIEW TO THE CONTRARY WOULD CAUSE CONSIDERABLE CONFUSION AND LEAD TO ARBITRARY, IF NOT ILLOGICAL, RESULTS. A VIEW TO THE CONTRARY WOULD THEN RAISE A QUESTION AS TO T HE EXTENT OF PROFITABILITY NECESSARY FOR AN ASSESSEE TO ESTABLIS H THAT THE TRANSACTION WAS AT AN ARMS LENGTH PRICE. A FURTHER QUESTION THAT MAY ARISE IS WHETHER THE ARMS LENGTH PRICE IS TO BE DETERMINED IN PROPORTION TO THE EXTENT OF PROFIT. T HUS, WHILE PROFIT MAY REFLECT UPON THE GENUINENESS OF AN ASSES SEES CLAIM, IT IS NOT DETERMINATIVE OF THE SAME. 23. AS REGARDS COMPARATIVE ANALYSIS, ON GOING THROU GH THE RECORD WE NOTE THAT ASSESSEE HAS BENCHMARKED ITS TRANSACTI ON BY APPLYING CUP METHOD. THE AE HAS PROVIDED SIMILAR SERVICES T O OTHER ENTITIES FOR WHICH IT HAS CHARGED ROYALTY OF 3% OF THE NET W HOLESALE PRICE. THE COMPARABLE SELECTED BY THE ASSESSEE ARE ALSO LO CATED IN THE SAME GEOGRAPHICAL LOCATION AND THE RATE AT WHICH THE ROY ALTY HAS BEEN PAID BY THE ASSESSEE BEING 2.94% WHICH IS LESS THAN THE RATE AT WHICH THE ROYALTY HAS BEEN PAID BY THE NON-AE. ACCORDINGLY, THE ARMS LENGTH PRICE DETERMINED BY THE ASSESSEE DOES NOT WARRANT A NY ADJUSTMENT. THE LEARNED TPO AS WELL AS THE DRP HAVE NOT CONTROV ERTED THE ABOVE FACTS. DURING THE COURSE OF THE HEARING ALSO THE L EARNED DR AT A ITA NO.297/DEL/2015 13 SPECIFIC QUERY FROM THE BENCH COULD NOT DISPUTE THE SE FACTS. NO ADVERSE MATERIAL HAS BEEN BROUGHT ON RECORD EITHER BY THE TPO OR THE DRP AGAINST THE ASSESSEE. WE HAVE ALSO GONE TH ROUGH THE SUBMISSION MADE BY THE ASSESSEE BEFORE THE DRP WHER E THE ASSESSEE HAS SUBMITTED A LIST OF THE VARIOUS COMPANIES WHICH ARE PAYING ROYALTY AND ARE STILL INCURRING LOSSES. THERE IS N O DISPUTE TO THE FACTS THAT YAMAHA MOTOR CO. LTD., JAPAN HAS PROVIDED THE TECHNOLOGY AND IT IS THE OWNER OF THE YAMAHA TRADEMARK. 24. TAKING INTO CONSIDERATION THE ABOVE FACTS WE AR E OF THE VIEW THAT ASSESSEE HAS BEEN ABLE TO SUFFICIENTLY DEMONST RATE THE JUSTIFICATION FOR PAYMENT OF THE ROYALTY AND DETERM INATION OF ITS ARMS LENGTH PRICE AND ACCORDINGLY THE DRP WAS NOT JUSTIF IED IN CONFIRMING THE ORDER OF THE TPO IN PROPOSING DISALLOWANCE OF R S.18.78 CRORES ON ACCOUNT OF THE ROYALTY PAID BY THE ASSESSEE. ACCOR DINGLY, WE DIRECT THE AO TO DELETE THIS ADDITION MADE ON ACCOUNT OF T HE ROYALTY. 11. IN VIEW OF WHAT HAS BEEN DISCUSSED ABOVE AND TH E DECISION RENDERED BY THE COORDINATE BENCH OF THE TRIBUNAL, W E ARE OF THE CONSIDERED VIEW THAT WHEN AE HAS GRANTED EXCLUSIVE NON- TRANSFERABLE AND NON-DIVISIBLE LICENCE TO USE THE T ECHNICAL INFORMATION FOR MANUFACTURE, TO USE YAMAHA TRADEMAR K AND PERMIT THE COMPANY DEALERS TO USE THE YAMAHA TRADEMARK IN THE COURSE OF MARKETING ACTIVITIES IN INDIA AND THEN PAID THE ROY ALTY AT PRE- DETERMINED RATE, IT IS NOT THE PREROGATIVE OF THE T PO TO DECIDE IF ANY TANGIBLE BENEFIT HAS BEEN TRANSFERRED TO THE TA XPAYER FROM THE TECHNICAL KNOW-HOW RECEIVED FROM ITS AE BECAUSE DEC ISION OF A BUSINESSMAN FOR BUSINESS EXPENDITURE OR PAYMENT OF ROYALTY FOR RUNNING THE BUSINESS CANNOT BE INTERFERED BY THE TP O IN ANY MANNER. MOREOVER, LIABILITY OF THE BUSINESS EXPEND ITURE AND ADJUSTMENT OF ALP CANNOT BE MADE ON THE BASIS OF TH E FACT NO ITA NO.297/DEL/2015 14 BENEFIT HAS BEEN ACCRUED TO THE TAXPAYER. IT IS ON LY FOR THE BUSINESSMAN TO SEE AS TO HOW TO EXECUTE THE DECISIO N FOR BETTER RUNNING OF THE BUSINESS. SO, IN VIEW OF THE MATTER , WE ARE OF THE CONSIDERED VIEW THAT TPO/DRP HAVE ERRED IN MAKING A DJUSTMENT OF ALP OF RS.24,78,07,525/- ON ACCOUNT OF ROYALTY PAYM ENT BY THE TAXPAYER TO ITS AE. HENCE, GROUNDS NO.3 TO 6 ARE D ETERMINED FAVOUR OF THE TAXPAYER. GROUND NO.7 12. GROUND NO.7 IS GENERAL IN NATURE, HENCE NEEDS N O SPECIFIC ADJUDICATION. ORDER PRONOUNCED IN OPEN COURT ON THIS 12 TH DAY OF FEBRUARY, 2018. SD/- SD/- (B.P. JAIN) (KULDIP SING H) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED THE 12 TH DAY OF FEBRUARY, 2018 TS COPY FORWARDED TO: 1.APPELLANT 2.RESPONDENT 3.CIT 4.CIT (A) 5.CIT(ITAT), NEW DELHI. AR, ITAT NEW DELHI.