Johnson Matthey India Pvt. Ltd., New Delhi V. DCIT, New Delhi

ITA 3123/DEL/2016

• Counselvise Citation: [2019] 115 COUNSELVISE.COM (IT) 6701 (ITAT-DELHI)
• Duration Of Justice: 3 year(s) 5 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-10-2019
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: I
• Assessment Year: 2010-2011
• Appeal Filed On: 30-05-2016
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: SUBHAKANT SAHU
• Keywords: Transfer pricing; International transaction; Commercial expediency; Set aside

Judgement Text

1 IN THE INCOME TAX APPELLATE TRIBUNAL, DELHI I-1 B ENCH, NEW DELHI BEFORE SHRI N.K. BILLAIYA, ACCOUNTANT MEMBER, AND SHRI KULDIP SINGH, JUDICIAL MEM BER ITA NO. 3123/DEL/2016 [A.Y 2010-11] JOHNSON MATHEY INDIA PVT. LTD VS. THE D.C .I.T. 103, ASHOKA ESTATE CIRCLE 13(2) BARAKHAMBA ROAD NEW DELHI NEW DELHI PAN: AAACJ 2919 A ITA NO. 3406/DEL/2016 [A.Y 2010-11] THE D.C.I.T. VS. JOHNSON MATHEY INDIA PVT. LTD CIRCLE 13(2) 103, ASHOKA ESTATE NEW DELHI BARAKHAMBA ROAD NEW DELHI PAN: AAACJ 2919 A (APPLICANT) (R ESPONDENT) ASSESSEE BY : SHRI SAKSHAM S INGHAL, CA SHRI SUMIT MANGAL, ADV DEPARTMENT BY : SHRI SUBHA KANT S AHU, SR. DR DATE OF HEARING : 22.10.2019 DATE OF PRONOUNCEMENT : 30.10.2019 2 ORDER PER N.K. BILLAIYA, ACCOUNTANT MEMBER, THE ABOVE TWO CAPTIONED CROSS APPEALS BY THE ASSESS EE AND REVENUE ARE PREFERRED AGAINST THE ORDER OF THE LD. CIT(A) 44, NEW DELHI DATED 11.01.2016 PERTAINING TO ASSESSMENT YE AR 2010-11. SINCE BOTH THESE APPEALS WERE HEARD TOGETHER, THESE ARE B EING DISPOSED OF BY THIS COMMON ORDER FOR THE SAKE OF CONVENIENCE AN D BREVITY. 2. THE SUBSTANTIVE GRIEVANCES OF THE ASSESSEE READ AS UNDER: 5. THE LD. CIT(A) HAS ERRED IN LAW AND ON THE FACT S AND CIRCUMSTANCES OF THE CASE BY HOLDING THAT NO BENEFI T WAS DERIVED BY THE APPELLANT IN RESPECT OF PAYMENTS FOR VARIOUS INTRA GROUP SERVICES SUCH AS (A) AGGREGATE SUM OF R S. 3,15,64,510 AS SALES COMMISSION TO JOHNSON MATTHEY JAPAN INC., JAPAN AND JOHNSON MATTHEY PIC, UK ( B ) AGGREGATE SUM OF RS. 1,34,12,002 AS COST SHARING CHARGES TO JOHNSON MATTHEY SDN BHD., MALAYSIA; JOHNSON MATTHEY INORGANICS SDN BHD., MALAYSIA; JOHNSON MATTHEY SHANGHAI; AND JOHNSON MAT THEY JAPAN INC., JAPAN; AND (E) SERVICE CHARGES OF RS. 1 0,08,309 TO JOHNSON MATTHEY HONG KONG LIMITED; THEREBY HOLDING THE ARM'S LENGTH PRICE OF THESE INTERNATIONAL TRANSACTI ONS OF THE APPELLANT TO BE NIL. 3 3. AT THE VERY OUTSET, THE LD. COUNSEL FOR THE ASSE SSEE STATED THAT THE UNDERLYING ISSUES RAISED IN THE GRIEVANCE OF TH E ASSESSEE ARE COVERED BY THE ORDER OF THE TRIBUNAL IN ASSESSEES OWN CASE FOR A.YS 2007-08 TO 2009-10 IN ITA NOS. 1817 & 2493/DEL/2014 & 3755/DEL/2015. 4. THE LD. DR FAIRLY CONCEDED TO THIS SUBMISSION OF THE LD. COUNSEL FOR THE ASSESSEE. 5. WE HAVE CAREFULLY CONSIDERED THE UNDERLYING FACT S IN GRIEVANCE. WE HAVE ALSO CONSIDERED THE ORDER OF THE CO-ORDINAT E BENCH [SUPRA]. WE FIND FORCE IN THE CONTENTION OF THE LD. COUNSEL FOR THE ASSESSEE. PAYMENTS FOR VARIOUS INTRA GROUP SERVICES UNDER DIS PUTE ARE: (A) SALES COMMISSION TO JOHNSON MATTHEY JAPAN INC., JAPAN (B) JOHNSON MATTHEY PIC, UK (A) AGGREGATING TO A SUM OF RS . 3,15,64,510/-. 6. AN IDENTICAL ISSUE WAS CONSIDERED BY THE CO-ORDI NATE BENCH IN ITS ORDER [SUPRA]. THE RELEVANT FINDINGS READ AS UNDER : 4 UNDER THESE FACTS AND CIRCUMSTANCES IT IS VERY DIF FICULT TO HOLD THAT THE PAYMENT OF SALES COMMISSION TO AE J APAN IS EITHER FOR THE PURPOSE OF BUSINESS OR FOR ANY COMME RCIAL EXPEDIENCY. UNDER THE ARMS LENGTH SCENARIO NO INDEP ENDENT ENTERPRISE WILL PAY TO A THIRD PARTY IN A FOREIGN C OUNTRY WHERE IT HAS NOT BEEN ABLE TO SHOW THAT ANY SALE HAS BEEN MADE TO THE CUSTOMERS OR ANY SUCH SERVICES HAS RENDERED FOR THE CUSTOMERS IN THAT FOREIGN COUNTRY. FOR BENCHMARKING SUCH A PAYMENT ONE HAS TO SEE, WHETHER ANY INDEPENDENT IND IAN PARTY WOULD PAY TO A FOREIGN ENTITY WHEN NEITHER IT HAS IT ANY CUSTOMERS NOR HAS IT BEEN ESTABLISHED THAT ANY SUCH SERVICES HAVE BEEN RENDERED BY THE FOREIGN ENTITY WHICH CAN HAVE SOME COMMERCIAL EXPEDIENCY BENEFITTING THE INDIAN C OMPANY. THUS, UNDER ARMS LENGTH CONDITIONS ALSO SUCH A PAYM ENT DOES NOT STAND THE TEST OF ALP; AND ACCORDINGLY, WE CONF IRM THE ORDER OF THE TPO THAT THE PAYMENT OF SALES COMMISS ION TO AE IS NOT MEANT EITHER FOR BUSINESS PURPOSE OR UNDE R THE ARMS LENGTH CONDITIONS SUCH A PAYMENT IS JUSTIFIED. ACCORDINGLY, THE AMOUNT OF RS. 1,08,48,310/- IS CON FIRMED. 7. AS NO DISTINGUISHING FACTS HAS BEEN BROUGHT TO O UR NOTICE, RESPECTFULLY FOLLOWING THE FINDINGS OF THE CO-ORDIN ATE BENCH, ADDITION OF RS. 3,15,64,510/- IS CONFIRMED. 5 (B) AGGREGATING SUM OF RS . 1 ,34,12,002/- 8. AS COST SHARING CHARGES TO JOHNSON MATTHEY SDN B HD., MALAYSIA; JOHNSON MATTHEY INORGANICS SDN BHD., MALAYSIA; JOHN SON MATTHEY SHANGHAI; AND JOHNSON MATTHEY JAPAN INC., JAPAN . 9. A SIMILAR ISSUE WAS CONSIDERED BY THE CO-ORDINAT E BENCH IN ITS ORDER [SUPRA]. THE RELEVANT FINDINGS READ AS UNDER : 46. SIMILARLY FOR THE COST SHARING CHARGE, THE ASSESSEE HAS STATED THAT ASIAN REGION HEADQUARTER OF JOHNSON MATTHEY GROUP WAS LOCATED IN MALAYSIA WHICH WAS MANAGED BY PERSONNEL APPOINTED BY JMM GROUP AND DEPUTED AT HEADQUARTERS, WHO ARE MANAGING THE ASIA REGION, LIKE MANAGING DIRECTO R, FINANCE DIRECTOR, SALES DIRECTOR, COMMON SECRETARY ETC. THE SALARY OF THESE EMPLOYEES AND OTHER EXPENDITURE INCURRED O N THESE EMPLOYEES HAVE BEEN ALLOCATED TO THE GROUP COMPANIE S LOCATED IN ASIA REGION, I.E., INDIA, JAPAN, CHINA AND MALAY SIA; AND THE BASIS FOR ALLOCATION OF THE EXPENSES INCURRED TO MA NAGE ASIA REGION IS THE NET REVENUE OF RESPECTIVE COUNTRIES L OCATED IN ASIA REGION. THE ALLOCATION OF EXPENSE IS BASED ON RATIO OF FIGURES ARRIVED AT AFTER REDUCING FROM THE TURNOVER OF EACH COUNTRY AND SUCH PAYMENT MADE TO SUCH HIGH LEVEL SE NIOR PERSONNEL, DEFINITELY HAS TO BE RECKONED TO BE PART OF 6 BUSINESS REQUIREMENT AND OVERALL MANAGEMENT IN THE ADMINISTRATION OF VARIOUS GROUP ENTITIES IN THE ASI AN REGION COUNTRIES, NOT ONLY TO SUPERVISE BUT ALSO CARRY OUT VARIOUS OTHER FUNCTIONS. SUCH COST SHARING ARRANGEMENTS HAS TO BE TREATED AS PART OF THE OPERATING COST OF THE ASSESS EE COMPANY AND THEREFORE, UNDER TNMM NO SEPARATE BENCH MARK SHOULD BE DONE FOR THIS SERVICE AS IT CAN BE FACTOR ED IN ARRIVING AT NET PROFIT MARGIN. ACCORDINGLY, WE HOLD THAT NO SEPARATE ADDITION SHOULD BE MADE ON COST SHARING C HARGES. THUS, IN VIEW OF OUR FINDING GIVEN ABOVE, TPO IS DI RECTED TO GIVE EFFECT AND DETERMINE THE ARMS LENGTH PRICE AC CORDINGLY. IN THE RESULT APPEAL OF THE ASSESSEE AS WELL AS OF THE DEPARTMENT FOR ASSESSMENT YEAR 2007-08 IS PARTLY AL LOWED FOR STATISTICAL PURPOSES. 10. RESPECTFULLY FOLLOWING THE FINDINGS OF THE CO-O RDINATE BENCH, WE DIRECT ACCORDINGLY. (C) SERVICES CHARGES OF RS. 10,08,309/- 11. AN IDENTICAL ISSUE WAS CONSIDERED BY THE CO-OR DINATE BENCH IN ITS ORDER [SUPRA]. THE RELEVANT FINDINGS READ AS UNDER : 7 LASTLY, ON THE ISSUE OF SERVER CHARGES, ADDITION OF RS. 8,28,530/- AND RS. 8,44,175/- MADE BY THE TPO HAS BEEN SUSTAINED BY THE LD. CIT(A), EVEN THOUGH NO SUCH AD DITION WAS MADE IN A.Y. 2007-08. IN THE SERVER CHARGES ALSO TH E ASSESSEE STATED THAT IT HAS PAID TO JM-UK FOR MAINT AINING A CENTRALISED SERVER FOR THE ASIA REGION, WHICH SERVE S AS A COMMON EMAIL AND COMMUNICATIONS PLATFORM. COST HAS BEEN ALLOCATED AMONG JM ASIA ENTITIES PROPORTIONATELY AN D SUCH AN ARRANGEMENT WAS MADE FOR THE PURPOSE OF BEING COST EFFECTIVE AND FOR EFFICIENCY OF BUSINESS OF ALL GRO UP ENTITIES. IT HAS BEEN STATED THAT WITHOUT ANY PAYMENT ASSESSE E WOULD NOT BE ABLE TO ACCESS THE CENTRALISED SYSTEM SET UP FOR THE ASIA REGION WHICH IS REQUIRED FOR COMMON E-MAIL AND COMMUNICATING PLATFORM FOR GROUP ENTITIES AND EVEN IF AN INDEPENDENT ENTITIES WAS APPOINTED, THEN ALSO SIGNI FICANT COST WOULD HAVE BEEN INCURRED. LOOKING TO THE FACTS AND THE NATURE OF PAYMENT, WE HOLD THAT SERVER CHARGES IS DEFINITE LY INEXTRICABLY LINKED WITH THE BUSINESS ACTIVITIES AN D IS AN OPERATING COST OF THE ASSESSEE, THEREFORE, NO SEPAR ATE BENCHMARKING IS REQUIRED AS THE SAME WILL BE AGGREG ATED UNDER TNMM. ACCORDINGLY, NO SEPARATE ADDITION OR ADJUSTMENT IS WARRANTED. 12. RESPECTFULLY FOLLOWING THE FINDINGS OF THE CO-O RDINATE BENCH, WE HOLD ACCORDINGLY. 8 13. AS A RESULT, THE APPEAL OF THE ASSESSEE IS PART LY ALLOWED. 14. SIMILARLY, GRIEVANCE IN REVENUES APPEAL IS IN RESPECT OF DELETION OF ADDITION OF RS. 2,75,67,978/- ON ACCOUNT OF ROYA LTY TO AES. 15. AN IDENTICAL ISSUE WAS CONSIDERED BY THE CO-ORD INATE BENCH IN ITS ORDER [SUPRA]. THE RELEVANT FINDINGS READ AS UNDER : 40. THE MANDATE OF CUP METHOD IS THE PRICE CH ARGED OR PAID FOR THE SERVICES PROVIDED IN COMPARABLE UNCONT ROLLED TRANSACTION AND ITS ADJUSTED PRICE PAID FOR AVAILIN G SERVICES WHICH CONSTITUTES THE BENCHMARK FOR COMPARISON WITH PRICE PAID FOR AVAILING OF ANY SERVICES IN AN INTERNATION AL TRANSACTION. IF THE PRICE PAID FOR AVAILING THE SER VICE IN A COMPARABLE UNCONTROLLED TRANSACTION IS COMPARED WIT H PRICE PAID IN AN INTERNATIONAL TRANSACTION, THEN IT IS RE CKONED TO BE AT ALP. SINCE, THERE IS NO INTERNAL CUP, I.E., THER E IS NO SIMILAR PAYMENT OF ROYALTY TO AN INDEPENDENT THIRD PARTY, THEREFORE, IT WOULD BE DESIRABLE THAT EXTERNAL CUP IS TO BE AP PLIED. HERE IN THIS CASE NEITHER THE ASSESSEE NOR THE AO HAS SE ARCHED FOR 9 ANY EXTERNAL CUP; AND THEREFORE, WE DEEM FIT THAT T HE ISSUE OF BENCHMARKING OF ROYALTY PAYMENT SHOULD BE REMA NDED BACK TO THE FILE OF THE AO/TPO TO BENCHMARK ROYALT Y PAYMENT SEPARATELY BY USING EXTERNAL CUP. THE DATA FROM ROYALTY STAT AVAILABLE FOR AUTOMOTIVE INDUSTRY CAN BE USED FOR SEARCH OF EXTERNAL COMPARABLES AND THE PAYMENT OF ROYALTY PAID FOR USE OF TECHNICAL KNOWHOW FOR MAN UFACTURING OF AUTOMOTIVE COMPONENTS CAN BE USED FOR THE PURPOS E OF BENCHMARKING. THE ONUS WOULD BE ON THE ASSESSEE TO CARRY OUT THE FRESH SEARCH PROCESS AND AFTER SELECTING EXTERN AL COMPARABLES AND CARRYING OUT COMPARABILITY ANALYSIS MAY PRESENT THE SAME TO THE TPO, WHO SHALL ANALYSE THE EXTERNAL COMPARABLES AND BENCHMARK THE ROYALTY PAYMENT OF TH E ASSESSEE. WITH THIS DIRECTION THE ISSUE OF ROYALTY PAYMENT IS SET ASIDE TO THE FILE OF THE AO/TPO AND THE TPO WHO SHALL GIVE APPROPRIATE OPPORTUNITY OF HEARING TO THE ASSE SSEE TO SUBSTANTIATE THE ALP OF THE SAID TRANSACTION. 16. RESPECTFULLY FOLLOWING THE FINDINGS OF THE CO-O RDINATE BENCH, WE HOLD ACCORDINGLY. 10 17. AS A RESULT, THE APPEAL OF THE REVENUE IS ALLOW ED FOR STATISTICAL PURPOSES. 18. IN THE RESULT, THE APPEAL OF THE ASSESSEE IN IT A NO. 3123/DEL/2016 IS PARTLY ALLOWED WHEREAS THE APPEAL OF THE REVENUE IN ITA NO. 3406/DEL/2016 IS TREATED AS ALLOWED FOR STA TISTICAL PURPOSES. THE ORDER IS PRONOUNCED IN THE OPEN COURT ON 30.10 .2019. SD/- SD/- [ KULDIP SINGH] [N.K. BILLAIYA] JUDICIAL MEMBER ACCOUNTANT MEMBER DATED: 30 TH OCTOBER, 2019 VL/ COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) ASST. REGISTRAR, 5. DR ITAT, NEW DELHI 11 DATE OF DICTATION DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE THE DICTATING MEMBER DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE THE OTHER MEMBER DATE ON WHICH THE APPROVED DRAFT COMES TO THE SR.PS /PS DATE ON WHICH THE FAIR ORDER IS PLACED BEFORE THE DICTATING MEMBER FOR PRONOUNCEMENT DATE ON WHICH THE FAIR ORDER COMES BACK TO THE SR.P S/PS DATE ON WHICH THE FINAL ORDER IS UPLOADED ON THE WE BSITE OF ITAT DATE ON WHICH THE FILE GOES TO THE BENCH CLERK DATE ON WHICH THE FILE GOES TO THE HEAD CLERK THE DATE ON WHICH THE FILE GOES TO THE ASSISTANT RE GISTRAR FOR SIGNATURE ON THE ORDER DATE OF DISPATCH OF THE ORDER