ACIT, New Delhi V. M/s Keihin Panalfa Ltd., New Delhi

ITA 3287/DEL/2011

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 77696 (ITAT-DELHI)
• Duration Of Justice: 2 year(s) 10 month(s) 19 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 06-05-2014
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: I
• Next Hearing Date: 25-02-2014
• Assessment Year: 2004-2005
• Appeal Filed On: 17-06-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: YOGESH KR VERMA
• Assessee Lawyers: PALLAVI DINODIA; PRADEEP DINODIA ADV SHRI
• Keywords: Business income; Transfer pricing; International transaction; Bad and doubtful debts; Royalty expenses; Revenue expenditure
• Section: 92C

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH I NEW DELHI BEFORE SHRI R.P. TOLANI: JUDICIAL MEMBER AND SHRI B.C. MEENA : ACCOUNTANT MEMBER ITA NOS. 3287/DEL/2011 & 5546/DEL/2012 ASSTT. YRS: 2004-05 & 2005-06 ACIT CIR. 5(1), VS. M/S KEHIN PANALFA LTD., NEW DELHI. M-34, 2 ND FLOOR, GREATER KAILASH-II, MARKET, NEW DELHI-110049. PAN: AAACK 5968 J ( APPELLANT ) ( RESPONDENT ) APPELLANT BY : SHRI YOGESH KR. VERMA CIT (DR) RESPONDENT BY : MS. PALLAVI DINODIA CA & SHRI PRADEEP DINODIA, ADV. SHRI R.K. KAPOOR CA DATE OF HEARING: 25-02-2014 DATE OF ORDER: 6 TH MAY, 2014. O R D E R PER R.P. TOLANI, J.M: : THESE ARE TWO REVENUES APPEALS AGAINST THE RESPECT IVE ORDERS PASSED BY THE LD. CIT(A), GRANTING RELIEF TO ASSESSEE QUA TP ADJUSTMENTS AND CORPORATE ADDITIONS, PERTAINING TO A.Y. 2004-05 & 2 005-06. FOLLOWING GROUNDS ARE RAISED BY THE REVENUE: AY 2004-05 . 1.THE ORDER OF THE LEARNED CIT(APPEALS) IS ERRONEOU S & CONTRARY TO FACTS & LAW. ITA 3287/D/11 & 5546/D/12 ACIT VS. M/S KEHIN PANALFA LTD. 2 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE LEARNED CIT(APPEALS) HAS ERRED IN DELETING THE ADDITION OF RS.1,29,70,076/- MADE U/S.92CA(3) OF THE ACT BEING THE TPO ADJUSTMENT FOR AY 2004-05. 2.1 THE LD. CIT(A) IGNORED THE FINDING RECORDED BY THE AO AND THE FACT THAT THE ARMS LENGTH HAS BEEN CALCULATED B Y THE AO IN ACCORDANCE WITH THE PREVAILING TRENDS IN THE INTERN ATIONAL MARKET. 3. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE LEARNED CIT(APPEALS) HAS ERRED IN DELETING THE ADDITION OF RS.22,53,000/- MADE BY CAPITALIZING THE ROYALTY. 3.1 THE LD. CIT(A) IGNORED THE FINDING RECORDED BY THE AO AND THE FACT THAT THE ASSESSEE SHALL BE DERIVING LONG T ERM BENEFIT BY PAYMENT OF ROYALTY TO ITS PARENT COMPANY. 4.ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED CIT(APPEALS) HAS ERRED IN DELETING THE ADDITION OF RS.14,52,020/- MADE U/S.40A(1)(B) OF THE ACT. 4.1 THE LD. CIT(A) IGNORED THE FINDINGS RECORDED BY THE AO AND THE FACT THAT THE AO WORKED OUT THE ADDITIONS I N ACCORDANCE WITH THE EXISTING MARKET TRENDS. 5.THE APPELLANT CRAVES LEAVE TO ADD, TO ALTER, OR A MEND ANY GROUNDS OF THE APPEAL RAISED ABOVE AT THE TIME HEAR ING. AY 2005-06 LD. CIT(A) ERRED IN LAW AND ON FACTS IN DELETING O F DISALLOWANCE OF ROYALTY EXPENDITURE AMOUNTING TO RS.1,97,40,726/ - WHICH WAS DISALLOWED BY THE ASSESSING OFFICER FOLLOWING THE O RDER PASSED BY THE TPO U/S 92CA(3) OF THE INCOME TAX ACT . 2. BRIEF FACTS ARE THAT THE ASSESSEE I.E. KEIHIN PA NALFA LIMITED (KPL) WAS INCORPORATED IN 1997 IN INDIA, WITH THE OBJECTIVE O F MANUFACTURING AUTO ITA 3287/D/11 & 5546/D/12 ACIT VS. M/S KEHIN PANALFA LTD. 3 COMPONENTS CATERING TO THE DEMAND OF THE INDIAN MAR KET. 74% OF ITS EQUITY IS OWNED BY KEIHIN CORPORATION, JAPAN (KEIHIN JAPAN ). UNDER A TECHNOLOGICAL COLLABORATION AGREEMENT DATED 12 TH SEPTEMBER, 1997, KEIHIN JAPAN LICENSED THE MANUFACTURING TECHNOLOGY AND KNO W HOW TO KPL. IT IS UNDISPUTED THAT PL UNDERTAKES NO R&D ACTIVITIES AND OWNS NO INTANGIBLE ASSETS OF ITS OWN. BESIDES, THE ASSESSEE AND KEIHIN JAPAN ALSO ENTERED INTO A TECHNICAL COLLABORATION AGREEMENT DATED 12 TH SEPTEMBER, 1997 LICENSING THE ASSESSEE TO MANUFACTURE PRODUCTS USING THE TECHNOLO GY, KNOW-HOW AND TECHNICAL ASSISTANCE OF THE AE. 2.1. THE KEIHIN GROUP GLOBALLY, IS ENGAGED IN THE M ANUFACTURE OF FUEL INJECTION AND AIR CONDITIONING SYSTEMS AND HIGHER V ALUE-ADDED PRODUCTS BY FUSING HIGHER MECHANICAL AND ELECTRONIC DEVICES. TH E GROUP UNDERTAKES MAJOR R & D ACTIVITIES FOR THE DEVELOPMENT OF NEW P RODUCT TECHNOLOGIES AND ENHANCEMENT OF EXISTING PRODUCTS, THIS LEADS TO CRE ATION OF SIGNIFICANT INTANGIBLES. THE BASIC POLICY FOR THE R&D ACTIVITIE S OF THE KEIHIN GROUP IS CLAIMED TO BE TO SUPPORT THE CORE NEEDS OF AUTOMOBI LE MANUFACTURING INDUSTRY. HONDA MOTORS CO. LTD. (JAPAN) OWNS 41.33% OF THE EQUITY OF KEIHIN JAPAN AS WELL AS 99.99% OF THE EQUITY IN HON DA SIEL COMPANY INDIA (HSCI). BOTH KPL AND HSCI ARE INDIAN COMPANIES. 2.2. FOR AY 2004-05 ASSESSEE FILED ITS RETURN OF IN COME DECLARING A TAXABLE INCOME OF RS.4,55,33,164/- ALONG WITH TP REPORT, WH ICH WAS PROCESSED U/S.143(1) ON 11.3.2005 AND THEREAFTER A NOTICE U/S .143(2) DATED 21.4.2005 WAS ISSUED. ON REFERENCE LD. TPO IN HIS ORDER MADE TP ADDITIONS OF RS.1,29,70,076/- BY DETERMINING THE CLAIM OF ROYALT Y EXPENDITURE AT RS. NIL AS AGAINST RS.1,24,41,118/- PAID BY THE ASSESSEE AN D BALANCE AMOUNT OF ITA 3287/D/11 & 5546/D/12 ACIT VS. M/S KEHIN PANALFA LTD. 4 ADDITION WAS ON AN OVERALL TNMM ANALYSIS OF RS.5,28 ,958/- HELD TO BE ATTRIBUTABLE TOWARDS THE PURCHASE OF THE PARTS AND COMPONENTS FROM THE AE. 2.3. BESIDES, ASSESSING OFFICER BY ORDER DATED 26.1 2.2006 PASSED U/S.143(3), MADE OTHER CORPORATE ADDITIONS U/S.40A( 2)(A) RESULTING IN FOLLOWING ADDITIONS: - TRANSFER PRICING ADDITION RS. 1,29,70,076/-. AS SUGGESTED BY THE TPO 25% OF ROYALTY EXPENSES RS. 22,53,000/- TREATED AS OF CAPITAL NATURE DISALLOWANCE OUT OF BUSINESS CENTER CHARGES U/S.40A(2)(A) RS. 14,52,020/- 2.4. FOR AY 2005-06, LD. TRANSFER PRICING OFFICER P ASSED AN ORDER U/S 92CA(3) OF THE INCOME TAX ACT ON 24.10.2008 AND FOL LOWING HIS EARLIER ORDER FOR AY 2004-05, DETERMINED THE ALP OF THE ROY ALTY PAYMENT MADE BY THE ASSESSEE OF RS.1,97,40,726/- AT RS. NIL ALTHOUG H ALL OTHER INTERNATIONAL TRANSACTIONS WITH THE ASSOCIATED ENTERPRISE INCLUDI NG THE METHOD APPLIED BY THE ASSESSEE, I.E. TNMM WAS ACCEPTED. HOWEVER, TPO CHANGED THE PROFIT LEVEL INDICATOR (PLI) AS ADOPTED BY THE ASSESSEE FR OM OPERATING PROFIT TO CAPITAL EMPLOYED (OP/CE) TO OPERATING PROFIT TO TOT AL COST, I.E. OP/TC. LD. TRANSFER PRICING OFFICER HELD THAT IN SPITE OF THE FACT THAT TECHNICAL DESIGN ARE PROVIDED TO THE ASSESSEE BY THE ASSOCIATED ENTERPRI SE FOR MANUFACTURE OF ITS PRODUCTS IN INDIA AND ALSO THE FACT THE ASSESSEE OW NS NO INTANGIBLE AND ALL INTANGIBLE ARE OWNED BY AO, YET BECAUSE THE ASSESSE E IS SELLING ITS PRODUCTS TO ANOTHER ASSOCIATED ENTERPRISE, THEREFORE, ROYALT Y WAS NOT REQUIRED TO BE PAID AND HE DETERMINED THE ALP OF ROYALTY AT NIL. F OLLOWING TPOS ORDER ITA 3287/D/11 & 5546/D/12 ACIT VS. M/S KEHIN PANALFA LTD. 5 LD. ASSESSING OFFICER VIDE ORDER DATED 29.12.2008 D ISALLOWED THE AMOUNT OF ROYALTY 2.5. AGGRIEVED ASSESSEE FILED RESPECTIVE APPEALS BE FORE THE CIT(A), BY A DETAILED ORDER HE DELETED ALL THE ADDITIONS MADE BY THE AO IN BOTH THE YEARS. FOR AY 2004-05, THE RELEVANT FINDINGS FROM PAGE 47 ONWARDS OF LD. CIT(A)S ORDER ARE REPRODUCED HEREUNDER:- I HAVE CAREFULLY EXAMINED THE FACTS ON RECORD, REA SONING OF THE AO/TPO IN THEIR RESPECTIVE ORDERS, WRITTEN SUBM ISSIONS AND ORAL ARGUMENTS ON BEHALF OF THE APPELLANT. I FIND THAT THE TPO HAS CORRECTLY ADOPTED THE APP ROACH ABOUT PL1 OF THE ASSESSEE BY REJECTING THE OPERATIN G PROFIT TO CAPITAL EMPLOYED AS AN ACCEPTABLE PLI AND HAS CORRE CTLY APPLIED PLI OF OPERATING PROFIT TO TOTAL COST. HOWE VER, I DO NOT AGREE WITH THE TPOS FINDING THAT THE ASSESSEE IS O NLY A CONTRACT MANUFACTURER. AS PER THE FAR ANALYSIS CARR IED OUT BY THE APPELLANT AND AS ALSO THE FUNCTIONS PERFORMED B Y THE ASSESSEE, WHICH HAVE BEEN RECORDED BY THE TPO AND N OT DISPUTED BY HIM IN HIS ORDER AND ALSO IN VIEW OF TH E AGREEMENTS, WHEREIN THE ASSESSEE HAS A LICENSE TO MANUFACTURER CERTAIN ITEMS BY USING THE TECHNOLOGY OF ITS AE, I AM OF THE CONSIDERED OPINION THAT THE APPELLANT IS CARRYING ALL THE NORMAL FUNCTIONS OF A ROUTINE LICENSE MANUFACTU RER AND NOT A CONTRACT MANUFACTURER. IT CARRIES ALL THE RISKS O F A LICENSE MANUFACTURER. IT DEALS WITH ITS BUYER ON PRINCIPLE TO PRINCIPLE BASIS. IT HAS RECEIVED NO TECHNOLOGY, FINANCIAL OR ANY OTHER SUPPORT FROM ITS BUYER HSCI, WHICH COULD POSSIBLY L EAD TO SUCH AN INFERENCE. IT IS OBSERVED THAT AS PER TRANSFER PRICING STUDY, THE APPELLANT PERFORMED VARIOUS FUNCTIONS, SUCH AS PROC UREMENT AND INVENTORY MANAGEMENT WHICH CONSISTS OF LIAISONS WITH LOCAL VENDORS FOR PLANNING AND SCHEDULING FOR ALL I TEMS, PRODUCTION AND MANUFACTURING PLANNING, CO-ORDINATIO N OF PRODUCTION AND SALES, IMPORT OF GOODS AND MAINTAINI NG OF PRODUCTION FACILITIES. IT ALSO CARRIES OUT QUALITY CONTROL FUNCTIONS WHICH INVOLVES TESTING OF PRODUCTION BY T HE APPELLANT ITA 3287/D/11 & 5546/D/12 ACIT VS. M/S KEHIN PANALFA LTD. 6 TO ENSURE MATCH WITH THE GLOBAL QUALITY STANDARD. K EIHIN INDIA ALSO BEARS THE WARRANTY COST ASSOCIATED WITH SUCH P RODUCTS. SALES FUNCTIONS WHICH MAINLY COMPRISE OF THE ROLE OF CUSTOMER RELATIONSHIP MANAGEMENT, NEGOTIATIONS ON P RICE AT WHICH THE GOODS ARE TO BE SUPPLIED. PACKAGING AND TRANSPORTING FUNCTIONS ARE ALSO CARRIED OUT BY THE APPELLANT. OTHER ROUTINE MANUFACTURING FUNCTIONS INCLUDING COR PORATE STRATEGY DETERMINATION WITH REFERENCE TO POLICIES O F INDIAN GOVERNMENT OF FINANCE, ACCOUNTING, TREASURY AND LEG AL FUNCTIONS AND MAINTENANCE OF HUMAN RESOURCES ETC. A RE CARRIED OUT BY THE ASSESSEE. APART FROM THIS, RISK ANALYSIS AND ASSETS EMPLOYED BY THE APPELLANT HAVE ALSO BEEN EXAMINED AS CONTAINED IN T HE TRANSFER PRICING STUDY. THE ASSESSEE BEARS THE PRIC E RISK, RISK OF BAD DEBTS, WARRANTY AND PRODUCT LIABILITY RISK, FOREIGN EXCHANGE FLUCTUATION RISK, CREDIT RISK, INVENTORY R ISK ETC, ALL THESE ARE NOT DISPUTED BY TPO. IN MY OPINION, IT IS AN UNDISPUTED FACT THAT THE A PPELLANT AND HSCI, ITS CUSTOMER ARE LEGALLY CONSTITUTED INDE PENDENT ENTITIES. HSCI MANUFACTURES HONDA SIEL CARS IN IN DIA AND IS ONE OF THE LARGE CAR MANUFACTURER OF INDIA. THE APP ELLANT ALSO IS A LEGALLY RECOGNIZED ENTITY ORGANIZED UNDER THE COMPANIES ACT. THERE IS NO COMMONALITY OF DIRECTORS AND BOTH HAVE COMPLETELY INDEPENDENT BOARDS OF DIRECTORS. AT THE REGISTERED SHAREHOLDER LEVEL, THERE AGAIN IS NO COMMON SHAREHO LDER. THE SHAREHOLDER OF THE APPELLANT HAS A MINORITY SHAREHO LDING OF HONDA, JAPAN WHICH HAS SUBSTANTIAL HOLDING IN HSCI. BUT IT CANNOT BE ASSUMED AS DONE BY THE TPO THAT THEY ARE ONE AND THE SAME ENTITY. ALL OF THEM ARE LARGE ENTITIES OF THEIR OWN RIGHT. I AM THEREFORE OF THE OPINION THAT THE TPO/AO HAVE MADE A FUNDAMENTAL ERROR IN DISREGARDING THE LEGALLY SEP ARATE AND INDEPENDENT CHARTER OF THE APPELLANT, KEIHIN JAPAN, HONDA MOTOR CO., JAPAN AND HONDA SIEL CARS INDIA LTD. CON SIDERING ALL THE FACTS AND FAR ANALYSIS, I AM OF THE CONSIDE RED VIEW THAT THE APPELLANT CANNOT BE CATEGORIZED AS A CONTR ACT MANUFACTURER, BUT IT HAS TO BE CATEGORIZED AS A ROU TINE LICENSE ITA 3287/D/11 & 5546/D/12 ACIT VS. M/S KEHIN PANALFA LTD. 7 MANUFACTURER, WHICH CARRIES OUT ALL FUNCTIONS OF MANUFACTURING. IN MY OPINION, THIS CONTROVERSY BETWEEN CONTRACT MANUFACTURER AND LICENSE MANUFACTURER HAS BEEN UNNE CESSARILY GIVEN TOO MUCH IMPORTANCE BY THE TPO. ALL AUTO ANCI LLARIES WHO MANUFACTURE COMPONENTS FOR OEM (ORIGINAL EQUIPM ENT MANUFACTURERS) OF CARS AND TWO WHEELERS ETC. DO SO BASED ON TECHNOLOGY LICENSED TO THEM FROM THIRD PARTIES AND/ OR SELF ACQUIRED. THEY ALL NEGOTIATE PRICES WITH OEMS. THE COMPARABLES USED BY THE ASSESSEE AND ACCEPTED BY TP O FOR CARRYING OUT FAR ANALYSIS AND FOR MAKING ADJUSTMENT TO ARMS LENGTH PRICE WHICH FORMS THE FOUNDATION OF THE TPO S ORDER ARE ALL COMPONENT MANUFACTURERS FOR OEMS LIKE THE ASSES SEE. WHILE RETAINING THE COMPARABLES, THE TPO HAS NOT MA DE ANY DISTINCTION BETWEEN FULL-FLEDGED MANUFACTURER, CONT RACT MANUFACTURER OR LICENSED MANUFACTURER. ONCE THE PLI IS ACCEPTED TO BE OPERATING PROFIT TO TOTAL COSTS AS A GAINST OPERATING PROFIT TO CAPITAL EMPLOYED IT BECOMES IRR ELEVANT WHAT TYPE OF MANUFACTURING ACTIVITIES ARE CARRIED O UT BY THE APPELLANT. THEREFORE, IN MY OPINION, EVEN THOUGH I HAVE HELD THE ASSESSEE TO BE A ROUTINE LICENSE MANUFACTURER, THIS ASPECT IS IRRELEVANT FOR PURPOSES OF DETERMINING ALP IN THE I NTERNATIONAL TRANSACTIONS OF THE ASSESSEE. IN MY OPINION, IN FAC T THIS ARGUMENT GOES AGAINST THE TPOS ANALYSIS AS A MERE CONTRACT MANUFACTURER WOULD GET LESS MARGINS AS ITS FAR WOUL D BE TOTALLY DIFFERENT FROM A FULL LICENSED NORMAL MANUF ACTURERS OF COMPONENTS. ON THE ISSUE OF USING TWO PREVIOUS YEARS FINANCIA L DATA OF THE COMPARABLE FOR BENCHMARKING THE INTERNATIONAL TRANSACTIONS OF THE ASSESSEE, I DO NOT AGREE WITH T HE SUBMISSIONS OF THE ASSESSEE. IN MY CONSIDERED VIEW, THE TRANSFER PRICING REGULATIONS REQUIRE THAT THE COMPA RABLE DATA, AS FAR AS POSSIBLE, SHOULD BE CONTEMPORANEOUS . HENCE, THE CUT OFF POINT FOR EXAMINING THE COMPARABLE DATA SHOULD NOT BE BEYOND THE END OF THE CURRENT FINANCIAL YEAR. RULE 10B(4) OF THE INCOME TAX RULES, 1962 SPECIFIE S THE REQUIREMENT REGARDING DATA TO BE USED FOR ANA LYZING THE COMPARABILITY OF AN UNCONTROLLED TRANSACTION WITH A N INTERNATIONAL TRANSACTION WHICH READS AS UNDER: ITA 3287/D/11 & 5546/D/12 ACIT VS. M/S KEHIN PANALFA LTD. 8 RULE 10B(4) STATES THAT THE DATA TO BE USED IN AN ALYZING THE COMPARABILITY OF AN UNCONTROLLED TRANSACTION WI TH AN INTERNATIONAL TRANSACTION SHALL BE THE DATA RELATIN G TO THE FINANCIAL YEAR IN WHICH THE INTERNATIONAL TRANSACTI ON HAS BEEN ENTERED INTO: PROVIDED THAT THE DATA RELATING TO A PERIOD NOT BEI NG MORE THAN TWO YEARS PRIOR TO SUCH FINANCIAL YEAR MAY ALS O BE CONSIDERED IF SUCH DATA REVEALS FACTS WHICH COULD H AVE AN INFLUENCE ON THE DETERMINATION OF TRANSFER PRICES I N RELATION TO THE TRANSACTIONS BEING COMPARED. THE USE OF THE WORD SHALL IN THE MAIN PROVISION OF THE RULE MAKES IT ABUNDANTLY CLEAR THAT THE USE OF CURR ENT FINANCIAL YEAR DATA (I.E. THE FINANCIAL YEAR IN WHICH INTERNA TIONAL TRANSACTION WAS ACTUALLY ENTERED INTO) IS A MANDATO RY REQUIREMENT OF LAW IN THE COMPARABILITY ANALYSIS UN DER THE INDIAN TRANSFER PRICING REGULATIONS. THE PROVISO TO THE SAID RULE MAKES IT AN EXCEPTION IN ALLOWING THE USE OF D ATA FOR THE PRECEDING TWO YEARS, IF AND ONLY IF, IT IS PROVED T HAT SUCH DATA REVEALS FACTS, WHICH COULD HAVE AN INFLUENCE ON THE DETERMINATION OF TRANSFER PRICE. THEREFORE, THE EXC EPTION COMES INTO PLAY ONLY WHEN PROOF OF SUCH INFLUENCE IS BROU GHT ON RECORD. CONTEMPORANEOUS TRANSACTIONS REFLECT SIMILAR ECONOM IC CONDITIONS. THEREFORE, THE USE OF CURRENT FINANCIAL YEAR DATA IS MORE RELEVANT AND APPROPRIATE FOR ENSURING A HIG HER DEGREE OF COMPARABILITY OF UNCONTROLLED TRANSACTION S FOR ARRIVING AT RELIABLE ARMS LENGTH PRICE IN RESPECT OF THE INTERNATIONAL TRANSACTION. FURTHER, PARA 1.49 TO PARA 1.51 OF OECD GUIDELINES HAVE ACKNOWLEDGED THE USE OF MULTIPLE YEAR DATA UNDER SP ECIAL CIRCUMSTANCES. USE OF MULTIPLE YEAR DATA IS CONSIDE RED USEFUL TO SMOOTH OUT THE FLUCTUATIONS CAUSED BY BUSINESS/ ECONOMIC/ PRODUCT LIFE CYCLE. IN OTHER WORDS MULTIPLE YEAR DA TA SHOULD BE USED ONLY WHEN IT ADDS VALUE TO THE TRANSFER PRICIN G ANALYSIS. THE ISSUE RELATING TO USE OF CURRENT YEAR DATA IS WELL SETTLED NOW IN VIEW OF THE DECISION OF THE SPECIAL BENCH OF BANGALORE TRIBUNAL IN THE CASE OF AZTEC SOFTWARE & TECHNOLOGY SERVICES LTD. VS. ACIT, (2007) 107 ITD 141 (BANGALORE) AND REAFFIRMED ITA 3287/D/11 & 5546/D/12 ACIT VS. M/S KEHIN PANALFA LTD. 9 BY THE JURISDICTIONAL DELHI TRIBUNAL IN THE CASE OF MENTOR GRAPHIC PVT. LTD. VS. DCIT, (2007) 109 ITD 101 (DEL HI). THEREFORE, UNLESS SPECIFIC REASONS ARE BROUGHT ON R ECORD, WHICH IN THIS CASE THE ASSESSEE HAS NOT BROUGHT ON RECORD, THE COMPARABILITY ANALYSIS IS TO BE CONDUCTED ON THE BASIS OF CURRENT YEAR DATA. IN VIEW OF THE ABOVE, I AM OF THE CONSIDERED VIEW THAT THE RELEVANT DATA OF CURRENT FINANCIAL YEAR I.E. 2003 04 IS TO BE USED FOR BENCHMARKING THE INTERNATIONAL TRANSACTION S OF THE ASSESSEE WITH THE COMPARABLE COMPANIES. PLI: RETURN ON CAPITAL EMPLOYED IS NOT ACCEPTABLE . I AGREE WITH TPO'S FINDINGS BUT WITH MODIFICATION. AGGRIEVED, REVENUE IS BEFORE US. 3. LEARNED CIT (DR) DREW OUR ATTENTION TO PAGE 11 OF TPOS ORDER, WHICH INTER ALIA CONTAINS A DIAGRAMED DISPLAY OF RE LATIONSHIP BETWEEN VARIOUS ENTITIES I.E. HONDA MOTOR CO. JAPAN AND KEI HIN CORPORATION JAPAN ON THE ONE HAND, HONDA MOTOR CO. JAPAN AND HONDA SI EL CARS LTD. INDIA. IT IS SUBMITTED THAT ESSENTIALLY THE TOTAL BENEFIT OF ALL THE TRANSACTIONS WHICH ARE TAKING PLACE IN INDIA BETWEEN VARIOUS ENTITIES MAIN LY ENURES TO THE AE, HONDA MOTOR CO. JAPAN. THE ASSESSEE WAS MANUFACTURI NG FOR THE SINGLE CUSTOMER I.E. HONDA SIEL CARS INDIA LTD., WHICH IS ALSO ITS ASSOCIATE ENTERPRISE AND THAT THE ULTIMATE BENEFICIARY OF BOT H THE ASSESSEE AND ITS BUYER WAS HONDA MOTOR COMPANY, JAPAN. THE LEARNED DR, IN ESSENCE, ENDEAVORED TO LIFT THE CORPORATE VEIL OF RELATED ENTITIES IN O RDER TO BUTTRESS HIS ARGUMENT THAT THE ULTIMATE BENEFICIARY OF THE ENTIRE TRANSAC TION IS HONDA MOTOR COMPANY, JAPAN. IT IS FURTHER SUBMITTED THAT IN VIE W OF THIS, BOTH THE TPO AND AO WERE CORRECT IN DISALLOWING THE ENTIRE ROYAL TY PAID BY THE ASSESSEE TO KEIHIN, JAPAN. THE LEARNED DR LAID STRESS ON PARA 4 .2 OF THE TPOS ORDER AND ITA 3287/D/11 & 5546/D/12 ACIT VS. M/S KEHIN PANALFA LTD. 10 REITERATED THE CONCLUSIONS DRAWN BY THE TPO AS PER PARA 4.11 OF HIS ORDER AT PAGE 14 ARE CORRECT. 3.1. APROPOS THE TP ADDITION BASED ON THE COMPARABL ES, SINGLE YEAR DATA AND REWORKING OF OP/CE WORKING ORDER OF TPO IS RELI ED ON. 4. LD. COUNSEL FOR THE ASSESSEE MS. PALLAVI DINODI A QUA THE TP ADDITION CONTENDS THAT ASSESSEE IS A LICENSED MANUFACTURER B ASED ON THE MANUFACTURING TECHNOLOGY AND TECHNICAL ASSISTANCE S UPPLIED BY ITS AE I.E. KEIHIN CORPORATION, JAPAN, WHO HOLDS 74% STAKE IN T HE ASSESSEE COMPANY. IN THIS SET UP FOLLOWING INTERNATIONAL TRANSACTIONS HAVE BEEN UNDERTAKEN WITH ITS AE S. NO. NATURE OF TRANSACTION VALUE OF TRANSACTION ON WHICH ALP DETERMINED 1. IMPORT OF RAW MATERIALS, PARTS AND COMPONENTS RS.14,08,30,131 2. PAYMENT OF ROYALTY RS.1,24,41,118 3. PURCHASE OF CAPITAL GOODS RS.6,15,289 4. PAYMENT OF TECHNICAL GUIDANCE FEE RS.15,98,686 5. TECHNICAL KNOW HOW FEE RS.41,97,000 RS.15,90,66,935 4.1. THE ARMS LENGTH PRICE (ALP) OF THE INTERNATIO NAL TRANSACTIONS OF THE APPELLANT WAS PROPERLY WORKED OUT BY ASSESSEE IN IT S TRANSFER PRICING STUDY BY AGGREGATING THEM UNDER THE TNMM - ENTITY LEVEL A NALYSIS USING PLI AS OP/CE (OPERATING PROFIT TO CAPITAL EMPLOYED) AND TH REE YEARS AVERAGE DATA ITA 3287/D/11 & 5546/D/12 ACIT VS. M/S KEHIN PANALFA LTD. 11 FOR COMPARABLE COMPANIES. TP STUDY WAS COMPILED BY AN INDEPENDENT CONSULTANT I.E. PWC WHICH IS BASED ON INDUSTRIES OV ERVIEW AND HAD ANALYSIS OF FUNCTIONAL TEST, ASSETS EMPLOYED AND RISK ASSUME D BY THE ASSESSEE (FAR) AS WELL AS SIX COMPARABLES AS WERE FOUND THROUGH A DETAILED SEARCH PROCESS BY USING PROWESS AND CAPTIVE DATABASE. 4.2. IT IS PLEADED THAT LEARNED TPO HAS OBSERVED TH AT AVERAGE PLI OF THE COMPARABLES BASED ON LAST THREE YEARS DATA WAS 25%, WHEREAS THAT OF THE ASSESSEE WAS COMPUTED AT 29%. THIS OBSERVATION GIVE S A FAIR INDICATION THAT ALL THE INTERNATIONAL TRANSACTIONS WERE ON THE ARM S LENGTH PRINCIPLES. NEVERTHELESS THE PLI OF OPERATING PROFIT TO CAPITAL EMPLOYED WAS NOT ACCEPTED BY THE TPO AS THE CORRECT PLI. WHILE APPRO VING THE TNMM AS MOST APPROPRIATE METHOD, TPO REQUIRED THE ASSESSEE TO CHANGE THE PLI TO OPERATIVE PROFIT TO TOTAL COST (OP/TC). THE TPO AL SO HELD THAT THERE WAS NO JUSTIFICATION FOR USE OF MULTIPLE YEARS' DATA AND H ELD THAT SINGLE YEAR FINANCIALS WERE REQUIRED TO BE CONSIDERED WHILE DET ERMINING THE PLI OF THE COMPARABLES. THE ASSESSEE IN RESPONSE SUBMITTED TH E REVISED PLI BASED ON OP/TC, WHICH WAS COMPUTED AT 6.22% OF THE ASSESSEE AND 8.29% OF THE COMPARABLES. THE ASSESSEE CLAIMED THAT EVEN THE CH ANGED PLI BASED ON OP/TC WILL FALL WITHIN (+)/(-) RANGE OF 5% AS PER T HE PROVISO TO SECTION 92C(2), THEREFORE, ASSESSEES INTERNATIONAL TRANSAC TIONS SHOULD BE HELD TO BE ON THE ARMS LENGTH PRINCIPLES. 4.3. THE LEARNED TPO ACCEPTED THE PLI OF THE ASSESS EE, AS WAS COMPUTED AT 6.22% AND ALSO ACCEPTED THE PLI OF THE COMPARABL ES AT 8.29%. HOWEVER, THE DIFFERENCE BETWEEN THE PLIS, WHICH WAS 2.07% WA S NOT FOUND TO BE FALLING WITHIN (+)/(-) RANGE OF 5%, AS THE TPO HELD THAT THE SHORTFALL IN THE ITA 3287/D/11 & 5546/D/12 ACIT VS. M/S KEHIN PANALFA LTD. 12 PLI IS ATTRIBUTABLE ONLY TO THE INTERNATIONAL TRANS ACTIONS, IN SPITE OF THE FACT THAT THE COST, WHICH THE TPO WAS EXAMINING UNDER TP REGULATIONS, WERE JUST ABOUT 23% OF THE TOTAL COST INCURRED BY THE ASSESSE E. THE TPO HELD THAT THIRD PARTY COST INCURRED BY THE ASSESSEE ARE TO BE TREATED AT ARMS LENGTH AND IT IS ONLY THE RELATED PARTY COSTS, WHICH ARE INHER ENTLY PRESUMED NOT TO BE AT ARMS LENGTH UNDER THE TP REGULATIONS. 4.4. THEREAFTER, THE LEARNED TPO CARRIED OUT TWO AN ALYSES IN HIS ORDER: (I) IN THE FIRST ANALYSIS HE EXAMINED THE TOTAL COS T AT ENTITY LEVEL AND CONCLUDED THAT THE DIFFERENCE IN THE PLI IS ATT RIBUTABLE ONLY TO THE INTERNATIONAL TRANSACTIONS INCLUDED IN THE TOTAL CO ST AND WORKED OUT AN LP ADJUSTMENT OF RS.1,29,70,076/-. (II) THE PAYMENT OF ROYALTY WAS NOT REQUIRED TO BE MADE, AS ACCORDING TO THE TPO, THE ASSESSEE WAS ALMOST LIKE A CONTRACT MANUFACTURER AND BECAUSE OF THE RELATIONSHIP BETWEE N HONDA MOTOR CO., JAPAN AND KEIHIN CORPORATION, JAPAN ON THE ONE HAND AND THE ASSESSEE AND KEIHIN CORPORATION, JAPAN ON THE OTHER HAND, AS ALSO BECAUSE OF RELATIONSHIP BETWEEN HONDA MOTOR CO. JAP AN AND HONDA SIEL CAR INDIA LTD., THE WHOLE BUSINESS OF THE ASSE SSEE WAS TREATED TO HAVE BEEN CONDUCTED FOR THE SOLE BENEFIT OF HONDA M OTOR CO. JAPAN. THE TPO BASED ON CERTAIN OBSERVATIONS HELD THAT ROY ALTY IS BEING PAID TO MAKE SALES TO ITS OWN ASSOCIATED ENTERPRISES; AN D THEREFORE, THERE WAS NO REQUIREMENT OF PAYMENT OF ROYALTY OF RS.1,24 ,41,118/-. HOWEVER, SINCE THE OVERALL DIFFERENCE OF RS.1,29,70 ,076/- HAS BEEN FOUND OUT TOWARDS ADJUSTMENT OF ALP BASED ON THE T NMM METHOD, THE TPO WAS OF THE VIEW THAT THIS AMOUNT OF ROYALTY OF ITA 3287/D/11 & 5546/D/12 ACIT VS. M/S KEHIN PANALFA LTD. 13 RS.1,24,41,118/- CAN BE CONSIDERED TO INCLUDE IN TH E OVERALL COST ADJUSTMENT ADVISED BY HIM AT RS.1,29,70,076/-. 4.5. BEFORE LD CIT(A) ASSESSEE EXPLAINED THAT EVEN IF THE REVISED PLI OF OPERATING PROFIT TO TOTAL COST WAS TO BE RETAINED A ND EVEN IF THE SINGLE YEAR DATA WAS TO BE ADOPTED, THEN THE PLI OF THE ASSESSE E CAME TO 6.22% AS AGAINST 8.29% OF THE COMPARABLES FELL VERY MUCH WIT HIN THE PERMISSIBLE +/- 5% RANGE AS PROVIDED BY THE PROVISO TO SECTION 92C . THE APPROACH OF THE TPO TO DISREGARD THIS SUBMISSION AND TO CONCLUDE TH AT WHOLE OF THE VARIATION IN EARNING OF PLI IS ATTRIBUTABLE ONLY TO THE RELAT ED PARTY COST IS GROSSLY ERRONEOUS AND NOT IN CONFORMITY WITH PROVISIONS OF TP REGULATIONS. IT WAS SUBMITTED BEFORE LD. CIT(A) THAT IF THE SALES TO AS SOCIATED ENTERPRISES ARE TO BE TREATED AS SALES TO SELF AS OPINED BY THE TPO, T HEN THE WHOLE MECHANISM OF TP PROVISIONS WOULD FAIL. THUS, SUCH A VIEW ADO PTED BY THE TPO IS NOT IN CONSONANCE WITH THE PROVISIONS OF SETTLED TP NORMS AS ADHERENCE TO SUCH WORKING WILL NOT EVER YIELD TO PROFITS. 4.6. IT IS A CARDINAL PRINCIPLE THAT NO ONE CAN EAR N FROM SELF AND THERE SHOULD HAVE BEEN NO DECLARED TAXABLE INCOME OF RS.4 .55 CRORES, IF THE SALES WHICH UNDISPUTEDLY HAVE BEEN MADE TO ONLY ONE CUSTO MER IN INDIA I.E. HONDA SIEL CARS INDIA LTD., ARE TO BE TREATED AS SA LES TO SELF ON WHICH ACCORDING TO THE TPO/AO ROYALTY IS NOT PAYABLE. IT WAS CONTENDED THAT ASSESSEE IS MAKING USE OF TECHNOLOGY SUPPLIED BY IT S AE I.E. KEIHIN CORPORATION, JAPAN. IT IS CARRYING OUT VARIOUS FUN CTIONS OF ROUTINE MANUFACTURER, WHICH INCLUDE BUT NOT LIMITED TO PROC UREMENT OF INVENTORY MANAGEMENT, MANUFACTURING OF PRODUCTS BASED ON KNOW -HOW, TECHNOLOGY INFORMATION, DATA KNOWLEDGE AND PATENT ETC. FOR MAN UFACTURING OPERATIONS SUPPLIED BY KEIHIN CORPORATION JAPAN. THE INFORMAT ION SUPPLIED INCLUDES DESIGNS, DRAWINGS, MANUFACTURING DATA, STANDARDS AN D SPECIFICATION OF ITA 3287/D/11 & 5546/D/12 ACIT VS. M/S KEHIN PANALFA LTD. 14 MATERIAL TO BE USED, PROCESS MANUAL, DIRECTIONS MAP AND/OR ANY OTHER TECHNICAL INFORMATION THAT MAY BE REQUIRED IN THE M ANUFACTURING PROCESS. FURTHER, THE ASSESSEE HAS TO MAINTAIN THE QUALITY S TANDARDS WHICH ARE ENSURED BY QUALITY CONTROL DIRECTOR EMPLOYED BY ASSESSEE AS DEPUTED BY KEIHIN JAPAN. IT IS TO BE APPRECIATED THAT ALL THE INTANGI BLES ARE OWNED BY THE AE AND THERE IS NO R&D ACTIVITY AND ASSESSEE COULD NOT PRODUCE OR SELL WITHOUT THE AVAILABILITY OF SUCH TECHNOLOGY BY ITS AE. 4.7. APART FROM THE AFORESAID FUNCTIONS IN THE MANU FACTURING SEGMENTS, THE ASSESSEE HAS TO COMPLY WITH REGARD TO HUMAN RESOURC E MANAGEMENT FUNCTIONS. IT HAS ALSO EMPLOYED ASSETS WHICH ARE CO MMENSURATE WITH THE SIZE OF OPERATIONS OF MANUFACTURING. RISK PROFILE OF TH E ASSESSEE INCLUDE VARIOUS RISKS ASSOCIATED WITH THE NATURE OF BUSINESS AND IN CLUDE MARKET RISK, PRODUCT LIABILITY RISK I.E. WARRANTY RISK OF THE GOODS MANU FACTURED, CREDIT RISK, PRICE RISK, INVENTORY RISK AND FOREIGN CURRENCY RISK. IT WAS FURTHER SUBMITTED BEFORE THE CIT(A) THAT TPO HAD FAILED TO CORRECTLY APPLY THE PROVISIONS CONTAINED IN PROVISO TO SECTION 92C WITH REGARD TO CALCULATION OF +/- 5%. IT WAS AMONGST OTHERS SUBMITTED THAT TOTAL AE TRANSACT IONS INCLUDED IN THE COST, WHICH HAS BEEN TAKEN AS DENOMINATOR BY CHANGING IT FROM CAPITAL EMPLOYED BY TPO WAS ONLY 23% AND ATTRIBUTION OF SHORTFALL IN THE PROFIT WHOLLY TO THE INTERNATIONAL TRANSACTION BY THE TPO WAS NOT IN ACC ORDANCE WITH THE PROVISIONS OF LAW, AS HAS BEEN INTERPRETED BY VARIO US JUDICIAL BODIES. 4.8. LD. CIT(APPEAL) DELETED THE ADDITIONS BY DETAI LED OBSERVATIONS. GIST THEREOF IS AS UNDER: (I) PLI ISSUE :- ITA 3287/D/11 & 5546/D/12 ACIT VS. M/S KEHIN PANALFA LTD. 15 IN MY OPINION, THIS CONTROVERSY BETWEEN CONTRACT MANUFACTURER AND LICENSE MANUFACTURE HAS BEEN UNNEC ESSARILY GIVEN BY THE TPO. ALL AUTO ANCILLARIES WHO MANUFACT URE COMPONENTS FOR OIM (ORIGINAL EQUIPMENT MANUFACTURER S) OF CARS AND TWO WHEELERS ETC. DO SO BASED ON TECHNOLOG Y LICENSED TO THEM FROM THIRD PARTIES AND/ OR SELF ACQUIRED. T HEY ALL NEGOTIATE PRICES WITH OEMS. THE COMPARABLES USED BY THE ASSESSEE AND ACCEPTED BY TPO FOR CARRYING OUT FAR A NALYSIS AND FOR MAKING ADJUSTMENT TO ARMS LENGTH PRICE WHI CH FORMS THE FOUNDATION OF THE TPOS ORDER ARE ALL COMPONENT MANUFACTURERS FOR OEMS LIKE THE ASSESSEE. WHILE RET AINING THE COMPARABLES, THE TPO HAS NOT MADE ANY DISTINCTION B ETWEEN FULL FLEDGED TO BE OPERATING PROFIT TO TOTAL COSTS AS AGAINST OPERATING PROFIT TO CAPITAL EMPLOYED IT BECOMES IRR ELEVANT WHAT TYPE OF MANUFACTURING ACTIVITIES ARE CARRIED OUT BY THE APPELLANT. THEREFORE, IN MY OPINION, EVEN THOUGH I HAVE HELD THE ASSESSEE TO BE A ROUTINE LICENSE MANUFACTURER, THIS ASPECT IS IRRELEVANT FOR PURPOSES OF DETERMINING ALP IN THE I NTERNATIONAL TRANSACTIONS OF THE ASSESSEE. IN MY OPINION, IN FAC T THIS ARGUMENT GOES AGAINST THE TPOS ANALYSIS AS A MERE CONTRACT MANUFACTURERS WOULD GET LESS MARGINS AS ITS FAR WOU LD BE TOTALLY DIFFERENT FROM A FULL LICENSED NORMAL MANUF ACTURERS OF COMPONENTS. 4.9. BASED ON THESE OBSERVATIONS, CIT(A) HELD THE A SSESSEE TO BE FALLING IN SAFE HARBOUR RULE I.E. (+) (-) 5% AS UNDER: INR ADJ ATTRIBUTABLE TO THIRD PARTY (521/680) 9,936,483 ADJ ATTRIBUTABLE TO AE (159/680) 3,033,593 TOTAL COST 680,088,000 THIRD PARTY COST 521,021,065 RELATED PARTY COST 159,066,935 UNRELATED (ALP, IL JIN) 511,084,582 RELATED (ALP, IL JIN 156,033,342 667,117,924 RANGE (+5%) 7,801,667 NO ADJ, SINCE INR 3,033,593 FALLS WITHIN RANGE. ITA 3287/D/11 & 5546/D/12 ACIT VS. M/S KEHIN PANALFA LTD. 16 (II) ROYALTY ISSUE : WITH REGARD TO THE PAYMENT OF ROYALTY, ALTHOUGH, I T HAS BEEN ACKNOWLEDGED BY THE TPO IN THE ASSESSMENT ORDER AT PAGE 14, PARA 4 THAT VIRTUALLY ALL THE INTANGIBLE PROPERTY R IGHTS ARE OWNED BY THE PARENT COMPANY, YET HE AHS VIEWED THAT SUCH PARENT COMPANY DOES NOT DESERVE ANY REMUNERATION FO R USE OF THE SAME AND THIS VIEW, IN ANY CASE, IS A CONTRADIC TORY STAND OF THE TPO AND CANNOT BE UPHELD. AGREEMENT FOR PAYMENT OF ROYALTY AND OBTAINING OTHER TECHNICAL SERVICES WERE ENTERED IN 1997. THE APPELLANT HAS BEEN CARRYING ON ITS BUSINE SS BASED ON THESE AGREEMENTS AND AHS BEEN MANUFACTURING GOODS A ND SELLING THE SAME. A ALREADY HELD BY ME, ALL ENTITIE S ARE LARGE LEGALLY CONSTITUTED COMPARABLES AND THEREFORE IN SU BSTANCE AND IN FACT THEY CANNOT BE BRUSHED ASIDE AS NON EXISTEN T AND CALLA THE SALE AS IT WAS SALE TO SELF. I DISAGREE WITH TH E FINDING AND THE APPROACH OF THE TPO IN THIS REGARD. IN MY VIEW THE TPO HAD NO JURISDICTION TO QUESTION THE NEED OF THE APPELLANT TO ENTER INTO AN ARRANGEMENT WITH KEI HIN BY WHICH IT GETS TO USE THE VAST AND VALUABLE KNOW HOW , EXPERTISE, TRADE MARK OF KEIHIN IN INDIA. THE EXISTENCE OF THE APPELLANT WAS TO MANUFACTURE PRODUCTS BY USING THE TECHNOLOGY OF THE PARENT COMPANY. THE TPO HAS IN MY VIEW EXCEEDED HIS JURISDICTION UNDER THE GAB OF TRANSFER PRICING BY S TATING THAT THE ROYALTY PAYMENT WAS NOT NECESSARY. IN FACT, IN MY V IEW NO SALE WOULD HAVE RESULTED IF THIS TECHNOLOGY ETC. WAS NOT PROVIDED TO THE APPELLANT. THIS HAS ALSO BEEN APPROVED BY THE G OVT. OF INDIA. THIS ROYALTY ARRANGEMENT AND RESULTANT PAYME NT HAS BEEN ALLOWED TO IT AS REVENUE EXPENDITURE ALL ALONG SINCE 1997. IT IS INCORRECT TO SAY THAT IN 2003-04 IT WAS NOT R EQUIRED; THEREFORE SHOULD BE TAKEN AT NIL, THE NECESSITY OF THE BUSINESS OF THE ASSESSEE IS THE ASSESSEES DOMAIN AND REQUIRES NO ADJUDICATION FROM THE AO/TPO, THE SAME HAS BEEN HEL D IN A NUMBER OF JUDGMENTS AS BELOW: (A) SONY INDIA (P) LTD. V. DCIT (DELHI)(2008) 114 ITD 4 48 (ITAT) (B) SASSOON J. DAVIS & CO. PVT. LTD. VS. CIT [118 ITR 261(SC); ITA 3287/D/11 & 5546/D/12 ACIT VS. M/S KEHIN PANALFA LTD. 17 (C) CIT VS. CHANDULAL KESHAV LAL & CO. [138 ITR 601] (D) CIT VS. WALCHAND & CO. PVT. LTD. [65 ITR 381(SC);] (E) J.K. WOOLLEN MANUFACTURING VS. CIT [72 ITR 612 (SC) ] (F) ALUMINIUM CORP. OF INDIA VS. CIT [86 ITR 11 (SC)] A ND (G) CIT VS. PANIPAT WOOLLEN & CEMENT MILLS [103 ITR (SC )]. 4.10. MS. PALLAVI DINODIA, LD. COUNSEL FOR ASSESSEE FAIRLY CONCEDED THAT ASSESSEE HAS NO OBJECTION TO THE ACTION OF THE TPO , WHICH IS CONFIRMED BY LD. CIT(A) REGARDING THE ADOPTION OF PLI OF OPERATI NG PROFIT TO TOTAL COST (OP/TC) AS ALSO THE ADOPTION OF SINGLE YEAR DATA IN ACCORDANCE WITH RULE 10B(4) OF THE I.T. RULES. 4.11. HOWEVER, WITH REGARD TO ISSUE OF TREATING TH E ASSESSEE AS CONTRACT MANUFACTURER BY THE TPO LEARNED CIT(A) HAS CATEGORI CALLY HELD THAT CONTROVERSY PERTAINING TO CONTRACT MANUFACTURER AND /OR THE LICENSED MANUFACTURER HAS BEEN UNNECESSARILY GIVEN TOO MUCH IMPORTANCE BY THE TPO. THIS OBSERVATION HAS BEEN MADE CONSIDERING THE FACT THAT ALL THE COMPARABLES SELECTED BY THE ASSESSEE AFTER CARRYING OUT A PROPER FAR ANALYSIS HAVE BEEN ACCEPTED AND RETAINED BY THE TPO . LEARNED CIT(A) WHILE RETAINING THE COMPARABLES, HAS JUSTIFIABLY HE LD THE TPO HAS NOT MADE ANY DISTINCTION BETWEEN THE FULL-FLEDGED MANUFACTUR ER, A CONTRACT MANUFACTURER OR LICENSED MANUFACTURER. THERE IS FUN DAMENTAL DIFFERENCE BETWEEN A CONTRACT MANUFACTURER AND A LICENSED MANU FACTURER. A LICENSED MANUFACTURER PRODUCES GOODS BY USE OF TECHNOLOGY ON THE BASIS OF DIFFERENT RISK PROFILE. IN THE CASE OF A CONTRACT MANUFACTURE R, THE ENTIRE RISK ASSOCIATED WITH MANUFACTURING OF GOODS LIES WITH THE BUYER AND THE CONTRACT MANUFACTURER IS NORMALLY COMPENSATED FOR ALL ITS CO STS, PLUS MARGIN OF PROFIT. THE FUNCTIONS PERFORMED, RISKS ASSUMED AND ASSETS E MPLOYED ARE DIFFERENT IN THE CASE OF A CONTRACT MANUFACTURER. ITA 3287/D/11 & 5546/D/12 ACIT VS. M/S KEHIN PANALFA LTD. 18 4.12. THE ASSESSEE IS A JOINT VENTURE COMPANY BETWE EN KEIHIN CORPORATION OF JAPAN HAVING 74 % SHARE AND ITS INDIAN PARTNER P ANALFA INVESTMENT INDIA HAVING 26% SHARE. KEIHIN PANALFA INDIA PVT. LTD., I S A COMPANY ORGANIZED UNDER THE LAWS OF INDIA. HONDA MOTOR COMPANY LTD., JAPAN, HAS ONLY 41.33% SHARE IN KEIHIN CORPORATION, JAPAN. BOTH HON DA MOTORS COMPANY LTD., JAPAN, AND KEIHIN CORPORATION LTD., JAPAN, AR E WIDELY HELD LISTED COMPANIES IN JAPAN; SIMILARLY HONDA SIEL CARS. INDI A LTD. IS A SEPARATE LEGAL ENTITY INCORPORATED AS PER INDIAN LAWS. THEREFORE, AS FAR AS THE ASSESSEE IS CONCERNED, IT IS NOT A CAPTIVE SUBSIDIARY OF HONDA MOTORS CO., LTD., JAPAN, AS ARBITRARILY VIEWED BY TPO. THE BUYER OF GOODS FROM THE ASSESSEE I.E HONDA SIEL CARS LTD., INDIA, IS ALSO A PUBLIC LIMITED COM PANY REGISTERED IN INDIA. THEREFORE, AT THE OWNERSHIP STAGE, THERE IS NO UNAN IMITY OF OWNERSHIP BETWEEN THE ASSESSEE COMPANY AND ITS BUYER. THEREFO RE, ON FACTS, IT IS COMPLETELY INCORRECT AND OUTLANDISH TO ATTRIBUTE AN Y COLORABLE DEVICE AND RECOURSE TO LIFTING OF CORPORATE VEIL IS ARBITRARY. IN THE REALM OF GLOBAL ENTERPRISE A SITUATION CANNOT BE ENVISAGED WHERE TH ERE IS NO INTERCONNECTION BETWEEN ENTITIES. CONSEQUENTLY THERE IS NEITHER A C ASE NOR A SITUATION TO WISH AWAY THE REALTY BY ARBITRARILY APPLYING HYPOTHESIS IN THE NAME OF LIFTING OF CORPORATE VEIL BY THE REVENUE. 4.13. RELIANCE IS PLACED UPON THE PARA 16 OF THE IT AT JUDGMENT IN THE CASE OF SAMSUNG INDIA ELECTRONICS PVT. LTD., VS. ACIT IN ITA NO. 5316/DEL/2011 DATED 21.6.2013 (ONE OF US IS A PARTY TO IT), IN SIMILAR CIRCUMSTANCES CORPORATE VEIL CAN ONLY BE LOOKED AT AND NOT LOOKED THROUGH. SIMILAR VIEW HAS BEEN ECHOED BY THE JUDGM ENT OF HONBLE SUPREME COURT IN THE CASE OF VODAFONE REPORTED AS 3 41 ITR 1 (SC), WHEREIN SIMILAR PROPOSITION ABOUT MULTI ENTITY CORPORATION HAS BEEN CONSIDERED. IT HAS ITA 3287/D/11 & 5546/D/12 ACIT VS. M/S KEHIN PANALFA LTD. 19 BEEN UNAMBIGUOUSLY HELD THAT LEGALLY INCORPORATED E NTITIES RETAIN THEIR SEPARATE EXISTENCE AND CORPORATE VEIL CAN NOT BE AT TEMPTED TO BE LIFTED IN A CASUAL MANNER. 4.14. APROPOS TPO ACTION TO DENY BENEFIT OF PROVIS O TO SECTION 92C FOR +/- 5% IT IS STATED THAT TPO HAD ERRONEOUSLY HELD THAT IF THERE IS DIFFERENCE IN THE PLI OF THE TESTED PARTY WITH THAT OF COMPARABLE, TH EN THE DIFFERENCE IS INHERENTLY PRESUMED TO BE PERTAINING TO INTERNATION AL TRANSACTION. SUCH A VIEW HAS NO SUPPORT OF ANY RULES, REGULATIONS OR PR OVISIONS OF THE TRANSFER PRICING. ON THE CONTRARY, IT WAS OBLIGATORY ON TPO TO CORRECTLY APPLY THE PROVISIONS OF THE TRANSFER PRICING AND OUGHT TO HA VE RESTRICTED THE ADJUSTMENT IN PROPORTION OF INTERNATIONAL TRANSACTIONS. SUCH T RANSACTIONS ARE ADMITTEDLY ONLY ABOUT 23% OF THE TOTAL COST, IN THIS SITUATION NO ADDITION COULD HAVE BEEN MADE ON ACCOUNT OF ASSESSEES ALP. LD. CIT(A) HAS TAKEN A CORRECT VIEW OF THE MATTER THAT VARIATION ON ACCOUNT OF DIF FERENCE IN ASSESSEES PLI AND THAT OF THE COMPARABLES FELL VERY MUCH WITHIN + /- 5% RANGE. FOLLOWING MORE JUDGMENTS ARE RELIED UPON FOR THE PROPOSITION THAT ONLY INTERNATIONAL TRANSACTIONS ARE REQUIRED TO BE EXAMINED AND BENCHM ARKED UNDER THE TP REGULATIONS AND THE APPLICABILITY OF THE PROVISO TO SECTION 92C. I) IL-JIN ELECTRONICS VS. ASST CIT [2010 36 SOT 227 (D EL)] II) ADDL CIT VS. TAJDIAM [2010] 130 TTJ 570 (MUM) III) PHOENIX MECANO (INDIA) PVT. LTD. VS. ITO. [2014-TII -27- ITAT-MUMBAI-TP] / [2012-TII-06-ITAT-MUM-TP] IV) THYSSEN KRUPP INDUSTRIES INDIA PVT. LTD. [2013-TII- 13- ITAT-MUMBAI-TP.] V) ALSTOM PROJECTS INDIA LTD [36 TAXMANN 130 MUMBAI ITAT] VI) LIONBRIDGE TECHNOLOGIES PVT LTD [2012-TII-74-MUM- TP] VII) T TWO INTERNATIONAL PVT LTD [2010-TIOL-166ITAT- MUM] ITA 3287/D/11 & 5546/D/12 ACIT VS. M/S KEHIN PANALFA LTD. 20 4.15. FOR THE SECOND PROPOSITION ABOUT THE APPLICAB ILITY OF GRANTING BENEFIT OF +/- 5%, FOLLOWING JUDGMENTS ARE RELIED UPON: - I) MAERSK GLOBAL SERVICES CENTRE VS. ACIT [(2012) 22 TAXMANN.COM 33] II) TATRA VECTRA MOTORS LTD. V. DCIT (2012-TII-15-ITAT- BANG-TP) III) LIONBRIDGE TECHNOLOGY VS. DCIT [2012-TII-74-ITAT- MUM-TP] IV) AMDOCS BUSINESS SERVICE PVT. LTD. VS. DCIT [2012-TI I- 97-ITAT-PUNE-TP] V) MERCEDES BENZ R&D INDIA PVT. LTD. VS. ITO [2012-TI I- 69-ITAT-BANG-TP] VI) BENETTON INDIA PVT. LTD. VS ITO [2012-TII-05-ITAT- DEL-TP] VII) STARENT NETWORKS (INDIA) PVT. LTD. VS DCIT 2011-TII - 142-ITAT-PUNE-TP] VIII) CORDYS R&D PVT. LTD. VS. ACIT [2011-TII-01-ITAT- HYD-TP] IX) CUMMINS INDIA [2011-TII-32-ITAT-PUNE-TP] 4.16. APROPOS THE SECOND ANALYSIS WHEREBY LD. TPO H AS DETERMINED ROYALTY PAYABLE AT NIL AS AGAINST RS.1,24,41,118/-, IT IS C ONTENDED THAT SUCH A VIEW AGAIN IS NOT SUPPORTED EITHER BY THE TP PROVISIONS AND RULES THERE UNDER OR THE INTERPRETATION BY VARIOUS AUTHORITIES ON THIS I SSUE. LD. TPO EXCEEDED HIS JURISDICTION IN THIS BEHALF BY GOING BEYOND EXPRESS TP PROVISIONS AND A CATENA OF JUDICIAL PRECEDENTS IN ASSESSEES PROPOSI TION. LD. TPO WAS UNDER OBLIGATION TO DETERMINE THE PRICE PAID FOR THE INTE RNATIONAL TRANSACTIONS BASED ON ONE OF THE PRESCRIBED METHODS AND THE TPO CANNOT DETERMINE THE PRICE AT NIL UNLESS HE APPLIES ONE OF THE SPECIFIED METHODS AS PER LAW OR RULES. FOR THIS PROPOSITION RELIANCE IS PLACED UPON THE FOLLOW ING CASE LAWS: - (I) THAT UNLESS ONE OF THE 5 METHODS PRESCRIBED U/S 92C OF THE ACT ARE APPLIED BY THE TPO TO DETERMINE THE ALP OF INTE RNATIONAL ITA 3287/D/11 & 5546/D/12 ACIT VS. M/S KEHIN PANALFA LTD. 21 TRANSACTIONS INCLUDING THAT OF ROYALTY, THE SAME CA NNOT BE DETERMINED AT NIL. THE SAME HAS ALSO BEEN HELD IN THE CASE OF CASTROL INDIA VS. ADDL. COMMISSIONER OF INCOME TAX, [2014-TII-08-ITAT -MUMBAI TP] AND CA COMPUTER ASSOCIATES VS. DCIT [2010-TIOL- 68-ITAT- MUM]. (II) AIR LIQUIDE ENGINEERING INDIA PVT LTD. [TS-43- ITAT-2014- HYDERABAD-TP], WHEREIN IT WAS HELD THAT ONCE THE PA YMENT OF ROYALTY @5% ON DOMESTIC SALES AND 8 % ON EXPORT SALES IS BA SED ON A RBI APPROVAL THEN THE SAME IS DEEMED TO BE TRANSACTED A RMS LENGTH PRICE. I. DCIT VS. SONA OKEGAWA PRECISION FORGINGS LIMITED [ TS- 773-ITAT-2011(DEL)-TP] II. HERO MOTORCORP LIMITED VS. ADDL CIT [TS-718-ITAT- 2012(DEL)-TP] III. THYSSEN KRUPP INDUSTRIES INDIA PVT. LTD. [2013-TII -13- ITAT-MUMBAI-TP.] IV. ABHISHEK AUTO INDUSTRIES LTD. VS. CIT [TS-60-ITAT- 2010(DEL)-TP] 4.17. HONBLE DELHI HIGH COURT IN ASSESSEES OWN CA SE FOR A.Y. 2003-04, VIDE ORDER DATED 8-2-2011 HAS DECIDED THE ISSUE WHE THER PART OF ROYALTY IS OF CAPITAL NATURE OR WHOLE OF ROYALTY ON A PERCENTAGE OF SALES IS ON REVENUE ACCOUNT. THE HONBLE DELHI HIGH COURT UPHELD THE IT AT ORDER FOR A.Y. 2003-04 HOLDING THAT ENTIRE ROYALTY WAS ALLOWABLE A S REVENUE EXPENDITURE. 4.18. SIMILAR ISSUE ALSO AROSE IN THE CASE OF LUMAX INDUSTRIES LTD. [2013- TII-123-ITAT-DEL-TP] WHEREIN IT WAS HELD, PAYMENT OF ROYALTY WAS BEING CLAIMED AND ALLOWED R IGHT FROM 1984 TO ASSESSMENT YEAR 2003-04, AS BUSINESS EXPEND ITURE OF THE ASSESSEE AND NO NEW CIRCUMSTANCE HAS BEEN POINT ED OUT BY EITHER OF THE AUTHORITIES BELOW TO HOLD THAT IN THE YEARS ITA 3287/D/11 & 5546/D/12 ACIT VS. M/S KEHIN PANALFA LTD. 22 THEREAFTER, THE BENEFIT ACCRUED TO THE ASSESSEE BY THE PAYMENT OF SUCH ROYALTY HAS DRIED UP; RELIANCE IS PLACED ON THE SAID ORDER, SINCE THE ROY ALTY WAS BEING PAID FROM 1997 AND WAS CONTINUOUSLY EXAMI NED BY THE AO AND THE TPO, THEN IN LIGHT OF NO NEW FACTS TO HO LD THAT IT WAS NECESSARY WAS UNCALLED FOR . 5. WE HAVE HEARD THE RIVAL CONTENTIONS AND CONSIDER ED THE MATERIAL AVAILABLE ON RECORD, APROPOS TP ISSUES EACH SUCH CA SE IS TO BE DECIDED IN ITS OWN PECULIAR MERITS. IN THIS CASE, IT IS QUITE CLEA R THAT THE ASSESSEE IS A LICENSED MANUFACTURER OF ITS PRODUCTS IN ITS OWN RI GHT USING THE TECHNOLOGY PROVIDED BY THE PARENT COMPANY I.E. KEIHIN OF JAPAN . THESE AGREEMENTS AND ARRANGEMENT ARE IN SUBSISTENCE SINCE 1997 AND THE F ACTS ABOUT RISKS ASSOCIATED WITH INDEPENDENT MANUFACTURING AND THOSE UNDERTAKEN BY THE ASSESSEE HAVE BEEN DISCUSSED BY THE CIT(A) IN PAINS TAKING MANNER. 5.1. ON FACTS OF OWNERSHIP ALSO, HONDA MOTORS COMPA NY LTD., JAPAN, IS NOT A 100% OWNER OF THE ASSESSEE AND HAS ONLY MINOR ITY INTEREST IN ONE OF THE SHAREHOLDERS OF THE ASSESSEE I.E. KEIHIN CORPOR ATION OF JAPAN WHICH HOLDS 74% SHARE IN THE ASSESSEE AND HONDA MOTORS CO MPANY OF JAPAN HOLDS 41.33% IN KEIHIN CORPORATION OF JAPAN. THEREFORE, O N FACTS, THERE IS NO UNANIMITY OF OWNERSHIP VESTED IN HONDA MOTORS COMPA NY LTD., OF JAPAN; THE ASSESSEE AND ITS BUYER OF GOODS I.E. HONDA SIEL CARS LTD.. IT HAS NOT BEEN DISPUTED THAT ALL OF THEM ARE PUBLIC LIMITED COMPAN IES; BOTH THE JAPANESE COMPANIES ARE LISTED IN JAPANESE STOCK EXCHANGE. TH ERE IS NO MATERIAL TO SUGGEST ANY COLORABLE DEVICE OR COLLUSIVE TRANSACTI ON AMONGST THEM. IN THE ABSENCE OF ANY COGENT ADVERSE MATERIAL, FACT OR FIN DING IN THIS BEHALF THE REVENUES ARGUMENT ABOUT LIFTING THE CORPORATE VEIL HAS NO JUSTIFICATION. ITA 3287/D/11 & 5546/D/12 ACIT VS. M/S KEHIN PANALFA LTD. 23 5.2. THIS VIEW IS SUPPORTED BY JUDGMENT OF CO-ORDIN ATE BENCH OF THE ITAT IN THE CASE OF SAMSUNG (SUPRA) WHEREIN THE TRIBUNAL AT PAGE 27 HAS HELD THAT:- 6.9 THUS, WE AGREE WITH THE LD. COUNSEL OF THE ASSESSEE THAT TPO H A S CONFUSED THE ISSUE BY NOTING THAT THE PAYMENT OF ROYALTY IS TO I T S E L F I . E ., HOLDING COMPANY . IN THIS REGARD, IT HAS BEEN SUBMITTED THAT TPO AT P A G E 127, PARA 7.2 HAS OBSERVED THAT ALL THE A E S TYPICALLY ARE WITHIN THE B R OA D UMBRELLA OF THE MULTINATIONAL CO R P O R A T I O N . IT HAS BEEN RIGHTLY S UB M I TT E D BY THE LD. COUNSEL OF THE ASSESSEE THAT THAT WHILE DOING SO TPO ENDEAVOURED TO REACH THE SO CALLED ECONOMIC S UB S T A N C E IGNORING THE L E G A L S UB S T A N C E ACCEPTED AND ADMITTED IN S E P A R A T E JURISDICTIONS. IN SUCH A SITUATION THE VEIL HAS ONLY TO BE LOOKED AT AND NOT LOOKED T H R O UGH. 5.3. THIS VIEW IS FURTHER FORTIFIED BY HONBLE SUPR EME COURT JUDGMENT IN THE CASE OF VODAFONE (SUPRA). 5.4. LD. CIT(A) PAGE 49 OF THE ORDER HAS CATEGORICA LLY HELD THAT UNNECESSARY IMPORTANCE HAS BEEN GIVEN BY THE TPO WH ETHER THE ASSESSEE IS A CONTRACT MANUFACTURER OR A LICENSED MANUFACTURER. THIS IS FOR THE REASON THAT ALL THE COMPARABLES TAKEN BY THE TPO ARE FULLY RISK BEARING MANUFACTURERS AND NOT MERE CONTRACT MANUFACTURERS. ALL THESE COMPARABLES WERE GIVEN BY THE ASSESSEE AT THE TRANSFER PRICING HEARING STAGE AND IN CASE THE TPO WANTED TO TAKE THIS THOUGHT TO ITS LOGICAL CONCLUSION, THEN HE SHOULD HAVE CHOSEN THE COMPARABLES WHICH ASSUME NO RISK OR LIMITED RISK OF CONTRACT MANUFACTURER WHICH HE HAS NOT DONE. WE ARE OF THE VIEW THAT LD. CIT(A) OBSERVATION IN THIS REGARD ARE PERFECTLY JUS TIFIED AND DESERVE TO BE UPHELD. ITA 3287/D/11 & 5546/D/12 ACIT VS. M/S KEHIN PANALFA LTD. 24 5.5. APROPOS THE REMAINING ISSUE ABOUT DETERMINATIO N OF ARMS LENGTH PRICE, ASSESSEE EMPHASIS IS ON THE FACT THAT EVEN I F THE TPOS ANALYSIS IS ACCEPTED, THERE EXIST TWO FUNDAMENTAL ERRORS WHILE PROPOSING THE ADJUSTMENT. FIRSTLY, TPO HAS ADJUSTED THE ENTERPRISES OPERATIN G INCOME AND ITS OPERATING EXPENSES AND ADJUSTED THE SAME AT ENTITY LEVEL AND NOT CONFINED IT TO THE INTERNATIONAL TRANSACTION CONDUCTED BY THE ENTITY W HICH IS ONLY 23% OF ITS TOTAL COST. THE SECOND OBJECTION OF THE ASSESSEE WA S THAT THE SAFE HARBOR PLUS MINUS 5% IN ACCORDANCE WITH THE PROVISO TO SECTION 92C HAS BEEN INCORRECTLY CALCULATED. THIS SUBMISSION OF THE ASSE SSEE IS REWORKED AT PAGES 26 TO 28 OF CIT(A)S ORDER AS UNDER:- 3.1ACCORDING TO THE APPELLANT, THE TPO HAS FAILED TO CORRECTLY CALCULATE THE +/- 5% RANGE IN HIS TP ORDER. IT IS I MPORTANT TO NOTE THAT THE INTERNATIONAL TRANSACTIONS OF THE ASS ESSEE WITH ITS AES AMOUNTING TO RS.159,066,935 IS INCLUDED IN THE COST OF THE ASSESSEE, BUT DEFINITELY DOES NOT CONSTITUTE AS THE ENTIRE COST OF THE ASSESSEE AT THE ENTITY LEVEL. THE COST OF THE A SSESSEE ALSO INCLUDES THIRD PARTY COSTS I.E. NON AE, NON INTERNA TIONAL TRANSACTION COSTS. HENCE, THE CALCULATION OF +/- 5% SHOULD BE MADE ON A PROPORTIONATE COST BASIS. 3.2 ACCORDING TO THE APPELLANT, THE CORRECT COMPUTA TION OF THE ARMS LENGTH RANGE IS CALCULATED AS BELOW: PARTICULARS AMT. (RS.) OPERATING EXPENSES (TOTAL COSTS ) (A) 680,088,000 VALUE OF INTERNATIONAL TRANSACTIONS (COSTS) (B) 159,066,935 ADJUSTED TOTAL COSTS (AS COMPUTED BY THE TPO) (C ) 667,117,924 INTERNATIONAL TRANSACTIONS AS A PROPORTION OF TOTAL COST (B)(A)=(D) 0.23 DIFFERENCE IN COSTS (A)-(C) = (E) 12,970,076 ADJUSTMENT ON INTERNATIONAL TRANSACTIONS ( D) * (E) 3,033,593 5% OF INTERNATIONAL TRANSACTIONS (5% OF B) 7,953,347 ITA 3287/D/11 & 5546/D/12 ACIT VS. M/S KEHIN PANALFA LTD. 25 1.3 THE ABOVE COMPUTATION SHOWS THAT THE INTERNATIONAL TRANSACTIONS OF THE ASSESSEE FALLS WITHIN THE +/- 5 % RANGE AS PER PROVISO TO SECTION 92C (2). WE AGREE WITH TH IS VIEW OF THE APPELLANT AND APPROVE THE SAME AND HOLD THAT TPO WAS NOT CORRECT IN ADOPTING A VIEW THAT WHOLE OF ADJUSTMENT IS TO BE PRESUMED AS ARRIVING OUT OF INTERNATIONAL TRANSACTIONS. THERE IS NO LAW FOR MAK ING SUCH PRESUMPTION 1.4 THE APPELLANT SUBMITTED THAT AS PER THE ORDER OF TH E TPO IN CALCULATING THE QUANTUM OF ADJUSTMENT HE HAS CORRECTLY BROUGHT OUT THAT THE OP/TC CALCULATION IS IMPACTED BY OPERATING INCOME AND TOTAL COST. THE INTERNATIONAL TRANSACTIONS OF THE ASSESSEE ALSO FOR MS PART OF THE TOTAL COST AND CONSTITUTE 23% OF THE TOTAL C OST. A SHORTFALL IN OPERATING PROFIT COULD ARISE ON ACCOUN T OF A SHORTFALL IN OPERATING INCOME, HIGHER THIRD PARTY C OSTS OR HIGHER INTERNATIONAL TRANSACTIONS. IN DOING SO THE TPO HAS ERRONEOUSLY PRESUMED THAT THE ENTIRE SHORTFALL IS O NLY ON ACCOUNT OF THE HIGHER INTERNATIONAL TRANSACTIONS. 1.5 THE HONBLE DELHI TRIBUNAL IN THE CASE OF IL JIN ELECTRONICS (36 SOT 222 DEL) HAS HELD THAT ADJUSTME NTS UNDER TRANSFER PRICING ANALYSIS CAN ONLY BE MADE TO THE INTERNATIONAL TRANSACTIONS IN THE PROPORTION OF THE IR QUANTUM VIS--VIS THE TOTAL ENTITY LEVEL SALES. THU S IN THE PRESENT CASE ALSO THE ADJUSTMENT IN THE ARMS LENGT H PRICE CAN ONLY BE MADE TO THE COST INCURRED BY THE ASSESS EE WITH THE ASSOCIATED ENTERPRISES AND NOT THE TOTAL COST I NCURRED BY THE ASSESSEE WITH UN-RELATED PARTIES ALSO. 1.6 ESSENTIALLY, THE TPO HAS ERRED IN CALCULATING THE +/- 5% RANGE AND HAS ASSUMED THAT THE PROFITS EARNE D ON THE INTERNATIONAL TRANSACTIONS IS NIL. THIS IS CLEA RLY DEPICTED IN THE FOLLOWING TABLE: ITA 3287/D/11 & 5546/D/12 ACIT VS. M/S KEHIN PANALFA LTD. 26 PARTICULARS AMT. (RS.) OPERATING EXPENSES (TOTAL COSTS ) (INCLUDES PAYMENT OF EXCISE DUTY) (A) 680,088,000 PROFIT EARNED @ 6.22% ON TOTAL COSTS (B) 42,334,000 VALUE OF INTERNATIONAL TRANSACTIONS (C) 159,066,935 PROFIT ASSUMED ON INTERNATIONAL TRANSACTIONS NIL COSTS EXCLUDING INTERNATIONAL TRANSACTIONS (A)-(D) = (D) 521,021,065 PROFIT RATE ON THE ABOVE (B) (D) = (E) 8.13% ADJUSTMENT AMOUNT(F) 12,970,076 PROFIT RATE ON INTERNATIONAL TRANSACTIONS (F)/(C) = (G) 8.15% 1.7 THE TPO HAS ALSO NOT CONSIDERED THE FINANCIALS OF THE COMPANY IN DETAIL AND HAS PRESUMED THE CAUSE OF SHORTFALL IN TRANSFER PRICES ONLY ON ACCOUNT OF PAY MENT FOR ROYALTY. IN REALITY THERE SHOULD BE VARIOUS REASONS FOR THE SHORTFALL INCLUDING REDUCTION OF UNIT PRICES. AS IS EVIDENT FROM NOTE 5 OF SCHEDULE Q OF THE FINANCIAL STATEMEN TS, SALES VOLUMES OF CAR A/CS BY THE COMPANY INCREASED BY 97. 22% WHEREAS TOTAL SALES VALUE FOR THESE A/CS INCREASED BY 33% ONLY, CLEARLY INDICATING A REDUCTION SALE PRICE. TH ERE COULD BE NUMEROUS SUCH VARIANCES WHICH RESULTED IN A LOWE R THAN EXPECTED NET MARGIN. THIS ASPECT HAS NOT BEEN CONSI DERED BY THE TPO IN HIS ANALYSIS. 1.8 IT IS ALSO PERTINENT TO NOTE THAT THE PROFITS BEFOR E TAX OF THE COMPANY HAVE INCREASED FROM RS.37,053,300 IN FY: 2002-03 TO INR 45,153,000 IN FY: 2003-04. THIS 21.8 % INCREASE IN PROFIT BEFORE TAX CLEARLY INDICATES THA T THE ITA 3287/D/11 & 5546/D/12 ACIT VS. M/S KEHIN PANALFA LTD. 27 COMPANY HAS NO INTENTION OF SHIFTING PROFITS IN IND IA OR EVADING TAXES AS SUCH. 5.6. THE LEARNED CIT(A) HAS ACCEPTED THIS PROPOSI TION OF THE ASSESSEE RESTRICTED THE CALCULATION OF THE ADJUSTMENT AT 23 % TO THE TOTAL COST . THE LEARNED DR HAS NOT CONTROVERTED THIS PROPOSITION. THEREFORE, FOLLOWING THE CATENA OF ITAT JUDGMENTS, WE HOLD THAT CIT(A) WAS C ORRECT IN CONFINING THE CALCULATION OF ADJUSTMENT TO THE INTERNATIONAL TRANSACTIONS ONLY AND NOT ON THE ENTIRE TOTAL COST OF THE ENTITY. 5.7. SECONDLY LD CIT(A) HELD THAT THE ASSESSEE FAL LS WITHIN THE PLUS MINUS 5% RANGE UNDER PROVISO TO SECTION 92C(2) OF THE AC T IS CONCERNED,; SIGNIFICANTLY BOTH THE TPO AND THE LEARNED AO IN PR INCIPLE HAVE RAISED NO OBJECTION TO THIS SAFE HARBOR PROVISION IN PRINCIPL E. THE TPO HAS, HOWEVER, MADE HIS OWN CALCULATION AND HAS COME TO THE CONCLU SION THAT THE ARMS LENGTH PRICE IS BEYOND THE PLUS MINUS 5% RANGE. LD CIT(A) HAS DISLODGED TPOS CALCULATION, WHICH HAS NOT BEEN EFFECTIVELY C ONTROVERTED BY THE DEPARTMENT, CONSEQUENTLY SAFE HARBOR RULES BECOMES CLEARLY APPLICABLE TO ASSESSEES CASE. DECISION FOR AY 2004-05 T P ADJUSTMENTS: 5.8. WE HAVE CONSIDERED THE RIVAL CONTENTIONS AND M ATERIAL AVAILABLE ON RECORD, A BARE LOOK OF THE CALCULATION MADE BY THE TPO REVEALS THAT THE ASSESSEES PLI IS WITHIN THE PLUS MINUS RANGE OF 5% . THE PLI CALCULATED BY THE TPO IS OP/TC (ASSESSEE) 6.22%, WHEREAS PLI OF T HE COMPARABLE CALCULATED BY THE TPO IS OP/TC OF THE COMPARABLE IS 8.29%. THE PLUS MINUS RANGE OF THE COMPARABLE WOULD BE PLUS MINUS 8.29% I .E. FROM 3.29% TO 13.29% AND IT IS BUT OBVIOUS THAT THE ASSESSEES PL I OF 6.22% FALLS WITHIN ITA 3287/D/11 & 5546/D/12 ACIT VS. M/S KEHIN PANALFA LTD. 28 THE RANGE. THE LEARNED AR SUBMITTED THAT WHILE CALC ULATING THE ABSOLUTE NUMBERS AT PAGE 9 OF HIS ORDER, THE LEARNED TPO HAS INCORRECTLY CALCULATED THE PLUS MINUS RANGE ON THE INTERNATIONAL TRANSACTI ON I.E. OF RS.15.9 CRORES, BUT WHILE CALCULATING THE PLUS MINUS 5%, HE HAS TAK EN IT AT THE TOTAL ENTERPRISE COST OF RS.68 CRORES. THIS IS A BASIC MA THEMATICAL ERROR COMMITTED BY THE TPO. WE AGREE WITH THIS VIEW OF THE AR. THE SAFE HARBOR HAS ALSO TO BE CALCULATED APROPOS THE INTERNATIONAL TRANSACTION S ONLY AND NOT ON THE TOTAL COST AND THIS ERROR HAS BEEN CORRECTED BY CIT(A) IN HER ORDER AT PAGE 52. THE PLUS MINUS RANGE HAS BEEN CORRECTLY CALCULATED RS.78,01,667/- WHEREAS THE ADJUSTMENT ATTRIBUTABLE TO THE ASSESSEES A.E . COMES TO LESSER FIGURE I.E. RS.30,33,593/-. THE ASSESSEES ADJUSTMENTS BEING WI THIN THE PLUS MINUS 5% RANGE, THE ADJUSTMENT IN THIS BEHALF IS RIGHTLY DE LETED BY CIT(A). 5.9. WE HAVE CAREFULLY EXAMINED THIS ISSUE, MATERIA L AVAILABLE ON RECORD, CASE LAWS AND RIVAL CONTENTIONS. WE ARE IN AGREEMEN T WITH LD. CIT(A); THE PLUS MINUS 5% RANGE HAS TO BE WITH REFERENCE TO INT ERNATIONAL TRANSACTIONS WITH THE AE ONLY AND IN VIEW OF THE SAME AS THE DIF FERENCE BETWEEN THE TWO AS CALCULATED BY TPO IS 8.29% OF THE COMPARABLES AN D 6.22% OF PLI OF THE ASSESSEE, THAT BEING WITHIN THE PLUS MINUS RANGE OF 5% (3.29% TO 13.29%), OBVIOUSLY NO ADJUSTMENT SHOULD HAVE BEEN MADE. WE, THEREFORE, UPHOLD THE ORDER OF THE CIT(A) IN DELETING THE ADJUSTMENT MADE BY TPO/AO IN THIS BEHALF . 5.10. CONSEQUENTLY THE ORDER OF LD. CIT(A) ON THESE TP ISSUES IS UPHELD AND THE GROUNDS OF THE REVENUE ON TRANSFER PRICING ADJ USTMENT ARE DISMISSED. DECISION FOR AY 2005-06 T P ADJUSTMENTS: ITA 3287/D/11 & 5546/D/12 ACIT VS. M/S KEHIN PANALFA LTD. 29 5.11. FACTS AND CIRCUMSTANCES OF THIS TP ADJUSTMENT S ARE SIMILAR TO AY 2004-05, LD CIT (APPEALS) HAS ALSO SUBSTANTIALLY RE LIED ON THE ORDER FOR AY 2004-05 WHILE GRANTING THE RELIEF. LD. CIT (APPEALS ) HAS SUPPLEMENTED HIS ORDER ON THE NECESSITY OF PAYING THE ROYALTY WHICH IS TO BE DECIDED FROM BUSINESSMAN POINT OF VIEW. THIS PROPOSITION HAS BEE N UPHELD BY THE HONBLE DELHI HIGH COURT IN THE CASE OF CIT V. EKL APPLIANC ES 2012-TII-01-HC- DEL-TP. THE ACCEPTED HISTORY OF THE CASE REGARDING PAYMENT OF ROYALTY IS THAT IN ASSESSMENT YEAR 2003-04 ALSO THE MATTER TRA VELLED UP TO THE DELHI HIGH COURT. IT IS HELD IN FAVOUR OF THE ASSESSEE T HAT THE PAYMENT OF RUNNING ROYALTY IS ON REVENUE ACCOUNT. THEREFORE, IN VIEW O F THE HONBLE DELHI HIGH COURT JUDGMENT IN ASSESSEES OWN CASE THE NECESSITY OF PAYMENT OF ROYALTY CANNOT BE QUESTIONED OR DOUBTED. 5.12. BESIDES SIMILAR ISSUE OF ROYALTY PAYMENT IS D ECIDED IN FAVOR OF THE ASSESSEE IS DECIDED BY THE ITAT IN THE CASE OF LUMA X INDUSTRIES LTD. [ 2013- TII-123-ITAT-DEL-TP ] HOLDING THAT: PAYMENT OF ROYALTY WAS BEING CLAIMED AND ALLOWED R IGHT FROM 1984 TO ASSESSMENT YEAR 2003-04, AS BUSINESS EXPEND ITURE OF THE ASSESSEE AND NO NEW CIRCUMSTANCE HAS BEEN POINT ED OUT BY EITHER OF THE AUTHORITIES BELOW TO HOLD THAT IN THE YEARS THEREAFTER, THE BENEFIT ACCRUED TO THE ASSESSEE BY THE PAYMENT OF SUCH ROYALTY HAS DRIED UP; 5.13. OUR AFORESAID VIEW IS FORTIFIED BY THE AFORES AID JUDGMENT OF LUMAX INDUSTRIES (SUPRA). SINCE THE ROYALTY WAS BEING PA ID FROM 1997 AND WAS CONTINUOUSLY EXAMINED BY THE AO, THEN IN THE ABSENC E OF ANY NEW FACTS TO HOLD THAT THERE WAS NO NEED TO PAY THE ROYALTY WAS UNCALLED FOR. 5.14. AFTER HEARING THE PARTIES AND ON PERUSAL OF T HE RECORD IN OUR CONSIDERED VIEW NO INTERFERENCE IS CALLED FOR IN T HE ORDER PASSED BY THE CIT ITA 3287/D/11 & 5546/D/12 ACIT VS. M/S KEHIN PANALFA LTD. 30 (APPEALS) ON THIS ISSUE AND THE APPEAL OF THE REVEN UE FOR AY 2005-06 IS DISMISSED. 5.15. NEXT REVENUE GROUND FOR AY 2004-05, A CORPORA TE TAX ISSUE IS AGAINST DELETION OF ADDITION OF RS. 22,53,000/- BEING 25% OUT OF THE ROYALTY PAID BY TREATING THE SAME AS CAPITAL IN NATURE. BRIEF FACTS PERTAINING TO THIS ISSUE ARE THAT WHEREAS TPO DISALLOWED 100% OF ROYALTY BY TREA TING THE ALP AT NIL, THE ASSESSING OFFICER TREATED 25% OF ROYALTY AS CAP ITAL IN NATURE & DISALLOWED A SUM OF RS.22,53,000/-. BOTH THE PARTIE S FAIRLY CONCEDED THAT THIS ISSUE ON IDENTICAL FACTS IS COVERED IN FAVOUR OF THE ASSESSEE IN ASSESSEES OWN CASE BY THE JUDGMENT OF HONBLE DELHI HIGH COUR T IN ITA NO. 126/2010 DATED 8.2.2011, A COPY OF WHICH HAS BEEN FILED BEFO RE US. RESPECTFULLY, FOLLOWING THE ORDER OF HONBLE DELHI HC IN ASSESSES OWN CASE, WE UPHOLD THE ORDER OF LD. CIT (A). GROUND NO. 3 OF THE REVEN UE IS, THEREFORE, DISMISSED. 5.16. GROUND NO. 4 & 4.1 RAISED BY THE REVENUE IS A GAINST THE DISALLOWANCE MADE BY THE A.O. U/S 40A (2) (B) (WRONGLY MENTIONED AS SECTION 40A(1)(B) IN THE GROUND). THE ASSESSEE HAD INCURRED EXPENSES FOR MAKING PAYMENT TO A RELATED CONCERN PANALFA INVESTMENTS PVT. LTD. TOWAR DS VARIOUS FACILITIES SUCH AS RENT, ELECTRICITY, WATER, GENERATOR EXPENSES AND ALSO PROVIDING MANPOWER ETC. A.O. MADE HIS OWN ESTIMATES AND HELD THE EXPEN DITURE TO EXCESSIVE & UNREASONABLE. THE AVAILING OF FACILITIES IS NOT IN DISPUTE. THE A.O. DISPUTED THE REASONABLENESS OF PAYMENTS AND MADE HIS OWN GUE SS WORK TO CONCLUDE THAT THE PAYMENTS MADE WAS EXCESSIVE. THIS ISSUE A LSO CAME UP IN AY 2003-04, BEFORE THE ITAT, ON SIMILAR FACTS THIS ISS UE WAS DECIDED IN FAVOR OF THE ASSESSEE HOLDING THAT THERE WAS NO EXCESSIVE NESS OR UNREASONABLENESS QUA THIS EXPENDITURE. LD. CIT (A) HAS GRANTED RELIE F TO THE ASSESSEE BY ITA 3287/D/11 & 5546/D/12 ACIT VS. M/S KEHIN PANALFA LTD. 31 FOLLOWING THIS DECISION OF ITAT IN ASSESSEES OWN C ASE IN AY 2003-04 IN ITA NO.3714/DEL/2006, A COPY OF WHICH HAS BEEN FILE D BEFORE US. 5.17. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUS ED THE RECORD AND FIND NO INFIRMITY IN THE ORDER OF LD. CIT (A) THAT A.O. HAS NOT BROUGHT ANY COGENT MATERIAL ON RECORD TO COME TO A CONCLUSION THAT THI S EXPENDITURE IS EXCESSIVE OR UNREASONABLE. BESIDES, THIS ISSUE IS ALREADY DEC IDED BY ITAT IN FAVOUR OF ASSESSEE IN N AY2003-04. RESPECTFULLY FOLLOWING THE SAME, THIS GROUND OF THE REVENUE IS DISMISSED. 6. IN THE RESULT BOTH REVENUES APPEALS FOR AY 2004 -05 AND AY 2005-06 ARE DISMISSED. ORDER PRONOUNCED IN OPEN COURT ON 06-05-2014. SD/- SD/- ( B.C. MEENA ) ( R.P. TOLANI ) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED: 06-05-2014. MP COPY TO : 1. ASSESSEE 2. AO 3. CIT 4. CIT(A) 5. DR