Munjal Showa Ltd., Gurgaon V. Addl. CIT, New Delhi

ITA 3844/DEL/2012

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 82075 (ITAT-DELHI)
• Duration Of Justice: 2 year(s) 4 month(s) 4 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 28-11-2014
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: I
• Next Hearing Date: 20-11-2014
• Assessment Year: 2008-2009
• Appeal Filed On: 24-07-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: PEEYUSH JAIN
• Keywords: Transfer pricing; Opportunity of being heard; International transaction; Avoidance of tax; Capital expenditure

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH: I NEW DELHI BEFORE SH.S.V.MEHROTRA, ACCOUNTANT MEMBER AND SMT DIVA SINGH, JUDICIAL MEMBER I.T.A .NO. - 3844/ DEL/201 2 (ASSESSMENT YEAR - 2008 - 09 ) MUNJAL SHOWA LIMITED, 9 - 11, MARUTI INDUSTRIAL AREA, GURGAON - 122015 (HARYANA). PAN - AAACM0070D (APPELLANT) VS ACIT, RANGE - 5, NEW DELHI (RESPONDENT) APPELLANT BY SH. NEERAJ JAIN, ADV. & SH. ABHISHEK AGARWAL, CA RESPONDENT BY SH. PEEYUSH JAIN, CIT DR ORDER PER DIVA SINGH, JM TH IS IS AN APPEAL FILED BY THE ASSESSEE AGAINST THE ORDER PASSED BY THE AO U/S 144(3) R.W.S 144C(5) DATED 06 . 12 .201 2 PURSUANT TO THE DIRECTION S OF THE DISPUTE RESOLUTION PANEL - I, NEW DELHI. 2. THE RELEVANT FACTS OF THE CASE ARE TH A T THE ASSE SSEE ESTABLISHED IN 1985 AND ENTERED INTO A TECHNICAL AND FINANCIAL COLLABORATION WITH SHOWA CORPORATION J APAN STATED TO BE THE PIONEER AND LEADER IN THE WORLD OF SHOCK ABSORBERS. AS A RESULT OF THE JOINT VENTURE THE EXPERT I ES IN DESIGN AND MANUFACTURING OF SHOCK ABSORBERS FOR ALL LEADING TWO WHEELERS AND FOUR WHEELERS IT IS CLAIMED WAS BROUGHT IN INDIA AS SHOWA AS PER THE CLAIM OF THE ASSESSEE IS ONE OF THE LARGEST SUPPLIERS OF SHOCK A B S O R B ERS TO MAJOR AUTO GIANT IN JAPAN, U SA, GERMANY, UK AND OTHER DEVELOPED MARKETS. THE COMPANY PRODUCTS IT IS CLAIMED CONFORM S TO THE HIGHEST STANDARDS OF QUALITY, SAFETY, COMFORT AND DEPENDABILITY AND ITS PRODUCTS ENJOY WIDE PATRO N AGE WHILE SERVING AS ORIGINAL EQUIPMENT TO VEHICLES LIKE MAR UTI 800CC, OMNI VAN, ZEN, 2 I.T.A .NO. - 3844 /DEL/201 2 ALTO, ESTEEM, HONDA CITY CAR, COMPLETE RANGE OF HERO HONDA MOTOR CYCLE, KINETIC HONDA SCOOTER, HERO PUCH, HERO WINNER, HERO MAJESTIC AND UNICORN. 2.1. BY WAY OF THE PRESENT APPEAL THE ASSESSEE HAS RAISED FIVE GROUNDS ALONGWITH VARIOUS SUB - GROUNDS ADDRESSING WHICH THE LD. AR RIGHT AT THE OUTSET SUBMITTED THAT GROUND NO - 1 IS GENERAL IN NATURE AND GROUND NO. - 4 TO 4.2 ON ACCOUNT OF THE SMALLNESS OF AMOUNT IS NOT BEING PRESSED AND THE ONLY ISSUES WHICH THE ASSESSEE WOULD ADDRESS WOULD BE THE ISSUES ADDRESSED VIDE GROUND NO S. - 2 TO 2.3 AND GROUND NO S . - 3, 3.1 TO 3.2 . THESE ISSUES IT WAS SUBMITTED HAVE BEEN A SUBJECT MATTER OF CONSIDERATION IN ASSESSEE S OWN CASE ON THE VERY SAME FACTS AND CIRCUMSTANCES. THE L D. CIT DR CONSIDERING THE ORDERS OF THE TRIBUNAL AND THE DISCUSSIONS IN THE RELEVANT ORDERS AVAILABLE ON RECORD STATED THAT IT IS A MATTER OF FACT THAT IDENTICA L ISSUES HAVE BEEN CONSIDERED BY CO - ORDINATE BENCHES AND THE ISSUES IN THE CIRCUMSTANCES MAY NEED TO BE RESTORED. HOWEVER IN ORDER TO KEEP THE ISSUES ALIVE FOR THE REVENUE RELIANCE WAS PLACED UPON THE IMPUGNED ORDER. 2. 2. THE FIRST ISSUE AGITATED BY THE ASSESSEE IS FOUND ADDRESSED IN GROUND NOS. - 2 TO 2.3 AND READS AS UNDER: - 2. THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN MAKING AN ADDITION OF RS.19,18,75,432 ON ACCOUNT OF THE ALLEGED DIFFERENCE IN THE ARM S LENGTH PRICE OF THE INTERNATIONAL TRANSACTIONS OF PAYMENT OF ROYALTY AND TECHNICAL FEES ENTERED INTO BY THE APPELLANT WITH ITS ASSOCIATED ENTERPRISE, ON THE BASIS OF THE ORDER PASSED UNDER SECTION 92CA(3) READ WITH SECTION 144C(5) OF THE ACT BY THE TRANSFER PRICING OFFICER ( THE TPO ). 2. 1. THAT THE ASSESSING OFFICER/DRP ERRED ON FACTS AND IN LAW IN HOLDING THE ARMS LENGTH PRICE OF THE INTERNATIONAL TRANSACTIONS OF PAYMENT OF ROYALTY AND TECHNICAL FEES OF RS.19,18,75,432 TO BE NIL, ALLEGEDLY HOLDING THAT NO RECOGNIZABLE BENEFIT HAS BEEN DE RIVED BY THE APPELLANT FROM THE AFORESAID PAYMENTS. 2.2. THAT THE ASSESSING OFFICER/DRP ERRED ON FACTS AND IN LAW IN NOT APPRECIATING THAT THE PAYMENT OF ROYALTY AND TECHNICAL FEES WAS VALIDLY BENCHMARKED APPLYING TNMM AS MOST APPROPRIATE METHOD AND THAT N O ADVERSE INFERENCE COULD BE DRAWN ON THIS ACCOUNT. 2.3. THAT THE ASSESSING OFFICER/DRP ERRED ON FACTS AND IN LAW IN COMPUTING ADJUSTMENT ON ACCOUNT OF INTERNATIONAL TRANSACTION OF PAYMENT OF ROYALTY AND TECHNICAL FEES TRADEMARK FEE ON THE BASIS OF CONJECT URE AND SURMISES, WITHOUT APPLYING ANY OF THE PRESCRIBED METHODS UNDER THE TRANSFER PRICING REGULATIONS. 3 I.T.A .NO. - 3844 /DEL/201 2 3. T HE RELEVANT FACTS RELATABLE TO THE SAME ARE THAT THE ASSESSEE MADE PAYMENTS IN PURSUANCE OF THE TECHNICAL COLLABORATION AGREEMENT DATED 11.03.200 2 W ITH SHOWA CORPORATION THE ASSOCIATE ENTERPRISE (HEREINAFTER REFERRED TO AS AE ) WHICH PROVIDED FOR PAYMENT OF ROYALTY @ 3% ON INTERNATIONAL SALES AND EXPORTS MADE. IT IS SEEN THAT RS.19,03,06,184/ - WAS PAID TOWARDS ROYALTY FOR USE OF TECHNOLOGY AND RS.15,69,248/ - TOWARDS TECHNICAL SERVICES FEE AND RS.60,13,500/ - TOWARDS DESIGN AND DRAWING FEE PROVIDED BY THE AE. FOR BENCH - MARKING THE INTERNATIONAL TRANSACTION OF PAYMENT OF ROYALTY THE ASSESSEE RELIED UPON THE APPROVAL DATED 14.06.2002 GRANTED BY TH E CENTRAL GOVERNMENT ( SIA, MINISTRY OF COMMERCE AND INDUSTRY ) AND THIRD PARTY COMPARABLE UNCONTROLLED PRICES CITING 12 INSTANCES AS COMPARABLE UNCONTROLLED TRANSACTIONS OF PAYMENT OF ROYALTY WITH AVERAGE RATE OF 3%. T RANSACTION NET MARGIN METHOD (HEREINAF TER REFERRED TO AS T NMM ) WAS ALSO APPLIED TO BENCHMARK THE INTERNATIONAL TRANSACTION OF PAYMENT OF ROYALTY. FOR WHICH PURPOSE 4 COMPARABLES COMPANIES WERE IDENTIFIED WHOSE OP/SALES WAS 2.30% WHICH IN THE CASE OF THE ASSESSEE WAS 5.01%. THE PAYMENT ACCORDINGLY WAS CLAIMED TO BE AT ARM S LENGTH. HOWEVER THE TPO DID NOT ACCEPT THE POSITION WHO DETERMINED THE ARM S LENGTH PRICE OF THE TRANSACTION AT NIL HOLDING THAT NO ECONOMIC BENEFIT WAS DERIVED BY THE ASSESSEE FROM THE PAYMENTS MADE. T HE PAST POSITION ON SIMILAR FACTS AND CIRCUMSTANCES SHOWS THAT R OYALTY TO THE A E WAS DISALLOWED BY THE AO IN 1993 - 94 TO 1995 - 96 ASSESSMENT YEARS . THIS FINDING WAS UPSET BY THE CO - ORDINATE BENCHES WHO D E L E T E D THE ADDITION MADE IN THE RESPECTIVE YEARS AND THIS FINDING HAS BEEN UPHELD BY THE JURISDICTIONAL HIGH COURT VIDE ITS ORDER DATED 06.09.2010. THIS FACTUAL POSITION IS NOT IN DISPUTE. IT IS FURTHER SEEN THAT TWO YEARS IMMEDIATELY PRECEDING THE YEAR UNDER CONSIDERATION THE C O - ORDINATE BENCH VIDE ITS ORDER DATED 30.05.2014 IN ITA NO. - 4675/DEL/2010 AND 4242/DEL/2010 SET ASIDE THE ISSUE TO THE FILE TO THE A O DIRECTING HIM TO DECIDE THE ISSUE AFRESH AFTER CONSIDERING THE ARGUMENTS OF THE ASSESSEE. COPY OF THE SAID ORDER 4 I.T.A .NO. - 3844 /DEL/201 2 IS AVAILABLE AT PAGE NO. - 359 TO 379. FOR READY - REFERENCE WE REPRODUCE RELEVANT FINDING THEREFROM : - 25. WE HAVE HEARD THE PARTIES WITH REFERENCE TO THE MATERIAL ON RECORD AND CASE LAWS BROUGHT TO OUR NOTICE. COMPUTATION OF INCOME FROM INTERNATIONAL TRANSACTIONS HAVING REGARD TO ARM S L ENGTH PRICE HAS BEEN CHARACTERIZED UNDER CHAPTER - X OF THE IT ACT UNDER SPECIAL PROVISIONS RELATING TO AVOIDANCE OF TAX. THE ASSESSEE S CLAIM FOR DEDUCTION OF ROYALTY IN THE EARLIER YEARS WAS ALLOWED UNDER THE GENERAL PROVISIONS FOR COMPUTATION OF ITS BUS INESS INCOME AS THE PAYMENTS WERE FOUND WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF ITS BUSINESS. IT IS A SETTLED PROPOSITION OF LAW THAT SPECIAL PROVISIONS SHALL PREVAIL UPON THE GENERAL PROVISIONS. THE ASSESSING AUTHORITY THEREFORE, CANNOT BE SAID HAVE E RRED IN EMBARKING ENQUIRY INTO ARMS LENGTH PRICE WITH RESPECT TO THE ROYALTY PAYMENT MADE BY THE ASSESSEE WITH RESPECT TO THE EXISTING AGREEMENT BY THE ASSESSEE WITH ITS ASSOCIATE ENTERPRISE. THE DRP IN ITS ORDER HAS PLACED RELIANCE ON THE JUDG E MENT IN THE CASE OF COCA COLA PVT. LTD. (309 ITR 194) [P&H] FOR THE PROPOSITION THAT THE SUBSTANCE OF THE TRANSACTION HAS TO BE JUDGED AS TO WHETHER THE TRANSACTION IS AT ARM S LENGTH OR NOT. ASSESSEE WAS THEREFORE, UNDER A DUTY TO HAVE SATISFIED HIM. THE A SSESSEE HAS RAISED VARIOUS NEW PLEAS BEFORE US IN ORDER TO SUBSTANTIATE IT CLAIM, THROUGH WRITTEN SUBMISSION THAT THE PAYMENT OF ROYALTY @ 3% IN LINE OF ACTIVITY IS AT ARM S LENGTH, BUT THE SAME HAS NOT BEEN TESTED IN THE MANNER HAS PROJECTED ITS GRIEVANCE BEFORE THE APPELLATE TRIBUNAL THROUGH WRITTEN NOTE. THE ASSESSEE ALSO DOES NOT APPEAR TO HAVE BEEN AFFORDED AN EFFECTIVE OPPORTUNITY OF BEING HEARD TO SUBSTANTIATE ITS CLAIM AND SATISFY THE AUTHORITIES THAT PAYMENT OF ROYALTY TO THE ASSOCIATE ENTERPRISE IS AT ARM S LENGTH. IN THE INTEREST OF JUSTICE, WE SET ASIDE THE ADDITION AND REMIT THE BACK TO THE AO FOR TAKING A DECISION AFRESH IN ACCORDANCE WITH LAW, AFTER GIVING REASONABLE AND EFFECTIVE OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. 3. 1. IN VIEW OF THE FACT THAT THE CO - ORDINATE BENCH IN THE IMMEDIATELY TWO PRECEDING YEARS WAS PLEASED TO RESTORE THE ISSUE ON THE VERY SAME FACTS AND CIRCUMSTANCES JUDICIAL PROPRIETY DEMANDS THAT IN DEFE R RENCE TO THE VIEW TAKEN THE SAID FINDING IS BINDING ON US. ACCORD INGLY THE ISSUE IS RESTORED TO THE FILE OF THE AO WITH THE DIRECTION TO DECIDE THE SAME IN ACCORDANCE WITH LAW BY WAY OF A SPEAKING ORDER AFTER GIVING THE ASSESSEE A REASONABLE OPPORTUNITY OF BEING HEARD. 4. THE NEXT ISSUE AGITATED BY THE ASSESSEE IS ADDRE SSED BY GROUND NO - 3 TO 3.1 . T HE SAME ARE REPRODUCED HERE UNDER FOR READY - REFERENCE : - 3 . THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN TREATING EXPENDITURE INCURRED ON ACCOUNT OF ROYALTY OF RS.19,03,06,184 AND TECHNICAL FEES OF RS.15,69,248 AS CA PITAL EXPENDITURE. 3.1. WITHOUT PREJUDICE, THE ASSESSING OFFICER/DRP ERRED ON FACTS AND IN LAW IN DISALLOWING 100% EXPENDITURE INCURRED ON ACCOUNT OF ROYALTY AND 5 I.T.A .NO. - 3844 /DEL/201 2 TECHNICAL FEES, AS OPPOSED TO 25% THEREOF BEING TREATED AS CAPITAL EXPENDITURE IN EARLIER YEAR S, WHICH WAS, IN ANY CASE, EXCESSIVE. 5. BY WAY OF THIS GROUND, THE ASSESSEE ASSAILS THE ACTION OF THE REVENUE IN TREATING THE EXPENDITURE ON ACCOUNT OF ROYALTY OF RS. 19.3 LAC ODD AND RS.15,69,000/ - ODD AS CAPITAL EXPENDITURE. REFERRING TO THE PAST HISTORY ON THE ISSUE, LD. AR SUBMITTED THAT IN 1993 - 94 TO 1995 - 96 THE AO HAD MADE SIMILAR ADDITIONS WHICH WERE DELETED BY THE ITAT AND WHICH ACTION WAS UPHELD BY THE HON BLE HIGH COURT AND SIMILAR VIEW WAS TAKEN BY THE ITAT IN 2002 - 03 & 2004 - 05 ASSESSMENT YEARS AND THE REVENUE S APPEAL AGAINST THE SAID ORDER WAS DISMISSED BY THE HON BLE HIGH COURT. IN THE IMMEDIATELY 2 PRECEDING ASSESSMENT YEAR 2006 - 07 & 2007 - 08 ASSESSMENT YEARS THE CO - ORDINATE BENCH VIDE ITS ORDER DATED 30.05.2014 (CITED SUPRA) HAS RESTOR ED THE ISSUE BACK TO THE FILE TO THE AO. THE POSITION WAS NOT DISPUTED BY THE LD. CIT DR . 6. ACCORDINGLY CONSIDERING THE FACTS AND CIRCUMSTANCES OF THE CASE IN THE LIGHT OF THE ARGUMENTS ADVANCED BEFORE US, WE DEEM IT APPROPRIATE TO SET ASIDE THE IMPUGN ED ORDER AND THE AO AND RESTORE THE ISSUE BACK TO THE AO WITH THE DIRECTION TO DECIDE THE ISSUE AFRESH BY WAY OF A SPEAKING ORDER IN ACCORDANCE WITH LAW. RESPECTFULLY FOLLOWING THE ORDER OF THE C O - ORDINATE BENCH THE ISSUE ARISING IN GROUND NO - 3 & 3.1 IS RESTORED BACK TO THE FILE TO THE AO . 7 . IN THE RESULT THE APPEAL OF THE ASSESSEE IS ALLOWED FOR STATISTICAL PURPOSES. THE ORDER IS PRONOUNCED IN THE OPEN COURT ON 2 8 T H OF NOVEMBER 2014. S D / - S D / - ( S.V.MEHROTRA ) (DIVA SINGH) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED: 2 8 / 11 /2014 *AMIT KUMAR* 6 I.T.A .NO. - 3844 /DEL/201 2 COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(APPEALS) 5. DR: ITAT ASSISTANT REGISTRAR ITAT NEW DELHI