ACIT, New Delhi V. M/s. Denso India Ltd., New Delhi

ITA 4365/DEL/2011

• Counselvise Citation: [2017] 127 COUNSELVISE.COM (IT) 3176 (ITAT-DELHI)
• Duration Of Justice: 6 year(s) 2 month(s) 5 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 05-12-2017
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: I1
• Next Hearing Date: 14-06-2017
• Assessment Year: 2005-2006
• Appeal Filed On: 30-09-2011
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: AMRENDRA KUMAR
• Keywords: Related party transaction; Capital asset; Depreciation; Transfer pricing; International transaction; Retrospective amendment; Question of law; Royalty expenses; Revenue expenditure; Capital expenditure
• Section: 143(3); 92F; 37(1); 154; 92

Judgement Text

PAGE | 1 INCOME TAX APPELLATE TRIBUNAL DELHI BENCH I - 1 : NEW DELHI BEFORE SHRI BHAVNESH SAINI , JUDICIAL MEMBER AND SHRI PRASHANT MAHARISHI, ACCOUNTANT MEMBER ITA NO. 1751 AND 4365/DEL/2011 (ASSESSMENT YEAR: 2004 - 05 AND 2005 - 06 ) ACIT, CIRCLE - 10(1), NEW DELHI VS. DENSO INDIA LTD, THE CAPITAL COURT, 3 RD FLOOR, LEFT WING, OLOF PALM MARG, MUNIRKA, NEW DELHI PAN:AAACD4255F (APPELLANT) (RESPONDENT) REVENUE BY: SHRI AMRENDRA KUMAR, CIT DR ASSESSEE BY : SHRI KANCHAL KAUSHAL, CA SHRI ANUBHAN RASTOGI, ADV DATE OF HEARING 11/ 09/2017 DATE OF PRONOUNCEMENT 0 5 / 12 /2017 O R D E R PER PRASHANT MAHARISHI , A. M. 1. TH ESE ARE THE APPEALS FILED BY THE REVENUE AGAINST THE ORDER OF THE LD CIT(A) - XX, NEW DELHI DATED 19.01.2011 AND 29.07.2011 FOR THE ASSESSMENT YEAR 2004 - 05 AND 2005 - 06. 2. THE REVENUE HAS RAISED THE FOLLOWING GROUNDS OF APPEAL IN ITA NO. 1751/DEL/2011 FOR AY 2004 - 05 : - 1. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT(A) HAS ERRED IN DELETING THE ENHANCEMENT OF INCOME BY THE AO BY RS. 29,600,000/ - ON ACCOUNT OF PAYMENT OF ROYALTY HOLDING THAT THE INTERNATIONAL RELATED PARTY TRANSACTIONS OF THE APPELLANT DO NOT SATISFY THE ARM LENGTH PRINCIPLE ENVISAGED UNDER THE ACT. 2. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT(A) HAS ERRED IN DELETING THE ENHANCEMENT OF INCOME BY THE AO BY RS. 17,100,000/ - DETERMINED BY THE CUP METHOD AFTER DULY MAKING COMPARISON BETWEEN THE IMPORT PRICES OF THE ASSESSEE TRANSACTIO NS WITH SUMITOMO JAPAN AND THE PRICES OF SIMILAR COMPONENTS SUBSEQUENTLY LOCALIZED . 3. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT(A) HAS ERRED IN DELETING THE DISALLOWANCE OF RS.1,194,259/ - MADE BY THE AO ON ACCOUNT OF NICNET CHAR GES PAID TO M/S DENSO HARYANA, IGNORING THAT THE INTERNET FACILITIES WERE WHOLLY & EXCLUSIVELY FOR THE BUSINESS OF M/S DENSO HARYANA AND NOT FOR THE ASSESSEE COMPANY. 3. THE REVENUE HAS RAISED THE FOLLOWING GROUNDS OF APPEAL IN ITA NO. 4365/DEL/2011 FOR AY 2 005 - 06 : - ACIT VS. DENSO INDIA LTD, ITA NO. 1751 AND 4365/DEL/2011 (ASSESSMENT YEAR: 2004 - 05 AND 2005 - 06) PAGE | 2 (1) ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW WHETHER THE LD CIT(A) WAS CORRECT IN DELETING THE ADDITION OF RS. 12,53,92,899/ - MADE BY THE A.O. ON ACCOUNT OF TPO'S ORDER UNDER SECTION 92CA(3) ON ACCOUNT OF ADJUSTMENTS IN THE ALP OF IN TERNATIONAL TRANSACTIONS OF THE ASSESSEE. (2) ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW WHETHER THE LD CIT(A) WAS CORRECT IN DELETING THE ADDITION OF RS. 87,82,391/ - , BY HOLDING IT AS REVENUE EXPENSES, AS AGAINST THE SAID ROYALTY EXPENSES BEING TREATED AS CAPITAL EXPENDITURE BY THE AO. (3 ) ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW WHETHER THE LD CIT(A) WAS CORRECT IN DELETING THE ADDITION OF RS. 5,12,449/ - , BY HOLDING IT AS REVENUE EXPENSES, AS AGAINST THE SAID EXPENSES OF APPLICATION COST BEING TREATED AS CAPITAL EXPENDITURE B Y THE AO. (4) ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW WHETHER THE LD CIT(A) WAS CORRECT IN DELETING THE ADDITION OF RS 10,44,714/ - (RS.8,95,625 + RS.1,49,089/ - ) PAID TO DENSO CORPORATION, JAPAN , FOR TECHNICAL COST & TRAINING FEE BY TREATING T HE SAME AS REVENUE EXPENDITURE AS AGAINST BEING HELD AS CAPITAL EXPENDITURE BY THE AO. 4. THE FIRST WE TAKE THE APPEAL FOR AY 2004 - 05 AND NARRATE THE FACTS THAT ASSESSEE IS A PUBLIC LTD COMPANY AND DENSO JAPAN HELD 47.93% EQUITY SHARES IN THE COMPANY. FOR T HE YEAR ASSESSEE FILED ITS RETURN OF INCOME DECLARING INCOME OF RS. 240000569/ - ON 29.10.2004. THE ASSESSEE HAS ENTERED INTO THE INTERNATIONAL TRANSACTION RELATED TO PAYMENT OF ROYALTY WHICH WAS REFERRED TO THE LD TRANSFER PRICING OFFICER U/S 92CA(3) OF THE INCOME TAX ACT. THE ASSESSEE HAS PAID ROYALTY OF RS. 5.166 CRORES TO ITS PARENT. THE ASSESSEE HAS ALSO ENTERED INTO CERTAIN OTHER INTERNATIONAL TRANSACTION OF IMPORT, EXPORT, PAYMENT OF TECHNICAL FEES, PURCHASE OF SOFTWARE AND REIMBURSEMENT OF EXPENSES OVER AND ABOVE THE PAYMENT OF ROYALTY. ASSESSEE BENCHMARK ED THESE TRANSACTIONS OTHER THAN REIMBURSEMENT APPLYING TRANSACTIONAL NET MARGIN METHOD (TNMM) AS THE MOST APPROPRIATE METHOD AND ADOPTED PROFIT LEVEL INDICATOR OF OPERATING PROFIT/ TOTAL COST SELEC TING NINE COMPARABLES AND USING MULTIPLE YEAR DATA DERIVED AT AVERAGE MARGIN OF COMPARABLES @3.38% WHEREAS, THE ASSESSEES MARGIN WAS 6.19% AND THEREFORE, THE INTERNATIONAL TRANSACTION OF PAYMENT OF ROYALTY AS PER TP DOCUMENTATION WAS STATED TO BE AT ARMS LENGTH. 5. THE LD TRANSFER PRICING OFFICER HELD THAT MERELY ON THE BASIS OF THE AGREEM ENT BETWEEN THE ASSESSEE AND AE, IT CANNOT BE CONSIDERED THAT TRANSACTIONS AT ARE ARMS LENGTH WITHOUT ESTABLISHING THE COMMENSURATE ECONOMIC BENEFIT FOR THE PAYMENT OF ROYALTY. THEREFORE, THE LD TRANSFER PRICING OFFICER APPLIED THE TNMM ADOPTING OP/TC AS PLI USING SINGLE YEAR DATA WITH APPROPRIATE TURNOVER FILTERS SELECTED THREE COMPARABLES AND THE N DETERMINED THE MARGINS OF THE COMPARABLES @7.77% AGAINST 6.19% OF THE ASSESSEE. THEREFORE, THE LD TPO PROPOSED AN ADJUSTMENT OF RS. 2.96 CRORES ON ACCOUNT OF ROYALTY PAYMENT AT AND RS. 1.71 CRORES ON ACCOUNT OF IMPORT OF GOODS. THE ABOVE ADJUSTMENTS WER E INCORPORATED BY THE LD ASSESSING ACIT VS. DENSO INDIA LTD, ITA NO. 1751 AND 4365/DEL/2011 (ASSESSMENT YEAR: 2004 - 05 AND 2005 - 06) PAGE | 3 OFFICER IN THE ASSESSMENT ORDER U/S 143(3) OF THE ACT DATED 29.12.2006 DETERMINING THE TOTAL INCOME OF THE ASSESSEE AT RS. 287894828/ - . THE ASSESSEE PREFERRED APPEAL BEFORE THE LD CIT (A) WHO VIDE ORDER DATED 19.01.2011 A LLOWED THE APPEAL OF THE ASSESSEE. THEREFORE, REVENUE IS IN APPEAL BEFORE US. 6. THE FIRST GROUND OF APPEAL IS WITH RESPECT TO THE ADJUSTMENT OF RS. 2.96 CRORES ON ACCOUNT OF ALP OF THE ROYALTY. 7. THE LD DEPARTMENTAL REPRESENTATIVE RELIED UPON THE ORDERS OF THE LD ASSESSING OFFICER AND TPO. 8. THE LD AR RELIED UPON THE ORDER OF THE LD CIT(A) AS WELL AS SUBMITTED THAT EVEN IF THE APPROACH OF THE TPO OR OF THE LD CIT(A) WITH RESPECT TO PLI IS CONSIDERE D THE TRANSACTION ENTERED INTO BY THE ASSESSEE FALLS WITHIN (+)/ ( - ) 5% RANGE AND THEREFORE, IN VIEW OF THE CIRCULAR NO. 12/2011 DATED 23.08.2001 NO ADDITION CAN BE MADE. THE LD AR SUBMITTED A WRITTEN SUBMISSION WHICH IS AS UNDER: - 1. DENSO INDIA LIMITED IS A PUBLIC LIMITED COMPANY AND IS HELD 47.93% BY DENSO CORPORATION, JAPAN WHILE THE BALANCE IS HELD BY OTHER PROMOTERS, INSTITUTIONAL INVESTORS, AND OTHERS (INCLUDING PUBLIC). FURTHER, AMONG THE AFORESAID EQUITY HOLDERS, SUMITOMO CORPO RATION, JAPAN (HEREINAFTER REFERRED TO AS SUMITOMO JAPAN) HELD 10.27% SHARES IN THE RESPONDENT DURING THE ASSESSMENT YEAR (AY) 2004 - 05. (PLEASE REFER PAGE 8 OF PAPER BOOK FOR SHAREHOLDING PATTERN) 2. DENSO INDIA WAS ENGAGED IN THE BUSINESS OF MANUFACTURI NG AND DISTRIBUTION OF A WIDE RANGE OF AUTOMOTIVE COMPONENTS INCLUDING ALTERNATORS, STARTERS, WIPER MOTORS, FANS, VENTILATORS, WINDOW WASHERS, PRINT MOT ORS, MAGNETO AND CAPACITOR DISCHARGE IGNITION (CDI). IN ADDITION TO THE ABOVE, IT WAS ALSO ENGAGED INTO RESALE OF SPARE PARTS SOME OF WHICH WERE IMPORTED FROM OVERSEAS GROUP ENTITIES. (RE: PAGE 26 - 31 OF PAPER BOOK FOR TP STUDY AND PAGE 457 - 458 FOR TP ORDER) 3. DURING THE YEAR UNDER ASSESSMENT, DENSO INDIA ENTERED INTO THE FOLLOWING INTERNATIONAL TRANSACTIONS WITH ITS ASSOCIATED ENTERPRISES (AES) WITHIN THE MEANING OF SECTIONS 92 TO 92F OF THE INCOME TAX ACT, 1961 (ACT). (RE: PAGE 458 OF PAPERBOOK) SR. NO. TRANSACTIONS ENTERED DURING THE YEAR AMOUNT AS PER TP STUDY (RS. IN CRORES) MAM AS PER TP STUDY 1 IMPORT OF RAW MATERIAL AND COMPONENTS 0.083 TNMM 2 EXPORT OF FINISHED GOODS (SAMPLES) 0.042 3 PAYMENT OF ROYALTY 5.166 4 PAYMENT OF APPLICATION COST AND TECHNICAL ASSISTANCE FEE 2.852 5 PURCHASE OF SOFTWARE 0.016 6 REIMBURSEMENT OF EXPENSES 0.217 CUP 4. THE GROUND WISE BACKGROUND AND THE RESPONDENT'S CONTENTIONS TO THE DEPARTMENTS GROUNDS OF APPEALS IS AS FOLLOWS: RE: GROUND NO. 1 OF GROUNDS OF APPEAL: ADDITION ON ACCOUNT OF PAYMENT OF ROYALTY TO AE 1) BACKGROUND OF TRANSACTION ACIT VS. DENSO INDIA LTD, ITA NO. 1751 AND 4365/DEL/2011 (ASSESSMENT YEAR: 2004 - 05 AND 2005 - 06) PAGE | 4 1.1. AS DETAILED IN PARA 2 ABOVE, DENSO INDIA IS A FULL - FLEDGED MANUFACTURER OF AUTO COMPONENTS. IT DEPENDS UPON DENSO JAPAN FOR TECHNICAL INFORMATION WHICH IS IN THE NATURE OF DESIGNS, ENGINEERING DATA, MANUFACTURING AND PROCESS DATA, MACHINERY AND FACILITY L AYOUTS, TESTING AND QUALITY CONTROL DATA, PRODUCTION AND TESTING EQUIPMENT DATA ETC. DENSO INDIA HAS ALSO ENTERED INTO VARIOUS AGREEMENTS WITH DENSO JAPAN FOR SUCH INFORMATION. THE ROYALTY PERTAINS TO PRODUCT PATENTS, TECHNICAL INFORMATION ON MANUFACTURE A ND SALE OF PRODUCTS AND KNOW HOW RANGING FROM 3% OF NET SALES AND 5% OF EXPORT SALES ALONG WITH LUMP SUM PAYMENT. (RE: COPIES OF AGREEMENTS ON PAGE 331 - 406 OF PAPER BOOK FOR AY 2005 - 06). 1.2. FOR BENCHMARKING ITS INTERNATIONAL TRANSACTION OF PAYMENT OF R OYALTY COVERED UNDER CLASS 1 TRANSACTIONS (SR. NO. 1 - 5 OF TABLE 1) THE RESPONDENT ADOPTED THE FOLLOWING APPROACH: PARTICULARS RESULT PAGE REFERENCE MOST APPROPRIATE METHOD APPLIED TNMM 50 PROFIT LEVEL INDICATOR (PLI) OPERATING PROFIT/TOTAL COST (OP/TC) 50 NO. OF COMPARABLES 9 50 UNADJUSTED / WORKING CAPITAL ADJUSTED MARGIN OF COMPARABLES USING MULTIPLE YEANDATA 4.12%, 3.38% 50 RESPONDENTS MARGIN (OP/TC) 6.19% 65 2) TRANSFER PRICING ASSESSMENT PROCEEDINGS AND ASSESSMENT PROCEEDINGS 2.1 THE LEARNED TRANSFER PRICING OFFICER (TPO) VIDE ORDER UNDER SECTION 92CA(3) OF THE ACT DATED 15/12/2006 GAVE THE FOLLOWING OBSERVATIONS W.R.T. THE INTERNATIONAL TRANSACTION OF PAYMENT OF ROYALTY : 2.2 THE LD. TPO DISREGARDED THE DETAILED SUBMISSIONS AND FORMAL AGREE MENTS BETWEEN THE RESPONDENT AND ITS AES AND RULED THAT THE FORMAL AGREEMENT BETWEEN THE AES CANNOT BE A BASIS FOR DETERMINING THE ARMS LENGTH PRICE OF THE TRANSACTIONS. THEREFORE, PAYMENT OF ROYALTY CANNOT BE JUSTIFIED ON THE BASIS OF AGREEMENT BETWEEN THE RESPONDENT AND THE AE. THE REAL TEST LIES IN COMMENSURATE ECONOMIC BENEFITS IN WHICH THE PROFITS EARNED BY THE ENTERPRISE OVER AND ABOVE THE INDUSTRY AVERAGE CAN BE CONSIDERED AS INCOME ATTRIBUTABLE TO THE PAYMENT OF ROYALTY. 2.3 CONSEQUENTLY, THE LD. TPO APPLIED TNMM USING OP/TC AS THE PLI FOR BENCHMARKING THE INTERNATIONAL TRANSACTION OF PAYMENT OF ROYALTY USING SINGLE YEAR DATA AND APPLIED TURNOVER FILTER 100 CRORES (SELECTION OF COMPARABLES HAVING TURNOVER GREATER THAN 100 CRORES AGAINST THE ASSESS EES TURNOVER FILTER OF RS. 50 CRORES) AND SELECTED COMPARABLES USED IN TP PROCEEDINGS FOR AY 2003 - 04 WITHOUT CONSIDERING THE COMPARABLES FOR AY 2004 - 05. (REF: PAGE 464 TO 466 OF PAPER BOOK) 2.4 THEREAFTER, THE LD. TPO ARRIVED AT A SET OF 3 COMPARABLES AND DETERMINED THE ARMS LENGTH PLI AT 7.77% AS AGAINST THE RESPONDENTS PLI OF 6.19%. S. NO. TPO'S COMPARABLES OP/TC % 1 AMFORGE INDUSTRIES LIMITED 9.93 2 HI - TECH GEARS LIMITED 9.26 3 SUBROS LTD. 4.12 AVERAGE 7.77 2.5 THE LD. TPO PROPOSED AN ADJUSTMENT OF RS. 4.67 CRORES TO THE VALUE OF INTERNATIONAL ACIT VS. DENSO INDIA LTD, ITA NO. 1751 AND 4365/DEL/2011 (ASSESSMENT YEAR: 2004 - 05 AND 2005 - 06) PAGE | 5 TRANSACTION RELATED TO PAYMENT OF ROYALTY BEING THE DIFFERENTIAL OF ARMS LENGTH PLI AND RESPONDENTS PLI (7.77 - 6.19=1.58%) APPLIED ON TOTAL COST OF THE RESPONDENT BEING 29 5.53 CRORES. (DETAILED CALCULATION ON PAGE 466 OF PAPER BOOK) 2.6 THE LD. AO INCORPORATED THE ORDER OF THE LD. TPO IN ITS ORDER AND CONSEQUENTLY MADE AN ADDITION OF RS. 2.96 CRORES ON ACCOUNT OF ROYALTY AND RS. 1.71 CRORES ON ACCOUNT OF INTERNATIONAL TRANS ACTION OF IMPORT OF GOODS FROM SUMITOMO CORPORATION, JAPAN WHICH IS DETAILED IN THE SUCCEEDING DISCUSSION RELATING TO GROUND NO. 2. (REF: PAGE 449 - 452 OF PAPER BOOK) 3. RESPONDENTS APPEAL BEFORE THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) (CIT (A)) 3.1 THE LD. CIT(A) ACCEPTED THE RESPONDENTS FILTER OF ACCEPTING COMPANIES HAVING TURNOVER > RS. 50 CR. AND DISREGARDED THE TPOS METHODOLOGY OF ACCEPTING COMPANIES HAVING TURNOVER> RS. 100 CRORES AND ALSO GRANTED WORKING CAPITAL ADJUSTMENT VIS A VIS THE COMPARABLES SELECTED BY THE RESPONDENT. 3.2 THE LD. CIT(A) HELD THAT SINCE THE TRANSACTIONS OF THE APPELLANT WITH ITS AES ARE ON THE COST SIDE THE PLI SHOULD HAVE A BASE WHICH SHOULD NOT BE CONTROLLED AND THEREFORE OP/SALES IS THE APPROPRIATE PLI FOR BENC HMARKING THE INTERNATIONAL TRANSACTION OF PAYMENT OF ROYALTY (RE: PAGE 443 OF PAPER BOOK). THE LD. CIT(A) ALSO GRANTED BENEFIT OF +/ - 5% RANGE AS MANDATED U/'S 92C(2) OF THE ACT WHICH HAD BEEN IGNORED BY THE LD. TPO/AO. 3.3. THEREAFTER, THE LD. CIT(A) ARRI VED AT A SET OF 6 COMPARABLES AND DETERMINED THE ARMS LENGTH PLI AT 6.44% AS AGAINST THE RESPONDENTS PLI OF 5.83%. S. NO. TPO'S COMPARABLES OP/SALES % 1 AMFORGE INDUSTRIES LIMITED 8.26 2 AXLES INDIA LTD. 5.38 3 HI TECH GEARS LTD. 8.07 4 MAHINDRA SONA LTD. 12.87 5 SHARDLOW INDIA LTD. 0.35 6 SUBROS LTD. 3.72 AVERAGE 6.44% 3.4. KEEPING IN VIEW THE ABOVE, THE LD. CIT(A) HELD THAT THE RESPONDENTS INTERNATIONAL TRANSACTION WITH AES MET THE ARMS LENGTH TEST AS THE OP/SALES OF 5.83% EARNED BY THE RESPONDENT FALLS WITHIN THE +/ - 5% RANGE ALLOWED AS PER PROVISO TO SECTION 92C(2) OF THE ACT. (RE: PAGE 443 OF PAPER BOOK) 4) RESPONDENTS CONTENTIONS NEED FOR PAYMENT OF ROYALTY THE LD. TPO IGNORED THE DETAILED EVIDENTIARY INFORMATION (DESIGNS, DRAWIN GS, PRODUCT STANDARDS, ENGINEERING DATA ETC.) SUBMITTED BY THE RESPONDENT TO SUBSTANTIATE THE ARMS LENGTH NATURE OF ROYALTY PAYMENT TO ASSOCIATED ENTERPRISES AND WRONGLY ASSUMED THAT NO SIGNIFICANT ECONOMIC BENEFIT AROSE TO THE RESPONDENT FROM RECEIPT OF SUCH TECHNICAL KNOW - HOW/INFORMATION. (REFER PAGE 417 AND 418 OF THE PAPER BOOK). IN FACT THE RESPONDENT HAS IMMENSELY BENEFITTED FROM THE INTANGIBLES GRANTED BY ITS AES AND THE RESPONDENT COULD NOT HAVE CARRIED OUT ITS BUSINESS AND SOLD DENSO PRODUCTS TO CUSTOMERS IN INDIA WITHOUT THE ONGOING TECHNOLOGY TRANSFER AND CONTINUING RIGHT TO USE SUCH INTANGIBLES OBTAINED FROM ITS AES. TO SUBSTANTIATE THE SAME, THE PAST 5 YEARS TREND OF THE SALES TURNOVER WHICH SHOWS AN 85% JUMP IN THE TURNOVER FROM ACIT VS. DENSO INDIA LTD, ITA NO. 1751 AND 4365/DEL/2011 (ASSESSMENT YEAR: 2004 - 05 AND 2005 - 06) PAGE | 6 MARCH 1 999 TO MARCH 2004 IS AS FOLLOWS: DENSO INDIA LTD. (SALES IN RS. CRORES) MAR - 99 MAR - 2000 MAR - 01 MAR - 02 MAR - 03 MAR - 04 169.5 197.22 238.94 250.56 256.46 313.83 THEREFORE, FROM THE ABOVE, IT CAN BE ESTABLISHED BEYOND DOUBT THAT THE RESPONDENT HAS BENEFITTED IMMENSELY FROM THE USE OF INTANGIBLES PROVIDED BY ITS AES. THE RESPONDENT HAS MADE USE OF SOPHISTICATED TECHNOLOGY DEVELOPED AND UPGRADED BY THE AES ON A CONTINUOUS BASIS. IT IS WORTH MENTIONING THAT THE RESPONDENT HAS EARNED AN OPERATING PROF IT BEFORE ROYALTY PAYMENT OF RS. 23.45 CRORES IN FY 2003 - 04, OUT OF WHICH IT HAS PAID A ROYALTY OF RS. 5.16 CRORES I.E. ONLY ABOUT 1 /5 TH OF SUCH PROFITS. BENEFIT OF +/ - 5% RANGE AS MANDATED UNDER PROVISO TO SECTION 92C(2) OF THE ACT TO BE ALLOWED THE LD. TPO/AO DID NOT GRANT THE BENEFIT OF +/ - 5% AS MANDATED U/S 92C(2) OF THE ACT. ONCE THE SAME IS ALLOWED THE POSITION WILL BE AS FOLLOWS: PARTICULARS OPERATING PROFIT OF THE RESPONDENT OP/TC 6.19% OPERATING MARGIN OF COMPARABLES (AS PER TP ORDER) 7.77% +/ - 5% RANGE 5.47% - 7.61% * CASE 2: IF THE APPROACH OF CIT(A) IS UPHELD KEEPING OP/SALES AS THE PLI CONCLUSION. AS IS EVIDENT FROM THE ABOVE DISCUSSION THE RESPONDENTS INTERNATIONAL TRANSACTION OF PAYMENT OF ROYALTY TO ITS AES MEETS THE ARMS LENGTH STANDARD BY SATISFYING BOTH THE NEED AND BENEFIT TEST AS WELL AS WITHIN +/ - 5% RANGE AS MANDATED BY THE ACT. THEREFORE, THE APPELLANTS GROUND IS LIABLE TO BE DISMISSED. RE: GROUND NO. 2 OF GROUNDS OF APPEAL: ADDITION ON ACCOUNT OF IMPORTS FROM SUMITOMO JAPAN 1) BACKGROUND OF TRANSACTION 1.1. DURING FY 2003 - 04, THE RESPONDENT IMPORTED VARI OUS RAW MATERIALS, PARTS AND COMPONENTS ETC. FROM SUMITOMO JAPAN. THESE PARTS WERE SUBSEQUENTLY LOCALISED AS PER INDIAN MARKET CONDITIONS IN THE LATER YEARS. SINCE, SUMITOMO CORP. JAPAN (SCJ) ONLY HELD 10.27% SHARE IN THE RESPONDENT COMPANY IT WAS NOT CO NSIDERED TO BE AN ASSOCIATED ENTERPRISE OF THE RESPONDENT AS IT WAS LESS THAN 26% AS MANDATED U/S 92 OF THE ACT AND THEREFORE NOT REPORTED IN FORM 3CEB BY THE RESPONDENT AND CONSEQUENTLY NOT SEPARATELY BENCHMARKED. 2) TRANSFER PRICING ASSESSMENT PROCEEDING S AND ASSESSMENT PROCEEDINGS 2.1 THE LD. TPO DID NOT CONSIDER THIS TRANSACTION AS AN INTERNATIONAL TRANSACTION AND DID NOT MAKE A MENTION OF THE SAME IN THE TP ORDER. HOWEVER, THE LD. AO CONSIDERED THE SAME AS AN INTERNATIONAL TRANSACTION BY BRINGING THE SAME (RE: PAGE 443 OF PAPERBOOK) PARTICULARS OP/SALES OPERATING PROFIT OF THE RESPONDENT 5.83% OPERATING MARGIN OF COMPARABLES (AS PER TP ORDER) 6.44% +/ - 5% RANGE 5.26 - 7.42% ACIT VS. DENSO INDIA LTD, ITA NO. 1751 AND 4365/DEL/2011 (ASSESSMENT YEAR: 2004 - 05 AND 2005 - 06) PAGE | 7 UNDER THE AMBIT OF SECTION 92B(2) OF THE ACT BY RELYING ON THE ORDER OF HIS PREDECESSOR FOR AY 2002 - 03. (RE: PAGE 451 OF THE PAPER BOOK). 2.2 RELYING UPON THE METHODOLOGY ADOPTED BY THE TPO/AO FOR PRECEDING YEAR, THE LD. AO DETERMINED COMPARABLE UNCON TROLLED PRICE (CUP) METHOD TO BE THE MOST APPROPRIATE METHOD FOR BENCHMARKING THE INTERNATIONAL TRANSACTION AND COMPARED THE PRICES OF IMPORTED RAW MATERIAL AND COMPONENTS FROM SCJ WITH THAT OF DOMESTIC VENDORS EITHER DURING THE SAME YEAR OR IN SUBSEQUEN T YEARS. (RE: PAGE 451 AND 456 OF THE PAPER BOOK). 2.3 CONSEQUENTLY THE AO MADE AN ADDITION TO THE TUNE OF 1.71 CRORES TO THE INTERNATIONAL TRANSACTION OF IMPORTS OF RAW MATERIAL AND COMPONENTS FROM SCJ AND REDUCED THIS ADJUSTMENT FROM THE ADDITION OF 4.6 7 CRORES MADE TO THE INTERNATIONAL TRANSACTION OF PAYMENT OF ROYALTY AS DISCUSSED IN PARA 2.5 AND 2.6 ABOVE. (RE: PAGE 452 OF PAPER BOOK) 3) RESPONDENTS APPEAL BEFORE THE LEARNED CIT(A) 3.1. THE LD. CIT(A) UPHELD THE TPOS APPROACH OF CONSIDERING THE TRA NSACTIONS BETWEEN RESPONDENT AND SCJ AS A DEEMED INTERNATIONAL TRANSACTION U/S 92B(2) OF THE ACT HOLDING THAT THE RELATIONSHIP BETWEEN THE RESPONDENT, ITS HOLDING CO. DENSO JAPAN AND SCJ IS SUCH THAT DENSO JAPAN COULD INFLUENCE THE TERMS OF TRANSACTION BET WEEN RESPONDENT AND SCJ. (RE: PAGE 430 OF PAPER BOOK) 3.2. HOWEVER, THE LD. CIT(A) OBSERVED THAT CUP IS NOT AN APPROPRIATE METHOD FOR DETERMINING THE ALP OF IMPORT TRANSACTION AND THEREFORE, DELETED THE ADJUSTMENT ON THIS ACCOUNT POINTING OUT THAT THERE ARE SIGNIFICANT DIFFERENCES BETWEEN THE CHARACTERISTICS OF T HE TRANSACTION OF IMPORT OF RAW MATERIALS AND COMPONENTS FROM SCJ AND THAT OF LOCAL INDIAN VENDORS. THEREFORE, THE PRICES OF IMPORTED RAW MATERIALS CANNOT BE COMPARED WITH PRICES OF LOCALLY PROCURED MATERIALS. (RE: PAGE 433,434 OF PAPER BOOK) 4) RESPONDENT S CONTENTIONS THE IMPORT PRICE WOULD INCLUDE A VERY SIGNIFICANT ELEMENT OR COMPONENT CONSTITUTING INTELLECTUAL PROPERTY RIGHTS, WHICH ARE EMBODIED IN THE PARTS, COMPONENTS AND OTHER ITEMS, WHEREAS THE PRICES OF THE INDIAN VENDORS DO NOT INCLUDE THE INTELL ECTUAL PROPERTY RIGHTS ELEMENT AT ALL AS THE RESPONDENT PROVIDES TOOLS, JIGS AND DIES TO LOCAL INDIAN VENDORS FROM WHOM IT PROCURES LOCALIZED COMPONENTS. MANUFACTURING AND OTHER COSTS INCURRED BY A MANUFACTURER IN JAPAN ARE FAR MORE THAN THE COSTS THAT AR E INCURRED BY ANY MANUFACTURER IN INDIA. ALL OTHER ITEMS OF COSTS SUCH AS OVERHEADS, TRANSPORTATION FACILITIES AND EVEN THE COST OF FACTORY LAND AND BUILDING IN JAPAN ARE FAR MORE THAN THE COST OF SIMILAR ITEMS IN INDIA. A FAR HIGHER INCOME LEVEL HAS THE I NEVITABLE EFFECT AND CONSEQUENCE OF GENERALLY HIGHER PRICES FOR ALL ITEMS IN THE ECONOMY AS A WHOLE. THE COMPONENTS IMPORTED BY DENSO INDIA DURING THE YEAR, WHICH WERE LOCALISED IN SUBSEQUENT FINANCIAL YEARS, WERE NOT AT ALL AVAILABLE IN INDIA DURING THE P ERIOD WHEN IMPORTS WERE MADE AND HENCE A MEANINGFUL COMPARISON IS NOT POSSIBLE. THE MAJORITY OF THE LOCALIZED COMPONENTS, WHOSE PRICES THE LD. TPO USED AS A CUP AGAINST THE CORRESPONDING IMPORT PRICES, WERE IN FACT LOCALIZED IN THE FINANCIAL YEAR SUBSEQUEN T TO THE FINANCIAL YEAR OF IMPORT OF THESE COMPONENTS BY DENSO INDIA. THE USE OF PRICES OF COMPONENTS LOCALIZED IN THE SUBSEQUENT FINANCIAL YEAR FOR COMPARISON BY THE LD. TPO IS CONTRARY TO THE RULE 10B(4) OF THE INDIAN INCOME TAX RULES, 1962 (RULES) AS ACIT VS. DENSO INDIA LTD, ITA NO. 1751 AND 4365/DEL/2011 (ASSESSMENT YEAR: 2004 - 05 AND 2005 - 06) PAGE | 8 PE R WHICH DATA FOR ONLY CURRENT YEAR OR FOR A PERIOD NOT MORE THAN PREVIOUS TWO YEARS CAN BE USED TO DETERMINE THE ARMS LENGTH PRICE OF AN INTERNATIONAL TRANSACTION. HENCE, THE INDIAN TRANSFER PRICING LEGISLATION DOES NOT PERMIT USAGE OF FUTURE YEARS DATA FOR THE PURPOSES OF COMPARABILITY; THE CUP METHOD REQUIRES EXTREMELY STRINGENT COMPARABILITY FACTORS TO BE MET, IN THE ABSENCE OF WHICH RELIABLE ADJUSTMENTS NEED TO BE MADE TO ENSURE A JUST AND FAIR COMPARISON. IN THE INSTANT CASE, IT IS NOT POSSIBLE TO AD JUST FOR THE VARIOUS DIFFERENTIATING FACTORS BETWEEN THE CASE WHEN DENSO INDIA IMPORTS COMPONENTS AND THE CASE WHEN THE COMPONENTS ARE SUBSEQUENTLY LOCALIZED, AND THEREFORE CUP CANNOT BE APPLIED AS THE MOST APPROPRIATE METHOD. 5. JUDICIAL RELIANCE: (IN RES PONDENTS OWN CASE) IN ACIT VS. DENSO INDIA LIMIT ED (64 SOTJLBTY - THDONBLE DELHI ITAT UPHELD THE USE OF CUP AND SET ASIDE THE ISSUE TO THE FILE OF THE AO WITH THE DIRECTION TO DETERMINE THE ALP BY TRYING TO ASCERTAIN THE PRICE AT WHICH SUCH COMPONENTS OR PARTS WERE BEING EXPORTED BY DENSO JAPAN OUTSIDE JAPAN OR THE PRICE AT WHICH THEY WERE SOLD BY THE AE IN THE DOMESTIC MARKET, IF POSSIBLE OR IN ANY OTHER MANNER. (RE: PARA 44 OF THE ORDER) THE KEY OBSERVATIONS OF THE HONBLE BENCH ARE AS FOLLOWS: 39. AS T HERE IS A HIGH DEGREE OF PRODUCT COMPARABILITY, IN OUR CONSIDERED OPINION CUP METHOD IS THE MOST APPROPRIATE METHOD TO BE FOLLOWED IN THE CASE ON HAND. THE FINDING OF THE LEARNED CIT(A) ON THIS ISSUE DOES NOT CONVINCE US. IF THERE ARE SIGNIFICANT DIFFERENC E IN THE FACTS AND CIRCUMSTANCES BETWEEN THE TRANSACTIONS OF IMPORT OF RAW - MATERIAL AND COMPONENTS FROM JAPAN VIS - A - VIS PROCUREMENT OF RAW - MATERIAL AND COMPONENTS FROM LOCAL INDIAN VENDORS, SUITABLE ADJUSTMENTS CAN BE MADE FOR THE SAME. THE METHOD ITSELF CANNOT BE REJECTED. HENCE, THIS ISSUE IS DECIDED IN FAVOUR OF THE REVENUE. 40. NEXT ISSUE IS WHETHER FUTURE DATA CAN BE TAKEN FOR THE PURPOSE OF COMPARABLES. ON THIS ISSUE WE UPHOLD THE ORDER OF THE COMMISSIONER OF INCOME - TAX (APPEALS) THAT THE TRANSFER P RICING REGULATIONS DO NOT CONTEMPLATE TAKING INTO ACCOUNT FUTURE DATA FOR THE PURPOSE OF BENCH MARKING. HENCE IN RESPECT OF 7 COMPONENTS, THE TPO'S ACTION IN USING FUTURE DATA IS RIGHTLY HELD AS NOT IN CONSONANCE WITH TRANSFER PRICING PROVISIONS. IN DE NSO INDIA LTD. VS. CIT [388 ITR 324] THE HONBLE DELHI HIGH COURT UPHELD THE STAND TAKEN BY THE HONBLE ITAT IN RESPONDENTS OWN CASE (SUPRA) AND HELD THAT CUP HAS BEEN RIGHTLY APPLIED BY THE TPO. IN REACHING SUCH CONCLUSION THE COURT GAVE THE FOLLOWING OB SERVATION: NOW, THERE CAN BE NO DISPUTE THAT THE ASSESSING OFFICER WOULD NORMALLY ACCEPT THE FIGURES GIVEN, IF THEY DO NOT SHOW FEATURES THAT CALL FOR HIS INTERFERENCE. HOWEVER, HIS JOB ALSO EXTENDS TO CRITICALLY EVALUATING MATERIALS AND IN CASES WHICH DO REQUIRE SCRUTINY, GO AHEAD AND DO SO. IN THE PROCESS, AT LEAST IN THIS CASE, THE UNUSUAL FEATURES WHICH REMAINED UNEXPLAINED BY THE ASSESSEE, INFLUENCED THE TPO AND THE ASSESSING OFFICER TO RESORT TO TRANSFER PRICING ADJUSTMENT AND DETERMINE ALP BY ADOPTI NG THE CUP METHOD FOR THE PROCUREMENTS FROM SUMITOMO.' [RE: PARA 16 OF THE ORDER] THEREFORE, THE COURT DID NOT FIND AN INFIRMITY IN THIS APPROACH AND APPLICATION OF CUP METHOD WAS UPHELD. HOWEVER, THE RESPONDENT REITERATES ITS ARGUMENTS ADVANCED IN PARA 4( SUPRA), THAT CUP CANNOT BE APPLIED TO THIS INTERNATIONAL TRANSACTION AND THE APPROACH OF THE CIT(A) MUST BE UPHELD IN THIS REGARD. ACIT VS. DENSO INDIA LTD, ITA NO. 1751 AND 4365/DEL/2011 (ASSESSMENT YEAR: 2004 - 05 AND 2005 - 06) PAGE | 9 RE: GROUND NO. 3 OF GROUNDS OF APPEAL: ADDITION ON ACCOUNT OF NICENET CHARGES PAID TO DENSO HARYANA FOR USE OF INTRANET FAC ILITY 1. BACKGROUND OF TRANSACTION 1.1. DURING FY 2003 - 04, THE RESPONDENT PAID AN AMOUNT OF RS. 11,94,259 TOWARDS COST OF SHARING THE INTRANET FACILITY CALLED NICENET TO M/S DENSO HARYANA. 2) ASSESSMENT PROCEEDINGS 2.1 THE LD. AO DISALLOWED THE EXPENSE CONSIDERING THE AGREEMENT PURSUANT TO WHICH THESE CHARGES WERE PAID AS A SHAM AGREEMENT ON THE GROUND THAT IT WAS EFFECTIVE WITH RETROSPECTIVE EFFECT AND SPECIFIC CHARGES THAT WERE TO BE CHARGED FOR THIS SERVICE WERE NOT MENTIONED. THE LD. RELYING ON PAST YEARS TOOK I NTO ACCOUNT THAT THE SAME ADDITION ON THE SAME REASONING WAS DONE BY THE AO IN AY 2002 - 03 AND 2003 - 04. 3) APPEAL BEFORE LD. CIT(A) 3.1. THE LD. CIT(A) RELIED ON THE ORDER FOR AYS 2002 - 03 AND 2003 - 04 ALLOWED THE EXPENSES U/S 37(1) CONSIDERING THAT THERE WAS NO CHA NGE IN FACTS AND CIRCUMSTANCES OF THE CASE. 4) RESPONDENTS CONTENTIONS IT IS PERTINENT TO NOTE THAT FOR AY 2002 - 03 AND AY 2003 - 04, VIDE ORDER DATED FEBRUARY 27, 2013, THE HONBLE ITAT UPHELD THE ORDER OF THE CIT(A) WHICH DELETED THE ADJUSTMENT MADE BY THE L D. AO ON ACCOUNT OF NICENET CHARGES TO DENSO HARYANA. [RE: PARA 12 OF ITAT ORDER] THE OBSERVATIONS OF THE HONBLE ITAT HAVE BEEN UPHELD BY THE HONBLE DELHI HIGH COURT IN RESPONDENTS OWN CASE IN CIT VS DENSO INDIA LTD. (374 ITR 62) [RE: PARA 5 OF ORDER]. CONSIDERING THAT THE FACTS OF THE CASE ARE SAME AS PREVIOUS YEARS IT IS RESPECTFULLY PRAYED THAT THIS GROUND OF THE DEPARTMENT BE SUMMARILY DISMISSED. 9. WE HAVE CAREFULLY CONSIDERED THE RIVAL CONTENTIONS . BRIEFLY STATED THE FACTS ARE THAT THE ASSESSEE IS ENGAGED IN THE BUSINESS OF MANUFACTURING AND DISTRIBUTION OF A WIDE RANGE OF AUTOMOTIVE COMPONENTS INCLUDING ALTERNATORS, STARTERS, WIPER MOTORS, FANS, VENTILATORS, WINDOW WASHERS, PRINT MOT ORS, MAGNETO AND CAPACITOR DISCHARGE IGNITION (CDI). IN ADDITION TO THE ABOVE, IT IS ALSO ENGAGED INTO RESALE OF SPARE PARTS SOME OF WHICH WERE IMPORTED FROM OVERSEAS GROUP ENTITIES. AS SUBMITTED DENSO INDIA IS A FULL - FLEDGED MANUFACTURER OF AUTO COMPONENTS. IT DEPENDS UP ON DENSO JAPAN FOR TECHNICAL INFORMATION WHICH IS IN THE NATURE OF DESIGNS, ENGINEERING DATA, MANUFACTURING AND PROCESS DATA, MACHINERY AND FACILITY LAYOUTS, TESTING AND QUALITY CONTROL DATA, PRODUCTION AND TESTING EQUIPMENT DATA ETC. DENSO INDIA HAS ALSO ENTERED INTO VARIOUS AGREEMENTS WITH DENSO JAPAN FOR SUCH INFORMATION. THE ROYALTY PERTAINS TO PRODUCT PATENTS, TECHNICAL INFORMATION ON ACIT VS. DENSO INDIA LTD, ITA NO. 1751 AND 4365/DEL/2011 (ASSESSMENT YEAR: 2004 - 05 AND 2005 - 06) PAGE | 10 MANUFACTURE AND SALE OF PRODUCTS AND KNOW HOW RANGING FROM 3% OF NET SALES AND 5% OF EXPORT SALES ALONG WITH LUMP SUM P AYMENT. THE COPY OF THE AGREEMENT FURNISHED BEFORE US AS PER PAGE 331 TO 406 OF THE PAPER BOOK. THE DISPUTE BETWEEN THE PLI ADOPTED BY THE LD TRANSFER PRICING OFFICER AS WELL AS OF THE ASSESSEE IS OP/TC WHEREAS, THE LD CIT(A) HAS ADOPTED THE PLI OF OP/SALE S. FURTHER, THE ASSESSEE HAS SHOWN THAT IT HAS BENEFITTED BY THE IMPROVED SALES OF ITS BUSINESS. THE ASSESSEE HAS ALSO SHOWN THAT IT HAS EARNED AN OPERATING PROFIT OF RS. 23.45 CRORES IN ASSESSMENT YEAR 2004 - 05 WHEREIN, ROYALTY PAYMENT IS RS. 5.16 CRORES O NLY. EVEN OTHERWISE ASSESSEE HAS SUBMITTED TWO COMPARATIVE CHARTS WHICH SHOWS THAT IF THE PLI OF OP/TC IS ADOPTED THEN OPERATING PROFIT OF THE RESPONDENT COMPANY IS 6.19% WHEREAS THE OPERATING MARGIN OF THE COMPARABLES COMPANIES SELECTED BY THE TPO IS 7.77 % AND THE 5% RANGE IS 5.47% TO 7.61% . HOWEVER, THE ABOVE ADDITION TO THE ARMS LENGTH PRICE IS MADE BY THE LD ASSESSING OFFICER . THE LD CIT(A) HAS DELETED IT HOLDING THAT THE APPELLANT HAS PAID SIMILAR ROYALTY IN ASSESSMENT YEAR 2002 - 03 AND NO TRANSFER PRICING ADJUSTMENT WAS PROPOSED AND ITAT HAS ALLOWED THE CLAIM OF THE ROYALTY AS REVENUE EXPENDITURE. WE DO NOT SUBSCRIBE TO THE FINDING OF THE LD CIT(A) AS ALLOWANCE OF THE EXPENDITURE OPERATES IN ALTOGETHER DIFFERENT PROVISIONS OF THE LAW AS WELL AS THE DETERMINATION OF ARMS LENGTH PRICE OF INTERNATIONAL TRANSACTION OPERATES IN DIFFERENT. FURTHER, AS IN THE IMPUGNED ASSESSMENT ORDER THE ADJUSTMENT ON ACCOUNT OF ARMS LENGT H PRICE IS MADE OF RS. 2.96 WITH RESPECT TO THE SERVICE AVAILED BY THE ASSESSEE . THE LD CIT(A) HAS NOT GIVEN ANY ANSWER TO THAT FACT. FURTHER, THE LD ASSESSING OFFICER HAS MADE AN ADJUSTMENT OF RS. 4.67 CRORES ON THE BENEFIT TEST BASIS WHICH IS NOT PERMISS IBLE. FURTHER, THE COMPARABILITY ANALYSIS MADE BY THE TPO IS BASED ON THE PAST YEAR, WHICH IS ALSO NOT PERMISSIBLE. IN VIEW OF THIS WE SET ASIDE THE WHOLE TRANSACTION OF DETERMINATION OF ALP OF ROYALTY BACK TO THE FILE OF THE LD ASSESSING OFFICER TO DETERM INE THE SAME IN ACCORDANCE WITH THE LAW. FURTHER, IF THE OPERATING PROFIT OF THE RESPONDENT FALLS INTO 5% RANGE THEN NO ADDITION SHOULD BE MADE. IN THE RESULT GROUND NO. 1 OF THE APPEAL OF THE REVENUE IS ALLOWED ACCORDINGLY. 10. GROUND NO. 2 OF THE APPEAL I S ON ACCOUNT OF IMPORTS FROM SUMITOMO , JAPAN . DURING THE YEAR ASSESSEE IMPORTED RAW MATERIALS FROM JAPAN WHICH WERE LOCALIZED AS PER INDIAN MARKET CONDITION. AS THE TOTAL SHARE HOLDING OF JAPANESE COMPANY IN ASSESSEE COMPANY WAS 10.27% IT WAS NOT CONSIDE RED AS INTERNATIONAL TRANSACTION AND THEREFORE NOT REPORTED IN TP STUDY DOCUMENTS AS WELL AS NOT SEPARATELY BENCHMARKED. THE LD ASSESSING OFFICER HELD THE SAME TO BE INTERNATIONAL TRANSACTION U/S 92B(2) OF THE ACT. AS HELD IN ASSESSMENT YEAR 2002 - 03 THE AO APPLIED CUP METHOD AND COMPARED PRICE OF IMPORTED RAW MATERIAL WITH DOMESTIC VENDOR OF THE SAME YEAR OR IN SUBSEQUENT YEAR AND MADE AN ADJUSTMENT OF RS. 1.71 CRORES ON THAT ACIT VS. DENSO INDIA LTD, ITA NO. 1751 AND 4365/DEL/2011 (ASSESSMENT YEAR: 2004 - 05 AND 2005 - 06) PAGE | 11 ACCOUNT. ON APPEAL BEFORE THE LD CIT(A) , HE UPHELD THAT THE TRANSACTION OF IMPORT IS AN INTERNATIONAL TRANSACTION BUT DELETED THE ADJUSTMENT HOLDING THAT CUP IS NOT AN APPROPRIATE METHOD. 11. THE DR AGGRIEVED , RELIED UPON THE ORDERS OF THE LD ASSESSING OFFICER AND SUBMITTED THAT CUP IS THE MOST APP ROPRIATE METHOD AND THEREFORE, ADJUSTMENT IS CORRECTLY MADE. IT WAS FURTHER STATED THAT THE LD CIT(A) DID NOT PIN POINT THE DIFFERENCES IN THE MATERIAL OF THE LOCAL VENDORS. HE FURTHER STATED THAT LD CIT(A) HAS WRONGLY HELD THAT TNMM IS TO BE USED. HE REFE RRED TO PARA NO. 27 AND 28 OF THE ORDER OF THE LD CIT(A) AND SUBMITTED THAT THESE ARE GENERAL REMARKS. 12. THE LD AUTHORISED REPRESENTATIVE SUBMITTED THE SAME ARGUMENT AS WERE RAISED BEFORE THE LD CIT(A). IT WAS FURTHER STATED THAT IDENTICAL ISSUE IS DECIDE D IN CASE OF THE ASSESSEE FOR ASSESSMENT YEAR 2002 - 03 AND 2003 - 04 WHEREIN IT HAS BEEN HELD THAT MOST APPROPRIATE METHOD FOR IMPORT OF RAW MATERIAL AND COMPONENT IS THE CUP METHOD. 13. WE HAVE CAREFULLY CONSIDERED THE RIVAL CONTENTIONS AND ALSO PERUSED THE ORDE RS OF THE LOWER AUTHORITIES. THE GROUND NO. 2 OF THE APPEAL OF THE REVENUE IS SQUARELY COVERED BY THE ORDER OF THE COORDINATE BENCH IN ASSESSEES OWN CASE WHEREIN, THE SAME WAS CONSIDERED IN PARA NO. 38 AND 39 HOLDING THAT CUP METHOD IS THE MOST APPROPRIAT E METHOD TO BE FOLLOWED WITH RESPECT TO THE IMPORT OF RAW MATERIAL AND COMPONENTS. THEREFORE, WE ALSO ACCORDINGLY, UPHELD CUP METHOD TO BE ADOPTED FOR THIS YEAR. WITH RESPECT TO THE ADJUSTMENT OF RS. 1.71 CRORES THE COORDINATE BENCH HAS HELD IN PARA NO. 48 AND 49, THE MATTER WAS ULTIMATELY SET ASIDE TO THE FILE OF THE LD ASSESSING OFFICER FOR FRESH ADJUDICATION IN ACCORDANCE WITH THE LAW. THE COORDINATE BENCH HAS ALSO GIVEN A DIRECTION TO THE LD ASSESSING OFFICER VIDE PARA NO. 44 ABOUT THE COMPARABILITY ANA LYSIS. THE ABOVE DECISION OF THE COORDINATE BENCH HAS FURTHER BEEN UPHELD BY THE HON'BLE DELHI HIGH COURT IN 388 ITR 244 . THEREFORE RESPECTFULLY FOLLOWING THE DECISION OF THE COORDINATE BENCH IN ASSESSEES OWN CASE FOR EARLIER YEARS, WE ALSO SET ASIDE THE WHOLE ISSUE BACK TO THE FILE OF T H E LD AO WITH SIMILAR DIRECTION FOR APPLICATION OF CUP METHOD AND ADOPTING COMPARABLE ANALYSIS AS DIRECTED BY THE COORDINATE VIDE PARA NO. 44 AND 45 OF THE ORDER. ACCORDINGLY GROUND NO. 2 OF THE APPEAL OF THE REVENUE IS ALL OWED WITH ABOVE DIRECTION. 14. GROUND NO. 3 OF THE APPEAL IS WITH RESPECT TO THE DISALLOWANCE OF RS. 1194259/ - ON ACCOUNT OF NICNET CHARGES PAID TO M/S DENSO HARYANA, IGNORING THAT THE INTERNET FACILITIES WERE WHOLLY & EXCLUSIVELY FOR THE BUSINESS OF ASSESSEE AND NOT FOR THE ASSESSEE COMPANY AS COVERED BY THE DECISION OF THE HON'BLE DELHI HIGH COURT IN ASSESSEES OWN CASE IN 374 ITR ACIT VS. DENSO INDIA LTD, ITA NO. 1751 AND 4365/DEL/2011 (ASSESSMENT YEAR: 2004 - 05 AND 2005 - 06) PAGE | 12 62. THEREFORE, RESPECTFULLY FOLLOWING THE DECISION OF THE HON'BLE DELHI HIGH COURT THE GROUND NO. 3 OF THE APPEAL OF THE REVENUE IS DISMISSED . 15. IN THE RESULT APPEAL OF THE REVENUE FOR THE AY 2004 - 05 IS PARTLY ALLOWED. 16. NOW WE COME TO THE APPEAL OF THE REVENUE FOR THE ASSESSMENT YEAR 2005 - 06. 17. THE BRIEF FACTS OF THE CASE IS THAT THE ASSESSEE FILED RETURN OF INCOME DECLARING INC OME OF RS . 262158889/ - ON 30.10.2005. THE ASSESSMENT U/S 143(3) WAS COMPLETED ON 29.12.2008 ASSESSING THE TOTAL INCOME OF THE ASSESSEE AT RS. 403736285/ - . THE LD ASSESSING OFFICER MADE THE FOLLOWING ADJUSTMENT TO THE TOTAL INCOME OF THE ASSESSEE: - A. ALP WITH RESPECT TO THE INTERNATIONAL TRANSACTIONS OF RS. 125392899/ - AND B. TREATING PART OF THE INTERNATIONAL TRANSACTION SUCH AS ROYALTY ETC TREATING IT AS CAPITAL EXPENDITURE AND ALLOWING DEPRECIATION THEREON RESULTING INTO NET ADDITION OF RS. 14948590/ - . 18. ON APPEAL BEFORE THE LD CIT(A) HE DIRECTED THE LD ASSESSING OFFICER TO DELETE THE ADDITION ON ACCOUNT OF ALP VIDE PARA NO. 6.11 TO 6.18 OF HIS ORDER AND WITH RESPECT TO THE CAPITAL EXPENDITURE HE FOLLOWED THE DECISION OF THE COORDINATE BENCH IN CASE OF THE ASSESSEE FOR EARLIER YEARS AND HELD THAT THESE EXPENDITURE ARE REVENUE IN NATURE. AGGRIEVED REVENUE IS IN APPEAL BEFO RE US. 19. THE LD DEPARTMENTAL REPRESENTATIVE FOR ALL THE GROUNDS RELIED UPON THE ORDER OF THE LD ASSESSING OFFICER WHEREAS THE LD AR HAS SUBMITTED HIS WRITTEN SUBMISSION AS UNDER: - BACKGROUND 1. DENSO INDIA LIMITED IS A PUBLIC LIMITED COMPANY AND IS HELD 47.9 3% BY DENSO CORPORATION, JAPAN WHILE THE BALANCE IS HELD BY OTHER PROMOTERS, INSTITUTIONAL INVESTORS, AND OTHERS (INCLUDING PUBLIC). FURTHER, AMONG THE AFORESAID EQUITY HOLDERS, SUMITOMO CORPORATION, JAPAN (HEREINAFTER REFERRED TO AS SUMITOMO JAPAN) HELD 10.27% SHARES IN THE RESPONDENT DURING THE ASSESSMENT YEAR (AY) 2004 - 05. (PLEASE REFER PAGE 8 OF PAPER BOOK FOR SHAREHOLDING PATTERN) 2. DENSO INDIA IS ENGAGED IN THE BUSINESS OF MANUFACTURING AND DISTRIBUTION OF A WIDE RANGE OF AUTOMOTIVE COMPONENTS INCLUDI NG ALTERNATORS, STARTERS, WIPER MOTORS, FANS, VENTILATORS, WINDOW WASHERS, PRINT MOTORS, MAGNETO AND CAPACITOR DISCHARGE IGNITION (CDI). IN ADDITION TO THE ABOVE, IT WAS ALSO ENGAGED INTO RESALE OF SPARE PARTS SOME OF WHICH WERE IMPORTED FROM OVERSEAS GROU P ENTITIES (RE: PAGE 17 - 23 OF PAPER BOOK FOR TP STUDY AND PAGE 178 FOR TP ORDER) 3. DURING THE YEAR UNDER ASSESSMENT, DENSO INDIA ENTERED INTO THE FOLLOWING INTERNATIONAL TRANSACTIONS WITH ITS ASSOCIATED ENTERPRISES (AES) WITHIN THE MEANING OF SECTIONS 92 TO 92F OF THE INCOME TAX ACT, 1961 ( ACT). SR. NO. TRANSACTIONS ENTERED DURING THE YEAR AMOUNT AS PER TP STUDY (RS.) MAM AS PER TP STUDY 1 PURCHASE OF RAW MATERIAL 1,83,337 ACIT VS. DENSO INDIA LTD, ITA NO. 1751 AND 4365/DEL/2011 (ASSESSMENT YEAR: 2004 - 05 AND 2005 - 06) PAGE | 13 2 SALE OF FINISHED GOODS 51,69,561 3 PAYMENT OF ROYALTY 6,12,80,272 4 APPLICATION COST PAID 35,75,676 5 TECHNICAL FEES PAID 62,49,341 TNMM 6 TECHNICAL KNOW - HOW FEES PAID 6,63,09,460 7 TRAINING FEES PAID 10,40,286 8 IT COST FEES PAID 6,19,261 9 REIMBURSEMENT OF EXPENSES PAID 14,735 10 MISCELLANEOUS RECEIPTS 19,42,702 SR. NO. TRANSACTIONS ENTERED DURING THE YEAR AMOUNT AS PER TP STUDY (RS.) MAM AS PER TP STUDY 11 REIMBURSEMENT OF EXPENSES RECEIVED 28,00,157 CUP 4. THE GROUND WISE BACKGROUND AND THE RESPONDENTS CONTENTIONS TO THE DEPARTMENTS GROUNDS OF APPEALS IS AS FOLLOWS: RE: GROUND NO. 1 OF GROUNDS OF APPEAL: ADDITION OF RS. 12.53 CRORES MADE BY THE AO ON ACCOUNT OF TPOS ORDER U/S 92CA (ADJUSTMENT IN ARMS LENGTH PRICE (ALP) OF PAYMENT OF ROYALTY AND TECHNICAL SERVICES) 1) BACKGROUND OF TRANSACTI ON 1.1. AS DETAILED IN PARA 2 ABOVE, DENSO INDIA IS A FULL - FLEDGED MANUFACTURER OF AUTO COMPONENTS. IT DEPENDS UPON DENSO JAPAN FOR TECHNICAL INFORMATION WHICH IS IN THE NATURE OF DESIGNS, ENGINEERING DATA, MANUFACTURING AND PROCESS DATA, MACHINERY AND FACILITY LAYOUTS, TESTING AND QUALITY CONTROL DATA, PRODUCTION AND TESTING EQUIPMENT DATA ETC. DENSO INDIA HAS ALSO ENTERED INTO VARIOUS AGREEMENTS WITH DENSO JAPAN FOR SUCH INFORMATION. THE ROYALTY PERTAINS TO PRODUCT PATENTS, TECHNICAL INFORMATION ON MAN UFACTURE AND SALE OF PRODUCTS AND KNOW HOW RANGING FROM 3% OF NET SALES AND 5% OF EXPORT SALES ALONG WITH LUMP SUM PAYMENT. (RE: COPIES OF AGREEMENTS ON PAGE 331 - 406 OF PAPER BOOK). 1.2. FOR BENCHMARKING ITS INTERNATIONAL TRANSACTION OF PAYMENT OF ROYALTY AND TECHNICAL SERVICES COVERED UNDER CLASS 1 TRANSACTIONS (SR. NO. 1 - 8 OF TABLE 1) THE RESPONDENT ADOPTED THE FOLLOWING APPROACH: PARTICULARS RESULT PAGE REFERENCE MOST APPROPRIATE METHOD APPLIED TNMM 33 PROFIT LEVEL INDICATOR (PLI) OPERATING PROFIT /TOTAL COST (OP/TC) 40 NO. OF COMPARABLES 14 42 WORKING CAPITAL ADJUSTED MARGIN OF COMPARABLES USING MULTIPLE YEAR DATA 3.79% 42 RESPONDENTS MARGIN (OP/TC) 6.84% 59 2) TRANSFER PRICING ASSESSMENT PROCEEDINGS AND ASSESSMENT PROCEEDINGS ACIT VS. DENSO INDIA LTD, ITA NO. 1751 AND 4365/DEL/2011 (ASSESSMENT YEAR: 2004 - 05 AND 2005 - 06) PAGE | 14 2.1. THE LEARNED TRANSFER PRICING OFFICER (TPO) VIDE ORDER DATED 23/10/2008 UNDER SECTION 92CA(3) OF THE ACT GAVE THE FOLLOWING OBSERVATIONS W.R.T. THE INTERNATIONAL TRANSACTION OF PAYMENT OF ROYALTY, TECHNICAL SERVICES FEES, KNOW HOW FEE (HEREINAFTER REFERRED AS ROYALTY AND TECHNICAL SERVICES FEES) ETC: 2.2 THE LD. TPO DISREGARDED THE DETAILED SUBMISSIONS AND FORMAL AGREEMENTS BETWEEN THE RESPONDENT AND ITS AES AND RULED THAT THE FORMAL AGREEMENT BETWEEN THE AES CANNOT BE A BASIS FOR DETERMINING THE ARMS LEN GTH PRICE OF THE TRANSACTIONS. THEREFORE, PAYMENT OF ROYALTY/TECHNICAL SERVICES AND KNOW HOW FEES CANNOT BE JUSTIFIED ON THE BASIS OF AGREEMENT BETWEEN THE RESPONDENT AND THE AE. THE REAL TEST LIES IN COMMENSURATE ECONOMIC BENEFITS IN WHICH THE PROFITS EAR NED BY THE ENTERPRISE OVER AND ABOVE THE INDUSTRY AVERAGE CAN BE CONSIDERED AS INCOME ATTRIBUTABLE TO THE PAYMENT OF ROYALTY AND TECHNICAL SERVICES FEES. (RE: PAGE 184,185 OF PAPER BOOK) 2.3 CONSEQUENTLY, THE LD. TPO APPLIED TNMM USING OP/TC AS THE PLI FOR BENCHMARKING THE INTERNATIONAL TRANSACTION OF PAYMENT OF ROYALTY USING SINGLE YEAR DATA AND APPLIED TURNOVER FILTER> 100 CRORES (SELECTION OF COMPARABLES HAVING TURNOVER GREATER THAN 100 CRORES AGAINST THE ASSESSEES TURNOVER FILTER OF RS. 50 CRORES) AND SELECTED THE FOLLOWING COMPARABLES: (REF: PAGE 188 - 190 OF PAPER BOOK) 2.4 THEREAFTER, THE LD. TPO ARRIVED AT A SET OF 6 COMPARABLES AND DETERMINED THE ARMS LENGTH PLI AT 10.35% AS AGAINST THE RESPONDENTS PLI OF 6.84%. S. NO. TPO'S COMPARABLES OP/TC % 1 AMFORGE INDUSTRIES LIMITED 9.93 2 AXLES INDIA LTD. 6.43 3 LIFELONG INDIA LTD. 3.90 4 NAPINO AUTO AND ELECTRICAL 14.92 5 TURBO ENERGY LTD. 18.99 6 ZF STEERING GEAR LTD. 16.08 AVERAGE 10.35% 2.5 IN DOING SO THE LD. TPO DENIED WORKING CAPITAL ADJUSTMENT TO COMPARABLES AND ALSO THE BENEFIT OF +/ - 5% RANGE AS MANDATED U/S 92C(2) OF THE ACT. (REF: PAGE 199 AND 203 OF PAPERBOOK) 2.6 THE LD. TPO PROPOSED AN ADJUSTMENT OF RS. 12.53 CRORES TO THE VALUE OF INTERNATIONAL TRANSACTION RELATED TO PAYMENT O F ROYALTY AND TECHNICAL SERVICES FEES BEING THE DIFFERENTIAL OF ARMS LENGTH PLI AND RESPONDENTS PLI (10.35 - 6.84=3.51 %) APPLIED ON TOTAL COST OF THE RESPONDENT BEING 356.87 CRORES. (DETAILED CALCULATION ON PAGE 205 OF PAPER BOOK) 2.7 CONSEQUENTLY, THE LD . TPO ENHANCED THE INCOME OF THE RESPONDENT BY RS. 12,53,92,899 AND LOADED THE DIFFERENCE ON DIFFERENT INTERNATIONAL TRANSACTIONS AS FOLLOWS: (RE: PAGE 205 OF PAPERBOOK) S.NO. INTERNATIONAL TRANSACTIONS BOOK VALUE DIFFERENCE LOADED ARM'S LENGTH PRICE 1 IMPORT OF RAW MATERIALS 1,83,337 1,57,062 26,275 2 SALE OF FINISHED GOODS 51,69,591 44,28,710 95,98,301 3 ROYALTY PAID 6,12,80,272 5,24,97,881 87,82,391 4 APPLICATION COST PAID 35,75,676 30,63,227 5,12,449 5 TECHNICAL FEES PAID 62,49,341 53,53,716 8,95,625 6 TECHNICAL KNOW - HOW FEES PAID 6,63,09,460 5,68,06,310 95,03,150 7 TRAINING FEES PAID 10,40,286 8,91,197 1,49,089 8 IT COST FEES PAID 6,19,261 5,30,512 88,749 9 MISCELLANEOUS RECEIPTS 19,42,702 16,64,283 36,06,985 TOTAL 14,63,69,926 12,53,92,899 ACIT VS. DENSO INDIA LTD, ITA NO. 1751 AND 4365/DEL/2011 (ASSESSMENT YEAR: 2004 - 05 AND 2005 - 06) PAGE | 15 2.8 THE LD. AO INCORPORATED THE ORDER OF THE LD. TPO IN ITS ORDER AND CONSEQUENTLY MADE AN ADDITION OF RS. 12.53 CRORES ON ACCOUNT OF INTERNATIONAL TRANSACTION OF PAYMENT OF ROYALTY AND TECHNICAL SERVICES FEES. (REF: PAGE 171 - 173 OF PAPER B OOK) 3) RESPONDENTS APPEAL BEFORE THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) (CIT (A)) 3.1. THE LD. CIT(A) ACCEPTED THE RESPONDENTS FILTER OF ACCEPTING COMPANIES HAVING TURNOVER > RS. 50 CR. AND DISREGARDED THE TPOS METHODOLOGY OF ACCEPTING COMPANIES HAVING TURNOVER> RS. 100 CRORES. (REF: PAGE 120 OF PAPERBOOK) 3.2 THE LD. CIT(A) HELD THAT SINCE THE TRANSACTIONS OF THE APPELLANT WITH ITS AES ARE ON THE COST SIDE THE PLI SHOULD HAVE A BASE WHICH SHOULD NOT BE CONTROLLED AND THEREFORE OP/SALES IS THE APPROPRIATE PLI FOR BENCHMARKING THE INTERNATIONAL TRANSACTION OF PAYMENT OF ROYALTY (RE: PAGE 121 OF PAPER BOOK). THE LD. CIT(A) ALSO GRANTED BENEFIT OF +/ - 5% RANGE AS MANDATED U/S 92C(2) OF THE ACT WHICH HAD BEEN IGNORED BY THE LD TPO/AO. (RE: P AGE 122 OF PAPER BOOK). 3.3. THEREAFTER, THE LD. CIT(A) ARRIVED AT A SET OF 16 COMPARABLES AND DETERMINED THE ARMS LENGTH PLI AT 7.35% AS AGAINST THE RESPONDENTS PLI OF 6.40%. S. NO. CIT(A) COMPARABLES UNADJUSTED OP/SALES % 1 AMFORGE INDUSTRIES LIMITED 1.77 2 AXLES INDIA LTD. 5.99 3 EL FORGE LTD. 6.76 4 H S I AUTOMOTIVES LTD. 6.56 5 INDIA FORGE AND DROP STAMPINGS LTD. 1.74 6 KALYANI FORGE LTD. 10.55 7 LUMAX AUTOMOTIVE SYSTEMS 4.19 8 SONA KOYA ENGINEERING SYSTEMS 7.29 9 SUBROS LTD 4.25 S. NO. CIT(A) COMPARABLES UNADJUSTED OP/SALES % 10 LIFELONG LTD. 3.75 11 NAPINO AUTO AND ELECTRONICS LTD 13.01 12 TURBO ENERGY LTD. 15.9 13 ZF ENGINEERING GEAR LTD. 13.85 AVERAGE 7.35 3.4. KEEPING IN VIEW THE ABOVE, THE LD. CIT(A) HELD THAT THE RESPONDENTS INTERNATIONAL TRANSACTION WITH AE'S FALLS WITHIN THE +1 - 5% RANGE, ALLOWED AS PER PROVISO TO SECTION 92C(2) OF THE ACT AND THEREFORE, INTERNATIONAL TRANSACTION IS HELD TO BE AT ARMS LENGTH. RELEVANT EXTRACT OF CIT (A) (RE: PAGE 122 OF PAPER BOOK) IS AS UN DER: - 6.18. AS CAN BE SEEN FROM THE ABOVE CALCULATION, THE INTERNATIONAL TRANSACTION OF THE APPELLANT FALLS WITHIN +/ - 5% OF THE ALP DETERMINED. THEREFORE, INTERNATIONAL TRANSACTION IS HELD TO BE AT ARMS LENGTH. THEREFORE, GROUND NO. 5 IS ALSO HELD IN FAVO R OF THE APPELLANT. 4) RESPONDENTS CONTENTIONS NEED FOR PAYMENT OF ROYALTY/TECHNICAL SERVICES AND KNOW HOW FEES THE LD. TPO IGNORED THE DETAILED EVIDENTIARY INFORMATION (DESIGNS, DRAWINGS, PRODUCT STANDARDS, ACIT VS. DENSO INDIA LTD, ITA NO. 1751 AND 4365/DEL/2011 (ASSESSMENT YEAR: 2004 - 05 AND 2005 - 06) PAGE | 16 ENGINEERING DATA ETC.) SUBMITTED BY THE RESPONDENT TO SUBSTANTIATE THE ARMS LENGTH NATURE OF ROYALTY AND TECHNICAL SERVICES FEES PAYMENT TO ASSOCIATED ENTERPRISES AND WRONGLY ASSUMED THAT NO SIGNIFICANT ECONOMIC BENEFIT AROSE TO THE RESPONDENT FROM RECEIPT OF SUCH TECHNICAL KNOW - HOW/INFORMATION . (REFER PAGE 303 - 307 OF THE PAPER BOOK). IN FACT THE RESPONDENT HAS IMMENSELY BENEFITTED FROM THE INTANGIBLES GRANTED BY ITS AES AND THE RESPONDENT COULD NOT HAVE CARRIED OUT ITS BUSINESS AND SOLD DENSO' PRODUCTS TO CUSTOMERS IN INDIA WITHOUT THE ONGOING TECHNOLOGY TRANSFER AND CONTINUING RIGHT TO USE SUCH INTANGIBLES OBTAINED FROM ITS AES. TO SUBSTANTIATE THE SAME, THE PAST 5 YEARS TREND OF THE SALES TURNOVER WHICH SHOWS A HUGE JUMP IN THE TURNOVER FROM MARCH 2000 TO MARCH 2005 IS AS FOLLOWS: DE NSO INDIA LTD. (SALES IN RS. CRORES) MAR - 2000 MAR - 01 MAR - 02 MAR - 03 MAR - 04 MAR 05 197.22 238.94 250.56 256.46 313.83 379 33 THEREFORE, FROM THE ABOVE, IT CAN BE ESTABLISHED BEYOND DOUBT THAT THE RESPONDENT HAS BENEFITTED IMMENSELY FROM THE USE OF INTANGIBLES PROVIDED BY ITS AES. IT IS ALSO WORTH NOTING THAT THE HONBLE ITAT IN THE RESPONDENTS OWN CASE IN AY1988 - 89 TO 1997 - 98 AND LATER ON RELIED IN DCIT VS. DENSO INDIA LIMITED (ITA NO. 4798/DEL/2004) THE HONBLE ITAT RELYING ON VARIOUS JUDICIAL PRECEDENTS HELD THAT THE MORE YOU TAKE THE MORE ROYALTY YOU PAY. IT FURTHER HELD THAT THE MORE ASSETS THE ASSESSE WILL PRODUCE, THE ROYALTY WILL INCREASE AS THE AMOUNT OF ROYALTY IS DIRECTLY LINKED WITH THE VOLUME OF CONTRACT PRODUCTS. IN VIEW OF THE SAM E IT WAS HELD THAT THE AMOUNT OF ROYALTY IS A REVENUE EXPENDITURE. IT CAN BE SEEN FROM THE TABLE ABOVE THAT THE SALES OF THE RESPONDENT HAVE KEPT ON INCREASING THEREBY ENTAILING PAYMENT OF ROYALTY AND THUS SATISFYING THE BENEFIT AND NEED TEST. THE DELHI HI GH COURT IN CIT VS. DENSO INDIA LTD. (374 ITR 62) ALSO UPHELD THE APPROACH OF THE ITAT AND HELD ROYALTY TO BE A REVENUE EXPENDITURE. BENEFIT OF +/ - 5% RANGE AS MANDATED UNDER PROVISO TO SECTION 92C(2) OF THE ACT TO BE ALLOWED IN VIEW OF THE ABOVE, THE RESPONDENT REQUEST YOUR GOODSELF TO UPHOLD THE ORDER OF CIT(A). FURTHER, WITHOUT PREJUDICE TO THE ABOVE, IN CASE YOUR GOODSELF UPHOLDS THE ORDER OF THE LD.TPO AND ALLOWS THE BENEFIT OF +/ - 5% RANGE AS MANDATED UNDER PROVISO TO SECTION 92C(2) OF THE ACT, TH E RESPONDENTS MARGIN WOULD FALL WITHIN THE ARMS LENGTH RANGE AS PER THE INDIAN TP REGULATIONS. CONCLUSION AS IS EVIDENT FROM THE ABOVE DISCUSSION THE RESPONDENTS INTERNATIONAL TRANSACTION OF PAYMENT OF ROYALTY AND TECHNICAL FEES ETC. TO ITS AES MEETS TH E ARMS LENGTH STANDARD BY SATISFYING BOTH THE NEED AND BENEFIT TEST AS WELL AS WITHIN +/ - 5% RANGE AS MANDATED BY THE ACT. ATTENTION IS ALSO DRAWN TO CIRCULAR NO. 12/2001, DATED 23/08/2001 WHEREIN THE CBDT HAS DECIDED THAT THE ASSESSING OFFICER SHALL NOT MAKE ANY ADJUSTMENT TO THE ARMS LENGTH PRICE DETERMINED BY THE TAXPAYER, IF SUCH PRICE IS UP BY 5% LESS OR UP TO 5% MORE THAN THE PRICE DETERMINED BY THE AO. IN SUCH CASES THE PRICE DECLARED BY THE TAXPAYER MAY BE ACCEPTED. THEREFORE, THE APPELLANTS GROU ND IS LIABLE TO BE DISMISSED. IT IS ALSO WORTH NOTING THAT ONCE THIS ADJUSTMENT IS DELETED THE REST OF THE ADJUSTMENTS MADE BY THE LD. AO WILL BECOME ACADEMIC. RE: GROUND NO. 2 - 5 OF GROUNDS OF APPEAL: ENHANCEMENT OF INCOME TREATING VARIOUS EXPENSES AS CAP ITAL IN NATURE 1. TRANSFER PRICING ASSESSMENT PROCEEDINGS AND ASSESSMENT PROCEEDINGS ACIT VS. DENSO INDIA LTD, ITA NO. 1751 AND 4365/DEL/2011 (ASSESSMENT YEAR: 2004 - 05 AND 2005 - 06) PAGE | 17 AS DETAILED IN TABLE 2 (SUPRA) THE LD, TPO/AO MADE A PRO RATA ADJUSTMENT ON VARIOUS PAYMENTS MADE BY THE RESPONDENT TO ITS AE'S FOR ROYALTY AND TECHNICAL FEES ETC. RECEI VED THE LD. (RE: POINT NO. 2.7 ABOVE). THE LD. AO HELD THAT THESE PAYMENTS HAVE BEEN MADE TO ACQUIRE INTANGIBLE ASSETS BEING TECHNICAL KNOWHOW, PATENTS, TRADEMARKS AND OTHER BUSINESS OR COMMERCIAL RIGHTS OF SIMILAR NATURE. AFTER PERUSAL OF VARIOUS AGREEMEN TS AND DETAILS ON RECORD, THE LD. AO HELD THAT THE FOLLOWING PAYMENTS ARE CAPITAL IN NATURE: (RE: PAGE 172 OF PAPER BOOK) S.NO. INTERNATIONAL TRANSACTIONS AMOUNT TREATED AS CAPITAL EXPENDITURE 1 ROYALTY PAID 87,82,391 2 APPLICATION COST PAID 5,12,449 3 TECHNICAL FEES PAID 8,95,625 4 TECHNICAL KNOWHOW FEES PAID 95,03,150 5 TRAINING FEES PAID 1,49,089 6 IT COST FEES PAID 88,749 2. APPEAL BEFORE CIT(A) THE LD. CIT(A) HELD THAT THE ABOVE EXPENSES ARE REVENUE IN NATURE AND DELETED THE ADDITIONS MADE BY THE LD. AO. THE REASONING GIVEN BY THE LD. CIT(A) W.R.T EACH ITEM OF EXPENSE IS AS FOLLOWS: S.NO. INTERNATIONAL TRANSACTIONS REASON FOR DELETION OF ADJUSTMENT PAGE REFERENCE 1 ROYALTY PAID RELIED ON THE ORDER OF THE ITAT IN RESPONDENTS OWN CASE IN ITA NO. 4798/DEL/2004 (AY 2001 - 02) 127 2 APPLICATION COST PAID RELIED ON THE ORDER OF THE ITAT IN RESPONDENTS OWN CASE IN ITA NO. 4798/DEL/2004 (AY 2001 - 02) AND HELD THAT THERE HAS BEEN NO ACQUISITION OF A CAPITAL ASSET. ALSO, THERE HAS BEEN NO DISALLOWANCE IN AY 2006 - 07 AND 2007 - 08 BY THE LD. AO 129 3 TECHNICAL FEES PAID RELIED ON THE ORDER OF THE ITAT IN RESPONDENTS OWN CASE IN ITA NO. 4798/DEL/2004 (AY 2001 - 02) 132 4 TECHNICAL KNOWHOW FEES PAID TREATED THE SAME AS CAPITAL IN NATURE AND DIRECTED THE AO TO GRANT DEPRECIATION ON THE SAME 140 5 TRAINING FEES PAID RELIED ON THE ORDER OF THE ITAT IN RESPONDENTS OWN CASE IN ITA NO 4798/DEL/2004 (AY 2001 - 02) 132 S.NO. INTERNATIONAL TRANSACTIONS REASON FOR DELETION OF ADJUSTMENT PAGE REFERENCE 6 IT COST FEES PAID HELD THE SAME TO BE RECURRING EXPENSES AND THEREFORE REVENUE IN NATURE. 141 3. RESPONDENTS CONTENTIONS IT IS HUMBLY SUBMITTED THAT THESE ISSUES HAVE ALREADY BEEN DECIDED IN FAVOR BY THE HONBLE ITAT AND UPHELD BY THE HONBLE HIGH COURT OF DELHI IN THE APPELLANT'S OWN CASE THE GROUND WISE CONTENTIONS ARE AS FOLLOWS: GROUND NO. 2: DELETION OF ADJUSTMENT AMOUNTING TO RS. 87,82,391 ON ACCOUNT OF ROYALTY BY HOLDING THE SAME AS REVENUE EXPENDITURE ACIT VS. DENSO INDIA LTD, ITA NO. 1751 AND 4365/DEL/2011 (ASSESSMENT YEAR: 2004 - 05 AND 2005 - 06) PAGE | 18 THE RESPONDENT HUMBLY SUBMI TS THAT THIS ISSUE IS SQUARELY COVERED IN FAVOUR OF THE RESPONDENT IN ITS OWN CASE IN DCIT VS. DENSO INDIA LIMITED (ITA NO. 4798/DEL/2004) (AY 2001 - 02) AND FOLLOWED IN ACIT VS. DENSO INDIA LIMITED (64 SOT 191) WHEREIN THE HONBLE DELHI ITAT HELD THE SAME T O BE A REVENUE EXPENDITURE. THE OBSERVATIONS OF THE ITAT ARE AS FOLLOWS: [REF: PAGE 13 - 14 PARA 6 OF CASE LAW COMPENDIUM] FURTHER WE MAY REFER THE DECISION OF THE APEX COURT IN THE CASE OF GOTAN LIME SYNDICATE V. CIT [1966] 59 ITR 718 IN WHICH IT WAS ALSO LAID DOWN THAT THE AMOUNT OF ROYALTY HAS TO BE ALLOWED AS REVENUE EXPENDITURE, AS THE SAID EXPENDITURE WAS IN RELATION WITH THE EXCAVATION OF RAW MATERIAL. MORE YOU TAKE THE MORE ROYALTY YOU PAY. THIS RATIO IS AGAIN APPLICABLE IN THE CASE AS AMOUNT OF ROY ALTY IN THE CASE IS DIRECTLY LINKED WITH THE VOLUME OF CONTRACT PRODUCTS. THE MORE ASSETS WILL PRODUCE, THE AMOUNT OF ROYALTY WILL INCREASE. IN CASE ASSESSEE STOPS MANUFACTURING OF CONTRACT PRODUCTS THE AMOUNT OF ROYALTY WILL NOT BE PAYABLE. IN VIEW OF THE ABOVE RATIO THE AMOUNT OF ROYALTY WHICH IS LINKED WITH THE VOLUME OF PRODUCTION IS ALLOWABLE AS REVENUE EXPENDITURE. ON THE BASIS OF ABOVE DISCUSSION THE CUMULATIVE RESULT IS THAT AMOUNT OF ROYALTY BEING PAID WAS ALLOWABLE AS, REVENUE EXPENDITURE IN VIEW OF THE CASE LAW REFERRED TO BY THE ID COUNSEL AND DISCUSSED ABOVE AND IT CANNOT BE TREATED AS CAPITAL EXPENDITURE. THE GROUND IS ALLOWED ACCORDINGLY. THE HONBLE DELHI HIGH COURT ALSO UPHELD THE ORDER OF THE HONBLE ITAT IN THE CASE OF CIT VS. DENSO INDI A LIMITED (374 ITR 62) AND HELD AS FOLLOWS: [RE: PARA 4 ON PAGE 45 OF CASE LAW COMPENDIUM] QUESTION NO. 1 4. THE ASSESSEE IN TERMS OF ITS ARRANGEMENT WITH PARENT COMPANY - DENSO JAPAN HAD TO REMIT ROYALTY AT DIFFERENT RATES. THESE WERE SOUGHT TO BE BROUGHT TO TAX ON THE GROUND THAT EXPENDITURE WAS NOT REVENUE BUT IT WAS CAPITAL IN NATURE AS IT WOULD RESULT IN ENDURING BENEFIT. THE CIT (APPEALS) DISAGREED AND AFTER ANALYZING THE NATURE OF THE TRANSACTION HELD THAT THE AMOUNTS PAID CORRECTLY BELONGED TO THE RE VENUE STREAM AND FOR ALL THE PREVIOUS YEARS THE AMOUNT WAS TREATED AS REVENUE EXPENDITURE, I.E. FOR A Y. 1988 - 89 TO 1997 - 98. IN A PREVIOUS YEAR I.E. ITA NO. 479/DEL./2004 DECIDED BY THE IT AT ON 20.03.2008, IT WAS HELD AFTER AN ELABORATE ANALYSIS OF CASE L AW AND AGREEMENT ON THE RECORD THAT THE ROYALTY WAS REVENUE EXPENDITURE AND COULD NOT BE TREATED AS CAPITAL EXPENDITURE. THE EXTRACT OF THAT DECISION APPEARS IN PARA 6 OF THE IMPUGNED ORDER. IT IS NOT DISPUTED THAT NO NEW FACT OR DEVELOPMENT TOOK PLACE OR WAS TAKEN INTO ACCOUNT BY THE A.O. CONSIDERING THAT CONSISTENTLY FOR 12 YEARS IDENTICAL PAYMENTS WERE TREATED AS REVENUE EXPENDITURE AND IN FACT ARE ENTITLED TO BE TREATED AS SUCH THIS COURT IS OF THE OPINION THAT THE QUESTION OF LAW HAS TO BE ANSWERED AGA INST THE REVENUE AND IN FAVOUR OF THE ASSESSEE. HENCE, IT IS PRAYED THAT THE GROUND OF THE APPELLANT BE SUMMARILY DISMISSED. GROUND NO. 3: DELETION OF ADJUSTMENT AMOUNTING TO RS. 5,12,449 ON ACCOUNT OF APPLICATION COST BY HOLDING THE SAME AS REVENUE EXPEN DITURE IT IS SUBMITTED THAT AS PER THE TERMS OF APPLICATION WORKS CONSIGNMENT AGREEMENT DENSO JAPAN SHALL ASSIST IN PROVIDING APPLICATION WORK IN RELATION TO MODIFICATION OR APPLICATION OR DESIGN WORK REGARDING THE PRODUCTS REQUIRED TO MAKE THE BASIC UNDER LYING TECHNOLOGY COMPATIBLE WITH THE INDIAN MARKET AND CUSTOMER SPECIFIC REQUIREMENTS NOT COVERED BY ANY OF THE BASIC AGREEMENT. IT IS FURTHER SUBMITTED THAT THE ISSUE IS COVERED IN FAVOUR OF THE RESPONDENT IN ITS OWN CASE IN CIT VS. DENSO INDIA LIMITED (3 44 ITR 566) WHEREIN THE HONBLE HIGH COURT HAS HELD THE SAME TO BE OF REVENUE NATURE. THE OBSERVATIONS OF THE HONBLE HC ARE AS FOLLOWS: [RE: PARA 20 ON PAGE 56 AND PARA 23 ON PAGE 58 OF CASE LAW COMPENDIUM] 20. FOR THE PURPOSES OF STANDARDIZING THE MODIF ICATION TO SUIT THE REQUIREMENT OF THE CLIENTS OF THE ASSESSEE, NAMELY, MANUFACTURES OF AUTOMOBILES, TECHNICAL FEE WAS PAID ACIT VS. DENSO INDIA LTD, ITA NO. 1751 AND 4365/DEL/2011 (ASSESSMENT YEAR: 2004 - 05 AND 2005 - 06) PAGE | 19 FOR THE SERVICES RENDERED, WHICH PAYMENT WAS DESCRIBED AS 'FEE FOR THE APPLICATION WORKS' UNDER THE AGREEMENT. IN VIEW OF AFORESAID DISCUSSION, THE TRIBUNAL WAS JUSTIFIED IN ITS OPINION THAT THE PAYMENT IN QUESTION WAS ALLOWABLE AS A REVENUE EXPENDITURE AND NOT AS A CAPITAL EXPENDITURE ALLOWABLE FOR DEPRECATION UNDER SECTION 32. HENCE, IT IS PRAYED THAT THE GROUND OF THE APPELLANT BE SUMMARILY DISMISSED. GROUND NO. 4: DELETION OF ADJUSTMENT AMOUNTING TO RS. 10,44,714 ON ACCOUNT OF TECHNICAL COST AND TRAINING FEES BY HOLDING THE SAME AS REVENUE EXPENDITURE IT IS SUBMITTED THAT THE ISSUE IS COVERED IN FAVOUR OF THE RESPONDENT IN ITS OWN CASE IN CIT VS. DENSO INDIA LIMITED (64 SOT 191) WHEREIN THE HONBLE ITAT RELYING ON ITS OWN ORDER FOR AY 2001 - 02 IN THE RESPONDENTS CASE HAS HELD THE SAME TO BE OF REVENUE NATURE. THE OBSERVATIONS OF THE ITAT ARE AS FOLLOWS: [RE: PARA 13 ON PAGE 18 OF C ASE LAW COMPENDIUM] 13. GROUND NO. 6 IS ON THE DISALLOWANCE OF TECHNICAL SERVICE EXPENSES BEING PAID TO DENSO CORP., ON THE GROUND THAT THE SAME IS CAPITAL IN NATURE. THE ISSUE IS COVERED IN FAVOUR OF THE ASSESSEE BY THE TRIBUNAL IN ASSESSEE'S OWN CASE FO R THE A. Y. 2001 - 02 WHEREIN IT HAS BEEN HELD AS UNDER: - '10. WITH REGARD TO DELETION OF ADDITION OF RS. 1.05 CRORES, BEING THE EXPENSES INCURRED FOR TECHNICAL SERVICES PROVIDED BY DENSO CORPORATION, JAPAN, WE FOUND THAT DURING THE COURSE OF ASSESSMENT, THE ASSESSING OFFICER HAS DISALLOWED RS. 12.60 CRORES, THE SAME WAS RECTIFIED U/S 154 AND THE SAME WAS REDUCED TO RS. 10.58 LAKHS. WE FOUND THAT ASSESSEE HAS INCURRED THESE EXPENDITURE FOR CONDUCTING TRAINING OF ITS EMPLOYEES IN INDIA AS IT FACILITATED THE AS SESSEE'S TRADING AND MANUFACTURING OPERATION IN INDIA UNDER AGREEMENT WITH DENSO CORPORATION, JAPAN. AFTER CONSIDERING THE VERDICT OF HON'BLE HIGH COURT REPORTED AT 159 ITR 673 (2003 - TIOL - 278 - HC - KOL - IT), 160 ITR 35 AND 124 ITR 1 (2002 - TIOL - 238 - SC - IT), THE CIT(A) DELETED THE ADDITION AND HELD THAT ASSESSEE HAS INCURRED THE ABOVE EXPENDITURE FOR TRAINING OF ITS EMPLOYEES WHICH FACILITATED THE ASSESSEE'S TRADING OPERATION TO BE CARRIED ON MORE EFFICIENTLY OR MORE PROFITABLY. NO INTERFERENCE IS REQUIRED IN THE ORDER OF THE CIT(A) FOR DELETING THE DISALLOWANCE OF EXPENDITURE INCURRED ON TRAINING OF THE EMPLOYEES.' 14 RESPECTFULLY FOLLOWING THE SAME WE UPHOLD PARA 10.4.3 OF THE CIT(A)'S ORDER AND DISMISS THIS GROUND OF APPEAL. HENCE, IT IS PRAYED THAT THE GROUN D OF THE APPELLANT BE SUMMARILY DISMISSED. GROUND NO. 5: DELETION OF ADJUSTMENT AMOUNTING TO RS. 88,749 ON ACCOUNT OF IT COST FEES / TRAINING FEES BY HOLDING THE SAME AS REVENUE EXPENDITURE THE ABOVE EXPENDITURE HAS BEEN INCURRED ON ACCOUNT OF ANNUAL MAINT ENANCE CONTRACT FOR THE SOFTWARE OF FINANCIAL REPORTING TO DENSO, JAPAN. THESE EXPENSES ARE RECURRING ANNUAL FEES INCURRED FOR UPKEEP AND MAINTENANCE OF EXISTING SOFTWARE AND NOT FOR ACQUIRING ANY NEW EQUIPMENT. CONCLUSION: IN VIEW OF THE ABOVE DISCUSSION, IT IS PRAYED THAT THE GROUNDS RAISED BY THE APPELLANT BE SUMMARILY DISMISSED. 20. THE FIRST GROUND OF APPEAL IS PERTAINING TO THE ADDITION OF RS. 125392899/ - BEING ADJUSTMENT ON ACCOUNT OF TPOS ORDER U/S 92CA(3) WITH RESPECT TO THE ARMS LENGTH PRICE OF INTERNATIONAL TRANSACTION. THE ASSESSEE HAS ENTERED INTO THE 11 INTERNATIONAL TRANSACTIONS WITH ITS ASSOCIATED ENTERPRISE AND EX CEPT REIMBURSEMENT THE ASSESSEE ADOPTE D TNMM AS THE MOST APPROPRIATE METHOD DETERMINING THE PROFIT LEVEL INDICATOR OPERATING PROFIT/ TOTAL COST SELECTING 14 ACIT VS. DENSO INDIA LTD, ITA NO. 1751 AND 4365/DEL/2011 (ASSESSMENT YEAR: 2004 - 05 AND 2005 - 06) PAGE | 20 COMPARABLES WHOSE WORKING CAPITAL ADJUSTED MARGIN ADOPTING MULTIPLE YEAR DATA WAS WORKED OUT AT 3.79% WHEREAS THE MARGIN OF THE RESPONDEN T WAS CALCULATED AT 6.84% AND HENCE, THE TP STUDY DOCUMENTATION OF THE ASSESSEE SHOWED THAT INTERNATIONAL TRANSACTIONS ARE AT ARMS LENGTH. 21. ON REFERENCE, THE LD TRANSFER PRICING OFFICER HELD THAT INTERNATIONAL TRANSACTION WITH RESPECT TO PAYMENT OF ROYALT Y OF RS. 61280272/ - CANNOT BE CLUBBED WITH OTHER INTERNATIONAL TRANSACTIONS AND ACCORDING TO HIM THERE IS NO ECONOMIC BENEFIT DERIVED BY THE ASSESSEE FROM THE PAYMENT OF ROYALTY. THEREFORE, THE LD TRANSFER PRICING OFFICER SELECTED 6 COMPARABLES DETERMINING THEIR PLI AT 10.35% WHEREAS, THE PLI OF THE ASSESSEE WAS 6.84% PROPOSED AN ADJUSTMENT OF RS. 12.53 CRORES. 22. THE LD CIT(A) HELD THAT OPERATING PROFIT/ SALES IS THE CORRECT PLI FOR BENCHMARKING THE INTERNATIONAL TRANSACTION OF ROYALTY AND HE ARRIVED AT PLI OF 16 COMPARABLES AT 7.35% AGAINST THE PLI OF THE ASSESSEE OF 6.4% AND CONSEQUENTLY AFTER GIVING BENEFIT OF 5% DELETED THE ABOVE ADJUSTMENT. THEREFORE, REVENUE AGGRIEVED IS IN APPEAL BEFORE US. THE ABOVE GROUND IDENTICAL TO GROUND NO. 1 OF THE APPEAL OF THE REVENUE FOR AY 2004 - 05 WHICH HAS BEEN DECIDED BY US SETTING ASIDE THE WHOLE ISSUE TO THE FILE OF THE LD A O/TPO, THEREFORE, FOR SIMILAR REASONS WE SET ASIDE THIS GROUND OF APPEAL ALSO TO FILE OF THE AO/TPO FOR FRESH ADJUDICATION WITH SIMILAR DIRECTION. IN THE RESULT GROUND NO. 1 OF THE APPEAL OF THE REVENUE IS ALLOWED ACCORDINGLY. 23. GROUND NO. 2 OF THE APPEAL I S AGAINST THE DELETION OF THE ADDITION OF RS. 8782391/ - BY THE LD CIT(A) HOLDING IT AS REVENUE EXPENDITURE WHEREAS, THE LD ASSESSING OFFICER TREATED THE SAME AS CAPITAL EXPENDITURE. THE LD AO/TPO HELD THAT THE ROYALTY PAYMENT OF RS. 61280272/ - AND TREATED PROPORTIONATE ADJUSTMENT OF RS. 8782391/ - AS CAPITAL EXPENDITURE. THE ABOVE ISSUE HAS BEEN FAIRLY DECIDED IN FAVOUR OF THE ASSESSEE BY THE COORDINATE BENCH FOR AY 1988 - 89 TO AY 1991 - 92 . FURTHER, THE HON'BLE DELHI HIGH COURT IN ASSESSEES OWN CASE IN ITA NO . 767 AND 796/DEL/2014 VIDE ORDER DATED 13.01.2015 HAS HELD THAT ROYALTY PAID BY ASSESSEE TO ITS PARENT COMPANY WAS REVENUE EXPENDITURE AND CANNOT BE TREATED AS CAPITAL EXPENDITURE. THE HON'BLE DELHI HIGH COURT IN PARA NO. 4 HAS HELD THAT SUCH PAYMENT IS REVENUE IN NATURE. THEREFORE, RESPECTFULLY FOLLOWING THE DECISION OF HON'BLE DELHI HIGH COURT IN ASSESSEE S OWN CASE IN 374 ITR 62 WE CONFIRM THE FINDING OF THE LD CIT(A) THAT ROYALTY IS REVENUE EXPENDITURE. GROUND NO. 2 OF THE APPEAL OF THE REVENUE IS DIS MISSED. 24. GROUND NO. 3 OF THE APPEAL OF REVENUE IS AGAINST DELETION OF ADDITION OF RS. 512449/ - HOLDING IT AS REVENUE EXPENDITURE BEING AN APPLICATION COST WHICH WAS TREATED BY THE LD ASSESSING OFFICER AS CAPITAL EXPENDITURE. THE LD CIT(A) ALSO DELETED THE ABOVE DISALLOWANCE BASED ON ACIT VS. DENSO INDIA LTD, ITA NO. 1751 AND 4365/DEL/2011 (ASSESSMENT YEAR: 2004 - 05 AND 2005 - 06) PAGE | 21 THE PREVIOUS JUDICIAL PRECEDENTS AVAILABLE IN CASE OF THE ASSESSEE. THE IDENTICAL ISSUE IS DECIDED IN ITA NO. 4798/DEL/2004 FOR AY 2001 - 02 WHEREIN, THE ABOVE APPLICATION COST WAS ALLOWED AS REVENUE EXPENDITURE. FURTHER, IT HAS B EEN STATED THAT THERE IS NO DISALLOWANCE FOR AY 2006 - 07 AND 2007 - 08 BY THE LD ASSESSING OFFICER. THE ABOVE ISSUE IN ASSESSEES OWN CASE FOR AY 2001 - 02 WHEREIN, TECHNICAL FEES PAID HAS BEEN HELD TO BE REVENUE IN NATURE. WE DO NOT FIND ANY REASON TO DEVIATE FROM THE SAME AND HENCE, RESPECTFULLY FOLLOWING THE DECISION OF THE COORDINATE BENCH , WE DIRECT THE LD ASSESSING OFFICER TO TREAT RS. 512449/ - BEING TECHNICAL APPLICATION COST AS REVENUE EXPENDITURE. ACCORDINGLY, GROUND NO. 3 OF THE APPEAL OF THE REVENUE I S DISMISSED. 25. GROUND NO. 4 AND 5 OF THE APPEAL BOTH RELATES TO HOLDING OF REVENUE EXPENDITURE OF TECHNICAL COST, TRAINING FEE AND IT COST FEES AS REVENUE EXPENDITURE WHEREAS, THE LD ASSESSING OFFICER TREATED THE SAME AS CAPITAL EXPENDITURE. THE ABOVE ISSUE IS ALSO SQUARELY COVERED BY GROUND NO. 4 IN APPEAL OF THE ASSESSEES OWN CASE IN ITA NO . 4798/DEL/2004, WHEREIN, VIDE PARA NO. 10 ALL THESE EXPENDITURE HAVE BEEN HELD TO BE REVENUE IN NATURE. THEREFORE, RESPECTFULLY FOLLOWING , WE ALSO DIRECT THE LD ASSESSING OFFICER TO TREAT THESE EXPENDITURE AS REVENUE EXPENDITURE INSTEAD OF CAPITAL EXPENDITURE AS HELD BY HIM. IN THE RESULT GROUND NO. 4 AND 5 OF THE APPEAL OF THE REVENUE ARE DISMISSED. 26. GROUND NO. 6 IS WITH RESPECT TO DISALLOW ANCE OF RS. 1235907/ - DELETED BY THE LD CIT(A) ON ACCOUNT OF NICE NET FACILITY PROVIDED BY DENSO HARYANA TREATING IT AS CAPITAL EXPENDITURE BY AO AND LD CIT(A) REVERSED IT HOLDING TO BE REVENUE EXPENDITURE. THIS ISSUE IS SQUARELY COVERED IN FAVOUR OF THE A SSESSEE BY THE DECISION OF THE HON'BLE DELHI HIGH COURT IN ASSESSEES OWN CASE IN 374 ITR 62 WHEREIN THE ABOVE DEDUCTION WAS ALLOWED. THEREFORE, RESPECTFULLY FOLLOWING THE DECISION OF THE HON'BLE DELHI HIGH COURT WE DIRECT THE ASSESSING OFFICER TO DELETE T HE ABOVE DISALLOWANCE. IN THE RESULT GROUND NO. 6 OF THE APPEAL IS DISMISSED. 27. IN THE RESULT THE APPEAL OF THE REVENUE FOR AY 2005 - 06 IS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 0 5 / 1 2 /2017. - S D / - - S D / - ( BHAVNESH SAINI ) (PRASHANT MAHARISHI) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED: 0 5 / 12 /2017 A K KEOT COPY FORWARDED TO ACIT VS. DENSO INDIA LTD, ITA NO. 1751 AND 4365/DEL/2011 (ASSESSMENT YEAR: 2004 - 05 AND 2005 - 06) PAGE | 22 1. APPLICANT 2. RESPONDENT 3. CIT 4. CIT (A) 5. DR:ITAT ASSISTANT REGISTRAR ITAT, NEW DELHI