M/s Munjal Showa Limited, Gurgaon V. ACIT, New Delhi

ITA 4675/DEL/2010

• Counselvise Citation: 467520114 RSA 2010
• Duration Of Justice: 3 year(s) 7 month(s) 4 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-05-2014
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: I
• Next Hearing Date: 12-05-2014
• Assessment Year: 2006-2007
• Appeal Filed On: 26-10-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: PEEYUSH JAIN; YOGESH VERMA; B SRI
• Keywords: Capital asset; Business income; Transfer pricing; Business expenditure; Opportunity of being heard; International transaction; Avoidance of tax; Revenue expenditure; Capital expenditure
• Section: 143(3); 14A

Judgement Text

ITA NOS. 4675/DEL/2010 & 4242/DEL/2011 1 IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH I, NEW DELHI BEFORE SHRI R.P. TOLANI, JUDICIAL MEMBER AND SHRI B.R. JAIN, ACCOUNTANT MEMBER I.T.A. NO. 4675/DEL/2010 & I.T.A. NO. 4242/DEL/2011 A.Y RS .: 2006 - 07 & 2007 - 08 MUNJAL SHOWA LIMITED, 9-11, MARUTI INDUSTRIAL AREA, GURGAON 122015 (HARYANA) (PAN:AAACM0070D) VS. ADDL. COMMISSIONER OF INCOME TAX, RANGE-5, NEW DELHI (APPELLANT) (APPELLANT) (APPELLANT) (APPELLANT) (RESPONDENT) (RESPONDENT) (RESPONDENT) (RESPONDENT) ASSESSEE BY : SH. AJAY VOHRA, SH. NEERAJ JAIN, ADVOCATES, SH. ABHISHEK AGARWAL, SH. PUNEET CHUGH, CAS DEPARTMENT BY : SH. PEEYUSH JAIN AND SH. YOGESH VERMA, CIT(DR), & SH. B. SRINIVAS KUMAR, SR. DR ORDER ORDER ORDER ORDER PER PER PER PER B.R. JAIN, : B.R. JAIN, : B.R. JAIN, : B.R. JAIN, : A AA AM MM M ITA NO. 4675/DEL/2010 THESE TWO APPEALS BY THE ASSESSEE ARISE FROM ORDERS DATED 11.10.2010 AND 5.9.2011 MADE U/S. 143(3) READ WITH SECTION 144C OF THE INCOME TAX ACT BY THE ASSESSING OFFICER, AC IT, RANGE-5, NEW DELHI FOR ASSTT. YEAR 2006-07 AND ASSESSING OFFICE R DCIT, CIRCLE- ITA NOS. 4675/DEL/2010 & 4242/DEL/2011 2 5(1), NEW DELHI FOR ASSTT. YEAR 2007-08 BY RAISING SEVERAL GROUNDS IN APPEAL. 2. IN ASSTT. YEAR 2006-07 BRIEFLY FACTS ARE THAT TH E ASSESSEE IS ENGAGED IN THE BUSINESS OF MANUFACTURING AND SALE O F SHOCK ABSORBERS FOR TRANSPORT VEHICLES HAVING JOINT VENT URE BETWEEN SHOWA CORPORATION, A COMPANY INCORPORATED IN JAPAN. FOR THE YEAR UNDER CONSIDERATION, THE ASSESSEE RETURNED INCOME O F RS. 25,57,38,102/-. THE ASSESSMENT STOOD COMPLETED ON 11.9.2010 AT AN INCOME OF RS. 41,22,28,870/- BY MAKING ADDITIONS ON ACCOUNT OF TRANSFER PRICING ADJUSTMENTS, DISALLOWANCE OF EXPEN SES IN TERMS OF SECTION 14A OF THE ACT AND DISALLOWANCE OF ROYALTY AND TECHNICAL FEES PAID BY THE ASSESSEE. 3. IN GROUND NO. 2 TO 2.10 IN APPEAL THE ASSESSEE A GITATED ADDITION OF RS. 4,89,58,700 ON ACCOUNT OF TRANSFER PRICING ADJUSTMENTS. THE AO NOTICED THAT THE ASSESSEE HAD MADE PAYMENT OF RS. 14,21,48,282/- AS A ROYALTY TO ITS ASSOCIATE ENTERPRISE NAMELY SHOWA CORPORATION. THE ASSESSEE HAS ALSO MADE PURCH ASES (IMPORT OF COMPONENTS, PARTS ETC.). IN RESPECT OF ROYALTY, THE ASSESSEE HAD CLAIMED THAT THE ROYALTY PAYMENT HAS BEEN MADE @ 3% ON DOMESTIC SALES AND EXPORTS. THIS PAYMENT WAS MADE TO THE ASSOCIATE ENTERPRISE AS PER APPROVAL DATED 14.6.2002 GRANTED BY THE CENTRAL GOVT. (SIA, MINISTRY OF COMMERCE AND INDUSTRY) AND RELIED UPON THE ITA NOS. 4675/DEL/2010 & 4242/DEL/2011 3 COMPARABLE UNCONTROLLED PRICE OF PAYMENT OF ROYALTY BY THE UNRELATED PARTIES TO SHOWA CORPORATION, JAPAN. THE ASSESSEE SUBMITTED THAT THE PAYMENT OF ROYALTY WAS AT ARM S LENGTH PRICE BY APPLYING THE CUP METHOD. AS REGARDS THE IMPORT OF C OMPONENTS / PARTS ETC. THE ASSESSEE APPLIED TRANSACTIONAL NET MARGIN METHOD (TNMM) AS MOST APPROPRIATE METHOD BY IDENTIFYING T WO COMPARABLES NAMELY (A) RENOWNED AUTO PRODUCTS MANUF ACTURING LTD. AND (B) GABRIEL INDIA LTD. 4. IN HIS TRANSFER PRICING STUDY THE ASSESSEE HAS W ORKED OUT THE OPERATING PROFIT MARGIN TO SALES AT 4.98% AS COMPA RED TO 1.52% OF THE INTERNATIONAL TRANSACTIONS OF THESE TWO COMPARA BLES AND CLAIMED THAT THE INTERNATIONAL TRANSACTIONS CARRIED BY THE ASSESSEE WITH ITS ASSOCIATED ENTERPRISES ARE AT ARMS LENGTH. BEFORE THE TPO THE ASSESSEE ON THE BASIS OF FINANCIAL STATEMENTS MADE ACTUALLY LINE BY LINE WORKING VIS A VIS CAPACITY UTILIZATION AND COMPUTED ADJUSTED OPERATING PROFIT MARGIN RATIO AT 3.75% OF SALES OF THESE COMPARABLES AS AGAINST OP RATIO OF 5.24% IN HIS CAS E. 5. IN THE ORDER PASSED U/S 92CA(3) OF THE ACT THE T PO, HOWEVER, REJECTED THE RENOWNED AUTO PRODUCTS MANUFACTURING L TD. AS A COMPARABLE COMPANY AS IT HAD A TURNOVER OF RS. 88.4 8 CRORES ONLY AS AGAINST WHICH THE ASSESSEES HUGE TURNOVER WAS RS. 596.62 CRORES. THE ASSESSING OFFICER, THEREFORE, BENCHMARKED ITS ANALYSIS WITH ITA NOS. 4675/DEL/2010 & 4242/DEL/2011 4 THE SECOND COMPARABLE NAMELY GABRIEL INDIA LTD. AND COMPARED OPERATING PROFIT MARGIN ON INTERNATIONAL TRANSACTI ONS BOTH FOR ROYALTY AND IMPORT OF PARTS ETC. HE COMPUTED ADJU STMENT OF RS. 48,958,700/- AS UNDER AND DRAFT ASSESSMENT ORD ER WAS PASSED ACCORDINGLY. PARTICULARS PARTICULARS PARTICULARS PARTICULARS RS. IN CRORES RS. IN CRORES RS. IN CRORES RS. IN CRORES PURCHASE (IMPORT) OF COMPONENTS, PARTS ETC. 801,877,267 PAYMENT OF ROYALTY 142,148,282 VALUE OF INTERNATIONAL TRANSACTION 994,025,549 SALES 6,994,100,000 ARMS LENGTH PROFIT 363,693,200 ACTUAL PROFIT 314,734,500 DIFFERENCE 48,958,700 PERCENTAGE OF VALUE OF INTERNATIONAL PERCENTAGE OF VALUE OF INTERNATIONAL PERCENTAGE OF VALUE OF INTERNATIONAL PERCENTAGE OF VALUE OF INTERNATIONAL TRANSACTIONS TRANSACTIONS TRANSACTIONS TRANSACTIONS 5.18% 5.18% 5.18% 5.18% 6. THE DISPUTE RESOLUTION PANEL (DRP) VIDE ITS ORDE R DATED 30.9.2010 CONSIDERED THE OBJECTIONS TO THE DRAFT AS SESSMENT ORDER. HAVING APPROVED THE DRAFT ASSESSMENT ORDER, IT DIRE CTED THE AO TO COMPLETE THE ASSESSMENT ACCORDINGLY, WHICH IS IMPUG NED BEFORE US. 7. THE LD. COUNSEL FOR THE ASSESSEE OBJECTED THE S AID ADJUSTMENTS ON VARIOUS GROUNDS AND HAS ALSO FILED DETAILED WRITTEN NOTE INTER-ALIA CONTENDED THAT THERE IS NO JUSTIFI CATION IN REJECTING THE RENOWNED AUTO PRODUCTS MANUFACTURING LTD. AS A COMPARABLE MERELY ON THE BASIS OF TURNOVER EVEN THOUGH THIS CO MPANY WAS SELECTED AS A COMPARABLE IN THE IMMEDIATELY PRECEDI NG YEAR ITSELF. ITA NOS. 4675/DEL/2010 & 4242/DEL/2011 5 THE FACTS WILL REVEAL THAT THIS COMPANY IS FUNCTIONA LLY COMPARABLE TO THE APPELLANT. SECONDLY, THE TPO WHILE COMPUTING T HE OPERATING PROFIT MARGIN OF THE APPELLANT AT 4.50% DID NOT EXC LUDE NON OPERATING ITEMS WHICH IS CONTRARY TO ITS OWN WORKI NG WITH RESPECT TO ANOTHER COMPARABLE NAMELY GARBIEL INDIA LTD. THE OP ERATING PROFIT MARGIN TO SALES WORKED OUT AT 5.2% BY THE ASSESSEE IS FACTUALLY CORRECT. THE SAME NEEDS TO BE ADOPTED FOR THE PURPO SE OF BENCH- MARKING ANALYSIS AS AGAINST 4.58% CONSIDERED BY THE TPO. THIRDLY, THE OPERATING PROFIT MARGIN WORKED OUT AT 3.82% IN THE CASE OF OTHER COMPARABLE NAMELY GABRIEL INDIA LTD. IS ALSO NOT AP PROPRIATE AS THE TPO HAS NOT CORRECTLY COMPUTED THE CAPACITY UTILIZA TION OF THE ASSESSEE AND GABRIEL INDIA BY UTILIZING THE CORRECT DATA FROM THE FINANCIAL STATEMENTS. HE DID NOT EXCLUDE THE PRIOR PERIOD EXPENSES, EXTRA ORDINARY ITEMS AND NON OPERATING EXPENSES WHI CH ITEMS DO NOT CONSTITUTE PART OF THE OPERATING INCOME. IF THE A SSESSEES CLAIM IS ACCEPTED IN THE RIGHT PERSPECTIVE THEN OPERATING PR OFIT OF M/S GABRIEL INDIA LTD. WOULD BE 3.76% ONLY. THE EXERCISE CONDU CTED IN MAKING TRANSFER PRICING ADJUSTMENTS WAS WITHOUT AFFORDING THE OPPORTUNITY TO POINT OUT THE MISTAKES IN THE PROCEEDINGS SO UND ERTAKEN BY THE ASSESSING AUTHORITY. IN THE ALTERNATE, ADJUSTMENT S, IF ANY, COULD AT BEST BE RESTRICTED TO INTERNATIONAL TRANSACTIONS AL ONE AND NOT TO THE ENTIRE TURNOVER OF THE APPELLANT. THIS MISTAKE ALS O IS FATAL TO THE TO THE ADDITIONS SO MADE IN THE ASSESSMENT ORDER. IT H AS, THEREFORE, ITA NOS. 4675/DEL/2010 & 4242/DEL/2011 6 BEEN CONTENDED THAT THE ADJUSTMENTS MADE BY THE TPO ARE NOT SUSTAINABLE. THE SAME ARE THEREFORE, LIABLE TO BE D ELETED. 8. ON THE OTHER HAND, LD. DEPARTMENT REPRESENTATIV E SUPPORTED THE ORDER OF THE ASSESSING AUTHORITY AND CONTENDS THAT THE PERUSAL OF THE ORDER OF DRP WOULD REVEAL THAT IT HAS PASSED THE ORDER AFTER CONSIDERING THE OBJECTIONS OF THE ASSESSEE CAREFULL Y AND THEREAFTER ONLY IT APPROVED THE DRAFT ASSESSMENT ORDER. THE D IRECTIONS GIVEN ARE IN ACCORDANCE WITH LAW. HENCE, THERE IS NO FA ULT THAT CAN BE SAID TO HAVE BEEN COMMITTED BY THE ASSESSING AUTHOR ITY IN FOLLOWING THE DIRECTIONS. 9. HEARD PARTIES WITH REFERENCE TO THE MATERIAL PL ACED ON RECORD. THE OPERATIVE PORTION OF THE ORDER OF THE DRP IS R EPRODUCED AS UNDER:- WE HAVE GONE THROUGH THE DRAFT ASSESSMENT ORDER. W E HAVE ALSO HEARD THE AUTHORISED REPRESENTATIVE (AR) AND HAVE CONSIDERED THE OBJECTIONS OF THE ASSESSEE CARE FULLY. AFTER CONSIDERING THE SAME, WE ARE OF THE OPINION T HAT THE DRAFT ASSESSMENT ORDER PROPOSED BY THE AO IS TO BE APPROVED. THE AO IS DIRECTED TO COMPLETE THE ASSESSMENT AS PROPOSED IN THE DRAFT ASSESSMENT ORDE R. ITA NOS. 4675/DEL/2010 & 4242/DEL/2011 7 10. THE SAID ORDER OF THE DRP IS A LACONIC ORDER. T HE SPEAKING ORDER HAS NOT BEEN PASSED BY THE DRP. IT HAS NOT G IVEN ANY REASON FOR DISPOSAL OF THE ASSESSEES OBJECTIONS AND FAR R EACHING ITS CONCLUSIONS. IT HAS ALSO NOT ADOPTED THE REASONS CONTAINED IN THE DRAFT ASSESSMENT ORDER NOR EVEN THE REASONS THAT A RE CONTAINED IN THE ORDER OF THE TPO. THE APPELLANT HAS A RIGHT TO KNOW THE REASON AND APPELLATE TRIBUNAL ALSO CAN SCRUTINIZE THE CORR ECTNESS OF THE SAID ORDER ONLY IF REASONS THERETO ARE CONTAINED IN THE SAID ORDER. IN THE ABSENCE OF ANY SUCH REASONING THE ORDER SO PASSED I S HEREBY SET ASIDE WITH THE DIRECTIONS TO HEAR THE ASSESSEE AND DECIDE THE ISSUE AFRESH IN ACCORDANCE WITH LAW BY PASSING A SPEAKIN G ORDER THEREON. 11. GROUND NO. 3 TO 3.4 IN APPEAL RELATED TO DISAL LOWANCE OF RS. 1,24,746/- MADE U/S. 14A READ WITH RULE 8D OF T HE I.T. RULES, 1962. 11.1 BRIEFLY STATED THE FACTS LEADING TO SUCH DISA LLOWANCE ARE THAT THE APPELLANT EARNED DIVIDEND INCOME OF RS. 72,62,4 74/- ON INVESTMENT MADE IN MUTUAL FUNDS WHICH WAS EXEMPTE U /S. 10(35) OF THE ACT. THE ASSESSING AUTHORITY MADE THE ADHOC DI SALLOWANCE OF EXPENSES TO THE TUNE OF RS. 1,24,746/-. 11.2 THE ASSESSEES CASE IS THAT THE AO HAS ERRED I N INTERPRETING THE STATUE CORRECTLY IN AS MUCH AS THE PHRASE USED IN SECTION 14A IS EXPENDITURE INCURRED. THIS EXPENDITURE INCURRED THEREFORE, SHOULD ITA NOS. 4675/DEL/2010 & 4242/DEL/2011 8 HAVE PROXIMATE NEXUS WITH THE EXEMPTED INCOME AND N O IMAGINARY OR NOTIONAL EXPENSES CAN BE DISALLOWED. RELIANCE HA S BEEN PLACED ON THE FOLLOWING THE JUDGMENTS - CIT VS. WALFORT SHARE AND STOCK BROKERS IN SLP(C) NO. 19422 OF 2009. - GODREJ & BOYCE MFG. CO. LTD. VS. CIT : 328 ITR 81. - MAXOPP INVESTMENT LTD. VS. CIT : 347 ITR 272 11.3 IT IS ALSO CONTENDED THAT THE EXPENSES WERE IN CURRED DURING THE YEAR FOR THE PURPOSE OF OTHER REGULAR BUSINESS OF T HE COMPANY AND IT HAD NO RELATION WITH EARNING OF DIVIDEND INCOME, W HICH WAS A PASSIVE INCOME RECEIVED PURSUANT INVESTMENTS OF SUR PLUS AVAILABLE FROM TIME TO TIME. NO EXPENSES WERE INCURRED TO MAK E INVESTMENT IN MUTUAL FUNDS OUT OF THE INTEREST FREE FUNDS. NO BORROWED FUNDS WERE UTILIZED IN MAKING SUCH INVESTMENTS. THE DIS ALLOWANCE SO MADE, THEREFORE, NEEDS TO BE DELETED. 12. ON THE OTHER HAND, LD. DR RELIED UPON THE ORDER OF THE ASSESSING OFFICER. 13. HEARD PARTIES WITH REFERENCE TO THE MATERIAL PLACED ON RECORD AND CASE LAWS THERETO. THE ASSESSEE CLAIMED THAT THE INVESTMENT IN MUTUAL FUNDS WAS MADE OUT OF THE SURP LUS FUNDS. THIS ITA NOS. 4675/DEL/2010 & 4242/DEL/2011 9 FACT NEEDS TO BE EXAMINED AND A FINDING HAS TO BE R ETURNED BY THE ASSESSING AUTHORITY THEREON. WE, THEREFORE, SET AS IDE THE DISALLOWANCE AND REMIT THE MATTER BACK TO THE FILE OF THE ASSESSING AUTHORITY FOR TAKING DECISION AFRESH, AFTER AFFOR DING REASONABLE AND EFFECTIVE OPPORTUNITY OF BEING HEARD TO THE ASSESSE E. NEEDLESS TO SAY, HE SHALL HAVE REGARD TO THE JUDGMENT OF THE JU RISDICTIONAL HIGH COURT IN THE CASE OF MAXOPP INVESTMENTS LTD. VS. CI T 347 IR 272. 14. IN GROUND NO. 4 TO 4.3. THE ASSESSEE HAS AGITAT ED THE DISALLOWANCE OF ROYALTY AND TECHNICAL FEES. THE ASS ESSEE HAD PAID THE ROYALTY OF RS. 14,21,48,282/- TO SHOWA CORPORA TION, JAPAN BEING 3% ON EX-FACTORY SALE PRICE OF PRODUCTS. THE ASSES SING OFFICER DISALLOWED THE ROYALTY PAID HOLDING THE SAME TO BE IN THE NATURE OF CAPITAL EXPENDITURE. THE ASSESSEES CASE IS THAT I T HAD ENTERED INTO THE TECHNICAL COLLABORATION AGREEMENT ON 11.3.2002 WITH SHOWA CORPORATION, JAPAN. THE APPELLANT ALSO ENTERED INT O THE ADMINISTRATIVE AGREEMENT WITH SHOWA TO PROVIDE INTE RNATIONAL TECHNICAL ASSISTANCE BY DISPATCH OF ITS TECHNICAL P ERSONNEL PROVIDING TECHNICAL TRAINING AND GUIDANCE TO APPELLANTS EMPL OYEES FOR PROVIDING SUPPORT, IN CASE OF ANY PROBLEM IN MANUFA CTURING ACTIVITY. THE APPELLANT PAID TECHNICAL FEE OF RS. 10,61,534/- TO SHOWA CORPORATION, JAPAN FOR PROVIDING ITS TECHNICIANS AN D TRAVELLING / STAY EXPENSES OF THESE TECHNICIANS. THE AGREEMENT PROVI DES TO GRANT THE APPELLANT AN INDIVIDUAL AND NON TRANSFERABLE, NON E XCLUSIVE RIGHT AND ITA NOS. 4675/DEL/2010 & 4242/DEL/2011 10 LICENSE TO MANUFACTURE, ASSEMBLY, SELL AND DISTRIB UTE PRODUCTS AND PARTS DURING THE TERM OF THE AGREEMENT WITHIN THE SPECIFIED TERRITORY AND THUS THE APPELLANT HAD ONLY A LIMITED RIGHT TO USE THE TECHNOLOGY OF SHOWA. THE OWNERSHIP AND RIGHT IN TE CHNICAL KNOW HOW CONTINUED TO VEST IN SHOWA. THE AGREEMENT DID NOT RESULT IN ACQUISITION OF ANY KNOW HOW BY THE APPELLANT. SIN CE THE APPELLANT WAS TO KEEP SECRET THE CONFIDENTIAL INFORMATION FU RNISHED BY SHOWA CORPORATION, JAPAN AND USE IT ONLY FOR THE PURPOSE S OF THE SAID AGREEMENT, THERE WAS THUS NO EXPLICIT OR IMPLIED INTENTION, TO TRANSFER OR CREATE OWNERSHIP IN THE TECHNICAL KNOW HOW / TECHNOLOGY. THUS THE EXPENDITURE ON ROYALTY/ TECHN ICAL FEE DID NOT RESULT IN ACQUISITION OF ANY CAPITAL ASSET OR A BEN EFIT OF ENDURING NATURE, IN AS MUCH AS IN THE CAPITAL FIELD. THE H ONBLE HIGH COURT BENCH OF THE TRIBUNAL IN THE CASE OF HERO MOTOCORP LTD. (EARLIER KNOWN AS HERO HONDA MOTOR CO. LTD.) TOO, DELETED S IMILAR DISALLOWANCE MADE BY THE ASSESSING OFFICER, IN THE ASSESSMENT YEARS 2000-01, 2001-02, (ITS NOS. 716 & 717/DEL/200 8), 2002-03 (ITA NO. 1052/DEL/2011), 2006-07 (ITA NOS. 5130/DEL /2010) AND 2007-08 (ITA NO. 1980/DEL/2012) WHEREIN THE ANNUAL PAYMENT OF ROYALTY WAS HELD TO BE REVENUE EXPENDITURE. 14.1 THE DELHI BENCH OF THE TRIBUNAL IN THE APPELL ANTS OWN CASE FOR ASSESSMENT YEARS 1993-94 TO 1995-96, TOO, DELETED T HE SIMILAR DISALLOWANCE MADE BY THE ASSESSING OFFICER IN THOSE YEARS. THE ITA NOS. 4675/DEL/2010 & 4242/DEL/2011 11 ORDER OF THE TRIBUNAL HAS SINCE BEEN UPHELD BY THE HONBLE DELHI HIGH COURT VIDE ITS ORDER DATED 6.9.2010. 14.2 FOLLOWING ITS EARLIER ORDER, THE DELHI BENCH OF THE TRIBUNAL IN THE APPELLANTS CASE FOR ASSTT. YEARS 2002-03 TO 20 04-05, TOO, DELETED THE SIMILAR DISALLOWANCE MADE BY THE ASSESS ING OFFICER IN THOSE YEARS. REVENUES APPEAL AGAINST THE ORDER OF THE TRIBUNAL FOR THE ASSTT. YEARS 2002-03, 2003-04 AND 2004-05 IN IT A NOS. 94, 94, AND 96/2014 ARE DISMISSED BY THE HONBLE DELHI HIGH COURT BY FOLLOWING THEIR ORDER DATED 6.9.2010. 15. ON THE OTHER HAND, LD. DR CONTENDS THAT THE AS SESSING OFFICER DID NOT HAVE BENEFIT OF THE ORDER DATED 6.9.2010 BY THE HONBLE DELHI HIGH COURT WHEN HE TOOK THE DECISION. MATTER MAY, THEREFORE, BE REMITTED BACK TO HIM FOR PASSING THE ORDER IN AC CORDANCE WITH LAW. 16. HEARD PARTIES WITH REFERENCE TO THE MATERIAL P LACED ON RECORD. ADMITTEDLY, THE ASSESSING OFFICER DID NOT HAVE BEN EFIT OF THE JUDGMENT DATED 6.9.2010 PASSED BY THE HIGH COURT OF DELHI IN ITA NO. 94, 95 & 96/DEL/2014 IN REVENUE APPEALS FOR ASS TT. 2002-03, 2003-04 AND 2004-05, WHEN HE PASSED THE IMPUGNED ORDER. IN THE INTEREST OF JUSTICE, WE SET ASIDE THE ORDER IN THIS REGARD AND REMIT THE MATTER BACK TO THE FILE OF THE AO FOR PASSING AN ORDER AFRESH IN ACCORDANCE WITH LAW AFTER HAVING DUE REGARD TO THE AFORESAID ITA NOS. 4675/DEL/2010 & 4242/DEL/2011 12 JUDGMENT VIS A VIS THE FACTS OF THE CASE AND CONTIN UANCE OF THE SAME AGREEMENT AS SUCH AS IN THE IMPUGNED YEAR AS WELL. THE ASSESSEE SHALL BE AFFORDED REASONABLE AND EFFECTIVE OPPORTU NITY OF BEING HEARD BEFORE TAKING THE DECISION IN ACCORDANCE WITH LAW. 17. GROUND NO. 1 IS GENERAL. NO ADJUDICATION IS CON SIDERED NECESSARY. ITA NO. 4242 (A.Y. 2007 ITA NO. 4242 (A.Y. 2007 ITA NO. 4242 (A.Y. 2007 ITA NO. 4242 (A.Y. 2007- -- -08 0808 08) ) ) ) 18. GROUND NO. 1 IN APPEAL IS STATED TO BE GENERAL IN NATURE, HENCE, ADJUDICATION THEREOF IS NOT CONSIDERED NECES SARY. 19. GROUND NO. 2 TO 2.2 RELATE TO THE ADDITION OF R S. 19,47,11,585/- ON ACCOUNT OF TRANSFER PRICING ADJUSTMENTS. 20. THE ASSESSEE MADE A CLAIM FOR ROYALTY FOR OBTA INING TECHNOLOGY FROM SHOWA CORPORATION AND ASSOCIATE EN TERPRISE. THE SAID CLAIM WAS MADE IN TERMS OF AGREEMENT DATED 11 .3.2002 AND PROVIDED THE ROYALTY PAYMENT @ 3% ON INTERNAL SALE S AND EXPORTS. THE SAID AGREEMENT WAS CLAIMED TO HAVE BEEN APPROVE D BY THE CENTRAL GOVERNMENT (SIA, MINISTRY OF COMMERCE AND I NDUSTRIES). THE ASSESSEE CLAIMED THAT THE PAYMENT OF ROYALTY AN D TECHNICAL FEE IS CLEARLY ON ACCOUNT OF BUSINESS CONSIDERATION AND IS A NECESSARY EXPENDITURE INCURRED FOR CARRYING BUSINESS OPERATIO NS OF THE ASSESSEE. THE ASSESSING AUTHORITY REFERRED THE CAS E TO THE TPO IN ITA NOS. 4675/DEL/2010 & 4242/DEL/2011 13 TERMS OF THE PROVISIONS OF SECTION 92CA OF THE ACT , WHO DETERMINED THE ROYALTY AT RS. NIL AS NO TANGIBLE BENEFIT HA S PASSED TO THE ASSESSEE ON THIS ACCOUNT. ACCORDINGLY, IN THE DRAFT ASSESSMENT ORDER AN ADJUSTMENT OF RS. 19,47,11,585/- WAS PROPOSED. 21. BEFORE THE DISPUTE RESOLUTION PANEL (DRP), TH E ASSESSEE STATED THAT TPO REJECTED THE CUP METHOD AND APPLIED THE TRANSACTIONAL NET MARGIN METHOD (TNMM) TO THE INTER NATIONAL TRANSACTIONS PERTAINING TO ROYALTY. THE ASSESSEE ALSO CLAIMED THAT THE PAYMENT OF ROYALTY WAS FOR MAKING AVAILABLE NE W TECHNOLOGY WITH RESPECT TO THE SHOCK ABSORBERS MANUFACTURED BY THE ASSESSEE. ASSESSEE ALSO CLAIMED THAT THE AGREEMENT HAD APPRO VAL OF GOVT. OF INDIA AND THE ENTIRE BENEFIT OF THE SAID PAYMENT IS TO THE ASSESSEE ALONE. VARIOUS OBJECTIONS RAISED BY THE ASSESSEE BEFORE THE DRP AND STATED IN PARA 3 OF THE ORDER DATED 31.7.2011 MADE BY THE DRP. DRP, HOWEVER, DID NOT FIND MERIT IN THE OBJECTIONS RAISED BY THE ASSESSEE AS THE SUBSTANCE OF THE TRANSACTION WAS T O BE JUDGED AS TO WHETHER THE TRANSACTION IS AT ARMS LENGTH OR NOT. IN SUPPORT IT RELIED UPON THE JUDGMENT IN THE CASE OF COCA COLA PVT. LT D. 309 ITR 194 (P&H). AFTER CONSIDERING THE ENTIRE GAMUT BEFORE IT, THE DRP OPINED AS UNDER:- I) THE ASSESSEE IS MAKING SEPARATE PAYMENT FOR DESIGNS AND DRAWING, TECHNICAL GUIDANCE ETC. ITA NOS. 4675/DEL/2010 & 4242/DEL/2011 14 THERE IS NO APPARENT NEED TO MAKE A SEPARATE PAYMENT OF ROYALTY. NO INDEPENDENT PARTY WOULD DO SO. II) THE ASSESSEE HAS NOT BEEN ABLE TO GIVE DETAILS OF THE COST THAT THE AE HAS INCURRED IN THE DEVELOPMENT OF THIS TECHNOLOGY. ANY INDEPENDENT ENTERPRISE WOULD SEEK THIS DETAIL AS IT WOULD EXPECT TO SHARE ONLY A PORTION OF THE COST. LINKING THE REMUNERATION TO THE AE TO THE SALES OF THE ASSESSEE WOULD PASS AN UNDUE BENEFIT TO THE AE. III) THE ASSESSEE HAS NOT BEEN ABLE TO PROVIDE ACCEPTABLE CUP DATA TO JUSTIFY THE ARMS LENGTH PRICE OF THE INTERNATIONAL TRANSACTION RELATED TO PAYMENT OF ROYALTY. 22. THE DRP FOUND NO INFIRMITY IN THE ACTION OF THE TPO IN ADOPTING THE CUP METHOD AND DIRECTED THAT ROYALTY TRANSACTIO N HAS TO BE INDEPENDENTLY BENCHMARKED USING CUP METHOD TAKING A LP AT NIL. ACCORDINGLY, THE ASSESSEES OBJECTIONS HAVE BEEN RE JECTED. THE AO ACCORDINGLY MADE THE ADDITION OF RS. 18,22,69,037/- WITH THE OBSERVATION THAT AS THE WHOLE OF THE ROYALTY AMOUNT STANDS ADJUSTED U/S. 92CA, NO FURTHER ADJUSTMENT IS REQUIRED FOR MA KING DISALLOWANCE ITA NOS. 4675/DEL/2010 & 4242/DEL/2011 15 OF ROYALTY SEPARATELY AT PARA NO. 3.2 OF THE ASSESS MENT ORDER. THE ASSESSING AUTHORITY CONCLUDED THAT IF TPO ADJUSTMEN TS ON THIS ACCOUNT IS NOT SUSTAINED AT APPEAL STAGE, THEN THE ADDITION OF ROYALTY OF RS. 18,22,69,037/- AS DISCUSSED ABOVE WI LL BE CONSIDERED SEPARATELY. 23. IN APPEAL LD. COUNSEL FOR THE ASSESSEE CONTEND S THAT THE ROYALTY PAYMENT IS FOR OBTAINING THE TECHNOLOGY FRO M ASSOCIATE ENTERPRISE FOR MANUFACTURE OF SHOCK ABSORBERS BY TH E ASSESSEE IN INDIA. IT HAS NEVER BEEN HELD TO BE NON BUSINESS EXPENDITURE IN ANY OF THE INCOME TAX ASSESSMENT OF THE ASSESSEE. TH E TECHNOLOGY AGREEMENT DATED 11.3.2002 IS DULY APPROVED AND PROV IDES FOR PAYMENT OF ROYALTY @ 3% ON INTERNAL SALES AND EXPOR T. THE PAYMENT OF ROYALTY AND TECHNOLOGY FEE IS CLEARLY ON ACCOUNT OF BUSINESS CONSIDERATION AND IS A NECESSARY EXPENDITURE INCURR ED FOR CARRYING ON THE BUSINESS OPERATIONS OF THE ASSESSEE. THE SAL ES OF THE ASSESSEE HAVE LARGELY IMPROVED AND THE ENTIRE BENEF IT OF SAID PAYMENT IS TO THE ASSESSEE ALONE. SINCE THE ASSESS EE IS FREE TO CONDUCT ITS BUSINESS IN THE MANNER MORE SUITABLE TO IT AND THE COMMERCIAL AND BUSINESS EXPEDIENCY OF INCURRING ANY EXPENDITURE IS TO BE SEEN FROM ASSESSEES POINT OF VIEW, THE REVEN UE AUTHORITIES, CANNOT STEP INTO THE SHOES OF THE BUSINESSMAN. AS LONG AS THE ITEM OF EXPENDITURE INCURRED IS WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF THE ASSESSEES BUSINESS, WHETHER OR NOT SUCH EXPEND ITURE ACTUALLY ITA NOS. 4675/DEL/2010 & 4242/DEL/2011 16 BENEFITS THE ASSESSEE IS IRRELEVANT TO CONSIDER FOR THE PURPOSE OF DETERMINATION OF ALP. IN VIEW OF THE APPROVAL GRA NTED BY THE CENTRAL GOVERNMENT, THE PAYMENT OF ROYALTY NEEDS TO BE CONSIDERED AT ARMS LENGTH. RELIANCE HAS BEEN PLACED OF THE JU DGEMENT OF DELHI BENCH, TRIBUNAL IN THE CASE OF SONA OKEGAWA PRECISI ON FORGINGS LTD. VS. ADDL. CIT IN ITA NO. 4781/DEL/2010 AND ALSO INC LUDES OF SGS INDIA PVT. LTD. VS. ACIT ITA 2406/MUM/2006. THE ASSESSEE S COUNSEL FURTHER CONTENDS THAT THE PAYMENT OF ROYALTY @ 3% T O THE ASSOCIATE ENTERPRISE IS ON PREVAILING RATE OF ROYALTY FOR SP ARE PARTS IN THE INDUSTRY AND MADE REFERENCE TO THE COMPARABLES. I T WAS, THEREFORE, NOT CORRECT TO SAY THAT THE PAYMENT OF ROYALTY TO AE WAS UNJUSTIFIED, WHEN THE TPO DID NOT BRING ON RECORD ANY EVIDENC E TO ESTABLISH THE ARMS LENGTH PRICE. THAT APART THE TPO ERRONEOU SLY CAME TO THE CONCLUSION THAT TNMM IS MERELY A METHOD TO TEST THE VALUE OF TRANSACTION AND IT COMES INTO PLAY ONLY AFTER VERAC ITY OF THE TRANSFER HAS BEEN DETERMINED. THE TPO HAS PROVED TO COMPUTE THE ALP ROYALTY PAID BY THE APPELLANT AS NIL VALUE BY APPLY ING THE CUP METHOD. WHEREAS THE CUP METHOD CAN BE APPLIED ONLY FOR DETERMINING THE ALP ON THE BASIS OF PRICES PAID/ CH ARGED IN THE COURSE OF UNCONTROLLED TRANSACTIONS. THE TPO HAS H YPOTHETICAL DETERMINED THE VALUE OF ROYALTY PAID BY THE APPELLA NT AS NIL MERELY ON THE BASIS OF SURMISES AND CONJECTURES AND WITHOU T PLACING ANY MATERIAL ON RECORD AND ANY COMPARABLE UNCONTROLLED TRANSACTIONS. ITA NOS. 4675/DEL/2010 & 4242/DEL/2011 17 HE WAS LIABLE TO COMPUTE THE ALP ON THE BASIS OF AC TUAL FACTS AND INFORMATION RELATED TO PRICES CHARGED / PAID IN TH E COMPARABLE UNCONTROLLED TRANSACTIONS AND NOT ON THE BASIS OF H YPOTHETICAL ASSUMPTIONS AND SURMISES. THE METHOD APPLIED BY T HE ASSESSEE IS MOST APPROPRIATE METHOD. THE OPERATING PROFIT RAT E OF THE APPELLANT IS 5.58% WHICH IS HIGHEST AVERAGE OPERATING PROFIT TO FOUR COMPARABLES AT 3.77%. THE INTERNATIONAL TRANSACTION UNDERTAKEN BY THE APPELLANT THEREFORE, HAS TO BE CONSIDERED AT AR MS LENGTH PRICE. THE ASSESSEE ALSO MADE EXHAUSTIVE WRITTEN SUBMISSIO NS AND LAID RELIANCE ON SEVERAL JUDGMENTS, THAT ARE KEPT ON REC ORD. THAT APART THE ASSESSEE CONTENDS PAYMENT OF ROYALTY HAS ALR EADY BEEN HELD TO BE EXPENDITURE INCURRED FOR THE PURPOSE OF BUSI NESS OF THE ASSESSEE AND THE HONBLE DELHI HIGH COURT HAS ALREA DY UPHELD THE DEDUCTION OF PAYMENT OF ROYALTY AS REVENUE BUSINES S EXPENDITURE IN THE CASE OF THE ASSESSEE FOR EARLIER YEARS. IT WAS THUS CONTENDED THE TPO WAS UNJUSTIFIED IN MAKING THE ADJUSTMENTS O N ACCOUNT OF PAYMENT OF ROYALTY. THE SAME THEREFORE, IS LIABLE T O BE DELETED. 24. ON THE OTHER HAND, LD. D.R. CONTENDS THAT BURD EN IS ON THE ASSESSEE TO PROVE THAT THE TRANSACTION WITH ASSOC IATE ENTERPRISE IS AT ARMS LENGTH. RELIANCE HAS BEEN PLACED ON THE COCA COLA JUDGMENT REFERRED IN THE ORDER OF THE DRP. AND ALSO NESTLES CASE REPORTED AT 337 ITR 103 (DEL WITH SPECIFIC REFERENC E TO PARA 15 AND 16 AT PAGE 119. THAT THE ASSESSEES CLAIM THAT NO S UCH ADJUSTMENT ITA NOS. 4675/DEL/2010 & 4242/DEL/2011 18 WAS MADE IN THE EARLIER YEARS, CANNOT BE A REASON FOR EXAMINING THE TRANSACTIONS AND MAKING ADJUSTMENTS IN THE YEAR UNDER CONSIDERATION. EACH YEAR IS AN INDEPENDENT YEAR AND RES JUDICATA DOES NOT APPLY TO THE INCOME TAX PROCEEDINGS. FURT HER IF THE ALP HAS BEEN TAKEN AT NIL THEN NO METHOD IS TO BE USED AS HAS HELD BY MUMBAI TRIBUNAL IN DELOITTE CONSULTING INDIA PVT. L TD. THE ASSESSEE DID NOT DISCHARGE ITS BURDEN SUCH ADJUSTMENTS NEED NO INTERFERENCE. 25. WE HAVE HEARD THE PARTIES WITH REFERENCE TO THE MATERIAL ON RECORD AND CASE LAWS BROUGHT TO OUR NOTICE. COMPU TATION OF INCOME FROM INTERNATIONAL TRANSACTIONS HAVING REGARD TO AR MS LENGTH PRICE HAS BEEN CHARACTERIZED UNDER CHAPTER-X OF THE IT AC T UNDER SPECIAL PROVISIONS RELATING TO AVOIDANCE OF TAX. THE ASSES SES CLAIM FOR DEDUCTION OF ROYALTY IN THE EARLIER YEARS WAS ALLOW ED UNDER THE GENERAL PROVISIONS FOR COMPUTATION OF ITS BUSINESS 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 A SSESSING AUTHORITY THEREFORE, CANNOT BE SAID HAVE ERRED IN EMBARKING ENQUIRY INTO ARMS LENGTH PRICE WITH RESPECT TO THE ROYALTY PAYME NT MADE BY THE ASSESSEE WITH RESPECT TO THE EXISTING AGREEMENT BY THE ASSESSEE WITH ITS ASSOCIATE ENTERPRISE. THE DRP IN ITS ORDE R HAS PLACED RELIANCE ON THE JUDGMENT IN THE CASE OF COCA COLA P VT. LTD. (309 ITR 194) (P&H) FOR THE PROPOSITION THAT THE SUBSTANCE O F THE TRANSACTION ITA NOS. 4675/DEL/2010 & 4242/DEL/2011 19 HAS TO BE JUDGED AS TO WHETHER THE TRANSACTION IS A T ARMS LENGTH OR NOT. ASSESSEE WAS THEREFORE, UNDER A DUTY TO HAVE SATISFIED HIM. THE ASSESSEE HAS RAISED VARIOUS NEW PLEAS BEFORE US IN ORDER TO SUBSTANTIATE IT CLAIM, THROUGH WRITTEN SUBMISSION T HAT THE PAYMENT OF ROYALTY@ 3% IN LINE OF ACTIVITY IS AT ARMS LEN GTH, 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 EFFEC TIVE OPPORTUNITY OF BEING HEARD TO SUBSTANTIATE ITS CLAIM AND SATISF Y THE AUTHORITIES THAT PAYMENT OF ROYALTY TO THE ASSOCIATE ENTERPRIS E IS AT ARMS LENGTH. IN THE INTEREST OF JUSTICE, WE SET ASIDE TH E ADDITION AND REMIT THE BACK TO THE AO FOR TAKING A DECISION AFRESH IN ACCORDANCE WITH LAW, AFTER GIVING REASONABLE AND EFFECTIVE OPPORTU NITY OF BEING HEARD TO THE ASSESSEE. 27. GROUND 4 TO 4.3 RELATES TO THE DISALLOWANCE OF ROYALTY AND TECHNICAL FEE 28. THE ASSESSEES CASE IS THAT IT HAD LIMITED RIGH T TO USE THE TECHNOLOGY OF SHOWA JAPAN. THE OWNERSHIP / PROPERT Y RIGHTS IN TECHNICAL KNOW HOW CONTINUE TO BE VESTED IN SHOWA AND THE APPELLANT HAS NO AUTHROISED APPROVAL OF COMPANY TO TRANSFER THE KNOW HOW OR ANY TECHNICAL INFORMATION TO ANY THIRD PARTY. THERE IS NO EXPLICIT OR IMPLICIT AUTHORITY TO TRANSFER OR CR EATE OWNERSHIP IN THE TECHNOLOGY, KNOW HOW/TECHNICAL INFORMATION IN THE A PPELLANT. THE EXPENDITURE OF ROYALTY OR TECHNICAL FEE DID NOT RES ULT WITH CAPITAL ITA NOS. 4675/DEL/2010 & 4242/DEL/2011 20 ASSET OR A BENEFIT OF ENDURING NATURE MUCH LESS IN THE CAPITAL FIELD. THE APPELLATE TRIBUNAL IN THE CASE OF THE ASSESSEE FOR THE ASSTT. YEAR 1993-94 TO 1995-96 AND FOR ASSTT. YEAR 2002-03 AND 2004-05 HAVE DELETED THE SIMILAR DISALLOWANCE. REVENUE APPEAL F OR ASSTT. YEAR 2002-03 AND 2004-05 STANDS DISMISSED BY THE DELHI H IGH COURT VIDE ITS ORDER DATED 6.9.2010 IN ITA NO. 94, 95 & 96/DEL /2014. 29. HEARD PARTIES. IN THE PECULIAR FACT-SITUATIO N AND THE JUDGMENT OF THE HONBLE DELHI HIGH COURT IN THE EARLIER YEAR S IN ASSESSEES OWN CASE OF WHICH, THE AO DID NOT HAVE BENEFIT AT T HE TIME WHEN HE PASSED THE ORDER, WE CONSIDER IT APPROPRIATE TO REM IT THE MATTER BACK TO HIM AND TAKE DECISION AFRESH, IN ACCORDANC E WITH LAW BY HAVING REGARD TO THE AFORESAID JUDGMENT. NEEDLESS TO SAY THE ASSESSEE MAY BE GRANTED EFFECTIVE OPPORTUNITY OF BEING HEARD. 30. GROUND NO. 3. IN APPEAL RELATES TO THE DISALLO WANCE U/S. 14A OF THE I.T. ACT READ WITH RULE 8D OF THE I.T. RULES, 1 963. DURING THE YEAR UNDER CONSIDERATION THE ASSESSEE HAD EARNED DIVIDEN D INCOME OF RS. 14,25,370/- FROM INVESTMENT MADE IN MUTUAL FUN DS WHICH IS CLAIMED TO BE EXEMPT U/S. 10(35) OF THE ACT. THE A O MADE ADHOC DISALLOWANCE OF EXPENSES TO THE TUNE OF RS. 88,782/ -. 31. THE ASSESSEE CONTENDS THAT ON SIMILAR GROUNDS D ISALLOWANCE HAS BEEN CHALLENGED FOR ASSTT. YEAR 2006-07 IN APPE AL BEFORE THE TRIBUNAL AND THE SAME REASONING NEEDS TO BE ADOPTED FOR ALLOWING THE RELIEF TO THE ASSESSEE. 32. HEARD PARTIES WITH REFERENCE TO THE MATERIAL ON RECORD. FOR THE REASONS AS ARE CONTAINED IN ASSESSEES OWN CASE FOR ASSTT. YEAR ITA NOS. 4675/DEL/2010 & 4242/DEL/2011 21 2006-07 IN ITA NO. 4675/DEL/2010 WHICH IS BEING DIS POSED OF ALONG WITH THIS APPEAL, FOR THE SAME REASONING IN THAT AP PEAL, WE REMIT THE MATTER BACK TO THE AO FOR DECIDING THE ISSUE AFRESH AND IN ACCORDANCE WITH LAW. 33. IN THE RESULT, BOTH THE APPEALS FILED BY THE AS SESSEE STAND ALLOWED FOR STATISTICAL PURPOSES ONLY. ORDER PRONOUNCED IN THE OPEN COURT ON 30/5/2014. SD/- SD/- [ [[ [R.P. TOLANI R.P. TOLANI R.P. TOLANI R.P. TOLANI] ]] ] [ [[ [B.R. JAIN B.R. JAIN B.R. JAIN B.R. JAIN] ]] ] JUDICIAL MEMBER JUDICIAL MEMBER JUDICIAL MEMBER JUDICIAL MEMBER ACCOUNTANT MEMBER ACCOUNTANT MEMBER ACCOUNTANT MEMBER ACCOUNTANT MEMBER DATE 30/5/2014 SRBHATNAGAR SRBHATNAGAR SRBHATNAGAR SRBHATNAGAR COPY FORWARDED TO: COPY FORWARDED TO: COPY FORWARDED TO: COPY FORWARDED TO: - -- - 1. APPELLANT - 2. RESPONDENT - 3. CIT 4. CIT (A) 5. DR, ITAT TRUE COPY BY ORDER, ASSISTANT REGISTRAR, ITAT, DELHI BENCHES