Sona Okegawa Precision Foregings Ltd., New Delhi V. Addl. CIT, New Delhi

ITA 4781/DEL/2010

• Counselvise Citation: 478120114 RSA 2010
• Duration Of Justice: 1 year(s) 1 month(s) 13 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 16-12-2011
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: G
• Next Hearing Date: 22-11-2011
• Assessment Year: 2006-2007
• Appeal Filed On: 02-11-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: B R R KUMAR
• Assessee Lawyers: VIDUR PURIC A
• Keywords: Transfer pricing; International transaction

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH G DELHI BEFORE SHRI RAJPAL YADAV AND SHRI K.G. BANSAL ITA NO. 4781(DEL)/2010 ASSESSMENT YEAR: 2006-07 SONA OKEGAWA PRECISION FORGINGS ADD ITIONAL COMMISSIONER OF LTD., UGF-6, INDRAPRAKASH BLDG., VS. INC OME-TAX, RANGE-9, 21, BARAKHAMBA ROAD, NEW DELHI. NEW DELHI. PAN: AABCS4786P (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI VIDUR PURI,C.A. RESPONDENT BY : SHRI B.R.R. KUMAR, DR DATE OF HEARIN G: 22.11.2011 DATE OF PRONOU NCEMENT: 16.12.2011. ORDER PER K.G. BANSAL : AM THE ASSESSEE HAS TAKEN UP FOUR GROUNDS IN THIS A PPEAL. IN THE COURSE OF HEARING BEFORE US, THE LD. COUNSEL FOR THE A SSESSEE EXPLAINED THAT THE REAL GRIEVANCE IS STATED IN GROUND NO. 1.2 THE GROUND IS THAT THE ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN FOLLOWING TH E ORDER OF TRANSFER PRICING OFFICER (TPO FOR SHORT) IN WHICH DISALLOWANCE O F ROYALTY PAYMENT OF RS. 14,47,956/- WAS SUGGESTED IN RESPECT OF SALES TO T HE ASSOCIATED ENTERPRISE (AE), MITSUBISHI MATERIAL CORPORATION, JAPAN, ON TH E ASSUMPTION THAT ITA NO. 4781(DEL)/2010 2 SPECIFIC GOODS WERE MANUFACTURED FOR IT AND, TH EREFORE, NO ROYALTY WAS NEEDED TO BE PAID. THE OTHER GROUNDS ARE IN SUPPORT OF THIS GROUND. 2. THE FACTS OF THE CASE ARE THAT THE RETURN W AS FILED ON 25.11.2006 DECLARING TOTAL INCOME OF RS. 16,88,49,751/-. THE RETURN WAS PROCESSED ON 19.12.2007. SUBSEQUENTLY, ASSESSMENT PROCEEDINGS WERE STARTED BY ISSUING NOTICE U/S 143(2) OF THE ACT. IT WAS FOUND THAT THE ASSESSEE IS ENGAGED IN THE BUSINESS OF MANUFACTURING PRECISIO N FORGED BEVEL GEARS AND SYNCHRONIZER RINGS USED IN THE AUTOMOBILE I NDUSTRY. 2.1 THE REPORT FILED BY THE ASSESSEE IN FORM NO. 3CEB SHOWED EIGHT INTERNATIONAL TRANSACTIONS WITH ASSOCIATED ENTER PRISES (AE FOR SHORT). THESE TRANSACTIONS INCLUDE PAYMENT OF ROYALTY TO T HE AE AMOUNTING TO RS. 1,67,55,048/-. THE ASSESSEE HAS USED COMPARABLE UNCONTROLLED PRICE (CUP FOR SHORT) FOR JUSTIFYING THE VALUE OF THESE INTERNATIONAL TRANSACTIONS. IT WAS SUBMITTED THAT IN VIEW OF TECHNICAL COLLA BORATION AGREEMENT APPROVED BY THE GOVERNMENT OF INDIA FOR PAYMENT OF ROYALTY @ 1% AND 3% OF NET SALE PRICE OF THE MANUFACTURED GOODS S OLD OR USED BY THE ASSESSEE, THE PAYMENT IS JUSTIFIED AS THE RATE OF PAYMENT HAS BEEN APPROVED BY THE RESERVE BANK OF INDIA. IN THE A LTERNATIVE, THE PAYMENT ITA NO. 4781(DEL)/2010 3 ALSO STANDS JUSTIFIED UNDER TNNM BY USING TH E RATIO OF PROFIT BEFORE TAX TO SALES AS PROFIT LEVEL INDICATOR (PLI FOR SHORT). THIS RATIO WORKS OUT AT 15.02% IN THE CASE OF THE ASSESSEE AGAI NST THE AVERAGE OF 5.91% IN THE CASE OF COMPARABLE CASES. FOR THE SAKE OF R EADY REFERENCE, THE SUBMISSIONS ARE REPRODUCED BELOW:- 5.1 THE ASSESSEE VIDE ITS REPLY DATED 18.02. 2009 AND 28.07.2009 HAS RELIED ON ITS REPLY FILED BEFORE THE TPO IN FY 2004-05, WHEREIN IT WAS STATED THAT : AS PER THE GOVERNMENT OF INDIA POLICY OF ALLOWI NG MAXIMUM ROYALTY TO FOREIGN COLLABORATORS @ 5% ON DOMESTIC SALES AND 8% ON EXPORTS TO ALL MANUFACTURING ENTITIES, IT IS AN ACCEPTABLE METHOD OF JUSTIFYING IT AS CUP FOR ARMS LENGT H PRICE FOR PAYMENT OF ROYALTY @ 3% (NET OF IMPORTED RAW MAT ERIAL AND BOUGHT OUT COMPONENTS) OF ASSESSEES EXPORT AND DOMESTIC SALES TO AE, MITSUBISHI MATERIAL CORPORATION (MMTL) . IT IS IN CONTRACT MANUFACTURING WHERE ONE GROUP MEMBER PROD UCES GOODS FOR ANOTHER GROUP MEMBER SINCE IT IS AN IN DEPENDENT COMPANY AND PART OF SONE GROUP (DR. SURINDER KAPU R AND ARE NOT A GROUP MEMBER OF MMTL). TO SUBSTANTIAT E ITS CUP FOR ROYALTY, ASSESSEE HAS SUBMITTED A SIMILAR APPROVAL RELATING TO THE PRODUCE IN THE AUTOMOBILE INDUSTRY, FOR A THIRD PARTY. THE APPROVAL DATED 31 ST DECEMBER, 1998 IS OF GOVERNMENT OF INDIA, MINISTRY OF INDUSTRY, DEPART MENT OF INDUSTRIAL POLICY AND PROMOTION TO ITS SISTER CONC ERN, SONA SOMIC COMPONENTS LTD. FOR MANUFACTURE OF BALL JOI NS ASSEMBLIES TO CARS/COMMERCIAL VEHICLES (AUTOMOBILE INDUSTRY) WITH FOREIGN COLLABORATION BY ALLOWING ROYALTY @ 3 % ON INTERNAL SALES AND ON EXPORTS. THEREFORE, PAYMEN T OF ROYALTY TO THE AE, MITSUBISHI MATERIAL CORPORATION (MMTL) I S AT ARMS LENGTH PRICE AS PER CUP METHOD. ITA NO. 4781(DEL)/2010 4 IT HAS BEEN ALSO STATED THAT ALTERNATIVELY EVEN UNDER THE TNNM FOR THE PAYMENT OF ROYALTY, THE PROFIT LEVE L INDICATOR OF PROFIT BEFORE TAXES (PBT) TO SALES RATIO AT 15.02% IS MUCH MORE THAN THAT OF NET MARGIN OF THE COMPARABLES USED TO BENCHMARK THE TRANSACTION (5.91%) AND HENCE IS STATED TO BE AT AN ARMS LENGTH PRICE IN COMPLIANCE WITH THE I NDIAN TRANSFER PRICING REGULATIONS. 2.2 THE AO HAD REFERRED THE MATTER TO THE TPO, WHO CAME TO THE CONCLUSION THAT THERE IS NO JUSTIFICATION OF PAY MENT OF ROYALTY TO THE AE. TWO REASONS WERE ASSIGNED FOR COMING TO THIS CO NCLUSION. FIRSTLY, THE ASSESSEE IS A CONTRACT MANUFACTURER AND AS PER GUIDELINES ISSUED BY OECD IN PARAGRAPH NOS. 6.14 AND 6.17, THERE IS NO JUSTIFICATION FOR PAYMENT OF ROYALTY IN SUCH A CASE. SECONDLY, T HE ASSESSEE HAS ITSELF CREATED PROVISION FOR TECHNICAL KNOW-HOW SEPAR ATELY AS SEEN FROM THE SCHEDULES OF THE AUDIT REPORT. PARAGRAPH NOS. 6.14 OF THE OECD GUIDELINES IS REPRODUCED BELOW:- PARA 6.14 ARMS LENGTH PRICING FOR INTANGIBLE PROPERTY MUST TAKE INTO ACCOUNT FOR THE PURPOSES OF COMPAR ABILITY THE PERSPECTIVE OF BOTH THE TRANSFEROR OF THE PROPERTY AND THE TRANSFEREE. FROM THE PERSPECTIVE OF THE TRANSFER OR, THE ARMS LENGTH PRINCIPLE WOULD EXAMINE THE PRICING AT WHIC H A COMPARABLE INDEPENDENT ENTERPRISE WOULD BE WILLI NG TO TRANSFER THE PROPERTY. FROM THE PERSPECTIVE OF THE TRANSFEREE, A COMPARABLE INDEPENDENT ENTERPRISE MAY OR MAY NO T BE PREPARED TO PAY SUCH A PRICE, DEPENDING ON THE VALUE AND USEFULNESS OF THE INTANGIBLE PROPERTY TO THE TRAN SFEREE IN ITS BUSINESS. THE TRANSFEREE WILL GENERALLY BE PREPA RED TO PAY ITA NO. 4781(DEL)/2010 5 THIS LICENSE FEE IF THE BENEFIT IT REASONABLY EXPECTS TO SECURE FROM THE USE OF THE INTANGIBLES IS SATISFACTORY HAVING REGARD TO OTHER OPTIONS REALISTICALLY AVAILABLE. GIVEN THAT THE LICENSEE WILL HAVE TO UNDERTAKE INVESTMENTS OR OTHERWISE INCUR EXPENDITURES TO USE THE LICENCE IT HAS TO B E DETERMINED WHETHER AN INDEPENDENT ENTERPRISE WOULD BE PREPA RED TO PAY A LICENCE FEE OF THE GIVEN AMOUNT CONSIDERING THE EXPECTED BENEFITS FROM THE ADDITIONAL INVESTMENTS AND OTH ER EXPENDITURES LIKELY TO BE INCURRED. 2.3 THE AUDIT REPORT DEALING WITH THE CREATION OF TECHNICAL KNOW-HOW SEPARATELY IS REPRODUCED AS UNDER:- LUMP SUM TECHNICAL KNOW-HOW FEES PAID TO THE T ECHNICAL COLLABORATORS FOR ACQUIRING KNOW-HOWARE WRITTE N OFF TO REVENUE OVER PERIOD OF THE CONTRACT OR EARLIER FROM THE COMMENCEMENT OF COMMERCIAL PRODUCTION. COMPOSITE LUMP SUM TECHNICAL KNOW-HOW FEES PAID FOR BOTH THE T YPE OF KNOW- HOW ARE APPORTIONED BETWEEN THE TWO BASED ON TE CHNICAL ESTIMATES MADE BY THE COMPANY. RUNNING ROYALTY P AID TO THE COLLABORATORS IS WRITTEN OFF TO REVENUE IN THE YEA R IN WHICH IT ACCRUES. 2.4 BASED UPON THE AFORESAID FINDING FURNISHED BY THE TPO, THE ROYALTY PAYABLE IN RESPECT OF THE GOODS SUPPLIED TO THE AE, QUANTIFIED AT RS. 14,47,956/-, HAS NOT BEEN ALLOWED. THUS, THE TOTAL INCOME IN THE DRAFT ORDER HAS BEEN COMPUTED AT RS. 17,02,97,707/-. ITA NO. 4781(DEL)/2010 6 3. THE LEARNED DISPUTE RESOLUTION PANEL-II, NEW DE LHI (THE DRP FOR SHORT) HAS APPROVED THIS ADJUSTMENT. THE DEDU CTION OF 5% HAS ALSO NOT BEEN ALLOWED ON THE GROUND THAT UNDER THE AMENDED PROVISO TO SECTION 92C(2), THE ADJUSTMENT IS PERMISSIBLE ONLY IF THE DIFFERENCE BETWEEN THE ARMS LENGTH PRICE ARRIVED AT BY THE AO AND THE ASSESSEE IS LESS THAN 5% OF THE ARMS LENGTH PRICE SHOWN BY THE ASSESSEE. SINCE THE DIFFERENCE IS MORE THAN 5%, THE BENEFIT IS NOT AVAILABLE. FINALL Y, THE ASSESSMENT ORDER HAS BEEN PASSED ON 15.10.2009 IN ACCORDANCE WIT H THE DIRECTIONS OF THE DRP BY MAKING AN ADDITION OF RS. 14,47,956/- TO THE TOTAL INCOME RETURNED BY THE ASSESSEE. 4. BEFORE US, THE LD. COUNSEL FOR THE ASSESSEE S UBMITTED THAT SIMILAR ISSUE AROSE IN THE PROCEEDINGS OF ASSESSMENT YEAR 2004-05 IN THE CASE OF THE ASSESSEE. THE LD. CIT(APPEALS) HAS DELETED T HE DISALLOWANCE MADE BY THE AO. THE TRIBUNAL HAS UPHELD THE ORDER OF THE L D. CIT(A). ON THE OTHER HAND, THE LD. DR HAS RELIED ON THE ORDERS OF THE AO AND THE DRP. 5. WE HAVE CONSIDERED THE FACTS OF THE CASE AN D SUBMISSIONS MADE BEFORE US. IT IS SEEN THAT THE MAIN QUESTION IS WHETHER THE ROYALTY PAID BY THE ASSESSEE @ 3% OF THE NET SALE PRICE STA NDS JUSTIFIED UNDER CUP. ITA NO. 4781(DEL)/2010 7 THE ASSESSEE HAS PLACED ON RECORD A COPY OF THE LETTER DATED 30.04.1993 WRITTEN BY THE RESERVE BANK OF INDIA, EXCHANGE CONT ROL DEPARTMENT, TO SONA STEERING SYSTEMS LTD., IN WHICH PAYMENT OF ROYALTY @ 3% ON DOMESTIC SALES WAS ALLOWED TO BE PAID FOR A PERI OD OF FIVE YEARS. THERE ARE SIMILAR OTHER CORRESPONDENCES WHICH HAVE BEEN PLACED ON RECORD. THE ASSESSEE HAS ALSO PLACED ON RECORD A PRESS NOTE ISSUED BY THE GOVERNMENT OF INDIA, MINISTRY OF COMMERCE AND INDUSTRIES, DEPARTMENT OF INDUSTRIAL POLICY & PROMOTION, ISSUED IN 2003, UNDER WHICH ROYALTY PAYMENT @ 8% ON EXPORT SALES AND 5% ON DOMESTIC SALES HAVE BE EN REFERRED TO BE REASONABLE FOR THE PURPOSE OF PROCESSING APPROVA L OF PAYMENTS. ON THE OTHER HAND, THE AO FAILED TO BRING ANY MATERIAL O N RECORD THAT PAYMENT OF ROYALTY @ 3% WAS NOT AT ARMS LENGTH. THEREFORE , THE PAYMENT STANDS JUSTIFIED UNDER THE CUP METHOD. THE SECOND AS PECT IS WHETHER THE ASSESSEE IS A CONTRACT MANUFACTURER FOR THE AE . IN THIS CONNECTION, IT IS SEEN FROM THE ORDER OF THE TPO ITSELF THAT ONLY A FRACTION OF GOODS MANUFACTURED BY THE ASSESSEE HAVE BEEN SOLD TO THE AE. BULK OF SALES ARE TO UNCONTROLLED PARTIES. THUS, THE ASSESSEE IS NOT A CAPTIVE MANUFACTURER SUPPLYING ALL MANUFACTURED GOODS TO THE AE. IN FACT, THE TECHNOLOGY HAS BEEN USED FOR MANUFACTURING AND SUPPLYING GOODS TO INDEPENDENT PARTIES ITA NO. 4781(DEL)/2010 8 ALSO. THEREFORE, IT CANNOT BE SAID THAT THE AS SESSEE IS A CONTRACT MANUFACTURER. 5.1 ACCORDINGLY, WE ARE OF THE VIEW THAT THERE W AS NO JUSTIFICATION FOR DISALLOWANCE OF ROYALTY PAID IN RESPECT OF GOODS SUPPLIED TO THE AE. 6. IN THE RESULT, THE APPEAL IS ALLOWED. SD/- SD/- (RAJPAL YADAV) (K.G. BANSA L) JUDICIAL MEMBER ACCOUNTANT MEMBER SP SATIA COPY OF THE ORDER FORWARDED TO:- SONA OKEGAWA PRECISION FOREGINGS LTD., NEW DELHI . ADDL. CIT, RANGE-9, NEW DELHI. CIT(A) CIT THE DR, ITAT, NEW DELHI. ASSISTANT REGISTRAR.