Appeal Details
Counselvise Citation
[2014] 140 COUNSELVISE.COM (IT) 82180 (ITAT-DELHI)
Assessee PAN
Bench
Appeal Number
CRN Number
Duration Of Justice
3 year(s) 21 day(s)
Appellant
Respondent
Appeal Type
Income Tax Appeal
Pronouncement Date
08-12-2014
Appeal Filed By
Assessee
Order Result
Partly Allowed
Bench Allotted
I
Next Hearing Date
02-12-2014
Assessment Year
2007-2008
Appeal Filed On
17-11-2011
Judgement Text
IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCHES: I : NEW DELHI BEFORE SH. R. S. SYAL, AM AND SH. I. C. SUDHIR, JM ITA NO. 5140/DEL/2011 : ASSTT. YEAR : 2007 - 08 LG ELECTRONICS INDIA PVT. LTD., PLOT NO. 51, UDYOG VIHAR, SURAJPUR KASNA ROAD, GREATER NOIDA, GAUTAM BUDH NAGAR, UTTAR PRADESH. VS ACIT, CIRCLE - 3, NOIDA. (APPELLANT) (RESPONDENT) PAN NO. AAACL1745Q ASSESSEE BY : SH. AJAY VOHRA, SR. ADV. , SH. NEERAJ JAIN , ADV. AND SH. ABHISHEK AGARWAL, CA REVENUE BY : SH. PEEYUSH JAIN, CIT DR DT. OF HEARING : 02. 12.2014 DT. OF PRONOUNCEMENT : 08. 12.2014 ORDER PER R. S. SYAL, AM: THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST THE FINAL ASSESSMENT ORDER PASSED BY THE ASSESSING OFFICER ( AO ) ON 31.10.2011 FOR THE ASSESSMENT YEAR 200 7 - 08 . 2. GROUND NO S .1 AND 6 ARE GENERAL , WHICH DO NOT REQUIRE ANY SEPARATE ADJUDICATION. GROUND NO. 7 WAS NOT PRESSED BY THE LD. AR. GROUND NO. 14 IS PREMATURE. THESE TWO GROUNDS , THEREFORE, STAND DISMISSED. ITA NO.5140/DEL/2011 LG ELECTRONICS INDIA PVT. LTD. 2 3. GROUND NO.2 IS AGAINST MAKING OF ALL THE ADDITION S TO THE TUNE OF ` 2,26,61,73,676/ - ON ACCOUNT OF TRANSFER PRICING ADJUSTMENT . T HIS GROUND SIMPLY SUMMARIES TOTAL OF VARIOUS ADDITIONS MADE ON ACCOUNT OF INTERNATIONAL TRANSACTIONS , WHICH HAVE ALSO BEEN DISTINCTLY CHALLENGED ITEM - WISE THROUGH S EPARATE GROUNDS. WE WILL DEAL WITH SUCH GROUNDS, ONE BY ONE , INFRA . 4. GROUND NO.3 IS AGAIN ST MAKING OF ADDITION TOWARDS TRANSFER PRICING ADJUSTMENT AMOUNTING TO ` 1,82,71,11,446/ - IN RELATION TO THE ADVERTISEMENT, MARKETING AND SALES PROMOTION (AMP) EXPENSES. HERE, IT IS PERTINENT TO MENTION THAT A SPECIAL BENCH WAS CONSTITUTED ON THIS ISSUE IN TH IS VERY APPEAL . AN ORDER DATED 23.1. 20 13 HAS SINCE BEEN PASSED BY THE SPECIAL BENCH AS LG ELECTRONICS PVT. LTD. VS ACIT (2013) 140 ITD 41 (DEL) (SB) . TWO QUESTIONS WERE REFERRED TO THE SPECIAL BENCH. THE FIRST QUESTION HAS BEEN ANSWERED BY HOLDING T HAT THE TRANSFER PRICING ADJUSTMENT IN RELATION TO THE AMP EXPENSES INCURRED BY THE ASSESSEE FOR CREATING OR IMPROVING THE MARKETING INTANGIBLES FOR AND ON BEHALF OF ITS FOREIGN ASSOCIATED ENTERPRISE S , IS PERMISSIBLE. THE SECOND QUESTION AS TO WHETHER THE ASSESSEE SHOULD HAVE EARNED A MARK - UP FROM ITS AE IN RESPECT OF SUCH AMP EXPENSES ITA NO.5140/DEL/2011 LG ELECTRONICS INDIA PVT. LTD. 3 INCURRED FOR AND ON BEHALF OF THE AE , HAS ALSO BEEN ANSWERED BY EVENTUALLY RESTORING THE MATTER TO THE FILE OF TPO FOR DE NOVO ADJUDICATION IN THE LIGHT OF CERTAIN GUIDELINES OUTLINED IN TH E ORDER. NOW, THIS DIVISION BENCH IS BOUND BY THE SPECIAL BENCH DECISION AND CANNOT TINKER OR AMEND THE CONCLUSIONS SO DRAWN, AS WAS ARGUED BY THE LD. AR IN AN ATTEMPT TO PERSUADE US FOR RE - DEC IDING THIS ISSUE OR SENDING IT BACK TO THE AO/TPO FOR A FRESH DECISION AS PER LAW. IN FACT, THE S PECIAL BENCH ORDER , PASSED IN THIS APPEAL ALONE, CONSTITUTES AN INTEGRAL PART OF THIS ORDER. RESPECTFULLY FOLLOWING THE VIEW TAKEN BY THE SPECIAL BENCH, WE SE ND THE MATTER BACK TO THE TPO/AO FOR DECIDING IT IN ACCORDANCE WITH THE SPECIAL BENCH VERDICT. ACCORDINGLY, GROUND NO. 3 IS ALLOWED FOR STATISTICAL PURPOSES. 5. GROUND NO. 4 IS AGAINST THE ADDITION MADE ON ACCOUNT OF TRANSFER PRICING ADJUSTMENT FOR THE INTERNATIONAL TRANSACTION OF PAYMENT OF R OYALTY . BRIEFLY STATED, THE FACT UAL MATRIX OF THIS ISSUE IS THAT THE ASSESSEE REPORTED SEVERAL INTERNATIONAL TRANSACTIONS WHICH HAVE BEEN REPRODUCED ON PAGES 3 AND 4 OF THE T RANSFER P RICING OFFICER S (TPO) OR DER. ONE OF SUCH TRANSACTIONS IS PAYMENT OF ROYALTY BY THE ASSESSEE TO ITS A SSOCIATED E NTERPRISES ITA NO.5140/DEL/2011 LG ELECTRONICS INDIA PVT. LTD. 4 (AES). THE ASSESSEE BENCHMARKED THIS INTERNATIONAL TRANSACTION ALONG WITH A BUNCH OF OTHER INTERNATIONAL TRANSACTIO NS IN A COMBINED MANNER BY USING THE TRANSACTIONAL NET MARGIN METHOD (TNMM) ON ENTITY LEVEL . ON BEING CALLED UPON TO PROVE THAT THE INTERNATIONAL TRANSACTION OF PAYMENT OF ROYALTY WAS AT ARM S LENGTH PRICE (ALP), THE ASSESSEE TENDERED SUBMISSIONS WHICH HAVE BEEN REPRODUCED IN THE TPO S ORDER . T HE TPO OBSERVED THAT THE ASSESSEE S AE HAD ALSO CHARG ED DESIGN AND DEVELOPMENT FEE, IN ADDITION TO , ROYALTY. APART FROM THE DESIGN DEVELOPMENT FEE, THE TPO NOTICED THAT THE ASSESSEE HAD ALSO PAID SEPARATELY FOR TRAINING AND IMPORT OF SOFTWARE AND SOFTWARE SERVICES . THE AMOUNT OF ROYALTY PAID TO THE AES WAS FOUND TO BE ALMOST EQUAL TO THE NET PROFIT EARNED BY THE ASSESSEE IN INDIA. THE TPO DID NOT APPROVE THE APPLICATION OF TNMM AS THE MOST APP ROPRIATE METHOD FOR THE TRA NSACTION OF ROYALTY UNDER UMBRELLA APPROACH OF SEVERAL INTERNATIONAL TRANSACTIONS. HE REQUIRED THE ASSESSEE TO FURNISH DATA OF CERTAIN COMPARABLES FOR SEPARATELY BENCHMARKING THIS INTERNATIONAL TRANSACTION. THE ASSESSEE SUBMITTED A LIST OF EIGHT COMPANIES AS COMPARABLES, OUT OF WHICH THE TPO ACCEPTED ONLY ONE, WITH TOSHIBA CORPORATION ( L ICENSOR) AND VIDEOCON ITA NO.5140/DEL/2011 LG ELECTRONICS INDIA PVT. LTD. 5 INTERNATIONAL LTD. ( AS LICENSEE ). IN THIS COMPARABLE CASE, THE LICENSEE PAID ROYALTY @ 4% ON DOMESTIC SALES AND 3% ON EXPORT SALES. THE TPO TOOK AVE RAGE OF TWO PERCENTAGES AT 3.5% . IT WAS FURTHER NOTICED THAT THE RATE OF 3.5% PAID BY VIDEOCON INTERNATIONAL LTD., WAS UNDER LICENSE FOR ONLY SEVEN YEARS, AS AGAINST THE PERPETUAL LICENSE TAKEN BY THE ASSESSEE. CONSIDERING THE FACT THAT THE ASSESSEE SEPARATELY PAID FOR DESIGN AND DEVELOPMENT AND THAT THE LICENSE WAS PERPETUAL, HE DISCOUNTED THE UNCONTROLLED ROYALTY RATE BY 2%, THEREBY CALCULATI NG THE ARM S LENGTH ROYALTY RATE AT 1.5%. SINCE THE ASSESSEE PAID ROYALTY @ 5%, HE PROPOSED AN ADJUSTMENT OF 3.5% , TRANSLATING INTO AN ADDITION TO THE TUNE OF ` 76,50,88,800/ - . THE ASSESSEE CHALLENGED THE DRAFT ORDER PREPARED ON THE BASIS OF THE T PO S ORD ER , BEFORE THE DISPUTE RESOLUTION PANEL (DRP) . THE DRP, VIDE ITS DIRECTION DATED 27.9.11, PARTLY AGREED WITH THE ASSESSEE S CONTENTIONS. IT WAS HELD THAT THE TPO OUGHT TO HAVE CONSIDERED SOME OTHER COMPANIES ALSO AS COMPARABLE WHICH WERE DEALING IN THE S AME PRODUCT AS SELECTED BY THE TPO , VIZ., C OLOUR TELEVISION. T WO COMPANIES, NAMELY, KENWOOD DESIGN CORPORATION ( L ICENSOR) AND VIDEOCON INTERNATIONAL LTD. ( L ICENSEE ) WITH 5% ROYALTY RATE AND ITA NO.5140/DEL/2011 LG ELECTRONICS INDIA PVT. LTD. 6 VICTOR COMPANY OF JAPAN ( L ICENSOR) AND MIRC ELECTRONICS LTD. ( L ICENSEE ) WITH 5% ROYALTY , WERE ALSO HELD TO BE COMPARABLE. TH US, THREE COMPANIES IN TOTAL, INCLUDING THE ONE WHICH WAS SELECTED BY THE TPO, WERE SHORTLISTED BY THE DRP. IT WAS, THEREFORE, DIRECTED THAT THESE THREE COMPANIES , USING TECHNICAL KNOW - HOW FOR MANUFACTURING OF C OLOUR TELEVISIONS , BE CONSIDERED AS COMPARABLE . RESULTANTLY, THE AVERAGE RATE OF ROYALTY OF THESE THREE COMPANIES WAS COMPUTED AT 4.5% , AS AGAINST 3.5% COMPUTED BY THE TPO. CONSIDERING THE FACT THAT THE ASSESSEE HAD ENTERED INTO A PERPETUITY AGREEMENT FOR USING TECHNICAL KNOW - HOW OF THE LICENSOR , AS AGAINST THE AGREEMENTS OF THE THREE COMPARABLE COMPANIES WITH A LIMITED PERIOD LICENSES , T HE DRP DIRECTED THAT A REDUCTION OF 1% SHOULD BE ALLOWED FROM THE AVERAGE RATE OF COMPARABLE COM PANIES. THUS, THE ARM S LENGTH RATE TO BE APPLIED FOR ROYALTY PAYMENT WAS DIRECTED TO BE TAKEN AT 3.5% . THE AO FINALIZED THE ASSESSMENT BY TAKING INTO ACCOUNT THE ABOVE DIRECTIONS GIVEN BY THE DRP. THE ASSESSEE IS AGGRIEVED AGAINST THE APPLICATION OF SUCH LOW ER RATE OF ROYALTY AS ARM S LENGTH RATE . ITA NO.5140/DEL/2011 LG ELECTRONICS INDIA PVT. LTD. 7 6. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE RELEVANT MATERIAL ON RECOR D. THE ASSESSEE (LICENSEE) ENTERED INTO A TECHNICAL ASSISTANCE AND ROYALTY AGREEMENT WITH LG ELECTRONICS INC. (LICENSOR) ON 1 ST JULY, 2001, A COPY OF WHICH IS AVAILABLE ON PAGE 370 ONWARDS OF THE PAPER BOOK. AS PER THIS AGREEMENT, THE LICENSOR, WHO WAS LONG ENGAGED IN THE MANUFACTURE OF PRODUCTION AND SALE OF C OLOUR TELEVISIONS, ALLOWED THE USE OF TECHNICAL INFORMATION AND INDU STRIAL PROPERTY RIGHTS TO THE ASSESSEE LICENSEE . ARTICLE 2 OF TH E A GREEMENT PROVIDES THAT THE LICENSOR GRANTS TO THE LICENSEE AN EXCLUSIVE NON - TRANSFERRABLE LICENSE WITHOUT THE RIGHT TO SUB - LICENSE AND THE RIGHT TO MANUFACTURE, PRODUCE, USE, SELL OR OTHER WISE DISPOSE OF THE AGREED PRODUCT ( C OLOUR TELEVISION), UTILIZING THE TECHNICAL INFORMATION AND/OR I NDUSTRIAL P ROPERTY R IGHTS FURNISHED BY THE LICENSOR. ARTICLE 4 OF THE AGREEMENT PROVIDES THAT IN CONSIDERATION OF THE USE OF SUCH INDUSTRIAL PROPERTY RIGHT S, DESIGNS, TECHNICAL KNOW - HOW FOR ALL TYPES, SIZES AND MODELS OF COLOUR TELEVISION, BEING CURRENTLY MANUFACTURED AND ANY NEW TYPES, SIZES AND MODELS OF COLOUR TELEVISION THAT MAY BE MANUFACTURED IN FUTURE, TH E LICENSEE SHALL PAY TO THE LICENSOR A ROYALTY FEE @ 1%. AN A DDENDUM DATED ITA NO.5140/DEL/2011 LG ELECTRONICS INDIA PVT. LTD. 8 1.1.2002 TO THE SUPPLEMENTARY AGREEMENT DATED 1.7.2001, WAS EXECUTED ENLARGING THE SCOPE OF PRODUCTS TO BE MANUFACTURED EXTENDING TO W ASHING MACHINES AND A IR CONDITIONERS , IN ADDITION TO C OLOUR TELEVISIO N. ANOTHER A DDENDUM DATED 4.2. 20 03 , A COPY OF WHICH IS AVAILABLE ON PAGE 391 ONWARDS OF THE PAPER BOOK, WAS SIGNED, EFFECTIVE FROM 1.1. 20 03 , PROVIDING THAT THE R OYALTY SHALL BE CHARGED AT 3% , BEING THE SAME RATE AS PER TERMS AND CONDITIONS OF THE PRESS NOTE NO.9 (2000 SERIES) DATED 8.9.2000 . A NOTHER A DDENDUM DATED 20 TH JANUARY, 2004 WAS ENTERED INTO W.E.F. 1.1. 20 04 , A COPY OF WHICH IS AVAILABLE ON PAGE 395 ONWARDS OF THE PAPER BOOK, INCREASING THE RATE OF ROYALTY TO 5% , IN CONFORMITY WITH THE RBI INSTR UCTION AND ALSO ADDING R EFRIGERATORS TO THE EXISTING RANGE OF P RODUCTS. ONE MORE A DDENDUM DATED 3.1.2005 WAS EXECUTED EFFECTIVE FROM 1.1.2005 STIPULATING THE SAME RATE OF ROYALTY OF 5%, BUT WITH PAYMENT ON QUARTERLY BASIS AS AGAINST THE EARLIER ANNUAL PAYMENTS. STILL ANOTHER A DDENDUM DATED 14.1.2006 WAS SIGNED W.E.F. 1.1.2006 , A COPY OF WHICH IS AVAILABLE ON PAGE 401 ONWARDS OF THE PAPER BOOK, PROVIDING FOR THE PAYMENT OF ROYALTY @ 5% AS PERMISSIBLE BY THE RBI CIRCULAR . BY THIS A DDENDUM, THE RA NGE OF PRODUCTS TO BE MANUFACTURED BY ITA NO.5140/DEL/2011 LG ELECTRONICS INDIA PVT. LTD. 9 THE ASSESSEE INCREASED TO FIVE WITH THE FURTHER ADDITION OF M ICROWAVE. THAT IS HOW , THE ASSESSEE PAID ROYALTY @ 5% TO LG ELECTRONICS INC. FOR THE PERIOD RELEVANT TO THE ASSESSMENT YEAR UNDER CONSIDERATION . AS AGAINST THE INTERNATIONAL TRANSACTION OF ROYALTY PAYMENT AT THE RATE OF 5%, THE TPO INITIALLY DETERMINED ARM S LENGTH RATE OF ROYALTY AT 1.5 % AND THEN ON THE DIRECTION OF THE DRP, SUCH RATE OF ROYALTY STOOD INCREASED IN THE FINAL ASSESSMENT ORDER TO 3.5% . THE ASSESSEE IS AGGRIEVED AGAINST THE ADDITION ON ACCOUNT OF TRANSFER PRICING ADJUSTMENT TO THE EXTENT OF 1.5% (5% MINUS 3.5%) . THE LD. AR ASSAILED THE ORDERS OF THE AUTHORITIES BELOW IN MAKING SUCH ADDITION ON SEVERAL COUNTS, WHICH WE WILL ESPOUSE ONE BY ONE FOR CONSIDERATION AND DECISION . I. WHETHER TNMM CAN BE USED ON ENTITY LEVEL FOR BENCHMARKING SEVERAL INTERNATIONAL TRANSACTION S INCLUDING ROYALTY ON A COMBINED BASIS : 7.1. THE LD. COUNSEL FOR THE ASSESSEE CONTENDED THAT THE AUTHORITIES BELOW ERRED IN DIRECTING THAT THE ALP OF THE INTERNATIONAL TRANSACTION OF R OYALTY PAYMENT SHOULD BE DETERMINED INDEPENDENT OF OTHER S , WHICH WERE RIGHTLY BENCHMARKED BY THE ASSESSEE UNDER TNMM IN A COMBINED ITA NO.5140/DEL/2011 LG ELECTRONICS INDIA PVT. LTD. 10 MANNER ON ENTITY LEVEL. IT WAS ARGUED THAT WITHOUT THE PAYMENT OF ROYALTY , THE ASSESSEE COULD NOT HAVE CARRIED ON ITS BUSINESS AND, HENCE, THIS TRANSACTION SHOULD BE VIEWED AS AN INTEGRAL PART OF OTHER TRANSACTIONS INCLUDING IMPORT OF RAW MATERIALS, IMPORT OF SERVICE SPARE, EXPORT OF FINISHED GOODS, EXPORT OF SERVICE SPARES, COMMISSION, DESIGN AND DEVELOPMENT FEE AND IMPORT OF PRODUCTION EQUIPMENT, ETC., SO AS TO QUALIFY FOR THE DETERMINATION OF ITS ALP UNDER TNMM ON ENTITY L EVEL . IN THE OPPOSITION, THE LD. DR SUPPORTED THE IMPUGNED ORDER BENCHMARKING THE INTERNATIONAL TRANSACTION OF ROYALTY DISTINCTLY FROM OTHER INTERNATIONAL TRANSACTIONS UNDER THE C OMPARABLE U NCONTROLLED P RICE (CUP) METHOD. 7.2. SECTION 92(1) OF THE INCO ME - TAX ACT, 1961 (HEREINAFTER ALSO CALLED THE ACT ) PROVIDES THAT ANY INCOME ARISING FROM AN INTERNATIONAL TRANSACTION SHALL BE COMPUTED HAVING REGARD TO THE ARM S LENGTH PRICE. SECTION 92C PROVIDES MECHANISM FOR COMPUTATION OF ARM S LENGTH PRICE. SUB - SECTION (1) OF S ECTION 92C STATES THAT : T HE ARM S LENGTH PRICE IN RELATION TO AN INTERNATIONAL TRANSACTION SHALL BE DETERMINED BY ANY OF THE FOLLOWING METHODS , BEING THE MOST APP ROPRIATE METHOD , HAVING REGARD TO THE NATURE ITA NO.5140/DEL/2011 LG ELECTRONICS INDIA PVT. LTD. 11 OF TRANSACTION OR CLASS OF TRANSACTION . IN SO FAR AS THE ASSESSMENT YEAR UNDER CONSIDERATION IS CONCERNED, SECTION 92C PROVIDES FIVE SPECIFIC METHOD S UNDER CLAUSES (A) TO (E). THE RESIDUAL METHOD CONTAINED I N C LAUSE (F) , BEING SUCH OTHER METHOD AS MAY BE PRESCRIBED BY THE BOARD , IS NOT RELEVANT TO THE YEAR UNDER CONSIDERATION AS IT HAS BEEN PRESCRIBED UNDER RULE 10A B BY THE INCOME - TAX (SIXTH AMENDMENT) RULE, 2012, WITH RETROSPECTIVE EFFECT FROM 1.4. 20 12 APP LICABLE FR OM ASSESSMENT YEAR 2012 - 13. RULE 10B PROVIDES MECHANISM FOR DETERMINATION OF ALP UNDER THE FIVE METHODS . SUB - RULE (1) OF RULE 10B PROVIDES THAT : F OR THE PURPOSES OF SUB - SECTION (2) OF SECTION 92C, THE ARM S LENGTH PRICE IN RELATION TO AN INTERNATIONAL TRANSACTION SHALL BE DETERMINED BY ANY OF THE FOLLOWING METHODS , BEING THE MOST APPROPRIATE METHOD . A BRIEF R EFERENCE TO THE ABOVE PROVISIONS DIVULGES THAT THE TRANSFER PRICING LEGISLATION CONTEMPLATES DETERMINATION OF ARM S LENGTH PRICE O F AN INTERNATIONAL TRANSACTION , WHICH MEANS FOR EACH TRANSACTION SEPARATELY . THE TERM TRANSACTION HAS BEEN DEFINED IN RULE 10A(D) TO MEAN A NUMBER OF CLOSELY LINKED TRANSACTIONS. A CONJOINT READING OF THE PROVISIONS DISCUSSED ABOVE ALONG WITH RULE 10A(D) MAKES IT AMPLY CLEAR THAT THE ALP IS ITA NO.5140/DEL/2011 LG ELECTRONICS INDIA PVT. LTD. 12 REQU IRED TO BE DETERMINED IN RESPECT OF EACH INTERNATIONAL TRANSACTION SEPARATELY. IF, HOWEVER, THERE ARE A NUMBER OF CLOSELY LINKED TRANSACTIONS, THEN, SUCH CLOSELY LINKED PLURAL TRANSACTIONS CAN BE CONSIDERED A S A SINGULAR TRANSACTION FOR THE PURPOSES OF BENCHMARKING. IN OTHER WORDS, A NUMBER OF CLOSELY LINKED TRANSACTIONS CAN BE CATEGORIZED AS ONE TRANSACTION FOR THE PURPOSES OF DETERMINATION OF ALP . TO PUT IT CONVERSELY , THE TRANSACTIONS WHICH ARE NOT CLOSELY LINKED , SHOULD BE PROCESSED UNDER THE TRANSFER PRICING REGIME INDEPENDENTLY AND NOT ON A CONSOLIDATED BASIS. THIS ISSUE HAS BEEN DEALT WITH BY THE SPECIAL BENCH OF THE TRIBUNAL IN LG ELECTRONICS (SUPRA) IN PARA 21.4 OF ITS ORDER. IT HAS BEEN HELD THAT IF AN INDIAN ENTERPR ISE HAS MADE A SALE OF SIMILAR GOODS TO ITS FOREIGN AE THROUGH SEVERAL INVOICES AND HAS ALSO INCURRED SOME EXPENSES OR PAID INTEREST TO IT, IT WOULD MEAN THAT ALL THE TRANSACTIONS OF SALES ARE CLOSELY L INKED AND THE S E CAN BE PROCESSED AS ONE UNIT. HOWEVER, THE TRANSACTIONS OF PAYMENT OF INTEREST OR INCURRING OF ANY OTHER EXPENSE WOULD BE REQUIRED TO BE SEPARATELY SCRUTINIZED UNDER CHAPTER - X OF THE ACT , AS THE LATTER ARE OF A DIFFERENT GENUS VIS - A - VIS THE TRANSACTION S OF SALE. IF WE ACCEPT TH E CONTENTION OF THE LD. ITA NO.5140/DEL/2011 LG ELECTRONICS INDIA PVT. LTD. 13 AR FOR CLUBBING OF ROYALTY PAYMENT WITH OTHER INTERNATIONAL TRANSACTIONS FOR PROCESSING THEM JOINTLY IN A COMBINED TNMM APPROACH , IT WOULD DEFEAT THE MANDATE OF VARIOUS PROVISIONS AS DISCUS SED ABOVE , WHICH TALK OF DETERMINING ALP OF AN INTERNATIONAL TRANSACTION AND A TRANSACTION MEANS ONLY CLOSELY LINKED TRANSACTIONS. ANY DECISION OF THE TRIBUNAL WHICH RUNS CONTRARY TO THE RATIO DECIDENDI OF THE SPECIAL BENCH , CANNOT BE CONSIDERED AS A BINDING PRECEDENT. 7.3. IT IS SIMPLE AND PLAIN THAT CROSS SUBSIDIZATION OF THE INTERNATIONAL TRANSACTIONS IN A COMBINED APPROACH IS IMPERMISSIBLE. IT IS CLEAR FROM SECTION 92(1) THAT IF INTERNATIONAL TRANSACTION IS RECORDED SHOWING A LOWER INCOME THAN ITS ALP INCOME , THEN IT IS THE HIGHER ALP INCOME , WHICH SHOULD BE CONSIDERED FOR THE PURPOSES OF COMPUTATION OF THE TOTAL INCOME . SECTION 92(3) OF THE ACT MANIFESTS THAT THE PROVISIONS OF THIS SECTION SHALL NOT APPLY IN A CASE WHERE THE COMPUTATION OF INCOME HAVING REGARD TO ALP HAS THE EFFECT OF REDUCING INCOME CHARGEABLE TO TAX. THE NET EFFECT OF SECTION 92(3) IS THAT IF TRANSACTED VALUE INCOME FROM AN INTERNATIONAL TRANSACTION IS MORE THAN ITS ARM S LENGTH PRICE IN COME , THEN, THE ALP INCOME SHOULD ITA NO.5140/DEL/2011 LG ELECTRONICS INDIA PVT. LTD. 14 BE DISCARDED AND THE ACTUAL INCOME SHOULD BE CONSIDERED. TO SUM UP, IT IS THE HIGHER OF ACTUAL INCOME OR THE ALP INCOME FROM AN INTERNATIONAL TRANSACTION, WHICH SHOULD TO BE TAKEN INTO CONSIDERATION FOR COMPUT I N G THE TOTAL INCOME. IT DOES NOT MEAN THAT THE ACTUAL MORE INCOME FROM ONE INTERNATIONAL TRANSACTION VIS - A - VIS ITS ALP INCOME SHOULD BE COMBINED WITH AN OTHER TRANSACTION WHICH GIVES ACTUAL INCOME LESS THAN THE ALP INCOME AND THEN BOTH BE PROCESSED TOGETHER UNDER THIS CHAPTER SO AS TO SET OFF THE INCOME (TRANSACTED INCOME MINUS ALP INCOME ) FROM THE FIRST TRANSACTION WITH THE POTENTIAL INCOME ARISING FROM THE SECOND TRANSACTION (ALP INCOME MINUS TRANSACTED VALUE INCOME ). WHEN WE CONSIDER MOR E THAN ONE SEPARATE TRANSACTION UNDER THE COMBINED UMBRELLA OF TNMM ON AN ENTITY LEVEL , IT IS QUITE POSSIBLE THAT A PROBABLE ADDITION ON ACCOUNT OF TRANSFER PRICING ADJUSTMENT ARISING FROM ONE INTERNATIONAL TRANSACTION MAY BE USURP ED B Y THE INCOME FROM THE OTHER INTERNATIONAL TRANSACTION GIVING HIGHER INCOME ON TRANSACTED VALUE . THAT IS THE REASON FOR WHICH THE LEGISLATURE HAS PROVIDED FOR DETERMINING THE ALP OF EACH INTERNATIONAL TRANSACTION SEPARATE FROM THE OTHER S . AS THE INTERNATIONAL TRANSACTION OF ROYALTY PAYMENT IS A SEPARATE ITA NO.5140/DEL/2011 LG ELECTRONICS INDIA PVT. LTD. 15 TRANSACTION AND NOT CLOSELY LINKED WITH THE OTHER TRANSACTIONS WITH WHICH THE ASSESSEE HAS MERGED IT , WE CANNOT ALLOW SUCH MERG ER FOR THE PURPOSES OF THE DETERMINATION OF ITS ALP ON ENTITY L EVEL UNDER TNMM . WE, THEREFORE, REJECT TH I S CONTENTION RAISED ON BEHALF OF THE ASSESSEE. 7.4. HAVING HELD THAT THE AUTHORITIES BELOW WERE JUSTIFIED IN REJECTING THE ASSESSEE S POINT OF VIEW OF COMBINING SEVERAL TRANSACTIONS UNDER THE TNMM , LET US EXAMINE IF THE APPLICATION OF CUP METHOD IS IN ORDER FOR DETERMINING THE ALP OF ROYALTY PAYMENT . BY NOW, IT IS FAIRLY SETTLED THROUGH A CATENA OF DECISIONS THAT THE CUP IS THE MOST APPROPRIATE METHOD TO DETERMINE THE ALP OF AN INTERNATIONAL TRANSACT ION PROVIDED THE APPROPRIATE COMPARABLE UNCONTROLLED DATA IS AVAILABLE. THE CUP IS CONSIDERED AS A MOST PREFERRED METHOD BECAUSE IT SEEKS TO COMPARE THE PRICE CHARGED OR PAID FOR PROPERTY TRANSFERRED OR SERVICES PROVIDED. IT IS UNDER THIS METHOD ALONE THAT THE PRICE CHARGED OR PAID IS DIRECTLY COMPARED WITH THE PRICE CHARGED OR PAID IN AN UNCONTROLLED COMPARABLE TRANSACTION. REST OF THE FOUR SPECIFIC METHODS SEEK TO MAKE COMPARISON OF THE PRICE CHARGED OR PAID INDIRECTLY THROUGH THE MEDIUM OF NORMAL PROFIT ACCRUING OR ARISING ITA NO.5140/DEL/2011 LG ELECTRONICS INDIA PVT. LTD. 16 IN A COMPARABLE UNCONTROLLED TRANSACTION. WHEN WE ADVERT TO THE FACTUAL POSITION OBTAINING IN THIS CASE, IT CAN BE NOTICED THAT THE APPROPRI ATE COMPARABLE UNCONTROLLED DATA OF THE INTERNATIONAL TRANSACTION OF ROYALTY PAYMENT IS AVAILAB LE , WHICH WAS FURNISHED BY THE ASSESSEE AND CONSIDERED BY THE TPO AS WELL AS THE DRP. AS SUCH, WE HOLD THAT THE CUP IS THE MOST APPROPRIATE METHOD FOR DETERMINING THE ALP OF ROYALTY TRANSACTION UNDER THE PRESENT CIRCUMSTANCES. II. WHETHER RATE OF R OYALTY A PPROV ED BY THE RBI IS BINDING ? 8.1. THE LD. AR CONTENDED THAT THE ROYALTY AT 5% AS PAID BY THE ASSESSEE TO ITS AE WAS DULY PERMITTED/APPROVED BY THE GOVERNMENT OF INDIA AND RESERVE BANK OF INDIA. RELYING ON CERTAIN TRIBUNAL DECISIONS, HE CONTENDED THAT THE ACTION OF THE TPO IN NOT ACCEPTING IT AS A COMPARABLE RATE WAS CONTRARY TO THE LAW. SOUNDING A CONTRA NOTE, T HE LD. D R PUT FORTH THAT SUCH RATES APPROVED BY THE GOVERNMENT OF INDIA/RESERVE BANK OF INDIA ARE FOR MEANT FOR THE PURPOSE OF REGULATING THE FLOW OF THE FOREIGN EXCHANGE UNDER THE FOREIGN EXCHANGE MANAGEMENT ACT AND, HENCE, ARE NOT BINDING ON THE TPO FOR THE COMPUTATION OF THE ALP. ITA NO.5140/DEL/2011 LG ELECTRONICS INDIA PVT. LTD. 17 HE BOLSTERED SUCH CONTENTION WITH THE SUPPORT OF THE JUDGMENT S IN CIT VS. NESTLE INDIA (2011) 337 ITR 103 (DEL) AND COCA COLA INC. VS. ASSTT. CIT (2009) 309 ITR 194 (P&H) AND C ERTAIN TRIBUNAL ORDERS . 8.2. WE HAVE HEARD THE RIVAL SUBMISSIONS ON THIS ASPE CT OF THE MATTER IN THE LIGHT OF VARIOUS DECISIONS CITED AT THE BAR. THERE IS NO DISPUTE ON THE FACT THAT CERTAIN BENCHES OF THE TRIBUNAL HAVE HELD THAT THE RATE OF ROYALTY AS APPROVED BY THE GOVERNMENT OF INDIA/RESERVE BANK OF INDIA SHOULD BE CONSIDERED AT ARM S LENGTH PRICE, WHEREAS OTHER BENCHES HAVE NOT AFFIRMED SUCH A VIEW. SOME OF THE DECISIONS HOLDING IN FAVOUR OF THE ASSESSEE ARE AS UNDER : - (I) ABHISHEK AUTO INDUSTRIES LTD. VS. CIT (ITA NO.1433/DEL/2009) (II) SONA OKEGAWA PRECISION FORGINGS LTD. VS. ADDL.CIT (ITA NO.4781/DEL/2010) (III) SGS INDIA PVT. LTD. VS. ACIT (ITA NO.2406/MUM/2006). 8.3. ON THE CONTRARY, SOME OF THE DECISIONS WHICH HAVE NOT APPROVED THIS LINE OF THINKING THAT THE RATE OF ROYALTY AS ALLOWED ITA NO.5140/DEL/2011 LG ELECTRONICS INDIA PVT. LTD. 18 BY THE GOV ERNMENT OF INDIA/RESERVE BANK OF INDIA SHOULD BE CONS TRUED A S A ARM S LENGTH RATE , ARE AS UNDER : - (I) SERDIA PHARMACEUTICALS (INDIA) (P) LTD. VS. ACIT (ITA NO.2469/MUM/2006). (II) P E ROT SYSTEMS TSI (INDIA) LTD. VS. JCIT (ITA NO.2320 - 2322/DEL/2008). (III) SKOL BREWERIES LTD. VS. ACIT (ITA NO. 6175/MUM/2011) 8.4. IN VIEW OF THE DIAGONALLY DIVERGENT DECISIONS OF THE TRIBUNAL ON THE POINT, WE WOULD HAVE ORDINARILY REFERRED THIS ISSUE FOR CONSIDERATION BY THE SPECIAL BENCH TO EVOLVE CONSENSUS. HOWEVER, THE FA CT OF THE MATTER IS THAT THIS ISSUE HAS CROSSED THE TRIBUNAL FORUM AND HAS COME UP FOR CONSIDERATION BY THE HON BLE HIGH COURTS. AS SUCH, THE CLEAVAGE OF THE OPINION AMONGST VARIOUS BENCHES OF THE TRIBUNAL , SHOULD BE PRESUMED TO HAVE EXTINCTED WITH THE ADVENT OF THE HIGH COURT JUDGMENTS, WHICH WE WILL SHORTLY ADVERT TO. 8.5. IN THE CASE OF NESTLE INDIA (SUPRA) , THE P ROVISIONS OF SECTION 40A(2) ALONG WITH SECTION 92 ETC. OF THE ACT CAME TO BE CONSIDERED BY T HEIR LORDSHIPS . IN THAT CASE, T HE TRIBUNAL DELETED ITA NO.5140/DEL/2011 LG ELECTRONICS INDIA PVT. LTD. 19 THE DISALLOWANCE U/S 40A(2), BEING THE EXCESSIVE AND UNREASONABLE PAYMENT OF ROYALTY TO THE ASSOCIATED CONCERN, BY HOLDING THAT SINCE THE PERMISSION WAS GIVEN BY THE RBI, ITS REASONABLENESS COULD NOT HAVE BEEN GONE INTO BY THE AO. SETTING ASIDE THE TRIBUNAL ORDER ON THIS SCORE, THE HON BLE DELHI HIGH COURT HELD THAT : THE TRIBUNAL IS NOT CORRECT IN OBSERVING THAT SINCE THE PERMISSION IS GIVEN BY THE RBI, THE REASONABLENESS AND GENUINENESS OF THE EXPENDITURE COULD NOT HAVE BEEN GONE INTO BY THE AO. THE PURPOSE FOR WHICH SUCH PERMISSION IS GIVEN BY THE RBI IS TOTALLY DIFFERENT. THE RBI IS ONLY CONCERNED WITH THE FOREIGN EXCHANGE AND, THEREFORE, WOULD LOOK INTO THE MATTER FROM THAT POINT OF VIEW. THE RBI, AT THE TIME OF GIVING SUCH PER MISSION WOULD NOT KEEP IN MIND THE PROVISIONS OF THE IT ACT AND THAT IS THE FUNCTION OF THE IT AUTHORITIES AND, THEREFORE, THEY CAN VALIDLY GO INTO SUCH AN ISSUE . IT IS EXPLICITLY CLEAR FROM THE ENUNCIATION OF LAW BY THE HON BLE DELHI HIGH COURT THAT THE GRANT OF PERMISSION BY THE RBI TO PAYMENT OF ROYALTY IS NOT SACROSANCT FOR THE PURPOSES OF THE ACT AND, CAN BE EXAMINED BY THE AO TO ASCERTAIN IT S EXCESSIVE NESS. WE WANT TO MAKE IT CLEAR THAT THIS JUDGMENT IN THE CASE OF NESTLE INDIA (SUPRA) WAS RENDERED FOR THE ASSESSMENT ITA NO.5140/DEL/2011 LG ELECTRONICS INDIA PVT. LTD. 20 YEARS 1997 - 98 AND 1998 - 99 . CHAPTER - X OF THE ACT CONT AINING THE TRANSFER PRICING PROVISIONS CAME INTO FORCE ONLY W.E.F. ASSESSMENT YEAR 2002 - 03. HOWEVER, THE FACT REMAINS THAT THE QUESTION BEFORE THE HON BLE HIGH COURT WAS TO CONSIDER THE REASONABLENESS OF THE ROYALTY AMOUNT PAID BY THAT ASSESSEE TO ITS ASSOCIATED CONCERN UNDER THE PROVISIONS OF SECTION 40A(2). THE NITTY - GRITTY OF SECTION 40A(2) IS TO DISALLOW ANY EXCESSIVE AND UNREASONABLE PAYMENT MADE TO THE CLOSELY RELA TED PERSONS AS REFERRED TO IN CLAUSE (B) OF SECTION 40A(2). SIMILARLY, THE PURPOSE OF CHAPTER - X OF THE ACT IS ALSO TO ENSURE THAT INCOME FROM INTERNATIONAL TRANSACTIONS IS COMPUTED HAVING REGARD TO THE ARM S LENGTH PRICE . I N THIS WAY, ANY EXCESS PAYMENT M ADE TO ASSOCIATED ENTERPRISES IN AN INTERNATIONAL TRANSACTION IS RECOMPUTED TO BRING IT IN LINE WITH WHAT AN INDEPENDENT PARTY WOULD CHARGE FROM ANOTHER UNRELATED PARTY . THE ESSENCE OF BOTH THE PROVISIONS IS SAME IN SO FAR AS THE PAYMENT FOR EXPENSE TO RE LATED PARTIES IS CONCERNED. 8.6. NOW WE TAKE UP THE DECISION IN THE CASE OF COCA COLA (SUPRA) . THE ASSESSEE IN THAT CASE FILED A WRIT PETITION REQUESTING TO QUASH THE NOTICES ISSUED UNDER SS. 148 AND 92CA(3) OF THE ACT. THE HON BLE PUNJAB & HARYANA H IGH COURT FRAMED FOUR QUESTIONS ITA NO.5140/DEL/2011 LG ELECTRONICS INDIA PVT. LTD. 21 FOR CONSIDERATION AND DECISION, INTER ALIA , QUESTION NO. (III) READING AS UNDER : - '(III) WHETHER PROVISIONS OF CHAPTER X ARE ATTRACTED WHEN BOTH THE PARTIES TO A TRANSACTION ARE SUBJECT TO TAX IN INDIA, IN ABSENCE OF ALLE GATION OF TRANSFER OF PROFITS OUT OF INDIA OR EVASION OF TAX ?' 8.7. ALL THE FOUR QUESTIONS WERE DECIDED AGAINST THE PETITIONER. WHILE DEALING WITH QUESTION NO. (III) ABOVE, THE HON BLE HIGH COURT HELD IN PARA 54 OF THE JUDGMENT THAT : THE CONTENTION THAT ACCORDING TO THE PERMISSION GRANTED BY THE RBI UNDER THE FERA, THE ASSESSEE CANNOT CHARGE MORE THAN PARTICULAR PRICE, CAN ALSO NOT CONTROL THE PROVISIONS OF THE ACT, WHICH PROVIDES FOR TAXING THE INCOME AS PER THE SAID PROVISION OR CO MPUTATION OF INCOME, HAVING REGARD TO ALP IN ANY INTERNATIONAL TRANSACTION, AS DEFINED. FROM THE ABOVE OBSERVATIONS OF THE HON BLE HIGH COURT, IT IS MANIFEST THAT CHARGING OR PAYING IN ACCORDANCE WITH THE AMOUNT PERMITTED BY THE RBI CANNOT MAKE THE TRANS FER PRICING PROVISIONS INA PPLICABLE. IN SUCH CASES ALSO, WHERE THE PAYMENT IS SO MADE OR ITA NO.5140/DEL/2011 LG ELECTRONICS INDIA PVT. LTD. 22 RECEIVED, THE PROVISIONS OF TRANSFER PRICING FOR DETERMINING ALP ARE NOT OUSTED. 8.8. THE LD. AR ARGUED THAT THIS JUDGMENT HAS BEEN OVERRULED BY THE HON BLE SUPREME COURT IN COCA COLA INDIA INC. VS. ADD L. CIT & ORS. (2011) 336 ITR 1 (SC) AND HENCE CEASES TO HAVE THE FORCE OF LAW. IN ORDER TO APPRECIATE THIS CONTENTION, IT IS PARAMOUNT TO NOTE THE BRIEF JUDGMENT OF THE HON BLE SUPREME COURT, WHICH RUNS A S UN DER : - THE ISSUE IN THIS SPECIAL LEAVE PETITION CONCERNS THE APPLICATION OF THE PRINCIPLE OF TRANSFER PRICING. IN THE CASE OF ASSESSEE HEREIN, NOTICE WAS ISSUED UNDER S. 148 OF THE IT ACT, 1961 ('ACT', FOR SHORT) FOR SOME OF THE ASSESSMENT YEARS. ON THE QUESTION OF JURISDICTION, A WRIT PETITION WAS FILED BY THE ASSESSEE, WHICH HAS BEEN DISPOSED OF BY THE HIGH COURT IN THE WRIT JURISDICTION. HOWEVER, ON GOING THROUGH THE PAPERS, WE FIND THAT FOUNDATIONAL FACTS ARE REQUIRED TO BE ESTABLISHED WHICH COULD NOT HAVE BEEN DONE BY WAY OF WRIT PETITION. FOR THE AFORESTATED REASONS, WE ARE OF THE VIEW THAT THE ASSESSEE SHOULD BE RELEGATED TO ADOPT PROCEEDINGS, ITA NO.5140/DEL/2011 LG ELECTRONICS INDIA PVT. LTD. 23 WHICH ARE PENDING, AS OF DATE, BEFORE VARIOUS AUTHORITIES UNDER THE ACT. ENCLOSED HEREWITH IS THE CHART IND ICATING THE PROCEEDINGS WHICH ARE PENDING BEFORE VARIOUS AUTHORITIES UNDER THE ACT. 2. WE, ACCORDINGLY, DIRECT THESE AUTHORITIES TO EXPEDITIOUSLY HEAR AND DISPOSE OF PENDING PROCEEDINGS AS EARLY AS POSSIBLE. IF THE PETITIONER - ASSESSEE HEREIN IS AGGRIEVED BY THE ORDERS PASSED BY ANY OF THESE AUTHORITIES, IT WILL HAVE TO EXHAUST THE STATUTORY REMEDY PROVIDED UNDER THE ACT. WE MAKE IT CLEAR THAT EACH OF THE AUTHORITIES WILL DECIDE THE MATTER UNINFLUENCED BY ANY OF THE OBSERVATIONS MADE IN THE IMPUGNED JUDGMEN T. 3. ACCORDINGLY, THE SPECIAL LEAVE PETITION STANDS DISPOSED OF. STAY ORDER GRANTED BY THIS COURT STANDS VACATED. 8.9. IT CAN BE SEEN FROM THE OBSERVATIONS OF TH E HON BLE SUPREME COURT THAT NO WHERE THE VIEW OF THE HON BLE HIGH COURT HAS BEEN REVERSED A S CONTENDED BY THE LD. AR. THE HON BLE SUPREME COURT HAS SIMPLY HELD THAT IN THE ABSENCE OF THE ITA NO.5140/DEL/2011 LG ELECTRONICS INDIA PVT. LTD. 24 FOUNDATIONAL FACTS , THE WRIT PETITION COULD NOT HAVE BEEN DISPOSED OF. ACCORDINGLY, THE ASSESSEE WAS RELEGATED TO THE PROCEEDINGS BEFORE THE AUTHORITIES AS PER LAW. IT WAS FURTHER MADE CLEAR THAT THE AUTHORITIES WILL DECIDE THE MATTER UNINFLUENCED BY ANY OF THE OBSERVATIONS MADE IN THE IMPUGNED JUDGMENT. THE MATERIAL FACT TO BE NOTED IS THAT THE HON BLE SUPREME COURT DID NOT VACATE THE PRINCIPLES LAID DOWN BY THE HON BLE HIGH COURT ON MERITS, BUT SIMPLY HELD THAT IN THE ABSENCE OF FACTUAL POSITION CONCERNING THAT CASE IN WRIT PETITION, THE AUTHORITIES UNDER THE ACT WERE TO DECIDE THE PROCEEDINGS INDEPENDENT OF SUCH PRINCIPLES . IN SO FAR AS THE LEGAL PRINCIPLES ARTICULATE D BY THE HON BLE HIGH COURT, INCLUDING THE APPLICABILITY OF THE TRANSFER PRICING PROVISIONS EVEN ON THE TRANSACTIONS WHICH HAVE BEEN APPROVED BY THE RBI, ARE CONCERNED, THESE STAND AS SUCH. IF THESE ARE NOT AFFIRMED BY TH E HON BLE SUPREME COURT, THE SAME CANNOT BE EQUALLY CONSIDERED AS OVERRULED AS WELL. BE THAT AS IT MAY, THERE IS NO DOUBT ABOUT THE AVAILABILITY OF THE JUDGMENT OF THE HON BLE DELHI HIGH COURT IN NESTLE INDIA (SUPRA) ON THE ISSUE, WHICH UNMISTAKABLY PROVID ES THAT THE PERMISSION GRA NTED BY THE RBI UNDER THE FERA CAN NOT CONTROL THE PROVISIONS OF THE ACT . ITA NO.5140/DEL/2011 LG ELECTRONICS INDIA PVT. LTD. 25 8.10. WHEN WE VIEW THE ORIGINAL APPROVAL GRANTED BY THE RBI TO THE ASSESSEE FOR THE PAYMENT TOWARDS FOREIGN TECHNOLOGY TRANSFER, THROUGH ITS LETTER DT. 4.10.2001, A COPY OF WHICH IS AVAILABLE ON PAGE 3065 ONWARDS OF THE PAPER BOOK , IT SPRINGS UP THAT THE SAME ALSO PROVIDED IN NO UNCERTAIN TERMS THAT IT WAS NOT RELEVANT FOR ANY OTHER LAW EXCEPT FEMA. P ARA 7 OF ANNEXURE TO THE LETTER, AVAILABLE ON PAGE 3067 OF THE PAPER BOOK, STATES : THAT OUR APPROV A L IS ONLY FOR PAYMENT TOWARDS TECHNOLOGY TRANSFER FROM FEMA ANGL E AND SH O ULD NOT BE CONSTRUED AS APPROVAL UNDER THE PROVISION OF ANY OTHER LAW IN FORCE . 8.11. THE LD. AR PRESSED INTO SERVICE RULE 10B( 2)(D) OF THE IT RULES TO CONTEND THAT THE GOVERNMENT ORDERS IN FORCE MUST BE TAKEN INTO CONSIDER ATION . IT WAS ARGUED THAT SINCE THE RBI DIRECTION PROVIDING PAYMENT OF ROYALTY UP TO 5% IS NOTHING BUT A GOVERNMENT ORDER, THE SAME SHOULD BE ACCEPTED AS A BEN CHMARK. 8.12. WE ARE NOT CONVINCED WITH THIS SUBMISSION FOR THE REASON THAT RBI HAS PROVIDED MAXIMUM PERMISSIBLE RATE OF ROYALTY WHICH CAN BE PAID . THIS RATE OF ROYALTY IS APPLICABLE TO ALL THE MANUFACTURING ACTIVITIES ACROSS THE BOARD WITH A FEW EXCE PTIONS. ITA NO.5140/DEL/2011 LG ELECTRONICS INDIA PVT. LTD. 26 THE TECHNICAL KNOW - HOW REQUIRED FOR MANUFACTURING ELECTRONIC GOODS IS QUITE DIFFERENT FROM THE TECHNICAL KNOW - HOW REQUIRED FOR MANUFACTURING AUTOMOBILES OR HEAVY INDUSTRIAL EQUIPMENTS. THAT IS THE REASON FOR WHICH THE GOVERNMENT HAS PROVIDED A UNI VERSAL UPPER RATE OF ROYALTY SO THAT THE PARTIES MAY NEGOTIATE THE ACTUAL RATE DEPENDING UPON COMPLEXITY OF THE TECHNICAL KNOW - HOW REQUIRED FOR THE CONCERNED PRODUCT. WITH THE GIVEN MAXIMUM COMMON RATE OF 5%, T HE ACTUAL RATE MAY BE ANYTHING 5% OR 4% OR 3% OR 2% OR 1% ETC. , DEPENDING UPON THE INTRICACY OF THE KNOW - HOW REQUIRED FOR THE CONCERNED PRODUCT ALONG WITH OTHER RELEVANT FACTORS . SUCH A RATE FLUCTUATING FROM 0% TO 5% CAN NEVER CONSTITUTE A BENCHMARK FOR ALL THE BUSINESSES FOR WHICH TECHNICAL KNOW - HOW MAY BE REQUIRED. WHAT WE NEED TO DO I N A TRANSFER PRICING ANALYSIS IS TO FIND OUT A COMPARABLE CASE ENGAGED IN THE SAME LINE OF BUSINESS . T HE RATE OF ROYALTY FOR USE OF TECHNICAL KNOW - HOW OF INDUSTRIAL EQUIPMENT S CANNOT BE CONSIDERED AS COMPARABLE WITH THAT OF ELECTRONIC GOODS. EVEN WITHIN THE OVERALL ELECTRONIC GOODS SEGMENT, THERE CAN BE DIFFERENT PRODUCTS OR COMPONENTS AND THE TECHNICAL KNOW - HOW REQUIRED FOR COMPONENTS CANNOT BE COMPARED WITH THE ELECTRONIC GOODS ON THE WHOLE. IN ITA NO.5140/DEL/2011 LG ELECTRONICS INDIA PVT. LTD. 27 OUR CONSIDERED OPINIO N, A T BEST, THE RATE OF ROYALTY APPROVED BY THE RBI HAS A PERSUASIVE VALUE IN THE PROCESS OF DETERMINATION OF ALP OF ROYALTY FOR A PARTICULAR CASE AND CANNOT BE CONSIDERED AS CONCLUSIVE . 8.13. I T IS RELEVANT TO MENTION THAT THE LD. AR INITIALLY ARGUED AND ALSO SUBMITTED SYNOPSIS IN SUPPORT OF THE CONTENTION , THAT IF THE PAYMENT OF ROYALTY HAS BEEN MADE AS PER THE RATE APPROVED BY THE RBI, THEN NO FURTHER BENCHMARKING IS REQUIRED AND THE QUESTION OF DETERMINATION OF ALP SHOULD BE DEEMED AS SET TO REST . HOWEVER, IN THE REJOINDER, HE FAIRLY CONCEDED AND RIGHTLY SO, THAT SUCH APPROVAL HAS ONLY A PERSUASIVE VALUE AND IS NOT CONCLUSIVE. THE CONTRARY CONTENTION INITIALLY ADVANCED ON BEHALF OF THE ASSESSE E IN THIS REGARD IS, THEREFORE, JETTISONED ON MERITS, WHICH HAS ALSO BECOME INFRUCTUOUS IN VIEW OF THE LD. AR S STAND IN THE REJOINDER . III. SELECTION OF SOME COMPANIES AS COMPARABLE : 9.1. IT IS PERTINENT TO NOTE THAT THE ASSESSEE CHOSE EIGHT COMPANIES AS COMPARABLE. THE TPO REDUCED IT TO ONE AND THE DRP ENHANCED THE IR NUMBER TO THREE. THE LD. AR INSISTED O N THE ITA NO.5140/DEL/2011 LG ELECTRONICS INDIA PVT. LTD. 28 INCLUSION OF OTHER FIVE COMPANIES ALSO IN THE LIST OF COMPARABLES. BEFORE EXAMINING THE COMPARABILITY OF THESE FIVE COMPANIES, WE NEE D TO NOTE THAT THE ASSESSEE PAID ROYALTY FOR THE USE OF TECHNICAL KNOW - HOW FOR MANUFACTURING OF C OLOUR TV S , A IR CONDITIONERS, W ASHING MACHINES, R EFRIGERATORS AND M ICROWAVES. THE FIRST OF FIVE CASE S IS THAT OF HITACHI LTD. (LICENSOR) AND VOLTAS LTD. ( LICENSEE ) IN WHICH ROYALTY WAS PAID @ 5%. THIS COMPANY OBTAINED TECHNICAL KNOW - HOW FOR MANUFACTURE OF STEAM FIRED VAPOUR . ON BEING CALLED UPON TO EXPLAIN THE NATURE OF THIS PRODUCT, THE LD. AR STATED THAT IT I S A COMPONENT OF AN AIR - CONDITIONER. WE A RE UNABLE TO ACCEPT THE ASSESSEE S CONTENTION FOR INCLUDING THIS COMPANY IN THE LIST OF COMPARABLES BECAUSE THIS COMPANY IS USING TECHNICAL KNOW - HOW FOR MANUFACTURE OF A COMPONENT OF AN AIR CONDITIONER, WHEREAS THE ASSESSEE IS USING TECHNICAL KNOW - HOW FOR THE MANUFACTURE OF AIR CONDITIONERS AS SUCH. THERE CAN BE NO COMPARISON OF KNOW - HOW FOR MANUFACTURING A COMPONENT OF AN AIR CONDITIONER WITH THE MANUFACTURING OF AC AS SUCH . SINCE THIS COMPANY IS FUNCTIONALLY DISSIMILAR, WE UPHOLD ITS EXCLUSION FROM THE LIST OF COMPARABLES. ITA NO.5140/DEL/2011 LG ELECTRONICS INDIA PVT. LTD. 29 9.2. THE NEXT CASE IS EATCO W ILLIAM S GROUP (LICENSOR) AND BLUESTAR LTD. ( LICENSEE ). IN THIS CASE, PAYMENT WAS MADE FOR OBTAINING TECHNICAL KNOW - HOW FOR MANUFACTUR E OF INVICTS PAC USAGE OF A IR C ONDITIONING. HERE AGAIN, IT WAS AGREED THAT THIS WAS A CASE OF USE OF TECHNOLOGY FOR THE MANUFACTURE OF A COMPONENT OF AN AC AND NOT AC IN ITSELF. ADOPTING THE REASONING GIVEN ABOVE, WE UPHOLD THE EXCLUSION OF THIS COMPANY ALSO FROM THE LIST OF COMPARABL ES. 9.3. THE NEXT C ASE IS SAMSUNG ELECTRONICS CO. LTD. (LICENSOR ) AND VIDEOCON APPLIANCES LTD. ( LICENSEE ). THIS COMPANY OBTAINED TECHNICAL KNOW - HOW FOR MANUFACTURE OF S HOWCASE OF REACH - I N - T YPE AND O PEN T YPE REACH - IN - C OOLER AND OPEN F REEZER. HERE AGAIN , IT WAS ADMITTED THAT THIS TRANSACTION WAS FOR OBTAINING TECHNICAL KNOW - HOW FOR MANUFACTUR ING COMPONENTS OF ACS AND R EFRIGERATORS AND NOT THE ACS AND REFRIGERATORS AS SUCH . FOLLOWING THE REASON S GIVEN ABOVE, THIS C ASE ALSO CANNOT BE CONSIDERED AS COMPARABLE. ERGO, WE UPHOLD THE EXCLUSION OF THIS C ASE ALSO FROM THE LIST OF COMPARABLES. ITA NO.5140/DEL/2011 LG ELECTRONICS INDIA PVT. LTD. 30 9.4. THE NEXT C ASE IS SRS LABS INC. (LICENSOR) AND SALORA INTERNATIONAL LTD. ( LICENSEE ). THIS COMPANY MADE PAYMENT FOR TECHNICAL KNOW - HOW FEES FOR MANUFACTURE OF S PEAKER . OBVIOUSLY, THE TECHNICAL KNOW - HOW FOR MANUFACTURING OF S PEAKER CANNOT BE FUNCTIONALLY COMPARED WITH THE KNOW - HOW FOR MANUFACTURING OF AC, R EFRIGERATOR AND WASHING MACHINE ETC. THUS, THIS COMPANY IS ALSO HELD TO HAVE BEEN RIGHTLY EXCLUDED. 9.5. THE LAST CASE IS VILTER MANUFACTURING CORPORATION (LICENSOR) AND FRICK INDIA LTD. ( LICENSEE ). IN THIS CASE, PAYMENT OF ROYALTY WAS MADE FOR OBTAINING TECHNICAL KNOW - HOW FOR THE MANUFACTURE OF R EFRIGERATION COMPRESSORS. THERE IS HARDLY ANY NEED TO AC CENTUATE THAT REFRIGERATION COMPRESSORS , BEING A COMPONENT OF REFRIGERATOR , CANNOT BE COMPARED WITH REFRIGERATOR AS SUCH. WE, THEREFORE, HOLD THAT THE AUTHORITIES BELOW WERE RIGHT IN EXCLUDING THIS COMPANY ALSO FROM THE LIST OF COMPARABLES. 9.6. THE OTHER THREE C ASES WHICH FIND MENTION IN THE LIST OF COMPARABLES HAVE PAID ROYALTY FOR OBTAINING TECHNICAL KNOW - HOW FOR THE M ANUFACTUR E OF C OLOUR TVS. SINCE THE ASSESSEE HAS ALSO PAID ROYALTY FOR OBTAINING TECHNICAL KNOW - HOW FOR MANUFACTURE, ITA NO.5140/DEL/2011 LG ELECTRONICS INDIA PVT. LTD. 31 INTER ALIA , OF COLOUR TVS , THESE THREE COMPANIES WERE RIGHTLY INCLUDED. 9.7. THE LD. AR SUBMITTED THAT IT SOUGHT TO INCLUDE CERTAIN OTHER COMPANIES IN THE LIST OF COMPARABLES BEFORE THE DRP BUT WITHOUT ANY SUCCESS . REFERRING TO PAGES 206 AND 207 OF THE APPEAL SET, BEING THE PART OF OBJECTIONS BEFORE THE DRP, THE LD. AR INVITED OUR ATTENTION TOWARDS THE ASSESSEE S REQUEST FOR INCLUSION OF CERTAIN COMPANIES IN THE LIST OF COMPARABLES WHICH WERE SEARCHED BY USING R OYALTYSTAT DATABASE. IT WAS STATED THAT SUCH COMPANIES WERE REJECTED WITHOUT ASSIGNING ANY REASON. 9.8. AT THE OUTSET, WE WANT TO MAKE IT CLEAR THAT THERE CAN BE NO HINDRANCE IN THE ASSESSEE URGING FOR THE INCLUSION OF NEW COMPANIES IN THE LIST OF COMPARABLES FOR THE FIRST TIME BEFORE THE DRP. THE ONLY COND ITION IS THAT SUCH COMPANIES SHOULD ACTUALLY CONFORM TO THE COMPARABILITY CRITERION WITH THE ASSESSEE. FROM THE SUBMISSIONS MADE BEFORE THE DRP IN THIS REGARD, IT CAN BE SEEN THAT THE ASSESSEE USED R OYALTYSTAT ( NOT AN INDIAN DATA BASE ) WITH CERTAIN FILTERS FOR SELECTING NEW COMPARABLE COMPANIES . THEREAFTER, THERE IS DISCUSSION IN SUCH OBJECTIONS BEFORE THE DRP ITA NO.5140/DEL/2011 LG ELECTRONICS INDIA PVT. LTD. 32 ABOUT THE SEARCH FOR POTENTIAL CU P RESULTING IN AN INTERQUARTILE RANGE OF ROYALTY RATES BETWEEN 5% AND 9% WITH MEDIAN OF 7%. THIS INTERQUART IL E RANGE OF 5% AND 9% WAS COMPUTE D BY COMBINING THE INTERQUARTILE RANGE CONSTITUTED OF SELECT ED TECHNOLOGY CUPS AND THE INTERQUARTIL E RANGE CONSTITUTED A SELECT ED TRADE MARK CUPS. WE ARE DIS INCLINED TO ACCEPT THE REQUEST OF THE ASSESSEE FOR THE INCLUSION OF SUCH COMPANIES SELECTED BY USING INTERQUARTIL E RANGE OF ROYALTY. THE INDIAN LEGISLATION DOES NOT ADMIT SUCH INTERQUARTIL E RANGE , WHICH IS PREVALENT IN SOME OTHER COUNTRIES . THE INDIAN LAW TALKS OF ARITHMETIC MEAN OF ALL THE POTENTIAL COMPARABLE COMPANIES. THE FIRST PROVISO TO S ECTION 92C(2) OF THE ACT CLEARLY PROVIDES THAT : WHERE MORE THAN ONE PRICE IS DETERMINED BY THE MOST APPROPRIATE METHOD, THE ARM S LENGTH PRICE SHALL BE TAKEN TO B E THE ARITHMETIC MEAN OF SUCH PRICES. I N OUR CONSIDERED OPINION, THERE IS NO MERIT IN THE CONTENTION OF THE LD. AR FOR INCLUSION OF SOME OTHER COMPANIES IN THE LIST OF COMPARABLES ON THE BASIS OF INTERQUARTILE RANGE . ITA NO.5140/DEL/2011 LG ELECTRONICS INDIA PVT. LTD. 33 9.9. WE SUM UP OUR CONCLUSION ON THIS ISSUE BY HOLDING THAT THE DRP WAS JUSTIFIED IN DIRECTING THE AO TO INCLUDE ONLY THREE COMPANIES IN THE LIST OF COMPARABLES TO THE EXCLUSION OF OTHER COMPANIES. TH E CONTENTION RAISED ON BEHALF OF THE ASSESSEE FOR EXPANDING THE LIST OF COMPARABLES , THEREFORE, FAILS. IV. D E DUCTION FOR PERPETUAL AGREEMENT : 10.1. THE LD. AR ARGUED THAT THE DRP WAS NOT JUSTIFIED IN DIRECTING TO REDUCE THE AVERAGE RATE OF ROYALTY OF COMPAR ABLE COMPANIES ( HAVING A FIXED TERM ROYALTY AGREEMENTS) BY 1% ON ACCOUNT OF ASSESSEE S PERPETU AL ROYALTY AGREEMENT WITH LG ELECTRONICS INC. THE LD. AR CONTENDED THAT ALTHOUGH THERE WAS NO FIXED TERM PRESCRIBED FOR LICENSING OF TECHNICAL KNOW - HOW IN THE AGREEMENT BETWEEN THE ASSESSEE AND LG ELECTRONICS INC. AND WAS THUS PERPETUAL , YET IT PROVIDED FOR ITS TERMINATION IN CERTAIN CIRCUMSTANCES. IT WAS SUBMITTED THAT THE FIXED TE NURE OF THE AGREEMENTS FOR SUPPLY OF KNOW - HOW OF THREE COMPARABLE COMPANIES CHOSEN BY THE AUTHORITIES BELOW RANGED FROM 5 TO 7 YEARS. H E STATED THAT INSTEAD OF REDUCING THE AVERAGE RATE OF ROYALTY BY 1%, THERE SHOULD HAVE BEEN ENHANCEMENT OF 1% ITA NO.5140/DEL/2011 LG ELECTRONICS INDIA PVT. LTD. 34 BECAUSE A PERSON WITH A PERPETUAL AGREEMENT IS ALWAYS IN A DISADVANTAGE OUS POSITION BECAUSE OF THE FEAR OF OBSOL ESCENCE OF TECHNOLOGY . THE LD. D R OPPOSED SUCH SUBMISSIONS BY CONTENDING THAT A PERPETUAL AGREEMENT ASSURES THE LICENSOR OF THE LICENSING OF TECHNICAL KNOW - HOW AND OTHER RIGHT S ON A LONG - TERM BASIS WITHOUT ANY HASSLE OF VENTURING INTO THE HAZARDOUS EXERCISE OF REPEATEDLY FIND ING A NEW CUSTOMER AFTER THE CONCLUSION OF THE EARLIER TENURE . ACCORDINGLY, IT WAS PUT FORTH BY THE LD. DR THAT AN AGREEMENT FOR A FIXED SMALL PERIOD NORMALLY GETS HIGH RATE OF ROYALTY VIS - A - VIS THE PERPETUAL AGREEMENT. 10.2. W E FIND THAT THERE IS NO DISPUTE ON THE FACT THAT THE ASSESSEE ENTERED INTO THE AG REEMENT WITH LG ELECTRONICS FOR SUPPLY OF TECHNICAL ASSISTANCE ON PERPETUAL BASIS. ON THE OTHER HAND, THE THREE COMPANIES SHORTLISTED AS COMPARABLE S, ENTERED INTO AGREEMENT FOR A LIMITED PERIOD OF TIME. THE CONTENTION OF THE LD. AR ABOUT THE AGREEMENT HAVING TERMINATION CLAUSE MAKING IT AS NON - PERPETUAL , DOES NOT STAND ANYWHERE. A BARE READING OF THIS CLAUSE POINTS OUT THAT IT IS HEAVILY LOADED IN FAVO UR ON THE LICENSOR AND THERE IS VERY LIMITED SCOPE FOR THE ASSESSEE - LICENSEE TO SEEK TERMINATION OF THE A GREEMENT. NOW, WE ESPOUSE THE QUESTION AS ITA NO.5140/DEL/2011 LG ELECTRONICS INDIA PVT. LTD. 35 TO WHETHER ANY ADJUSTMENT IS CALLED FOR IN THE PRESENT FACTS AND CIRCUMSTANCES WHERE IN THE ASSESSEE ENTERED I NTO PERPETUAL AGREEMENT AND THE COMPARABLES HAD ONLY A FIXED TERM AGREEMENT S . FIRSTLY, WE TAKE UP THE CONTENTION OF THE LD. AR ABOUT THE PREMIUM TO THE AGREEMENT IN PERPETUITY DUE TO FEAR OF OBSOLESCENCE OF TECHNOLOGY. I T IS RELEVANT TO MENTION THAT WHEN T HE LD. DR WAS TRYING TO MAKE OUT A CASE THAT THE RATE OF ROYALTY PAID BY THE ASSESSEE WAS FOR THE SUPPLY OF TECHNICAL KNOW - HOW EXISTING AT THE TIME OF ENTERING INTO THE ORIGINAL AGREEMENT, WITHOUT ANY PROVISION FOR UPGRADATION, THE LD. AR COUNTERED SUCH ARGUMENT BY STATING THAT THE UPGRADATION WAS TO BE PROVIDED BY THE LG INC. TO THE ASSESSEE FROM TIME TO TIME WITHIN THE FRAMEWORK OF THIS VERY AGREEMENT AS WAS PROVIDED UNDER ARTICLE 4 OF THE AGREEMENT PR OVIDING FOR THE USE OF INDUSTRIAL PROPERTY RIGHTS, D ESIGNS, TECHNICAL KNOW - HOW ETC. FOR ALL TYPES, SIZES AND MODELS OF COLOUR TELEVISION, BEING CURRENTLY MANUFACTURED AND ANY NEW TYPES, SIZES AND MODELS OF COLOUR TELEVISION THAT M AY BE MANUFACTURED IN FUTURE . IT WAS AL SO SHOWN WITH THE HELP OF ARTICLE 3.2 OF THE AGREEMENT DT. 1.7.200, PROVIDING THAT THE ADDITIONAL MODELS SELECTED BY LICENSEE AND AGREED BY LICENSOR SHALL BE ITA NO.5140/DEL/2011 LG ELECTRONICS INDIA PVT. LTD. 36 DEEMED TO HAVE BEEN INCLUDED IN THE AGREED PRODUCTS. THAT IS HOW , IT WAS ARGUED THAT THE ROYALTY PAID WAS NOT ONLY FOR THE TECHNICAL ASSISTANCE AS PROVIDED AT THE TIME OF ENTERING IN TO THE AGREEMENT, BUT ALSO FOR THE FUTURE MODELS OF THE PRODUCTS . THIS SHOWS THAT THE L ICENSOR IS BOUND TO PROVIDE UPGRADED KNOW - HOW OF TH E PRODUCTS FROM TIME TO TIME AND IT IS NOT THE CASE THAT WHATEVER KNOW - HOW WAS PROVIDED AT THE TIME OF ENTERING INTO AGREEMENT , SHALL CONTINUE FOREVER . THIS POSITION BELIES THE CONTENTION OF THE LD. AR ABOUT THE OBSOLESCENCE OF TECHNOLOGY CALLING FOR UPWAR D ADJUSTMENT IN THE PROFIT RATE OF COMPARABLES. 10.3. AT THIS STAGE, IT IS SIGNIFICANT TO MENTION THAT THE PERPETUAL AGREEMENT BETWEEN THE ASSESSEE AND LG ELECTRONICS INC. IS NOT SUBJECT TO A FIXED RATE OF ROYALTY. WITH EVERY INCREASE ALLOWED BY THE GOVERNMENT OF INDIA, THE ASSESSEE AND ITS AE HAVE REVISED UPWARD S THE RATE OF ROYALTY START ING WITH 1% AND GOING UPTO 5%. IT CAN BE SEEN THAT THE REVIEW OF THE RATE OF ROYALTY CLAUSE HAS BEEN STIPULATED I N THE A GREEMENT DATED 1 ST JULY, 2001. ARTICLE 4.1 (A) WITH THE CAPTION REVIEW OF THE ROYALTY PROVIDES THAT T HE PARTIES AGR EE TO REVIEW AND RE - NEGOTIATE THE RATE OF R OYALTY, T ECHNICAL A SSISTANCE F EES, IF REQUIRED , WITHIN 90 DAYS BEFORE THE ITA NO.5140/DEL/2011 LG ELECTRONICS INDIA PVT. LTD. 37 COMMENCEMENT OF EVERY THIRD (3 RD ) YEAR STARTING FROM THE E FFECTIVE D ATE, I.E., JULY 1, 2001 , SUBJECT TO PRIOR APPROVAL OF THE GOVERNMENT OF INDIA, IF REQUIRED . IT, IS THUS EVIDENT THAT WITH THIS CLAUSE OF THE AGREEMENT, THE RATE OF ROYALTY, WHICH WAS FIXED AT 1% VIDE A GREEMENT DATED 1 ST JULY, 2001, INCREASED TO 3% W.E.F. 1.1.2003 AND THEN ZOOME D TO 5% W.E.F. 1.1. 20 04 , IN CONFORMITY WITH THE INCREASE ALLOWED BY THE GOVERNMENT OF INDIA. 10.4. AT THIS JUNCTURE, WE CONSIDER IT EXPEDIENT TO TAKE NOTE OF ONE MORE FACT. A PART FROM THE ABOVE ROYALTY, THE ASSESSEE HAS ALSO SEPARATELY PAID DESIGN AND DEVELOPMENT FEE AMOUNTING TO `38.96 CRORE TO LGEK AND `3.32 CRORE T O LG ELECTRONICS SHEN YANG INC. , WHICH HAS BEEN CONSIDERED BY THE TPO AS A PART OF THE ISSUE OF ROYALTY PAYMENT . T HIS DESIGN AND DEVELOPMENT FEE IS CONSIDERATION PAID FOR OBTAINING DESIGN AND DEVELOPMENT SERVICES WIT H CERTAIN MODIFICATIONS/CUSTOMIZ ATION AS REQUIRED BY THE ASSESSEE TO MAKE THE SAME PRODUCTS, FOR WHICH IT PAID ROYALTY, MORE ACCEPTABLE TO THE INDIAN CONSUMER S AND CONDITIONS. STILL FURTHER, THE ASSESSEE ALSO AGREED TO PAY SEPARATELY FOR THE ADDITIONAL MODEL(S) OF THE SAME PRODUCTS . ARTICLE 4.1(B) OF THE AGREEMENT ON PAGE 374 OF THE PAPER BOOK PROVIDES THAT : ITA NO.5140/DEL/2011 LG ELECTRONICS INDIA PVT. LTD. 38 A DDITIONAL MODEL(S) FEES FOR THE NEW CONCEPTUAL MODEL(S) LIKE NEWLY DESIGNED MOULD CHASIS MORE COMMONLY KNOWN AS CIRCUIT KIT OR PRINTED CIRCUIT BOARD, DIGITAL TVS, HIGH DEFINITION TVS OR ANY OTHER NEWLY DESIGNED PRODUCTS TO BE DECIDED AT LICESOR S OPTION SHALL BE NEGOTIATED DIFFER ENTLY. FROM THE ABOVE DISCUSSION, IT IS PALPABLE THAT IN ADDITION TO 5% ROYALTY , THE ASSESSEE HAS ALSO SEPARATELY PAID FOR DESIGN AND DEVELOPMENT FEE AND UNDERTAKEN TO PAY CONSIDERATION FOR NEW TECHNOLOGY IN THE SHAPE OF ADDITIONAL MODEL(S) FEES , WHICH AMOUNTS ARE ALSO SOMEWHAT AKIN TO THE PAYMENT OF ROYALTY ALBEIT WITH DIFFERENT NOMENCLATURES. 10.5. REVERTING TO THE MAIN DISCUSSION, WE FIND THAT THE ASSESSEE ENTERED INTO A PERPETUAL AGREEMENT FOR GETTING TECHNICAL KNOW - HOW, TO BE UPGRADED FROM TIME TO TIME, WITH THE RE - NEGOTIABLE ROYALTY CLAUSE AND THUS PAID ROYALTY DURING THE YEAR AT THE MAXIMUM PERMISSIBLE DOMESTIC RATE OF 5% COUPLED WITH THE PAYMENT OF DESIGN AND DRAWING FEES AND ALSO UNDERT AK ING TO PAY ADDITIONAL MODEL(S) FEE . IN CONTRAST, THE AGREEMENTS ENTERED INTO BY THE COMPARABLE COMPANIES ARE OF FIXED TERM. WHEN AN AGREEMENT WITH A FIXED TERM IS ENTERED INTO, THE POSSIBILITY OF NON - UTILIZATION OF THE TECHNICAL KNOW - HOW DURING INTERREG NUM, BEING ITA NO.5140/DEL/2011 LG ELECTRONICS INDIA PVT. LTD. 39 FROM THE TERMINATION OF THE FIRST AGREEMENT TILL THE ENTERING INTO OF A NEW AGREEMENT , CANNOT BE RULED OUT. IT IS BUT NATURAL TO FACTOR THE EFFECT OF SUCH TEMPORARY LULL IN THE RATE OF ROYALTY TO BE CHARGED AS PER THE COMMERCIAL REALITIES , SO AS TO SET OFF THE POSSIBLE LOSS DUE TO TEMPORARY NON - USER OF TECHNICAL INFORMATION AFTER THE TERMINATION OF THE AGREEMENT. THIS TENDS TO INCREASE THE RATE OF ROYALTY IN A CASE OF FIXED TERM LICENSE . AS THERE CAN BE NO SUCH POSSIBILITY OF NON - USER OF TECHNICAL KNOW - HOW IN THE CASE OF A N AGREEMENT WITH PERPETUITY, OTHER THINGS BEING EQUAL, THE RATE OF ROYALTY IN A PERPETUAL AGREEMENT IS BOUND TO BE LOW . 10.6. IN AN EARLIER PARA, WE HAVE UPHELD THE A PPLICATION OF CUP AS THE MOST APPROPRIATE METHOD FOR THE DETERMINATION OF ALP OF TH E INTERNATIONAL TRANSACTION OF ROYALTY PAYMENT . RULE 10B(1)(A) OF THE I . T . RULES, DEALS WITH THE COMPUTATION OF ARM S LENGTH PRICE UNDER THE CUP METHOD. SUB - CLAUSE (I ) PROVIDES THAT THE PRICE CHARGED OR PAID IN A COMPARABLE UNCONTROLLED TRANSACTION OR A NUMBER OF SUCH TRANSACTIONS IS IDENTIFIED. SUB - CLAUSE (II) STIPULATES THAT SUCH PRICE IS ADJUSTED TO ACCOUNT FOR DIFFERENCES IF ANY, BETWEEN THE INTERNATIONAL TRANSAC TION AND THE COMPARABLE UNCONTROLLED TRANSACTIONS .. . SUB - CLAUSE (III) PROVIDES THAT THE ITA NO.5140/DEL/2011 LG ELECTRONICS INDIA PVT. LTD. 40 ADJUSTED PRICE ARRIVED AT UNDER SUB - CLAUSE (II) IS TAKEN AS ARM S LENGTH PRICE . WHEN WE VIEW THESE THREE SUB - CLAUSES OF RULE 10B(1)(A), IT COMES TO THE FORE THAT T HE PRICE CHARGED OR PAID IN A COMPARABLE UNCONTROLLED TRANSACTION IS REQUIRED TO BE ADJUSTED IN SUCH A MANNER SO AS TO IRON OUT THE DIFFERENCES BETWEEN THE INTERNATIONAL TRANSACTION AND COMP ARABLE UNCONTROLLED TRANSACTION S . IT IS SUCH ADJUSTED PRICE, WHICH IS CONSIDERED AS ALP. TURNING TO THE FACTUAL SCENARIO PREVAILING IN THE EXTANT CASE, IN WHICH , ON ONE HAND, THE INTERNATIONAL TRANSACTION IS FOR PAYMENT OF ROYALTY UNDER A PERPETUAL AGREEMENT AND THE COMPARABLE UNCONTROLLED TRANSACTIONS HAVE A FIXED TE RM AGREEMENTS COMMANDING HIGHER RATE OF ROYALTY , THERE IS A NEED TO ADJUST THE PRICE OF SUCH UNCONTROLLED TRANSACTIONS IN CONFORMITY WITH SUB - CLAUSE (II) OF RULE 10B(1 )(A) SO TO BRING IT AT PAR WITH THE INTERNATIONAL TRANSACTION UNDER CONSIDERATION. THIS CAN BE DONE BY SUITABLY REDUCING THE RATE OF ROYALTY PAID BY THE COMPARABLE COMPANIES TO EQUALIZE IT WITH THE CONDITION OF PERPETUAL AGREEMENT COMMANDING RELATIVELY LOW RATE O F ROYALTY . WE, THEREFORE, HOLD IN PRINCIPLE THAT THE AUTHORITIES B ELOW WERE ITA NO.5140/DEL/2011 LG ELECTRONICS INDIA PVT. LTD. 41 JUSTIFIED IN REDUCING T HE AVERAGE RATE OF ROYALTY OF COMPARABLE UNCONTROLLED TRANSACTIONS. 10.7. THE NEXT QUESTION IS ABOUT THE DETERMINATION OF SUCH REDUCTION IN THE RATE OF ROYA LTY. BOTH THE SIDES FAIRLY AGREED THAT THE ISSUE OF QUANTIFICATION OF ADJUSTMENT TO BE ALLOWED ON ACCOUNT OF FIXED TERM AND PERPETUAL LICENSE IS A VIRGIN ISSUE INASMUCH AS THERE IS NO PRECEDENT AVAILABLE ON THIS POINT. WE FIND THAT THE TPO DETERMINED COMPARABLE AVERAGE RATE OF 3.5% OF THE COMPAN IES HAVING FIXED TERM AGREEMENT S . CONSIDERING THE FACT THAT THE ASSESSEE HAD A PERPETUAL LICENSE, HE DISCOUNTED THE UNCONTROLLED ROYALTY RATE BY 2%, THEREBY CALCULATING THE ARM S LENGTH ROYALTY RATE AT 1.5%. T HE DRP COMPUTED AVERAGE RATE OF ROYALTY OF THREE COMPARABLE COMPANIES AT 4.5% AND, THEREAFTER, REDUCED 1% ON ACC OUNT OF LIMITED PERIOD OF LICENS E USED BY THE COMPARABLES VIS - A - VIS THE ASSESSEE USING THE PERPETUAL LICEN S E. 10.8. THERE CAN BE NO QUARREL ON THE FACT THAT , OTHER THINGS BEING EQUAL , A LANDLORD INTENDING TO HAVE A TENANT FOR A LONG - TERM MAY COMPROMISE SOME AMOUNT OF RENT , IN COMPARISON WITH A LANDLORD FINDING A TENANT REQUIRING THE PREMISES FOR A SHORT - TERM . ITA NO.5140/DEL/2011 LG ELECTRONICS INDIA PVT. LTD. 42 THE RATE O F RENT IN A FORMER CASE WILL BE LOWER FOR A VARIETY OF REASONS, SUCH AS, NOT UNDERGOING THE PROCESS OF FINDING A TENANT EVERY NOW AND THEN , FEAR OF THE PROPERTY REMAINING VACANT FOR SOME TIME AFTER THE EXIT OF THE FIRST TENANT AND INCURRING COSTS AT THE TIME OF EACH LET OUT. D IFFERENCE BETWEEN THE RENT CHARGED BY THE LANDLORD OR PAID BY THE TENANTS IN THE AFORE DISCUSSED TWO SITUATIONS IS NOTHING BUT A DISCOUNT ALLOWED TO A TENANT O F LONG - TERM ON THE AVAILABLE MARKET RATE OF R ENT . THIS ANALOGY CAN BE APPLIED TO THE PRESENT FACTS BY CONSIDERING THE DISCOUNT WHICH A LICENSOR WITH A PERPETUAL LICENSE MAY ALLOW OR THE PREMIUM WHICH A LICENSOR WITH A FIXED TERM LICENSE MAY CHARGE. I T CAN BE SEEN THAT THE TPO DOWNGRADED 2% ON THIS SCORE AND REDUCED THE UNADJUSTED COMPARABLE RATE OF 3.5% TO THE ADJUSTED 1.5%. TO PUT IT DIFFERENTLY, THE TPO TREATED THE PREMIUM CHARGED BY THE COMPARABLE LICENSOR S ON ACCOUNT OF FIXED TERM LICENSE S AT 57% (2 / 3.5 *100 ) , OR IN OTHER WORDS, THE DISCOUNT AT SUCH RATE TO THE PREVALENT MARKET RATE ON ACCOUNT OF PERPETUAL LICENSE . HOWEVER, T HE DRP TREATED SUCH DISCOUNT FOR PERPETUAL LICENSE AT 22% (1 /4.5*100). CONSIDERING THE ENTIRETY OF THE FACTS AND CIRCUMSTANCES OF THE INSTANT CASE, WE FIND THAT THE RATE OF ITA NO.5140/DEL/2011 LG ELECTRONICS INDIA PVT. LTD. 43 PREMIUM ON THE LICENSE WITH FIXED TERM AT 22% IS ON A HIGHER SIDE. IN OUR CONSIDERED OPINION, THE RATE OF SUCH PREMIUM SHOULD BE RESTRICTED TO 10% OF THE AVERAGE RATE OF ROYALTY OF THE COMPARABLE CASES. 10.9. IT HAS BEEN HELD A BOVE THAT THE DRP RIGHTLY CONSIDERED THREE COMPANIES AS COMPARABLE, WHOSE AVERAGE RATE OF UNADJUSTED ROYALTY COMES AT 4.5% WITHIN THE MEANING OF SUB - CLAUSE (I) OF RULE 10B(1)(A). WHEN RATE IS DISCOUNTED WITH 10% UNDER SUB - CLAUSE (II), RESULTING INTO A DED UCTION OF 0.45% (10% OF 4.5), THE ARM S LENGTH RATE OF ROYALTY AS PER SUB - CLAUSE (III) OF RULE 10B(1)(A) COMES TO 4.05% (4.5 - 0.45). IT IS THIS RATE, WHICH IS DIRECTED TO BE APPLIED AS ARM S LENGTH RATE OF ROYALTY PAYMENT. V. RULE OF CONSISTENCY. 11.1. THE LD. AR FORCEFULLY HARPED ON THE PRINCIPLE OF CONSISTENCY TO ARGUE THAT THE ROYALTY PAID AT THE RATE OF 5% BE TREATED AT ARM S LENGTH IN VIEW OF THE SAME RATE HAVING BEEN ACCEPTED BY THE TPO FOR THE EARLIER YEAR. THIS ARGUMENT WAS PROPOUNDED BY R ELYING ON CERTAIN DECISIONS ADVOCATING THE RULE OF CONSISTENCY . IT WAS COUNTERED BY THE LD. DR SUBMITTING THAT THERE CAN BE NO RES ITA NO.5140/DEL/2011 LG ELECTRONICS INDIA PVT. LTD. 44 JUDICATA IN THE INCOME - TAX ASSESSMENT AS EACH YEAR IS A SEPARATE AND INDEPENDENT UNIT OF ASSESSMENT AND THIS RULE IS MORE RELEVANT IN THE CONTEXT OF TRANSFER PRICING PROVISIONS IN WHICH , EVERY YEAR MAY HAVE NEW COMPARABLES WITH VARYING PRICES OR PROFIT RATES REQUIRING INDEPENDENT EXAMINATION AND EVALUATION OF THE ASSESSEE S INTERNATIONAL TRANSACTIONS . T O SUPPORT SUCH CONTENTION, HE ALSO RELIED ON CERTAIN DECISIONS. 11.2. W E HAVE NO HESITATION IN HOLDING THAT THE RULE OF THE CONSISTENCY SHOULD BE ADHERED TO SO THAT VACILLATING STANDS ARE NOT TAKEN BY THE REVENUE ON YEAR TO YEAR BASIS. AT THE SAME TIME, IT IS EQUALLY IMP ERATIVE TO NOTE THAT THE RULE OF CONSISTENCY CANNOT BE STRETCHED SO FAR AS TO COME IN THE WAY OF THE APPLYING THE CORRECT PROVISIONS OF LAW , IF IN THE EARLIER YEAR THE AUTHORITIES PROCEEDED ON A WRONG NOTION. ALONG WITH THE RULE OF CONSISTENCY, THERE IS ANOTHER EQUALLY SIGNIFICANT RULE OF NO ESTOPPEL AGAINST THE LAW. BOTH THESE RULES SHOULD BE HARMONIZED IN SUCH A WAY THAT IF THE THINGS HAVE BEEN CORRECTLY DECIDED IN ACCORDANCE WITH THE LAW IN AN EARLIER YEAR, AND THERE IS NO CHANGE IN THE FACTS OR LAW, THEN THE VIEW SO TAKEN SHOULD NOT BE DEPARTED FROM IN THE SUCCEEDING YEAR . I F , HOWEVER, DUE TO SOME MISTAKEN BELIEF, THE AO HAS ITA NO.5140/DEL/2011 LG ELECTRONICS INDIA PVT. LTD. 45 DECIDED AN ISSUE WRONGLY IN AN EARLIER YEAR, THEN THE MISTAKE SO COMMITTED MUST NOT BE ALLOWED TO PERPETUATE. IT SHOULD BE CORRECTED SO AS TO MAKE THE FINAL ASSESSMENT IN ACCORDANCE WITH THE CORRECT RULE OF LAW. THE HANDS OF THE AO CANNOT BE TIED SO AS TO MAKE HIM FUNCTUS OFFICIO BY STICK ING TO SUCH A WRONG VIEW IN LATER YEAR AS WELL, EVEN AFTER HAVING REALIZ ED THE MISTAKE COMMITTED IN EARLIER YEAR . AS A MISTAKE COMMITTED BY THE AO IN WRONGLY DECIDING AN ISSUE AGAINST THE ASSESSEE IN AN EARLIER YEAR CAN BE CORRECTED BY DECIDING IT IN ACCORDANCE WITH LAW IN ASSESSEE S FAVOUR IN A SUCCEEDING YEAR , SIMILARLY A MISTAKE COMMITTED BY THE AO IN WRONGLY DECIDING AN ISSUE IN FAVOUR OF THE ASSESSEE IN AN EARLIER YEAR CAN BE EQUALLY CHECKED BY DECIDING IT CORRECTLY AGAINST THE ASSESSEE IN A SUCCEEDING YEAR . THE CRUX OF THE MATTER IS THAT THE LAW SHOULD TAKE ITS OWN COURSE AND THE ASSESSMENT SHOULD BE MADE STRICTLY IN CONFORMITY WITH THE PROVISIONS OF THE ACT . IF A PARTICULAR ISSUE WAS WRONGLY DECIDED IN AN EARLIER YEAR, THEN IT MUST BE SET RIGHT IN THE SUBSEQUENT YEAR , RATHER THAN HARPING ON THE PRINCIPLE OF CONSISTENCY TO SUPPORT THE CONTINUATION OF SUCH A WRONG VIEW . ITA NO.5140/DEL/2011 LG ELECTRONICS INDIA PVT. LTD. 46 11.3. COMING TO THE FACTS OF THE INSTANT CASE, I T CAN BE SEEN THAT THE ASSESSEE BENCHMARKED THE INTERNATIONAL TRANSACTION OF ROYALTY BY CLUBBING IT ALONG WITH THE OTHER INTERNATIONAL TRANSACTIONS , SUCH AS , IMPORT OF RAW MATERIAL AND COMPONENTS, SERVICE SPARES , EXPORT OF FINISHED GOODS ALONG WITH COMMISSION, TRAINING FEE, IMPORT OF SOFTWARE SERVICES, ETC. ALL THESE INTERNATIONAL TRANSACTIONS WERE BENCHMARKED IN A COMBINED MANNER UNDER TNMM ON AN ENTITY LEVEL . SIMILAR WAS THE POSITION IN THE PRECEDING YEAR, IN WHICH THE ASSESEE DID THE SAME AND THE TPO ACCEPTED THE ALP OF THE PAYMENT OF ROYALTY TRANSACTION ACCORDINGLY BY VIEWING THAT THE OPERATING PROFIT AT THE E NTITY LEVEL DID NOT WARRANT SEPARATE ADJUSTMENT ON ACCOUNT OF THE INTERNATIONAL TRANSACTION OF ROYALTY PAYMENT . WE HAVE ELABORATELY DISCUSSED ABOVE AND HELD THAT ROYALTY IS NOT CLOSELY LINKED WITH OTHER INTERNATIONAL TRANSACTIONS AND HENCE SHOULD BE BENCH MARKED SEPARATELY. THE VIEW TAKEN BY THE TPO IN EARLIER YEAR BY CONSIDERING THE PAYMENT OF ROYALTY IN A COMBINED WAY WITH OTHER INTERNATIONAL TRANSACTIONS AND THEN FINDING ALP ON ENTITY LEVEL TNMM, IS OBVIOUSLY CONTRARY TO THE UNAMBIGUOUS MANDATE OF THE PROVISIONS OF SECTIONS 92 AND 92C ALONG WITH THE ITA NO.5140/DEL/2011 LG ELECTRONICS INDIA PVT. LTD. 47 RELEVANT RULES AS DISCUSSED SUPRA, WHICH TALK OF THE DETERMINATION OF ALP OF AN INTERNATIONAL TRANSACTION, THAT IS , A TRANSACTION AL LEVEL AND NOT ENTITY LEVEL APPROACH. THE SPECIAL BENCH OF THE TRIBUNAL IN THE ASSES SEE S OWN CASE FOR THE INSTANT YEAR HAS ALSO HELD THAT EACH INTERNATIONAL TRANSACTION SHOULD BE SEPARATELY BENCHMARKED AND NOT IN A CONSOLIDATED MANNER , UNLESS THESE ARE CLOSELY LINKED TRANSACTIONS . E VIDENTLY TRANSACTION OF ROYALTY CANNOT BE CONSIDERED AS CLOSELY LINKED WITH THE OTHER INTERNATIONAL TRANSACTIONS AS WERE CLUBBED BY THE ASSESSEE. IN SUCH A SITUAT ION, THE ALP OF ROYALTY PAYMENT WAS REQUIRED TO BE DETERMINED SEPARATELY , AS HAS BEEN RIGHTLY DONE BY THE TPO FOR THE INSTANT YEAR , JUSTIFYING DEPARTURE FROM THE CONTRARY VIEW TAKEN IN THE PRECEDING YEAR. IN VIEW OF THE ABOVE DISCUSSION, WE ARE NOT PERSUADED TO AGREE WITH THE CONTENTION OF THE LD. AR FOR FOLLOWING THE RULE OF CONSISTENCY AND ACCEPT ING THE PAYMENT OF ROYALTY AT ALP ALONG WITH OTHER INTERNATIONAL TRANSACTIONS UNDER TNMM ON ENTITY LEVEL. THIS CONTENTION IS, THEREFORE, REPELLED. 12. WE SUM UP OUR DECISION ON THIS ISSUE BY HOLDING THAT THE ARM S LENGTH RATE OF ROYALTY BE TAKEN AT 4.05% AND THE ADDITION ON ACCOUNT OF TRANSFER PRICING ADJUSTMENT OF ROYALTY PAYMENT AT ITA NO.5140/DEL/2011 LG ELECTRONICS INDIA PVT. LTD. 48 5% BE MADE ACCORDINGLY. THE IMPUGNED ORDER IS MODIFIED PRO TANTO. 13. 1. G ROUND NO. 5 OF APPEAL IS AGAINST THE ADDITION TOWARDS TRANSFER PRICING ADJUSTMENT AMOUNTING TO ` 11,11,67,130/ - ON ACCOUNT OF INTERNATIONAL TRANSACTION OF PAYMENT OF E XPORT COMMISSION . GROUND NO. 11 IS ALSO CONNECTED WITH TH E GROUND NO. 5, BY WHICH THE ACTION OF THE AO HAS BEEN CHALLENGED IN TREATI NG THE AMOUNT OF ` 11.11 CRORE AS DIVERSION OF PRO FITS TO LG KOREA AND THUS A NON GENUINE BUSINESS EXPENDITURE. BRIEFLY STATED, THE FACTS APROPOS THIS ISSUE ARE TH AT THE ASSESSEE PAID COMMISSION OF ` 11.11 CRORE TO LG KOREA FOR EXPORTS OF COLOUR TVS. THE TPO OBSERVED THAT THE COMMISSION WAS PAID TO ASSESS EE S AE IN KOREA FOR EXPORTS MADE TO OTHER COUNTRIES. ON BEING CALLED UPON TO FURNISH THE DETAILS OF SERVICE S RENDERED BY ITS AE TO PROMOTE THE ASSESSEE S SALES OUTSIDE INDIA, THE ASSESSEE STATED THAT ITS AE PROVIDED MARKETING SUPPORT THROUGH ITS NETWORK ALL OVER THE WORLD. IN THE ABSENCE OF ANY CONCRETE EVIDENCE OF SUCH SERVICES HAVING BEEN RENDERED TO PROMOTE THE EXPORT OF GOODS FROM INDIA, THE TPO HELD THAT THE COMMISSION PAYMENT WAS ONLY A MECHANISM FOR EXTRACTING PROFITS FROM INDIA. THE ALP OF ITA NO.5140/DEL/2011 LG ELECTRONICS INDIA PVT. LTD. 49 THIS INTERNATIONAL TRANSACTION WAS TAKEN AT N IL , WHICH RESULTED INTO TP ADJUSTMENT OF ` 11.11 CRORE. THE ASSESSEE OBJECTED TO SUCH ADDITION BEFORE THE DRP MADE BY THE AO IN THE DRAFT ORDER BY , INTER ALIA , CONTENDING THAT IT PAID COMMISSION @ 4.5 0 % TO LG KOREA ON THE EXPORT OF C OLOUR TV S MADE TO VARIOUS ENTITIES IN MIDDLE EAST AND SOUTH ASIAN COUNTRIES. IT WAS S TATED THAT ITS EXPORT OF CTVS WAS `255 CRORE , WHICH WAS MORE THAN 10% OF THE PRECEDING YEAR S EXPORT . THE ASSESSEE CLAIMED THIS TRANSACTI ON AT ARM S LENGTH THROUGH THE TNMM ANALYSIS ON ENTITY LEVEL . THE FUNCTIONS UNDERTAKEN BY LG KOREA IN THIS REGARD, WERE SUBMITTED BEFORE THE DRP, WHICH CAN BE SUMMARIZED AS UNDER : - I. PROD UCT PLANNING & MARKET RESEARCH; II. PRODUCTION S CHEDULING - BY PERFORMING MARKET RE SEARCH; III. MARKETING ACTIVITIES - BY PREPARING NEW IDEAS FOR ADVERTISING, PROMOTION, DESIGN AND MATERIAL FOR IMPLEMENTING THE MARKETING STRAT EGIES AND SUPERVISING THE SAME; IV. PERSONNEL ; ITA NO.5140/DEL/2011 LG ELECTRONICS INDIA PVT. LTD. 50 V. DISTRIBUTION - P ROVIDING SUPPORT ACTIVITIES BY BEARING THE LOGI STICS COST FOR RAW MATERIAL AND PARTS, MANAGING THE QUALITY OF THE EXPORTED PRODUCTS; AND VI. CREDIT MANAGEMENT AND GUARANTEES - BY MANAGING THE ASSESSEE S A/R BY PURCHASING INSURANCE FROM THE KOREA EXPORT INSURANCE CORPORATION. 1 3 . 2. A COST BENEFIT ANALYSIS WAS ALSO DEMONSTRATED BY CLAIMING THAT THE ASSESSEE PAID COMMISSION TO ITS AE AT 4.5%, WHEREAS THE AE, NAMELY, LG KOREA INCURRED COSTS ON BEHALF OF THE ASSESSEE AT ALMOST DOUBLE THE AMOUNT OF COMMISSION RECEIVED. AFTER CONSIDE RING ALL THE OBJECTIONS TAKEN BY THE ASSESSEE, THE DRP NOTICED THAT THE ASSESSEE PAID COMMISSION TO ITS AE, LG KOREA, FOR EXPORTS OF CTVS MADE TO ITS GROUP ENTITIES IN MIDDLE EAST AND SOUTH ASIAN COUNTRIES AND ALSO TO SOME UN - RELATED DISTRIBUTORS OUTSIDE I NDIA. DESPITE THE ASSESSEE LISTING SEVERAL EXPORT ACTIVITIES PURPORTEDLY UNDERTAKEN BY THE AE FOR ITS EXPORT PROMOTION, NO EVIDENCE WHATSOEVER WAS SUBMITTED EITHER BEFORE THE TPO OR THE DRP TO INDICATE THAT THE SO - CALLED SERVICES WERE ACTUALLY RENDERED BY THE AE. SINCE THE ASSESSEE WAS IN EXPORT BUSINESS FOR A LONG TIME, IT WAS QUITE LIKELY THAT IT MAY HAVE ITA NO.5140/DEL/2011 LG ELECTRONICS INDIA PVT. LTD. 51 ESTABLISHED REPETITIVE CUSTOMERS OUTSIDE INDIA AND, HENCE, DID NOT NEED MUCH SUPPORT FOR PROMOTION OF ITS EXPORT SALES. IT WAS NOT SHOWN AS TO HOW THE COMMISSION RATE OF 4.5% OF THE SALES REPRESENTED THE ARM S LENGTH RATE. THE ASSESSEE S CONTENTION THAT THE BENCHMARKING OF THIS TRANSACTION WAS RIGHTLY DONE UNDER TNMM ON CONSOLIDATED BASIS WAS ALSO REJECTED IN VIEW OF THE DRP NOTICING SEVERAL TRIBUNAL D ECISIONS HOLDING THAT TRANSACTION BY TRANSACTION APPROACH WAS TO BE FOLLOWED FOR DETERMINING THE ALP OF INTERNATIONAL TRANSACTIONS. SINCE THE PAYMENT OF COMMISSION IS A SEPARATE CLASS OF TRANSACTION, THE DRP OPINED THAT THE SAME OUGHT TO HAVE BEEN BENCHMA RKED SEPARATELY FROM THE REST OF THE INTERNATIONAL TRANSACTIONS. IN THE ABSENCE OF ANY EVIDENCE FOR RENDERING OF ACTUAL SERVICES BY ITS AE, THE DRP CAME TO HOLD THAT THE ALP OF THIS TRANSACTION WAS RIGHTLY TAKEN AT NIL. THE ASSESSEE IS AGGRIEVED AGAINST T HE ADDITION MADE BY THE AO PURSUANT TO THE DRP S DIRECTION. 13.3. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE RELEVANT MATERIAL ON RECORD. THE CLAIM OF THE ASSESSEE IS THAT LG KOREA RENDERED NUMEROUS SERVICES FOR WHICH COMMISSION WAS PAID AT THE RATE OF 4.5%. IT IS JUST BASIC THAT A DEDUCTION FOR ITA NO.5140/DEL/2011 LG ELECTRONICS INDIA PVT. LTD. 52 COMMISSION CAN BE ALLOWED ONLY IF THE RENDITION OF SERVICES IS PROVED. IN THE ABSENCE OF ANY POSITIVE AND SPEAKING EVIDENCE OF SERVICES, THERE CAN BE NO QUESTION OF ALLOWING ANY DEDUCTION. ON A CONSIDER ATION OF THE ENTIRE FACTUAL PREVAILING POSITION, WE FIND THAT APART FROM THEORETICALLY LISTING SEVERAL ACTIVITIES ALLEGEDLY PERFORMED BY LG KOREA, AS BRIEFLY NARRATED ABOVE, THE ASSESSEE FAILED TO FILE ANY EVIDENCE WORTH THE NAME, EITHER BEFORE THE TPO OR THE DRP OR EVEN BEFORE US , TO SHOW THAT SUCH SERVICES WERE ACTUALLY RENDERED. WHEN THIS POSITION WAS CONFRONTED TO THE LD. AR, HE CONCEDED THAT NO SUCH EVIDENCE WAS PLACED, BUT STATED THAT THE EVIDENCE COULD BE THERE IN THE SHAPE OF E - MAILS EXCHANGED BETWE EN LG KOREA AND THE ASSESSEE, WHICH HAVE ADMITTEDLY NOT BEEN PLACED ON RECORD SO FAR. ON THE NEXT DATE OF HEARING, THE LD. AR EXPRESSED HIS INABILITY TO PRODUCE COPIES OF SO CALLED ALLEGED E - MAILS FOR WANT TO THEIR NON - AVAILABILITY AFTER A LAPSE OF TIME. STILL, ON THE NEXT HEARING, HE FILED COPIES OF SOME E - MAILS TO JUSTIFY THE PAYMENT OF COMMISSION. A PERUSAL OF THESE E - MAILS NOW FILED SHOWS THAT PRIMARILY THESE ARE BETWEEN ONE DEPARTMENT OF THE ASSESSEE WITH ANOTHER DEPARTMENT OF ITS OWN. TO PUT IT SIMPL Y, THESE ARE ONLY INTERNAL CORRESPONDENCE NOT ITA NO.5140/DEL/2011 LG ELECTRONICS INDIA PVT. LTD. 53 SHOWING IN ANY WAY THE RENDERING OF THE SERVICES BY LG KOREA IN BOOSTING THE EXPORTS OF THE CTVS. IT IS FURTHER RELEVANT TO NOTE THE DATES OF THESE E - MAILS , WHICH ARE FOR THE CALENDAR YEAR 2008. THIS SHOWS THA T EVEN THE INTERNAL CORRESPONDENCE PROPOSED AS EVIDENCE FOR DEDUCTION OF COMMISSION , IS NOT RELEVANT FOR THE YEAR UNDER CONSIDERATION. THIS ABUNDANTLY PROVES THAT THE ASSESSEE IS NOT HAVING EVEN AN IOTA OF EVIDENCE TO SUBSTANTIATE ITS CLAIM OF HAVING RECE IVED SERVICES FROM LG KOREA. 13.4. IT GOES WITHOUT SAYING THAT THE DOCUMENTATION TO ANY LENGTH IS NO SUBSTITUTE OF E VIDENCE OF RENDERING ACTUAL SERVICES, WHICH MUST BE PROVED AS A BASIC CONDITION FOR DEDUCTION. WE ARE REMINDED OF THE CELEBRATED CASE OF T HE HON BLE SUPREME COURT IN LACHMINARAYAN MADAL LAL.VS. CIT (1972) 86 ITR 439 (SC) , THE FACTS OF WHICH ARE QUITE CLOSE TO THE CASE UNDER CONSIDERATION. IN THAT CASE THE ASSESSEE CLAIMED TO HAVE PAID A SUM TO ESC AS SELLING AGENCY COMMISSION AND CLAIMED D EDUCTION OF THE SAME. THE ITO REJECTED THAT CLAIM. BUT THE AAC IN APPEAL ALLOWED THE SAME. THE TRIBUNAL REVERSED THE ORDER OF THE AAC AND RESTORED THAT OF THE ITO. IT CAME TO THE CONCLUSION THAT THE SO - CALLED SELLING AGENCY AGREEMENT BETWEEN THE ASSESSEE - F IRM AND THE SELLING ITA NO.5140/DEL/2011 LG ELECTRONICS INDIA PVT. LTD. 54 AGENCY FIRM WAS ONLY A MAKE - BELIEVE ARRANGEMENT. IT WAS MERELY A DEVICE TO MINIMIZE THE TAX LIABILITY OF THE ASSESSEE - FIRM AND IT WAS NOT A GENUINE BUSINESS ARRANGEMENT. WHEN THE MATTER F INALLY REACHED THE HON BLE APEX C OURT, THE VIEW TAKEN BY THE T RIBUNAL WAS AFFIRMED BY HOLDING THAT THE MERE EXISTENCE OF AN AGREEMENT BETWEEN THE ASSESSEE AND ITS SOLE SELLING AGENTS OR PAYMENT OF CERTAIN AMOUNTS AS COMMISSION, ASSUMING THERE WAS SUCH PAYMENT, DID NOT BIND THE ITO TO HOLD THAT THE PAYME NT WAS MADE EXCLUSIVELY AND WHOLLY FOR THE PURPOSE OF THE ASSESSEE'S BUSINESS. ALTHOUGH THERE MIGHT BE SUCH AN AGREEMENT IN EXISTENCE AND THE PAYMENTS MIGHT HAVE BEEN MADE, IT WAS STILL OPEN TO THE ITO TO CONSIDER THE RELEVANT FACTORS AND DETERMINE FOR HIM SELF WHETHER THE COMMISSION SAID TO HAVE BEEN PAID TO THE SELLING AGENTS OR ANY PART THEREOF IS PROPERLY DEDUCTIBLE UNDER S. 37 OF THE ACT. CONSIDERING THE RATIO OF THIS JUDGMENT, WE FIND NO HESITATION IN HOLDING THAT THE AO WAS FULLY JUSTIFIED IN HOLDING ON PAGE 29 OF THE ASSESSMENT ORDER THAT : FOR A COMMISSION PAYMENT, IT IS TO BE ESTABLISHED AS A GENUINE COMMISSION, PROVISIONS OF SERVICES BY RECEIPT HAS TO BE ESTABLISHED . IN VIEW OF THE FACT THAT THERE IS NO TANGIBLE EVIDENCE WHA TSOEVER INDICATING ITA NO.5140/DEL/2011 LG ELECTRONICS INDIA PVT. LTD. 55 THE RENDERING OF SERVICES BY LG KOREA, THE DEDUCTIBILITY FAILS ON THE PRELIMINARY TEST ITSELF. 1 3 . 5. HAVING FOUND THAT THE ASSESSEE FAILED TO ADDUCE ANY POSITIVE EVIDENCE ABOUT THE RENDERING OF SERVICES BY LG KOREA, LET US EXAMINE IF ANY PRESUMPTION CAN STILL BE DRAWN ABOUT SUCH SERVICES ON THE BASIS OF ATTENDING FACTS AND CIRCUMSTANCES OF THE CASE. IN THIS REGARD, IT IS PERTINENT TO NOTE THAT THE ASSESSEE MADE A CLAIM MADE BEFORE THE DRP ABOUT LG KOREA HAVING RENDERED SEVERAL SERVICE S TO PROMOTE THE EXPORT OF COLOUR TVS IN MIDDLE EAST AND SOUTH ASIAN COUNTRIES. TO VERIFY THE VERACITY OF SUCH CLAIM, THE LD. AR WAS DIRECTED TO FILE A COPY OF THE AGREEMENT WITH LG KOREA, PURSUANT TO WHICH COMMISSION @ 4.5% WAS PAID FOR EXPORTS OF CTVS. A COPY OF SUCH AGREEMENT DATED 1 ST JANUARY, 2005, HAS BEEN FILED, WHICH IS AVAILABLE ON PAGE 2964 OF THE PAPER BOOK. ARTICLE 3 OF THIS AGREEMENT PROVIDES FOR THE RATE OF COMMISSION AT 4.5%. ARTICLE 4 PROVIDES THAT LG KOREA MAY SPECIFY AND NOTIFY MODELS, QUA NTITY, DUE DATE AND DELIVERY PLACE TO THE ASSESSEE AND THE ASSESSEE SHALL, IN TURN, PRODUCE AND SUPPLY CTVS ACCORDING TO THE ORDER OF LG KOREA. IT HAS FURTHER BEEN PROVIDED IN CLAUSE (2) OF ARTICLE 4 THAT THE ASSESSEE SHALL PURCHASE ITA NO.5140/DEL/2011 LG ELECTRONICS INDIA PVT. LTD. 56 RAW MATERIALS ETC. DIR ECTLY FROM OPEN MARKET. ONLY IF SUCH MATERIALS CANNOT BE SO PROCURED, THE ASSESSEE SHALL ASK LG KOREA TO SUPPLY THE SAME ON SALE BASIS. ARTICLE 5 PROVIDES FOR DELIVERY SCHEDULE AND QUALITY ASSURANCE. IT HAS BEEN PROVIDED UNDER THIS ARTICLE THAT THE ASSE SSEE SHALL SELL CTVS AS PER THE AGREED SCHEDULE AND IT SHALL BE RESPONSIBLE FOR THE LOSS CLAIMED BY THE BUYERS. PRIMARILY, T HESE ARE THE ONLY TWO ARTICLES WHICH LIST THE SERVICES TO BE PROVIDED BY LG KOREA. THE SUM AND SUBSTANCE OF THE CONTENTS OF THESE ARTICLES IS THAT LG KOREA IS TO PROCURE ORDERS OF CTVS ON BEHALF OF THE ASSESSEE. IN OUR CONSIDERED OPINION, I T DOES NOT MAKE ANY DIFFERENCE IF LG KOREA HAS TO ENSURE THE QUALITY OF THE GOODS AS PER THE ORDERS BOOKED BY IT ON BEHALF OF THE ASSESSEE. FURTH ER, IF THE ASSESSEE CANNOT PROCURE RAW MATERIALS DIRECTLY FROM THE OPEN MARKET, THEN, LG KOREA SHALL SUPPLY THE SAME TO THE ASSESSEE ON SALE BASIS. IN SO FAR AS THE PROCUREMENT OF RAW MATERIAL IS CONCERNED, WE FIND THAT THERE IS NO SERVICE WHICH IS TO BE PROVIDED BY THE LG KOREA IN LIEU OF COMMISSION. IT IS SO FOR THE REASON THAT ONLY IF THE REQUISITE MATERIALS CANNOT BE PROCURED BY THE ASSESSEE THAT LG KOREA SHALL SUPPLY THE SAME ON SALE BASIS . SUPPLYING THE RAW MATERIAL, ETC., ITA NO.5140/DEL/2011 LG ELECTRONICS INDIA PVT. LTD. 57 TO THE ASSESSEE ON SALE BASIS BY LG KOREA CANNOT BE EQUATED WITH RENDERING OF SERVICES FOR EARNING COMMISSION, BECAUSE THE SALE PRICE WILL NATURALLY HAVE THE ELEMENT OF PROFIT TO COMPENSATE FOR THE EFFORT IN MAKING SALE. IN A NUTSHELL, THE AGREEMENT BETWEEN THE ASSESSEE AND L G KOREA MANDATING A COMMISSION PAYMENT @ 4.5% ON SALE OF COLOUR TVS IS SIMPLY FOR PROCURING ORDERS BY LG KOREA ON BEHALF OF THE ASSESSEE, WHICH IS COVERED UNDER CLAUSE 1 OF ARTICLE 4. HAVING SEEN THE NATURE OF SERVICES TO BE RENDERED BY LG KOREA AS PER THE AGREEMENT, WE FIND THAT THERE IS A GREAT MISMATCH BETWEEN THE ASSESSEE MAKING A HUGE CLAIM OF SEVERAL ACTIVITIES DONE BY LG KOREA, AS SUMMARIZED IN AN EARLIER PARA WITH SR. NOS. I. TO VI., AS QUID PRO QUO FOR 4.5% COMMISSION. IT IS FURTHER SIGNIFICANT TO NOTE THAT THE ASSESSEE STATED BEFORE THE DRP THAT EXPORT COMMISSION WAS PAID TO LG KOREA IN RESPECT OF EXPORT OF COLOUR TVS TO MIDDLE EAST AND SOUTH ASIAN COUNTRIES. THE LD. AR WAS REQUIRED TO FILE A YEAR - W ISE CHART SHOWING PRODUCT - WISE EXPORTS TO AES AND NON - AES. SUCH CHART HAS BEEN PLACED ON PAGE 3104 OF THE PAPER BOOK. A PERUSAL OF THIS CHART SHOWS THAT THE TOTAL EXPORTS OF THE ASSESSEE FOR THE YEAR ARE ` 894.01 CRORE (PRECEDING YEAR FIGURE OF ` 586.26 CR ORE). EXPORT OF ITA NO.5140/DEL/2011 LG ELECTRONICS INDIA PVT. LTD. 58 COLOUR TVS FOR THE CURRENT YEAR TO BOTH AES AND NON - AES, INCLUDED IN THE TOTAL FIGURE OF EXPORT, STANDS AT ` 255.44 CRORE (PRECEDING YEAR FIGURE OF ` 232.14 CRORE). WHEN WE VIEW THE DETAILS OF EXPORT OF COLOUR TVS, WHICH HAVE ALSO BEEN GIVE N IN THE SAME PAPER BOOK, IT CAN BE EASILY NOTICED THAT EXPORTS HAVE BEEN MADE NOT ONLY TO MIDDLE EAST AND SOUTH ASIAN COUNTRIES BUT ALL OVER THE WORLD. THE LD. DR STATED THAT THE ASSESSEE HAS, IN FACT, PAID COMMISSION TO LG KOREA ON ITS GLOBAL SALES OF C OLOUR TVS AND , AS SUCH , IT INTENTIONALLY MISLED THE DRP BY MAKING A FALSE STATEMENT THAT EXPORT COMMISSION WAS PAID ONLY IN RESPECT OF EXPORTS OF COLOUR TVS MADE TO MIDDLE EAST AND SOUTH ASIAN COUNTRIES. THE LD. AR HAD NO ANSWER TO IT EXCEPT FOR STATING TH AT SUCH CONTENTION WAS MADE ONLY BEFORE THE DRP AND NOT THE TPO. WE FAIL TO APPRECIATE THE LOGIC OF THIS STATEMENT BEFORE US. 1 3 . 6. IT IS SIGNIFICANT TO NOTE THAT COMMISSION @ 4.5% WAS PAID BY THE ASSESSEE TO LG KOREA IN RESPECT OF EXPORT OF COLOUR TVS . ON A SPECIFIC QUERY, IT WAS STATED BY THE LD. AR THAT THE ASSESSEE PAID COMMISSION TO LG KOREA FOR EXPORTS MADE TO AES AS WELL AS NON - AE. IT WAS POINTED OUT THAT OUT OF TOTAL COMMISSION OF ` 11.11 CRORE, A SUM OF ` 7.60 CRORE WAS THE AMOUNT OF COMMISSI ON PAID ITA NO.5140/DEL/2011 LG ELECTRONICS INDIA PVT. LTD. 59 FOR EXPORTS MADE TO AES AND THE REMAINING AMOUNT OF ` 3.51 CRORE WAS FOR EXPORTS MADE TO UNRELATED PARTIES. WE FAIL TO UNDERSTAND THE LOGIC IN ONE AE PAYING COMMISSION TO ANOTHER AE FOR SALES TO STILL ANOTHER AE AND ALL THE THREE CONCERNS BEING CL OSELY RELATED TO EACH OTHER. SUCH SERVICES CAN BE ONLY ANY BODY S GUESS. 13.7. HERE, IT IS ALSO RELEVANT TO MENTION THAT ALTHOUGH THE ASSESSEE EXPORTED ALL ITS PRODUCTS, INCLUDING, COLOUR TVS, AIR CONDITIONERS, WASHING MACHINES, REFRIGERATORS AND MICRO WAVES, YET THE COMMISSION WAS PAID ONLY IN RESPECT OF EXPORT OF COLOUR TVS BY CLAIMING THAT LG KOREA INTERMEDIATED IN PROCURING ORDERS OF COLOUR TVS AND SUCH INTERMEDIATION LED TO INCREASE IN THE SALE OF THIS PRODUCT BY 10% VIS - A - VIS THE PRECEDING YEAR. WE FIND IT AS UNDISPUTED THAT THE EXPORT OF COLOUR TVS INCREASED BY 10%, BUT THE FACT WHICH MERITS NOTICE IS THAT THERE IS AN ALL A ROUND INCREASE IN THE EXPORTS OF ALL THE PRODUCTS OF THE ASSESSEE, FOR WHICH NO COMMISSION WAS PAID. IT CAN BE SEEN THAT T HERE IS A N OVERALL INCREASE OF 52% (307 CRORE /586 CRORE *100) IN TOTAL EXPORTS FOR THE YEAR OVER THE PRECEDING YEAR. NOTWITHSTANDING 10% INCREASE IN EXPORTS OF COLOUR TVS, WE FIND THAT THERE IS AN INCREASE OF 65% (83 CRORE/ 127 CRORE *100) IN THE EXPORT OF REFRIGERATORS, 10.5% ITA NO.5140/DEL/2011 LG ELECTRONICS INDIA PVT. LTD. 60 (1.50 CRORE / 14.28 CRORE *100) IN THE EXPORT OF PCS AND 51% (3.64 CRORE / 7.04 CRORE *100) IN THE EXPORT OF MONITORS. WE FAIL TO APPRECIATE THE CONTENTION OF THE ASSESSE THAT THE EFFORTS PUT IN BY LG KOREA LED TO 10% INCREASE IN E XPORTS OF CTVS, WHEN THIS FACT IS SEEN IN JUXTAPOSITION TO THE OVERALL INCREASE IN THE EXPORTS BY 52% ON ENTITY LEVEL AND MUCH HIGHER INCREASE IN EXPORT OF REFRIGERATORS (65%) AND MONITORS (51%), FOR WHICH NO COMMISSION WAS PAID AT ALL. 1 3. 8. ANOTHER SIG NIFICANT FACTOR, WHICH NEEDS TO BE CONSIDERED IS THAT THE ASSESSEE ENTERED INTO AGREEMENT WITH LG KOREA FOR PAYING COMMISSION @ 4.5% W.E.F. 1 ST JANUARY, 2005 AND PRIOR TO THAT ALSO, THE ASSESSEE WAS MAKING EXPORTS OF COLOUR TVS BUT WITHOUT PAYING ANY COMMI SSION WHATSOEVER. LET US SEE EXAMINE THE RESULT OF ENTERING INTO THE SO - CALLED AGREEMENT FOR RENDERING OF SERVICES FOR PROMOTION OF EXPORT OF COLOUR TVS. FOR THE FINANCIAL YEAR 2003 - 04, THAT IS, WHEN NO SUCH AGREEMENT WAS IN FORCE, THE EXPORT OF COLOURS TVS WAS ` 169 CRORE AS AGAINST THE TOTAL EXPORT OF ` 262 CRORE. IT MEANS PERCENTAGE OF COLOUR TVS TO TOTAL EXPORT WAS 64%. DURING THE FINANCIAL YEAR 2004 - 05, THAT IS WHEN THE AGREEMENT WAS IN FORCE FOR ONLY THREE MONTHS, THE ITA NO.5140/DEL/2011 LG ELECTRONICS INDIA PVT. LTD. 61 EXPORT OF COLOURS TVS WAS ` 239 CRORE AS AGAINST THE TOTAL EXPORT OF ` 447 CRORE. IT MEANS PERCENTAGE OF COLOUR TVS TO TOTAL EXPORT WAS 53%. DURING THE FINANCIAL YEAR 2005 - 06, THAT IS WHEN THE AGREEMENT WAS IN FORCE FOR FULL YEAR, THE EXPORT OF COLOURS TVS WAS ` 232 CRORE AS AGAINST TH E TOTAL EXPORT OF ` 586 CRORE. IT MEANS PERCENTAGE OF COLOUR TVS TO TOTAL EXPORT WAS 39%. DURING THE FINANCIAL YEAR 2006 - 07, THAT IS , THE ASSESSMENT YEAR UNDER CONSIDERATION WHEN THE AGREEMENT WAS IN FORCE FOR FULL YEAR, THE EXPORT OF COLOURS TVS WAS ` 255 CRORE AS AGAINST THE TOTAL EXPORT OF ` 894 CRORE. IT MEANS PERCENTAGE OF COLOUR TVS TO TOTAL EXPORT WAS 28%. THE ABOVE ANALYSIS SHOWS THE DECLINING TREND OF EXPORT OF COLOURS TVS IN PERCENTAGE TERMS OF TOTAL EXPORTS AFTER THE ASSESSEE STARTED PAYING C OMMISSION TO ITS AE FOR THE PROMOTION OF EXPORT OF COLOUR TVS. IF THERE WERE ANY SERVICES PROVIDED BY LG KOREA FOR EXPORT OF COLOURS TVS, THEN THERE SHOULD HAVE BEEN A NORTHWARDS SOJOURN IN THE EXPORTS OF COLOUR TVS TO TOTAL EXPORTS, FOR THE REASON OF THE ABSENCE OF SIMILAR SERVICES FOR THE PROMOTION OF EXPORT OF OTHER PRODUCTS. THE ABOVE STATISTICS BELIES THE CONTENTION OF THE UPSWING IN THE BUSINESS OF EXPORT OF COLOUR TVS PURSUANT TO THE PAYMENT OF COMMISSION. ITA NO.5140/DEL/2011 LG ELECTRONICS INDIA PVT. LTD. 62 1 3. 9. THE LD. AR CAME OUT WITH ONE MORE ARGUMENT THAT LG KOREA WAS RENDERING SIMILAR SERVICES TO THE ASSESSEE EVEN PRIOR TO 1.1.2005 BUT WAS NOT CHARGING ANY COMMISSION. IT WAS ONLY FROM THE DATE OF ENTERING INTO THE AGREEMENT THAT IT STARTED CHARGING COMMISSION. HE STATED THAT THERE CAN BE SEVE RAL REASONS WHEN A HOLDING COMPANY NURTURES ITS SUBSIDIARY COMPANY IN INITIAL YEARS AND DOES NOT CHARGE ANYTHING TILL ITS FINANCIAL HEALTH STABILIZES. ON A SPECIFIC QUERY, IT WAS ADMITTED THAT THE ASSESSEE WAS EARNING PROFITS EVEN PRIOR TO 1.1.2005. THIS ITSELF SHOWS THAT THERE WAS NO SUCH CASE OF UPBRINGING OF THE INDIAN ENTITY TILL IT WAS IN RED OF ITS FINANCIAL HEALTH. 1 3 . 10. THE CONTENTION OF THE LD. AR THAT THE DRP IN THE SUCCEEDING YEAR HAS ACCEPTED THAT THE ASSESSEE DID NOT HAVE ANY INFRASTRUCTURE ABROAD TO MAKE EXPORTS AND HENCE THE SAME BE ACCEPTED FOR THE INSTANT YEAR AS WELL, IS NOT ACCEPTABLE. WE FIND THAT THERE IS CONTRARY EVIDENCE GALORE. THE ASSESSEE NOT ONLY EXPORTED PRODUCTS, OTHER THAN CTVS, TO FOREIGN DESTINATIONS WITHOUT PAYING ANY COMM ISSION DURING THE INSTANT YEAR, BUT WAS ALSO REGULARLY EXPORTING CTVS PRIOR TO THE ENTERING OF THE INSTANT ITA NO.5140/DEL/2011 LG ELECTRONICS INDIA PVT. LTD. 63 AGREEMENT FOR COMMISSION. HOW THE ASSESSEE COULD EFFECT EXPORTS WITHOUT HAVING ANY INFRASTRUCTURE, IS BEYOND OUR COMPREHENSION. 13.11. A BALD CONTENTION THAT BECAUSE OF THE EFFORTS PUT IN BY LG KOREA, THE ASSESSEE S EXPORT OF COLOUR TVS REGISTERED AN INCREASE BY 10%, CANNOT BE ACCEPTED UNLESS SUCH INCREASE IN EXPORTS IS LINKED WITH THE POSITIVE SERVICES RENDERED BY THE LG KOREA, WHICH LINK IS MISERABLY MISSING HERE. BE THAT AS IT MAY, WE FIND THAT THERE IS NO SPECIAL INCREASE IN EXPORT OF CTVS BECAUSE OF THE ALLEGED SERVICES RENDERED BY LG KORE A. WHAT IS RELEVANT TO NOTE IS THAT, THERE IS RATHER MORE CONVINCING INCREASE IN THE OVERALL EXPORTS AND ALSO OF SPECIFIC PRODUCTS FOR WHICH NO EXPORT COMMISSION HAS BEEN PAID. THE POSITION APPEARS TO BE RATHER UPSIDE DOWN. 13.12. THE RELIANCE OF THE LD . AR ON THE TRIBUNAL ORDER IN THE CASE OF HERO MOTOR CORP , IS ALSO INCONSEQUENTIAL. THAT WAS A CASE IN WHICH THE INDIAN ENTITY DID NOT, PRIOR TO THE COMMISSION AGREEMENT, HAVE ANY PERMISSION TO EXPORT ITS GOODS. IT WAS ONLY PURSUANT TO SUCH COMMISSION AGRE EMENT THAT THE FOREIGN AE ITA NO.5140/DEL/2011 LG ELECTRONICS INDIA PVT. LTD. 64 MADE AVAILABLE ITS NETWORK TO THE INDIAN ENTITY FOR MAKING EXPORTS. APART FROM THAT, WE NOTE FROM THE TRIBUNAL ORDER THAT THE ASSESSEE IN THAT CASE PRODUCED POSITIVE EVIDENCE OF THE SERVICES PROVIDED BY THE AE, WHICH IS LACKING IN OUR CASE. 13.14. THE LD. AR ALSO RELIED ON A TRIBUNAL ORDER IN ADDL. CIT VS . NESTLE INDIA LTD. (2005) 94 TTJ (DEL) 53 TO SUPPORT THE GRANT OF DEDUCTION FOR COMMISSION PAY MENT. IN THAT CASE FOR THE A.YS . 1997 - 98 AND 1998 - 99 , THE ASSESSEE PAID ROYALTY FOR TECHNICAL KNOW - HOW FOR THE FIRST TIME, WHICH WAS NOT PAID EARLIER AND THE TRIBUNAL HELD IT T O BE DEDUCTIBLE. THIS DECISION DOES NOT ADVANCE THE CASE OF THE ASSESSEE ANY FURTHER. THE REASON FOR OUR CONCLUSION IS THAT IN THAT CASE THE FACTUM OF THE ASSE SSEE HAVING RECEIVED TECHNICAL SERVICES WAS NOT DENIED. WHEREAS IN OUR CASE, EVEN THE PRELIMINARY REQUIREMENT OF LG KOREA HAVING RENDERED ANY SERVICE TO THE ASSESSEE , IS UNPROVED. IN OUR CONSIDERED OPINION, THE AO WAS FULLY JUSTIFIED IN HOLDING ON PAGE 29 OF THE ASSESSMENT ORDER THAT : THE CLAIM OF THE ASSESSEE THAT PAYMENT OF EXPORT COMMISSION BY IT TO M/S LGK FOR PROMOTING CTVS ABROAD IS A GENUINE EXPENDITURE IS COMPLETELY FALSE, BASELESS AND UNJUSTIFIED . THUS IT IS SEEN THAT THERE IS NEITHER ANY POSITIVE ITA NO.5140/DEL/2011 LG ELECTRONICS INDIA PVT. LTD. 65 EVIDENCE OF RENDERING OF SERVICES BY LG KOREA FOR THE PROMOTION OF EXPORTS OF COLOUR TVS, NOR THE PRESUMPTION OF SUCH RENDITION OF SERVICES HAS BEEN ESTABLISHED, WARRANTING ANY DEDUCTION FOR COMMISSION. 13.15 . NOTWITHS TANDING THE ABOVE, THE LD. AR CANVASSED THE FOLLOWING PROPOSITIONS IN SUPPORT OF HIS ARGUMENT FOR NOT MAKING ANY ADDITION ON THIS SCORE : - I. TNMM ON ENTITY LEVEL WAS CORRECTLY APPLIED; II. T HE REVENUE CANNOT STEP IN TO THE SHOES OF THE ASSESSEE TO DECIDE AS TO W HETHER ANY SERVICES WERE REQUIRED OR NOT; III. T HE TPO CANNOT CONSIDER ALP AT NIL BECAUSE OF ABSENCE OF SERVICE; IV. NO SPECIFIC METHOD HAS BEEN USED BY THE TPO FOR DETERMINING THE ALP AT NIL. 1 3 . 1 6. IN SO FAR AS THE FIRST OBJECTION ABOUT THE APPLICATION OF T NMM ON ENTITY LEVEL IN DEMONSTRATING THE TRANSACTION OF COMMISSION AT ALP ALONG WITH SEVERAL OTHER INTERNATIONAL TRANSACTIONS ON A COMBINED BASIS IS CONCERNED, WE HAVE ELABORATELY DISCUSSED AND REJECTED SUCH CONTENTION WHILE DECIDING ITA NO.5140/DEL/2011 LG ELECTRONICS INDIA PVT. LTD. 66 THE EARLIER GROUND ABO UT THE PAYMENT OF ROYALTY. THE SAME REASONING IS ADOPTED TO HOLD THAT THE INTERNATIONAL TRANSACTION OF COMMISSION PAYMENT IS NOT CLOSELY LINKED WITH THE OTHER INTERNATIONAL TRANSACTIONS OF IMPORT AND EXPORT ETC. AND, HENCE, THE SAME IS REQUIRED TO BE SEPA RATELY BENCHMARKED. THIS ARGUMENT OF THE LD. AR IS, THEREFORE, REPELLED. 13.1 7. AS REGARDS THE OTHER CONTENTION ABOUT THE REVENUE STEPPING INTO THE SHOES OF THE ASSESSEE FOR DECIDING AS TO WHETHER THE COMMERCIAL DECISION OF PAYING COMMISSION SHOULD HAV E BEEN TAKEN OR NOT, WE FIND THAT THE EXTANT POSITION IS QUITE DIFFERENT. THERE IS A REMARKABLE DIFFERENCE IN A SITUATION IN WHICH THE REVENUE CHALLENGES THE COMMERCIAL DECISION OF AN ASSESSEE IN AVAILING A PARTICULAR SERVICE AND, A SITUATION IN WHICH THE AUTHORITY TO TAKE THE COMMERCIAL DECISION IS NOT CHALLENGED BUT THE FACTUM OF THE ASSESSEE HAVING NOT RECEIVED ANY SUCH SERVICE IS ESTABLISHED FOR LACK OF ANY POSITIVE AND DIRECT EVIDENCE TO SUBSTANTIATE THE RECEIPT OF SERVICES. N ECESSITY OF AVAILING SOME SERVICE AND ADDUCING NO EVIDENCE FOR HAVING AVAILED SUCH SERVICE , ARE TWO ALTOGETHER DIFFERENT SITUATIONS . THE CASES RELIED ON BY THE LD. AR FALL IN THE CATEGORY IN WHICH THE COMMERCIAL DECISION OF ITA NO.5140/DEL/2011 LG ELECTRONICS INDIA PVT. LTD. 67 AVAILING SERVICE WAS QUESTIONED BY THE REVENUE AUTHORITIE S, WHICH CAME TO BE NEGATED BY THE APPELLATE FORUMS. ON THE CONTRARY, WE ARE PRESENTLY CONFRONTED WITH A SITUATION IN WHICH THE QUESTION IS NOT AS TO WHETHER THE ASSESSEE OUGHT TO HAVE OBTAINED SERVICES FROM ITS FOREIGN AE FOR MAKING EXPORTS OF COLOUR TVS TO OTHER COUNTRIES, BUT, THAT THE ASSESSEE FAILED TO ADDUCE ANY COGENT EVIDENCE FOR HAVING AVAILED ANY SUCH SERVICE. 1 3.1 8 . IN SO FAR AS THE OTHER CONTENTION ABOUT THE TPO HAVING NO AUTHORITY TO DETERMINE IF THE ACTUAL SERVICES WERE RENDERED OR NOT, THE LD. AR RELIED ON THE JUDGMENT OF THE HON BLE DELHI HIGH COURT IN THE CASE CIT VS. CUSHMAN AND W AKEFIELD INDIA PVT. LTD. ( 2014) 367 ITR 730 (DEL) , WHEREIN ALMOST A SIMILAR ISSUE HAS BEEN DECIDED. THE HO N BLE HIGH COURT HAS HELD THAT THE AUTHORITY OF THE TPO IS LIMITED TO CONDUCTING TRANSFER PRICING ANALYSIS FOR DETERMINING THE ALP OF AN INTERNATIONAL TRANSACTION AND NOT TO DE CIDE IF SUCH SERVICES EXIST OR BENEFITS DID ACCRUE TO THE ASSESSEE. SUCH LATER ASPECT S HAVE BEEN HELD TO BE FALLING IN THE EXCLUSIVE DOMAIN OF THE AO. IN THAT CASE, IT WAS OBSERVED THAT THE E - MAILS CONSIDERED BY TRIBUNAL FROM MR. BRAGANZA AND MR. CHOUDHARY DEALT WITH SPECIFIC INTERACTION AND RELATED TO BENEFI TS ITA NO.5140/DEL/2011 LG ELECTRONICS INDIA PVT. LTD. 68 OBTAINED BY ASSESSEE, PROVIDING A SUFFICIENT BASIS TO HOLD THAT BENEFIT ACCRUED TO ASSESSEE. SINCE THE DETAILS OF SPECIFIC ACTIVITIES FOR WHICH COST WAS INCURRED BY BOTH AES (FOR ACTIVITIES OF MR. BR AGANZA AND MR. CHOUDHARY), AND ATTENDANT BENEFIT S TO ASSESSEE WERE NOT CONSIDERED, THE HON BLE HIGH COURT REMANDED THE MATTER TO FILE OF CONCERNED A O, FOR AN ALP ASSESSMENT BY TPO , FOLLOWED BY AO S ASSESSMENT ORDER IN ACCORDANCE WITH LAW CONSIDERING THE DEDUCTIBILITY OR OTHERWISE AS PER SECTION 37(1) OF THE ACT . 13.19. WHEN WE ADVERT TO THE FACTS OF THE INSTANT CASE, IT IS FOUND THAT THE TPO PROPOSED TRANSFER PRICING ADJUSTMENT WITH THE NIL ALP OF THE COMMISSION TRANSACTION ON THE GR OUND THAT NO EVIDENCE OF ANY SERVICES RENDERED BY THE FOREIGN AE, WAS FURNISHED. THE AO IN HIS FINAL ASSESSMENT ORDER DATED 31.10.2011 , INTER ALIA , HELD THAT THE CLAIM OF THE ASSESSEE THAT PAYMENT OF COMMISSION BY IT TO LG KOREA WAS MADE FOR PROMOTING CTVS ABROAD COULD NOT BE ACCEPTED AS A GENUINE BUSINESS EXPENSES AND THE SAME WAS A DIVERSION OF INCOME BY ASSESSEE TO ITS HOLDING COMPANY IN GARB OF EXPORT COMMISSION AS PROVISION OF SERVICES BY LG KOREA TO THE ASSESSEE WAS NOT ESTABLISHED. THAT IS ITA NO.5140/DEL/2011 LG ELECTRONICS INDIA PVT. LTD. 69 HOW, T HE AO DISALLOWED THE AMOUNT. THEREAFTER, THE AO HELD THAT SINCE THE TPO HAS ALSO MADE AN ADJUSTMENT OF ` 11.11 CRORE IN THE ALP OF THIS TRANSACTION, NO SEPARATE ADDITION WAS CALLED FOR. 1 3. 20. APPLYING THE RATIO DECIDENDI OF CUSHMAN AND WAKEFIELD INDIA PVT. LTD. ( SUPRA ) TO THE FACTS OF THE INSTANT CASE, WE FIND THAT THE TPO WAS REQUIRED TO SIMPLY DETERMINE THE ALP OF THIS TRANSACTION UNCONCERNED WITH THE FACT, IF ANY BENEFIT ACCRUED TO THE ASSESSEE AND THEREAFTER, IT WAS FOR THE AO TO DECIDE THE DEDUCTIBILITY OF THIS AMOUNT U/S 37(1) OF THE ACT. THUS, WHEREAS THE TPO DID NOT DECIDE THIS ISSUE IN CONFORMITY WITH THE JUDGMENT IN CUSHMAN (SUPRA) , THE AO RIGHTLY DID HIS PART OF THE JOB. GOING BY THIS JUDGMENT, EVEN IF THE TPO HAD DETERMINED ALP OF T H E TRANSACTION OF COMMISSION AT SOME POSITIVE FIGURE INSTEAD OF NIL, THE AO STILL COULD HAVE MADE THE DISALLOWANCE FOR THE REASONS SO GIVEN BY HIM IN THE ASSESSMENT ORDER. ON A SPECIFIC QUERY THAT - IF THE VIEW POINT OF THE AO IS UPHELD BY THE TRIBUNAL A BOUT THE NON - GRANTING OF THE DEDUCTION FOR THE REASONS ASSIGNED BY HIM - WOULD THERE BY ANY FURTHER REQUIREMENT TO SEND THE MATTER TO THE TPO FOR DETERMINATION OF ALP AFRESH. THE LD. AR CANDIDLY ADMITTED, AND RIGHTLY SO, THAT SUCH AN EXERCISE WOULD BE A ME RE RITUAL, WITHOUT ITA NO.5140/DEL/2011 LG ELECTRONICS INDIA PVT. LTD. 70 HAVING ANY BEARING ON THE DETERMINATION OF THE TOTAL INCOME. SINCE WE HAVE HELD ABOVE THAT THE VERY FACTUM OF THE ASSESSEE HAVING AVAILED ANY SERVICES FROM ITS AE HAS NOT BEEN PROVED WITH ANY POSITIVE EVIDENCE WHATSOEVER, THE DEDUCTION IS HELD TO BE RIGHTLY DENIED BY THE AO. 13.21. BOTH THE GROUNDS ARE, CONSEQUENTLY NOT ALLOWED. 14 . GROUND NO. 8 IS AGAINST THE TREATMENT OF SALES TAX SUBSIDY OF ` 61,00,79,579 / - AS TAXABLE REVENUE RECEIPT. THE FACTS CONCERNING THIS GROUND ARE THAT THE ASSESSEE TREATED SALES TAX SUBSIDY AS CAPITAL RECEIPT, WHICH WAS HELD BY THE AO TO BE CHARGEABLE TO TAX IN THE NATURE OF REVENUE RECEIPT. IT IS NOTICED THAT THIS ISSUE CAME UP FOR CONSIDERATION BEFORE THE TRIBUNAL IN EARLIER YEARS. FOR THE FIRST TIME, THE TRIBUNAL DECIDED IT AGAINST THE ASSESSEE F OR THE ASSESSMENT YEAR 2002 - 03 AND SUCH VIEW H AS BEEN FOLLOWED FOR THE SUBSEQUENT YEARS. IN VIEW OF THE CONSISTENT VIEW TAKEN BY THE TRIB UNAL IN DECIDING SALES TAX SUBSIDY AS REVENUE RECEIPT, WE DO NOT FIND ANY REASON TO INTERFERE WITH THE IMPUGNED ORDER ON THIS ISSUE. THIS GROUND FAILS. ITA NO.5140/DEL/2011 LG ELECTRONICS INDIA PVT. LTD. 71 15 . GROUND NO. 9 IS AGAINST THE DISALLOWANCE OF PROVISION FOR SERVICE WARRANTY AMOUNTING TO ` 7,79,04,5 73/ - . IT IS NOTICED THAT THE TRIBUNAL HAS DECIDED THIS ISSUE FOR EARLIER YEARS IN ASSESSEE S FAVOUR FROM THE ASSESSMENT YEAR 2002 - 03 ONWARDS. RESPECTFULLY FOLLOWING THE PRECEDENT, WE ALLOW THIS GROUND. 16 . GROUND NO. 10 IS AGAINST THE DISALL OWANCE OF ROYA LTY AMOUNTING TO ` 81,98,02,800/ - PA I D TO LG ELECTRONICS INC. , KOREA BY TREATING IT AS A CAPITAL EXPENDITURE. BRIEFLY STATED THE FACTS OF THIS GROUND ARE THAT THE ASSESSEE PAID ROYALTY OF ` 114 . 76 CRORE TO LG ELECTRONICS INC. KOREA. A FINAL TP ADJUSTMENT FOR ROYALTY PAYMENT WAS MADE BY DISALLOWING IT TO THE EXTENT TO ` 32.78 CRORE, THEREBY LEAVING THE REMAINING AMOUNT OF ROYALTY PAID TO LG ELECTRONICS INC. KOREA AT ` 81.98 CRORE. THE ASSESSING OFFICER IN HIS FINAL ASSESSMENT ORDER CAME TO HOLD THAT SUCH RO YALTY WAS PAID FOR THE SERVICES PERTAINING TO ENDURING NATURE OF PRODUCTS INVOLVING TECHNICAL INFORMATION. H E TREATED IT AS A CAPITAL EXPENDITURE AND ACCORDINGLY MADE ADDITION FOR ` 81.98 CRORE. THE ASSESSEE IS AGGRIEVED AGAINST THIS ADDITION. ITA NO.5140/DEL/2011 LG ELECTRONICS INDIA PVT. LTD. 72 16.1 . WE H AVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE RELEVANT MATERIAL ON RECORD. IN ORDER TO DECIDE AS TO WHETHER THE ROYALTY PAID BY THE ASSESSEE IS OF A CAPITAL OR REVENUE NATURE, IT IS APPROPRIATE TO SEE THE RELEVANT CLAUSES OF THE AGREEMENT DATED 01.07.2001, PURSUANT TO WHICH SUCH ROYALTY WAS PAID. THE PREAMBLE PART OF THE AGREEMENT STATES THAT THE LICENSOR ALLOWS USE OF TECHNICAL INFORMATION AND INDUSTRIAL PROPERTY RIGHTS FOR THE MANUFACTURE, PRODUCTION AND SALE OF THE PRODUCTS. ARTICLE 1 OF THE AGREEMENT DEFINES TECHNICAL INFORMATION TO MEAN ALL THE TECHNICAL KNOWLEDGE, KNOWHOW, PROCESS, SPECIFICATION, LAY OUTS, DESIGNS, DRAWINGS, AND QUALITIES STANDARDS, STANDARDS CALCULATION, DATA AND INF ORMATION DEVELOPED OR OTHERWISE GENERALLY USED BY THE LICENSOR PERTAINING TO THE MANUFACTURE, PRODUCTION, ASSEMBLY, USE AND SALE OF THE AGREED PRODUCTS. ARTICLE 2 OF THE AGREEMENT STATES THAT: SUBJECT TO THE TERMS AND CONDITIONS SET FORTH IN THIS AGREEMEN T, LICENSOR HEREBY GRANTS TO LICENSEE AN EXCLUSIVE, NON - TRANSFERABLE LICENSE, WITHOUT THE RIGHT TO SUB - LICENSE, AND THE RIGHT TO MANUFACTURE, PRODUCE, USE, SELL, OR OTHERWISE DISPOSE OF THE AGREED PRODUCTS UTILIZING THE TECHNICAL INFORMATION AND/OR INDUSTR IAL PROPERTY RIGHTS FURNISHED BY LICENSOR . ARTICLE 4 OF THE ITA NO.5140/DEL/2011 LG ELECTRONICS INDIA PVT. LTD. 73 AGREEMENT DEALING WITH ROYALTY PAYMENT STIPULATES THAT: IN CONSIDERATION OF THE USE OF THE INDUSTRIAL PROPERTY RIGHTS, DESIGNS, TECHNICAL KNOW - HOW, FOR ALL TYPES, SIZES AND MODELS OF COLOUR TEL EVISIONS THAT MAY BE MANUFACTURED IN FUTURE , LICENSEE SHALL PAY LICENSOR A ROYALTY FEE @ 1% . ARTICLE 7 WITH CAPTION USE OF LG BRAND NAME & TRADE MARK PROVIDES THAT: THE LICENSOR HEREBY ALLOWS THE LICENSEE FOR THE USE OF ITS BRAND NAME AND TR ADE MARK FOR THE LICENSED PRODUCTS . . ARTICLE 11 OF THE AGREEMENT CONTAINS A TERMINATION CLAUSE. PARA 11.4 OF THE AGREEMENT WITH MARGINAL NOTE CONFIDENTIALITY STIPULATES THAT: THE LICENSEE SHALL KEEP SECRET AND CONFIDENTIAL, AND SHALL NOT DIRECTLY OR INDIRECTLY DISCLOSE, DIVULGE OR REVEAL EITHER DURING CONTINUANCE OF THIS AGREEMENT OR AT ANY TIME THEREAFTER , THE CLASSIFIED INFORMATION DISCLOSED, COMMUNICATED OR GIVEN OR GRANTED OR OTHERWISE ACQUIRED BY THE LICENSEE . . PARA 11.3 STIPULATES THAT: UPON THE TERMINATION, ALL THE RESPECTIVE RIGHTS AND OBLIGATION OF THE PARTIES HEREUNDER, EXCEPT FOR OBLIGATIONS HAVING ACCRUED TO THE DATE AND THOSE OF A CONTINUING NATURE SUCH AS CONFIDENTIALITY, SHALL CEASE. . ON AN OVER VIEW OF THE VARIOUS CLAUSES OF THE AGREEMENT, IT TRANSPIRES THAT THE A GREEMENT IS FOR ITA NO.5140/DEL/2011 LG ELECTRONICS INDIA PVT. LTD. 74 ALLOWING THE USE OF THE TECHNICAL INFORMATION AND IPRS FOR THE MANUFACTURE OF SPECIFIED PRODUCTS. SUCH RIGHTS HAVE BEEN GIVEN EXCLUSIVELY TO THE ASSESSEE. THIS AGREEMENT SIMPLY ALLOWS THE USE OF TECH NICAL INFORMATION AND IPRS WITHOUT GRANTING ANY OWNERSHIP RIGHTS IN IT TO THE ASSESSEE. FURTHER THE GRANT OF LICENSE TO THE ASSESSEE IS NON - TRANSFERABLE WITH NO RIGHT OF SUB - LICENSING. APART FROM THAT , THERE IS A CONFIDENTIALITY CLAUSE WHICH PROHIBITS THE ASSESSEE FROM DISCLOSING THE INFORMATION RECEIVED PURSUANT TO THIS AGREEMENT, TO ANYONE ELSE EITHER DURING THE CONTINUATION OF THIS AGREEMENT OR AT ANY TIME THEREAFTER. IT IS A PERPETUAL AGREEMENT WITHOUT THERE BEING ANY FIXED DURATION OF THE LICENSE. THE TERMINATION CLAUSE PROVIDES THAT UPON TERMINATION, ALL THE RESPECTIVE RIGHTS AND OBLIGATION OF THE PART IES, NAMELY , THE USE OF TECHNICAL KNOWHOW AND IPRS , SHALL CEASE. IN OTHER WORDS, THE ASSESSEE WILL NOT BE ENTITLED TO USE THIS TECHNI CAL KNOW - HOW OR IPRS AFTER THE TERMINATION OF THE AGREEMENT. NOW THE MOOT QUESTION WHICH ARISES IS AS TO WHETHER THE ROYALTY PAID FOR THE USE OF TECHNICAL KNOWHOW AND IPRS IN THE GIVEN CIRCUMSTANCES BE HELD AS A CAPITAL EXPENDITURE AS HAS BEEN HELD BY THE AO OR REVENUE EXPENDITURE AS CLAIMED BY THE ASSESSEE. ITA NO.5140/DEL/2011 LG ELECTRONICS INDIA PVT. LTD. 75 16.2 . THE HON BLE SUPREME COURT IN CIT VS CIBA OF INDIA LTD. (1968) 69 ITR 692 (SC) CONSIDERED A SITUATION IN WHICH THAT ASSESSEE WAS ENABLED TO ACQUIRE THE RIGHT TO DRAW FOR THE PURPOSE OF CARRYING ON ITS BUSINESS AS A MANUFACTURER AND DEALER OF PERMISSIBLE PRODUCTS UPON THE TECHNICAL KNOWLEDGE AVAILABLE FROM THE FOREIGN COMPANY FOR A LI MITED PERIOD WITH STIPULATION NOT TO DIVULGE THE INFORMATION TO THIRD PARTIES AND FURTHER RETURN SUCH INFORMATION ON THE CONCLUSION OF AGREEMENT WITH THE PROHIBITION OF NOT USING THE SAME AFTER TERMINATION OF THE AGREEMENT. THE PAYMENT MADE FOR THIS PURPOS E WAS EVENTUALLY HELD TO BE AN ADMISSIBLE REVENUE EXPENDITURE. IN THAT CASE THE INFORMATION SUPPLIED WAS TO BE SURRENDERED ON THE TERMINATION OF THE AGREEMENT AND NOT TO BE PUT TO USE THEREAFTER. IN CIT VS I.A.E.C (PUMPS) LTD. (1998) 232 ITR 316 (SC) , TH E HON BLE SUPREME COURT CONSIDERED A CASE IN WHICH PAYMENT WAS MADE FOR USE OF PATENTS AND DESIGN S EXCLUSIVELY IN INDIA; THE AGREEMENT WAS FOR A DURATION OF 10 YEARS WITH THE PARTIES HAVING OPTION TO EXTEND THE AGREEMENT; THERE WAS A CLAUSE FOR NON - DISCLOS URE TO THE THIRD PARTIES. IN VIEW OF THESE FACTS , THE HON BLE APEX COURT HELD THAT ITA NO.5140/DEL/2011 LG ELECTRONICS INDIA PVT. LTD. 76 THE EXPENDITURE INCURRED WAS ONLY A REVENUE EXPENDITURE BECAUSE WHAT WAS OBTAINED BY THE ASSESSEE WAS ONLY A LICENCE AND WHAT WAS PAID BY THE ASSESSEE WAS ONLY A LICENCE FEE AND NOT THE PRICE FOR ACQUISITION OF ANY CAPITAL ASSET. IN CIT VS INDIAN OXYGEN LTD. (1996) 218 ITR 337 (SC) , THE ASSESSEE ENTERED INTO AGREEMENT FOR THE USE OF INFORMATION, PROCESSES OR INVENTION AND WAS PROHIBITED FROM DISCLOSING THEM AFTER TERMINATIO N OF AGREEMENT AND FURTHER THE AGREEMENT WAS TERM INABLE EVEN PRIOR TO THE PERIOD SPECIFIED THEREIN. THE PAYMENT SO MADE WAS HELD TO BE OF REVENUE NATURE. IN CIT VS WAVIN (INDIA) LTD. (1996) 236 ITR 314 (SC), PAYMENT MADE BY THAT ASSESSEE WAS UNDER NON - EXCL USIVE AND NON - TRANSFERABLE AGREEMENT FOR THE USE OF TECHNICAL I NFORMATION , WHICH WAS HELD BY THE HON BLE SUPREME COURT AS A REVENUE EXPENDITURE. 1 6. 3 . IN CONTRAST TO ABOVE DECISIONS HOLDING PAYMENT OF ROYALTY AS A REVENUE EXPENDITURE, THERE IS A LINE OF JUDGMENTS HOLDING THE PAYMENT OF ROYALTY AS A CAPITAL EXPENDITURE. IN JONAS WOODHEAD & SONS LTD. VS CIT (1997) 224 ITR 342 (SC), THE ASSESSEE SET UP A NEW BUSINESS AND THE FOREIGN FIRM, IN ADDITION ITA NO.5140/DEL/2011 LG ELECTRONICS INDIA PVT. LTD. 77 TO SUPPLYING TECHNICAL KN OWHOW, ALSO RENDERED VALUABLE SERVICES IN SETTING UP THE FACTORY ITSELF AND THE ASSESSEE WAS ALLOWED TO MANUFACTURE THE PRODUCTS EVEN AFTER THE EXPIRY OF THE AGREEMENT. THE HON BLE SUPREME COURT HELD THAT 25% OF THE ROYALTY WAS A CAPITAL EXPENDITURE. IN SO UTHERN SWITCHGEAR LTD. VS. CIT AND ANR. (1998) 232 ITR 359 (SC), THE FOREIGN COMPANY PROVIDED TECHNICAL KNOWHOW AND OTHER SERVICES TO THE ASSESSEE COMPANY. THE TECHNICAL ASSISTANCE ALSO CONTEMPLATED ESTABLISHMENT OF A FACTORY. ON THE EXPIRY OF AGREEMENT AF TER 5 YEARS, THE ASSESSEE COULD USE METHOD OF PRODUCTION, PROCEDURE ETC. IN THE BACKDROP OF THESE FACTS , THE HON BLE SUPREME COURT HELD THAT THE PAYMENT WAS MADE BY THE INDIAN ASSESSEE FOR ACQUISITION OF KNOWLEDGE WHICH WAS OF ENDURING NATURE AND HENCE A C APITAL EXPENDITURE. 16.4 . A N ANALYSIS OF THE ABOVE JUDGMENTS RENDERED BY THE HON BLE SUMMIT COURT CLEARLY BRINGS OUT THAT WHEREAS THE PAYMENT MADE FOR ACQUISITION OF TECHNICAL KNOW - HOW ETC. ON OWNERSHIP BASIS IS A CAPITAL EXPENDITURE, THE PAYMENT MADE FO R USE OF SUCH TECHNICAL KNOW - HOW IS A REVENUE EXPENDITURE. A DIVIDER IN THE CAPITAL AND REVENUE EXPENDITURE IN THE CIRCUMSTANCES AS ARE PRESENTLY PREVAILING CAN BE PLACED BY ITA NO.5140/DEL/2011 LG ELECTRONICS INDIA PVT. LTD. 78 ASCERTAINING THE CORRECT NATURE OF THE RIGHT VESTED IN THE LICENSEE. IF LICENSEE I S ALLOWED NOT ONLY THE SIMPLICTOR USE OF TECHNICAL KNOW - HOW , BUT SUCH USE IS COUPLED WITH THE DIVESTING OF OWNERSHIP IN FAVOUR OF THE USER , THEN IT CAN BE CONSIDERED AS A CASE OF CAPITAL EXPENDITURE . IF ON THE OTHER HAND, THE LICENSEE IS ALLOWED A SIMPLE USE WITHOUT ANYTHING ELSE, THEN IT CAN BE ONLY A REVENUE EXPENDITURE. THE MERE FACT THAT THE EXPENDITURE IS RESULTING INTO BESTOWING A BENEFIT OF ENDURING NATURE IN THE SHAPE OF USE R OF TECHNICAL KNOW - HOW , WITH WHOSE ASSISTANCE THE ASSESSEE IS CARRYING ON ITS MAIN ACTIVITY OF BUSINESS, CANNOT BE THE SOLE DETERMINATIVE TEST OF THE NATURE OF EXPENDITURE. THE HON BLE APEX COURT IN EMPIRE JUTE CO. LTD. VS. CIT (1980) 124 ITR 1 (SC) HAS HELD THAT THERE MAY BE CASES WHERE EXPENDITURE, EVEN IF INCURRED FOR OBTAINING ADVANTAGE OF ENDURING BENEFIT, MAY, NONE THE LESS, BE ON REVENUE ACCOUNT AND THE TEST OF ENDURING BENEFIT MAY BREAK DOWN. THEIR LORDSHIPS EMPHATICALLY LAID DOWN THAT : IF THE ADVANTAGE CONSISTS ME RELY IN FACILITATING THE ASSESSEE'S TRADING OPERATIONS OR ENABLING THE MANAGEMENT AND CONDUCT OF THE ASSESSEE'S BUSINESS TO BE CARRIED ON MORE EFFICIENTLY OR MORE PROFITABLY WHILE LEAVING THE FIXED CAPITAL UNTOUCHED, THE ITA NO.5140/DEL/2011 LG ELECTRONICS INDIA PVT. LTD. 79 EXPENDITURE WOULD BE ON REVENUE ACC OUNT, EVEN THOUGH THE ADVANTAGE MAY ENDURE FOR AN INDEFINITE FUTURE . THUS, IT FOLLOWS THAT IF AN ASSESSEE GETS BENEFIT OF ENDURING NATURE BY INCURRING THE EXPENDITURE, BUT SUCH BENEFIT SIMPLY FACILITIES THE CARRYING ON THE BUSINESS IN A MORE PROFITABLE MA NNER WITHOUT ENHANCING THE FIXED CAPITAL BASE, IT WILL BE A CASE OF REVENUE EXPENDITURE. IF ON THE OTHER HAND, THE EXPENDITURE RESULTS INTO ACQUISITION OF ASSET AS AN OWNER AND NOT AS A MERE USER , WHICH AUGMENTS THE FIXED CAPITAL BASE , THE PAYMENT IS A CAPITAL EXPENDITURE. 16.5 . ARMED WITH THE ABOVE LEGAL POSITION, WE NEED TO ASCERTAIN IF THE ASSESSEE ACQUIRED USE AS WELL AS OWNERSHIP OF TECHNICAL KNOW - HOW ETC. OR WAS ALLOWED A SIMPLE USE DEVOID OF OWNERSHIP. IN ORDER TO DECIDE THIS ISSUE, A LL THE ATT ENDING FACTS AND CIRCUMSTANCES OF THE CASE NEED TO BE VIEWED . SOME OF THE FACTORS OF RELEVANCE IN DECIDING THE OVERALL QUESTION AS TO WHETHER THE PAYMENT IS CAPITAL OR R EVENUE CAN BE , THE EXCLUSIVE OR NON - EXCLUSIVE USE; FIXED OR PERPETUAL TENURE OF THE AGREEMENT FOR TRANSFER OF THE TECHNICAL KNOWHOW; THE AVAILABILITY OR OTHERWISE OF TECHNICAL KNOWHOW AFTER THE TERMINATION OF THE AGREEMENT; PURSUANT TO THE SURRENDERING OF SUCH TECHNICA L KNOW - HOW ON THE ITA NO.5140/DEL/2011 LG ELECTRONICS INDIA PVT. LTD. 80 TERMINATION OF THE AGREEMENT, THE EXISTENCE OR OTHERWISE OF RIGHT TO USE TECHNICAL KNOWLEDGE WHICH THE LICENSEE MAY HAVE IMBIBED DURIN G THE CURRENCY OF THE AGREEMENT ; THE EXISTENCE OR OTHERWISE OF CONFIDENTIALITY CLAUSE IN THE AGREEMENT D EBARRING THE LICENSEE FROM SHARING IT WITH OTHERS DURING THE CONTINUANCE OF THE AGREEMENT OR THEREAFTER. IN FACT, THERE CAN BE NO SINGLE CONCLUSIVE TEST FOR DECIDING THE NATURE OF ROYALTY PAYMENT AS TO WHETHER IT IS REVENUE OR CAPITAL . IT IS THE CUMULATI VE EFFECT OF ALL THE ABOVE DISCUSSED FACTORS WHICH HELPS IN ASCERTAINING THE TRUE NATURE OF ROYALTY PAYMENT. 16.6 . WHEN WE COME BACK TO THE FACTS OF THE INSTANT CASE IT IS OBSERVED THAT THE FACTORS WHICH WEIGH IN FAVOUR OF THE ASSESSEE ARE THAT THE LICEN SE WAS GIVEN ON NON - TRANSFERABLE BASIS; THERE IS A CONFIDENTIALITY CLAUSE PROHIBITING THE ASSESSEE FROM DIVULGING THE RELEVANT INFORMATION DURING CONTINUATION OF THE AGREEMENT OR ANY TIME THEREAFTER; ON THE TERMINATION OF THE AGREEMENT, RESPECTIVE RIGHTS OR OBLIGATION S UNDER THE AGREEMENT SHALL CEASE; AND THERE IS NO POWER WITH THE ASSESSEE TO SUB - LICENSE. ON THE OTHER HAND, THE FACTORS WHICH WEIGH AGAINST THE ASSESSEE ARE THAT THE LICENSE IS EXCLUSIVELY GRANTED TO THE ASSESSEE; AND THE LICENSE ITA NO.5140/DEL/2011 LG ELECTRONICS INDIA PVT. LTD. 81 IS NOT FOR A LIMITED PERIOD BUT PERPETUAL. ON CONSIDERING THE CUMULATIVE EFFECT OF ALL THE FACTORS, BOTH FOR AND AGAINST THE ASSESSEE, WE HAVE NO HESITATION IN HOLDING SUCH ROYALTY PAYMENT TO BE OF A REVENUE NATURE. THE REASON IS OSTENSIBLE, BEING THE FACTORS POINTI NG TOWARDS REVENUE EXPENDITURE PREDOMINANTLY OVERSHADOWING THE FACTORS POINTING AGAINST REVENUE EXPENDITURE. THE FACTORS WHICH ARE AGAINST THE ASSESSEE ARE ALBEIT MATERIAL, BUT STAND OUTSHINE D BY THE FACTORS WHICH ARE IN FAVOUR OF THE ASSESSEE. IT IS A CAS E OF ROYALTY PAYMENT IN LIEU OF THE USE OF LICENSE DEVOID OF CONFERRING ANY OWNERSHIP RIGHTS IN THE LICENSEE - ASSESSEE. 16.7 . THE JUDGMENT IN THE CASE OF RAM KUMAR PHARMACEUTICAL WORKS VS. CIT (1979) 119 ITR 33 (ALL) AS RELIED BY THE AO IS NOT GERMANE TO THE ISSUE UNDER CONSIDERATION. IN THAT CASE, ROYALTY WAS PAID FOR ACQUIRING OWNERSHIP OF KNOW - HOW AND WAS HENCE HELD TO BE AN EXPENDITURE INCURRED TO OBTAIN A RIGHT OF AN ENDURING NATURE. WE FURTHER FIND THAT THE HON BLE JURISDICTIONAL HIGH COURT IN A L ATER CASE OF CIT VS. PREM HEAVY ENGG. WORKS (P) LTD. (2006) 282 ITR 11 (ALL) HAS HELD THE PAYMENT FOR ACQUIRING TECHNICAL KNOW - HOW FOR MANUFACTURE OF PLANT AND NOT FOR ITA NO.5140/DEL/2011 LG ELECTRONICS INDIA PVT. LTD. 82 ESTABLISHMENT OF FACTORY ITSELF FOR A PERIOD OF SEVEN YEARS , AS A REVENUE EXPENDITURE . 16.8 . WE, THEREFORE, SUM UP OUR CONCLUSION BY HOLDING THAT THAT THE TOTAL ROYALTY PAYMENT, AS REDUCED BY THE TRANSFER PRICING ADJUSTMENT ON THIS SCORE, BE TREATED AS A R EVENUE EXPENDITURE. THIS GROUND IS ALLOWED. 17 . GROUND NO. 12 IS AGAINST RESTRICTING THE CLAIM OF DEDUCTION U/S 80JJAA OF THE ACT TO ` 6.80 LACS AS AGAINST ` 1.32 CRORE CLAIMED BY THE ASSESSEE. 17.2. AFTER CONSIDERING THE RIVAL SUBMISSIONS AND PERUSING THE RELEVANT MATERIAL ON RECORD, WE FIND THAT THIS ISSUE HAS ALREADY BEEN DECIDED AGAINST THE ASSESSEE BY THE TRIBUNAL IN ITS EARLIER ORDERS. RESPECTFULLY FOLLOWING THE PRECEDENT, WE APPROVE THE VIEW TAKEN BY THE ASSESSING OFFICER IN REDUCING THE AMOUNT OF DEDUCTION U/S 80JJAA. 1 8 . THE LAST GROUND ABOUT C HARGING OF INTEREST U/S S 234B AND 234C IS CONSEQUENTIAL IN NATURE AND HENCE DISPOSED OFF ACCORDINGLY. ITA NO.5140/DEL/2011 LG ELECTRONICS INDIA PVT. LTD. 83 19. IN THE RESULT, THE APPEAL IS PARTLY ALLOWED. ORDER PRONO UNCE D IN THE OPEN COURT ON 0 8 /12/2014. S D / - S D / - (I. C. SUDHIR ) (R. S. SYAL) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED: 0 8 /12/2014 *SUBODH* COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(APPEALS) 5. DR: ITAT ASSISTANT REGISTRAR DATE INITIAL 1. DRAFT DICTATED ON 02. 12.2014 PS 2. DRAFT PLACED BEFORE AUTHOR 05 .1 2.2014 PS 3. DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER JM/AM 4. DRAFT DISCUSSED/APPROVED BY SECOND MEMBER. JM/AM 5. APPROVED DRAFT COMES TO THE SR.PS/PS PS/PS 6. KEPT FOR PRONOUNCEMENT ON PS 7. FILE SENT TO THE BENCH CLERK PS 8. DATE ON WHICH FILE GOES TO THE AR 9. DATE ON WHICH FILE GOES TO THE HEAD CLERK. 10. DATE OF DISPATCH OF ORDER. *
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