DCIT, New Delhi V. M/s Sona Okegawa Precision Forgings Ltd., New Delhi

ITA 5386/DEL/2010

• Counselvise Citation: 538620114 RSA 2010
• Duration Of Justice: 1 year(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 16-12-2011
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: G
• Next Hearing Date: 22-11-2011
• Assessment Year: 2005-2006
• Appeal Filed On: 01-12-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: B R R KUMAR
• Assessee Lawyers: VIDUR PURI
• Keywords: Transfer pricing; International transaction

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL (DELHI BENCH G NEW DELHI) BEFORE SHRI RAJPAL YADAV AND SHRI K.G. BANSAL ITA NO. 5386/DEL/2010 ASSESSMENT YEAR: 2005-06 DEPUTY CIT, VS. SONA OKEGAWA PRECISION CIRCLE 9(1), FORGINGS LTD., UGF-6, NEW DELHI. INDRA PRAKASH BUILDING, 21-BARAKHAMBA ROAD, NEW DELHI. (PAN: AABCS4786P) (APPELLANT) (RESPONDENT) APPELLANT BY: SHRI BRR KUMAR, DR RESPONDENT BY: SHRI VIDUR PURI, CA DATE OF HEARING : 22.11.2011 DATE OF PRONOUNCEMENT : 16.12.2011 ORDER PER RAJPAL YADAV: JUDICIAL MEMBER THE REVENUE IS IN APPEAL BEFORE US AGAINST THE ORD ER OF LEARNED CIT(APPEALS) DATED 28.09.2010 PASSED FOR ASSESSMENT YEAR 2005-06. THE GROUNDS OF APPEAL TAKEN BY THE REVENUE READS AS UND ER: 1. LEARNED CIT(APPEALS) ERRED, IN LAW AND ON THE F ACTS AND CIRCUMSTANCES OF THE CASE, IN DELETING THE ADDITION OF RS.19,37,386 BEING THE DIFFERENCE IN THE ARMS LENGTH PRICE AND THE VALUE OF THE INTERNATIONAL TRANSACTION ON ACCOUNT OF ROYALTY. TH E A.O. MADE THIS ADDITION ON THE BASIS OF TPOS ORDER PASSED U/S.92C A(3) OF THE INCOME-TAX ACT. 2 2. THE APPELLANT CRAVES TO AMEND MODIFY, ALTER, ADD OR FOREGO ANY GROUND OF APPEAL AT ANY TIME BEFORE OR DURING THE H EARING OF THIS APPEAL. 2. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESSE E COMPANY IS ENGAGED IN THE BUSINESS OF MANUFACTURING OF PRECISION FORGED B EVAL GEARS AND SYNCHRONIZER RINGS USED IN THE AUTOMOBILE INDUSTRY. IT HAS FILED ITS RETURN OF INCOME FOR ASSESSMENT YEAR 2004-05 ON 28.10.2005 DE CLARING AN INCOME OF RS.8,89,09,600. THE CASE OF THE ASSESSEE WAS SELECT ED FOR SCRUTINY ASSESSMENT AND A NOTICE UNDER SEC. 143(2) OF THE AC T WAS SERVED UPON THE ASSESSEE. SHRI DINESH AGGARWAL AND SHRI HARSH DANG, CHARTERED ACCOUNTANTS APPEARED BEFORE THE ASSESSING OFFICER. ON SCRUTINY OF THE ACCOUNTS, IT REVEALED TO THE ASSESSING OFFICER THAT DURING THE YEAR, ASSESSEE HAD UNDERTAKEN INTERNATIONAL TRANSACTIONS WITH ITS OVERSEAS ASSOCIATES ENTERPRISES, NAMELY, MITSUBISHI MATERIAL CORPORATIO N, JAPAN, (MMC) AND METAL SINGAPORE, PTE LTD., SINGAPORE WORTH OVER RS. 16 CRORES. HE MADE A REFERENCE TO THE LEARNED TRANSFER PRICING OFFICER ( TPO) UNDER SEC. 92CA OF THE IT ACT FOR DETERMINATION OF ARMS LENGTH PRICE OF SUCH TRANSACTIONS. LEARNED TPO PASSED A DETAILED ORDER UNDER SEC. 92CA (2) OF THE ACT ON 27.8.2008. HE RECOMMENDED FOR AN ADJUSTMENT OF RS.1 9,37,386 IN THE ARMS LENGTH PRICE OF INTERNATIONAL TRANSACTION. THIS ADJ USTMENT HAS BEEN 3 RECOMMENDED ON ACCOUNT OF ROYALTY PAID BY THE ASSES SEE TO ITS A.E. LEARNED ASSESSING OFFICER HAS MADE AN ADDITION OF R S.19,37,386 IN THE TOTAL INCOME OF THE ASSESSEE. 3. ON APPEAL, LEARNED CIT(APPEALS) REAPPRECIATED AL L THE FACTS AND CIRCUMSTANCES IN A WELL REASONED ORDER AND DELETED THE ADDITION MADE BY THE ASSESSING OFFICER. 4. WITH THE ASSISTANCE OF LEARNED REPRESENTATIVES, WE HAVE GONE THROUGH THE RECORD CAREFULLY. IT EMERGES OUT FROM THE RECO RD THAT ASSESSEE HAS SHOWN EIGHT INTERNATIONAL TRANSACTIONS IN THE TRANSFER PR ICING REPORT SUBMITTED IN FORM NO.3CEB ALONGWITH THE RETURN OF INCOME. LEARNE D TPO ACCEPTED ALL THE TRANSACTIONS EXCEPT ONE WHICH IS AT SR.NO.5 OF THE TRANSACTIONS NOTICED BY HIM IN THE TABULAR FORM IN PARAGRAPH 3. THIS TRANSA CTION RELATES TO PAYMENT OF ROYALTY AT RS.1,73,24,153. THE FACTS RELATING TO THIS TRANSACTION ARE THAT ASSESSEE IS A JOINT VENTURE COMPANY WITH THE MITSUB HISHI MATERIAL CORPORATION(MMC, JAPAN) HAVING 25.79% OF SHARES HOL DING IN THE ASSESSEE COMPANY. THE ASSESSEE HAS ENTERED INTO A COLLABORAT ION AGREEMENT WITH MMC, JAPAN ON 19.12.1995 WHICH HAS BEEN APPROVED BY THE MINISTRY OF INDUSTRIES, DEPARTMENT OF INDUSTRIAL POLICY AND PRO MOTION ON 18.7.1996. AS 4 PER THE AGREEMENT, ASSESSEE HAD PAID ROYALTY @ 3% O N EXPORT AND DOMESTIC SALES (NET OF IMPORTED RAW-MATERIAL & BOUGHT OUT CO MPONENTS) AS PER COLLABORATION AGREEMENT APPROVED BY THE GOVERNMENT OF INDIA. THERE IS NO DISPUTE THAT MMC, JAPAN IS AN ASSOCIATE ENTERPRISES OF THE ASSESSEE. ACCORDING TO THE ASSESSEE, THE REGULATION OF THE GO VERNMENT OF INDIA ALLOWS ROYALTY @ 5% ON DOMESTIC SALES AND @ 8% ON EXPORT S ALES TO ALL ENTITIES, THEREFORE, THE ROYALTY PAID BY THE ASSESSEE TO MMC IS WELL WITHIN THE LIMIT SET UP BY THE GOVERNMENT OF INDIA. IT HAS FOLLOWED CUP METHOD AS A PREFERRED METHOD FOR DETERMINING THE ARMS LENGTH PRICE FOR R OYALTY PAID TO COLLABORATORS I.E. AE. 5. LEARNED TPO HAD ANALYZED THIS TRANSACTION AND OB SERVED THAT ASSESSEE MANUFACTURED THE GOODS AND SOLD THOSE GOODS TO THE AE. THESE GOODS ARE SPECIFIC GOODS WHICH HAVE BEEN PRODUCED FOR THE ASS OCIATE ENTERPRISES. THE TECHNOLOGY HAS BEEN RECEIVED FROM THE AE FOR PRODUC ING THESE GOODS, THEREFORE, THE ASSESSEE HAS TO BE CONSTRUED AS A CO NTRACT MANUFACTURER FOR THESE PRODUCTS. THE PAYMENT OF ROYALTY IN THE CASE OF A CONTRACT MANUFACTURER TO THE AE IS NOT JUSTIFIED AS PER OECD GUIDELINES. HE MADE A REFERENCE TO PARA NOS. 16.14 AND 16.17 OF SUCH GUID ELINES. IN THIS WAY, 5 ACCORDING TO THE LEARNED TPO, ASSESSEE OUGHT TO HAV E NOT PAID ROYALTY ON THE SALES MADE TO ITS A.E. HE WORKED OUT SUCH ROYALTY PAYMENT AS UNDER: SALES TO A.E 9,62,52,384 LESS: BROUGHT OUT IMPORTED RAW MATERIAL, COMPONENTS, CUTTING TIPS, DIES, OIL ETC. 3,16,72,866 NET SALES TO A.E 6,45,79,518 ROYALTY @ 3% 19,37,384 6. LEARNED TPO IN THIS WAY, RECOMMENDED THE ADDITIO N OF RS.19,37,384. THE CASE OF THE ASSESSEE BEFORE THE TPO WAS THAT IT IS NOT A CONTRACT MANUFACTURER. THE TOTAL ROYALTY PAID BY THE ASSESSE E IS OF RS.173 LACS, OUT OF THIS PAYMENT RS.154 LACS PERTAINS TO THE SALES MADE TO OTHERS. THE ROYALTY PAYMENT ATTRIBUTABLE TO THE SALES MADE TO THE A.E I S ONLY RS. 19 LACS. IT SUGGESTS THAT ROYALTY WAS PAID KEEPING IN VIEW THE BUSINESS NECESSITY AND AS PER THE COLLABORATION AGREEMENT. IT ALSO POINTED OU T THAT THE CHARACTERISTIC OF A CONTRACT MANUFACTURER IS THAT IT PERFORMS CERTAIN PRODUCTION ACTIVITIES REGARDING THE PRODUCTS OF THE PRINCIPLE, IN RETURN IT RECEIVES A PREVIOUSLY AGREED FEES. THE GOODS IN SUCH SITUATION REMAINS TH E PRINCIPALS PROPERTIES, THE CONTRACT MANUFACTURER ASSUMES ONLY A LIMITED DE GREE OF RISK WITH REGARD 6 TO THE GOODS. LEARNED FIRST APPELLATE AUTHORITY HAS APPRECIATED ALL THESE ASPECT AND DELETED THE ADDITION. THE FINDINGS OF TH E LEARNED FIRST APPELLATE AUTHORITY IN PARAGRAPH 10.2 AND 10.3 ARE WORTH TO R EFER, THEY READ AS UNDER: 10.2 I HAVE GONE THROUGH THE ABOVE SUBMISSION OF T HE APPELLANT AND HAVE ALSO PERUSED THE TPOS ORDER. FROM THE FACTS O F THE APPELLANTS CASE IT IS OBSERVED THAT THE ROYALTY FEE IS BEING P AID BY THE APPELLANT UNDER THE TECHNOLOGY AGREEMENT TO THE A.E AND IS IT COMPUTED ON THE BASIS OF THE ENTIRE PRODUCTION, NO DISTINCTION IS M ADE BETWEEN THE PRODUCTS SOLD TO THE A.E OR SOLD TO THE INDEPENDENT PARTIES. AS A RESULT OF WHICH THE FEES IS PAID ON THE SALES MADE TO THE A.E ALSO. THE ONLY THING WHICH THE A.O. SHOULD HAVE SEEN THAT WHETHER THE APPELLANT IS CHARGING ARMS LENGTH PRICES TO THE A.E. FOR THE EN D PRODUCT SALES OR NOT. SINCE NO MATERIAL HAS BEEN BROUGHT ON RECORD B Y THE TPO WHICH INDICATES THAT THE PRICES BEING CHARGED BY THE APPE LLANT IN THE CASE OF SALES TO THE A.E IS NOT ARMS LENGTH, IT IS THEREFO RE, PRESUMED THAT ALL SALES MADE BY THE APPELLANT HAVE BEEN MADE AT MARKE T DETERMINED PRICES. 10.3 THE AMOUNT OF FEES PAID UNDER THE TECHNOLOGY A GREEMENT IS AN INTEGRAL PART OF THE COST OF PRODUCTION AND IS RECO VERED FROM THE SALES PRICE. HENCE IN THE CASE OF SALES MADE TO THE A.E ( WHICH ARE AT MARKET PRICES) THE APPELLANT RECOVERS THE AMOUNT OF FEES P AID UNDER THE TECHNOLOGY AGREEMENT FROM THE A.E AS PART OF THE SA LES PRICE. HENCE THE CHARGE OF THE FEES PAID UNDER THE TECHNOLOGY AG REEMENT BECOMES 7 REVENUE NEUTRAL. IF THE APPELLANT DOES NOT PAY THE FEES ON THE SALES MADE TO THE A.E, IT WILL HAVE TO GIVE A CORRESPONDI NG REDUCTION IN THE PRICE CHARGED TO THE A.E SINCE ITS COSTING FOR THE SALE WILL COME DOWN. THIS WILL CREATE MORE COMPLICATIONS IN THE ACCOUNTS AND THE IMPACT ON THE TAXABLE PROFITS WILL BE NIL. THEREFORE SINCE TH E SALE PRICES CHARGED BY THE APPELLANT ON SUPPLIES MADE TO THE A.E ARE AT MARKET PRICES, THERE IS NO REASON FOR ADJUSTMENTS TO BE MADE IN TH E MANNER IN WHICH THE FEES PAID UNDER THE TECHNOLOGY AGREEMENT IS BEI NG COMPUTED. HENCE, THE ADDITION MADE BY THE TPO IS DELETED. 7. LEARNED DR RELIED UPON THE ORDER OF THE ASSESSIN G OFFICER WHEREAS LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT A S IMILAR ISSUE AROSE IN ASSESSMENT YEAR 2004-05 WHEREIN LEARNED CIT(APPEALS ) HAS DELETED THE DISALLOWANCE OF SIMILAR ROYALTY PAYMENT. THE ITAT H AS UPHELD THE ORDER OF THE LEARNED CIT(APPEALS). 8. WE HAVE DULY CONSIDERED THE RIVAL CONTENTIONS AN D GONE THROUGH THE RECORD CAREFULLY. TO OUR MIND, THERE ARE TWO ASPECT S. THE FIRST ASPECT IS WHETHER THE ROYALTY PAID BY THE ASSESSEE @ 3% IS EX CESSIVE AND NOT COMPUTED AT ARMS LENGTH PRICE. WE FIND THAT THE AS SESSEE HAS PLACED ON RECORD COPY OF THE LETTER DATED 30.4.1993 WRITTEN B Y THE RBI, EXCHANGE CONTROL DEPARTMENT TO M/S. SONA STEERING SYSTEM LTD . WHEREIN ROYALTY @ 8 3% ON DOMESTIC SALES SUBJECT TO TAXES FOR A PERIOD OF FIVE YEARS WAS ALLOWED TO BE PAID. THERE ARE SIMILAR OTHER CORRESPONDENCE WHICH HAVE BEEN PLACED ON THE PAPER BOOK. SIMILARLY, ON PAGE 51 OF THE PAP ER BOOK, A PRESS NOTE ISSUED IN 2003 ISSUED BY THE GOVERNMENT OF INDIA, M INISTRY OF COMMERCE & INDUSTRIES, DEPARTMENT OF INDUSTRIAL POLICY AND PRO MOTION HAS BEEN PLACED. IN THIS PRESS RELEASE, ROYALTY PAYMENT AT 8% ON EXP ORT AND 5% ON DOMESTIC SALES HAS BEEN REFERRED AS A REASONABLE PAYMENT FOR PROCESSING THE CASES FOR APPROVAL. THUS, LEARNED TPO FAILED TO BRING ANY MAT ERIAL ON THE RECORD WHICH CAN SUGGESTS THAT PAYMENT OF ROYALTY @ 3% WAS EXCESSIVE, ONE AND NOT AT ARMS LENGTH PRICE. THE OTHER ASPECT IS WHET HER ASSESSEE HAS MADE THE SALES TO THE A.E AT ARMS LENGTH PRICE OR NOT? THI S ISSUE HAS NOT BEEN CONSIDERED BY THE LEARNED TPO IN DETAIL. HE WAS UN ABLE TO COLLECT ANY MATERIAL INDICATING THAT SALES PRICE CHARGES BY THE ASSESSEE WAS NOT AT ARMS LENGTH. IN A WAY, HE ACCEPTED THAT SALES MADE BY TH E ASSESSEE TO ASSESSING OFFICER ARE ON ARMS LENGTH. LEARNED FIRST APPELLAT E AUTHORITY HAS CONSIDERED THIS ASPECT ALSO IN THE FINDING EXTRACTE D ABOVE. LEARNED TPO FURTHER NOT BROUGHT ANY MATERIAL INDICATING THE FAC T THAT ASSESSEE IS A CONTRACT MANUFACTURER. HE ONLY DRAWS INFERENCE IN THIS REGAR D. IN ASSESSMENT YEAR 2004-05, ITAT HAS CONSIDERED THIS ASPECT AND HAS UP HELD THE ORDER OF THE LEARNED CIT(APPEALS) DELETING SUCH ADDITION. THUS, AFTER TAKING INTO 9 CONSIDERATION THE FACTS AND CIRCUMSTANCES AND THE F INDINGS OF THE LEARNED CIT(APPEALS) EXTRACTED SUPRA, WE DO NOT FIND ANY ME RIT IN THIS APPEAL. IT IS DISMISSED. 9. IN THE RESULT, THE APPEAL OF THE REVENUE IS DISM ISSED. DECISION PRONOUNCED IN THE OPEN COURT ON 16.12.2011 SD/- SD/- ( K.G. BANSAL ) ( RAJPAL YADAV ) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED: 16/12/2011 MOHAN LAL COPY FORWARDED TO: 1) APPELLANT 2) RESPONDENT 3) CIT 4) CIT(APPEALS) 5) DR:ITAT ASSISTANT REGISTRAR 10