M/s. Renishaw metrology Systems Ltd., Pune V. Deputy Commissioner of Income-tax, Pune

ITA 623/PUN/2015

• Counselvise Citation: [2020] 111 COUNSELVISE.COM (IT) 7497 (ITAT-PUNE)
• Duration Of Justice: 4 year(s) 8 month(s) 24 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 29-01-2020
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: C
• Next Hearing Date: 18-12-2019
• Assessment Year: 2010-2011
• Appeal Filed On: 05-05-2015
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: T VIJAY BHASKAR REDDY
• Assessee Lawyers: ARIJIT CHAKRABORTY; ABHISHEK TILAK
• Keywords: Business income; Transfer pricing; International transaction; Rule of consistency; Initiation of penalty proceedings
• Section: 271(1)(c); 143(3); 37(1); 144C

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL C BENCH, PUNE BEFORE SHRI R.S. SYAL, VICE PRESIDENT AND SHRI S.S. VISWANETHRA RAVI, J UDICIAL MEMBER . / ITA NO . 6 23 /PUN/201 5 / ASSESSMENT YEAR : 20 10 - 11 M/S. RENISHAW METROLOGY SYSTEMS LIMITED, S. NO. 283, HISSA NO. 2, S. NO. 284, HISSA NO. 2 & 3A, RAISONI ESTATE, VILLAGE - MANN, TALUKA - MULSHI, PUNE 411057 PAN : AABCR6361F ....... / APPELLANT / V/S. DEPUTY COMMISSIONER OF INCOME TAX , CIRCLE 5, PUNE / RESPONDENT ASSESSEE BY : S /S HRI ARIJIT CHAKRABORTY & ABHISHEK TILAK REVENUE BY : SHRI T. VIJAY BHASKAR REDDY / DATE OF HEARING : 19 - 12 - 2019 / DATE OF PRONOUNCEMENT : 29 - 01 - 20 20 / ORDER PER S.S. VISWANETHRA RAVI, JM : THIS APPEAL BY THE ASSESSEE IS AGAINST THE ORDER PASSED BY THE AO DATED 20 - 02 - 2015 PASSED U/S. 143(3) R.W.S. 144C(13) OF THE ACT. 2. GROUND NOS. 1.1 AND 1.2 ARE GENERAL IN NATURE, HENCE, REQUIRE NO ADJUDICATION. 2 ITA NO . 623/PUN/2015, A.Y. 2010 - 11 3. IN RESPECT OF G ROUND NOS. 2.3 TO 2.7 , THE LD. AR SUBMITS THAT THE ASSESSEE IS NOT INTERESTED TO PROSECUTE THE SAME AND PRAYED TO DISMISS THE SAME AS NOT PRESSED. ACCORDINGLY, THE GROUND NOS. 2.3 TO 2.7 RAISED BY THE ASSESSEE ARE DISMISSED AS NOT PRESSED. 4. THE ASSESSEE RAISED GROUND NOS. 2.1, 2.2, 2.8 AND 2.9 AMONGST WHICH THE O NLY EFFECTIVE ISSUE EMANATES TO DECIDE TRANSFER PRICING ADJUSTMENT IN RESPECT OF MARKETING SUPPORT SERVICES OF RS.68,58,514/ - . 5. HEARD BOTH PARTIES AND PERUSED THE MATERIAL AVAILABLE ON RECORD. THE ASSESSEE BEFORE US CHALLENGING THE ACTION OF DISPUTE RESOLUTION PANEL (DRP) DIRECTING THE AO TO INCLUDE ICRA MANAGEMENT CONSULTING SERVICES LTD., QUADRANT COMMUNICATIONS AND ASIAN BUSINESS EXHIBITION & CONFERENCE LTD. IN CONSEQUENTLY, TO DELETE THE ADDITION MADE BY THE AO ON ACCOUNT OF TRANSFER PRICING ADJU STMENT INVOLVING THE ABOVE SAID AMOUNT. 6. WE NOTE THAT WHILE INCLUDING ICRA MANAGEMENT CONSULTING SERVICES LTD. THE AO DID NOT RECORD ANY REASON FOR INCLUSION OF SAID COMPANY AS COMPARABLE. WE FIND IN PARA 2.2.4 .4 OF DRP AT PAGE 14 DIRECTED THE TPO TO VERIFY THE COMPARABILITY OF THE SAID COMPANY BASED UPON ITS ANNUAL REPORT FOR F.Y. 2009 - 10 INVOLVING THE YEAR UNDER CONSIDERATION I.E. A.Y. 2010 - 11. THEREFORE, WE UPHOLD THE DIRECTIONS OF DRP WITH A DIRECTION TO AO T O GET THE REPORT FROM TPO AND DECIDE THE COMPARABILITY OF THE SAID COMPANY BE THAT OF ASSESSEE. REGARDING INCLUSION OF QUADRANT COMMUNICATIONS. 7. THE ASSESSEE OBJECTED FOR CONSIDERING THE FOREX AS NON - OPERATIVE TO THE INCLUSION OF QUADRANT COMMUNICATIONS THAT IT IS NOT FUNCTIONALLY 3 ITA NO . 623/PUN/2015, A.Y. 2010 - 11 COMPARABLE AND THE SAID COMPANY INVOLVED IN ADVERTISING AGENCY AND NON - AVAILABILITY OF REQUIRED DATA FOR COMPARABILITY. THE TPO REJECTED THE OBJECTIONS OF ASSESSEE AND HELD THE SAID COMPANY IS ENGAGED IN THE ADVE RTISING BUSINESS AND THE SERVICES PROVIDED INCLUDE FULL SERVICE ADVERTISING AGENCY, PROVIDING CLIENTS WITH 360 DEGREE MARKETING COMMUNICATIONS SOLUTIONS. THE DRP UPHELD THE TP REPORT FOR INCLUSION OF QUADRANT COMMUNICATIONS BY HOLDING THAT IT IS FUNCTIONA LLY COMPARABLE WITH THE ASSESSEE. 8. RENISHAW PLC IS INCORPORATED IN ENGLAND AND RENISHAW METROLOGY SYSTEMS PRIVATE LTD. IS INCORPORATED IN INDIA. WE FIND FUNCTIONS INVOLVED IN MARKETING SUPPORT SERVICES OF ASSESSEE I.E. RENISHAW METROLOGY SYSTEMS PRIVAT E LTD. (RMSPL) ENTERED INTO AN AFFILIATE AUTHORIZED SALES REPRESENTATIVE AGREEMENT ON 01 - 04 - 2005 WITH ITS AE RENISHAW PLC WHICH IS PLACE AT PAGE NO. 149 OF THE PAPER BOOK, WHEREIN IT REVEALS THAT THE BACKGROUND OF AGREEMENT THAT RENISHAW PLC AGREED TO GRAN T RMSPL A NON - EXCLUSIVE RIGHT TO PROVIDE SUPPORT SERVICES WITH REGARD TO SALE AND REPAIR OF THE PRODUCTS DESCRIBED IN SCHEDULE 1. THE PRIMARY FUNCTIONS OF RMSPL IN RELATION TO MARKETING SUPPORT SERVICES SUCH AS BRING TO THE NOTICE OF CUSTOMERS, THE GENERA L CONDITIONS OF SALES AS DOCUMENTED BY RENISHAW PLC TO EFFECTIVELY COMMUNICATE THE COMPLAINTS OR OBSERVATIONS MADE BY THE CUSTOMERS IN INDIA TO RENISHAW PLC AND PROVIDE INFORMATION TO RENISHAW PLC, IN RELATION TO THE COMPETITORS AND THEIR ACTIVITIES IN IND IA. FOR PROVIDING THE ABOVE MENTIONED SERVICES THE RMSPL WOULD BE COMPENSATED AT 9% OF THE NET SALE PRICE OF THE PRODUCTS SOLD IN INDIA. THEREFORE, INTER AFFILIATE AGREEMENT BETWEEN RENISHAW PLC AND RMSPL IS LIKE INTERNAL AGREEMENT BETWEEN THEM LIAISONIN G AND COORDINATING WITH THE CLIENTS BASED IN INDIA. 4 ITA NO . 623/PUN/2015, A.Y. 2010 - 11 9. WE NOTE THAT THE ANNUAL REPORT OF QUADRANT COMMUNICATIONS FOR A.Y. 2010 - 11 IS PLACED AT PAGES 271 TO 287 WHEREIN WE FIND NO ACTIVITIES OF SUCH KIND THE SAID COMPANY IS REFLECTING FROM THE SAID ANNUAL REPORT. WE ALSO NOTE THAT THE ASSESSEE VIDE ITS SUBMISSIONS DATED 18 - 11 - 2013 WHICH IS AT PAGE NO. 162 OF THE PAPER BOOK OBJECTED TO THE INCLUSION OF QUADRANT COMMUNICATIONS BY STATING THE DATA OF SAID CO MPANY IS NOT AVAILABLE. THEREFORE, IN OUR OPINION WHEN THE DATA IS NOT AVAILABLE IN PUBLIC DOMAIN , FOR COMPARABILITY OF BUSINESS SUPPORT SYSTEM SEGMENT BE THAT OF SAID COMPANY DOES NOT ARISE AT ALL. THEREFORE, WE REVERSE THE DIRECTION OF DRP TO INCLUDE T HE SAME AS COMPARABLE RESULTING INTO THE ADJUSTMENT MADE BY THE AO IS THEREFORE DELETED. THEREFORE, WE HOLD THAT THE QUADRANT COMMUNICATIONS CANNOT BE COMPARED. REGARDING INCLUSION OF ASIAN BUSINESS EXHIBITION & CONFERENCE LTD. 10 . THE ASSESSEE OBJE CTED THAT THE ACTIVITY OF ASIAN BUSINESS EXHIBITION & CONFERENCE LTD. IS FUNCTIONALLY DIFFERENT. FURTHER, IT WAS SUBMITTED THAT THE SAID COMPANY IS INTO ORGANIZING EXHIBITION AND TRADE FAIRS IN WHICH THE ASSESSEE IS NOT AT ALL INVOLVED. THE TPO REJECTED THE OBJECTIONS OF ASSESSEE. WE NOTE THAT THE TPO HAS OBSERVED IN ITS REMARKS THAT THE SAID COMPANY INVOLVED IN CONDUCTING EXHIBITIONS AND EVENTS AND MOST OF THE INCOME COMES FROM EXHIBITIONS AND EVENTS. THE DRP HELD THE FUNCTIONS OF THE SAID COMPANY ARE COMPARABLE WITH THE ASSESSEE AND THE AO MADE TRANSFER PRICING ADJUSTMENT. THE ASSESSEE PLACED ON RECORD THE ORDER DATED 25 - 04 - 2019 OF THIS TRIBUNAL PASSED IN M/S. JOHN DEERE INDIA PVT. LTD. WHEREIN THE REVENUE CHALLENGED DIRECTIONS OF DRP FOR EXCLUSION O F ASIAN BUSINESS EXHIBITION & CONFERENCE LTD. FROM THE LIST OF COMPARABLES. THE TRIBUNAL RENDERED THE DETAILED DISCUSSION AND HELD THE DRP IS JUSTIFIED IN DIRECTING TO EXCLUDE THE SAID COMPANY FROM THE COMPARABLES. WE NOTE THAT 5 ITA NO . 623/PUN/2015, A.Y. 2010 - 11 THE ASIAN BUSINESS EXHIBIT ION & CONFERENCE LTD. IS ENGAGED IN ORGANIZING EXHIBITION AND CONFERENCE. 11. THE TRIBUNAL EXAMINED THE PROFIT AND LOSS ACCOUNTS OF THE SAID COMPANY AND HELD THE DIRECT INCOME OF SAID COMPANY IS FROM EXHIBITION AND EVENTS. THEREFORE, AS WE DISCUSSED IN THE AFOREMENTIONED PARAGRAPHS THE AGREEMENT BETWEEN RENISHAW PLC AND RMSPL IS AN INTERNAL AFFILIATE AGREEMENT OF THE SAID TWO COMPANIES TO CO - ORDINATE AND EXCHANGE THE COMMUNICATION AND CORRESPONDENCE BETWEEN THEM RELATING TO THE CLIENTS BASED IN INDIA. WE NOTE THAT THE FINANCIAL STATEMENTS FOR THE PERIOD ENDED ON 31 - 03 - 2010 PLACED AT PAGE NO. 19 WHEREIN THE SALES AND SERVICES INCOME OF RS. 45,02,00,743/ - OUT OF WHICH THE MARKETING SUPPORT SERVICES IS ONLY RS.5,14,37,962/ - . THEREFORE, BIFURCATION OF SALES AND SERVICE INCOME THE INCOME EARNED FROM MARKETING SUPPORT SERVICES IS ONLY TO MEAGER, THEREFORE, WHICH CANNOT BE COMPARED WITH ASIAN BUSINESS EXHIBITION & CONFERENCE LTD. THUS, GROUND NOS. 2.1, 2.2, 2.8 AND 2.9 ARE ALLOWED. 12. GROUND NO. 3 RAISED BY THE ASSESSEE CHALLENGING THE ACTION OF DRP IN CONFIRMING THE TRANSFER PRICING ADJUSTMENT IN RESPECT OF MANAGEMENT SERVICES OF RS.1,27,37,577/ - . 13. HEARD BOTH PARTIES AND PERUSED THE MATERIAL AVAILABLE ON RECORD. WE FIND THE ISSU E RAISED IN GROUND NO. 3 IS SIMILAR TO THE ISSUE RAISED BY THE ASSESSEE IN GROUND NO. 3 FOR A.Y. 2009 - 10 IN ASSESSEES OWN CASE. ON PERUSAL OF THE SAME WE FIND THE TRANSFER PRICING ADJUSTMENT WAS MADE BASING ON SAME IDENTICAL FACTS AND SAID VARIANCE IN AM OUNTS. THE TRIBUNAL VIDE ITS ORDER DATED 12 - 09 - 2019 DISCUSSED THE FACTS, EVIDENCES, 6 ITA NO . 623/PUN/2015, A.Y. 2010 - 11 SUBMISSIONS OF LD. AR AND LD. DR OBSERVED THAT THE ASSESSEE HAS FILED DOCUMENTS JUSTIFYING NOT ONLY THE NEED OF SERVICES BUT ALSO THE AVAILMENT OF SERVICES. THE TPO HAS F AILED TO TAKE INTO COGNIZANCE THOSE DOCUMENTS/EVIDENCES AND HELD THE VALUE IN RESPECT OF MANAGERIAL SERVICES AVAILED BY THE ASSESSEE FROM ITS ASSOCIATED ENTERPRISE IS NIL. THE TRIBUNAL IN THE ABOVE SAID ORDER TAK ING INTO CONSIDERATION THE FACTS AND CIRCUM STANCES, HELD AS UNDER : 14. NOW, COMING TO THE NEXT ISSUE RAISED I.E. IN RESPECT OF PAYMENT OF MANAGERIAL FEES. 15. BRIEF FACTS RELATING TO THE ISSUE ARE THAT THE ASSESSEE HAD ENTERED INTO MANAGEMENT SERVICE AGREEMENT WITH RENISHAW PLC IN 2006. UNDER TH E SAID AGREEMENT, THE ASSOCIATED ENTERPRISE PROVIDED BUSINESS SUPPORT AND MANAGEMENT SUPPORT SERVICES TO THE ASSESSEE, WHICH THE ASSESSEE CLAIMED ENHANCED ITS OPERATIONAL EFFICIENCY AND ALSO STANDARDIZED ITS INTERNAL PROCESSES. THE ASSESSEE HAD FURNISHED D OCUMENTARY EVIDENCE IN THIS REGARD PROVIDING DETAILS OF PERSONNEL RENDERING THE SERVICES, NUMBER OF MAN HOURS SPENT, TOTAL COST INCURRED IN RENDERING SUCH SERVICES AND ALSO EXPLANATION WAS GIVEN VIS - - VIS WORK DONE. THE INVOICES RECEIVED FROM ASSOCIATED EN TERPRISE WERE ALSO FURNISHED BEFORE THE AUTHORITIES BELOW. HOWEVER, THE TPO HELD THAT IN FACT NO SERVICES WERE RECEIVED BY ASSESSEE AND ALSO OBSERVED THAT SERVICES WERE ROUTINE IN NATURE AND WERE NEITHER ASKED FOR NOR GIVEN BY ASSOCIATED ENTERPRISE AND THE TPO BENCHMARKED THE SAID TRANSACTION AT NIL AND MADE AN UPWARD ADJUSTMENT OF 2.18 CRORES. 16. THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE POINTED OUT THAT LAST YEAR THE TPO HAD ACCEPTED THE SAID TRANSACTION TO BE AT ARM'S LENGTH PRICE. THE A SSESSING OFFICER HAD DISALLOWED THE SAID PAYMENT UNDER SECTION 37(1) OF THE ACT. HOWEVER, THE DRP DELETED THE ADDITION, AGAINST WHICH NO APPEAL HAS BEEN FILED BY REVENUE. OUR ATTENTION WAS DRAWN TO THE ORDER OF TRIBUNAL IN THIS REGARD. HE ALSO POINTED OUT THAT THE ASSESSEE HAD FILED DETAILED LETTER TO THE TPO EXPLAINING THE NEED FOR AVAILING MANAGEMENT SERVICES DATED 06.05.2011 ALONG WITH SEVERAL ENCLOSURES AND ALSO DOCUMENTS WERE FILED EVIDENCING THE SAID PROVISION OF SERVICES. HOWEVER, THE TPO DOES NOT GI VE ANY COGENT REASON IN HOLDING THAT NO SERVICES WERE PROVIDED AND IN DETERMINING THE ARM'S LENGTH PRICE AT NIL. 17. THE LEARNED DEPARTMENTAL REPRESENTATIVE FOR THE REVENUE PLACED RELIANCE ON THE ORDERS OF AUTHORITIES BELOW. 18. WE HAVE HEARD THE RIVAL C ONTENTIONS AND PERUSED THE RECORD. THE ISSUE WHICH ARISES VIDE GROUND OF APPEAL NO.3 IS AGAINST ARM'S LENGTH PRICE OF TRANSACTION OF PAYMENT FOR MANAGERIAL SERVICES AVAILED FROM ASSOCIATED ENTERPRISE. THE AGREEMENT WHICH HAS BEEN ENTERED INTO BY ASSESSEE W ITH ITS ASSOCIATED ENTERPRISE WAS W.E.F. 01.04.2006. THE ASSESSEE IS AVAILING MANAGERIAL SERVICES UNDER THE SAME AGREEMENT FROM YEAR TO YEAR. IN ASSESSMENT YEAR 2007 - 08, NO ISSUE IN THIS REGARD WAS RAISED; IN ASSESSMENT YEAR 2008 - 09, THE TPO ACCEPTED THE A RM'S LENGTH PRICE BUT THE ASSESSING OFFICER HELD THAT THE SAID PAYMENT WAS NOT TO BE ALLOWED UNDER SECTION 37(1) OF THE ACT. THE DRP DELETED THE ADDITION, AGAINST WHICH NO APPEAL HAS BEEN FILED BY THE REVENUE. IN ASSESSMENT YEAR 2009 - 10 I.E. INSTANT ASSESS MENT YEAR, NO DISALLOWANCE HAS BEEN MADE BY ASSESSING OFFICER UNDER SECTION 7 ITA NO . 623/PUN/2015, A.Y. 2010 - 11 37(1) OF THE ACT, BUT THE TPO HAD HELD THE ARM'S LENGTH PRICE AT NIL. THE TPO IN FINAL ANALYSIS HOLDS THE ASSESSEE NOT TO HAVE RECEIVED ANY SERVICES AND ALSO HOLDS THAT THERE WAS N O NEED TO AVAIL ANY SERVICES. 19. WE HAVE IN SERIES OF DECISIONS ALREADY DECIDED SIMILAR ISSUE OF PAYMENT ON ACCOUNT OF MANAGERIAL SERVICES AVAILED BY ASSESSEE FROM ITS ASSOCIATED ENTERPRISES AND HAVE HELD THAT THE TPO OR THE ASSESSING OFFICER CANNOT SIT IN JUDGMENT OF THE DECISION OF BUSINESSMAN TO AVAIL SERVICES AND TO MAKE PAYMENTS FOR THAT. FURTHER, THE ASSESSEE HAS FILED DOCUMENTS JUSTIFYING NOT ONLY THE NEED OF THE SERVICES BUT ALSO THE AVAILMENT OF SERVICES. THE TPO HAS FAILED TO TAKE INTO COGNIZAN CE THOSE DOCUMENTS / EVIDENCES AND WE FIND NO MERIT IN THE SAME. IN ANY CASE, THE SAID AGREEMENT BETWEEN THE PARTIES IS IN FORCE W.E.F. 01.04.2006 AND IN NONE OF THE EARLIER YEARS ANY ADDITION HAS BEEN MADE BY THE TPO/ASSESSING OFFICER. IN THE ABSENCE OF S AME AND FOLLOWING THE RULE OF CONSISTENCY WE FIND NO MERIT IN THE ORDERS OF TPO/ASSESSING OFFICER AND THE SAME IS REVERSED. THE GROUND OF APPEAL NO.3 RAISED BY ASSESSEE IS THUS, ALLOWED. THE GROUNDS OF APPEAL RAISED BY ASSESSEE ARE THUS, ALLOWED. THERE W AS NO ORDER CONTRARY TO THE FINDINGS OF THIS TRIBUNAL IN ASSESSEES OWN CASE WAS PLACED ON RECORD AND IN VIEW OF THE SAME, WE REVERSE THE ORDER OF DRP AND DIRECT THE AO TO ACCEPT THE VALUE OF MANAGERIAL SERVICES AS CLAIMED BY THE ASSESSEE AT NIL. THUS, GR OUND NO. 3 RAISED BY THE ASSESSEE IS ALLOWED. 1 4 . GROUND NO. 4 RAISED BY THE ASSESSEE CHALLENGING THE ACTION OF AO IN CONFIRMING THE TRANSFER PRICING ADJUSTMENT AS DIRECTED BY THE DRP ON ACCOUNT OF PAYMENT OF ROYALTY OF RS.27,32,494/ - . 1 5 . HEARD BOTH PARTIES AND PERUSED THE MATERIAL AVAILABLE ON RECORD. THE ASSESSEE MADE PAYMENT OF RS.27,32,494/ - TO ITS ASSOCIATED ENTERPRISE RENISHAW PLC ON ACCOUNT OF ROYALTY. THE TPO CALLED FOR EXPLANATION AS TO WHY THE ROYALTY SHOULD NOT BE TREATED AS NIL. THE AS SESSEE EXPLAINED THE MARGIN EARNED BY THE ASSESSEE IS HIGHER THAN THAT OF COMPARABLES AND ASSESSEE MADE SUBSTANTIAL PURCHASE OF RAW MATERIAL FROM LOCAL MARKET, ASSESSEE IS NOT A CONTRACT MANUFACTURE. THE TPO HELD THAT THE ASSESSEE IS A CONTRACT MANUFACTURE AND REFERRED TO RELEVANT TP DOCUMENTATION REGARDING THE FUNCTIONS. ON PERUSAL OF THE FUNCTIONS AS REPRODUCED BY THE 8 ITA NO . 623/PUN/2015, A.Y. 2010 - 11 TPO IN ITS ORDER AT PAGE NO. 15 SHOWS THAT THE ASSESSEE PROVIDES MANUFACTURING SER VICES FOR THE PRODUCTS OF RENISHAW GROUP AND DOES ASSEMBLY OF A RANGE OF MACHINE TOOL PROBING PRODUCTS AND CABLE HARNESSES. THE MANUFACTURING ACTIVITY IS PREDOMINANTLY MANUAL ASSEMBLY, AIDED BY SOME COMPUTERIZED SEMI - AUTOMATED PROCESSES. FURTHER, TRAININ G OF INDIAN ENGINEERS IS UNDERTAKEN IN THE UK AND IRELAND PRIOR TO THE TRANSFER OF PRODUCTION TO INDIA. MATERIALS AND COMPONENTS REQUIRED FOR PRODUCTION ASSEMBLY OPERATIONS WERE INITIALLY SOURCED FROM THE PARENT COMPANY AS WELL AS LOCAL MARKET. REGARDING TECHNICAL COLLABORATION, THE ASSESSEE HAS RIGHT TO USE TECHNICAL KNOW - HOW, PATENTS AND TRADEMARKS, OWNED BY ITS ASSOCIATED ENTERPRISE RENISHAW PLC IN ITS MANUFACTURING PROCESS. THE BARE READING OF THE FUNCTIONS OF ASSESSEE ON ACCOUNT OF ROYALTY UNDER AN AGREEMENT CLEARLY SHOWS THAT THE ASSESSEE IS AVAILING TECHNICAL KNOW - HOW, PATENTS AND TRADEMARKS OWNED BY THE ITS ASSOCIATED ENTERPRISE IN ITS MANUFACTURING SERVICES FOR THE PRODUCTS WHICH ARE SUPPLIED TO ENTIRE RENISHAW GROUP. 16. FURTHER, THE TPO DISC USSED VARIOUS RISKS FACED BY THE ASSESSEE AND HELD THAT THE ASSESSEE IS A CONTRACT MANUFACTURER AND THE ARMS LENGTH PRICE OF INTERNATIONAL TRANSACTIONS ON ACCOUNT OF ROYALTY IS TREATED AT NIL. THE ASSESSEE CHALLENGED THE SAME BEFORE THE DRP UNDER SUB - CLA USE (1)(B) OF SUB - SECTION (2) OF SECTION 144C OF THE ACT. THE DRP CONFIRMED THE VIEW OF TPO AND REJECTED THE CONTENTION OF ASSESSEE THAT IT IS NOT A CONTRACT MANUFACTURE AND HELD PAYMENT OF ROYALTY IS NOT JUSTIFIED IN VIEW OF THE FACT THAT THE ASSESSEE SU PPLIED 100% MANUFACTURE D GOODS TO ITS AE. AGGRIEVED BY THE DIRECTION OF DRP, THE ASSESSEE BEFORE US CHALLENGING THE ACTION OF AO IN GIVING EFFECT TO DIRECTIONS OF DRP IN TREATING THE ROYALTY TRANSACTION AT NIL. 9 ITA NO . 623/PUN/2015, A.Y. 2010 - 11 17. WE NOTE THAT THE TECHNICAL COLLABORATIO N AGREEMENT DATED 01 - 04 - 2006 ENTERED BETWEEN THE ASSESSEE RMSPL AND ITS ASSOCIATED ENTERPRISE RENISHAW PLC IS AT PAGE NO. 561 OF THE PAPER BOOK. THE OBJECTIVE OF THE SAID AGREEMENT EXPLAINS THE RENISHAW PLC IS CONSIDERABLE ENGINEERING KNOW - HOW AND TECHNI CAL INFORMATION AND EQUIPMENT FOR MANUFACTURE OF METROLOGY PRODUCTS. THE RMSPL HAS BEEN DESIROUS OF MANUFACTURING METROLOGY PRODUCTS AND EXPORT THE SAME TO RENISHAW AND ANY COMPANY IN WHICH RENISHAW OWNS 20% OR MORE OF THE VOTING SHARE CAPITAL (AFFILIATE) ON THE TERMS AND CONDITIONS AS DETAILED THEREIN. THE TECHNICAL KNOW - HOW INCLUDES ALL INVENTIONS, PROCESSES, PATENTS, ENGINEERING AND MANUFACTURING SKILL AND OTHER TECHNICAL INFORMATION CALLED BY THE RENISHAW PLC HAVE BEEN AGREED TO USE WITHOUT INTIMATION BY THE RMSPL. FURTHER, RENISHAW PLC GRANTED AN EXCLUSIVE LICENSE TO MAKE IN INDIA THE PRODUCTS BY USE OF ANY OR ALL OF THE KNOW - HOW AND A NON - EXCLUSIVE LICENSE TO USE AND SELL THE SAID PRODUCTS THROUGHOUT INDIA AND OUTSIDE INDIA TO RENISHAW AND ITS AFFIL IATES. THEREFORE, IT IS CLEARS THAT HAVING TECHNICAL KNOW - HOW OWNED BY THE RENISHAW PLC INCLUDING A TECHNICAL AND ENGINEERING DATA, CALCULATION AND INFORMATION, DESIGN DATA, CALCULATIONS AND INFORMATION, DETAILS OF LAYOUT OF WORKS, INCLUDING DETAILS AND S PECIFICATION OF MACHINERY AND LICENSE TO MAKE IN INDIA AND NON - EXCLUSIVE LICENSE TO USE AND SELL THE SAID PRODUCTS THROUGHOUT INDIA AND OUTSIDE INDIA HAS BEEN GRANTED TO RMSPL. 18. WE NOTE THAT THE STATEMENT SHOWING THAT THE DETAILS OF PAYMENT OF ROYALTY ON THE BASIS OF TOTAL SALES TO ITS AFFILIATES IS PLACED AT PAGE NO. 560 OF THE PAPER BOOK WHICH CLEARLY SHOWS THAT THE TOTAL SALES TO ITS AFFILIATES IS RS.13,66,27,209/ - AND ROYALTY OF RS.27,32,494/ - @ 2% WAS PAID BY THE ASSESSEE TO ITS AE RENISHAW PLC. FURTHER, WE NOTE THAT THE RMSPL 10 ITA NO . 623/PUN/2015, A.Y. 2010 - 11 MANUFACTURED GOODS AND GOODS OTHER THAN ARMS AND MANUAL CONTROL UNIT TO RENISHAW PLC TO AN EXTENT OF RS. 12,62,13,313/ - AND RS.4,46,69,492/ - WHERE NO ROYALTY WAS PAID UNDER THE TRANSACTIONS HAD WITH ITS ASSOCIATED ENTE RPRISE. THAT MEANS TO SAY THE ASSESSEE PAID ROYALTY ON THE SALES EFFECTED TO ITS AFFILIATES AND NO ROYALTY PAID TO THE SALES EFFECTED TO RENISHAW PLC. SUPPORTING THE STATEMENT AT PAGE 560 THE CALCULATION OF ROYALTY FOR THE YEAR UNDER CONSIDERATION IS PLA CED AT PAGE NO. 579 OF THE PAPER BOOK WHEREIN IT CLEARLY SHOWS THAT NO ROYALTY PAID TO THE RENISHAW PLC ON THE SALE OF MANUFACTURED GOODS AND SUPPLIED TO IT. FURTHER, IN SUPPORTING PAYMENT OF ROYALTY TO RENISHAW PLC THE A SSESSEE CLAIMS THAT THE RENISHAW P LC CONTINUOUSLY INNOVATES AND IMPROVES THE TECHNOLOGY OF MANUFACTURING USED BY THE ASSESSEE. THE NEW AND IMPROVED TECHNOLOGY HELPS THE RMSPL IN MINIMIZING ITS RISK OF PRODUCING SUB - STANDARD PRODUCTS AND MAINTAINING THE HIGHEST MANUFACTURING QUALITY. THE ASSESSEE DOES NOT INCUR ANY EXPENSES ON THE RESEARCH AND DEVELOPMENT AND NO EXPENDITURE WAS DEBITED TO PROFIT AND LOSS ACCOUNTS AS ON 31 - 03 - 2010. IT IS OBSERVED FROM THE PAGES NOS. 587 AND 589 OF THE PAPER BOOK THAT THE RESEARCH AND DEVELOPMENT WHICH REV EALS THAT THE RENISHAW IT INCURRED HUGE COST FOR UPDATION OF THE TECHNOLOGY WHICH SUPPORTS THE VIEW OF ASSESSEE PAYING ROYALTY ON THE EXPORT SALES EFFECTED TO ITS RENISHAW AFFILIATES, A THIRD PARTY. 19. FURTHER, WE NOTE THAT THE PAYMENT OF ROYALTY HAS B EEN ACCEPTED BY THE RESPONDENT - REVENUE FROM 2006 ONWARDS THE DETAILS OF WHICH FILED AND THE TPO DID NOT ACCEPT CONTENTIONS OF THE ASSESSEE FOR THE YEAR UNDER CONSIDERATION. THE TPO ACCEPTED THE ARMS LENGTH PRICE ON MANUFACTURING ACTIVITY BUT HOWEVER TREA TED THE TRANSACTIONS ON ACCOUNT OF ROYALTY AT NIL WITHOUT APPLYING ANY METHOD. IN VIEW OF THE DISCUSSION MADE HERE - IN - 11 ITA NO . 623/PUN/2015, A.Y. 2010 - 11 ABOVE, WE DIRECT THE AO TO ACCEPT ARMS LENGTH PRICE ADOPTED BY THE ASSESSEE IN INTERNATIONAL TRANSACTIONS ON EXPORT OF SALES ON ACCOUNT OF ROYALTY. THEREFORE, TRANSFER PRICING ADJUSTMENT MADE BY THE AO IN PURSUANCE OF DIRECTIONS OF DRP IS DELETED. THUS, GROUND NO. 4 RAISED BY THE ASSESSEE IS ALLOWED. 20. IN GROUND NO. 5 THE ASSESSEE HAS ASSAILED INITIATION OF PENALTY PROCEEDINGS U/S. 271(1)(C) OF THE ACT , IT WAS AGREED BY THE LD. AR THAT IT IS THE GROUND RAISED BY THE ASSESSEE IS PRE - MATURE AT THIS STAGE. HENCE, REQUIRES NO ADJUDICATION, THE SAME IS DISMISSED . 21. IN THE RESULT, THE APPEAL OF ASSESSEE IS PARTLY ALLOWED . ORDER PRONOUNCED IN THE OPEN COURT ON 29 TH JANUARY, 2020 . SD/ - SD/ - ( R.S. SYAL ) ( S.S. VISWANETHRA RAVI ) VICE PRESIDENT JUDICIAL MEMBER / PUNE; / DATED : 29 TH JANUARY, 2020. RK / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT. 2. / THE RESPONDENT. 3. THE DISPUTE RESOLUTION PANEL, PUNE 4. THE D IT (IT&TP), PUNE 5. , , , / DR, ITAT, C BENCH, PUNE. 6. / GUARD FILE. // // TRUE COPY// / BY ORDER, / PRIVATE SECRETARY, , / ITAT, PUNE