DE Diamond Electric India Pvt Limited, New Delhi V. ACIT Special Range - 3, New Delhi

ITA 7167/DEL/2019

• Counselvise Citation: [2020] 110 COUNSELVISE.COM (IT) 8748 (ITAT-DELHI)
• Duration Of Justice: 10 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 23-07-2020
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Assessment Year: 2016-2017
• Appeal Filed On: 30-08-2019
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: JAGDISH SINGH
• Keywords: Transfer pricing; International transaction; Fair market value; Royalty expenses
• Section: 68; 271(1)(c); 143(3); 115JB; 37(1); 195; 143(2)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, DELHI BENCH: B (HEARING THROUGH VIDEO CONFERENCING), NEW DELHI BEFORE SHRI BHAVNESH SAINI, JUDICIAL MEMBER AND SHRI O.P. KANT, ACCOUNTANT MEMBER ITA NO.7167/DEL./2019 ASSESSMENT YEAR: 2016-17 DE DIAMOND ELECTRIC INDIA PVT. LTD., C/O- KAPIL GOEL, ADV. F- 26/124, SEC-07, ROHINI, NEW DELHI VS. ACIT, SPECIAL RANGE-3, NEW DELHI PAN :AACCD6324B (APPELLANT) (RESPONDENT) ORDER PER O.P. KANT, AM: THIS APPEAL HAS BEEN PREFERRED BY THE ASSESSEE AGAI NST THE ORDER DATED 17/06/2019 PASSED BY THE LEARNED CIT(AP PEALS)-34, NEW DELHI [IN SHORT THE LD. CIT(A)] FOR ASSESSMEN T YEAR 2016-17 RAISING FOLLOWING GROUNDS: JURISDICTIONAL GROUND NOTICE U/S 143(2) IS INVALID 1. THAT ORDER PASSED BY LD AO DATED 20/12/2018 AND FURTHER ORDER PASSED BY LD CIT A DATED 17/06/2019 ARE BAD IN LAW IN AS MUCH AS MECHANICAL NOTICE U/S 143(2) ON BASIS OF CASS IS NO T IN ACCORDANCE WITH APPELLANT BY SHRI KAPIL GOEL, ADV. RESPONDENT BY SHRI JAGDISH SINGH, SR. DR DATE OF HEARING 16.07.2020 DATE OF PRONOUNCEMENT 23.07.2020 2 ITA NO.7167/DEL./2019 JURISDICTIONAL CONDITIONS STIPULATED UNDER THE ACT SO IT SHOWS GRAVE AND PATENT NON APPLICATION OF MIND ON PART OF LD AO IN ISSUING NOTICE U/S 143(2) AND ACCORDINGLY ALL SUBSEQUENT PROCEEDING IN CLUDING ORDERS PASSED BY LD AO AND LD C1T-A ARE VOID AB INITIO. OTHER GROUNDS ON MERITS QUA DISALLOWANCE OF U/S 40A(2)(B) (RS.366,82,337) 2. THAT ORDER PASSED BY LD AO DATED 20/12/2018 AND FURTHER ORDER PASSED BY ID CIT A DATED 17/06/2019 ARE BAD IN LAW IN AS MUCH AS DISALLOWANCE OF RS 366,82,337/- U/S 40A(2)(B) IS MA DE WITHOUT APPRECIATING THAT THROUGHOUT REVENUE HAS CONSISTENT LY ALLOWED SUBJECT ROYALTY EXPENSE IN ASSESSMENT ORDERS DATED 16.12.20 16 (AY 2014- 2015) AND 23.10.2017(AY 2013-2014) AND MOREOVER THE RE IS NO SCRUTINY EXAMINATION IN IDENTICAL FACTS FOR AY 2015- 2016 AN D AY 2017-2018 AND WHEN SUCH ARE THE FACTS ISOLATED DISALLOWANCE IN SU BJECT PERIOD IS AGAINST THE PRINCIPLE OF UNIFORMITY, CONSISTENCY AN D PREDICTABILITY AND THUS ON THIS SHORT COUNT ITSELF ADDITION SUSTAINED NEEDS TO BE REVERSED; 3. THAT ORDER PASSED BY LD AO DATED 20/12/2018 AND FARTHER ORDER PASSED BY ID CIT A DATED 17/06/2019 ARE BAD IN LAW IN AS MUCH AS DISALLOWANCE OF RS.366,82,337/- U/S 40A(2)(B) IS MA DE WITHOUT APPRECIATING THAT THERE IS NO TAX EVASION PLAN WHIC H IS MUST TO INVOKE SECTION 40A(2)(B) AS STIPULATED IN MOTHER CIRCULAR OF CBDT NO 6P OF 1968 EXPLAINING THAT SANS TAX EVASION PROVISIONS OF SECT ION 40A(2) CANT BE PRESSED INTO SERVICE WHERE AS IN EXTANT CASE NOT ON LY DUE TAX IS DEDUCTED U/S 195 OF RS 68,83,862 ON SAID PAYMENT OF ROYALTY BUT SAME IS REMITTED ON SOUND AND RATIONAL BASIS OF COMMERCI AL EXPEDIENCY PRINCIPLES WHICH HAS BEEN UNLAWFULLY INTERDICTED BY LD AO/LD CIT-A ON MERE BASIS OF ASSUMPTION AND PRESUMPTION ONLY. 4. THAT ORDER PASSED BY LD AO DATED 20/12/2018 AND FURTHER ORDER PASSED BY ID CIT A DATED 17/06/2019 ARE BAD IN LAW IN AS MUCH AS DISALLOWANCE OF RS 366,82,337/- U/S 40A(2)(B) IS MA DE WITHOUT APPRECIATING THAT BURDEN LYING ON REVENUE TO INVOKE SECTION 40A(2)(B) IS PATENTLY UN-DISCHARGED IN PRESENT CASE AS NO EFFORT IS MADE AT ANY STAGE TO DEMONSTRATE SO CALLED ALLEGED EXCESSIVENESS IN P AYMENT OF SUBJECT ROYALTY SANS WHICH ENTIRE DISALLOWANCE BECOMES ULTR A VIRES TO PROVISIONS OF THE ACT; 5. THAT ORDER PASSED BY LD AO DATED 20/12/2018 AND FURTHER ORDER PASSED BY ID C1T A DATED 17/06/2019 ARE BAD IN LAW IN AS MUCH AS DISALLOWANCE OF RS 366,82,337/- U/S 40A(2)(B) IS MA DE WITHOUT APPRECIATING THAT LAW DOES NOT ALLOW REVENUE TO PUT ITSELF IN ARMCHAIR OF BUSINESS MAN AND DICTATE BUSINESS EXPEDIENCY WHICH IS IN EXCLUSIVE DOMAIN OF ASSESSEE ; 3 ITA NO.7167/DEL./2019 6. THAT THE APPELLANT CRAVES LEAVE TO ADD ADD/ALTER ANY/ALL GROUNDS OF APPEAL BEFORE OR AT THE TIME OF HEARING OF THE APPE AL. HUMBLE PRAYER: I) TO DELETE THE SOLE ADDITION OF RS 366,82,337/- O N A/C OF ALLEGED EXCESSIVE ROYALTY PAYMENT TO RELATED PARTY U/S 40A( 2)(B) ; II) TO RESTORE RETURNED INCOME. III) ANY OTHER APPROPRIATE RELIEF. 2. BRIEFLY STATED FACTS OF THE CASE ARE THAT THE ASSE SSEE COMPANY WAS ENGAGED IN BUSINESS OF MANUFACTURING AN D TRADING OF IGNITION COILS FOR MOTOR VEHICLE ENGINES. FOR TH E YEAR UNDER CONSIDERATION, THE ASSESSEE FILED RETURN OF INCOME ON 29/11/2016 DECLARING TOTAL INCOME OF 19,12,01,440/- UNDER NORMAL PROVISIONS OF THE INCOME TAX ACT, 1961 (IN SHORT T HE ACT) AND BOOK PROFIT 17,11,37,860/-UNDER SECTION 115JB OF THE ACT. THE CASE WAS SELECTED FOR SCRUTINY ASSESSMENT AND STATU TORY NOTICES WERE ISSUED AND COMPLIED WITH. THE SCRUTINY ASSESSM ENT WAS COMPLETED ON 20/12/2018 UNDER SECTION 143(3) OF THE ACT, AFTER MAKING CERTAIN ADDITIONS/DISALLOWANCES. ONE OF THE DISALLOWANCE MADE IS OF 3,66,82,337/- UNDER SECTION 40A(2)(B) OF THE ACT O N ACCOUNT OF THE EXCESSIVE ROYALTY PAYMENT MADE TO RE LATED PARTY. ON APPEAL BY THE ASSESSEE, THE LEARNED CIT(A) UPHEL D THIS ADDITION. AGGRIEVED WITH THE FINDING OF THE LD. CIT (A), THE ASSESSEE IS IN APPEAL BEFORE THE INCOME TAX APPELLATE TRIBUN AL (IN SHORT THE TRIBUNAL) RAISING THE GROUNDS AS REPRODUCED A BOVE. 3. BEFORE US, THE PARTIES APPEARED THROUGH VIDEO CONF ERENCING. THE LEARNED COUNSEL OF THE ASSESSEE FILED A PAPER-B OOK CONTAINING PAGES 1-49. THE LEARNED COUNSEL DID NOT RAISE ANY 4 ITA NO.7167/DEL./2019 ARGUMENT IN SUPPORT OF THE JURISDICTIONAL GROUND RA ISED IN THE APPEAL. INSTEAD HE RAISED A LEGAL ISSUE THAT DISALL OWANCE UNDER PROVISION OF SECTION 40A(2)(B) OF THE ACT CANNOT BE MADE IN THE CASE OF THE ASSESSEE AS THE TRANSACTION UNDER REFER ENCE IS AN INTERNATIONAL TRANSACTION WITH THE ASSOCIATED ENTER PRISE, HOWEVER, NO TRANSFER PRICING PROVISIONS HAVE BEEN INVOKED BY THE ASSESSING OFFICER THAT TOO WHEN SUBJECT TRANSACTION IN EARLIE R YEARS HAS GONE UNDER TRANSFER PRICING ADJUDICATIONS. ACCORDING TO HIM, THE TRANSACTION OF THE ROYALTY EXPENSES FALLS UNDER TRA NSFER PRICING PROVISIONS, WHICH BEING A SPECIFIC PROVISIONS, THE GENERAL PROVISIONS UNDER SECTION 40A(2)(B) CANNOT BE INVOKE D FOR MAKING ADDITION OF EXCESSIVE ROYALTY EXPENSES. 4. ON THE MERIT OF THE ADDITION, THE LEARNED COUNSEL SUBMITTED THAT IN ASSESSMENT YEAR 2013-14 AND 2014-15 THE SCR UTINY ASSESSMENTS HAVE BEEN CARRIED OUT AND THE ROYALTY E XPENSES HAVE BEEN CONSISTENTLY ALLOWED. HE SUBMITTED THAT IN IDE NTICAL FACTS IN ASSESSMENT YEAR 2015-16 AND 2017-18 NO SCRUTINY AS BEEN CARRIED OUT AND RETURNED INCOME HAS BEEN ACCEPTED. HE REFERRED TO A CHART ON PAGE 1 OF THE PAPER-BOOK OF AVERAGE R OYALTY PAYMENT IN PERCENTILE TERMS PAID FROM FINANCIAL YEAR 2012-1 3 TO FINANCIAL YEAR 2016-17. HE SUBMITTED THAT IN THE YEAR UNDER C ONSIDERATION AVERAGE ROYALTY PAYMENT IS 2.77 PERCENTAGE OF NET S ALES, WHEREAS ROYALTY PAYMENT AT 2.99% HAS BEEN ACCEPTED BY THE D EPARTMENT IN FINANCIAL YEAR 2012-13 CORRESPONDING TO ASSESSME NT YEAR 2013-14. HE SUBMITTED THAT IN ASSESSMENT YEAR 2013- 14, THE TRANSFER PRICING ADJUSTMENT MADE BY THE LEARNED TRA NSFER PRICING OFFICER (TPO) WAS DELETED BY THE LEARNED DISPUTE RE SOLUTION PANEL (DRP) AND ISSUE HAS NOT BEEN FURTHER LITIGATED BY T HE DEPARTMENT. 5 ITA NO.7167/DEL./2019 ACCORDING TO HIM, ONCE THE DEPARTMENT HAS ALREADY A CCEPTED THE AVERAGE RATE OF 2.99% OF ROYALTY PAYMENT IN THE ASS ESSMENT YEAR 2013-14, THE ACTION OF THE ASSESSING OFFICER FOR CO NSIDERING THE ROYALTY PAYMENT AT THE RATE OF 2.77% AS EXCESSIVE I S NOT JUSTIFIED. 5. THE LD. DR, ON THE OTHER HAND, RELIED ON THE ORDER OF THE LOWER AUTHORITIES AND SUBMITTED THAT THE ASSESSING OFFICER HAS NOT BEEN BARRED FROM INVOKING THE PROVISION OF SEC TION 40A(2)(B) OF THE ACT IN THE CASE OF INTERNATIONAL TRANSACTION S PARTICULARLY WHEN SUCH TRANSACTION IS NOT REPORTED BY THE ASSESS EE TO THE DEPARTMENT. ON THE MERIT OF THE ROYALTY EXPENSES, H E SUBMITTED THAT ROYALTY PAYMENT IN THE IMMEDIATELY PRECEDING A SSESSMENT YEAR WAS 1.78% OF THE SALES AND IN THE YEAR UNDER C ONSIDERATION, THERE IS A ABNORMAL INCREASE TO 2.77%, WHICH HAS NO T BEEN EXPLAINED BY THE ASSESSEE. HE FURTHER SUBMITTED THA T THE ASSESSING OFFICER HAS POINTED OUT INCREASE IN THE R OYALTY IN CASE OF FEW ITEMS RANGING FROM 39% TO 67.5%. HE SUBMITTE D THAT WHEN AS COMPARED TO THE IMMEDIATELY PRECEDING YEAR THERE WAS EXCESSIVE INCREASE IN THE ROYALTY EXPENSES, THE ONU S WAS ON THE ASSESSEE TO SUBSTANTIATE THE INCREASE AND IN FAILUR E TO DO SO, THE LEARNED ASSESSING OFFICER WAS JUSTIFIED IN INVOKING THE SECTION 40A(2)(B) OF THE ACT. IN SUPPORT, HE RELIED ON THE DECISION OF THE HONBLE BOMBAY HIGH COURT IN THE CASE CIT VS. SHATRU NJAY DIAMONDS (2003) 261 ITR 258 WHEREIN IT IS HELD THA T ONCE PURCHASES ARE MADE BY THE ASSESSEE FROM THE PERSONS FALLING UNDER ANY OF THE CATEGORIES UNDER SECTION 40A(2)(B) , THE BURDEN IS UPON THE ASSESSEE TO ESTABLISH THE PRICE PAID BY IT IS NOT EXCESSIVE OR UNREASONABLE AND IT IS DUTY OF THE ASSESSEE TO P ROVE AND 6 ITA NO.7167/DEL./2019 DISCHARGE ITS BURDEN BY LEADING PROPER EVIDENCE SUB JECT TO CROSS- EXAMINATION BY THE DEPARTMENT. 6. WE HAVE HEARD RIVAL SUBMISSION OF THE PARTIES ON T HE ISSUE IN DISPUTE AND PERUSED THE RELEVANT MATERIAL ON REC ORD. BEFORE US, NO ARGUMENTS HAD BEEN PREFERRED BY THE LEARNED COUN SEL OF THE ASSESSEE ON GROUND NO. 1 OF THE APPEAL, THEREFORE S AME IS DISMISSED AS NOT PRESSED. 6.1 AS REGARD TO ADDITION ON MERIT IS CONCERNED, WE FI ND THAT DISALLOWANCE UNDER SECTION 40A(2)(B) OF THE ACT CAN BE MADE BY THE ASSESSING OFFICER, IF HE IS OF THE OPINION THAT SUCH EXPENDITURE IS EXCESSIVE OR UNREASONABLE HAVING REGARD TO: (I) THE FAIR MARKET VALUE OF THE GOODS, SERVICES OR FACILITIES FOR WHICH PAYMENT IS MADE OR; (II) THE LEGITIMATE NEEDS OF THE BUSINESS OF PROFESSION OF THE ASSESSEE OR; (III) THE BENEFIT DERIVED BY OR ACCRUING TO HIM THEREFROM. IN ABOVE CIRCUMSTANCES, THE ASSESSING OFFICER SHALL DISALLOW THE EXCESSIVE OR REASONABLE EXPENDITURE. 6.2 IT HAS BEEN HELD BY THE HONBLE GUJARAT HIGH COURT IN THE CASE OF CORONATION FLOUR MILLS VS. ACIT (2009) 314 ITR 1 (GUJ.) THAT THE AO IS REQUIRED TO RECORD A FINDINGS AS TO WHETHER THE EXPENDITURE IS EXCESSIVE OR UNREASONABLE IN RELATIO N TO ANY OF THE THREE REQUIREMENTS PRESCRIBED, WHICH ARE INDEPENDEN T AND ALTERNATIVE TO EACH OTHER. 7 ITA NO.7167/DEL./2019 6.3 IN THE INSTANT CASE, THE LD. CIT(A) HAS SUSTAINED THE DISALLOWANCE OBSERVING AS UNDER: 5.4 THE CONTENTION OF THE APPELLANT IS NOT ACCEPTA BLE AS IT HAS NOT FURNISHED ANY JUSTIFIABLE REASON FOR INCREMENT IN R OYALTY COMPARE TO PREVIOUS YEAR. THE AO HAS PREPARED A CHART IN THE A SSESSMENT ORDER PARA 3.2.1 AND IT IS OBSERVED THAT THERE IS INCREAS E IN THE RATE OF ROYALTY IN SOME PRODUCT TO THE EXTENT 39%, 55%, 67. 5% & 71%. THE APPELLANT HAS NOT GIVEN ANY REASON FOR SUCH INCREAS E OF THE RATE OF ROYALTY. EVEN THE RATE OF ROYALTY IS MUCH HIGHER FO R NEW LINE OF PRODUCTS. THE APPELLANT IS PAYING ROYALTY TO ITS PA RENT COMPANY AND TRANSACTION ARE WITH THE RELATED PARTY COVERED AS P ER THE PROVISIONS OF SECTION 40A(2)(B). RES JUDICATA IS NOT APPLICABL E IN THE INCOME TAX PROCEEDINGS AND EACH YEAR IS AN INDEPENDENT YEAR. I T IS NOT NECESSARY FOR THE AO TO FOLLOW THE SAME ORDER AS DE TERMINED IN THE PREVIOUS YEARS. THIS YEAR AO HAS POINTED OUT THE IN CREMENT IN ROYALTY EXPENSES AND ASKED THE APPELLANT TO JUSTIFY THE SAME. THE APPELLANT HAS TRIED TO JUSTIFY IN A GENERAL WAY BY STATING THAT THEY ARE COVERED AS PER THE PROVISIONS OF SECTION 37(1) AND APPELLANT IS THE BEST JUDGE TO DECIDE THE EXPENSES BUT IT HAS NO T JUSTIFIED WHY THERE IS SUCH ABNORMAL HIKE IN RATES OF THE ROYALTY WITHIN SIX MONTHS I.E. 01.04.2015 TO 01.10.2015. THE AO JUSTIFIED IN MAKING ADDITION ON ACCOUNT OF EXCESSIVE ROYALTY PAYMENTS BY COMPARI NG IT WITH THE PREVIOUS YEARS EXPENSES OF THE APPELLANT IN WHICH I T HAS MADE PAYMENT TO ITS PARENT COMPANY ON ACCOUNT OF ROYALTY . IT- WAS 1.78% IN THE PREVIOUS YEAR I.E. FY 2014-15 AND 2.42% IN F Y 2013-14, THUS TRANSACTION WITH THE RELATED PARTIES NOT AT ARM'S L ENGTH. THE YEAR UNDER CONSIDERATION IT IS 2.77% AND THERE IS INCREA SE IN ROYALTY EXPENSES TO THE EXTENT OF RS.3,66,82,337/-. CONSIDE RING THE ABOVE FACT, AO IS JUSTIFIED IN MAKING ADDITION ON ACCOUNT OF EXCESSIVE PAYMENT OF ROYALTY AT RS.3,66,82,337/- AND ADDITION MADE BY THE AO IS HEREBY CONFIRMED. 6.4 THE ASSESSING OFFICER HAS ONLY QUESTIONED THE FAIR MARKET VALUE OF THE EXPENSES AND NOT QUESTIONED TO THE LEG ITIMATE NEED OF THE EXPENSES OR THE BENEFIT DERIVED FROM THE EXPENS ES. THE RELEVANT FINDING OF THE ASSESSING OFFICER IS REPROD UCED AS UNDER: 3.2.1. THE CHARTS RELATED TO DEFINITION OF PRODUCT AND THE ROYALTY RATES AS ON 01.04.2015 & 10.09.2015 FILED T HE ASSESSEE 8 ITA NO.7167/DEL./2019 HAVE BEEN PERUSED AND COMPERATIVE FIGURES FOR SOME OF THE PRODUCTS ARE AS UNDER: S.NO. CUSTOMER NAME PART CODE RATE OF ROYALTY W.E.F 1.4.15 RATE OF ROYALTY W.E.F 1.10.15 % OF INCREASE 1 MSIL FK0422-12S 3.4% 5.34% 55% 2 MSIL FK0491-12S 5% 5.34% 7% 3 DEID FK0422-12S 5% 5.29% 6% 4 DEHU FK0422-12S 5% 5.24% 5% 5 DAIKIN RA-063 1.8% 2.5% 39% 6 DAIKIN RB-133 4% 6.7% 67.5% 7 VOLTAS PCB. RB -126 4% 4.39% 10% 8 ONIDA PCB-RB-108 4% 6.83% 71% FROM THE PERUSAL THE ABOVE CHART IT CAN BE OBSERVED THAT, ON THE SAME KIND OF PARTS, THE ASSESSEE COMPANY HAD INCREA SED THE ROYALTY WITHOUT ANY BASIS IN A VERY SHORT TIME SPAN OF 6 MONTHS. IN SOME CASES THIS INCREMENT IS ONLY 5%,6% OR 7% BUT I N SOME OTHER CASES IT IS 55%, 67.5% - & 71%. IT IS COMMON SENSE THAT RATES OF ROYALTY COME DOWN FOR THE SAME PRODUCT WITH THE PAS SAGE OF TIME. BUT HERE IN THE CASE OF THE ASSESSEE, THE RATES ARE INCREASING WITH A VERY RAPID RATE AND WITHIN 6 MONTHS. FURTHER THE AS SESSEE IS NOT ABLE TO JUSTIFY THE REASONS OF STEEP INCREAMENT IN PAYMENTS FOR ROYALTY ON THE SAME PRODUCTS THAT TOO WITHIN 6 MONT HS. 3.2.2. IF WE COMPARE THE RATES OF ROYALTY FOR NEW L INE OF PRODUCTS WITH THE RATES OF ROYALTY FOR OLD PRODUCTS, WE FIND THAT THE ASSESSEE HAS AGREED TO PAY MUCH HIGHER RATES FOR NEW LINE OF PRODUCTS. 3.2.3. VALIDITY OF UNREGISTERED AGREEMENT FOR PAYME NT OF ROYALTY:- AS PER SECTION 68 OF THE EVIDENCE ACT, AN UNREGISTE RED DOCUMENT IS A WEAK EVIDENCE. IT IS TREATED AS COLLATERAL EVIDENCE AND THE ATTESTING WITNESS SHOULD GIVE THEIR TESTIMONY FOR THE SAME. B UT IN THIS CASE THERE IS NO ATTESTING WITNESS WHO COULD HAVE BEEN S UMMONED FOR TESTIMONY, THEREFORE THE VALIDITY OF THIS AGREEMENT REMAINED QUESTIONABLE. 3.2.4. IN VIEW OF THE ABOVE ANALYSIS AND KEEPING IN MIND THAT THE ASSESSEE HAD SUBMITTED THE UNREGISTERED, AGREEMENT FOR ROYALTY PAYMENT WHICH IS NOT MADE ON STAMP PAPER, AND NOT E VEN SIGNED BY TWO INDEPENDENT WITNESSES, EXCESSIVE ROYALTY PAID D URING YEAR TO THE RELATED PARTY [ ROYALTY PAID THIS YEAR (6,54,98 ,204)- ROYALTY PAID IN PREVIOUS YEAR (2,88,15,867) = 3,66,82,337/-] HEL D TO BE EXCESSIVE AND HENCE ADDED BACK TO THE INCOME OF THE ASSESSEE U/S 40A(2)(B) OF THE I.T ACT. PENALTY PROCEEDINGS U/S 271(1)(C) A RE INITIATED SEPARATELY FOR CONCEALING TRUE INCOME BY WAY OF FUR NISHING INACCURATE PARTICULARS OF SUCH INCOME. 9 ITA NO.7167/DEL./2019 [ADDITION OF RS. 3,66,82,337/-] 6.5 THE ONE OF THE GROUND TAKEN BY THE AO FOR INVOKING SECTION 40A(2)(B) IS THE AGREEMENT BETWEEN THE PARTIES HAS NOT BEEN REGISTERED. IN OUR OPINION, AN UNREGISTERED AGREEME NT CANNOT BE A GROUND FOR INVOKING PROVISIONS OF SECTION 40A(2)(B) OF THE ACT IN ABSENCE OF REQUIREMENT OF LAW. IF THE EXPENSES ARE NOT INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF THE BUSIN ESS, THEN DISALLOWANCE COULD BE MADE UNDER SECTION 37(1) OF T HE ACT. FOR INVOKING THE PROVISION OF SECTION 40A(2)(B) OF THE ACT, THE ASSESSING OFFICER HAS TO FORM AN OPINION OF EXPENSE S MORE THAN THE FAIR MARKET VALUE OR NOT ACCORDING TO THE LEGIT IMATE NEEDS OF THE BUSINESS OR NO BENEFIT DERIVED. IN THE INSTANT CASE THE ASSESSING OFFICER HAS ONLY COMPARED ROYALTY EXPENS ES OF THE PRECEDING ASSESSMENT YEAR AND NO EFFORTS HAVE BEEN MADE FOR IDENTIFYING THE FAIR MARKET VALUE OF SUCH EXPENSES DURING RELEVANT PERIOD, WHICH IS ONE OF THE REQUIREMENT FOR INVOKIN G THE PROVISIONS OF SECTION 40A(2)(B) OF THE ACT. UNDER T RANSFER PRICING PROVISIONS THE ARMS-LENGTH PRICE IS COMPARED WITH SIMILAR TRANSACTIONS. THOUGH THE PROVISIONS OF SECTION 40A( 2)(B) OF THE ACT ARE GENERAL PROVISION AS COMPARED TO THE SPECIFIC P ROVISIONS OF THE TRANSFER PRICING, THE ASSESSING OFFICER WAS REQUIRE D TO COMPARE THE ROYALTY EXPENSES PAID IN CASE OF THE SIMILAR PR ODUCT BY OTHER COMPANIES DURING THE RELEVANT PERIOD. THE ASSESSING OFFICER HAS NOT DONE ANY SUCH EXERCISE AND ONLY MADE BASIS OF E XPENSES PAID IN EARLIER YEARS. 6.6 THE LEARNED COUNSEL OF THE ASSESSEE CONTENDED THAT IN ASSESSMENT YEAR 2013-14 THE TRANSACTION OF THE ROYA LTY EXPENSES 10 ITA NO.7167/DEL./2019 WERE SUBJECTED TO TRANSFER PRICING PROVISIONS. HE S UBMITTED THAT IN ASSESSMENT YEAR 2013-14 AVERAGE ROYALTY PAYMENT WAS 2.99% OF THE SALES, WHICH STANDS ACCEPTED BY THE DEPARTME NT AND THEREFORE, NO DISALLOWANCE SHOULD BE MADE IN THE YE AR UNDER CONSIDERATION, WHERE THE ROYALTY EXPENSES ARE ONLY 2.77% OF THE SALES. THIS CONTENTION OF THE LEARNED COUNSEL IS RE JECTED AS THE FAIR MARKET VALUE OF THE EXPENSES HAVE TO BE IDENTI FIED FOR THE RELEVANT YEAR AND PERCENTILE OF THE EARLIER YEAR CA NNOT BE MADE BASIS FOR COMPARISON. 6.7 IN VIEW OF THE ABOVE DISCUSSION, THE DISALLOWANCE MADE OUT OF ROYALTY EXPENSES AMOUNTING TO 3,66,82,337/-IS DELETED. THE GROUND NO. 4 OF THE APPEAL IS ACCORDINGLY ALLOWED. 7. THE LEARNED COUNSEL OF THE ASSESSEE ARGUED THAT IN THE CASE OF THE ASSESSEE THE TRANSACTION OF THE ROYALTY EXPE NSES BETWEEN THE ASSESSEE AND ITS ASSOCIATED ENTERPRISES (AES), IS INTERNATIONAL TRANSACTION AND THEREFORE ITS ARMS-LENGTH PRICE CA N BE DETERMINED ONLY UNDER THE TRANSFER PRICING PROVISIO NS AND NOT UNDER THE PROVISION OF THE SECTION 40A(2)(B) OF THE ACT. THE CONTENTION OF THE LEARNED COUNSEL IS THAT WHEN THER E IS SPECIFIC PROVISIONS FOR DEALING WITH THE ISSUE OF EXPENSES P AID TO RELATED PARTY UNDER TRANSFER PRICING PROVISIONS, THE GENERA L PROVISIONS UNDER SECTION 40A(2)(B) OF THE ACT SHOULD NOT BE IN VOKED. WE HAVE NOTICED THAT THIS ISSUE WAS NOT RAISED BEFORE THE L OWER AUTHORITIES AND IT HAS BEEN RAISED BEFORE US FOR THE FIRST TIME THAT TOO AS ORAL ARGUMENT AND NOT EITHER AS REGULAR GROUND OR ADDITI ONAL GROUND. SINCE, WE HAVE ALREADY ADJUDICATED THE ISSUE ON MER IT, THE ARGUMENTS RAISED BY THE LEARNED COUNSEL REGARDING A PPLICABILITY 11 ITA NO.7167/DEL./2019 OF GENERAL VERSUS SPECIFIC PROVISIONS ARE RENDERED MERELY ACADEMIC AND WE ARE NOT ADJUDICATING THE SAME. 8. THE OTHER GROUNDS RAISED ON MERIT ARE ALSO RENDERE D MERELY ACADEMIC AND ACCORDINGLY, WE ARE NOT ADJUDICATING U PON THE SAME. 9. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS ALLOW ED. ORDER PRONOUNCED IN THE OPEN COURT ON 23 RD JULY, 2020. SD/- SD/- (BHAVNESH SAINI) (O.P. KANT) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED: 23 RD JULY, 2020. RK/- (D.T.D.S.) COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR ASST. REGISTRAR, ITAT, NEW DELHI