Woodward India Pvt. Ltd., Gurgaon V. DCIT, New Delhi

ITA 916/DEL/2015

• Counselvise Citation: [2019] 118 COUNSELVISE.COM (IT) 0995 (ITAT-DELHI)
• Duration Of Justice: 4 year(s) 1 month(s) 12 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 25-03-2019
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: I
• Assessment Year: 2009-2010
• Appeal Filed On: 13-02-2015
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: H K CHOUDARY
• Keywords: Business income; Transfer pricing; International transaction; Commercial expediency
• Section: 271(1)(c); 92C; 10B; 92

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH I-2 NEW DELHI BEFORE SHRI N.K. BILLAIYA, ACCOUNTANT MEMBER AND SHRI SUDHANSHU SRIVASTAVA, JUDICIAL MEMBER ITA NO. 916/DEL/2015 ASSESSMENT YEAR: 2009-10 WOODWARD INDIA PVT. LTD., (FORMERLY KNOWN AS WOODWARD GOVERNOR INDIA LTD.,), 12 TH FLOOR, BUILDING NO. 5, DLF CYBER TERRACES, DLF CYBER CITY, PHASE-III, GURGAON-122002 VS DCIT, CIRCLE-18(1), NEW DELHI. APPELLANT RESPONDENT ASSESSEE BY : SHRI VISHAL KALRA, ADV. SHRI S.S. TOMER, ADV. DEPARTMENT BY: SHRI H.K. CHOUDARY, C. I.T. DR DATE OF HEARING: 17.01.2019 DATE OF PRONOUNCEMENT: 25.03.2019 ORDER PER SUDHANSHU SRIVASTAVA, JUDICIAL MEMBER: THIS APPEAL IS PREFERRED BY THE ASSESSEE AGAINST TH E ORDER DATED 18.11.2014 PASSED BY THE LEARNED COMMISSIONER OF IN COME TAX (APPEALS) {LD. CIT (A)} AND PERTAINS TO ASSESSMENT YEAR (AY 2009- 2010. 2.0 BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE I S ENGAGED IN THE BUSINESS OF MANUFACTURING AND SALE OF SPECIFIC GOVERNORS AND ENGINE CONTROLS FOR INDIAN RAILWAYS AND OTHER CUSTO MERS. IT ALSO PROVIDES AFTER SALES SERVICE FOR A WIDE RANGE OF IN DUSTRIAL CONTROLS. ITA NO. 916/DEL/2015 (WOODWARD INDIA PVT. LTD.) 2 | P A G E FOR THE SUBJECT ASSESSMENT YEAR, THE TRANSFER PRICI NG OFFICER (TPO), VIDE ORDER DATED 30.1.2013, MADE AN ADJUSTME NT AMOUNTING TO RS.3,98,05,532/-IN RESPECT OF INTERNAT IONAL TRANSACTIONS PERTAINING TO ROYALTY AND TECHNICAL KN OW-HOW BEING PAID BY THE ASSESSEE TO ITS ASSOCIATE ENTERPRISES ( AES), NAMELY, WOODWARD GOVERNER COMPANY, USA. THE ASSESSEES GROU NDS OF APPEAL BEFORE THE LD. CIT (A) WERE DISMISSED AND NO W THE ASSESSEE IS IN APPEAL BEFORE THIS TRIBUNAL (ITAT) A ND HAS RAISED THE FOLLOWING GROUNDS OF APPEAL: 1. THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF THE C ASE AND IN LAW, THE ORDER PASSED BY THE LD. ASSESSING OFFICER (AO) IS BAD IN LAW AND VOID AB-INITIO. 2. THAT THE REFERENCE MADE BY THE LD. AO SUFFERS FROM JURISDICTIONAL ERROR AS THE LD. AO HAS NOT RECORDED ANY REASONS IN THE ASSESSMENT ORDER BASED ON WHICH HE REACHED THE CONC LUSION THAT IT WAS EXPEDIENT AND NECESSARY TO REFER THE MATTER T O THE LD. TPO FOR COMPUTATION OF THE ARMS LENGTH PRICE, AS IS RE QUIRED UNDER SECTION 92CA(1). 3. THAT ON FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. AO/LD. TRANSFER PRICING OFFICER (TPO)/ LD. COMMIS SIONER OF INCOME TAX (APPEALS) (CIT-A) ERRED IN MAKING AN ADDITION OF RS. 39,805,532 TO THE RETURNED INCOME OF THE APPELLANT BY RE-COMPUTING THE ARMS LENGTH PRICE OF THE INTERNATIONAL TRANSAC TIONS UNDER SECTION 92 OF THE ACT. ITA NO. 916/DEL/2015 (WOODWARD INDIA PVT. LTD.) 3 | P A G E 4. THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF THE C ASE AND IN LAW, THE LD. AO/ LD. TPO/ LD. CIT-(A) ERRED ON FACT S AND IN LAW IN DETERMINING THE ARMS LENGTH PRICE OF THE INTERNATI ONAL TRANSACTIONS OF ROYALTY AND TECHNICAL KNOW-HOW FEES OF THE APPEL LANT AS NIL BY: 4.1 BY NOT TAKING COGNIZANCE OF THE BUSINESS OPERATIONS OF THE APPELLANT ALONG WITH ITS FUNCTIONAL AND RISK PROFIL E AND THEREBY TREATING THE PAYMENT FOR ROYALTY AND TECHNICAL KNOW -HOW AS UNJUSTIFIED WITHOUT CONSIDERING THE BENEFITS DERIVE D FROM THE TECHNICAL ASSISTANCE RECEIVED AND UNDERLYING EVIDEN CE THEREOF AND HENCE CHALLENGING THE COMMERCIAL WISDOM OF THE APPE LLANTS BUSINESS OPERATIONS; 4.2 BY NOT APPRECIATING THAT THE TRANSACTIONS ARE CLOSE LY LINKED AND INTRINSIC TO THE BUSINESS OPERATIONS OF THE APPELLA NT AND ARBITRARILY REJECTING THE APPLICATION OF TRANSACTIONAL NET MARG IN METHOD AS THE MOST APPROPRIATE METHOD OF BENCHMARKING THE IMPUGNE D TRANSACTIONS; 4.3 BY ERRONEOUS APPLICATION OF COMPARABLE UNCONTROLLED PRICE METHOD WITHOUT FURNISHING DETAILS OF PRICE CHARGED IN ANY COMPARABLE UNCONTROLLED TRANSACTION WHICH IS IN CON TRAVENTION OF THE PROVISIONS OF RULE 10B OF THE RULES. 5. THAT THE ADVERSE FINDINGS GIVEN BY THE LD. AO/ LD. TPO/ LD. CIT-(A) ARE CONTRARY TO THE EVIDENCE ON RECORD AND THEIR CONCLUSIONS ARE BASED ON SURMISES. 6. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT-(A) ERRED IN NOT DELETING THE DISALLOWANCE MADE BY THE LD. AO ON ACCOUNT OF WARRANTY EXPENSES AMOUNTING TO RS. 2,659,823. ITA NO. 916/DEL/2015 (WOODWARD INDIA PVT. LTD.) 4 | P A G E 6.1 THAT ON THE FACTS OF THE CASE AND IN LAW, THE L D. CIT-(A) ERRED IN NOT ACCEPTING THE CONTENTIONS OF THE APPELLANT T HAT THE ENTIRE EXPENSE ON ACCOUNT OF WARRANTY, AMOUNTING TO RS. 7, 833,396 SHOULD BE ALLOWED TO THE APPELLANT, AND ACCORDINGLY ERRED IN DIRECTING THE LD. AO TO RE-COMPUTE THE PROVISION FO R WARRANTY IN ACCORDANCE WITH THE DIRECTIONS OF THE HONBLE DELHI HIGH COURT FOR AY 2005-06 AND 2006-07. 6.2 THAT ON THE FACTS OF THE CASE AND IN LAW, THE L D. CIT-(A) ERRED IN NOT APPRECIATING THAT THE ENTIRE ACTUAL WARRANTY EXPENSES AMOUNTING TO RS. 3,720,158/- CHARGED DIRECTLY TO PR OFIT & LOSS ACCOUNT DURING THE YEAR SHOULD BE ALLOWED TO THE AP PELLANT AS NO PROVISION FOR WARRANTY WAS CREATED IN RESPECT OF TH E SAME DURING THE YEAR. 6.3 WITHOUT PREJUDICE TO GROUND NO. 6.2 ABOVE, THE LD. CIT-(A) ALSO ERRED IN NOT ACCEPTING THE PROPOSITION THAT ACTUAL WARRANTY EXPENSES AMOUNTING TO RS. 3,720,158 CHARGED DIRECTL Y TO PROFIT & LOSS ACCOUNT DURING THE YEAR SHOULD BE GIVEN EFFECT TO AND ADJUSTED WHILE COMPUTING THE CLOSING PROVISION FOR WARRANTY TO BE CARRIED FORWARD TO SUBSEQUENT YEAR. 6.4 THE LD. CIT-(A) ALSO ERRED IN NOT ACCEPTING THE PROPOSITION OF THE APPELLANT THAT THE OPENING PROVISION OF WARRANT Y BROUGHT FORWARD FROM THE EARLIER YEAR SHOULD BE COMPUTED IN ACCORDANCE WITH APPLICATION OF THE RECTIFICATION FILED IN THE AY 2005-06 & 2006- 07 AND THE ACTUAL EXPENDITURE OF ACTUAL WARRANTY EX PENSES ITA NO. 916/DEL/2015 (WOODWARD INDIA PVT. LTD.) 5 | P A G E INCURRED AND CHARGED TO PROFIT & LOSS ACCOUNT IN TH E ASSESSMENT YEAR 2007-08 AMOUNTING TO RS. 3,078,892 SHOULD BE T AKEN INTO ACCOUNT. 7. THAT THE LD. AO/LD. CIT(A) ERRED IN FACTS AND IN LA W IN WITHDRAWING INTEREST UNDER SECTION 234D OF THE ACT. 8. THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. AO HAS ERRED IN INITIATING PENALTY PROCEEDI NGS UNDER SECTION 274 READ WITH SECTION 271(1)(C) OF THE ACT, FOR DIS ALLOWANCES MADE UNDER SECTION 92CA(3) AND PROVISION FOR WARRANTY, M ECHANICALLY AND WITHOUT RECORDING ANY ADEQUATE SATISFACTION FOR SUCH INITIATION. 3.0 THE LEARNED AUTHORISED REPRESENTATIVE (LD. AR) SUBMITTED THAT GROUNDS OF APPEAL NOS.1 TO 3 WERE GE NERAL IN NATURE REQUIRING NO SPECIFIC ARGUMENTS. 3.1 WITH RESPECT TO GROUND NOS. 4 AND 5, IT WAS SUB MITTED THAT DURING THE YEAR UNDER CONSIDERATION, THE ASSE SSEE HAD OBTAINED TECHNICAL KNOW-HOW AND EXPERTISE FOR MANUF ACTURING A NEW PRODUCT, I.E, 18 MM ALCO FUEL PUMP. IT WAS SUBM ITTED THAT AS CONSIDERATION FOR THE SUPPLY OF TECHNICAL KNOW-H OW RECEIVED, THE ASSESSEE PAID A LUMP SUM FEE AMOUNTING TO RS.3, 39,34,585/- TO ITS AES. AS A FURTHER CONSIDERATION FOR THE SUPP LY OF TECHNICAL KNOW-HOW AND FOR OTHER RIGHTS GRANTED BY THE AES, T HE ASSESSEE ALSO PAID ROYALTY AMOUNTING TO RS. 58,70,947/-. IT WAS FURTHER SUBMITTED BY THE LD. AR THAT AS PER THE AGREEMENT D ATED ITA NO. 916/DEL/2015 (WOODWARD INDIA PVT. LTD.) 6 | P A G E 27.3.2008, ALONG WITH THE AMENDED AGREEMENT DATED 3 0.03.2008, BETWEEN THE ASSESSEE AND ITS AES (PLACED AT PAPER B OOK PAGE 321 TO 334), THE ASSESSEE PAID ROYALTY AT THE RATE OF 5 % OF THE NET EX- FACTORY SALES PRICE OF THE PRODUCTS MANUFACTURED AN D SOLD IN INDIA AND AT THE RATE OF 8 PERCENT OF THE NET EX-FA CTORY SALES PRICE OF THE PRODUCTS MANUFACTURED AND SOLD OUTSIDE INDIA . IT WAS FURTHER SUBMITTED THAT EFFECTIVELY, THE ACTUAL PAY- OUT TOWARDS ROYALTY FOR THE IMPUGNED YEAR WAS 1.73% (I.E., ROYA LTY PAID DURING FINANCIAL YEAR 2008-09 RS 58,70,947/- MANUFACTURING SEGMENT SALES RS. 33,94,64,391/- ). 3.2 THE LD. AR SUBMITTED THAT FOR THE PURPOSE OF DETERMINATION OF THE ARMS LENGTH PRICE (ALP) OF TH E TRANSACTIONS PERTAINING TO ROYALTY AND TECHNICAL KNOW-HOW, THE A SSESSEE FOLLOWED THE SEGMENTAL APPROACH, APPLIED TRANSACTIO N NET MARGIN METHOD (TNMM) AND AGGREGATED THE TECHNICAL KNOW-H OW AND ROYALTY PAYMENTS WITH THE OVERALL MARGINS OF MANUFA CTURING SEGMENT. IT WAS SUBMITTED THAT BY APPLYING THE TNMM METHOD, OPERATING PROFIT MARGIN ON SALES (OP/ OI) WAS CON SIDERED THE MOST APPROPRIATE PROFIT LEVEL INDICATOR (PLI). 3.3 IT WAS FURTHER SUBMITTED BY THE LD. AR THAT IN THE MANUFACTURING SEGMENT, THE ASSESSEE EARNED OP/OI OF 9.25% ITA NO. 916/DEL/2015 (WOODWARD INDIA PVT. LTD.) 7 | P A G E WITH RESPECT TO THE MANUFACTURING ACTIVITIES (PAGES 454-455 OF PAPER BOOK VOLUME II) AND THE AVERAGE OP/OI OF THE COMPARABLE COMPANIES WAS DETERMINED TO BE 11.98% (UPDATED MARG INS OF COMPARABLE COMPANIES PRODUCED AT PAGE 360 OF PAPER BOOK VOLUME II). THE LD. AR SUBMITTED THAT THE MARGIN OF THE ASSESSEE AS PER THE PROVISO TO SECTION 92C (2) OF THE INCOME TAX ACT, 1961 (HEREINAFTER CALLED THE ACT), WAS WITHIN (+/-) 5% RANGE (PAGE 428 OF PAPER BOOK VOLUME II). 3.4 THE LD. AR SUBMITTED THAT THE TPO DISREGARDED T HE ALP AS COMPUTED IN THE DOCUMENTATION AND THE SUBMISSION S FILED DURING THE ASSESSMENT PROCEEDINGS AND APPLIED COMPA RABLE UNCONTROLLED PRICE (CUP) METHOD AS THE MOST APPRO PRIATE METHOD. IT WAS SUBMITTED THAT THE TPO DID NOT DISPU TE THE RECEIPT OF EXPERTISE AND KNOW-HOW RECEIVED FROM AE, BUT, HOWEVER, CONCLUDED THAT NO BENEFIT WAS DERIVED FROM SUCH KNOW- HOW RECEIVED BY HOLDING THAT NO UNRELATED PARTY WOU LD MAKE A PAYMENT FOR SUCH SERVICES. THUS THE ALP WAS DETERMI NED AS NIL BY THE TPO AND THE SAME WAS UPHELD BY THE LD. CIT ( A). 3.5 COMING TO THE ISSUE SPECIFIC TO THIS APPEAL, TH E LD. AR SUBMITTED THAT DURING FINANCIAL YEAR (FY) 2008-09, THE ASSESSEE HAD RECEIVED TECHNICAL KNOW-HOW FOR A NEW PRODUCT, I.E. 18 MM ITA NO. 916/DEL/2015 (WOODWARD INDIA PVT. LTD.) 8 | P A G E ALCO STYLE FUEL INJECTION PUMP, WHICH WERE SUPPLIED TO INDIAN RAILWAYS FOR USE IN THEIR 3100/3300 HP DIESEL LOCOM OTIVE ENGINES. THIS WAS NECESSARILY REQUIRED BY THE ASSES SEE AS ITS PRIMARY CUSTOMER, THE INDIAN RAILWAYS, SOUGHT THE P ART FOR BETTER EFFICIENCY AND PERFORMANCE OF ITS ENGINES. IT WAS S UBMITTED THAT THIS DEMONSTRATES THAT ACCESS TO THIS TECHNOLOGY WA S A BUSINESS REQUIREMENT IN ORDER TO REMAIN COMPETITIVE IN THE M ARKET. IT WAS SUBMITTED THAT WITH A VIEW TO DEMONSTRATE THE REQUI REMENT SET FORTH BY INDIAN RAILWAYS, THE ASSESSEE FURNISHED A LETTER BY THE INDIAN RAILWAYS BEFORE THE LOWER AUTHORITIES WHEREI N SUCH PART WAS SOUGHT FROM WOODWARD INDIA ( PAGE 153 OF PAPER BOOK VOLUME I). 3.6 IT WAS ALSO SUBMITTED THAT THE GROWTH OF WOODWA RD INDIAS SALES WAS IN A LARGE WAY DEPENDENT ON THE I NDIAN RAILWAYS AS DURING THIS YEAR, THE ASSESSEE WAS PRIM ARILY SELLING ONLY TO THE INDIAN RAILWAYS AND, THEREFORE, THE ASS ESSEE COMPANY HAD NO OPTION BUT TO COMPLY WITH THE DEMAND IN THE MARKET IN ORDER TO FUNCTION COMPETITIVELY. IT WAS VEHEMENTLY ARGUED BY THE LD. AR THAT IN THIS CASE: A) TECHNICAL KNOW- HOW WAS RECEIVED; B) TECHNICAL KNOW- HOW WAS UTILISED BY THE ASSESSEE TO MAKE SALES; ITA NO. 916/DEL/2015 (WOODWARD INDIA PVT. LTD.) 9 | P A G E C) SALES WERE MADE TO THE CUSTOMER THAT NECESSITATED T HE ACQUISITION OF THE TECHNICAL KNOW-HOW. IT WAS REITERATED THAT ALL THE ASPECTS OF RECEIPT, BENEFIT AS WELL AS COMMERCIAL REQUIREMENTS OF ENTERING INTO THIS INTER -COMPANY AGREEMENT ARE EVIDENCED IN THE PRESENT CASE. 3.7 IT WAS FURTHER SUBMITTED BY THE LD. AR THAT TO ENABLE THE MANUFACTURING OF THE NEW PRODUCT, THE ASSESSEE RECE IVED FROM ITS AE (AS PER THE AGREEMENT), TECHNICAL KNOW-HOW LIKE DOCUMENTS IN THE NATURE OF DRAWINGS, SPECIFICATIONS FOR MANUF ACTURE, TESTING AND REPAIR OF PRODUCTS, QUALITY ASSURANCE MANUALS, PRODUCT TECHNICAL MANUALS, STANDARDS, TECHNICAL RECORDS, MA TERIAL LISTS, PROCESS MANUALS AND ALL OTHER TECHNICAL DATA, INFOR MATION, FORMULAE AND KNOWLEDGE RELATING TO THE PRODUCTS (PA GES 327 AND 344 OF PAPER BOOK VOLUME I FOR AGREEMENT). IT WAS S UBMITTED THAT THE ASSESSEE HAD RECEIVED TECHNICAL ASSISTANCE SUCH AS: A) ASSISTANCE IN SETTING-UP OF PLANT: ASSISTANCE IN SE TTING UP THE PLANT FOR THE MANUFACTURE OF THE PRODUCTS BY WOODWA RD INDIA INCLUDING PROVIDING OF INFORMATION; B) TRAINING: TRAINING OF EMPLOYEES IN ITS PLANTS OF ITS AE. SUCH EMPLOYEES ARE TRAINED IN THE FUNCTION OF MANUFACTUR ING AND TESTING OF THE PRODUCTS AND NO SEPARATE CHARGE WAS LEVIED FOR THIS; ITA NO. 916/DEL/2015 (WOODWARD INDIA PVT. LTD.) 10 | P A G E C) INTELLECTUAL PROPERTY RIGHTS : IPR RIGHT TO MANUFACTURE THE PRODUCTS WHICH INCLUDES PATENT RIGHTS; D) TECHNICAL SUPPORT: TECHNICAL SUPPORT IN CASE REQUIRED. IT WAS SUBMITTED THAT IN ORDER TO SUBSTANTIATE THE ABOVE, THE ASSESSEE HAS PROVIDED DOCUMENTARY EVIDENCES AT PAGE S 18-72 AND 145-166 OF THE PAPER BOOK. 3.8 THE ASSESSEE FURTHER SUBMITTED THAT THE ASSESSE E HAS FILED THE FOLLOWING EVIDENCES TO SUBSTANTIATE THE T ECHNICAL KNOW- HOW RECEIVED DURING THE YEAR: I. DRAWINGS: NECESSARY FOR MANUFACTURE OF FUEL INJECTI ON PUMP. MINUTE DETAILS OF THE FUEL INJECTION PUMP WERE GIVE N AND EXPLAINED IN THIS DIAGRAM. IT GIVES INFORMATION ABO UT EACH AND EVERY PART, THE KNOWLEDGE OF WHICH IS NECESSARY FOR ITS ASSEMBLY AND MAINTENANCE AND EFFECTIVE FUNCTIONING OF WOODWA RD INDIA (REFER PAGE 74 OF PAPER BOOK VOLUME I). II. PRODUCT MANUAL: THIS SERVED AS A MAINTENANCE MANUAL AS WELL. IT GIVES THE COMPLETE DETAILS ABOUT THE DISMA NTLING, EXAMINATION AND ASSEMBLY PROCEDURE OF THE FUEL INJE CTION PUMP. THE MANUAL ALSO TALKS ABOUT PUMP CALIBRATION AND TE STING PROCEDURES, ITS SPARES LISTS ETC. (PAGES 76-99 OF PAPER BOOK VOLUME I). ITA NO. 916/DEL/2015 (WOODWARD INDIA PVT. LTD.) 11 | P A G E III. QUALITY ASSURANCE MANUAL: THIS MANUAL IS APPLICABLE TO ALL WOODWARD SITES AND BUSINESSES AND OUTLINES THE POLICIES, PROCESSES, AND REQUIREMENTS OF THE QUALITY MANAGEME NT SYSTEM REQUIREMENTS SET FORTH BY ISO 9001, AEROSPACE STAND ARD AS9100, WOODWARD CUSTOMERS AND APPLICABLE REGULATOR Y AUTHORITIES (PAGES 101-129 OF PAPER BOOK VOLUME I). IV. TEST SPECIFICATIONS: THESE WEREREQUIRED FOR THE EFF ECTIVE FUNCTIONING OF THE FUEL PUMP WHICH ENHANCES THE PER FORMANCE OF THE FUEL PUMP. THIS MANUAL ENSURES PROPER TESTING O F THE PUMP BEFORE AND AFTER ASSEMBLY OF THE SAME (PAGES 130-14 4 OF PAPER BOOK VOLUME I). V. TECHNICAL MANUAL: THE TECHNICAL MANUAL CONSISTS OF A MAINTENANCE MANUAL AND A SERVICE INSTRUCTION MANUAL WHICH PROVIDES GUIDANCE ABOUT THE PRACTICAL ASPECTS OF FU EL INJECTION EQUIPMENT OPERATION AND SERVICE (PAGES 167-214 OF P APER BOOK VOLUME I). VI. BILL OF MATERIAL AND DRAWINGS: THE BILL OF MATERIAL S AND DRAWINGS WHICH IS REQUIRED FOR THE SUCCESSFUL ASSEM BLY OF THE FUEL INJECTION PUMP. THE DRAWING AND SPECIFICATIONS OF EACH OF THE SPARE PART MENTIONED IN THE BILL OF MATERIAL WE RE ALSO PROVIDED FOR GUIDANCE AND SUPPORT (PAGES 215-266 OF PAPER BOOK VOLUME I). ITA NO. 916/DEL/2015 (WOODWARD INDIA PVT. LTD.) 12 | P A G E VII. TESTING PROCEDURES: IN PROCESS INSPECTION CHECK SHE ET AND FINISHED PRODUCT INSPECTION TEST SPECIFICATION WERE ALSO SUBMITTED, WHICH PROVES THAT AE HAS ALSO HELPED WIT H THE TESTING PROCEDURES WHICH WERE ABSOLUTELY NECESSARY FOR THE SUCCESS OF THE NEW PRODUCT (PAGES 267-298 OF PAPER BOOK VOLUME I). 3.9 IT WAS, THUS, VEHEMENTLY ARGUED BY THE LD. AR T HAT THE ALLEGATION OF THE TPO THAT NO TANGIBLE BENEFITS HAV E BEEN RECEIVED BY THE ASSESSEE AND AS UPHELD BY THE LD. CIT (A) WA S INCORRECT. 3.10 TO FURTHER BUTTRESS HIS ARGUMENTS, THE LD. AR SUBMITTED THAT THE TPO HAS FOCUSED MERELY ON THE PROFITABILIT Y TREND OF THE ASSESSEE AS EVIDENCE OF ECONOMIC BENEFIT. IN THIS R EGARD, IT WAS SUBMITTED THAT THE TECHNICAL KNOW-HOW AND TECHNOLOG Y RECEIVED FROM AE CONTRIBUTES TO THE INCREASED SALES OF THE A SSESSEE AS IS EVIDENT FROM THE TABLE BELOW: FY TOTAL SALES (INR) YEAR-ON- YEAR GROWTH SALE OF 18MM ALCO STYLE FUEL INJECTION PUMP YEAR-ON- YEAR GROWTH 2008- 09 67,48,09,678 - 28,49,891 - 2009- 10 81,79,40,213 21.21% 3,09,79,781 987.05% 2010- 11 1,18,17,95,412 44.48% 5,89,08,364 90.15% 2011- 12 1,12,95,92,319 3,10,32,079 3.11 FURTHER, THE MARGINS OF THE MANUFACTURING SEGM ENT OF THE ASSESSEE WERE ALSO PROVIDED AS UNDER: ITA NO. 916/DEL/2015 (WOODWARD INDIA PVT. LTD.) 13 | P A G E YEAR OP/OI OF THE MANUFACTURING SEGMENT FY 2008-09 9.25% FY 2009-10 9.33% FY 2010-11 10.64% FY 2011-12 17.34% 3.12 IT WAS FURTHER SUBMITTED THAT THE DECLINE IN I TS MARGINS VIS--VIS THE PRIOR YEAR(S) IS BECAUSE OF PRICING P RESSURES AND OTHER MARKET FACTORS RATHER THAN INTER-COMPANY PAYM ENTS. THIS IS EVIDENT FROM THE FACT THAT IF THE ASSESSEE HAD N OT RECEIVED THIS TECHNOLOGY FROM AE, IT WOULD NOT HAVE BEEN ABLE TO MANUFACTURE THE PRODUCTS AND EXECUTE ANY SALES AT ALL. IN THAT CASE THE ASSESSEE WOULD HAVE TO INVEST IN-HOUSE IN DEVELOPIN G THE TECHNOLOGY, WHICH WOULD HAVE BEEN COUNTERPRODUCTIVE AND EXPENSIVE FOR ITS SCALE OF OPERATIONS. 3.13 THE LD. AR SUBMITTED THAT THE SALES REGISTERED BY THE ASSESSEEE WERE WITH THE THIRD PARTIES AND, THUS, A DECREASE IN THE SALES WOULD ULTIMATELY RESULT IN A DECREASE IN THE MARGINS. A CHART COMPRISING PRODUCT WISE DETAILS OF SALES OF M ANUFACTURED GOODS WAS ALSO PROVIDED AS UNDER: FY 2008-09 FY 2009-10 FY 2010-11 AMOUNT IN % TERMS AMOUNT IN % TERMS AMOUNT IN % TERMS MANUFACTURED GOODS SALES PGEV GOVERNORS 92,993,129 27.41% 68,382,020 20.04% - 0% ITA NO. 916/DEL/2015 (WOODWARD INDIA PVT. LTD.) 14 | P A G E 3.14 IT WAS FURTHER SUBMITTED BY THE LD AR THAT THE ASSESSEE COMPANY HAS MADE SALES FOR THE 18 MM ALCO STYLE FUE L INJECTION PUMP BEYOND THE YEAR 2012 ALSO, WHEREAS, THE VALUE OF THE TECHNICAL KNOW-HOW WAS FULLY AMORTIZED IN FINANCIAL YEARS 2008- 09 AND 2009-10 ITSELF. IT WAS SUBMITTED THAT, THUS, THE ASSESSEE CONTINUED TO GARNER THE BENEFITS OF THE TECHNICAL K NOW-HOW BY WAY OF INCREASED SALES DURING SEVERAL YEARS, WHILE THE COST WAS INCURRED ONLY IN FINANCIAL YEARS 2008-09 AND 2009-1 0. 3.15 IT WAS FURTHER SUBMITTED BY THE LD. AR THAT TH E TPO HAS NOWHERE CLARIFIED AS TO WHY ECONOMICALLY OR COMMERC IALLY SIMILAR TRANSACTIONS THAT WERE MADE TO OBTAIN THE TECHNICAL KNOW-HOW FOR MANUFACTURING A PRODUCT SHOULD BE CONSIDERED TO BE A SEPARATE BUSINESS ACTIVITY OR A SEPARATE CLASS OF T RANSACTION. THE LD. AR ARGUED THAT THE TPO WHILE PROCEEDING TO APPL Y CUP METHOD HAS NOT PROVIDED ANY DATA ON PRICES CHARGED OR PAID BY COMPARABLE INDEPENDENT ENTITIES FOR SIMILAR TRANSAC TIONS AND, THEREFORE, THE APPLICABILITY OF CUP METHOD BY THE T PO IS INCORRECT. GOVERNORS/ CONTROLS FOR OTHER DIESEL ENGINES 3,093,453 0.91% NA NA NA NA STEAM TURBINE CONTROL SYSTEMS 156,192,099 46.04% 139,313,647 40.82% 145,876,256 44.85% OTHERS 84,144,193 24.80% 102,593,313 30.06% 120,478,142 37.04% FUEL PUMP 2,849,891 0.84% 30,979,781 9.08% 58,908,364 18.11% ITA NO. 916/DEL/2015 (WOODWARD INDIA PVT. LTD.) 15 | P A G E 3.16 THE LD. AR SUBMITTED THAT IT IS THE CASE OF TH E ASSESSEE THAT TECHNICAL KNOW-HOW AND ROYALTY PAYMENTS ARE IN EXTRICABLY LINKED WITH PRODUCTION AND SALE OF PRODUCTS. IF THE RE WERE NO PRODUCTION AND SALES, THERE WOULD BE NO QUESTION AR ISING REGARDING PAYMENT OF ANY TECHNICAL KNOWHOW/ROYALTY. THE LD. AR REITERATED THAT THE PAYMENTS MADE FOR TECHNICAL KNOW-HOW AND ROYALTY WAS CLOSELY LINKED WITH PRODUCTION AND SALES AND CANNOT BE SEGREGATED FROM THESE ACTIVITIES OF THE A SSESSEE AND THAT THESE PAYMENTS WERE AN INTEGRAL PART OF THE MA NUFACTURING OPERATIONS OF THE ASSESSEE AND WERE CLOSELY AND INT RINSICALLY LINKED. 3.17 IT WAS ALSO SUBMITTED BY THE LD AR THAT EVEN A FTER MAKING PAYMENTS FOR ROYALTY AND TECHNICAL KNOW-HOW, THE ASSESSEE HAS EARNED A PROFIT MARGIN WHICH IS COMPAR ABLE WITH THE ARMS LENGTH PROFIT MARGIN OF COMPARABLE COMPAN IES (PAGES 328 AND 454 OF THE PAPER BOOK FOR THE MARGINS OF CO MPARABLE COMPANIES AND THE ASSESSEE). 3.18 RELIANCE HAS BEEN PLACED BY THE LD. AR ON THE FOLLOWING DECISIONS, WHEREIN ROYALTY PAYMENTS HAVE BEEN HELD TO BE INTRINSICALLY LINKED TO THE MAIN TRANSACTIONS AND A GGREGATION APPROACH TO BENCHMARK THE SAME HAS BEEN UPHELD: ITA NO. 916/DEL/2015 (WOODWARD INDIA PVT. LTD.) 16 | P A G E MAGNETI MARELLI POWER TRAIN INDIA (P) LTD VS. DCIT [2016] 389 ITR 469 (DELHI). THE SLP FILED BY THE REVENUE AUTHO RITIES AGAINST THE JUDGMENT OF THE HONBLE DELHI HIGH COURT HAS BE EN DISMISSED BY THE HONBLE SUPREME COURT [2018] 89 TAXMANN.COM 8 (SC); FRIGOGLAS INDIA (P) LTD VS. DCIT [2016] 68 TAXMANN. COM 370 (DEL-TRIB.), UPHELD BY THE HONBLE DELHI HIGH COURT VIDE ORDER DATED MARCH 3, 2017 (ITA 123/2017). SLP FILED BY TH E REVENUE AUTHORITIES HAS BEEN DISMISSED BY THE HONBLE SUPRE ME COURT VIDE ORDER DATED JANUARY 19, 2018 (SLP (CIVIL) NO. 41702/2017); CUMMINS INDIA LIMITED VS. ADDL. CIT [2015] 68 SOT 1 4 (PUNE TRIBUNAL.); 3.18 FURTHER RELIANCE WAS ALSO PLACED ON THE FOLLOW ING DECISIONS WHEREIN IT HAS BEEN HELD THAT THE TPO IS TO CONDUCT A TRANSFER PRICING ANALYSIS AND DETERMINE ALP IN ACCO RDANCE WITH LAW AND THAT THE TPO CANNOT DETERMINE WHETHER THERE IS A SERVICE FROM WHICH THE ASSESSEE BENEFITS OR NOT AND, THEREF ORE, THE TPO CANNOT DETERMINE THE ALP OF PAYMENTS MADE BY AN ASS ESSEE TO ITS AE AS NIL TAKING A VIEW THAT NO BENEFIT WAS DER IVED: FRIGOGLAS INDIA (P) LTD VS. DCIT [2016] 68 TAXMANN. COM 370 (DEL-TRIB.), UPHELD BY THE HONBLE DELHI HIGH COURT VIDE ORDER DATED MARCH 3, 2017 (ITA 123/2017). SLP FILED BY TH E REENUE ITA NO. 916/DEL/2015 (WOODWARD INDIA PVT. LTD.) 17 | P A G E AUTHORITIES HAS BEEN DISMISSED BY THE HONBLE SUPRE ME COURT VIDE ORDER DATED JANUARY 19, 2018 (SLP (CIVIL) NO. 41702/2017) CIT VS. EKL APPLIANCES LTD. [2012] 345 ITR 241 (DEL HI) COIM INDIA PVT. LTD VS. ACIT (ITA NO. 7260/D/2017) (DELHI TRIB.) 3.19 THE LD. AR FURTHER SUBMITTED THAT THE DECISION TO ENTER INTO ANY TRANSACTION IS ASSESSEES COMMERCIAL DECIS ION, AND IT IS NOT OPEN FOR THE REVENUE TO QUESTION THE COMMERCIAL PRUDENCE. THE LD. AR SUBMITTED THAT THE REVENUE CANNOT SIT AN D JUDGE OVER THE MANNER IN WHICH THE ASSESSEE NEEDS TO RUN ITS B USINESS AND THAT THE DECISION OF THE ASSESSEE TO AVAIL SERVICES IS BASED ON ITS OWN JUDGMENT OF COMMERCIAL EXPEDIENCY AND THE REVEN UE CANNOT PURPORT TO PLACE THEMSELVES IN THE SHOES OF A BUSIN ESS PERSON AND ASSUME A ROLE TO DECIDE WHETHER A PARTICULAR EX PENDITURE NEEDS TO BE INCURRED OR NOT. RELIANCE IN THIS REGAR D WAS PLACED ON THE FOLLOWING DECISIONS: CIT VS. DHANRAJGIRJI RAJA NARASINGIR (1973) 91 ITR 544 (SC) CIT VS. WALCHAND AND CO (P) LTD. (65 ITR 381)(SC) CIT VS. DALMIA CEMENT LTD (254 ITR 377)(DEL) S.A. BUILDERS LTD. VS. CIT AND ANR. (289 ITR 26)(SC ) EKL APPLIANCES LIMITED VS. CIT [2012] 345 ITR 241 ( DEL) ITA NO. 916/DEL/2015 (WOODWARD INDIA PVT. LTD.) 18 | P A G E 3.20 LASTLY, THE LD AR DREW OUR ATTENTION TO THE F ACT THAT SIMILAR ROYALTY AND TECHNICAL PAYMENTS HAVE BEEN AC CEPTED BY THE AO/TPO IN SUBSEQUENT YEARS. IN THIS REGARD, HE RELIED ON THE BELOW TABULATION: AY TPO DRP REMARKS 2010- 11 ADJUSTMENTS IN RESPECT OF FEE FOR TECHNICAL KNOWHOW AND ROYALTY WERE MADE. (PAGES 1- 11 OF PAPER BOOK COMPRISING ORDERS OF SUBSEQUENT AYS) ADJUSTMENTS IN RESPECT OF FEE FOR TECHNICAL KNOWHOW AND ROYALTY WERE DELETED. ( PAGES 12- 21 OF PAPER BOOK COMPRISING ORDERS OF SUBSEQUENT AYS) NO INTIMATION OF APPEAL FILED BY REVENUE AUTHORITIES 2011- 12 NO ADVERSE INFERENCE DRAWN BY TPO IN RESPECT OF ANY INTERNATIONAL TRANSACTION ( PAGES 38-39 OF PAPER BOOK COMPRISING ORDERS OF SUBSEQUENT AYS) 2012- 13 NO ADVERSE INFERENCE DRAWN BY TPO IN RESPECT OF ANY INTERNATIONAL TRANSACTION ( PAGES 40- 41 OF PAPER BOOK COMPRISING ORDERS OF SUBSEQUENT AYS) 2013- 14 NO ADVERSE INFERENCE DRAWN BY TPO IN RESPECT OF ANY INTERNATIONAL TRANSACTION ( PAGES 42- 43 OF PAPER BOOK COMPRISING ORDERS OF SUBSEQUENT AYS) 3.21 IN VIEW OF THE ABOVE, IT WAS PRAYED BY THE LD. COUNSEL THAT THE DISALLOWANCE OF PAYMENTS MADE FOR ROYALTY AND TECHNICAL KNOW-HOW RECEIVED WAS UNWARRANTED AND DESERVED TO B E DELETED. 4.0 THE LD. DEPARTMENT REPRESENTATIVE (CIT DR) ST RONGLY COUNTERED THE SUBMISSIONS OF THE LD. AR. THE LD. C IT DR SUBMITTED THAT THE TPO HAS RIGHTLY COMPUTED THE ALP AS NIL OF ITA NO. 916/DEL/2015 (WOODWARD INDIA PVT. LTD.) 19 | P A G E THE PAYMENTS MADE IN RELATION TO ROYALTY AND TECHNI CAL KNOWHOW BY APPLYING THE CUP METHOD. IT WAS SUBMITTED THAT THE ASSESSEE HAS NOT BEEN ABLE TO SUBSTANTIATE THE BENEFITS RECE IVED OUT OF SUCH PAYMENTS MADE. THE LD CIT DR PLACED RELIANCE O N THE ORDERS OF THE LOWER AUTHORITIES AND PRAYED THAT THE SAME DESERVES TO BE UPHELD. 5.0 WE HAVE HEARD RIVAL SUBMISSIONS AND PERUSED THE MATERIAL ON RECORD. 5.1 GROUND NOS. 1 TO 3 ARE GENERAL AND DO NOT REQUI RE ANY SPECIFIC ADJUDICATION. 5.2 AS FAR AS GROUND NOS. 4 AND 5 ARE CONCERNED, TH E CASE OF THE ASSESSEE IS THAT IT HAS MADE A PAYMENT TO THE T UNE OF RS. 3,98,05,532/- IN RELATION TO ROYALTY AND TECHNICAL KNOW-HOW FOR THE NEW PRODUCT, I.E. 18 MM ALCO FUEL PUMP REQUIRED BY INDIAN RAILWAYS AS PER SPECIFIC DEMAND FOR THE CUSTOMER. O UR ATTENTION WAS DRAWN TO THE LETTER RECEIVED FROM THE INDIAN RA ILWAYS FOR SUCH FUEL PUMP REQUIREMENT FROM THE INDIAN RAILWAYS . IN ADDITION TO THE LETTER PLACED ON RECORD WHICH WAS R ECEIVED FROM THE INDIAN RAILWAYS, THE ASSESSEE HAS FILED VOLUMIN OUS DOCUMENTS, INTER ALIA , AGREEMENT WITH THE AE FOR RECEIPT OF TECHNICAL KNOW-HOW, SUCH AS, DRAWINGS, PRODUCT MANU ALS, ITA NO. 916/DEL/2015 (WOODWARD INDIA PVT. LTD.) 20 | P A G E QUALITY ASSURANCE MANUALS, TEST SPECIFICATIONS, TEC HNICAL MANUALS, BILL OF MATERIAL AND DRAWINGS AND TESTING PROCEDURES AS MENTIONED ELSEWHERE IN THE ORDER. PERUSAL OF THE V OLUMINOUS DOCUMENTS FILED, ORDERS OF THE LOWER AUTHORITIES AN D THE LEGAL POSITION EMANATING FROM THE VARIOUS CASE LAWS CITED , IT IS MANIFESTED THAT THE TPO IS OBLIGATED TO DETERMINE T HE ALP OF INTERNATIONAL TRANSACTIONS BY USING ONE OF THE METH ODS PRESCRIBED IN RULE 10B OF THE INCOME TAX RULES, 196 2 (THE RULES) AND THE LOWER AUTHORITIES HAVE FAILED TO D O SO. 5.3 MOREOVER, IT CAN BE SEEN THAT NEITHER THE TPO N OR THE LD. CIT (A) HAS DISCARDED THE MOST APPROPRIATE METHOD A DOPTED BY THE ASSESSEE WHICH WAS TNMM IN THE PRESENT CASE FOR BENCHMARKING THE MANUFACTURING SEGMENT. FACTS ON T HE RECORD ALSO SHOW THAT THE TPO HAS NOT DISCARDED THE EXERCI SE UNDERTAKEN BY THE ASSESSEE IN DETERMINING THE ALP O F THE INTERNATIONAL TRANSACTION RELATED TO ROYALTY AND TE CHNICAL FEES BY USING THE AGGREGATE APPROACH AND BENCHMARKING IT WI TH MANUFACTURING SEGMENT. WE FIND FORCE IN THE ARGUME NTS OF THE LD. AR THAT WHERE THE ASSESSEE HAD USED TNMM TO BEN CHMARK ALL ITS TRANSACTIONS AND THE TPO HAVING ACCEPTED TM NN AS THE MOST APPROPRIATE METHOD, IT WAS NOT OPEN TO THE TPO TO SUBJECT ITA NO. 916/DEL/2015 (WOODWARD INDIA PVT. LTD.) 21 | P A G E ONLY ONE ELEMENT, I.E. PAYMENT OF TECHNICAL ASSISTA NCE FEE, TO AN ENTIRELY DIFFERENT METHOD (CUP) AS THIS WOULD LEAD TO CHAOS AND BE DETRIMENTAL TO THE INTERESTS OF BOTH THE ASSESSE E AND THE REVENUE. FOR THIS, WE DRAW SUPPORT FROM THE JUDGMEN T OF THE HONBLE DELHI HIGH COURT IN THE CASE OF MAGNETI MAR ELLI POWERTRAIN INDIA (P) LTD. VS. DCIT REPORTED IN (201 6) 389 ITR 469 (DEL.) WHEREIN THE HONBLE DELHI HIGH COURT HAS UPH ELD THE FINDING OF THE DELHI TRIBUNAL IN MAGNETI MARELLI PO WERTRAIN INDIA (P) LTD. VS. DCIT REPORTED IN (2014) TAXMANN.COM 15 5 (DELHI TRIB.). 5.4 WE ALSO FIND IT APPROPRIATE TO MENTION THAT THE TPO, IN THE SUBSEQUENT YEARS, HAS ACCEPTED THE AGGREGATE AP PROACH AND THE TNMM METHOD AS AGAINST THE APPROACH OF THE TPO IN THIS YEAR TO BENCHMARK THE TRANSACTION SEPARATELY. THE TPO HAS ARBITRARILY APPLIED CUP, WHICH IS NOT SUPPORTED BY THE APPROACH OF THE TPO IN THE SUBSEQUENT YEARS. 5.5 IN OUR CONSIDERED OPINION, THE VIEW OF THE LOW ER AUTHORITIES THAT THE BENCHMARKING DONE BY THE ASSES SEE IS INCORRECT AND THE APPROACH OF THE TPO, AS HAS BEEN UPHELD BY THE LD. CIT (A), IS NOT SUSTAINABLE. OUR VIEW IS A LSO SUPPORTED BY COMPARISON OF MARGINS OF THE ASSESSEE WITH THE MARG IN OF THE ITA NO. 916/DEL/2015 (WOODWARD INDIA PVT. LTD.) 22 | P A G E COMPARABLE COMPANIES. AS STATED ELSEWHERE IN THE O RDER, THE ASSESSEE HAS EARNED THE MARGIN OF 9.25% WITH RESPEC T TO MANUFACTURING ACTIVITIES AS AGAINST THE MARGIN OF 1 1.98% EARNED BY THE COMPARABLE COMPANIES. THUS, THE ASSESSEES MARGIN IS WITHIN THE (+/-) 5% RANGE. 5.6 THEREFORE, LOOKING FROM ANY ANGLE, THE APPROACH OF THE ASSESSEE IS CORRECT IN SO FAR AS IT RELATES TO THE PAYMENT OF ROYALTY AND FEE FOR TECHNICAL KNOW-HOW AND THE ADJU STMENT AMOUNTING TO RS. 3,98,05,532/- IN RELATION TO INTER NATIONAL TRANSACTIONS PERTAINING TO PAYMENTS FOR ROYALTY AND TECHNICAL KNOW-HOW DESERVE TO BE DELETED. IT IS SO ORDERED AC CORDINGLY. 5.7 GROUND NO. 6 HAS NOT PRESSED BY THE LD. AR. THE SAME IS DISMISSED AS NOT PRESSED. 5.8 GROUND NOS. 7 AND 8 ARE CONSEQUENTIAL AND REQUI RE ACTION AT THE END OF THE AO WHILE GIVING THE APPEAL EFFECT. 6.0 IN THE FINAL RESULT, THE APPEAL OF THE ASSESSEE STANDS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 25 TH MARCH, 2019. SD/- SD/- (N.K. BILLAIYA) (SUDHANSHU SRI VASTAVA) ACCOUNTANT MEMBER JUDICIAL MEMBER ITA NO. 916/DEL/2015 (WOODWARD INDIA PVT. LTD.) 23 | P A G E DATED: 25 TH MARCH, 2019 COPY FORWARDED TO: - 1) APPELLANT 2) RESPONDENT 3) CIT(A) 4) CIT 5) DR TRUE COPY BY ORDER ASSTT. REGISTRAR DATE OF DICTATION DICTATED ON DRAGON DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE THE DICTATING MEMBER DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE THE OTHER MEMBER DATE ON WHICH THE APPROVED DRAFT COMES TO THE SR.PS /PS DATE ON WHICH THE FAIR ORDER IS PLACED BEFORE THE DICTATING MEMBER FOR PRONOUNCEMENT DATE ON WHICH THE FAIR ORDER COMES BACK TO THE SR.P S/PS DATE ON WHICH THE FINAL ORDER IS UPLOADED ON THE WE BSITE OF ITAT DATE ON WHICH THE FILE GOES TO THE BENCH CLERK DATE ON WHICH THE FILE GOES TO THE HEAD CLERK THE DATE ON WHICH THE FILE GOES TO THE ASSISTANT REGISTRAR FOR SIGNATURE ON THE ORDER DATE OF DISPATCH OF THE ORDER