TMI Blog2013 (9) TMI 796X X X X Extracts X X X X X X X X Extracts X X X X ..... or the purposes of any other business carried on by the assessee are transferred to the eligible business and, in either case, the consideration, for such transfer as recorded in the accounts of the eligible business does not correspond to the market value of such goods [or services] as on the date of the transfer - In the eligible business, the assessee is generating the power which is being consumed by the assessee company's manufacturing facility - Profit of the eligible business is to be computed at the market rate of supply of power. It is the assessee's contention that Maruti Udyog Limited is supplying the power to its AE at the rate of ₹ 8.50 per unit while the assessee has computed the profit of the eligible business by taking the rate of power at ₹ 7.08 per unit. The assessee has computed the rate of power by the cost of generation per unit with mark up of 15% - Held that:- Government undertaking i.e. Haryana State Electricity Board has supplied the power to the assessee and other industrial units in the area at the rate of ₹ 3.90 per unit - Rate at which power is being supplied by the Haryana State Electricity Board, to each and every industrial unit si ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... chnical know-how provided by HMCL for manufacture and sale of two wheelers and parts - Royalty is payable on such manufacturing of goods - Goods are exported to subsidiaries of the Associate Enterprise i.e. AE of Honda Japan and the assessee also paid export commission, would be no ground for disallowance of the royalty or determining arm's length price of the royalty at nil - The assessee is exporting goods to AE of Honda on principal to principal basis and the price at which export is made is higher than the domestic price - There is no justification for disallowance of the royalty on the export - Accordingly, the addition made by the TPO by determining arm's length price of royalty on export at nil is deleted – Decided in favor of Assessee. Computation of ALP in regard to spare parts etc. - Addition is with regard to the purchase of raw material, spare parts and components – Method to be adopted for computation of ALP – Held that:- For benchmarking international transaction of import of spare/components the most appropriate method is Comparable Uncontrolled Price (CUP) method - There exists a highest degree of similarity between import and domestic purchase of the spares/comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f motorcycles and spare parts. For the year under consideration, the assessee claimed the deduction of ₹ 22,940.58 lakhs as royalty payment which included the royalty of ₹ 408.32 lakhs paid on exports made to the associated enterprises. The TPO, vide his order dated 30th October, 2009, has held the royalty of ₹ 408.32 lakhs paid to AEs not at arm's length and, accordingly, the same was disallowed. The balance royalty of ₹ 22,082.26 lakhs (22,490.58 - 408.32) is disallowed by the Assessing Officer holding the same as capital expenditure. However, the Assessing Officer allowed depreciation at the rate of 25% thereon. Accordingly, the net disallowance was determined at ₹ 16,970 lakhs. The DRP, vide order dated 30th September, 2010, sustained the disallowance. Accordingly, the assessee is in appeal vide ground Nos.4, 6 6.1 of its appeal. 5. At the time of hearing before us, the learned counsel for the assessee, in addition to the detailed arguments, has also furnished the synopsis of his arguments. For ready reference, we reproduce the same herein below:- The assessee is engaged in the business of manufacture and sale of motorcycles using tech ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 970 lacs, after allowing depreciation @ 25%. The disallowance made by the assessing officer on the aforesaid grounds is incorrect, both on facts and in law, for the reasons elaborated hereunder: a. Brief History and Facts : The assessee had set up its plant in the year 1984 to manufacture models of motorcycles by using know-how of Honda Motor Co. through Technical Collaboration Contract dated 24th January, 1984. Under that agreement, the assessee was provided with technical assistance not only for manufacture, assembly and service of the products but was also provided with information, drawings and designs for the setting up of the plant. The assessee was required to pay lump sum amount of $5,00,000 in consideration of technical information for construction of plant, which was capitalized in the books of account and no part thereof was claimed as revenue expenditure. The aforesaid agreement expired in 1994. The agreement, prevailing during the relevant assessment year, was entered on 2.6.2004 on fresh terms for a further period of ten years and had no relation with the erstwhile agreement(s). The same cannot be said to be simple continuation of the earlier agreement exe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ces provided by technicians deputed by Honda in order to guide or solve the problems arising to the assessee company, while manufacturing the licensed products. The payment of guidance fees does not result in creation of any new asset nor result in any benefit of enduring nature. The said payment, was allowable expenditure under section 37(1) of the Act, being incurred for the purposes of business. Reliance in this regard is placed on the following decisions wherein it has been held that where payment is made to simply use the technical know how/knowledge provided by the foreign collaborator as opposed to acquisition of ownership rights therein, the payment made would be regarded as revenue expenditure. CIT vs. Ciba India Ltd. : 69 ITR 692 (SC). CIT Vvs. British India Corp. Ltd. [1987] 165 ITR 51 (SC). Alembic Chemical Works Co.Ltd. v. CIT : 177 ITR 377 (SC). Shriram Refrigeration Industries Ltd. vs. CIT : 127 ITR 746 (Del HC). Triveni Engineering Works Ltd. vs. CIT : 136 ITR 340 (Del). Addl. CIT vs. Shama Engine Valves Ltd. : 138 ITR 217 (Del). CIT vs. Bhai Sunder Dass Sons P.Ltd. : 158 ITR 195 (Del). CIT vs. Lumax Industries Ltd. : 173 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nda reserved the right to provide technology for manufacture of motorcycles to Honda Motorcycle and Scooters India Ltd. (iv) the subject payment made did not cover consideration paid for setting up of the manufacturing facility in India. On the strength of the aforesaid decisions, the total expenditure on account of royalty and technical guidance fees was claimed as revenue expenditure. The decisions of the Supreme Court in the case of Southern Switch Gear : 232 ITR 359 and Jonas Woodhead Sons (India) Ltd. vs. CIT : 224 ITR 342 relied upon in the assessment order are not applicable to the facts of the case and are distinguishable. Your Honour's attention is invited to the recent decision of Delhi High Court in the case of Sharda Motor Co. : 319 ITR 109, wherein it was held that royalty paid on the basis of rate per unit of production is revenue expenditure and cannot be considered as capital expenditure. The Delhi High Court in the aforesaid case distinguished the decision of Apex Court in the case of Southern Switch Gear (supra) on the ground that same was not applicable as in that case lumpsum payment was made, interalia, for setting up of factory and for that reas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he decision of the ITAT in the earlier year would not be applicable because law of res judicata is not applicable to the income tax proceedings. He also relied upon the following decisions in support of his claim that the payment of royalty is a capital expenditure :- (i) Southern Switch Gear Ltd. Vs. CIT Another - 232 ITR 359 (SC). (ii) Jonas Woodhead And Sons (India) Ltd. Vs. CIT - 224 ITR 342 (SC). He, therefore, submitted that the order of the Assessing Officer is quite fair and reasonable and the same should be sustained. 7. We have carefully considered the arguments of both the sides and perused the material placed before us. We find that an identical issue was considered by the ITAT in assessee's own case for AY 2000- 01, 2001-02 2002-03 vide ITA Nos.716 717/Del/2008, 1312/Del/2008, 718/Del/2008, 1648/Del/2007 and 1623 1624/Del/2008. At page 2 of the order dated 16th April, 2010, the ITAT recorded the controversy in those appeals which is reproduced as under:- This is a group of appeals by the assessee and the Revenue, the main controversy pertains to issues about the capital or revenue nature of payment of royalty called Technical Guidance Fee ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is attributable to any enduring benefit so as to make it capital expenditure. 7.19. Even if it is assumed that it has elements of enduring benefit the plea of Learned counsel about the same being revenue towards generating apparatus cannot be denied as by the so-called exclusivity what assessee can control is not the price of the know-how but the sale price of product in non- competitive Honda motorcycle market which will only increase the sale price and thus the revenue generating apparatus of assessee. In this eventuality also, the Supreme Court judgment of Empire Jute Co. Ltd. supports the assessee's case. 7.20. Here we may also add that assessee's plea about consistency on the basis of Hon'ble Supreme Court judgment in the case of Radhasoami Satsang (supra) is also relevant inasmuch as the Department has allowed the assessee expenditure in this behalf as revenue expenditure for a long period of 15 years. Hon'ble Supreme Court judgment in the case of SS and Jonas were pronounced in 1997 and with these judgments being on the case law books Department still allowed the assessee's expenditure in respect of TGF as revenue expenditure. In our view, the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... He, however, submitted that since it is a stay granted matter, the appeal should be disposed of without waiting for the disposal of the appeals for AY 2003-04, 2004-05 2005-06 because the issue is already settled by the ITAT in AY 2000- 01, 2001-02 2002-03. He also pointed out that the Revenue's appeals against the order of the ITAT for AY 2000-01, 2001-02 2002- 03 are pending before the Hon'ble High Court. 10. The learned DR, on the other hand, has no objection for disposal of this stay granted appeal despite the pendency of the appeals for AY 2003-04, 2004-05 2005-06. 11. Though the issue is covered by the decision of ITAT of earlier years (supra), however, we would like to deal with the merits of the case also for two reasons - (i) that, in the earlier years, the ITAT considered the agreement entered into on 2nd June 1995 while the agreement under consideration before us is the agreement dated 2nd June, 2004, and (ii) that, after the order of the ITAT, there are several decisions of the Hon'ble Jurisdictional High court on this issue. 12. We, therefore, discuss the merits of the case also. The Revenue has mainly relied upon the two decisions of the H ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the licensed products in that factory. The High Court took the view that the appellant acquired a benefit of enduring nature and that the sum paid for the same would constitute capital expenditure. On appeal to the Hon'ble Supreme Court, it was held as under:- Held, affirming the decision of the High Court, that the High Court having considered the different clauses of the agreement and having come to the conclusion that under the agreement with the foreign company, what was set up by the appellant was a new business and the foreign company had not only furnished information and technical know-how but rendered valuable services in the setting up of the factory itself and even after the expiry of the agreement there was no embargo on the appellant to continue to manufacture the product in question, the entire payment made could not be held to be revenue expenditure, merely because the payment was required to be made at a certain percentage rate of the gross turnover of the products as royalty. The disallowance of 25 per cent of the sum paid as royalty by the appellant to the English company as capital expenditure, not allowable as revenue expenditure under the provision ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rivilege of manufacturing and selling the products and the acquisition of such a right was rightly treated by the Tribunal as partly towards capital and partly towards revenue. The High Court affirmed the disallowance of royalty estimated at 25 per cent by the Tribunal. On appeal to the Hon'ble Supreme Court, the Apex Court affirmed the judgment of the Hon'ble High Court as under:- We have perused the order of the High Court. We have also seen the agreement. We are not persuaded to hold that the view taken by the High Court is erroneous; the appeals are dismissed. There will be no order as to costs. 15. The learned counsel for the assessee has relied upon a large number of decisions but, for the sake of brevity, we are discussing herein below only the decisions of Hon'ble Jurisdictional High Court and, that too, delivered after the above two decisions of the Hon'ble Apex Court. 16. In the case of CIT Vs. Lumax Industries Ltd. - 173 Taxman 390 (Delhi), the assessee company entered into an agreement with M/s Stanley Electric Co.Ltd. (SECL) on year to year basis for acquisition of technical knowledge. The assessee claimed the said payment as revenue expend ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 69 was fully applicable to the facts of the instant case and both the authorities were right in concluding that the payment made by the assessee towards licence fee to 'S' was a revenue expenditure. 17. In the case of Shriram Pistons Rings Ltd. Vs. CIT, New Delhi - [2008] 171 Taxman 81 (Delhi), the facts of the case are that the assessee company had entered into a technical collaboration agreement with a Japanese company, 'R' for the manufacture of piston rings. The said agreement mentioned that the technical know-how would be sold by 'R' to the assessee for a fixed amount and the payments would be made on the fulfillment of certain conditions. The agreement enabled the assessee to sub-license the technical know- how to another Indian party subject to the prior written permission of 'R'. The validity of the agreement was for a period of five years, but it could be terminated before the expiry of that period in the event of any default by any of the parties. The agreement laid down that the right of the assessee to market any of the products manufactured under the agreement would cease upon its expiry or termination. Pursuant to the said agreem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te per piece of production of different products. The assessee showed the lump sum payment against transfer of technical know-how provided by the Korean company as capital expenditure and claimed that the royalty was business expenditure. The Assessing Officer treated the royalty as capital expenditure. The order of the Assessing Officer was reversed by the Commissioner (Appeals) and this was affirmed by the Appellate Tribunal. On appeal, it was held as under:- That the finding of the Commissioner (Appeals) that the payment of royalty was purely a revenue expenditure, which was annual expenditure depending upon the quantum of production in the relevant year was a finding of fact rightly arrived at. 19. In this case, their Lordships discussed the earlier decision of Hon'ble Jurisdictional High Court in the case of CIT Vs. J.K.Synthetics Limited - [2009] 309 ITR 371 (Delhi) wherein their Lordships have enumerated certain principles for determining whether the payment of royalty is a capital expenditure or revenue expenditure. The same is discussed at pages 111 112 of 319 ITR and is being reproduced herein below for ready reference:- (v) expenditure incurred for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s crystal clear that the expenditure is of revenue nature. 20. In the case of Climate Systems India Ltd. Vs. CIT - [2009] 319 ITR 113 (Delhi), the facts of the case are that the assessee company engaged in the manufacture and sale of heat exchangers (radiators) entered into technical collaboration agreement with a US company to manufacture radiators with technology owned by the US company. Under the agreement, the assessee was permitted to use the technology for manufacture of upgraded radiators for which the assessee was to make a lump sum payment of US $ 1 million to the US company, which was capitalized in the assessee's books of account and a royalty of 3 per cent. of domestic sales and 5 per cent. of export sales to the US company for a period of 7 years for using the technology and for availing of technical services. During the previous year relevant to the assessment year 2002-03, the assessee paid to the foreign collaborators royalty calculated at 3 per cent. of domestic sales and at 5 per cent. of export sales and claimed deduction thereof as business expenditure. The Assessing Officer disallowed it as being of capital nature and this was confirmed by the Commissi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch were supplied by the licensor only enabled the assessee to manufacture the shock absorbers. The assessee was required to change the design of such shock absorbers from time to time for which new drawings and designs were required. For this purpose, the training of the personnel of the assessee was imperative. Under the agreement, the know-how acquired related to the process of manufacturing and for a technical and the documents, designs and specifications which had been supplied by the licensor were only for facilitating this purpose of manufacturing. This was basically in the realm of technical support. 22. Now, we come to the assessee's case so as to reach to the conclusion as to which of the above decisions would be applicable. At the outset, we may mention that the Assessing Officer has heavily relied upon the decisions of the Hon'ble Apex Court in the case of Southern Switch Gear Ltd. (supra) and Jonas Woodhead And Sons (India) Ltd. (supra), for holding that the payment of royalty is capital expenditure. But, the Assessing Officer has not fully applied those decisions because in both the cases, only 25% of the royalty payment was held to be capital expenditure ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ers and parts thereof as defined therein, designed and developed by LICENSOR. LICENSOR and LICENSEE mutually desire that the licensing arrangement under 1995 LTAA be extended for an additional period in accordance with the terms and conditions, set forth hereinafter, which will henceforth govern their relationship. 24. Thus, the agreement dated 2nd June, 2004 is virtually an extension of the agreement dated 2nd June, 1995 considered by the ITAT in its order for AY 2000-01, 2001-02 2002-03 (supra). The important clauses of the agreement read as under:- Article 2 Article (Grant of License and Exclusivity) Subject to the terms and conditions herein contained, LICENSOR hereby grants to LICENSEE an indivisible, non- transferable and exclusive right and license, without the right to grant sublicenses, to manufacture, assemble, sell and distribute the Products and the Parts during the term of this Agreement within the Territory under the Intellectual Property Rights and by using the Technical Information. Provided, it is acknowledged by LICENSEE, (i) the exclusivity granted herein is against the third parties but not HMSI, and (ii) the exclusivity against HMSI i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... led in any country any patent or other intellectual property right application which incorporates or is directed to the Intellectual Property Rights, the Technical Information, the Know-How or the Trademarks disclosed to LICENSEE hereunder. If LICENSEE, in violation of this Article 18.2, files any application for any patent or other intellectual property rights in any country, it shall be deemed a breach of this Agreement, and further, the right to such application and any intellectual property rights resulting from such application shall be automatically gratuitously assigned and transferred by LICENSEE to LICENSOR. 18.3 In the event any inventions and improvements which relate to the Products, the Parts, the Know-How or the Intellectual Property Rights was made by LICENSEE or its directors, officers, employees and Subcontractors in the course of or as the result of the change as set forth in Article 19.3 hereof, LICENSEE shall promptly disclose in writing to LICENSOR all such inventions and improvements, and LICENSEE, insofar as lawfully may, hereby grants or causes to be granted to LICENSOR a transferable right and license to use such inventions and improvements in any coun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... irrespective of source of import; (ii) the cost to LICENSEE of the standard bought-out component parts listed in Exhibit IV attached hereto; and (iii) excise duties imposed on LICENSEE by the Government of India and included in said ex-factory sales price or ex-warehouse sales price. It being understood by the parties that the aforesaid deduction in respect of calculation of running royalties shall be in accordance with the prevailing policy of the Government of India. Article 33 Effect of Expiry and Termination 33.1 In the event of any termination pursuant to Article 32.1 on account of material breach by LICENSOR of its obligations under this Agreement, and subject to the due performance by LICENSEE of its material obligations, LICENSEE may continue to manufacture, assemble, sell, deliver and service the Products and the Parts until the due expiration date of this Agreement as specified in Article 31. 33.2 In the event of any termination pursuant to Article 32.1 on account of material breach by LICENSEE of its material obligations under this Agreement, LICENSEE shall discontinue (i) the manufacture, sale and other disposition of the Products and the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mination in accordance with Article 33.1, and shall keep all information received by LICENSEE hereunder secret and confidential in accordance with Article 17 hereof. 33.7 LICENSEE shall not be entitled to demand from LICENSOR, for the reason of the expiration or termination of this Agreement or the failure to renew or extend it, any damages, reimbursements or other payments on account of the current or prospective profits on LICENSEE's sale or anticipated sale of the Products and the Parts, or on account of LICENSEE's expenditures, investments or commitments made in connection with the manufacture of the Products and the Parts, or on account of the establishment, development or maintenance of the goodwill or other business of LICENSOR, or on account of any other cause or thing whatsoever, except in case where this Agreement is terminated for any reason directly imputable to LICENSOR. 33.8 The LICENSEE shall promptly discontinue the use of; (i) the Trademarks licensed by LICENSOR hereunder and shall not claim any right, title and interest whatsoever in the said Trademarks. Further, LICENSEE agrees to terminate the utilization or the product names, product code or p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t only the original information and know-how provided by the licensor is the property of the licensor and not the assessee but even any inventions and improvements made by the assessee would be transferred to the licensor by the licensee. Paragraph 18.4 clearly provides that the assessee shall not claim any title or property right in respect of any intellectual property rights, know-how, technical information etc. provided under this agreement. Article 25 provides the consideration to be paid by the assessee for the use of technical information provided to the assessee under this license. The consideration is in the form of model fee as well as the running royalty. Paragraph 33.6 of the agreement provides that the licensee i.e. the assessee shall return to the licensor all documents and tangible property supplied by licensor in connection with this agreement. This proves beyond doubt that the intangible property continues to be owned of the licensor and the assessee has not acquired any know- how or license by virtue of this agreement which can be said to be intangible asset of the assessee. 26. In the light of these facts, let us examine the various decisions discussed above so ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 29. In the case of Lumax Industries Ltd. (supra), the assessee was paying license fee on year to year basis for acquisition of technical knowledge. The LIL claimed the said payment as revenue expenditure which was disallowed by the Assessing Officer holding that by virtue of the agreement, the LIL had derived an asset of enduring nature. On appeal, the CIT(A) allowed the assessee's claim and the Tribunal upheld the order of the CIT(A). On further appeal, the Hon'ble Jurisdictional High court upheld the order of the ITAT and has also observed that even if the assessee had obtained the long term advantage of enduring benefit, that by itself would not convert any expenditure incurred by the assessee into capital expenditure. This decision of Hon'ble Jurisdictional High Court is after considering the decision of Hon'ble Apex Court in the case of Jonas Woodhead and Sons (India) Ltd. (supra) relied upon by the Revenue. The decisions of Hon'ble Apex Court in the case of Southern Switch Gear Ltd. (supra) and Jonas Woodhead And Sons (India) Ltd. (supra) have slightly different facts because in both the cases, there was a collaboration agreement by which technical assi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8377; 15.08 lacs under Section 14A. That the Assessing Officer computed the disallowance under Section 14A as per Rule 8D of the Income-tax Rules, 1962 and worked out the disallowance at ₹ 128.29 lacs as against ₹ 15.08 lacs offered by the assessee. The DRP sustained the order of the CIT(A). 32. It is submitted by the learned counsel that the assessment year under consideration is 2006-07 while Rule 8D of the Income-tax Rules has come into existence with effect from AY 2008-09. That the Hon'ble Bombay High Court in the case of Godrej and Boyce Mfg. Co.Ltd. Vs. DCIT and Another - [2010] 328 ITR 81 (Bom) and also the Hon'ble Jurisdictional High Court in the case of Maxopp Investment Ltd. Vs. CIT, New Delhi - [2011] 203 Taxman 364 have held that Rule 8D is not retrospective and, therefore, not applicable in the assessment years prior to AY 2008-09. He, therefore, submitted that the working of disallowance under Section 14A by the Assessing Officer as per Rule 8D is not justified. He also submitted that since the assessee itself has disallowed the expenditure to the extent of ₹ 15.08 lacs, no further disallowance would be made. 33. The learned DR, on the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ional High Court in the case of Maxopp Investment Ltd. (supra), Rule 8D cannot be applied in assessment year 2008-09. Therefore, the disallowance was to be computed as per the observation of the Hon'ble Jurisdictional High Court in the case of Maxopp Investment Ltd. (supra). We, therefore, set aside the orders of the authorities below on this point and restore the matter to the file of the Assessing Officer with the direction that he shall rework the disallowance under Section 14A as per the observation of the Hon'ble Jurisdictional High Court in the case of Maxopp Investment Ltd. (supra). Needless to mention that Assessing Officer will allow adequate opportunity of being heard to the assessee. 36. Ground Nos.8 8.1 of the assessee's appeal read as under:- 8. That the assessing officer erred on facts and in law in disallowing deduction under section 80IA of the Act, amounting to ₹ 3,32,71,032/-, claimed by the appellant in respect of captive power generating unit at manufacturing facility at Gurgaon. 8.1 That the assessing officer erred on facts and in law in computing profits of the power generating unit by treating the rate of ₹ 3.90 per unit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts associated enterprises cannot be said to be the market value of the power because the assessee's counsel himself has stated that Maruti Udyog Limited was supplying the power to the associated factories and not to independent parties. Moreover, no evidence for supply of power by Maruti Udyog Limited to any independent party at the rate of ₹ 8.50 per unit is produced. He stated that the rate on which the government is supplying power in that area to every industry is in fact the market rate. He, therefore, submitted that the order of the Assessing Officer in this regard should be sustained. 39. We have carefully considered the submissions of both the sides and perused the material placed before us. Sub-section (8) of Section 80IA reads as under:- (8) Where any goods [or services] held for the purposes of the eligible business are transferred to any other business carried on by the assessee, or where any goods [or services] held for the purposes of any other business carried on by the assessee are transferred to the eligible business and, in either case, the consideration, if any, for such transfer as recorded in the accounts of the eligible business does not corr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tuated, is the market rate at which power is available. The rate at which Maruti Udyog Limited is claimed to supply the power to its AE cannot be said to be the market rate of the power in that area because as per assessee's own claim, Maruti Udyog Limited is supplying the power to its AE and not to unrelated parties in general. In view of the above, we hold that the Assessing Officer was fully justified in arriving at the conclusion that there was a loss in the power generation undertaking of the assessee and therefore, there was no eligible profit for allowing deduction under Section 80IA. Accordingly, we dismiss ground Nos.8 8.1 of the assessee's appeal. 41. Ground No.9 of the assessee's appeal reads as under:- 9. That the assessing officer erred on facts and in law in disallowing expenditure of ₹ 5.75 crores claimed by the appellant on account of provision for warranty made in respect of sales rendered during the year, on the ground that same is an unascertained liability. 42. We have heard both the parties and perused the material placed before us. We find this issue to be covered in favour of the assessee by the decision of ITAT in assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the issue of provisions for warranty is settled in favour of the assessee by the decision of ITAT as well as Hon'ble Jurisdictional High Court in assessee's own case. Respectfully following the same, we delete the disallowance made by the Assessing Officer in respect of provisions for warranty. Accordingly, ground No.9 of the assessee's appeal is allowed. 45. Ground Nos.10 to 10.3 are against the disallowance of ₹ 12.19 crores being export commission. 46. At the time of hearing before us, it is stated by the learned counsel that similar disallowance is made by the TPO also by way of transfer pricing adjustment and, therefore, ground No.10 should be adjudicated alongwith ground No.1.1 which is against the adjustment made by the Assessing Officer as per the order of the TPO. 47. The learned DR also accepted this submission of the learned counsel. Therefore, we shall adjudicate ground No.10 of the assessee's appeal alongwith ground No.1.1 of its appeal. 48. Ground Nos.1 to 5 of the assessee's appeal are with regard to adjustments made by the Assessing Officer as per the order passed by the TPO. 49. Ground No.1 of the assessee's appeal is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (b) The export agreement was for the benefit of HMCL and not the assessee company, therefore, the payment of export commission was held to be not allowable under Section 37(1). (c) The export agreement is in the nature of license acquired by the assessee for the purpose of making export to other countries where HMCL had exclusive privilege to operate. The license is for a longer period of time and, therefore, it constitutes an intangible asset. Accordingly, the expenditure was held to be a capital expenditure. 53. The disallowance made by the Assessing Officer under the transfer pricing provision is challenged vide ground No.1.1 reproduced above and the disallowance made under the general provisions of the IT Act have been challenged by way of ground Nos.10 to 10.3 which read as under:- 10. That the assessing officer erred on facts and in law in disallowing export commission paid to Honda, amounting to ₹ 12.19 crores, by applying provisions of section 40(a)(ia) on the ground that the appellant had failed to deduct tax at source therefrom as per section 195 of the Act. 10.1 That the assessing officer erred on facts and in law in holding that the payment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... chnical know-how agreement was approved by the concerned Ministry of the Government vide letter dated 06-09-2004. The appellant had entered into a separate Export agreement dated 21.06.2004 under which HMCL accorded consent to the appellant to export specific models of two wheelers to certain countries on payment of export commission @ 5% of the FOB value of such exports. The appellant has demonstrated the international transactions of payment of export commission to HMCL as being at arm's length, as under: i) The payment of export commission was made by the appellant to HMCL as consideration for according consent to the appellant to export two wheelers in the overseas territory (ies), which were earlier being supplied by HMCL or its other affiliates. In other words, the payment of commission was made to HMCL in lieu of HMCL agreeing to cede the overseas market. The Hon'ble Delhi Bench of the Tribunal in the case of Honda Siel Cars Ltd. vs. ACIT : 109 ITD 1 for the assessment year 2001-02 and 2002-03, held that similar expenditure on payment of commission on export was incurred exclusively for the purpose of the business of the appellant and did not constitute diversi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an expense is incurred wholly and exclusively for the purpose of business, it is irrelevant as to whether such expenditure actually results in profit or not. The Hon'ble High Court held as under: 21. The position emerging from the above decisions is that it is not necessary for the appellant to show that any legitimate expenditure incurred by him was also incurred out of necessity. It is also not necessary for the appellant to show that any expenditure incurred by him for the purpose of business carried on by him has actually resulted in profit or income either in the same year or in any of the subsequent years. The only condition is that the expenditure should have been incurred wholly and exclusively for the purpose of business and nothing more. It is this principle that inter alia finds expression in the OECD guidelines, in the paragraphs which we have quoted above. XXX So long as the expenditure or payment has been demonstrated to have been incurred or laid out for the purposes of business, it is no concern of the TPO to disallow the same on any extraneous reasoning. As provided in the OECD guidelines, he is expected to examine the international transactio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not be allowed under s. 37(1) of the Act, since the expenditure has been incurred by the assessee during the course of business and is having the nexus with the business of the assessee. Therefore the payment of royalty is a business expenditure which has been incurred wholly and exclusively for the purpose of business of the assessee and same is to be allowed in toto as a matter of commercial expediency. Therefore, the case laws relied upon by the learned CIT- Departmental Representative are of no benefit to the Revenue. The reasonableness of expenditure in the present circumstances and facts of case cannot be doubled and accordingly the AO is directed to allow the claim of the assessee and the order of learned CIT(A) is reversed. Thus, ground no.3 of the assessee is allowed. In addition to the aforesaid, it is respectfully submitted that, in all cross sections of industry, business enterprises engage export agents for securing export orders or for promoting/selling their products outside India. The Exchange Control Guidelines issues by Reserve Bank of India permit payment of export commission upto 12.5% of the invoice value. vi) The TPO in his order has erroneously held ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Honda vehicles in those countries and to take advantage of low cost of production in India. Moreover, the assessee is required to conduct the service campaign of products in those countries at its own cost. Therefore, at the cost of the assessee, the market for Honda products was promoted in those countries. That the assessee was not entitled to export each and every model but it was required to export only certain models as was permitted by Honda Motor Co.Ltd. The assessee was also required to bear the warranty cost. These facts clearly prove that the assessee was required to export motorcycles to underdeveloped countries in a very restrictive business environment and it was required to incur additional cost for promoting the market of Honda products. Inspite of these detrimental terms and conditions and the benefit to the subsidiaries of the AE, the AE has charged export commission from the assessee. This clearly proves that the payment of export commission was simply a mechanism to shift profit out of India to overseas AEs. On these facts, the TPO has rightly held that the assessee was not required to pay any commission on export and, therefore, the arm's length price of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat Article 1(6) of the agreement defines the territory as The term Territory shall mean the Republic of India . Therefore, as per the agreement between the assessee and HMCL dated 2nd June, 2004, the assessee was entitled to sell and distribute the product and the parts only within India. Thus, it was not entitled to export the product. However, the assessee entered into a separate agreement termed as 'export agreement' with HMCL on 21st June, 2004. By way of Article 2 of the export agreement, HMCL gave its consent for the export of the goods to the designated countries. The relevant portion of Article 2 of export agreement reads as under:- Article 2. (Consent to Export) 2.1 Subject to the terms and conditions herein contained, LICENSOR hereby gives consent to the export to the Designated Country by LICENSOR, however without a right to re-export; (i) of the Products for the sale thereof within the Designated Country only. (ii) of the Component Parts for the assembly of the Products therein and for the sale thereof within the specific Designated Country only, and (iii) of the Service Parts only for the purpose of repair or replacement of the Pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ese subsidiaries/group companies, (c) To promote market for Honda products in these countries. However, in-spite of using the assessee for these benefits of the subsidiaries and group companies, the AE has charged an export commission. During the course of proceedings no evidence to support a claim that the assessee has obtained any benefit in lieu of export commission and that payment of export commission was at arm's length price, was filed. Now the issue is whether such commission was paid in lieu of services rendered by the AEs and whether such commission is at arm's length price. In my view no third party would agree to such detrimental conditions as agreed by the assessee in the Export Agreement and for this reason the theory of form versus substance was examined in this case. Now a question will arise as to what are detrimental conditions to the assessee. The answer is available through the following facts: (a) The assessee is not able to export any model which it wants to export but it was required to export certain prescribed models. (Article 2.3 of the agreement dated 21.06.2004). (b) It cannot use any other distributor except for group co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enefit on export (over and above the domestic price after reducing royalty and export commission) amounted to ₹ 13.05 crores. Thus, it would be clear from the aforesaid chart that the assessee could earn additional margin from exports as sales price from export was higher than the domestic sales, inspite of paying export commission and royalty to the collaborator. 64. The above reply is at pages 299 300 of the assessee's paper book. At page 345 of the paper book, the assessee has enclosed the annexure by which a detailed working is given, how the assessee derived the benefit of ₹ 13.05 crores by the export. Neither the Assessing Officer nor the TPO in their respective orders have disputed the correctness of the above working by the assessee. Even at the time of hearing before us, the learned DR has not disputed the above working. From Annexure-1 which is at page 345 of the assessee's paper book, it is evident that assessee has given the model-wise details of export i.e. the quantity of each model, domestic sale value and export sale value and the difference. For ready reference, the copy of the Annexure is enclosed as Annexure-1 of this order. Therefore, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Products and the Service Parts for such Designated Country to a distributor, only, appointed by LICENSOR for the LICENSOR Goods in place of such disqualified distributor. 65. In the details filed before the Assessing Officer, the assessee has given model-wise details to show that the sale consideration of the export of each model was more than the domestic rate and even after considering the export commission, it was more than the domestic rate. The TPO has also held that under the export agreement, the assessee has agreed to various conditions which are detrimental to the assessee and, therefore, the assessee is not required to pay any export commission. The first point mentioned by the Assessing Officer to arrive at this conclusion is that the assessee is not able to export any model which it wants to export but it was required to export certain prescribed models. However, without the export agreement, the assessee was not able to export any of the models. It is only because of the export agreement the assessee is permitted to export the specified models to the specified countries. Therefore, the export agreement has benefited the assessee and not detrimental to the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en by export of specified models to the specified countries, the assessee has benefited and the assessee has given the detailed working of such benefit which is also enclosed as Annexure-1 to this order. As per this working, the assessee derived the benefit of ₹ 13.05 crores by the export. The export sale rate was more than the domestic sale rate even after considering the export commission. In view of the above, we are unable to uphold the disallowance of commission by the Assessing Officer by way of transfer pricing adjustment. 67. Now, we come to disallowance of export commission under the general provisions of the Income-tax Act. After the detailed discussion, the conclusion of the Assessing Officer in this regard is at page 26 of his order which reads as under:- 7.16 Export agreement mentions that the consideration payable under the agreement is a composite one including payment for permission, which is a commercial right being property of HONDA arising out of it being holder of information, payment for use of brand name which is a intellectual property right being held by HONDA and the services. These services which are evident from the export agreement are more ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. Thus, the export commission was not for use of any copyright, patent, trademark etc. The payment is, therefore, not in the nature of royalty. He further stated that the payment is not in the nature of fees for technical services since the same was not paid in lieu of rendering any services much less services of a managerial, technical or consultancy nature. In support of this contention, he relied upon the decision of Authority for Advance Ruling in the case of Spahi Project P.Ltd. - 315 ITR 374. He further submitted that even if the payment of export commission is regarded as royalty/fees for technical services, since the commission paid is related to services utilized for earning income from a source outside India, the same cannot be deemed to arise or accrue in India. Therefore, the export commission paid to a non-resident is not chargeable to tax in India. When the payment is not chargeable to tax in India, the question of deduction of tax under Section 195 does not arise. 69. With regard to the observation of the Assessing Officer that the payment is not relating to business and therefore disallowable under Section 37(1), it is stated by him that the payment is made in p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f business. He alternatively stated that the payment should be treated as a capital expenditure because by the export agreement, the assessee acquired the license to export for a longer period of time which itself is an intangible asset i.e. a capital asset. 71. We have carefully considered the arguments of both the sides and perused the material placed before us. While considering the adjustment made by the TPO in respect of export agreement, we have discussed both these agreements. The technical know-how agreement was entered into between the assessee and HMCL in the year 1984 which was renewed in the year 1994 and then in 2004. Under the technical know-how agreement, the assessee was permitted to manufacture, assemble, sell and distribute the products within the territory which was defined as Republic of India. Thus, since 1984 to 2004, the assessee was not allowed to export any product. The export agreement was entered into with HMCL only on 21st June, 2004 by which HMCL gave its consent for export of the goods to the designated countries on the payment of export commission. Therefore, the contention of the Revenue that cumulative effect of the two agreements is to be consid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... og towards commission for services rendered by it abroad were not liable to be taxed in India either under the Income-tax Act, 1961, or under the Double Taxation Avoidance Agreement between India and South Africa (DTAA). Consequently, the applicant was not liable to deduct tax at source under section 195 of the Act. Viewed from the angle of section 9(1) of the Act, Zaikog did not earn any income or account of business connection in India. Nor could Zaikog be subjected to tax in India in the absence of a permanent establishment in India. (ii) That Zaikog would not be rendering services of a managerial, technical or consultancy nature and, therefore, liability to tax could not be fastened on it by invoking the provisions dealing with fees for technical services. 72. The ratio of the above decision of Authority for Advance Ruling would be squarely applicable to the case of the assessee. Even otherwise, as per the provisions of the Income-tax Act, the export commission paid by the assessee would not fall within the ambit of either royalty or fee for technical services. The 'royalty' has been defined in Explanation-2 after Section 9(1)(vi) of the Income-tax Act, which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... transferred or permitted to use any patent, invention, model, design or secret formula. Similarly, HMCL, by way of export agreement, has not rendered any managerial, technical or consultancy services. In view of the above, we hold that export commission was neither royalty nor fee for technical services and, therefore, the assessee was not required to deduct tax at source on the payment of export fee. Once the assessee was not required to deduct the tax at source, it cannot be said that the assessee failed to deduct tax at source so as to apply Section 40(a)(ia). 74. While considering the disallowance made by the TPO by way of transfer pricing adjustment, we have discussed at length and have arrived at the conclusion that the export agreement was for the benefit of the assessee and not detrimental to the assessee. Therefore, the finding of the Assessing Officer that the expenditure incurred by the assessee by way of export agreement was not incurred for the purpose of business of the assessee cannot be upheld. We hold that the export commission paid by the assessee was for the purpose of assessee's business. 75. The Assessing Officer has alternatively held the payment of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at is required to be the R D undertaken to given final shape to the production technology, the assessee is responsible for the development of technology. Hence, keeping in view the relative contribution of the parties involved in the development of the technology, I am of the considered view that the payment made by the assessee for model fee at the arm's length price should have been only to the extent of 25 percent of the payment towards model fee. 77. On appeal, the DRP also sustained the finding of the TPO with the following observation:- Model fee was claimed to have been charged for making available technology for manufacture of newer models of the motorcycle and scooter in terms of technical knowhow agreement dated 02.06.2004 and supplementary amendment agreement dated 30.11.2004. The TPO observed that considerable amount of R D expenditure is claimed in the Annual Account of the assessee and the assessee itself in the said annual account boasted of development and absorption of new technologies leading to introduction of new models, yet it is making payment of model fee without any regard to R D carried out at its own end. The TPO after analyzing the matter an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mportant to perform functional analysis and also to see that commensurate benefit has been accrued to the participating entities. OECD Guideline throws ample light on the key measures for applying arm's length test on such services as pointed out by the TPO. If we see that contribution of the assessee vis a vis the contribution of the AE in launching of new models, it is justified to treat 25% of model fee paid to HMCL as arm's length price commensurate to services rendered by it in launching of new models. As regards other issues like approval of RBI, use of methods, allowability u/s 37(1), discussion on these points in earlier paragraphs may be referred to. In view of above, assessee's objection is not found tenable and ALP determined by the TPO is found to be correct. Hence, no interference in the draft assessment order on this issue is warranted. 78. At the time of hearing before us, it is stated by the learned counsel that the assessee is operating in a technologically intensive industry wherein continuous technological upgrading is imperative for the growth and survival of any industry. The assessee does not undertake any significant research for develop ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e beginning of model development by HMCL and research activity undertaken by the assessee for technology absorption and indigenization of the part was subsequent to the development of the model and supply of the technical details of the new model developed by HMCL. The assessee has not at all helped HMCL in the research and development activity of the new model. The model development fee paid by the assessee is for research and development of the new model which is undertaken exclusively by HMCL. That in the earlier years, the Revenue has disallowed the model development fee paid by the assessee holding it to be capital expenditure. That first time the model development fee was disallowed as capital expenditure in AY 1996-97 but the ITAT allowed the assessee's appeal vide ITA No.3093/Del/2000. That on Revenue's appeal to the Hon'ble High Court vide ITA No.41/2006, the question of law was not admitted by the Hon'ble Jurisdictional High Court vide order dated 17th June, 2006. That again in AY 1999-2000, the same was disallowed as capital expenditure and the Assessing Officer held that on this model development fee, deduction under Section 35AB is allowable. On appeal, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Public Enterprises which is authorized to give approval, vide letter dated 26th April, 2005, mentioned that the lump sum payment for model development appears to be on higher side and, therefore, the assessee was required to furnish the detailed justification alongwith specification of the new models proposed to be manufactured. That the assessee furnished the detailed explanation vide letter dated 12th May, 2005 and thereafter, the approval was allowed vide letter dated 6th June, 2005. Thus, the quantum of the model fee paid by the assessee was found to be reasonable after appreciation of all facts by the Government of India, Ministry of Heavy Industries. Therefore, the arm's length price determined by the TPO without any basis or justification at 25% of the model fee paid by the assessee is incorrect and baseless. He further submitted that the assessee has adopted TNMM which is one of the prescribed methods under the Income-tax Act in respect of all the international transactions taken together for determining the arm's length price. While applying TNMM, the operating profit of the assessee was compared with the sales and operating profit ratio of the assessee to the sale ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r the Income-tax Act. It is only the transfer pricing authorities who are competent to determine the arm's length price. In support of this contention, he relied upon the decision of Hon'ble Jurisdictional High Court in the case of CIT Vs. Nestle India Ltd. - 337 ITR 103 (Delhi). He further submitted that the development of new model was a joint activity undertaken by the assessee as well as HMCL. In fact, in the process of development of new model, more contribution was from the assessee's side than HMCL. The assessee first undertook the market research and market study and then give all inputs to HMCL. Then, even after the development of the model, again the assessee does further research and development so as to absorb the technology provided by HMCL. Thus, the contribution of the assessee in development of each model is much more than the contribution by HMCL and, therefore, the TPO has rightly determined the arm's length price at 25% of the model development fee paid by the assessee. 81. We have carefully considered the arguments of both the sides and perused the material placed before us. We find that the TPO has determined the arm's length price to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... paid by the assessee would be the arm's length price. He has not applied any of the methods prescribed under Section 92C(1) of the IT Act for determining the arm's length price. 82. It was pointed out by the learned counsel that for making the payment of model fee, the assessee required the permission of the Government of India. Before giving the permission, the Ministry of Heavy Industries examined the reasonableness of the model fee proposed to be paid by the assessee. In this regard, the learned counsel referred to the letter of Under Secretary to the Government of India, Ministry of Heavy Industries and Public Enterprises dated 26th April, 2005 which reads as under:- To M/s Hero Honda Motors Ltd., 34, Basant Lok, Vasant Vihar, New Delhi - 110 057. Subject :- Approval for first supplementary amendment to License and Technical Assistance Agreement. Sir, I am directed to refer to your application No.HHML:TCA:SECT:VK: ICK:05 dated 19.3.2005 on the subject cited above forwarded by Department of Industrial Policy and Promotion, PAB section to this Department, being Administrative Ministry for our comments. 2. While examinin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he representatives of Honda Motor Company Limited and ultimately in the end of November, 2004 a consensus was arrived wherein Honda Motor Co. Limited agreed to the proposed payment of Japanese Yen 1040 Million. You will appreciate that, to meet the prevailing competition and the government regulation, the Company need to improve its existing models as well as introduce new models with additional and improved features which are in the benefit of customers and the Country. The Company want to give the value for money to its customers. For this purpose the Company has to take technology from its collaborators who in turn are putting a lot of efforts in development such product which are suitable for Indian conditions. They are spending lot of time and money on these development which they have to recover from the receiver of the technology i.e. Hero Honda Motors Ltd. You will appreciate that in commercial transaction the reasonable value is assessed by the parties depending upon the subject matter and prevailing circumstances and accordingly in this case also the parties have negotiated and settled for the proposed amount. You will further appreciate that the amount is well withi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... istance Agreement . (b) Lumpsum Payments (Model Fee for three (3) new models) Development code Model description Model Fee (i) KTNA CB1506/CB150M6 JPY 230,000,000 (ii) KSTF CDN1005 JPY 310,000,000 (iii) KTPA SCV100HH6 JPY 500,000,000 Total Model Fee of JPY 1,040,000,000 for the three new models mentioned above shall be paid in 3 instalments, subject to taxes. 2. All other terms and conditions of the letter dated 6.9.2004 referred to above shall remain unchanged. 3. Kindly acknowledge the receipt this letter. Yours faithfully, Sd/- (T.C.Sharma) Under Secretary to the Govt. of India Phone 23014088 85. From the above letters, it is evident that before making the payment of model fee/royalty, the assessee had to seek the approval of the Government of India, Ministry of Commerce and Industry. However, the Ministry of Commerce and Industry, before giving permission, has sought for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at 3.5 per cent to 5 per cent as against the Government norms of 5-8 per cent was reasonable. He further held that the royalty payments for technical know-how were linked to sales and not to profit which was a derived figure that could vary from year to year. The Tribunal held that the payment of commission was not huge or unreasonable and since it was a business expenditure the entire expenditure incurred by the assessee by way of payment of royalty/commission to the two overseas companies was entitled to deduction. On appeal, the Hon'ble Jurisdictional High Court dismissed the Revenue's appeal. However, with regard to the fact of permission given by the Reserve Bank of India, the observation of their Lordships at page 119 of the report reads as under:- We take up question of law No.2 in the first instance. We are of the view that the Tribunal is not correct in observing that since the permission is given by the Reserve Bank of India, the reasonableness and genuineness of the expenditure could not have been gone into by the Assessing Officer. The purpose for which such permission is given by the Reserve Bank of India is totally different. The Reserve Bank of India is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... emuneration is not called for; The Tribunal has held that the assessee having discharged the initial onus, the burden shifted to the Revenue to show that the payment of royalty was excessive or unreasonable having regard to the legitimate needs of business or that the assessee has made less than ordinary profits and the Revenue has not discharged the said onus. 88. In our opinion, the ratio of the above decision would be applicable to the facts of the assessee's case because in this case also, there is no dispute about the genuineness of the payment, namely, that the payment was in fact made by the assessee to the recipient foreign company. The assessee has furnished the entire information asked for by the AO/TPO. It is not even the allegation of the Revenue that any information is not furnished by the assessee. The technical assistance received by the assessee by way of development of new model was essential for the purpose of assessee's business. It is also not in dispute that the assessee was benefited from the know-how and technical assistance by way of model development by HMCL. The said technical assistance was all pervasive in the operation of the assessee& ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was prior to the actual research and development undertaken by HMCL. The next activity of the assessee started only after the model is developed by HMCL and technology is handed over to the assessee. Then the assessee undertook the research and development activity for absorption of such technology and for indigenization of the spare parts. Thus, the activity of research and development of the model was undertaken by HMCL and not jointly by the assessee and HMCL. No other reason is given by the TPO for determining the arm's length price at 25% of the model fee paid by the assessee. He has not applied any method for determining the arm's length price prescribed under Section 92C(1) of the Income-tax Act. In view of the above, the decision of Hon'ble Jurisdictional High Court in the case of Nestle India Ltd. (supra) would support the case of the assessee rather than the Revenue. In view of the totality of above facts, we are unable to uphold the view of the TPO that the arm's length price of model development should be to the extent of 25% of the payment towards model fee. The same is set aside and the addition made on this count is accordingly directed to be deleted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ports made to the subsidiaries and group companies of Honda Japan. 4. The assessee is also paying Export Commission to Honda Japan @ 5% for the exports made to the AEs. 5. In a way the price of exports made to AEs have been reduced by the amount of royalty and export commission as compared to the sale in the domestic market. 11.3 The position of the assessee company with regard to manufacturing for the AEs is that of a Contract Manufacturer. The assessee company is purchasing raw material from the AEs. The royalty paid as a percentage of sales to the associated enterprise is not at arm's length because it amounts to collecting royalty on the sales to itself. All the AEs are typically within the broad umbrella of the multinational corporation. Even though, it appears that the technical knowhow is commercially exploited in India, in realty the price for these activities are not fixed by market forces. Whether the sales of the assessee are made within India to its AE or to the parent company does not make much difference to the principles of arm's length transactions. In this case the capacity and other parameters are tied to the AE capacity and it cannot act li ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s and in fact contrary to the facts on record. The raw materials have been purchased by the assessee in its own right. It is not the case of the TPO that the raw materials have been supplied by the AE. The assessee has sold the goods to AE on principal to principal basis and has received the sale consideration. In view of the above, in our opinion, there is no justification for disallowance of the royalty on the export. We may reiterate that the Revenue has disallowed the entire royalty paid even on domestic sale which has been considered at length by us in the earlier paragraph of this order and we have arrived at the conclusion that the payment or royalty was a revenue expenditure, incurred for the purpose of business. Accordingly, the addition made by the TPO by determining arm's length price of royalty on export at nil is deleted. 93. The next addition is with regard to the purchase of raw material, spare parts and components. During the accounting year, relevant to the assessment year under consideration, the assessee made purchases of ₹ 81,10,78,331/- from its AE. The TPO determined the ALP at ₹ 79,56,73,801/-, which resulted in addition of ₹ 1,54,04, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... similarity between import and domestic purchase of the spares/components. It is very difficult to accept an argument that CUP is not applicable in such circumstances. The responsibilities to establish the arm's length nature of the international transactions lies with the assessee. The assessee failed to discharge this responsibility as the method relied upon by it is ot the most appropriate method for the reasons discussed above. Since the assessee has not brought out any difference in the quality of components purchased from HMC and from uncontrolled domestic suppliers, the ALP of imports from HMC, Japan can be determined by comparing it with the prices of uncontrolled domestic suppliers. 12.10 In this manner the ALP of the imports of various components from HMC, Japan and the adjustment arising out of difference between the ALP and the book price has been computed in the table given in Para 11.6 above. A perusal of this table reveals that there is different of ₹ 1,54,04,530/- in the price as per book of account and arm's length price of the spare parts/components. In view of these finding, the arm's length price of purchase of spares/components reported in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e the greatest effort on comparability under this method. Minor differences in contractual terms or economic conditions could materially affect the amount charged in an uncontrolled transaction. The method becomes less reliable substitute for arm's length dealings if not all significant characteristics of the uncontrolled transactions are comparable. The prices of international transactions of import of components and spare parts would not be compared with the prices of such components sourced from local manufacturers in the domestic market after their indigenization. The appellant in absence of comparable uncontrolled transactions, has rightly applied Transactional Net Margin Method (TNMM) as the most appropriate method for determining the arm's length price of such international transactions. Reliance is placed on the Hon'ble Mumbai Bench of the Tribunal in the case of Intervet India Pvt.Limited vs. ACIT : ITA No.2845/Mum/2006, wherein it has been held that the two transactions between Thailand and Vietnam cannot be compared on account of economic and market conditions. Further, reliance may also be placed on the decision of the Hon'ble Mumbai Bench of the Tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... spares and components were purchased by the appellant from local vendors, to whom technology for manufacturing such parts and components was provided by the appellant, with the price at which the spares and components were purchased by the appellant from the associated enterprise, who is the owner of such technical know-how. Reference may be invited in this regard to paragraphs 2.14 to 2.16 of the OECD guidelines. In the present case, prices of international transactions of import of components from associated enterprise in Japan, cannot be compared with domestic price of such components in much as purchase after indigenization for the reasons : (i) The two transactions have been undertaken in entirely different economic and market scenario and are not comparable. (ii) There is geographical difference in the international transactions. The TPO in the Transfer Pricing assessment for assessment year 2007-08 accepted the aforesaid contention of the appellant and did not make any adjustment on account of import of components. 96. The learned counsel also stated that in AY 2007-08, i.e. immediately succeeding year, under similar circumstances, the TPO accepted t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... selection of CUP method by the TPO. However, while applying the CUP method, it is to be ascertained whether similar goods were available indigenously. If the goods were not available indigenously, then naturally the rate of indigenous goods cannot be applied for determining the ALP. It is the contention of the assessee that when the goods were not available indigenously then only the same were purchased from AE. However, no evidence in this regard is produced by the assessee. At the same time, we find that no specific opportunity was allowed to the assessee to produce such evidence. In view of above, in our opinion, it would meet the ends of justice if the orders of authorities below on this point are set aside and the matter is restored to the file of the Assessing Officer. We order accordingly and direct the Assessing Officer to allow adequate opportunity to the assessee to produce evidence in support of its contention that the spare parts were purchased from the AE only when the same were not available indigenously. The Assessing Officer will readjudicate the issue in accordance with law after considering the submissions of the assessee and also after taking into account the or ..... X X X X Extracts X X X X X X X X Extracts X X X X
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