TMI Blog2014 (1) TMI 388X X X X Extracts X X X X X X X X Extracts X X X X ..... sed by TPO reversed – Thus, the assessee’s payment made on account of royalty/license fee to be at arm’s length – Decided in favour of Assessee. Payment on account of research and development – Held that:- The CIT(A) has very categorically observed that, “there is nothing on record to suggest the bench marking the ALP - Even in the records, there is nothing specific, which clearly suggests the bench mark for the addition – FIPB approval cannot be treated as acceptance of arm’s length price more so in view of the specific method prescribed under the Act - thus, the matter remitted to the AO for fresh adjudication. Disallowance of delayed payment - Contribution to PF on account of ESIC and fund – Held that:- The payment have been made before the due date of filing of the return – Thus, the addition cannot be made. - ITA No. 2406/Mum/2006, ITA No. 9035/Mum/2010, C.O No. 245/Mum/2012, ITA No. 9110/Mum/2010 - - - Dated:- 30-1-2013 - Shri R. S. Syal And Shri Vivek Varma,JJ. For the Appellant : Shri Sunil Lala For the Respondent : Shri Ajeet Kumar Jain, Shri Praveen Kumar ORDER Per Vivek Varma, JM: The instant appeal is filed by the assessee against the ord ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d a brand. To give high quality business, the assessee uses the parent AE s trademark, names and logos, marketing and sales knowhow, domain, it pays to its parent AE license fee as per the agreement entered into by the assessee with SGS SA, dated 26.09.2000, which are in continuation and incorporates approvals from government authorities dated December 1995 and accordingly pays license fee ranging between 2.5% to 4% on the revenue generated. As per the international study to analyze from fiscal and economic point of view, ALP at 3% was considered as reasonable for the use of the intangibles provided by the parent AE. 7. The AR submitted that as per the agreement and approval granted by Foreign Investment Promotion Board (FIPB) dated 25.09.2000, the assessee was required to pay to its parent AE, USD 10 million in 20 equal quarterly installments of USD 5 million each (it was later extended to 38 equal quarterly installments). 8. The assessee AR submitted that since the assessee was bound by the worldwide agreement and approval of the government agency, i.e. FIPB, it has to be accepted that the assessee has complied with the arm length principles and no adjustment was required to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... computed the same at Rs. 1,59,88,100. 14. The assessee approached the CIT(A), wherein the assessee submitted (in the SOF) a. To justify that payment of license fees @ 3% is at arm s length; reliance was placed on the international benchmarking study commissioned by the SGS Group. The study has concluded the 2.5%-4% range to be arm s length. b. The said study also mentioned that in principle a higher rate than 4% could be justified, particularly in countries where the SGS image plays a more significant role in generating business. Further, other group affiliates in the Asia Regional (Malaysia, Thailand, Pakistan and Bangladesh) are paying license fees @ 5% of turnover and internal license agreements with minority shareholders and one third party also range between 2.5% - 10%. c. The Addl. C.I.T. has erred in law and on facts by accepting the treatment accorded by the TPO in determining the arm s length price of license fees for use of intangibles/intellectual property on the basis of Government of India s press note No. 9 of 2000 issued by the Ministry of Commerce and Industry which permits royalty @ 1% on domestic sales and 2% on export sales for the use of trade mark and b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was allowed to be paid for a period of five years. Assessee has also placed on record a press not issued by the Government of India, Ministry of Commerce and Industries, Department of Industrial Policy and Promotion, issued in 2003, under which royalty payments @ 8 per cent on export sales and 5 per cent on domestic sales have been referred to be reasonable for the purpose of processing approval of payments. On the other hand, the AO failed to bring any material on record that payment of royalty @ 3 per cent was not at arm s length. Therefore, the payment stands justified under the CUP method . 17. The AR also referred to the assessee s own case before the Hon ble Bombay High Court against the reassessment proceedings initiated by the AO on the basis of the addition made in the instant year, it was held, Further, the expenses in question have been incurred after obtaining FIPB approval and approval from the RBI Impugned notice quashed and set aside. Admittedly, the expenses in question have been incurred after obtaining FIPB approval and approval from the RBI. Therefore, reopening of the assessment for assessment year 2001-02 on the ground that the transactions are not at arm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the markets are wholesale or retail . 21. The DR, submitted that since there is neither any comparable nor any benchmarking done as per the provisions of Act and Rules, it would be appropriate that the case be set aside to the AO for fresh appraisal for fresh search and comparables, as may be available. 22. We have heard the arguments and also perused the documents, placed on record. The issue before us is only on royalty and not other charges, which have been accepted by the TPO. In the TP study, the assessee chose CUP as the most appropriate method for this segment and also relied on Government s directives. The AR also demonstrated before us that the issue was covered by FIPB instructions, where royalty is accepted to be 5% to 8%. It was pointed out by the AR that this instruction was before the TPO, who, maybe under some misconception, did not refer in his draft order. When we apply the circumstances of the case with the provisions of Act and Rules, we do find that on the basis of global study, reliance can be made on one entity, which can be accepted to be CUP, so far as the business of the assessee and its affiliates are concerned, where the TP study identified the uncont ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... psum amount of $3 million in 20 equal quarterly instalments for the availing the benefits of such research and development activities pursued by the associate entity. 10.2 As regards the reasons given by the assessee regarding the arms length nature of this transaction, the only submission made by the assessee in the study report at paragraph 5.53 is as follows. Based on understanding provided by SOS Switzerland, that such research and development fees paid by the assessee represents the costs attributable to it using a certain apportionment mechanism, it would be possible to conclude that such payment is not inconsistent with the arms length principle . 10.3 In support of this transaction the assessee has furnished a copy of the FIPB approval dated September 26, 2000 which permits the remittance of a sum of USD 3 million payable in 20 equal quarterly instalments of USD 1.5 million each. The assessee has also filed a copy of letter dated October 4, 2002 wherein the assessee has agreed to bear these costs. Regarding the ALP for this transaction the assessee has merely stated that it is a cost allocation and hence as no markup is involved, it is complies with the arm s length pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... may have to bear. In fact there is no basis for the 70% allocation made by the associate entity. Hence the allocation made to the assessee is held to be not relatable to it and the ALP for the same is determined at Nil, 28. The TPO refers to the assessee s working and observes, In this connection, the assessee was requested by this office to justify e various international transactions by performing a entity level TNM method. In this connection, this office had undertaken a search in the database to identify other companies engaged in similar activities. On the basis of the information obtained a list of cases was forwarded to the assessee which according to this office were considered to be comparable to it. Subsequently the assessee has undertaken another search on the specific direction of this office (on without prejudice basis) in the database and through their letter dated 4.3.2005 have submitted that the average margins of comparable companies during the previous year was 15.62% [details reproduced at para 7(a) earlier]. As against the same the assessee s margins during the relevant period was 6.63% on cost. The assessee s costs and revenues are as under (Rs. In thousa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rly lay down the method of sharing such benefit in case of cost sharing arrangements. And therefore in absence of such categoric arrangement I am unable to accede to the arguments of the appellant that expenses were justified for allowance of the same in term s length transactions. Further as has been seen that FIPB approval cannot be treated as acceptance of arm s length price more so in view of the specific method prescribed under the Act. Thus considering the fact that in cost sharing arrangement appellant company s terms of sharing of benefit being not defined expenses can not be said to meet the criteria laid down under the statute or for that matter OECD model and as such I am also not inclined to accept the arguments of the appellant in this regard and as such disallowance made by the AO in this regard is also confirmed. The CIT(A), thus confirmed the addition, suggested by the TPO. 30. The assessee is now before the ITAT. Before us, the AR submits that the case of the assessee is covered by the Hon ble Bombay High Court in its case, wherein, the Hon ble Bombay High Court had set aside the reopening on this issue, holding that the payments had been made as per governmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is required to be made on account of technical fees. 2. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) has failed to appreciate that no evidence was produced by the assessee to establish that the payment made for Area, Sector Functions (ASF) costs would be Rs 4.20 crores and hence the arm s length price of ASF costs should have been restricted to the difference between the technical fees paid of Rs. 5.10 crores and the license fees paid of Rs. 3.22 crores . 44. The assessee, in CO No. 245/Mum/2012 has raised the following grounds : 1. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) failed to appreciate that the remittance of license fee even if computed at the rate of 3% of turnover was at arm s length.. 2. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) failed to appreciate that the remittance of technical fees (comprising of license fee and Area, Sector and Function (ASF) Cists(m being specifically approved by the Foreign Investment Promotion Board, was at arm s length . 45. Ground no. 1 is already covered by our detailed observations in ITA no. 2406/Mum/2006, where we have accep ..... X X X X Extracts X X X X X X X X Extracts X X X X
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