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TMI Blog2014 (6) TMI 640X X X X Extracts X X X X X X X X Extracts X X X X ..... ncome of Rs. 41,22,28,870/- by making additions on account of Transfer Pricing adjustments, disallowance of expenses in terms of section 14A of the Act and disallowance of royalty and technical fees paid by the assessee. 3. In ground no. 2 to 2.10 in appeal the assessee agitated addition of Rs. 4,89,58,700 on account of transfer pricing adjustments. The AO noticed that the assessee had made payment of Rs. 14,21,48,282/- as a royalty to its associate enterprise namely Showa Corporation. The assessee has also made purchases (import of components, parts etc.). In respect of royalty, the assessee had claimed that the royalty payment has been made @ 3% on domestic sales and exports. This payment was made to the associate enterprise as per approval dated 14.6.2002 granted by the Central Govt. (SIA, Ministry of Commerce and Industry) and relied upon the comparable uncontrolled price of payment of royalty by the unrelated parties to Showa Corporation, Japan. The assessee submitted that the payment of royalty was at arm's length price by applying the CUP method. As regards the import of components / parts etc. the assessee applied Transactional Net Margin Method (TNMM) as most appropriate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the appellant at 4.50% did not exclude non operating items which is contrary to its own working with respect to another comparable namely Garbiel India Ltd. The operating profit margin to sales worked out at 5.2% by the assessee is factually correct. The same needs to be adopted for the purpose of benchmarking analysis as against 4.58% considered by the TPO. Thirdly, the operating profit margin worked out at 3.82% in the case of other comparable namely Gabriel India Ltd. is also not appropriate as the TPO has not correctly computed the capacity utilization of the assessee and Gabriel India by utilizing the correct data from the financial statements. He did not exclude the prior period expenses, extra ordinary items and non operating expenses which items do not constitute part of the operating income. If the assessee's claim is accepted in the right perspective then operating profit of M/s Gabriel India Ltd. would be 3.76% only. The exercise conducted in making transfer pricing adjustments was without affording the opportunity to point out the mistakes in the proceedings so undertaken by the Assessing Authority. In the alternate, adjustments, if any, could at best be restricted t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he adhoc disallowance of expenses to the tune of Rs. 1,24,746/-. 11.2 The assessee's case is that the AO has erred in interpreting the statue correctly in as much as the phrase used in Section 14A is "expenditure incurred". This expenditure incurred therefore, should have proximate nexus with the exempted income and no imaginary or notional expenses can be disallowed. Reliance has been placed on the following the judgments - CIT vs. Walfort Share and Stock Brokers in SLP(C) NO. 19422 of 2009. - Godrej & Boyce Mfg. Co. Ltd. vs. CIT : 328 ITR 81. - Maxopp Investment Ltd. vs. CIT : 347 ITR 272 11.3 It is also contended that the expenses were incurred during the year for the purpose of other regular business of the company and it had no relation with earning of dividend income, which was a passive income received pursuant investments of surplus available from time to time. No expenses were incurred to make investment in mutual funds out of the interest free funds. No borrowed funds were utilized in making such investments. The disallowance so made, therefore, needs to be deleted. 12. On the other hand, Ld. DR relied upon the order of the Assessing Officer. 13. Heard parties with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y capital asset or a benefit of enduring nature, in as much as in the capital field. The Hon'ble High Court Bench of the Tribunal in the case of Hero MotoCorp Ltd. (Earlier Known as Hero Honda Motor Co. Ltd.) too, deleted similar disallowance made by the Assessing Officer, in the assessment years 2000-01, 2001-02, (ITS Nos. 716 & 717/Del/2008), 2002-03 (ITA No. 1052/Del/2011), 2006-07 (ITA NOs. 5130/Del/2010) and 2007-08 (ITA No. 1980/Del/2012) wherein the annual payment of royalty was held to be revenue expenditure. 14.1 The Delhi Bench of the Tribunal in the appellant's own case for assessment years 1993-94 to 1995-96, too, deleted the similar disallowance made by the Assessing Officer in those years. The order of the tribunal has since been upheld by the Hon'ble Delhi High Court vide its order dated 6.9.2010. 14.2 Following its earlier order, the Delhi Bench of the Tribunal in the appellant's case for asstt. years 2002-03 to 2004-05, too, deleted the similar disallowance made by the Assessing Officer in those years. Revenue's appeal against the order of the Tribunal for the asstt. years 2002-03, 2003-04 and 2004-05 in ITA Nos. 94, 94, and 96/2014 are dismissed by the Hon'ble D ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d the CUP method and applied the Transactional Net Margin Method (TNMM) to the international transactions pertaining to royalty. The assessee also claimed that the payment of royalty was for making available new technology with respect to the shock absorbers manufactured by the assessee. Assessee also claimed that the agreement had approval of Govt. of India and the entire benefit of the said payment is to the assessee alone. Various objections raised by the assessee before the DRP and stated in para 3 of the order dated 31.7.2011 made by the DRP. DRP, however, did not find merit in the objections raised by the assessee as the substance of the transaction was to be judged as to whether the transaction is at arm's length or not. In support it relied upon the judgment in the case of Coca Cola Pvt. Ltd. 309 ITR 194 (P&H). After considering the entire gamut before it, the DRP opined as under:- "i) The assessee is making separate payment for designs and drawing, technical guidance etc. There is no apparent need to make a separate payment of royalty. No independent party would do so. ii) The assessee has not been able to give details of the cost that the AE has incurred in the develop ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oval granted by the Central Government, the payment of royalty needs to be considered at arm's length. Reliance has been placed of the judgement of Delhi Bench, Tribunal in the case of Sona Okegawa Precision Forgings Ltd. vs. Addl. CIT in ITA No. 4781/Del/2010 and also includes of SGS India Pvt. Ltd. vs. ACIT ITA 2406/Mum/2006. The assessee's counsel further contends that the payment of royalty @ 3% to the associate enterprise is on prevailing rate of royalty for spare parts in the industry and made reference to the comparables. It was, therefore, not correct to say that the payment of royalty to AE was unjustified, when the TPO did not bring on record any evidence to establish the arm's length price. That apart the TPO erroneously came to the conclusion that TNMM is merely a method to test the value of transaction and it comes into play only after veracity of the transfer has been determined. The TPO has proved to compute the ALP royalty paid by the appellant as NIL value by applying the CUP method. Whereas the CUP method can be applied only for determining the ALP on the basis of prices paid/ charged in the course of uncontrolled transactions. The TPO has hypothetical determined ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ovisions relating to avoidance of tax. The assesse's claim for deduction of royalty in the earlier years was allowed under the general provisions for computation of its business income as the payments were found wholly and exclusively for the purpose of its business. It is a settled proposition of law that special provisions shall prevail upon the general provisions. The Assessing Authority therefore, cannot be said have erred in embarking enquiry into arms length price with respect to the royalty payment made by the assessee with respect to the existing agreement by the assessee with its associate enterprise. The DRP in its order has placed reliance on the judgment in the case of Coca Cola Pvt. Ltd. (309 ITR 194) (P&H) for the proposition that the substance of the transaction has to be judged as to whether the transaction is at arm's length or not. Assessee was therefore, under a duty to have satisfied him. The Assessee has raised various new pleas before us in order to substantiate it claim, through written submission that the payment of royalty@ 3% in line of activity is at arm's length, but the same has not been tested in the manner has projected its grievance before the Appell ..... X X X X Extracts X X X X X X X X Extracts X X X X
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