TMI Blog2014 (12) TMI 560X X X X Extracts X X X X X X X X Extracts X X X X ..... ction of payment of Royalty on exports made to AE – Held that:- As decided in M/s Hero MotoCorp Limited Versus Additional Commissioner of Income tax [2013 (9) TMI 796 - ITAT DELHI] - the payment of royalty and the export commission are for two different purposes - the motorcycles which were exported by the assessee, were manufactured by using the technical know-how provided by HMCL under the technical know-how agreement - Therefore, royalty is payable on such manufacturing of goods - the export sale value was more than the domestic sale rate and the assessee has given a detailed working, which is enclosed with this order in the form of Annexure-I - the assessee has reduced the export commission - by export to the AE of Honda Japan, the assessee has been benefited and was not at a loss - The further finding of the TPO that the position of the assessee company with regard to export was that of a contract manufacturer is without any basis and in fact contrary to the facts on record - thus, there is no justification for disallowance of the royalty on the export – thus, the order of the TPO is directed to consider the claim of the assessee that the Agreement entered into by the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pany as per record is engaged in the business of manufacturing of portable generating sets, I.C. Engines, water pumping sets and manufacture and processing of pressure Die Casting parts. As a result of the additions made the income was assessed at ₹ 55,57,99,420/-. 3. Aggrieved by the additions the assessee has raised the following grounds before us:- General: 1. That the impugned order of assessment framed by the assessing officer in pursuance of the directions of the Dispute Resolution Panel (hereinafter referred to as 'DRP') under Section 143(3) read with Section 144C of the Income-tax Act, 1961 ( 'Act'), is bad in law, violative of principles of natural justice and void ab-initio. 1.1 That assessing officer erred on facts and in law in computing the income of the appellant at ₹ 55,57,99,420 against the returned total income of ₹ 37,15,72,026. Transfer Pricing Issues: 2.That the assessing officer erred on facts and in law in making addition to the income of the appellant to the extent of ₹ 9,81, 11,429 on account of the alleged difference in the arm's length price of international transactions. Advertisement, marketin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t (1) no independent person, particularly in a long term arrangement, would forego the compensation for the additional marketing activities undertaken by the appellant. (ii) the AE needs to compensate the appellant as it had been found that the appellant had incurred excessive AMP expenses, and development and promotion of a brand in India directly benefitted the AE also. 3.9 That the assessing officer/DRP erred in deeming an international transaction of provision of service allegedly applying Bright Line Test (BLT) holding that the AMP/Sales ratio of the appellant allegedly exceeds the AMP/Sales ratio of comparable companies: 3.10 That the assessing officer erred on facts and in law in not appreciating that bright line limit is not a prescribed method under the purview of section 92C of the Act. 3.11 That the assessing officer erred on facts and in law in not appreciating that the power of the TPO is restricted to the determination of arm's length price of international transactions by applying any of the prescribed method and not to make disallowance of business expenses incurred by the appellant. 3.12 That the assessing officer erred on facts and in law in not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed in not appreciating that no royalty is being paid by the appellant for the use of brand name 'Honda'. 3.20.That the assessing officer/ DRP erred on facts and in law in holding that the appellant has rendered service to the AEs by incurring the AMP expense and by holding that markup has to be earned by the appellant in respect of the AMP expenses, alleged to have incurred for and on behalf of the AE. 3.21 Without prejudice, the assessing officer/DRP erred on facts and in law in not appreciating that markup, if at all, had to be restricted to the value added expenses incurred by the appellant for providing the alleged service in the nature of brand promotion. Royalty in respect of exports made to associated enterprises: 4.That the Transfer Pricing Officer erred on facts and in law in holding that arm's length price of international transactions of payment of royalty on exports made to the associated enterprises of ₹ 53,34,000 was nil. 4.1 That the Transfer Pricing Officer erred on facts and in law in holding that the assessee was acting as a contract manufacturer and hence royalty paid as percentage of sale to the associated enterprises is not at arm& ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iture on the ground that- (i) In the event of the expiration of the contract, the assessee may continue to use the know-hew and the Industrial Property Rights for the purposes of manufacture, assembly, procurement, sale, delivery and service of the products and the parts. (ii) The terms of agreement are quite comprehensive and the whole technical know-how to set up the business of the appellant are provided by Honda. (iii) The assessee has paid the royalty for the acquisition of an indivisible, non-transferable and exclusive license in favour of the appellant to manufacture and assemble the products and the parts in the territory, and to sell and distribute in the territory the products and the parts so manufactured or assembled or procured. (iv) The assessee can grant indivisible and non-transferable sublicenses to use the know-how to Indian persons, companies or other legal entities exclusive privilege of manufacturing and selling the products. (v) In the event of the expiration of the contract, the appellant may continue to use the know-how and the Industrial property Rights is capital in nature. 6. That the assessing officer erred on facts and in law in disall ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee for technical service as per section 9(1)(vi)(b) or section 9(1)(vii)(b) of the Act respectively. 6.8 That the assessing officer erred on facts and in law in alternatively holding payment of export commission to be in the nature of capital expenditure not allowable under section 37(1) of the Act on the ground that the same was incurred for acquiring permission / license for making export. 7. That the assessing officer erred on facts and in law in levying interest under Section 234B and Section 234C of the Act. The appellant craves leave to add, amend, alter or vary, any of the aforesaid grounds of appeal before or at the time of hearing of the appeal and consider each of the grounds as without prejudice to the other grounds of appeal. 3.1. Addressing the Grounds, Ld. AR submitted that Ground Nos.-1 2 may be treated as general grounds. Addressing Ground No.-3 wherein transfer pricing issues have been raised it was submitted that the assessee had claimed the AMP expenses which were disallowed and adjustment to the extent of ₹ 8,27,61,669/- has been made. The said ground alongwith the various subgrounds it was submitted may be restored to the file of the TPO as ne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Canon India Pvt. Ltd. wherein the hearing has concluded and the judgement is reserved as to the extent the Hon ble High Court decides the issue the application of the decision of the Special bench in L.G. Electronics case may need to be modified. 4. The Ld. CIT DR, Sh. Yogesh Verma submitted that he has no objection if the issue is restored to be decided in terms of the decision of the Special Bench. It was further stated by him that the TPO necessarily would also take into consideration whatever other decisions are available either of the Tribunal or of the Hon ble High Court as such it need not be specifically so directed. 5. We have heard the rival submissions and perused the material available on record. The record shows that in the year under consideration the assessee incurred an expenditure of ₹ 12,39,19,327/-. As per the assessee s claim it was 4.46% of the sales. The following break up of expenses was provided:- S. No. Name of expenses Amount (Rs. Thousands) 1. Commission on sales 1,22,95,327 2. Advertisement and publicity 6,26,52,000 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n principal to principal basis and has received the sale consideration. In view of the above, in out opinion, there is no justification for disallowance of the royalty on the export. 6.1. It was his submission that the payment of royalty has been made in terms of technical knowhow agreement which has due approvals of Government of India in consideration for providing of technical knowhow and technical information, assistance etc. for manufacture of finished products which in the case of the assessee gensets as opposed to two wheelers by the sister concern which was the only difference otherwise all terms and arguments are pari materia with the assessee s terms and agreements with its AE. It was submitted that the assessee has wrongly been considered a contract manufacturer by the Revenue and is infact in regard to the sales to the AE is acting on a principal to principal basis wherein the price is agreed upon by the parties. In the facts of the present case it was submitted the TPO has arbitrarily characterized the assessee as a contract manufacturer without challenging FAR analysis conducted which would clearly establish that the assessee is acting as an entrepreneur in respec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he material placed before us. We have already considered similar issue while considering the disallowance of royalty and the export commission. While considering the disallowance of the export commission, we have noted that the payment of royalty and the export commission are for two different purposes. The assessee is paying royalty as per technical know-how agreement dated 02.06.2004 with HMCL. As per this agreement, the assessee is entitled to use technical know-how provided by HMCL for manufacture and sale of two wheelers and parts. Royalty is to be paid for the goods manufactured by the assessee, whether sold within India or outside India. It is not in dispute that the motorcycles which were exported by the assessee, were manufactured by using the technical know-how provided by HMCL under the technical know-how agreement dated 02.06.2004. Therefore, royalty is payable on such manufacturing of goods. The contention of the learned TPO that the 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the AE in asmuch as the terms and conditions impacting the issue are materially similar and accordingly thereafter considering the decision of the Co-ordinate Bench in the case of sister concern, he shall pass a speaking order in accordance with law after giving the assessee a reasonable opportunity of being heard. The assessee consequently would be at liberty to place relevant facts in support of its claim before the TPO. 8.2. In view of the above, Ground No.-4 of the assessee is allowed for statistical purposes. 9. The next issue agitated by the assessee vide Ground No.-5 to 5.4 is found discussed in the draft assessment order at pages 3 to 13 and in the DRP s order at page 7 para 5.1. The relevant facts are that the assessee paid royalty of ₹ 8,77,14,255/- and technical grounded fee of ₹ 1,74,64,000/- to M/s Honda Motor Company, Japan. The AO held the expenditure to be capital expenditure and disallowed the same. The assessee before the DRP placed reliance upon similar treatment given by the AO in 2007-08 assessment year where he had disallowed 25% of the expenditure on similar facts and circumstances. The expenditure was claimed to be revenue in nature and no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hi C Bench of the Tribunal by detailed finding in paras 7.4 to 7.7 pages 22 to 40 confirmed the relief granted by the CIT(A) holding that the comparative clauses based on the agreement in the case of the assessee and its sister concern were pari materia and consequently the payments were revenue in nature. Respectfully following the order of the Co-ordinate Bench in the immediately preceding assessment year, Ground Nos.-5 to 5.4 are allowed. 13. The next issue agitated by the assessee in the present appeal is addressed by Ground Nos.-6 to 6.8. A perusal of the record shows that the payment of ₹ 5,19,96,673/- paid to M/s Honda Motors Company, Japan was disallowed by the AO who held it to be in the nature of royalty and as such a disallowance of the above amount was made as TDS thereon was not deducted. The issue challenged before the DRP was confirmed on the reasoning that it has not been finally settled as such it was considered not appropriate to interfere. The Ld. AR relies upon the order of the Co-ordinate Bench in assessee s own case in the immediately preceding assessment year cited supra. The Ld. CIT DR has placed reliance upon the orders of the authorities below h ..... X X X X Extracts X X X X X X X X Extracts X X X X
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