TMI Blog2015 (5) TMI 350X X X X Extracts X X X X X X X X Extracts X X X X ..... amined by the TPO. For the above said purpose, the Transfer Pricing issue is restored to AO/TPO for denovo consideration. - Decided in favour of assessee for statistical purposes. Payment of royalty for export to Associated Enterprises (AEs) - Held that:- 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. There is no justification for disallowance of royalty on the export made to the AEs. Accordingly, the addition made by the AO/TPO by determining the ALP of royalty on exports to the AEs at “nil” is deleted - Decided in favour of assessee. Sales tools expense disallowed - expense incurred by t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d payment of royalty at ALP in respect of domestic sales and export sales made to non-AE s. However, he disputed the payment of royalty in respect of exports made to AE s. In doing so, the TPO held that the assessee is a contract manufacturer . Accordingly, he opined that since assessee is making a part of its sales to its related parties and benefit of producing components is reaped by the AE, the payment of royalty did not conform to the arm s length principle. He, therefore, made the TP adjustment amounting to ₹ 1,22,06,657/- in respect of payment of royalty for exports to AEs. The Assessing Officer adopted the above figures from TPO s order as such, without any further evaluation. 4. Aggrieved, the assessee preferred an application before the Disputes Resolution Panel (DRP). The DRP vide its directions dated 24.09.2012 u/s 144C(5) rejected the assessee s plea and confirmed the draft assessment order with regard to the transfer pricing adjustment. The assessee being aggrieved is in appeal before us. 5. As regards the issue with regard to payment of export commission, it was submitted by the ld. Counsel for the assessee that the matter needs to be restored to the AO/ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... perts on his rolls, and yet he may decide to engage services of outside experts for auditing and management consultancy; it is not for the revenue officers to question Assessee's wisdom in doing so. The Transfer Pricing Officer was not only going much beyond his powers in questioning commercial wisdom of Assessee's decision to take benefit of expertise of Dresser Rand US, but also beyond the powers of the Assessing Officer. We do not approve this approach of the revenue authorities. We have further noticed that the Transfer Pricing Officer has made several observations to the effect that, as evident from the analysis of financial performance, the assessee did not benefit, in terms of financial results, from these services. This analysis is also completely irrelevant, because whether a particular expense on services received actually benefits an Assessee in monetary terms or not even a consideration for its being allowed as a deduction in computation of income, and, by no stretch of logic, it can have any role in determining arm's length price of that service. When evaluating the arm's length price of a service, it is wholly irrelevant as to whether the assessee bene ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and that such costs are comparable. When commensurate benefit against the payment of services is not derived, then the Transfer Pricing Officer is justified in making an adjustment under the arm's length price. 38. In the case on hand, the Transfer Pricing Officer has determined the arm's length price at nil keeping in view the factual position as to whether in a comparable case, similar payments would have been made or not in terms of the agreements. This is a case where the assessee has not determined the arm's length price. The burden is initially on the assessee to determine the arm's length price. Thus, the argument of the assessee that the Transfer Pricing Officer has exceeded his jurisdiction by disallowing certain expenditure, is against the facts. The Transfer Pricing Officer has not disallowed any expenditure. Only the arm's length price was determined. It was the Assessing Officer who computed the income by adopting the arm's length price decided by the Transfer Pricing Officer at nil . This is a slender yet crucial distinction that restricts the authority of the TPO. Whilst the report of the TPO in this case ultimately noted that the A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dance with law. 7. The Hon ble High Court categorically held that the TPO is to conduct a Transfer Pricing analysis to determine the arm s length price (ALP) and not to determine whether there is a service from which assessee has derived benefit or not. The Hon ble Court held that the exercise to determine whether assessee had derived any benefit or not from payment of such management fee is to be examined by the AO and appropriate disallowance u/s 37 is called for. In the instant case, the TPO had determined the ALP of payment of export commission at NIL by holding that the assessee did not derive any benefit from services rendered by the AE. Therefore, keeping in view the dictum laid down by the judgment of the Hon ble Jurisdictional High Court, necessarily AO as to determine whether the assessee has derived any benefit from payment of export commission and if any benefit had derived, whether such payment is commensurate to comparable transaction has to be examined by the TPO. For the above said purpose, the Transfer Pricing issue is restored to AO/TPO for denovo consideration. We order accordingly. 8. As regards the payment of royalty, the TPO disallowed the same, prima ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n. In our opinion this fact has to be examined under each situation. Though we are of the opinion that this statement holds good but at the same time, if an enterprise is imparting a technology for manufacture off shore and imports are made then the payment of royalty is not justified. In such a situation, the technology is reaped by the assessee for its own sales but only for exports to the entity or the group from whom the technology flows in. The TPO has correctly determined the ALP of royalty on export sales to its AEs at NIL. 10. Aggrieved, the assessee is in appeal before us. It was submitted by the ld. Counsel that the AO/TPO has allowed the royalty payment on domestic sales as well as export sales to the non-AEs. It was stated that the assessee is not a contract manufacturer and on the contrary, it is a full risk bearing independent manufacturer that also export its products to AE and non-AEs. It was submitted that the same is also evident from the financial results of the assessee that it has independent sales, both domestic as well as exports. The assessee derives premium price of 30% on export of some of the products, net of export commission for the assessment year ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any third party the Parts for repair or replacement of the Products or other products of the LICENSOR. ARTICLE 3 - FURNISHING OF TECHNICAL INFORMATION 3.1 During the term of this Agreement, the LICENSOR shall furnish the LICENSEE with the Technical Information and Technical Material to the extent deemed necessary by the LICENSOR, by disclosing it in a documentary form, and advising them as to the application of the Technical Information and/or otherwise, in the manner mentioned in this Article 3. 3.2 Furnishing of the Technical Information in documentary form, that is the Technical Materials, the items of which are described in Exhibit II hereto as written in the English language, shall be effected within one year after the Effective Date hereof, with regard to the Technical Information existing as of the Effective Date hereof, and shall be effected from time to time at the time when the LICENSOR deems it necessary to do so, or effected within one year from the day when the LICENSOR approves the LICENSEE's request, or effected within one year from the day when the LICENSOR and the LICENSEE agree to a Model Change of the Products pursuant to Article 1 (2) hereof. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... NSOR of any payment tendered hereunder shall not constitute the LICENSOR's acceptance of any account, schedule or figure on which such payment is based. All payments made or to be made by the LICENSEE to the LICENSOR hereunder shall not be refundable to the LICENSEE, even if any of the Intellectual Property Rights licensed to the LICENSEE will have been extinguished or otherwise come into nonexistence for any reason whatsoever, or even if any of the Know- How contained in the Information furnished to the LICENSEE will have become public for any reason whatsoever. If the LICENSEE fails to make any payment hereunder on the due date, the LICENSEE agrees to pay a late payment fee in the amount equivalent to four percent (4%) per annum calculated on the basis of a 365-day year, subject to any regulatory approvals, that may be required. As per the agreement, the assessee is entitled to use the technology knowhow provided by the M/s. Honda Motors Company Ltd., Japan for manufacturer and sale of two wheelers and parts. The assessee is liable to pay the royalty of the goods manufactured whether the same is sold in India or outside India. It is not in dispute that the goods which are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. While discussing the disallowance of export commission, we have discussed this issue at length and have noted that even after reducing the export commission, the assessee derived the benefit of ₹ 13.05 crores by export. At the cost of repetition, we would like to mention that the export sale value was more than the domestic sale rate and the assessee has given a detailed working thereof, which is enclosed with this order in the form of Annexure-I. In the above working, the assessee has reduced the export commission. Therefore, 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, in our opinion, is without any basis 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 principa ..... X X X X Extracts X X X X X X X X Extracts X X X X
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