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2015 (5) TMI 350 - ITAT DELHI

2015 (5) TMI 350 - ITAT DELHI - TMI - Transfer pricing adjustment - payment of export commission - Held that:- 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 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 c .....

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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. - 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 abo .....

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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 the Assessee for subsidizing 50 percent of the basic cost of standard tools / fixtures for standardization of ‘Honda Exclusive Authorized Dealers [‘HEAD’] outlets - Held that:- It i .....

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AND SHRI GEORGE GEORGE K, JJ. For The Assessee : Shri Vijay Iyer, CA For The Revenue : Shri Judy James, Standing Counsel DR ORDER PER GEORGE GEORGE K., JM : This appeal, at the instance of the assessee, is directed against the final assessment order passed u/s 143(3) read with section 144C of the Income-tax Act, 1961 (order dated 29.11.2012). The relevant assessment year is 2008-09. 2. The assessee has primarily raised two grounds. The first ground relates to transfer pricing adjustments amount .....

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rvice of two wheelers, parts and accessories thereof. The assessee is a wholly owned subsidiary of M/s. Honda Motors Company Ltd., Japan. The assessee had reported ten international transactions. On reference made by the Assessing Officer, the Transfer Pricing Officer (TPO) accepted eight international transactions at Arm s Length Price (ALP). As regards the international transaction of payment of export commission , the TPO held that no services were rendered by the AEs to deserve the export co .....

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ts 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 direction .....

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kefield (India) (P.) Ltd. reported in [2014] 46 taxmann.com 317 (Delhi), since the export commission has been disallowed primarily by the TPO for the reason that assessee has not received any benefit for the payment of such sum. The ld. DR also did not have any objection with regard to remanding of the issue of export commission to AO/TPO. 6. We have heard rival submissions and perused the material on record. The Hon ble Jurisdictional High Court in the case of CIT-I Vs. Cushman and Wakefield (I .....

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That aspect of the exercise is left to the AO. This distinction was made clear by the IT AT in Dresser- Rand India (P.) Ltd v. Addl. CIT (2011) 47 SOT 423/13 taxxmann. com 82 (Mum.): 8. We find that the basic reason of the Transfer Pricing Officer's determination of ALP of the services received under cost contribution arrangement as 'NIL' is his perception that the assessee did not need these services at all, as the assessee had sufficient experts of his own who were competent enoug .....

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mentary that how an Assessee conducts his business is entirely his prerogative and it is not for the revenue authorities to decide what is necessary for an Assessee and what is not. An Assessee may have any number of qualified accountants and management experts 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 .....

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s 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 benefits from it or not; the real question which .....

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ations which are not at all relevant in the context of determining the arm's length price of the costs incurred by the assessee in cost contribution arrangement. We have also noted that the stand of the revenue authorities in this case is that no services were rendered by the AE at all, and that since there is No. evidence of services having been rendered at all, the arm's length price of these services is 'nil'. 35. The TPO's Report is, subsequent to the Finance Act, 2007, b .....

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9;nil' given that an independent entity in a comparable transaction would not pay any amount. However, this is different from the TPO stating that the assessee did not benefit from these services, which amounts to disallowing expenditure. That decision is outside the authority of the TPO. This aspect was made clear by the ITAT in Delloite Consulting India (P.) Ltd. v. Dy. CIT/ITO [2012] 137 ITD 21122 taxmann.com 107 (Mum): 37. On the issue as to whether the Transfer Pricing Officer is empowe .....

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er 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. Thu .....

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. Whilst the report of the TPO in this case ultimately noted that the ALP was 'nil', since a comparable entity would pay 'nil' amount for these services, this Court noted that remarks concerning, and the final decision relating to, benefit arising from these services are properly reserved for the AO. 36. In this case, the issue is whether an independent entity would have paid for such services. Importantly, in reaching this conclusion, neither the Revenue, nor this Court, must qu .....

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hey require interaction abroad. Whether it is commercially prudent or not to employ outsiders to conduct this activity is a matter that lies within the assessee's exclusive domain, and cannot be second guessed by the Revenue. 37. At this point, it is noteworthy that the circumstance that the assessee had market research facilities in India does not correspond to the performance of services abroad, especially in relation to client interaction services located outside India - albeit for ultima .....

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the activities of Mr. Braganza and Mr. Choudhary), and the attendant benefit to the assessee, have not been considered till date. This must be provided, in addition to a consideration of the ALP vis-avis the total cost claimed by these AEs. To this extent, for the consideration of ALP in respect of these transactions, the matter is remanded back to the file of the concerned AO, for an ALP assessment by the TPO, followed by the AO's assessment order in accordance with law. 7. The Hon ble High .....

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f 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 .....

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in India and then a part of it is exported to 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 is not fixed by market forces. Whether the sales of the assessee are made wi .....

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es to its related parties and the benefit of producing components is reaped by AE, the payment of charges for royalty does not conform to the arm's length principle. This view has been upheld in the recent case of ACIT v. Sono Okegawa Precision Forging Ltd. [2010-TII-41-ITAT-DEL-TP], where it was held that payment of royalty by a contract manufacturer is not at arm's length. Based on the discussion above the ALP of the transaction related to payment of royalty for exports to AE of ₹ .....

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technology without a compensation. 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 corre .....

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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 2008-09. The assessee has also earned a profit of 7% in export segment against the profit of 2.7% in domestic segment during the relevant year. The ld. AR has further submitted that the AO/TPO has not disputed at any point of time the transfer of technology. The only que .....

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on-AEs wherein it has showed that the price of the exports to AEs is much higher than to the non- AEs, even after considering the royalty and commission payments. The ld. AR took us through the technical know-how agreement dated 13.07.2000 and the amendments to the agreements on December 2006 and November 2007. The ld. AR has also placed reliance on the order of the Tribunal in assessee s own sister concern, namely, M/s. Hero MotoCorp Limited vs. Addl.CIT in ITA No.5130/Del/2010 order dated 23.1 .....

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CLE 2 - GRANT OF LICENSE 2.1 Subject to the terms and conditions herein contained, the LICENSOR hereby grants to the LICENSEE an indivisible and non-transferable exclusive right and license, without the right to grant sublicenses, to manufacture, use and sell the Products and the Licensed Parts within the Territory under the Intellectual Property Rights and by using the Technical Information and Technical Material provided by the LICENSOR to the LICENSEE hereunder. 2.2 Notwithstanding the provis .....

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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 th .....

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ICENSEE shall pay to the LICENSOR the following : a) the amount of lump-sum fee in respect of the initial model at the rate specified in the Exhibit I hereto . b) the amount of additional lump-sum fee and the manner of payment thereof shall, for each additional model or type of product as agreed upon by the parties, be decided under New Model Agreement for each such additional model or type of product. c) the amount of additional Jump-sum fee and the manner of payment thereof shall, for each mod .....

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ed by the LICENSOR in three (3) installments in accordance with the following payment schedule; (a) The first installment in the amount of six hundred sixty six thousand six hundred sixty six (US$666.666) shall be paid within sixty (60) days after the day on which the manufacture of the Products on a commercial basis has started; provided that such day shall be confirmed in writing by the parties hereto. (b) The second installment in the amount of six hundred sixty six thousand six hundred sixty .....

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ar of any deductions for taxes or other charges in the Territory, except for the taxes and other governmental charges set forth in Article 12 hereof. Receipt by the LICENSOR 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 .....

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ay 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 exported by the assessee were manufactured by using technical know-how provided by M/s. Honda Motors Company Ltd., Japan under agreeme .....

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Based on the submissions made before us and also the chart showing the price earned by the assessee from exports of goods to the AEs as well as non-AEs, the assessee has earned a premium which would not be in the case of a contract manufacturer. In case of sister concern of the assessee, identical payment of royalty was held to be allowable by the Tribunal in the case of M/s. Hero MotoCorp Ltd. in ITA No.5130/Del/2010. The relevant finding of the Tribunal reads as under :- 92. We have heard both .....

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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 92 ITA- 5130/Del/2010 motorcycles which were exported by the assessee, were manufactured by using the technical knowhow 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 t .....

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ave 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 ben .....

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deration. 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 93 ITA- 5130/Del/2010 that the payment or royalty was a revenue expenditure, incurred for the purpose of business. Accordingly, the addition made by the TPO by deter .....

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