TMI Blog2012 (12) TMI 1041X X X X Extracts X X X X X X X X Extracts X X X X ..... rdinate bench of this Tribunal dated 7th November, 2012 (supra) passed in assessee’s own case - decided in favor of assessee - I.T.A. No.6060/Mum/2011. - - - Dated:- 19-12-2012 - Shri P.M.Jagtap, Accountant Member and Shri Vijay Pal Rao, Judicial Member. For the Appellant : Shri R. Murlidhar. For the Respondent : Shri Ajeet Kumar Jain. ORDER Per P.M. Jagtap, A.M. This appeal filed by the assessee is directed against the order of learned CIT(Appeals)-15, Mumbai dated 28-06-2011 and the solitary issue arising out of the same for our consideration relates to the addition made by the AO and sustained by the learned CIT(Appeals) to the extent of ₹ 64,75,807/- by way of transfer prising (T.P.) adjustment on account of royalty. 2. The assessee in the present case is a Company which is engaged in the business of manufacturing of pesticides and its intermediate chemicals. The return of income for the year under consideration was filed by it on 28-10-2005. During the course of assessment proceedings, the AO noticed that the assessee has paid a royalty amounting to ₹ 67,93,080/- being 5% of the net sales to its associate enterprise M/s Sumitomo Ch ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of assessee s agreements with the AE that the functions being performed by the assessee is nothing but contract manufacturing. 2) In a contract manufacturing arrangement there is no justification for payment of royalty for use of technical know-how etc. Since it is responsibility of the principal to provide the same to the contract manufacturer. Accordingly, addition of ₹ 67,93,080/- was made by the AO to the total income of the assessee relying on the order of the TPO by way of TP adjustment in the assessment completed u/s 143(3) vide an order dated 26-11-2008. 4. Against the order passed by the AO u/s 143(3), an appeal was preferred by the assessee before the learned CIT(Appeals) challenging the addition made by way of TP adjustment in respect of royalty payment. It was submitted on behalf of the assessee before the learned CIT(Appeals) that all the purchases of raw material, packing material and other consumables required for the manufacturing having been purchased by it on its own account and the sales tax also having been paid on the sale of goods manufactured, it was not a case of contract manufacturing as held by the AO/TPO. It was also pointed out that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e manufactured goods are sold fully to third parties. However, if such goods are manufactured and sold within the group, I agree with the AO/TPO that there is no justification for royalty payment. Since the Japanese Company holds 90% share of the appellant, it automatically becomes a party to enjoy the profits earned by the appellant and hence the royalty over and above share profits would not be justified under the facts and circumstances of the case and when the free purchase of raw material, free commercial exploitation of the know how and sales to the third parties are not permitted at the freedom of the appellant. I, therefore, hold that the arms length price of royalty in respect of finished product sold to the India AE will be Nil. So far as goods sold to third parties are concerned, the appellant will be entitled for deduction of corresponding royalty. 3.11 As far as application of Section 92C(3) is concerned it is mentioned that the benchmarking down by the appellant is not found to be acceptable in the facts of the case. The clause (a) and (c) of section 92C(3) are clearly attracted in the case of the appellant. 3.12 Regarding the appellant s objection about m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Till assessment year 2003-04 there was no dispute with reference to the payment of royalty and even in the original assessment completed the royalty was allowed as eligible expenditure in the order under section 143(3). In assessment year 2004-05 this issue for the first time was examined by the TPO on the basis of the TP report of assessee wherein assessee submitted that the arrangement is in the nature of contract manufacturers in the FAR analysis. Since this was admitted by assessee, the TPO without examining the nature of agreement or the manufacturing activity of assessee or any other incidental factor came to a conclusion that since assessee admitted to be a contract manufacturer, there is no need to pay any royalty. In his order the TPO also mentions that assessee was not making any sales to outside parties, the fact of which is not correct. On the basis of his observations, he arrived at the royalty arms length price at Nil. 12. The Hon'ble Delhi High Court in the case of CIT vs. EKL Appliances (Supra) has examined a similar issue whether the TPO has power to restrict it to nil when he was supposed to have determined the arms length price of the international tran ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... expenditure which is otherwise a proper expenditure can cease to be such merely because there is no receipt of income. Whatever is a proper outgoing by 11'ay of expenditure must be debited irrespective of whether there is receipt of income or not. That is the plain requirement of proper accounting and the interpretation of Section 57(iii} cannot be different. The deduction of the expenditure cannot, in the circumstances, be held to be conditional upon the making or earning of the income. It is noteworthy that the above observations were made in the context of Section 57(iii) of the Act where the language is somewhat narrower than the language employed in Section 37(1) of the Act. This fact is recognized in the judgment itself. The fact that the language employed in Section 37(1) of the Act is broader than Section 57(iii) of the Act makes the position stronger. 20. In the case of Sassoon J. David Co. Pvt. Ltd. v. CIT, (1979) 118 ITR 261 (SC), the Supreme Court referred to the legislative history and noted that when the Income Tax Bill of 1961 was introduced, Section 37(1) required that the expenditure should have been incurred wholly, necessarily and exclusively ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hich have been given by the TPO is not contemplated or authorized . 13 The principles laid down by the Hon ble Delhi High Court in the above said case equally applies to the facts of the case. Even though the learned CIT (DR) tried to distinguish on the reason that the facts are different the ratio decidendi in the above said case is about the powers of the TPO to determine the ALP at nil value. As in the above said case what the TPO has done in the present case is also to hold that assessee need not pay any royalty on the presumption that assessee is a contract manufacturer. The TPO has to examine whether the price paid or amount paid was at arms length or not under the provisions of Transfer Pricing and its rules. The rule does not authorize the TPO to disallow any expenditure on the ground that it was not necessary or prudent for assessee to have incurred the same. On that principle alone, we cannot approve the order of the TPO as it not only considered the facts wrongly but also exceeded the jurisdiction available to the TPO in examining the arms length price on a transaction. 14. Apart from the legal position stated above, even on merits the disallowance of entire ..... X X X X Extracts X X X X X X X X Extracts X X X X
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