TMI Blog2013 (7) TMI 971X X X X Extracts X X X X X X X X Extracts X X X X ..... rovisions for leave encashment u/s 43B - Held that:- Matter needs to be verified by the AO by confirming the amount of disallowance - Remanded back for statistical purposes Disallowance of depreciation on computer peripherals - UPS and projector - Held that:- every computer system is accompanied by a UPS and, therefore, a UPS is these days considered an integral part of a computer system - thus entitled to 60% depreciation - assessee has not been able to show as to how a projector forms an integral part of a computer - regarding projector the order of DRP is upheld - ITA No. 5252/Del/2011 - - - Dated:- 12-7-2013 - G. D. Agrawal (Vice President) A. D. Jain (Judicial Member) For the Petitioner : Pradeep Dinodia, R .K. Kapoor, Pallavi Dinodia For the Respondent : Peeyush Jain ORDER A. D. Jain (Judicial Member) This is Assessee's appeal for Assessment Year 2007-08 against the order dated 17.10.2011 passed by the Assessing Officer, taking the following grounds:- 1. That the learned Assessing Officer has erred in law and on facts in making an addition of ₹ 5,83,21,388/- on wholly illegal, erroneous and untenable grounds. 2. The orde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... grounds. 2. Ground Nos.1-4 involve an issue concerning payment of royalty by the assessee to its AE leading to the addition being made on account of arm's length price u/s 92CA(3) of the IT Act. An exactly similar issue has been decided by us while disposing of ITA No.4456/Del/2012 in the assessee's case for Assessment Year 2008-09. Therein we have held as follows:- This is Assessee's appeal for Assessment Year 2008-09 against the order dated 17.07.2012 passed by the Assessing Officer, taking the following grounds:- 1. That the learned Assessing Officer has erred in law and on facts in making an addition of ₹ 8,03,58,167/- on wholly illegal, erroneous and untenable grounds. 2. The order of assessment is bad in law. 3. That the ld. A.O. has erred in law, on facts and in the circumstances of the case in making addition on account of arm's length price under section 92CA(3) of the Income Tax Act amounting to ₹ 5,32,07,016/- on wholly illegal, erroneous and untenable grounds. 4. The learned A.O's order based on the findings of the learned Transfer Pricing Officer and the directions of the learned Dispute Resolution Pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of the case in charging interest under section 234-B of ₹ 1,30,70,415/- of the Income Tax Act, 1961 on wholly erroneous, illegal and untenable grounds. 10. The DRP and consequently the A.O. have erred in law, on the facts and in the circumstances of the case in charging interest under section 234C of ₹ 13,68,438/- of the Income Tax Act, 1961 on wholly erroneous, illegal and untenable grounds. 11. The DRP and consequently the A.O. have erred in law, on the facts and in the circumstances of the case in charging interest under section 234D of ₹ 1,08,400/- of the Income Tax Act, 1961 on wholly erroneous, illegal and untenable grounds. 2. As per the record, the business profile of the assessee company is as follows:- The appellant is a Public Limited and a listed Company incorporated under the Companies Act. The appellant had been engaged in the business of manufacturing and trading of lighting products for the automotive industries. The business of the appellant was set up in 1945 and expanded in 1957. Initially it was a partnership firm which was converted into a Pvt. Ltd. company in 1981 by the name of Lumax Industries Pvt. Ltd. The compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed to furnish certain vital information like how the royalty rate was determined along with basis thereof, what cost benefit analysis was done, what is the royalty rate paid by other AEs or independent persons, what is the industry rate, what is the cost incurred by the AE for developing the intangible, what was the expected benefit from the use of the intangible, etc. Such information was essential to benchmark the transaction. As held by the ITAT in the case of Aztech Software (supra) it is the duty of taxpayer to furnish complete information not only about the transactions entered into by it with the AE, but also about the comparable cases, as the assessee is in that field and has knowledge about the comparables also. The ITAT further held that if the taxpayer does not furnish such information, the TPO would be justified in determining the arm's length price on the basis of the information available with him. For some of the questions, the taxpayer has simply stated that it is not privy to the information related to the AE. As held by the ITAT, Mumbai in the case of UCB India (2009-TII-02-ITAT-Mum-TP), it is the duty of the AE to furnish requisite information to the taxpayer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the losses. Thus, the aforesaid decision is of no help. Similarly, the decision of ITAT, Hyderabad in the case of LG Polymers is of no help as in that case the transaction was treated as sham and the matter was restored to the file of the AO/TPO for fresh determination of the ALP. Thus, the arm's length price of royalty is determined at Rs. NIL. a. Payment of Royalty Rs.5,32,07,016/- b. Arm's length price under CUP Rs.NIL c. Adjustment u/s 92CA Rs.5,32,07,016/- The above amount of ₹ 5,32,07,016/- is treated as adjustments under section 92CA as the value of royalty transactions in uncontrolled conditions is treated as Rs. NIL under CUP and the absence of any substantiation to show that substantial benefit is accrued to the taxpayer. 6. The assessee made detailed submissions before the Assessing Officer. The Assessing Officer, however, did not find the same to be acceptable and an addition of ₹ 532,07,016/- was made to the total income of the assessee. Wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... om 1984 and this continued even after Stanley Electric, Japan acquired the status of an AE of the assessee; that it has not been appreciated that in 1984, the assessee was a small company, having a turnover of just about ₹ 2 crores, whereas in the year under consideration, it had evolved into a company having a turnover of ₹ 600 crores; that no justification has been given as to how the arm's length price has been determined at nil under the CUP method, as against that of ₹ 5.32 crores claimed by the assessee, notwithstanding the fact that the TPO himself noted that the royalty had been paid by the assessee to its AE @ 3%; that 3% stands accepted as the rate of payment of royalty in the cases of the following companies:- 1. Sona Okegawa Precision Forgings Ltd. 2. Federal Mogul TPR India Ltd. 3. Climate Systems India Ltd. 4. Eicher Motors Ltd. 5. Swaraj Engines Ltd. 6. Praga Tools Ltd. 7.1 That the decisions in this regard are as follows:- 1. 'Sona Okegawa Precision Forgings Ltd. vs. ACIT' (ITA No.4781/Del/2010) 2. 'ACIT vs. Sona Okegawa Precision Forgings Ltd.' (ITA No.260/Del/2010. 3. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9;, 53 SOT 100 (Ahm.), wherein, it has been, inter alia, held that where the Assessing Officer had not brought on record the ordinary profits which could be earned in the type of business carried on by the assessee, the finding of the Assessing Officer in considering royalty charges as nil as ALP, could not be accepted and that therefore, the payment of royalty was not hit by the provisions of Section 92-C of the Act. 8. On the other hand, the Ld. DR has strongly supported the orders of the authorities below. It has been contended that just because the assessee and its AE are public listed companies, the requirement of establishment of arm's length price cannot be left uncomplied; and that apropos the RBI approval of 3% to 4% of payment of royalty, the assessee did not benchmark its payment of royalty. The Ld. DR has placed reliance on the following case laws:- 8.1 Order dated 30.3.2012 passed by the Mumbai Bench of the Tribunal in ITA No.5979/Mum/2010 and CO No.130/Mum/2011 for Assessment Year 2005-06, in the case of CMA CGM Global India (P) Ltd., wherein, according to the Ld. DR, earlier payment made to the same party, i.e., when the party was not an AE of the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mistake cannot bind the Department forever; that moreover, in the earlier cases, the payment was considered u/s 37 of the Act and not u/s 92C thereof. Reliance has been sought to be placed on CBDT Circular No.12 of 23.08.2001 (copy placed on record). 14. The Ld. DR has further contended that even otherwise, the royalty should be separately benchmarked, as there is a chance of cross-subsidisation. He further contended that in the present case, there is no intangible involved and the assessee sells products under the brand name 'Lumax' and not 'Stanley.' 15. We have heard both the parties on this ground and have examined the material placed on record with regard thereto. The issue is as to whether the addition of ₹ 532,07,016/- on account of arm's length price, has correctly been made concerning the payment of royalty by the assessee to its AE. 16. The TPO proposed the enhancement of ₹ 532,07,016/- to the total income of the assessee company on the basis that the assessee had failed to furnish information as to how the rate of royalty payment was determined, the basis thereof, the cost benefit analysis done by the assessee, the royalt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee. Thus, it was right from 1984, that technical assistance got started being given by Stanley Electric Company, Japan to the assessee, with regard to the manufacture of automotive lighting equipment. As available from para 1.4 of the agreement in the year under consideration (copy at APB-I, 340-359, relevant portion at page 342), a non-exclusive licence had been granted by Stanley, Japan to the assessee, only for India. As per the conditions thereof, the assessee was to pay royalty on its net sales, after deduction from the net sale price of the licensed products sold by Lumax in India. The basis of calculation of payment of royalty, as agreed to, is contained in Article 4 of the Agreement (APB-I, page 345). Such payment was to be @ 4% on the net sales. However, during the year, royalty was paid @ 2.43% on the sale of licensed products, amounting to ₹ 218.08 crores, as available at APB-I, page 385. This was so, since the cost of standard imported components, standard local components and certain other deductions had been deducted from the net sales of ₹ 218.08 crores. 20. The Ld. DR has contended that just because the assessee and its AE are publicly li ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with an AE having related party transactions and it was held that there was no external CUP for making any comparison in the relevant year, as the earlier Agency Agreement with the third party had expired and rates applicable in the earlier years could not be made applicable during the relevant year. However, this decision does not have any adverse effect on the case of the assessee. The facts herein are entirely at variance with those of 'CGM Global'. Herein, as opposed to the facts in 'CGM Global', the same Royalty Agreement and the same licence has been in continuance from 1984 till the year under consideration, the licence being renewed from year to year, albeit on the same terms and conditions. Moreover, the following decisions are instances of the external CUP having been employed and this has not been disputed by the Department:- 1. 'Sona Okegawa Precision Forgings Ltd. vs. ACIT' (ITA No.4781/Del/2010) 2. 'ACIT vs. Sona Okegawa Precision Forgings Ltd.' (ITA No.260/Del/2010. 3. 'CIT vs. Federal Mogul TPR India Ltd.' (ITA No.398/2012) 4. 'Climate Systems India Ltd. vs. CIT' (2009) 319 ITR 113 (Delhi) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Delhi Bench of the Tribunal in the case of 'Interra Information Technology (I) Pvt. Ltd. vs. DCIT', 2012-TIOL-142-ITAT-DEL-TP (supra), it is seen that here also, the facts are at a complete variance with those of the assessee's case, wherein payment of royalty for supply of technology and knowhow to manufacture licensed products was held to be for the benefit of the assessee and the same rate of royalty payment was allowed as allowed in the years when the parties were not in an AE relationship, but were having identical transactions as those in the year under consideration before the Tribunal. It was held that the royalty payment was a revenue expenditure incurred wholly and exclusively for the benefit of the assessee. The part of the payment disallowed as capital expenditure was held by the Hon'ble Delhi High Court to be revenue expenditure. It is as such that the invocation of the rule of consistency has been sought on behalf of the assessee and, in our considered opinion correctly so, contending that since the circumstances before and after the coming into existence of the AE relationship between the assessee and Stanley are identical inter se, it cannot at all ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Royalty is inextricably linked with these activities. In the absence of production and sale of products, there would be no question arising regarding payment of any royalty. Rule 10A(d) of the ITAT Rules defines 'transaction' as a number of closely linked transactions. Royalty, then, is a transaction closely linked with production and sales. It cannot be segregated from these activities of an enterprise, being embedded therein. That being so, royalty cannot be considered and examined in isolation on a standalone basis. Royalty is to be calculated on a specified agreed basis, on determining the net sales which, in the present case, are required to be determined after excluding the amounts of standard bought out components, etc., since such net sales do not stand recorded by the assessee in its books of account. Therefore, it is our considered opinion that the assessee was correct in employing an overall TNMM for examining the royalty. The TPO worked out the difference in the PLI of the outside party (the assessee) at 4.09% and the comparables at 7.05%. This has not been shown to fall outside the permissible range. 34. The decision of the Tribunal in 'Ekla Applianc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by us vide our common order dated 12.7.13 in ITA Nos.1677 2836/Del/2011. 3. To reiterate, the facts herein are, mutatis mutandis, exactly the same as those involved for Assessment Years 2008-09, 2004-05 2005-06. Both the parties have stated before us that their respective arguments for the year under consideration on this issue are also exactly on the same lines as those for the said Assessment Years. Therefore, following our above quoted observations for Assessment Years 2008-09, 2004-05 and 2005-06, this issue is decided in favour of the assessee. Accordingly, ground Nos.1-4 are accepted and addition of ₹ 3,92,71,137/- stands hereby deleted. 4. Coming to Ground no.5, a disallowance of ₹ 56,99,275/- was made on account of provision for warranty. The total of warranty provision for F.Y. 2006-07, relevant to the year under consideration, is as follows:- PROVISION UNIT ACTUAL WARRANTY PAID OP BAL 1.4.06 ADDITION UTILIZATION REVERSAL CL BAL 31.3.07 TOTAL EXPENSES F.Y. 06-07 (Rs. In lacs) 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e DRP, but it was hitherto pending before the ITAT. 7. This issue, it is seen, has also been dealt with by us while considering the matter for Assessment Year 2008-09. Therein we have held as follows:- 37. Coming to ground No.5, the assessee contends that addition of ₹ 84,48,000/- on account of disallowance of provisions of warranty u/s 37(1) of the Act has wrongly been made and confirmed. The Assessing Officer noted from Form No.3CD that the assessee had made provision for warranty. The assessee was asked to show cause as to why the same be not disallowed, as it was a contingent liability. The assessee submitted that during the year, it had worked out the amount of net warranty liability by applying a multiplying factor on the total sales made during the year on the basis of past results and had made provisions in its books; that since the provision had been made based on the past factor of actual expenses incurred towards warranty liability, deduction claimed with regard thereto u/s 37(1) of the Act was an allowable expenditure. Reliance was placed on the Tribunal decision in the case of 'DCIT, Circle 4 (1) vs. LG Electronics (I) Ltd.' and the Hon'ble Su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d, providing warranty of one year on the products which it was selling. It created provision for warranty for the unexpired period of warranty as at the end of the year, on a percentage of the actual warranty expenses during the immediately prior period, on the sales made. It has not been shown as to how this basis of making provision for warranty is not scientific. Moreover, similar provision for warranty was not disallowed in the earlier years, upto Assessment Year 2005-06. This position is also supported by the Hon'ble Supreme Court's decision in 'Rotork Controls India Pvt. Ltd.' (supra) and the Hon'ble Delhi High Court decision in 'Becton Dickinson' (supra). Accordingly, this addition is deleted and ground No.5 is allowed. 8. The facts for the year under consideration being similar to those for Assessment Year 2008-09, following our above observations for Assessment Year 2008-09, Ground no.5 is allowed and the addition of ₹ 35,06,410/- is deleted. 9. So far as regards Ground no.6, a disallowance of ₹ 1,63,98,913/- was proposed on account of provision for leave encashment. Before the DRP, the assessee contended that in its return, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee, has observed that there has been a double addition in this regard. 44. The Ld. DR, on the other hand, has placed strong reliance on the impugned order. 45. As to whether there has indeed been a double addition, needs to be verified by the Assessing Officer by confirming as to whether or not the assessee had made the disallowance itself and the amount had not been carried to the Profit Loss Account. For this purpose, the matter is remitted to the file of the Assessing Officer, to be decided afresh in accordance with the law, on affording adequate and due opportunity to the assessee. Ground No.6 is, as such, treated as allowed, for statistical purposes. 11. Following our above observations for Assessment Year 2008-09, the issue for the year under consideration is also remitted to the file of the Assessing Officer to restrict the disallowance to ₹ 1,51,22,430/- on verifying the payment made, of ₹ 11,77,483/-, in F.Y. 2006-07 and adjusting the same to the disallowance made. Ground No.6 is, as such, treated as allowed, for statistical purposes. 12. So far as regards ground No.7, the same relates to disallowance of depreciation on computer peri ..... X X X X Extracts X X X X X X X X Extracts X X X X
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