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TMI Blog2017 (5) TMI 1513X X X X Extracts X X X X X X X X Extracts X X X X ..... from sales tax/purchase tax was for setting up of an unit in a backward area and hence, in view of the Supreme Court decision in the case of Ponni Sugar & Chemicals Ltd. [306 ITR 392] and Special Bench decision in the case of Reliance Industries Ltd. [88 ITD 273 (SB)], the same was a capital receipt not chargeable to tax. 2] The learned A.O./DRP erred in recomputing the transfer price of the international transaction of payment of royalty despite the fact that none of the conditions as prescribed in Section 92C(3) of the Income Tax Act, 1961 ('the Act'), had been violated by the appellant. Thus, the A.O. erred in making an addition of Rs. 7,50,00,000/- u/s 92C on the basis of the order of the TPO u/s 92CA(3) dated 18.01.2013 in the case of the appellant company. 2.1] The learned A.O./DRP erred in not appreciating that in view of Article 9 of the DTAA between India and USA, no addition was warranted on account of any adjustment to ALP on account of payment of royalty as the comparable data clearly indicated that the assessee company had paid royalty to its AE at ALP. & ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee pointed out that the said issue of sales tax subsidy received by the assessee is whether capital receipt or revenue receipt, arose before the Tribunal in assessee's own case relating to assessment years 2006-07 and 2007-08 in ITA Nos. 1476/PN/2010 and 1686/PN/2011, order dated 20.02.2015. The learned Authorized Representative for the assessee further pointed out that the said ratio was applied by the Tribunal in assessment year 2008-09 in ITA No. 02/PN/2013, vide order dated 20.02.2015. 5. The learned Departmental Representative for the Revenue relied on the orders of authorities below. 6. We have heard the rival contentions and perused the record. The assessee had set up a unit at Sanaswadi, near Pune, wherein it was engaged in manufacturing of tractors, aggregates and parts which were sold in the domestic market as well as foreign market. The assessee was a joint venture between Larsen & Toubro Limited (L&T), India and Deere & Co. Both the joint venture partners had an equal stake in the assessee company. During the financial year 2005-06, John Deere India Pvt. Ltd. acquired 48% of L&T's stake and as a result of which, John Deere Equipment Pvt. Ltd. (JDEPL), the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ied on the ratio laid down by the Mumbai Bench of Tribunal in the case of DCIT v. Reliance Industries Ltd. (2004) 88 ITD 273 (Mum), which was confirmed by the Hon'ble Bombay High Court. The Assessing Officer in the final assessment order noted that the apex court in Civil Appeal No. 7769/2011 had set aside the order of the Hon'ble High Court and the assessee's reliance on the same was found to be incorrect. 7. The issue which arises in the present appeal is in relation to treatment of sales tax/purchase tax subsidy received by the assessee under 1993 Package Scheme of Incentives promulgated by the Government of Maharashtra. The assessee had set up its unit and had received similar subsidy in assessment years 2006-07 to 2008-09. The Tribunal (supra) had allowed the claim of assessee and had held that the said amount of subsidy received by the assessee under 1993 Package Scheme of Incentives promulgated by the Government of Maharashtra was a capital receipt. The Mumbai Bench of Tribunal in DCIT v. Reliance Industries Ltd. (supra) had also considered the said claim and have held that the sales tax/purchase tax subsidy received under 1993 Package Scheme of Incentives is a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s including old products as well as exports. He was of the view that the payment on old products was not justified. He further goes on to say that though the royalty expenses are considered in the preceding paragraphs, since CPM was applied to internal comparables in both of the segments. The TPO was of the view that separate adjustment on account of royalty is called for. In the absence of any workings, the TPO was of the view that on the principle that further royalty is not justified on old products, adjustment is proposed at Rs. 7.50 crores. In reply to the show cause notice, the assessee submitted that royalty has already been considered as expenses in CPM applied and further addition would result in double adjustment. The TPO held that the same was not strictly correct where the royalty was paid at the rate of approximately 3% on both the domestic and export sales. He was of the view that it would have no bearing on internal comparability of difference in cost plus mark up of the two segments. Further, since the adjustment was being made in respect of export of tractors, no separate adjustment was made in respect of royalty by the TPO. The Assessing Officer in the draft asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion could be made in the hands of assessee. He referred to the provisions of section 144C of the Act which provided overall mechanism and under sub-section (13), the Assessing Officer "cannot but follow the directions of the DRP". He further relied on the ratio laid down by the Tribunal in M/s. Spicer India Limited v. ACIT in ITA No. 251/PUN/2014, in ACIT v. M/s. Spicer India Limited in ITA No. 1327/PUN/2014 and Cross Objection No. 06/PUN/2015, relating to assessment year 2009-10, order dated 10.02.2017, wherein the TPO had first determined the adjustment and the same was subsumed with other additions. However, in the present case, no such exercise was carried out by the TPO and hence, no merit in the addition made on account of ad hoc disallowance of royalty. 14. With regard to the merits of case, the learned Authorized Representative for the assessee pointed out that the said royalty has been allowed in the hands of assessee in all the preceding years and even in the succeeding year i.e. assessment year 2010-11. Our attention was drawn to the copy of the order of TPO relating to assessment year 2010-11 at pages 69 and 71 of the Paper Book, wherein one of the international transa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on old products was not justified. He also notes that the assessee is not interested to give details of royalty on old products included in the current year. He further acknowledged that though royalty expenses are considered in the preceding paragraphs, since CPM is applied to internal comparables, but separate adjustment is called for. However, in the absence of any workings on a principle that further royalty is not justified on all old products, adjustment was proposed at Rs. 7.50 crores. The plea of the assessee was that where the royalty has been considered as expenses in the CPM applied, no further adjustment is to be made. It was also pointed out that royalty was paid at identical rates approximately at 3% on both domestic and export sales and it would have no bearing on internal comparability of difference in cost plus mark up of the two segments. The assessee also raised objections to the ad hoc adjustment proposed by the TPO without giving computation on royalty or new products and/or old products or justify the same by contemporaneous documentation of working considered for evaluating royalty to be made. The TPO in the final observed that without prejudice to the view ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ovide a mechanism to determine the arm's length price in relation to international transactions, which has to be applied by the TPO by considering the contemporaneous data after picking up one of the methods to be the most appropriate method. Thereafter, as per section 144C of the Act, the Assessing Officer shall in the first instance, forward draft of the proposed order of assessment to the eligible assessee, in case she proposed to make any variation in the income or loss returned, which is prejudicial to the interest of Revenue. As per sub-section (2) on receipt of said draft order, the eligible assessee shall within 30 days of the receipt of the draft order file his acceptance of the variation to the Assessing Officer or file his objections, if any, to such variation with the Dispute Resolution Panel and the Assessing Officer. The Assessing Officer has the power to complete the assessment on the basis of draft order where the assessee intimates to the Assessing Officer the acceptance of the variation or no objections are received within period specified in sub-section (2). Thereafter, the assessment order is to be passed within period of one month by the Assessing Officer. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Income Tax Act. The TPO has failed to do so. Further, since the TPO had not proposed the adjustment as per the Act, there was no occasion for the assessee to raise any objections before the DRP and hence, the order of DRP is silent on this issue. The Assessing Officer while passing final assessment order under section 144C(13) of the Act, has made the said addition in the hands of assessee on the ground that show cause notice was issued by the TPO in this regard and the assessee had already replied. However, such ad hoc disallowance of royalty is not warranted by applying the provisions relating to transfer pricing. The procedure laid down under the transfer pricing provisions has not been followed by the TPO and hence, there is no merit in the ad hoc disallowance of royalty. In any case, as is evident from the order of TPO relating to assessment year 2010-11, the assessee has also undertaken the international transactions of payment of royalty to its associated enterprises in the succeeding year also and that transaction has been accepted to be at arm's length. The learned Departmental Representative for the Revenue has failed to point out any difference in factual aspects vis ..... X X X X Extracts X X X X X X X X Extracts X X X X
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