TMI Blog2018 (2) TMI 1280X X X X Extracts X X X X X X X X Extracts X X X X ..... decision for better running of the business. TPO/DRP have erred in making adjustment of ALP on account of royalty payment by the taxpayer to its AE - Decided in favour of assessee - ITA No.297/Del./2015 - - - Dated:- 12-2-2018 - SHRI B.P. JAIN, ACCOUNTANT MEMBER AND SHRI KULDIP SINGH, JUDICIAL MEMBER For The ASSESSEE : Shri Ved Jain, Advocate Ms. Rano Jain, Advocate Shri Ashish Goyal, CA For The REVENUE : Shri Sanjay Kumar Yadav, Senior DR ORDER PER KULDIP SINGH, JUDICIAL MEMBER : The Appellant, M/s. India Yamaha Motor Pvt. Ltd. (hereinafter referred to as the taxpayer ) by filing the present appeal sought to set aside the impugned order dated 17.12.2014, passed by the AO in consonance with the orders passed by the ld. DRP/TPO under section 143 (3) of the Income-tax Act, 1961 (for short the Act ) qua the assessment year 2010-11 on the grounds inter alia that :- 1. On the facts and circumstances of the case, the order passed by the learned Assessing Officer is bad, both in the eye of law and on the facts. 2. On the facts and circumstances of the case, the learned A.O. has erred, both on facts and in law, in assessing the loss of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Transaction Method Arm s length price (as per the assessee) (INR) (i) Import of components/spare parts from AEs CPM 2,04,59,04,263 (ii) Import of capital goods CPM 1,36,37,40,983 (iii) Export of spare parts CPM 5,82,41,276 (iv) Export of Motorcycles RPM 1,17,43,01,910 (v) Royalty CUP 18,77,26,589 (vi) Model Fee CUP 20,11,65,967 (vii) Technical Guidance Fee CUP 16,98,99,424 (viii) Interest on short term financing CUP 36,91,245 (ix) Reimbursement of warranty claims to AEs - 42,12,004 (x ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... evenue relied on the orders of the authorities below. 9. Undisputedly, there is no change in the business model of the taxpayer. It is also not in dispute that royalty has been paid at a pre-determined rate on the basis of number of units of particular models sold by the taxpayer. 10. Undisputedly, the TPO has disallowed the royalty payment on the ground that the taxpayer has not been able to prove any real tangible benefit that has passed to him by technology received from its AE. This reasoning of the TPO as well as DRP has not been upheld by the coordinate Bench of the Tribunal in taxpayer s own case for AY 2009-10 and deleted the proposed adjustment on account of royalty payment of ₹ 18.78 crores by returning the following findings :- 14. On going through the facts, we note that this royalty has been paid by the assessee to its AE i.e. Yamaha Motor Co. Ltd., Japan which has granted an exclusive, non-transferable and non-divisible license to use the technical information for manufacture or process locally manufactured parts at its factory premises and to sub-contract the same to manufacture motorcycles at its factory premises, right to use Yamaha Trademar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... les. 2. When was the technology developed The technology is developed from time to time depending on the Company s requirements to introduce new products in the market, which again depends on various factors, including current market demand. 3. The nature of technical collaboration between the Assessee and YMC does not necessitate obtaining upgrades or modifications. However, whenever any support is required by the Assessee in connection with the Technical Collaboration Agreements, the same is duly provided by YMC. 4. The technical and other information licensed by YMC to the Assessee are unique in the sense that the said information is not readily available in the open market, and is developed by YMC specifically for the Assessee. There is no restriction on the period up to which these intangibles can be used by the Assessee. The Assessee can continue to use these intangibles for an unlimited period. 5. As stated above, the technology provided by YMC is developed specifically for the Assessee. Accordingly, the said technology is not usable for YMC for any other purpose. 6. It may be noted that similar technology is not available with non-A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rging the royalty from its other AEs at similar rates. In this respect, we invite your kind attention towards the Transfer Pricing Analysis Report. YMC has entered into a similar technical collaboration agreement with Dawood Yamaha Ltd., Pakistan ( DYL ). As per the terms of agreement entered into between YMC and DYL for provision of technical know-how by the former, YMC charges royalty from DYL as per the following rate:- 3% of Net wholesale price Where, Net wholesale price = (Ex-factory price) (Sales Tax) (CKD landed cost) Since YMC is charging royalty from the Assessee at an average rate of 2.94%, it may be appreciated that the transaction of payment of royalty has been carried out at an arm s length. 16. In this letter it was further clarified that royalty is being paid since the year 1984 when YML entered into technical collaboration agreement with Escorts Limited. From 1984 to 1999, by using the technology provided by YML, the Escorts Limited and subsequently Yamaha Motor India Private Limited made substantial profits. 17. It was further clarified that the technology provided cannot be the basis for the losses incurred by t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case, from the facts, it is evident that the royalty has been paid for the intangible license which has been granted by the AE to the assessee company and accordingly the assessee is required to make payment of the same. 21. This issue is squarely covered by the judgment of the Hon ble jurisdictional Delhi High Court relied upon by the learned AR, in the case of CIT vs. EKL Appliances Ltd. [2012] 345 ITR 241 dated March 29, 2012 wherein the Hon ble High Court has held as under:- 22. Even Rule 10B(1)(a) does not authorise disallowance of any expenditure on the ground that it was not necessary or prudent for the assessee to have incurred the same or that in the view of the Revenue the expenditure was unremunerative or that in view of the continued losses suffered by the assessee in his business, he could have fared better had he not incurred such expenditure. These are irrelevant considerations for the purpose of Rule 10B. Whether or not to enter into the transaction is for the assessee to decide. The quantum of expenditure can no doubt be examined by the TPO as per law but in judging the allowability thereof as business expenditure, he has no authority to disa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... its is a normal incidence in business. This is entirely incorrect. All businesses are not profitable. All decisions do not enhance profitability. Losses are also an incidence of business. Many are the failed business ventures of people and enterprises. 23. Enterprises, businessmen and professionals constantly experiment with different business models, theories and ventures. The aim indeed is to further the business, to enhance their profits. So long as that is the aim, it is sufficient for the purpose of the Income Tax Act. In a given case, profit may not even be the motive. Even so it would not indicate that the transactions in question are not at an arm s length price. Whether a transaction is entered into at an arm s length price or not must depend upon the facts of each case relating to the transaction per se, i.e., the transaction itself. Profit is only a possibility and a desired result with or without the aid of an international transaction. Every business venture is not necessarily profitable or successful. All business ventures do not succeed equally or uniformally. Indeed, if an assessee is able to establish financial or other commercial benefits arising from a tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y reflect upon the genuineness of an assessee s claim, it is not determinative of the same. 23. As regards comparative analysis, on going through the record we note that assessee has benchmarked its transaction by applying CUP method. The AE has provided similar services to other entities for which it has charged royalty of 3% of the net wholesale price. The comparable selected by the assessee are also located in the same geographical location and the rate at which the royalty has been paid by the assessee being 2.94% which is less than the rate at which the royalty has been paid by the non-AE. Accordingly, the arm s length price determined by the assessee does not warrant any adjustment. The learned TPO as well as the DRP have not controverted the above facts. During the course of the hearing also the learned DR at a specific query from the bench could not dispute these facts. No adverse material has been brought on record either by the TPO or the DRP against the assessee. We have also gone through the submission made by the assessee before the DRP where the assessee has submitted a list of the various companies which are paying royalty and are still incurring losses. The ..... X X X X Extracts X X X X X X X X Extracts X X X X
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