TMI Blog2018 (3) TMI 1657X X X X Extracts X X X X X X X X Extracts X X X X ..... t proceedings, second innings cannot be granted to the Assessing Officer to examine the same. No infirmity in the order of Commissioner of Income Tax (Appeals) in deleting ad-hoc disallowance with respect to homologation charges. - Decided in favour of assessee - ITA Nos.1108, 1109/PUN/2013 And CO.No.59/PUN/2014 - - - Dated:- 21-3-2018 - SHRI ANIL CHATURVEDI, AM AND SHRI VIKAS AWASTHY, JM For The Assessee : Shri Ranjan. R. Vohra And Shri Nikhil Mutha For The Revenue : Shri Rajeev Kumar, CIT ORDER PER VIKAS AWASTHY, JM These two appeals i.e. ITA No.1108/PUN/2013 for assessment year 2003-04 and ITA No.1109/PUN/2013 for assessment year 2004-05 are filed by the Revenue. The cross appeals of the assessee for the said assessment years in ITA No.1081/PN/2013 for assessment year 2003-04 and ITA No.1082/PN/2013 for assessment year 2004-05 and cross objections in CO. No.58/PN/2014 for assessment year 2003-04 and CO. No.59/PN/2014 for assessment year 2004-05 were decided by the Tribunal vide order dated 30.09.2016. Thereafter, the assessee filed Miscellaneous Application u/s. 254(2) of the Income Tax Act, 1961 (hereinafter referred to as the Act ) seek ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r should be treated separately based on the facts and documentation submitted; ( as per the ratio laid down in the case of M/s. Onward Technologies Vs. DCIT dated 30.04.2013, appeal No. ITA No.7985/Mum/2010 of ITAT Mumbai) 5. Whether on the facts and circumstances of the case and in law, the CIT(A) was justified in deleting addition made on account of homologation expenses, without calling for such details in support of its claim and remanding the matter to the A.O. ITA No. 1108/PUN/2013 ( A.Y. 2003-04) 4. The ground No. 1 and 2 raised in appeal by the Department are with respect to transfer pricing adjustment on payment of Royalty. 4.1 Shri Ranjan R. Vora appearing on behalf of the assessee submitted that identical issue has been decided by the Tribunal in appeal filed by assessee in ITA No.1080/PUN/2013 for the assessment year 2002-03. The facts in the present assessment year i.e. 2003-04 are identical. The agreement under which the Royalty has been paid is same which was the subject matter of dispute in assessment year 2002-03. Since, the agreement was executed in the period relevant to the assessment year 2002-03 and the same was valid for the period up to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... information database for obtaining publicly available financial information. For the purpose of margin of computation, in addition to financial data for the relevant financial year, the assessee also used data for 2 previous financial years as per the TP study conducted on the search of comparable. The weighted average margin of comparable companies was 2.48% whereas the margin of the assessee company was 4.30%. Since the net profit margin earned by the assessee was higher than the weighted average margins of comparable companies, the assessee concluded that the transactions including payment of royalty are at Arm s length. We find the TPO did not accept the application of TNM method for benchmarking the payment of royalty transaction and considered CUP as the most appropriate method to benchmark the transaction by comparing royalty payment made by the assessee @5% with the royalty payment made by Maruti Udyog Ltd. to Suzuki, Japan @3%. According to the TPO the letter received from DCAG submitted during the assessment proceedings referred to royalty rate of 3% and another 5%. Further Maruti Udyog Ltd. is paying royalty @3%. The net profit margin earned by the assessee company is le ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the disallowance in question mainly on the basis of the benefit test. In this regard, it is seen that the payment of royalty cannot be examined divorced from the production and sales. 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 IT 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 p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... marketing of machines benchmarked by assessee by aggregating the same with other international transactions pertaining to domestic operations using TNMM should not be-rejected. 81. The various other decisions relied on by the assessee on this issue also support its case to the proposition that TNM method applied by the assessee is the appropriate method and the CUP method applied by the TPO is not correct where he has used a controlled transaction to benchmark the payment of royalty. We further find the assessee has obtained approval from the Foreign Investment Promotion Board for the original as well as revised agreement. It has also obtained specific approval from Department of Industrial Policy and Promotion (DIPP) for the payment of royalty as royalty payment made by MB India is not covered under the automatic route. It has been held in various decisions that FIPB approval, Government of India, RBI approval etc for the royalty rates itself implies that the payments are at Arm s length. 82. The Mumbai Bench of the Tribunal in the case of M/s. Thyssenkrupp Industries Pvt. Ltd. Vs. ACIT vide ITA No.6460/Mum/2012 order dated 27-02-2013 for A.Y. 2008-09 has held that w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... followed by the assessee. 84.In view of the above discussion and in view of the detailed reasoning given by the CIT(A) we find no infirmity in his order. Accordingly, the same is upheld and the grounds raised by the revenue on this issue are dismissed. Since, the issues raised in the present appeal by the Department are identical in facts to assessment year 2002-03, the ground Nos. 1 and 2 raised by the Department in appeal are dismissed for similar reasons. 7. In ground No. 5 of the appeal, the Department has assailed deleting the addition made on account of homologation expenses. 7.1 The ld. AR submitted that the assessee is engaged in manufacturing and sale of passenger cars. As per Central Motor Vehicles Rule, it is mandatory for the assessee to seek approval from Automotive Research Association of India (ARAI), an agency designated by Government of India, before introduction of any technical change in the existing model or before introducing new vehicle. The whole process of getting an approval from ARAI is known as Homologation of Vehicle . After testing the vehicle as well as its parts, ARAI issues certificate of homologation for the particular vehicle. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n assessment year 2002-03, therefore, some disallowance has to be made in assessment year 2003-04, as well. This reasoning is certainly not acceptable for making disallowance, even if, it is on estimation basis. Once having missed the opportunity to examine material available to the Assessing Officer during assessment proceedings, second innings cannot be granted to the Assessing Officer to examine the same. Therefore, we find no infirmity in the order of Commissioner of Income Tax (Appeals) in deleting ad-hoc disallowance of ₹ 10,00,000/- with respect to homologation charges. Accordingly, ground No. 5 raised in appeal by the Revenue is dismissed being devoid of any merit. ITA No. 1109/PUN/2013 ( A.Y. 2004-05) CO. No. 59/PUN/2014 ( A.Y. 2004-05) 9. The grounds of appeal before us for adjudication in ITA No.1109/PUN/2013 reads as under: 1.Whether on the facts and circumstances of the case and in law, the CIT(A) was justified in giving directions to the A.O. to verify and decide the admissibility of the claim of expenditure of capitalized cars as given in ground No. 6 of A.Y.2002-03, when the facts for the given assessment year are different from tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he learned Assessing Officer. 10. In ground No. 1 of appeal, the Revenue has impugned the action of Commissioner of Income Tax (Appeals) in remitting the issue back to Assessing Officer to examine additional evidence furnished by assessee and thereafter, decide admissibility of claim of expenditure of capitalized cars. We do not find any error in the findings of Commissioner of Income Tax (Appeals) in remitting the matter back to the file of Assessing Officer for considering additional evidences filed by the assessee. The findings of Commissioner of Income Tax (Appeals) on this issue are well reasoned justified. The Assessing Officer shall decide this issue afresh after taking into consideration the additional evidences furnished by assessee and after affording reasonable opportunity of hearing to the assessee, in accordance with law. Thus, ground No. 1 raised in appeal by the Department and additional ground No. 3 raised in cross objection by assessee for the assessment year 2004-05 are allowed for statistical purposes. 11. We find that the ground Nos. 2 and 3 raised in appeal by the Department in assessment year 2004-05 are identical to ground Nos. 1 and 2 raised in ap ..... X X X X Extracts X X X X X X X X Extracts X X X X
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