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2018 (4) TMI 1735

..... TMI 1333 - DELHI HIGH COURT] held it did not give rise to a dispute that there is no international transaction involving the Assessee therein and its AEs. In fact each of the Assessees were receiving subsidies/subventions from their respective AEs. The second factor taken note of by the Court is that as BLT was invalidated as a means of determining the existence of an international transaction, the onus was on the Revenue to show the existence of an international transaction. In the present case, the existence of such a transaction was ascertained only by applying the BLT. For the above reasons, the Court is satisfied that the case of the present Appellant would not stand covered by the decision in Sony Ericsson [2015 (3) TMI 580 - DELHI HIGH COURT] Question (i) is accordingly answered in favour of the Assessee and against the Revenue. Transfer pricing adjustment on account of royalty paid on sales to associated enterprises - HELD THAT:- As decided own case [2017 (5) TMI 469 - DELHI HIGH COURT] Referring to comparative clauses based on the agreement in the case of the assessee and its' sister concern were pari materia and-consequently the payments were revenue in nature. Disall .....

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..... credit of advance tax was not at all verified by the Assessing Officer. Therefore, it will be appropriate to remand this issue to the file of the Assessing Officer for further verification. Needless to say, the assessee be given full opportunity of hearing by following principals of natural justice. Ground is partly allowed for statistical purpose. - I.T.A .No. 1579/DEL/2017 - 17-4-2018 - SHRI R. K. PANDA, ACCOUNTANT MEMBER AND MS SUCHITRA KAMBLE, JUDICIAL MEMBER For The Appellant : Sh. Ajay Vohra, Adv For The Respondent : Sh. Yogesh Verma, CIT DR ORDER PER SUCHITRA KAMBLE, JM This appeal has been filed by the assessee against the Assessment Order dated 31.01.2017 passed by DCIT, Circle 11(1), New Delhi u/s 143(3) r/w Section 144C of Income tax Act, 1961 in Assessment Year 2012-13. 2. The grounds of appeal are as under:- Transfer Pricing Issues: 1. That the assessing officer ( AO ) erred on facts and in law in making addition to the income of the appellant to the extent of ₹ 11,34,76,600 on account of the alleged difference in the arm s length price of international transactions. Advertisement, marketing and sales promotion expenses: 2. That the AO/Dispute Resolution Panel ( .....

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..... ents (as were required in the course of the hearing) were submitted in support of the claim of the appellant that the advertisement expenditure was independently incurred by the appellant without any understanding/ arrangement or any other influence from the associated enterprise. 2.9That the DRP/TPO erred on facts and in law in not appreciating that since the appellant was operating as a full-fledged manufacturer and full risk distributor, no adjustment on account of AMP expenses was warranted. 2.10. That the DRP/TPO erred on facts and in law in not appreciating that the AMP expenses were incurred by the appellant for it s own benefit and the benefit to the AE, if any, being incidental cannot be a basis to construe an international transaction between the appellant and the associated enterprises. 2.11The DRP/TPO erred on facts and in law in holding that expenditure incurred by the appellant which resulted in benefit by way of brand building and increases sales for the foreign AE, and therefore resulting in a transaction of creating and improving marketing intangibles for and on behalf of its foreign associated enterprise. 2.12 Without prejudice that the DRP/TPO erred on facts and .....

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..... y in respect of exports made to associated enterprises; 3. That the assessing officer/TPO erred on facts and in law in holding that arm s length price of international transactions of payment of royalty on exports made to the associated enterprises of ₹ 79,96,000/-was nil, on the basis of the order passed by the TPO under section 92CA(3) of the Act. 3.1 That the assessing officer/TPO erred on facts and in law in holding that the assessee was acting as a contract manufacturer and hence royalty paid as percentage of sale to the associated enterprises is not at arm s length as it amounts to collecting royalty on the sale to itself. 3.2 That the assessing officer/TPO erred on facts and in law in not appreciating that the transaction of sale of goods by the appellant to associated enterprises was undertaken on a principal to principal basis, wherein the appellant is acting as a licensed manufacturer. 3.3 3.3. That the assessing officer/TPO erred on facts and in law in arbitrarily holding that where the assessee company is making a part of its sales to its related parties and the benefit of producing components is reaped by AE, the payment for charges for royalty does not confirm t .....

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..... ry the products and the parts so manufactured or assembled or procured. (iv) The assessee can grant indivisible and non-transferable sublicenses to use the know-how to Indian persons, companies or other legal entities exclusive privilege of manufacturing and selling the products. 4.5 Without prejudice, that the assessing officer/ DRP erred on facts and in law in alternately disallowing the amount of royalty of ₹ 79,96,000, in respect of sale of goods to the associated enterprise allegedly holding the same to be not wholly and exclusively for the purpose of business and hence disallowable under section 37(1) of the Act. Disallowance of provision of service coupons: 5. That the assessing officer/ DRP erred on facts and in law in disallowing provision for service coupons amounting to ₹ 67,31,000, (erroneously mentioned as Rs.l,03,15,000 in the final assessment order), allegedly holding that estimate of provision for service coupons by the appellant was not based on any scientific method and, therefore, not allowable under section 37 of the Act. 5.1 That the assessing officer/ DRP erred on facts and in law in not appreciating that the provision for service coupons was made .....

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..... and manufacture and processing of pressure Die-Casting parts. The assessee company filed return of income declaring total income of ₹ 66,45,79,270/- on 29.11.2012. The case was selected for scrutiny and notice under Section 143(2) was issued on 14.08.2013. Again notice u/s 143(2) along with questionnaire u/s 142(1) was issued on 06.10.2015. In response to the notices, the Authorized Representatives appeared from time to time and furnished details which were examined by the Assessing Officer. A reference u/s 92CA(1) was made to the TPO. The TPO vide order dated 28.01.2016 held that the ALP of the transaction related to payment of royalty for exports to AE of ₹ 79,96,000/- to be NIL using CUP method . The Draft Assessment Order u/s 143(3) r.w.s. 144C(1) of the Income Tax Act, 1961 was passed on 14.03.2016 at income of ₹ 89,79,11,520/- as against the returned income of ₹ 66,45,79,270/-. The assessee filed objections before the DRP who vide order u/s 144C(5) of the Income Tax Act, 1961 passed on 27.12.2006 issued certain directions. The Final Assessment Order was passed on 31.01.2017 by making addition of ₹ 79,96,000/- on account of transfer pricing adjust .....

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..... ard both the parties and perused the material available on record. As per the decision of the Hon'ble High Court in the assessee s own case for Assessment Year 2008-09 ITA No. 346/2015 order dated 23/12/2015 the Hon'ble High Court held as under:- 38. The Court is satisfied that in the present case, the Assessee is carrying on business as an independent enterprise and is incurring AMP expenses for its own benefit and not at the behest of the AE. The benefit of creation of marketing intangibles for the foreign AE on account of AMP expenses can at best said to be incidental. The decision in Sony Ericsson (supra) acknowledges that an expenditure cannot be disallowed wholly or partly because it incidentally benefits the third party. This was in context of Section 37 (1) of the Act. Reference was made to the decision in Sassoon J David & Co Pvt. Ltd. v. CIT (1979) 118 ITR 26 (SC). The Supreme Court in the said decision emphasised that the expression 'wholly and exclusively' used in Section 10 (2) (xv) of the Act-(.Indian Income Tax Act, 1922) did not mean 'necessarily'. It said: "The fact that somebody other than the Assessee is also benefitfed by the exp .....

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..... t been able to demonstrate that there exists an international transaction involving the Assessee and a foreign AE on the question of AMP expenses. Thus, the issue is covered in favour of the assessee as per the Hon ble Delhi High Court decision in the assessee s own case by the Jurisdictional High Court decision. Therefore, Ground Nos. 2 to 2.19 are allowed. 8. As relates to Ground Nos. 3 to 3.5 regarding transfer pricing adjustment of ₹ 79,96,000/- on account of royalty paid on sales to associated enterprises, the Ld. AR submitted that this issue is covered in favour of the assessee by the order of the Tribunal for AY 2007-08 to AY 2011-12. The said finding of the Tribunal has not been challenged by the Revenue before the Hon ble High Court. Therefore, the order of the Tribunal has attained finality with regard to the issue of payment of royalty on sales made to associated enterprise. The Hon ble Delhi High Court in the appellant s case for assessment year 2008-09 held that the question of re-characterizing the assessee as a contract manufacturer was unwarranted . In view of the aforesaid, the Ld. AR submitted that submitted that the adjustment made by the TPO holding the ap .....

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..... invited to para 7.4 which-addresses the issue and the stand of the assessee that the terms and conditions being pari materia to the facts and circumstances to the terms and conditions in the case of_ the sister concern in ITA No.-5130/Del/2010 decisions rendered for 2006- 07 assessment year. The detailed comparison it was stated has been discussed in para 7.5 by the Co-ordinate Bench. The departmental stand that there was no similarity on facts and circumstances with the sister concern it was submitted has also been considered in para 7.6. Considering which it was submitted the Co-ordinate Bench has held that the issue is covered in favour of the assessee. Accordingly heavy reliance was placed on the order in its own case for the ^ immediately preceding assessment year. 11. The Ld. CIT DR placed reliance upon the assessment order and the order of the DRP. 12. We have heard the rival submissions and perused the material available on record. The record would show that the DRP refused to interfere on the reasoning that the issue was still alive as a result thereof the relief granted in appeal in 2007-08 assessment year by the First Appellate Authority was not followed. The Ld. AR has .....

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..... ssee s own case for assessment year 2007-08 reported at 165 TTJ 363 and the order dated 12.12.2014 passed by the Tribunal in assessee s own case for assessment year 2008-09 bearing ITA No. 6023/Del/2012. In these cases, the Tribunal, on identical facts and upon examining the Technical Collaboration Agreement under consideration in the present case, was pleased to hold that the payment of royalty to Honda Motor Company, Japan, in accordance with the Technical Collaboration Agreement dated 18.10.1985 and subsequent amendments made thereto was revenue in nature and accordingly deleted the disallowance made by the assessing officer. In assessment year 2009-10, the Tribunal likewise deleted the addition following Tribunal orders for the preceding assessment years. The Tribunal, in the aforesaid cases, placed reliance on the decision of Delhi Bench of the Tribunal in the case of Hero MotoCorp Ltd. v. ACIT: ITA No. 5130/Del/2010 for assessment year 2006-07 and held that the royalty agreements entered into between the parties in both the cases was identical. In the aforesaid cases, the Tribunal has, on an analysis of the respective agreements, come to the conclusion that payment made under .....

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..... 1) of the Act, the Ld. AR pointed out the findings of the Tribunal made in order passed for Assessment Year 2011-12, wherein the impugned disallowance has been deleted even on this alternative ground raised by the Revenue. Therefore, the Ld. AR submitted that no part of the royalty and technical guidance fee paid to Honda can be considered as capital expenditure and the same may kindly be directed to be allowable in full being an expenditure in revenue nature, allowable under section 37(1) of the Act. 12. As related to Ground No. 4 to 4.5, the Ld. DR relied upon the Assessment Order and order of the TPO as well as directions of the DRP. 13. We have heard both the parties and perused all the records. the Ld. AR pointed out the findings of the Tribunal made in order passed or Assessment Year 2011-12, reproduced below, wherein the impugned disallowance has been deleted even on this alternative ground raised by the Revenue: 16. Ground No. 4 is against disallowance of amount of royalty paid of ₹ 76,00,000/- and technical guidance fees of ₹ 6,11,000/- held to under section 37(1) of the Act. 17. On this issue, Ld. AR submitted that it is conclusively covered in favour of the a .....

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..... been disallowed in the transfer pricing order, further disallowance to that extent has resulted in double disallowance of the same amount, which is impermissible under the provisions of the Act. 15. The Ld. DR relied upon the order of Assessing Officer and DRP Directions and submitted that there is no double taxation. 16. We have heard both the parties and perused the material available on record. As per the submissions of the Ld. AR, since the payment of royalty, to the extent of ₹ 76,96,000 has already been disallowed in the transfer pricing order, further disallowance to that extent has resulted in double disallowance of the same amount, which is impermissible under the provisions of the Act. Since the Royalty issue is already decided in Ground Nos. 3 to 3.5 and 4 to 4.5, this contention of the assessee is accepted. 17. As relates to Ground Nos. 5 to 5.3 regarding disallowance of provision for service coupons of ₹ 67,31,000/- (erroneously mentioned as R.1,03,15,000/- in the final assessment order), the Ld. AR submitted that this issue is squarely covered by the order of the Tribunal, in assessee s own case, for the assessment year 2011-12. 18. As related to Ground No .....

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..... e with the terms of the contract since the incorporation of the company which was always accepted as eligible business deduction in those years. Disallowance of provision for warranty was made for the first time in the assessment year 1996-97, which was subsequently deleted by the Tribunal vide order dated 31.07.2006 bearing ITA No. 1842/Del/2000. In the aforesaid case, the Tribunal, on identical facts, has treated the provision for warranty expenses as eligible business deduction. Disallowance of warranty provision made in subsequent assessment years 1997-98, 1998-99 and 2001-02 was also deleted by the Tribunal following the aforementioned order for AY 1996-97. The Ld. AR further pointed out that no disallowance of provision for warranty was made in any of the preceding assessment years and the said provision has been consistently allowed as revenue deduction in all preceding years, apart from the above mentioned years which have also been conclusively decided in favor of the assessee company. Thus, the Ld. AR submitted that the disallowance of provision of warranty is based on incorrect appreciation of facts and position in law. Accordingly, the provision for warranty made by the .....

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