TMI Blog2022 (8) TMI 511X X X X Extracts X X X X X X X X Extracts X X X X ..... s. 3, 5, 6, 7 and 8 stand allowed. Entity-widen manufacturing activity - rejection of certain additional Indian companies and accepted certain inappropriate Indian companies as comparables - HELD THAT:- Hon ble Delhi High Court in Nokia Siemens Network India P. Ltd. [ 2019 (8) TMI 167 - DELHI HIGH COURT] that a comparable cannot be rejected merely on the ground that it is recurring losses if the industry in which the comparable operating itself is incurring loss. Following this view, we direct the A.O/T.P.O to include HML as comparable in respect to the assessee company. As in any case what has been consistently held by the Tribunal and we are also in conformity that RPT filter of 15% should be adopted. In both the cases of comparables selected by the T.P.O., M M have RPT from 25% to 30% and in case of TML the aggregate cost or revenue side transaction on a standalone basis are less than 30% as applied by the T.P.O. Therefore, in both these cases, the RPT filter is more than 15%. Accordingly, we direct the A.O/T.P.O to exclude the companies M M and TML from the final set of comparables with respect to the assessee company. Computation of operating margin of the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... JM For the Appellant : S/Shri Percy Pardiwalla, Darpan Kirpalani For the Respondent : Shri J.P., Chandraker ORDER PER PARTHA SARATHI CHAUDHURY, JM This Appeal preferred by the assessee emanates from the direction of the learned Dispute Resolution Panel (hereinafter referred to as DRP for short) dated 29-11-2016 for A.Y. 2012-13 as per the following grounds of appeal. Based on the facts and circumstances of the case and in law, the Appellant respectfully craves to prefer an appeal against the order dated 30 January 2017 passed by the learned Deputy Commissioner of Income-tax, Circle - 9, Pune (hereinafter referred as 'the learned Assessing Officer') (received by the Appellant on 31 January 2017) under section 143(3) read with section 144C(13) of the Income-tax Act, 1961 ('the Act') on the following grounds which are independent of and without prejudice to each other: On the facts and circumstances of the case and in law, the learned Assessing Officer: A. Grounds of appeal in respect of Transfer pricing adjustment Ground No.1-Transfer pricing adjustment should be deleted as being bad in law Erred in making the re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... jecting the separate Transaction Net Margin Method search Erred in facts and in circumstances of the case by rejecting the separate TNMM search provided (on a without prejudice basis) by the Appellant for separate benchmarking of the international transaction of import of CBUs. Ground No.9 - Rejecting certain additional Indian companies and accepted certain inappropriate Indian companies as com parables Erred on facts and in law by rejecting certain additional Indian companies identified by the Appellant during the course of assessment proceeding on without prejudice basis and also erred in accepting certain inappropriate Indian companies rejected by the Appellant as not comparable. Ground No. 10 - Computation of operating margin of the Appellant at entity level, without taking into consideration the excess custom duty paid on imports by Appellant vis-a-vis comparable companies Erred on the facts of the case and in law by computing the operating margin of the Appellant without taking into consideration the excess custom duty paid on imports by MB India. Ground No. 11 - Computation of operating margin of the Appellant at entity level, without excluding ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n market MB India currently manufacturing E.C.S. GL class and CLA class of passenger cars in India. Import of CBUs Generally, an automobile company starts with importing cars in the form of Completely Built units (CBUs) for three reasons: For assessing and penetrating into the market and then subsequently, depending upon the market situation start importing cars in the form of semi knocked down ( SKD ) condition, complete knock down ( CKD ) condition and then eventually operating at part level. For bringing in new products available with AE as CBU, which will take time to supply the same in SKD / CKD / Parts level and also some times to bridge a sudden gap of demand and manufacturing capacity. For bringing in niche models which will be sold in few numbers and may not be currently viable to manufacture in India but important to offer entire range to the customers. With respect to activity of import of CBUs, MB India wishes to submit that MB India manufactures S- Class, E-Class and C-Class range of Mercedes-Benz passenger cars in India. In addition to manufacturing operations, MB India also imports certain Mercedes-Benz models in the niche segment for resale in Ind ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sudden gap of demand and manufacturing capacity. Warranty commitments/replacements of spare parts In common parlance, automobile manufacturer generally sells the car to its dealers, who in turn sell cars to customers. Generally, the sale of car is covered by a manufacturer s warranty provided for 1 or 2 years and the charges towards that warranty is embedded in the sale price. Similarly, in case of MB India, when the Appellant sells its cars to various customers through its dealers, they have an attached warranty condition in respect of cars manufactured as well as imported as CBUs i.e. in the event of failure of any part / component, a faulty design/manufacture, defects arises which were not originally visualized, then in such case MB India would provide for replacement of spare parts. MB India provides warranty for 2 years and additionally for 1 year at no extra cost. Further, MB India provides extended warranty for fourth year on payment, under Star Care Program. This warranty is administered through dealers who addresses the warranty claims of the customers and resolves the same. The dealer recovers the warranty charges (i.e. cost of labour + cost of the spare par ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e additions/disallowances made by the learned AO in the draft assessment order, the assessee preferred an appeal before the Dispute Resolution Panel ( DRP ). Hon ble DRP after going through the submission/ details provided by the assessee adjudicated the issues under appeal, thereby granting partial relief to the assessee. Post DRP directions, the AO passed the final order to give effect to DRP directions (under section 143(3) r.w.s. 144C(13) of the Act) and thereby assessing the total income at Rs.144,56,24,160/- 5. Background relating to transfer pricing adjustment MB India had entered into international transactions of import of raw materials, import of spare parts, import of Completely Built Units ( CBUs ), import of capital goods, payment of royalty, payment for technical services availed, receipt of commission, reimbursement/ recovery of expenses, recovery of warranty, etc., with its Associated Enterprise ( AE ) for AY 2012-13. MB India is primarily engaged in manufacturing activity for which it imports raw material, capital goods and makes payment for services / know-how. Further, as a part of its manufacturing and sales activity it needs to: a) import CBUs whic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... LI used No of comparable companies Margin of comparable companies Margin of MB India Dow Jones Net operating profit/ Operating Income 9 (Asia Pacific regional comparables) 2.97 % 1.27%* * - The operating margin of MB India was computed post considering certain costs as non-operating in nature (c) Since the operating margin earned by MB India was within the 5% range (permitted under the Act) of arithmetic mean of the operating margins earned by comparable companies, it was concluded that the various international transactions undertaken by MB India were at arm s length. However, the learned TPO did not accept the search conducted by the assessee in its transfer pricing study and rejected all the comparables identified by the assessee citing following reasons: Use of consolidated financials; Annual report not available/ not available in English Language; Comparables operating in different geographical market. (d) Further, during course of transfer pricing assessment proceedings ( TP Proceedings), upon the request of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Further, the learned TPO also separately benchmarked the entity level operating margins of MB India with the operating margins of Indian comparable companies (as mentioned above). The arithmetic mean of operating margin of comparables identified by the Learned TPO is 5.99% vis- -vis 2.31% of MB India (after considering adjustment made for CBU segment). The summary of the transfer pricing adjustments is tabulated below: Sr. No Particulars AY 2012-13 (Rs) 1 Adjustment pertaining to CBU segment 53,81,00,000 2 Adjustment at entity level 87,04,00,000 Total 140,85,00,000 6. Aggrieved by the order, assessee filed an appeal before the Hon ble DRP for the aforesaid adjustments. Proceedings before the Hon ble DRP (a) The Hon ble DRP accepted Force Motors Ltd., as comparable company to MB India. However, for other comparables in dispute, Hon ble DRP upheld the order of TPO. The final set of comparable as per Hon ble DRP is tabulated below: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing resale price method and comparing gross margin from international transaction pertaining to import of CBUs with the international transaction pertaining to import of spares. Ground No. 7 is with regard to adjustment for differences in function, asset and risk profile of the spares segment vis- -vis CBU segment. Ground No. 8 is with regard to rejecting the separate transactional net margin method search. That apart from submissions made by the assessee on this ground, it was submitted by the learned Senior Counsel that all the above mentioned grounds of appeal are covered by the decision of Pune Bench of the Tribunal in assessee s own case, lead year being A.Y. 2005-06 (ITA No. 1083/PN/2013, ITA No. 1107/PN/2013 and C.O. No. 60/PN/2014 which is annexed at pages 23 to 65 in the paper book wherein the Co-ordinate Bench of the Tribunal in its decision has analyzed the business model of the assessee in detail along with rational for the aggregation approach followed by the assessee to bench mark its international transaction. Thereafter, the assessee submits that since all the international transactions entered into by MB India with its AEs are germane to the main business of MB Ind ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction 92(1) states Any income arising from an international transaction shall be computed having regard to the arm s length price‖. Under section 92B of the Act meaning of expression international transaction is provided i.e. transaction between two or more associated enterprise and section 92F(v) defines, transaction to include an arrangement, understanding or action in concert .‖ Further, Rule 10A(d) explains the meaning of the expression transaction as follows: transaction includes number of closely linked transactions (d) From the above meaning of the expression transaction , legislature intends to include transactions of similar nature which are closely linked to each other as a single transaction. (e) Further, Rule 10B(1) states, For the purposes of sub-section (2) of section 92C, the arm s length price in relation to an international transaction shall be determined by any of the following methods, being the most appropriate method, in the following manner, namely.. (f) From the above extract of Rule 10B and the meaning of the word transaction specified in the Rules, for the purpose of analysing the arm's length price, le ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ertaken by MB India except for import of CBUs which is benchmarked by learned TPO using RPM method. In this regard, the Assessee submits that RPM is not applicable because of following reasons: (l) Same or similar products to be compared while using RPM Rule 10B (1) of the Income-tax Rules provides as follows: For the purposes of sub-section (2) of section 92C, the arm's length price in relation to an international transaction shall be determined by any of the following methods, being the most appropriate method, in the following manner, namely :- b) resale price method, by which,- (i) the price at which property purchased or services obtained by the enterprise from an associated enterprise is resold or are provided to an unrelated enterprise, is identified; (ii) such resale price is reduced by the amount of a normal gross profit margin accruing to the enterprise or to an unrelated enterprise from the purchase and resale of the same or similar property or from obtaining and providing the same or similar services, in a comparable uncontrolled transaction, or a number of such transactions; The Assessee placed reliance on the above and submits that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the staff and staff cost to handle the spares. The differences in the functions performed, assets employed by MB India for the CBU and spares segment are detailed at page 561 to 563 of Paper book. (r) Thus, only because the products are imported and then resold to the third parties in India, the functions performed cannot be said to be same or similar. The learned TPO has also disregarded the fact that for additional functions, assets and risks the seller would increase the price which results in higher gross profit, as the cost of such higher functions, assets and risks is below gross profit and hence increases the gross profit. The learned TPO s argument that cost for higher functions, assets and risks would impact net margin is correct, however, he grossly fails to appreciate that the revenue for higher functions, assets and risks would be reflected in the Sales. Further, the Assessee submits that Rule 10B(2) which describes the methodology for application of RPM, states that it is necessary that the transactions being compared should be uncontrolled and it should be identified taking into account the functions performed, risks undertaken and assets employed. The le ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch the most popular models were being manufactured in India and in order to widen its customer base at par the requirement of customers or otherwise, the assessee was importing other models from its associated enterprises. Such import of CBUs and its resale was closely and interlinked to its basic activity of manufacture of passenger cars. Hence, the same has to be aggregated with import of raw materials and cannot be benchmarked independently. 33. The third segment was import of spare parts which were being imported from associated enterprises in order to fulfil warranty commitments of passenger cars sold by assessee i.e. both manufactured and imported CBUs and also in order to meet other requirements of customers. Undoubtedly, warranty commitments were being fulfilled by dealers but under a dealership agreement, wherein the dealer was to use only spare parts which were made available by assessee. Such imports were being made of spare parts in order to keep the standard of products sold and also to maintain efficiency of passenger cars. The assessee had fairly admitted that it was covering cost of such spares, which were to be provided free of cost to customers under warranty ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aforestated lead case in regard to the assessee-company wherein it is held that the transactions of import of completely built unit (CBU) and import of spare parts were closely and inter-linked to the manufacture of passenger car by the assessee and the said activity is to be bench marked on an aggregate basis along with other transactions under the umbrella of manufacturing activity. The ld. D.R. also could not demonstrate or bring on record any facts or difference evidences and therefore, we are of the considered view, respectfully following the aforestated judgment on the same facts and circumstances and on same parity of reasoning, ground Nos. 3, 5, 6, 7 and 8 stand allowed. 10. Next set of grounds pertains to entity-widen manufacturing activity. In this regard, ground No. 9 is rejection of certain additional Indian companies and accepted certain inappropriate Indian companies as comparables. The brief backgrounds are that During the course of assessment proceedings, the learned TPO rejected all the comparable companies identified by the Appellant in its Transfer pricing documentation. The assessee upon the request of the learned TPO and on without prejudice basis submitted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee which has been duly accepted in A.Y. 2009-10 by the learned D.R.P. That 85% of the revenue earned by HML is from sale of vehicles. The assessee further contended that the reasons for incurring losses are routine business reasons and not extra ordinary in nature. The company is adding products to its portfolio and thus has an ongoing business. The rejection of HML by T.P.O is that it is consistent loss maker. However, it is submitted by the assessee that automobile industry itself is incurring loss. Hon ble Delhi High Court in the case of Nokia Siemens Network India P. Ltd. (ITA No. 692/2019) has held that incase the general trend in the nature is of either loss making or declining revenues, a functionally comparable company should not be rejected. In this case, HML was already accepted as comparable company by T.P.O and the learned D.R.P in A.Y. 2009-10. The assessee submitted that the concept for rejecting the comparables merely on account of incurring losses is neither defined nor mentioned in the Indian TP Regulations nor does it find any mention in the OECD guidelines. Another objection of the T.P.O has been that HML is into persistent loss and only revenue is from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ltd. and the other two comparables is supported by sound reasoning given by the ITAT which in the considered view of this Court cannot be said to be perverse. No substantial question of law arises. 14. We are of the considered view as noted by the Hon ble Delhi High Court in Nokia Siemens Network India P. Ltd. (supra) that a comparable cannot be rejected merely on the ground that it is recurring losses if the industry in which the comparable operating itself is incurring loss. Following this view, we direct the A.O/T.P.O to include HML as comparable in respect to the assessee company. 15. The assessee also wants exclusion of Mahindra Mahindra Ltd (M M) from the final list of comparables. In this regard, the assessee, during the T.P proceedings submitted benchmarking analyses considering the Indian comparable companies (Indian car manufacturer) after eliminating companies having RPT more than 25%. The assessee rejected M M on the basis of RPT filter, as the related party transactions exceeded the 25% criteria. However, the T.P.O considered M M as comparable by relaxing the related party transaction filter from 25% to 30%.That on similar ground, the assessee also wants exc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e said filter of RPT, the benchmarking has to be carried out. In the facts of the present case before us, the Assessing Officer did not apply any RPT filter but the CIT(A) had applied RPT filter of 15% and the three concerns were excluded in the hands of the assessee. In view thereof, we find no merit in the issue raised by the Revenue vide ground of appeal No.1. We hold that the RPT filter needs to be applied in the present set of facts and the three concerns having not fulfilled RPT filter cannot be included in the final list of comparables. In the case of assessee itself, the Assessing Officer / TPO had applied RPT filter of 25% in assessment year 2005-06. Hence, there is no merit in plea of Revenue. Ground of appeal No.1 by the Revenue is dismissed. 16. We further find that the Bangalore Bench in Toyota Kirloskar Auto Parts Pvt. Ltd. (supra) has held as follows: 7.1 Further, the TPO has applied RPT filter of 5% (para 7 at page 8 of the TPO s order), the application of filter at 5% has no basis and has no legal sanction. Various orders of the Bangalore Tribunal had held that RPT filter of 15% should be adopted. Hence, fresh TP analysis should be conducted by applying R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... MB India 1146.49 1581.55 72.49% (a) From the above, it can be observed that the Company has significantly higher percentage of imports 72.49% vis-a-vis the comparable companies (12.57%). Hence, the additional cost incurred by the Appellant as compared to the comparable companies on account of custom duty would have to be neutralized so as to facilitate the profit comparison with the comparable companies. However, the learned TPO did not take into consideration the excess custom duty paid by MB India on imports while computing the operating margin of MB India. (b) The assessee would like to mention that the assessee has considered non-cenvatable custom duty for the purpose of import duty adjustment. These details are not available in case of comparable companies. The assessee needs to derive the normalized operating profit which can be compared with the comparable companies. Accordingly, the assessee used the details available in the public domain, i.e., the percentage of imports to total purchases of comparable companies and compared the same with its own percentage and basis the same has given the e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ies selected by the TPO 4Sr No Ref Name of company Amount (Rs.) 1 1 Tata Motors Ltd 4.82% 2 2 Premier Ltd-Automotive Segment 19.71% 3 3 Mahindra Mahindra Ltd 3.49% 4 4 Force Motors Ltd 22.28% Average 12.57% Computation of import duty adjustment A Total value of raw material imported indigenous for MB India for FY 2011-12 15,81,55,36,285 B Total value of raw material imported for MB India for FY 2011-12 11,46,49,34,675 C=B/A Import percentage of MB India 72.49% ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... O for re-computation of the operating margin of assessee after taking into consideration the excess custom duty paid on imports as non-operating in nature. The ld. D.R did not raise any objection in this regard. In view of the matter, this issue is restored to the file of the A.O/T.P.O to conduct the aforesaid exercise while complying with the principles of natural justice. 20. Ground No. 11 is reading computation of operating margin of the assessee at entity level, without excluding additional cost on account of abnormal foreign exchange rate movement. During the year, the assessee has imported raw material, CBUs and spare parts from its associated enterprise. The import content of MB India was 72.49%. This higher import content of the Company as compared to comparable companies (selected by the learned TPO) resulted in increased cost of purchases when compared to its comparable companies. So due to higher percentage of imports by the Company than that of comparable companies, it is required to bear additional cost (due to foreign exchange rate fluctuation) as compared to comparable companies which are having low percentage of imports. (a) The assessee submits that, during t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0.37 9 December 68.96 59.85 10 Jan 65.52 62.55 11 Feb 65.95 62.17 12 March 68.36 63.24 Average 66.54 60.36 Percentage increase in EUR vis- vis INR in the current year over previous year 10.23% (d) Accordingly, as per the computation enclosed on page 848 of the paper book, it is evident that the year under consideration witnessed around 10.23% increase in the Euro/ INR rate vis- -vis previous year. The impact of the movement in exchange rate on the profitability of MB India would be by two types: The cost of imported raw material, spares, CBUs, etc. would significantly go up which would be reflected by way of increased cost of raw material, spares, CBUs, etc. ( Impact 1 ); and Exchange loss d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .89 56.28 November 63.69 57.89 December 66.88 57.49 January 66.42 57.88 February 63.65 58.47 March 67.91 62.45 Average 65.70 57.06 (g) A close look of the chart show that in financial year 2007-08 average EURO rate was ₹ 57.06, whereas the average rate of EURO in financial year 2008-09 increased to ₹ 65.70. Thus, there was increase of about 15% in the value of EURO as against INR. In transfer pricing, adjustment has to be made for any abnormal change in the exchange rate fluctuation. Abnormal fluctuation in exchange rate has impact on the cost of inputs which are imported. The Delhi Bench of the Tribunal in the case of Honda Trading Corporation India Private Limited Vs. ACIT (supra) has granted exchange rate fluctuation adjustment where the value of INR has substantially fall ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the authorities below should have considered the said difference due to foreign exchange rate fluctuation in favour of Thai Bhat and against the INR and the said difference has to be removed and the margin thereon has to be adjusted for arriving at the credible comparable through the requisite adjustments. 17. The ld. DR has not been able to controvert the submissions made on behalf of the assessee in respect of fluctuation in exchange rate. Thus, in view of the facts of the case, we are of the considered opinion that this issue needs a revisit to the file of TPO for grant of exchange rate fluctuation. The TPO after examine the documents on record and the exchange rate prevalent at the time of international transaction carried out by the assessee shall decide this issue de-novo. Accordingly, ground No. 8 raised in the appeal by the assessee is allowed for statistical purpose. (h) Further, the Honourable Tribunal in assessee s own case for AY 200910 (ITA 514/PUN/2014), (ITA 566/PUN/2014), (CO 24/PUN/2015) the Hon ble Tribunal respectively observed that: 28. The case of assessee before us is that the year under consideration witnessed around 14.10% increase in Eu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 11,659.25 4 (D) Less: Foreign exchange loss already excluded from total expenditure in the TP report (1,460.00) 5 (E)= C+D Net increase in cost of goods imported because of exchange rate fluctuations 10,199.25 Impact on the margins of MB India's 6 (F) Operating Income as per Split profitability 2,36,521.01 7 (G) Operating Cost as per Split profitability 2,36,421.60 8 (H) = (E) Less: Net increase in cost of goods imported because of exchange rate fluctuation (10,199.25) 9 (I) = G+H Operating cost excluding increase in cost of goods imported due to exchange rate fluctuation 2,26,222.35 10 (J) = F-I Operating Profit 10,298.66 11 (K)= J/F% ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st 176,054,902 (d) The learned TPO in the TP order with respect to demurrage/detention charges stated as follows: Cleared from customs on a timely basis. In this regard, the comparable companies also operate in the same industry, and they may also be impacted in the same way as the assessee. Hence, this expense cannot be allowed as extra-ordinary expenses. (e) With respect to above, the assessee submits that the import content of the comparable companies as selected by the learned TPO (on an average 9.34%) is significantly lower than the import content of MB India (72.49%) and accordingly it would be incorrect to say that the comparable companies may also have been impacted in the same way as assessee. Litigation expenses (f) The assessee wishes to submit that, during the year under consideration, MB India did an out of court settlement with some of the dealers who have filed suit against MB India. The dealers agreed the compensation and amount was paid in order to end the litigation. Accordingly, the assessee excluded the said expenditure for computing the operating margin of MB India considering the said expenses as one time extra o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ating income of the assessee. However, without prejudice to any other ground of objections by the assessee, the assessee contends that the transfer pricing adjustment of Rs. 56.52 crores if any has to be made to the total income of the assessee and it should be in proportion of the international transactions of the assessee with its AEs only and not with reference to the total operating income of the assessee. In this regard, the assessee places reliance in the decision of Hon ble Jurisdictional High Court in the case of PCIT vs. Sandvik Asia Pvt. Ltd. (ITA No. 1088 of 2015), dated 26-4-2018 wherein it was observed and held by the Hon ble Jurisdictional High Court as under: 3 Re. Question (a):- (i) It is an agreed position between the parties that the issue raised herein stands concluded against the Revenue by the following decisions of this Court: (i) CIT v/s. M/s. Ratilal Becharlal Sons (Income Tax AppealNo.1906 of 2013) rendered on 24th November, 2015; (ii) CIT v/s. Goldstar Jewellery Design (P) Ltd., (Income Tax Appeal No.2237 of 2013) rendered on 4th February, 2016 ; (iii) CIT v/s. Alstom Projects India Ltd., (Income Tax Appeal No.362 of 2014) render ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he transfer pricing adjustment without giving benefit of +/- percent as available under the proviso of sec. 92C(2) of the Act. In this regard, the assessee places reliance in its own case for A.Y. 2005-06 (ITA No. 1083/PUN/2013 and ITA No. 1110/PUN/2013 and C.O. No. 60.PUN/2014 wherein at page 36 the Tribunal held as follows: The ground appeal No. 8 raised by the assessee is against allowing +/-5% range, which is directed to be allowed.‖ 28. In view of the aforesaid judgment in assessee s own case for A.Y. 2005-06 ground No. 15 raised by the assessee stands allowed. 27. Ground No. 16 is with regard to the disallowance of royalty expenditure. The assessee submits that it is a Company incorporated under the provisions of the Companies Act, 1956, and is engaged in the manufacture and sale of Mercedes-Benz passenger cars in the Indian market. Pursuant to a Technology License Agreement entered by the Appellant with Daimler AG, it had paid an amount of Rs 12,51,11,877 as royalty to Daimler AG during FY 2012-13. The key terms of the agreement, as amended from time to time provide the following: Grant to MB India a non-exclusive license within India to assemble, manu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ove terms and conditions, it is clear that MB India's rights under the agreement ends on termination of the agreement. It also evident that MB India has neither acquired any assets on an outright basis nor secured any enduring advantage. The benefit secured by MB India is essentially a license right to use the know-how for the period of the agreement and the royalty expenditure in this regard is therefore revenue in nature. (e) In relation to AY 2012-13, as mentioned above, the Ld. AO relying on the orders passed by the erstwhile AO s during the assessment proceedings for AY 2004-05 to AY 2011-12 and further relying on the Hon ble DRP s directions pertaining to AY 2007-08 to AY 2011-12 disallowed the royalty expenses by considering it to be a capital expenditure in its Draft Assessment order. The said ground was further raised before the Hon ble DRP, however the DRP by considering it to be an issue similar previous year upheld the disallowance made by the Ld. AO. (f) Further, the assessee submitted that the facts of the ground have already been considered in A.Y. 2002-03 to A.Y. 2013-14 and A.Y. 2014-15. In respect of the said issue in A.Y. 2002-03 the co-ordinate Bench P ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AY 2013-14 Hon ble DRP upheld AO s order considering royalty expenditure to be capital in nature Not Applicable Pending before Hon ble ITAT AY 2014-15 Expenditure allowed by the Hon ble CIT(A) as revenue deduction Not Applicable AY 2015-16 AY 2016-17 and AY 2017-18 Disallowed by the Hon ble AO based on the decisions in previous years - Pending before Hon ble CIT(A) AY 2018-19 Disallowance made by the DRP in the DRP directions. Final order pending to be issued Final order is yet to be issued Appellant to file an appeal once final order is issued (g) Respectfully following the aforesaid decision of Pune Tribunal in assessee s own case on the same parity of reasoning, facts and circumstances, we hold that the royalty expenditure in this regard is revenue in nature. Accordingly the Ground No. 16 stands allowed. 28. Ground No. 17 is with regard to disallowance of Homologation expenditure. The learned A.O disallowe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lt cars or new cars, which were sent for certification and it was fairly pointed out that in case they were in usable condition, the same were not destroyed. In case of any technical variation in any existing vehicle or any of the components that the assessee wants to introduce in the existing vehicles, it was incumbent upon the assessee to get homologation certificate before any change was so introduced. Another expenditure which was incurred was that ARAI may in random, choose any car (as produced) for conducting conformity of production. Hence, it were not only the initial stage for which specifications need to be approved from ARAI but even for the existing vehicles, random checks were made that the assessee was manufacturing the same in conformity with the procedure laid down. The expenditure thus, laid out was for the purpose of smooth running of business and the revenue expenditure merits to be allowed in the hands of assessee. The assessee had also filed breakup of homologation expenses incurred during the year under consideration and we have perused the same. Hence, there is no merit in the stand of authorities below in disallowing the same on the ground that the said expe ..... X X X X Extracts X X X X X X X X Extracts X X X X
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