TMI Blog2016 (4) TMI 1456X X X X Extracts X X X X X X X X Extracts X X X X ..... royalty payment for the year. Accordingly, Assessee in its TP Study report has said that the payment of royalty is at Arm s length price as the agreement is in accordance with industrial policy of the Govt. In its TP study report assessee applying the TNMM method and submitted that the above transaction is also conducted at an ALP. On the identical facts and circumstances in the case of the assessee in [ 2015 (10) TMI 2509 - DELHI HIGH COURT] has not admitted the appeal of the revenue with respect to the determination of ALP of royalty relying on the decision of CIT Vs. EKL Appliances Ltd. [ 2012 (4) TMI 346 - DELHI HIGH COURT] and CIT Vs. Sony Ericson Mobile Communication [ 2015 (3) TMI 580 - DELHI HIGH COURT] held that royalty payment cannot be disallowed on the basis of the so-called benefit test and the domain of the TPO is only to examine as to whether the payment based on the agreement adheres to the arm's length principle or not - we direct the ld. TPO/AO to delete the adjustment made on account of ALP of royalty payments. Disallowance u/s 14A r.w.r. 8D - mandation of recording satisfaction - HELD THAT:- Recording of satisfaction on the correctness of clai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... filed its return of income on 30.09.2009 at a loss of Rs.18,96,07,791/- which was revised subsequently to Rs.19,27,69,767/-. A reference was made to TPO to determine Arm s length price with respect to international transactions of the Assessee with its AE. Ld. TPO vide order dated 29.01.2013 passed an order u/s 92CA(3) who determined Arm s length price of royalty transactions applying CUP method at Rs.NIL and therefore proposed an adjustment of payment of royalty of Rs.6,69,57,682/-. The main reasons for adopting NIL amount as ALP for royalty transaction are as under :- i. The taxpayer did not produce any evidence/ documentation on how the royalty rate fixed. At an arm‟s length, party receiving technology would like to see the profitability from future revenue streams before fixing a royalty rate. ii. The taxpayer did not produce any cost benefit analysis at the time of entering into the agreement with its AE showing that the royalty rate is not fixed based on expected benefit. iii. There is no proof that the other group concerns or third parties are also charged identical royalty. iv. The taxpayer has also not been able to show that it derived any econ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... neously determining the ALP of the transaction on account of payment of royally to the AE of the appellant as NIL. b) The TPO as well as the DRP and consequently the AO has erred in law and on facts and in the circumstances of the case in erroneously holding that the appellant has not been able to show that it derived economic benefit from the know how licensed from the AE. c) The TPO and DRP and consequently the AO failed to appreciate that royalty was one of the two elements of cost and sales and could have been evaluated under same overall method as had been correctly done by the assessee under TNMM method and royalty payment is not independent to sales and could not be examined on standalone basis. d) The TPO as well as the DRP and consequently the AO has erred in law and on facts and in the circumstances of the case in erroneously exceeding their jurisdiction by judging the Royalty payments made by the assessee through a benefit test , which is not based on any of the methods prescribed as per section 92C of the IT Act, e) The DRP and consequently the AO has erred in law and on facts and in the circumstances of the case in drawing the conclusion that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e in its own case by Hon ble Delhi High Court by order dated 28 October 2015 where in the appeal of the revenue against the order of ITAT decided in favour of the assessee has not been admitted. Therefore he contended that now the issue is required to be decided in favour of the Assessee. He also placed on record the order of ld. TPO in AY 2012-13 wherein following the decision of Hon'ble Delhi High Court has held that international transaction of royalty is at ALP. 9. Ld. DR relied on the orders of lower authorities and submitted that as Assessee could not show the benefit accruing out of payment of royalty the ld. TPO, DRP and Assessing Officer are correct in determining its ALP at Rs. NIL. he relied up on the decision of Honourable Punjab and Harayana High court in case of 2015-TII-51-HC-P H-TP COMMISSIONER OF INCOME TAX, FARIDABAD Vs M/s KNORR-BREMSE INDIA PVT LTD. 10. We have carefully considered the rival contentions. The Assessee has entered into technical assistance agreement with Stanley Electric Company Japan on 01.04.2007 for grant of nonexclusive and nontransferable license without a right to sub-license, to manufacture and sale license product in India using ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the agreement in the year under consideration (copy at APB-I, 340-359, relevant portion at page 342), a non-exclusive license had been granted by Stanley, Japan to the assessee, only for India. As per the conditions thereof, the assessee was to pay royalty on its net sales, after deduction from the net sale price of the licensed products sold by Lumax in India. The basis of calculation of payment of royalty, as agreed to, is contained in Article 4 of the Agreement (APB-I, page 345). Such payment was to be@ 4% on the net sales. However, during the year, royalty was paid @2.43% on the sale of licensed products, amounting to ₹ 218.08 crores, as available at APB-I, page 385. This was so, since the cost of standard imported components, standard local components and certain other deductions had been deducted from the net sales of ₹ 218.08 crores. 20. The Ld. DR has contended that just because the assessee and its AE are publicly listed companies, this is no reason for the requirements of ALP to be flouted. However, the assessee‟s contention regarding both the entities being listed companies, it is seen, is not at all to support any violation of the ALP pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icable in the earlier years could not be made applicable during the relevant year. However, this decision does not have any adverse effect on the case of the assessee. The facts herein are entirely at variance with those of CGM Global‟. Herein, as opposed to the facts in CGM Global‟, the same Royalty Agreement and the same license has been in continuance from 1984 till the year under consideration, the license being renewed from year to year, albeit on the same terms and conditions. Moreover, the following decisions are instances of the external CUP having been employed and this has not been disputed by the Department:- 1. Sona Okegawa Precision Forgings Ltd. vs. ACIT‟ (ITANo.4781/Del/2010) 2. ACIT vs. Sona Okegawa Precision Forgings Ltd.‟ (ITANo.260/Del/2010. 3. CIT vs. Federal Mogul TPR India Ltd.‟ (ITA No.398/2012) 4. Climate Systems India Ltd. vs. CIT‟ (2009) 319 ITR 113(Delhi) 5. CIT vs. Eicher Motors Ltd.‟ (2007) 293 ITR 464 (MP) 6. Praga Tools Ltd. vs. CIT‟ (1980) 123 ITR 773 (A P) 7. Ekl Appliances (2012-TII-01-HC-DEL-TP) 8. Ericsson India Pvt. Ltd. vs. DCIT‟ (201 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re In payment of royalty for supply of technology and knowhow to manufacture licensed products was held to be for the benefit of the assessee and the same rate of royalty payment was allowed as allowed in the years when the parties were not in an AE relationship, but were having identical transactions as those in the year under consideration before the Tribunal. It was held that the royalty payment was a revenue expenditure incurred wholly and exclusively for the benefit of the assessee. The part of the payment disallowed as capital expenditure was held by the Hon‟ble Delhi High Court to be revenue expenditure. It is as such that the invocation of the rule of consistency has been sought on behalf of the assessee and, in our considered opinion correctly so, contending that since the circumstances before and after the coming into existence of the AE relationship between the assessee and Stanley are identical inter se, it cannot at all be said that though in the earlier years, the royalty payment was for the benefit of the assessee, since the inception of the AE relationship, it ceased to be so, due to which, the application of the benefit test by the TPO is entirely uncalled fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... losely 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 party (the assessee) at 4.09% and the comparables at 7.05%. This has not been shown to fall outside the permissible range. 34. The decision of the Tribunal in Ekla Appliances‟, 2012-TII-01HCDel-TP, has been sought to be distinguished by the TPO, observing that the facts in that case are not in perimetria with those of the assessee‟s case. However, therein also, the benefit test had been applied by the TPO, as in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the case before us the assessee has, in fact, contended that it has benefited from the international transactions entered into by it with its AEs. However, even assuming that this has not been established, it would make no difference. 12. In view of the above facts and respectfully following the decision of Hon'ble Delhi High Court in case of assessee for earlier years wherein the decision coordinate bench of ITAT in assessee s own case is upheld we direct the ld. TPO/AO to delete the adjustment of Rs.66957682/- made on account of ALP of royalty payments. 13. In the result ground Nos. 3 and 4 of the appeal of the assessee are allowed. 14. Ground No.5 of the appeal of the assessee is against the addition of Rs.13192275/- on account of disallowance of provision for leave encashment u/s 43B of the Income Tax Act. Ld. AR submitted before us that this ground is not pressed and hence it is dismissed. 15. The next Ground No.6 and 7 are against disallowance amounting to Rs.1659069/- u/s 14A of the Act. 16. Assessee has disallowed a sum of Rs.1266605/- suo motto u/s 14A of the Act. During the course of assessment proceedings vide order sheet entry dated 29.11.2012 asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Officer. Therefore he contended that the disallowance u/s 14A by invoking Rule 8D has rightly been made by the AO. 19. We have carefully considered the rival contentions. Assessee has voluntarily offered disallowance of Rs.1266605/- which is out of expenses, however, no disallowance has been made on account of interest expenditure. Ld. Assessing Officer without examining the correctness the claim of the assessee about disallowance of Rs.1266605/- has asked assessee vide sheet entry dated 29.11.2012 straightway to explain that why disallowance u/s 14A read with Rule 8D should not be made in respect of tax free income. On reading of the assessment order we do not find any finding about the verification of correctness of the claim of the assessee that it has incurred an amount of Rs.1266605/- only towards expense which can be disallowed. 20. Hon ble Delhi High Court Held In the case of I.P. Support Services India (P) Ltd vs CIT [TS-573-HC-2015-DEL] that AO cannot invoke Section 14A read with Rule 8D (2) without recording his satisfaction and noted that the recording of satisfaction as to why the voluntary disallowance made by the assessee was unreasonable and unsatisfactory i ..... X X X X Extracts X X X X X X X X Extracts X X X X
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