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2013 (9) TMI 796 - AT - Income TaxNature of expenditure - Payment of running royalty is a capital expenditure of revenue expenditure - Collaboration agreement was entered into for grant of technical assistance for setting up of the factory and also for the manufacture and sale of the product. But the assessee made separate payment for the technical assistance for setting up of the factory which was 5,00,000. This sum was treated as capital expenditure by the assessee itself. The annual payment for the royalty was based upon the percentage of sale of the motorcycles Held that - The case of the assessee is squarely covered by the cases Climate Systems India Ltd 2009 (10) TMI 116 - DELHI HIGH COURT and Sharda Motor Industrial Ltd 2009 (9) TMI 159 - DELHI HIGH COURT being identical in the facts Following the judgments in the abovementioned cases, the running royalty is allowed as revenue expenditure Decided in favor of Assessee. Eligibility of deduction u/s 80IA of the Income Tax Act - Eligible business are transferred to any other business carried on by the assessee - Goods or services held for the purposes of any other business carried on by the assessee are transferred to the eligible business and, in either case, the consideration, for such transfer as recorded in the accounts of the eligible business does not correspond to the market value of such goods or services as on the date of the transfer - In the eligible business, the assessee is generating the power which is being consumed by the assessee company s manufacturing facility - Profit of the eligible business is to be computed at the market rate of supply of power. It is the assessee s contention that Maruti Udyog Limited is supplying the power to its AE at the rate of ₹ 8.50 per unit while the assessee has computed the profit of the eligible business by taking the rate of power at ₹ 7.08 per unit. The assessee has computed the rate of power by the cost of generation per unit with mark up of 15% - Held that - Government undertaking i.e. Haryana State Electricity Board has supplied the power to the assessee and other industrial units in the area at the rate of ₹ 3.90 per unit - Rate at which power is being supplied by the Haryana State Electricity Board, to each and every industrial unit situated in the area, in which assessee s manufacturing unit is situated, is the market rate at which power is available - The rate at which Maruti Udyog Limited is claimed to supply the power to its AE cannot be said to be the market rate of the power in that area because as per assessee s own claim, Maruti Udyog Limited is supplying the power to its AE and not to unrelated parties in general - There was a loss in the power generation undertaking of the assessee and therefore, there was no eligible profit for allowing deduction under Section 80IA Decided against the Assessee. Arms Length Price of Model development Model development fee claimed by assessee is excessive Held that - TPO has not specified how the model development fee paid by the assessee was excessive or unreasonable. It is only his subjective assessment that the arm s length price of the model development fee should have been 25% of the payment made by the assessee. He has held that there was a joint activity of development of new model by the assessee and HMCL Held that - There was no such joint activity of the model development - Activity of the assessee started only after the model is developed by HMCL and technology is handed over to the assessee. Then the assessee undertook the research and development activity for absorption of such technology and for indigenization of the spare parts. Thus, the activity of research and development of the model was undertaken by HMCL and not jointly by the assessee and HMCL. No other reason is given by the TPO for determining the arm s length price at 25% of the model fee paid by the assessee. He has not applied any method for determining the arm s length price prescribed under Section 92C(1) of the Income-tax Act Reliance has been placed upon the judgment in the case of Nestle India Ltd. 2011 (5) TMI 566 - DELHI HIGH COURT View adopted by the TPO is incorrect arm s length price of model development should be to the extent of 25% of the payment towards model fee - Addition made on this count is accordingly directed to be deleted Decided in favor of Assessee. Disallowance of royalty paid on exports made to associate enterprise by determining the arm s length price at nil Held that - The assessee is paying royalty as per technical know-how agreement dated 02.06.2004 with HMCL. As per this agreement, the assessee is entitled to use technical know-how provided by HMCL for manufacture and sale of two wheelers and parts - Royalty is payable on such manufacturing of goods - Goods are exported to subsidiaries of the Associate Enterprise i.e. AE of Honda Japan and the assessee also paid export commission, would be no ground for disallowance of the royalty or determining arm s length price of the royalty at nil - The assessee is exporting goods to AE of Honda on principal to principal basis and the price at which export is made is higher than the domestic price - There is no justification for disallowance of the royalty on the export - Accordingly, the addition made by the TPO by determining arm s length price of royalty on export at nil is deleted Decided in favor of Assessee. Computation of ALP in regard to spare parts etc. - Addition is with regard to the purchase of raw material, spare parts and components Method to be adopted for computation of ALP Held that - For benchmarking international transaction of import of spare/components the most appropriate method is Comparable Uncontrolled Price (CUP) method - There exists a highest degree of similarity between import and domestic purchase of the spares/components - However, while applying the CUP method, it is to be ascertained whether similar goods were available indigenously. If the goods were not available indigenously, then naturally the rate of indigenous goods cannot be applied for determining the ALP. It is the contention of the assessee that when the goods were not available indigenously then only the same were purchased from AE. However, no evidence in this regard is produced by the assessee - No specific opportunity was allowed to the assessee to produce such evidence - Matter is restored to the file of the Assessing Officer Appeal is partly allowed.
Issues Involved:
1. Transfer Pricing Issues. 2. Corporate Issues. Detailed Analysis: 1. Transfer Pricing Issues: * Export Commission Adjustment: - Facts: The assessee paid export commission at the rate of 5% to Honda Motor Co. Ltd., Japan, for the export of motorcycles. The TPO disallowed the payment, determining the arm's length price at nil, arguing that the payment was a mechanism to shift profits out of India. - Assessee's Argument: The export commission was paid for accessing Honda's well-established overseas marketing network, which enabled the assessee to sell products in foreign markets at higher prices than domestic sales even after paying the commission. - Tribunal's Decision: The export agreement benefited the assessee, allowing it to export specific models to designated countries. The TPO's disallowance was found to be unjustified as the export commission was incurred for business purposes and resulted in additional revenue for the assessee. * Model Fee Adjustment: - Facts: The assessee paid a model fee to Honda Motor Co. Ltd. for the development of new motorcycle models. The TPO determined the arm's length price at 25% of the fee paid, arguing that the assessee also contributed significantly to the development. - Assessee's Argument: The model fee was paid for the development of new models as per the specifications provided by the assessee. The research and development activities by the assessee were for absorbing the technology and indigenizing parts, not for developing the models. - Tribunal's Decision: The TPO's determination of the arm's length price at 25% was arbitrary and without basis. The model fee was paid for the development of new models by Honda, and the assessee's activities were either prior to or subsequent to the development. The adjustment was deleted. * Royalty on Exports: - Facts: The assessee paid royalty on exports made to associated enterprises. The TPO determined the arm's length price at nil, arguing that the payment was for sales to subsidiaries of Honda Japan. - Assessee's Argument: The royalty was paid for using the technical know-how provided by Honda for manufacturing motorcycles, which were then exported. - Tribunal's Decision: The royalty payment was for the use of technical know-how in manufacturing motorcycles, and the exports were made on a principal-to-principal basis. The disallowance was found to be unjustified and was deleted. * Purchase of Raw Materials and Components: - Facts: The assessee purchased raw materials and components from associated enterprises. The TPO applied the CUP method and determined the arm's length price, resulting in an adjustment. - Assessee's Argument: The purchases from associated enterprises were made only when the components were not available indigenously. - Tribunal's Decision: The CUP method was appropriate, but it needed to be ascertained whether similar goods were available indigenously. The matter was remanded to the Assessing Officer to allow the assessee to produce evidence supporting its contention. 2. Corporate Issues: * Disallowance under Section 14A: - Facts: The Assessing Officer computed disallowance under Section 14A using Rule 8D, which was not applicable for the assessment year under consideration. - Tribunal's Decision: The disallowance was to be recomputed as per the observations of the Hon'ble Jurisdictional High Court in the case of Maxopp Investment Ltd., which held that Rule 8D is not applicable for assessment years prior to AY 2008-09. * Disallowance under Section 80IA: - Facts: The assessee claimed deduction under Section 80IA for power generated and consumed by its manufacturing facility. The Assessing Officer computed the profits using the rate at which power was supplied by the State Electricity Board. - Tribunal's Decision: The market rate for power should be the rate at which it is supplied by the State Electricity Board. The disallowance was upheld. * Provision for Warranty: - Facts: The assessee claimed a deduction for the provision for warranty. The Assessing Officer disallowed it, treating it as an unascertained liability. - Tribunal's Decision: The issue was covered in favor of the assessee by the Tribunal's decision in earlier years, which was upheld by the Hon'ble Jurisdictional High Court. The disallowance was deleted. * Export Commission Disallowance under General Provisions: - Facts: The Assessing Officer disallowed the export commission under Section 40(a)(i) for non-deduction of tax at source, holding it to be royalty/fee for technical services. - Tribunal's Decision: The export commission was neither royalty nor fee for technical services. The assessee was not required to deduct tax at source, and the disallowance was deleted. * Disallowance of Expenditure on Captive Power Generating Unit: - Facts: The assessee claimed deduction under Section 80IA for its captive power generating unit. The Assessing Officer disallowed it, treating the rate of power supplied by the State Electricity Board as the market price. - Tribunal's Decision: The market rate for power should be the rate at which it is supplied by the State Electricity Board. The disallowance was upheld. * Disallowance of Export Commission: - Facts: The assessee paid export commission to Honda Motor Co. Ltd. The Assessing Officer disallowed it under various grounds, including non-deduction of tax at source and treating it as capital expenditure. - Tribunal's Decision: The export commission was for business purposes and not capital expenditure. The disallowance was deleted. * Disallowance of Royalty Payment: - Facts: The assessee paid royalty for using technical know-how. The Assessing Officer disallowed it, treating it as capital expenditure. - Tribunal's Decision: The royalty payment was a revenue expenditure and not capital expenditure. The disallowance was deleted. Conclusion: The Tribunal allowed the appeal of the assessee partly, deleting several disallowances made by the Assessing Officer and the TPO, and remanding certain issues for reconsideration.
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