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2013 (11) TMI 668 - AT - Income TaxAdjustment of arm s length price - Purchases made from Associate Enterprise - For justifying the costs, assessee had used Transaction Net Margin Method (TNMM) using its operating margin to total cost as Profit Level Indicator - Denial of benefit of plus/minus 5% range - Held that - arm s length price of the cost has been worked out by the Assessing Officer at Rs. 103.11 Crores by erroneously applying the percentage on the cost, whereas the percentage ought have been applied on operating income. Even if we take the figure worked out by the TPO as correct, difference between the total operating cost of the assessee Rs. 103.90 Crores and arm s length price of such cost, worked out by the TPO at Rs. 103.11 Crores, is 0.79 Crores. Instead of doing this direct work out, TPO endeavoured to go a step further and assign such difference to the purchase cost of the components from the Associate Enterprise - when calculating the non-AE cost, reducing the cost of raw material imported alone from the total cost, will not lead to a logical conclusion. When cost is distributed, it has to be so done evenly. TPO attributed the difference is ALP of cost entirely to the purchase of components made by the assessee from its Associate Enterprise which, in our opinion, will not give fair results. Adjustment that can be carried out at the best is only on the proportionate sale that are relatable to the components imported by the assessee from its Associate Enterprise and not on the whole of the operational income - the issue of determining the arm s length price with respect to the imported components from Associate Enterprise requires a fresh look by the Assessing Officer - Decided in favour of assessee. Capital or revenue expenses - Disallowance of royalty - Whether the assessee has acquired a right to use the technology and licence during the assessment years - Held that - From the perusal of the agreement it is found that KMC granted the assessee an exclusive right to manufacture and sell the products in India using the licenced technology provided. An exclusive right has been conferred on the assessee for manufacturing and selling the products in India - it is a case where royalty was paid initially and also running expenses towards royalty are being paid year after year. As per this agreement for transfer of know-how as technical aid, initial royalty of 9 lakhs US Dollar has to be paid, and thereafter running royalty at the rate of 3.5% of the net sales is required to be paid by the assessee - The assessee-company has entered into a technical licence agreement with KMC, which had a 50% shareholding in the assessee-company, to manufacture and sell the contract products in India using licenced technology. The assessee-company paid a lump sum amount of 9 lakhs US Dollars to KMC to get this technology. This amount was paid in three instalments of 3 lakhs US Dollars from financial year 1996-97 to 1998-99. Apart from this, the assessee-company has been paying royalty @ 3.5% for products manufactured by using licenced technology supplied by KMC This royalty is paid @ 3.5% of net sales less imported components. As per this agreement, if there is no sales, no royalty is payable by the assessee. Technical assistance contemplated in the agreement covered the establishment of the factory and the operation thereof for the manufacture of transformers of all kinds and types. Thus, the property in that case, i.e, the drawing, was transferred to Indian company and the technical know-how transferred was also for the setting up of the factory which are all in the capital field. In those circumstances, 25% of the payment had been held to be capital because only 25% of the initial lump sum and royalty payment was considered as capital. In the given case, no such property has been transferred to Indian Company nor is the technical data provided to set up the plant - Therefore, royalty has to be allowed as revenue outgo for the impugned assessment year - Following decision of Jonas Woodhead & Sons Ltd. v. CIT 1997 (2) TMI 4 - SUPREME Court and assessee s own case in 2013 (11) TMI 570 - ITAT CHENNAI - Decided in favour of assessee.
Issues Involved:
1. Adjustments made to the prices paid for purchases from Associate Enterprise. 2. Disallowance of royalty payments. 3. Disallowance under Section 14A of the Income-tax Act, 1961. Detailed Analysis: 1. Adjustments to Arm's Length Price (ALP): The primary issue pertains to the adjustments made to the arm's length price (ALP) for purchases made by the assessee from its Associate Enterprise (AE). The assessee, a joint venture between Lucas-TVS Limited, Chennai, and Koito Manufacturing Company Limited, Japan, engaged in manufacturing automotive lamps, used the Transaction Net Margin Method (TNMM) to justify its costs. The Transfer Pricing Officer (TPO) recommended an adjustment of Rs. 0.80 Crores on the cost of components imported from the AE, citing that the costs were higher than the ALP. The TPO's methodology, which included comparisons with companies like Japan Lighting and Lumax Industries Ltd., was contested by the assessee, arguing that the TPO incorrectly attributed the entire cost difference to purchases from the AE. The Tribunal found merit in the assessee's argument that adjustments should be proportionate to the sales related to the imported components and not the entire operational income. Consequently, the Tribunal set aside the orders of the authorities below and remitted the issue back to the Assessing Officer (A.O.) for a fresh determination of the ALP, allowing the assessee's ground for statistical purposes. 2. Disallowance of Royalty Payments: The second issue involved the disallowance of royalty payments made by the assessee to Koito Manufacturing Ltd., Japan. The Tribunal noted that similar issues had been decided in favor of the assessee in previous years (2004-05 to 2006-07), where it was held that royalty payments should be treated as revenue expenditure. The Tribunal referenced the case of Alembic Chemical Works Co. Ltd v. CIT and other relevant judgments, emphasizing that the royalty payments were for the exclusive right to manufacture and sell products in India using licensed technology, and thus should be treated as revenue expenditure. The Tribunal, following its earlier decisions, allowed the royalty payments as revenue expenditure for the impugned assessment year, thereby allowing the assessee's ground. 3. Disallowance under Section 14A: The third issue was regarding the disallowance made under Section 14A of the Income-tax Act, 1961. The assessee's representative did not press this ground, leading the Tribunal to dismiss it as not pressed. Conclusion: The Tribunal partially allowed the appeal of the assessee for statistical purposes, remitting the issue of determining the ALP back to the Assessing Officer for fresh consideration, allowing the royalty payments as revenue expenditure, and dismissing the Section 14A disallowance ground as not pressed. The order was pronounced in the Court on 30/04/2013 at Chennai.
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