2014 (6) TMI 317 - AT - Income Tax

Transfer pricing adjustment Corporate additions Determination of Arm s Length Price Payment of Royalty - Held that - The assessee is a licensed manufacturer of its products in its own right using the technology provided by the parent company i.e. Keihin of Japan - the assessee s PLI is within the plus minus range of 5% - The PLI calculated by the TPO is OP/TC (Assessee) 6.22%, whereas PLI of the comparable calculated by the TPO is OP/TC of the comparable is 8.29% - The plus minus range of the comparable would be plus minus 8.29% i.e. from 3.29% to 13.29% and it is but obvious that the assessee s PLI of 6.22% falls within the range - the plus minus 5% range has to be with reference to international transactions with the AE only and in view of the same as the difference between the two as calculated by TPO is 8.29% of the comparables and 6.22% of PLI of the assessee, That being within the plus minus range of 5% (3.29% to 13.29%), obviously no adjustment should have been mad thus, the orderof the CIT(A) is upheld Decided against Revenue. Relying upon CIT Versus EKL APPLIANCES LTD 2012 (4) TMI 346 - DELHI HIGH COURT - the payment of running royalty is on revenue account - the Royalty was being paid from 1997 and was continuously examined by the AO, then in the absence of any new facts to hold that there was no need to pay the royalty was uncalled for Decided against Revenue. Disallowance made u/s 40A(2)(b) of the Act Held that - As decided in assessee s own case for the earlier assessment year, it has been held that, various facilities such as rent, electricity, water, generator expenses and also providing manpower etc. A.O. made his own estimates and held the expenditure to excessive & unreasonable - The availing of facilities is not in dispute - this issue was decided in favor of the assessee holding that there was no excessiveness or unreasonableness qua this expenditure there was no infirmity in the order of CIT (A) that AO has not brought any cogent material on record to come to a conclusion that this expenditure is excessive or unreasonable Decided against Revenue.

Summary

Issues Involved:
1. Transfer Pricing Adjustments (TP Adjustments)
2. Capitalization of Royalty
3. Disallowance under Section 40A(2)(b)

Issue-wise Detailed Analysis:

1. Transfer Pricing Adjustments (TP Adjustments):

AY 2004-05:
- Grounds Raised by Revenue: The Revenue challenged the CIT(A)'s deletion of TP adjustments amounting to Rs.1,29,70,076/- made under Section 92CA(3) of the Income Tax Act. The Revenue argued that the CIT(A) ignored the findings of the AO and the prevailing international market trends.
- Assessee's Background: The assessee, an Indian company, is a licensed manufacturer of auto components, using technology provided by its AE, Keihin Corporation, Japan.
- TP Adjustments by TPO: The TPO determined the ALP of royalty payment at Rs. NIL and made adjustments based on the TNMM method, changing the PLI from operating profit to capital employed (OP/CE) to operating profit to total cost (OP/TC).
- CIT(A)'s Findings: CIT(A) held that the assessee is a routine licensed manufacturer, not a contract manufacturer, and that the PLI of operating profit to total cost (OP/TC) was correctly applied. CIT(A) also held that the assessee's transactions fell within the +/- 5% range as per the proviso to Section 92C(2).
- Tribunal's Decision: The Tribunal upheld the CIT(A)'s order, confirming that the assessee's PLI fell within the permissible range and that the TPO's adjustments were not justified. The Tribunal also noted that the TPO's approach to treat the assessee as a contract manufacturer was incorrect.

AY 2005-06:
- Grounds Raised by Revenue: The Revenue challenged the CIT(A)'s deletion of the disallowance of royalty expenditure amounting to Rs.1,97,40,726/-.
- CIT(A)'s Findings: CIT(A) relied on the order for AY 2004-05, emphasizing the necessity of royalty payments from a business perspective and upheld the assessee's claim.
- Tribunal's Decision: The Tribunal upheld the CIT(A)'s order, citing the Delhi High Court's decision in the assessee's own case for AY 2003-04, which allowed the royalty payment as revenue expenditure. The Tribunal also referenced similar decisions in other cases, affirming that the necessity of royalty payment cannot be questioned.

2. Capitalization of Royalty:

AY 2004-05:
- Grounds Raised by Revenue: The Revenue challenged the deletion of the addition of Rs.22,53,000/- made by capitalizing the royalty.
- CIT(A)'s Findings: CIT(A) held that the entire royalty payment was allowable as revenue expenditure, referencing the Delhi High Court's decision in the assessee's own case for AY 2003-04.
- Tribunal's Decision: The Tribunal upheld the CIT(A)'s order, following the Delhi High Court's judgment that the royalty payment is on revenue account and not capital in nature.

3. Disallowance under Section 40A(2)(b):

AY 2004-05:
- Grounds Raised by Revenue: The Revenue challenged the deletion of the addition of Rs.14,52,020/- made under Section 40A(2)(b) of the Act.
- CIT(A)'s Findings: CIT(A) found that the AO's estimation of expenses as excessive was not supported by any cogent material. The CIT(A) relied on the ITAT's decision in the assessee's own case for AY 2003-04, which held that the expenses were reasonable.
- Tribunal's Decision: The Tribunal upheld the CIT(A)'s order, finding no infirmity in the deletion of the disallowance. The Tribunal noted that the AO had not provided any substantial evidence to prove the expenses were excessive or unreasonable.

Conclusion:
The Tribunal dismissed the Revenue's appeals for both AY 2004-05 and AY 2005-06, upholding the CIT(A)'s orders on all issues. The Tribunal confirmed that the TP adjustments were not justified, the royalty payments were allowable as revenue expenditure, and the disallowance under Section 40A(2)(b) was not supported by substantial evidence. The Tribunal's decisions were based on detailed analysis, adherence to legal provisions, and reliance on judicial precedents.