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TMI Blog2013 (8) TMI 669X X X X Extracts X X X X X X X X Extracts X X X X ..... geous position as compared to the assessee – Held that:- Phoenix were to be retained as a comparable, certain adjustments were required to be made to its statistics – There are remaining three comparables, i.e., Indo-Japan Lightings, Fiem Industries Ltd. and Jagan Lamps Ltd. - The PLI’s of these comparables were 8.1%, 2.69% and 1.91% respectively, amounting to a total of 12.77%. - Average PLI of these comparables at 4.26%. The assessee’s margin, at 6.5%, it is seen, is higher than the above average PLI of 4.26% and the assessee’s margin, therefore, does not call for any adjustment on account of ALP concerning royalty payment on purchase of raw material - The CIT (A)’s order in this regard is found to be fully justified as against that of the TPO, who initially observed that an FAR convergence was mandatory and then, simply rejected the comparables on the basis of turnover, without checking out the FAR convergence, and thereafter, chose a single comparable which too (according to him) was not comparable to the assessee company, which observation has correctly been subverted by the Ld. CIT (A) - Since Phoenix Lamps, as found by the Ld. CIT (A), was operating in an SEZ, it, in order t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , there was no business connection and the expenditure incurred was not commercially expedient- Held that:- As per Section 37(1) of the Act, it is not necessary that the incurrence of the expenditure should always result in earning of profits and it can be for any purpose, even incidental or ancillary to the business, for which the expenditure may have been incurred, in order to be allowable under the provision – Expenditure allowed – Decided against the Revenue. - ITA No.4715/Del/2010 and ITA No.6086/Del/2010 - - - Dated:- 12-7-2013 - SHRI G.D. AGRAWAL AND SHRI A.D. JAIN, JJ. For the Appellant: Shri Pradeep Dinodia,Shri R.K. Kapoor and Miss Pallavi Dinodia, CAs For the Respondent: Shri Peeyush Jain, CIT, DR ORDER PER A.D. JAIN, JUDICIAL MEMBER ITA No.4715/Del/2010 This is an appeal filed by the department for Assessment Year 2004-05 against the order dated 30.09.2010 passed by the CIT (A)-XX, New Delhi, taking the following effective grounds:- 2. On the facts and in the circumstances of the case and in law, the Ld. CIT (Appeals) has erred in deleting the addition of ₹ 2,27,23,781/- made by the A.O. for calculating the book profit bei ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessing Officer, that the liability was either contingent, or had not accrued. 7. The Ld. CIT (A), it is seen, in deleting the addition, has gone by Apollo Tyres Ltd. vs. CIT , 255 ITR 273 (SC) and Bharat Earth Movers vs. CIT , 245 ITR 428 (SC), besides other case laws cited by the assessee. In Apollo Tyres (supra), the Hon ble Supreme Court held that the Assessing Officer has limited powers to examine as to whether the books are certified by the authorities under the Companies Act and are properly maintained; and that the Assessing Officer has no power to go behind the net profit declared, except to the extent provided in the Explanation to Section 115J of the IT Act. In Bharat Earth Movers (supra), the Hon ble Supreme Court held that if a business liability has definitely arisen in the accounting year, the deduction should be allowed, albeit the liability may have to be quantified and discharged at a future date; that it should also be capable of being estimated with reasonable certainty, though the actual quantification may not be possible; and that the difference between accrued and contingent liability set apart to meet the liability on account of leave encashment of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... royalty paid to Rober Bosch Gmbh, Germany at ₹ 1,20,796/- and M/s Value Vision, France at ₹ 7,80,379/-, both @ 4% on sales, the assessee submitted that it had obtained technical assistance and knowledge for manufacture of Ford Ikon head lamp and tail lamp; that there was an agreement with these companies, approved by the RBI for payment of royalty; and that this was not a capital expenditure, as the expenditure had been incurred for technical know-how, which was a fast changing process. On considering the stand of the assessee, the Assessing Officer made an adjustment of ₹ 2,51,88,406/- u/s 92CA of the IT Act, on the basis of TNMM analysis. 11. By virtue of the impugned order, the Ld. CIT (A) deleted the addition made. 12. Challenging the impugned order in this regard, the Ld. DR has contended that the Ld. CIT (A) has erred in deleting the addition of ₹ 2,51,88,406/- correctly made by the Assessing Officer u/s 92CA of the Act, being the TP adjustment; that while doing so, the Ld. CIT (A) has ignored the facts recorded by the TPO and also the fact about the amount of royalty paid and the excess amount paid on purchases; that the royalty was correctly tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Year 2003-04, Stanley was a 19.41% shareholder with the assessee and it acquired the status of an AE of the assessee in Assessment Year 2003-04; that the TPO made an adjustment concerning royalty payment, failing to consider that the royalty was being paid by the assessee only on the products being produced under license from Stanley and not on items manufactured and sold under the assessee s own brand; that the TPO further failed to consider that since the corporate tax rates in Japan are much more than those in India, there was no reason whatsoever for the assessee to shift the income; that the TPO had erred in observing that the agreement of the assessee with Stanley was a mere paper document; that the TPO had erred in observing that since Stanley had provided full time expatriate employees/qualified engineers to the assessee, there was no need for the assessee to receive any further technology, whereas these personnel had been sent to the assessee by Stanley only because of the commercial relationship between them for providing technology, for which it was, that the royalty was paid; that the TPO had further erred in observing that the assessee s claim of engineers, etc., havi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt stage, requested this company to be rejected as a comparable, or for adjustment in the PLI thereof to be made; that the TPO had further failed to consider that for Assessment Year 2006-07, the TPO had himself rejected Phoenix Lamps as a comparable; that whereas the TPO took only one comparable, i.e., Phoenix Lamps, the Ld. CIT (A) has correctly taken the three comparables, i.e., Indian Japan Lighting, Fiam Industries and Jagan Lamps Ltd., as the proper comparables and finding the PLI of these three comparables to be lower than the PLI of the tested party, the assessee (4.26% as against 6.50%), the Ld. CIT (A) has correctly deleted the addition made on account of ALP; and that alternatively, even if Phoenix Lamps were to be retained as a comparable along with the other three comparables accepted by the CIT (A), the average PLI of the comparables including Phoenix would be 6.44%, warranting no addition on account of ALP, either on account of royalty, or on account of purchases of raw material. 15. Having heard the rival contentions on this issue with regard to the material available on record, it is seen that the CIT (A) deleted the addition of ₹ 2,51,88,406/- made by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 377; 2,03,02,776/-, however while recommending the final adjustment he has determined the arms length price on an overall basis under TNMM. (i) The appellant has submitted that in the in the ever changing competitive world every person is striving hard for increasing its market share by introducing new technology in its manufacturing process. (ii) That the Automotive industry is one of the fastest growing industries in India, with its rapidly changing technology and the frequent introducing of new models of vehicles. It is an established fact that Japan and Germany are world leaders in automotive technology and best practices. Most Indian companies have entered into Joint ventures, partnerships and/ or collaborations with foreign companies of these two countries. The trend is followed by most Indian companies, the foreign partner brings with him the advantage of technology which is superior as they are already ahead in their Research and Developmental activities. India being n emerging market where there is a huge demand of goods and services making this the natural choice for most of the foreign company to invest. The Technology provided by a foreign companies is slowly ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hip/ collaboration between the two companies which has assured the customers in India, of a should aegis and good relations. No consumers would want a relationship with parties which do not show good relations and stable foundations, which the period of 20 years signifies. Thus, by being a good aegis for the appellant even when the foreign partner was not an associate enterprise goes to show the support it lent by being a strong brand worldwide. (vi) That a strong support by the Stanley brand in India, should in fact have led to an increase in rate of royalty after it becoming the AE of the appellant, which has in fact was not the case and the royalty was actually reduced showing signs of equity and parity between the two companies. 5. The appellant has further made submissions by highlighting the points made out by TPO in his order and countered the same as under :- It has been submitted that as per the policy of the Government of India, these types of agreements require approval from the Reserve Bank of India and other Govt. Body on year to year basis, because the necessity and business needs of entering into such agreements are required to be examined by these author ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inority stake holder (of 19.41%). Infact, the facts of the assessee may prove to be contrary wherein the JV partner has perhaps put up an Executive Director to ensure that the business is conducted and carried out by accepting appropriate accounting norms and prudent business practices which are just and fair to all the business partners. (ii) With regard to the observations of the TPO in para 6, page 6, of his order that since the assessee had employed full-time expert qualified engineers provided by Stanley Group of Japan, there is no need for receiving any technology, because the know-how is provided by such technical personnel. Their presence has great impact on the quality of the products manufactured by Lumax and for various technical discussions with engineers of the vendors who are both Indians and Foreigners. Such compensation to the AE could only be by way of payment of royalty. If the appellant was not paying any royalty for use of technology, even the arrangement of obtaining engineers would not have been provided. The appellant has claimed that, in fact, this aspect of the matter clearly demonstrated in favour of the appellant that the expats have been deputed by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the TNMM on an overall margin analysis is justified. It would be pertinent to note that in the next ground raised by the TPO, he himself accepted that the aggregation of various international transactions is permissible as per Rule 10B. Therefore, it is prayed that his contention be dismissed. (v) It has been submitted that reasons given by the TPO for rejecting the comparables found out by the assessee are not justified. Under the transfer pricing what is required to be seen is that whether the comparables selected ssatisfy the conditions envisaged under rule 10B(2) i.e. popularly known as FAR analysis. (a) The specific characteristics of the property transferred: (b) The functions performed, taking into aqccount the qassets employed and risks assumed. (c) The contractual terms; (d) Conditions prevailing in the markets in which the respective parties to the transactions operate keeping in view geographical locations, size of markets, the laws and government orders in force, overall economic development etc. etc. It has been submitted that all the comparables selected through a quantitative seach process by the assessee stood the test as under : (1) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o ratios, which have some relevance to the FAR analysis clearly signal that functionally these two companies are not comparable. We have carried out some ratio analysis which has some meaning nd significance to FAR analysis with other comparables and the same is as under :- Sl. No. Company s Name Year End Fixed Assets to Turnover ROCE (%) RONW(%) 1 Fiem Inds. Ltd 200403 2.38 19.71 10.25 2 Phoenix Lamps 200403 0.97 18.07 28.74 3 India Japan Lighting 200403 1.10 11.13 11.15 4 Jagan Lamps 200403 1.07 1.63 1.44 5 Lumax Inds. 200403 1.69 12.83 18.00 (Sources : Capitaline Plus datab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Companies 2003-04 1 India Japan Lighting 8.17 % 2 Autolite India Ltd -10.79 % 3 Fiem Industries Ltd 2.69 % 4 Japan Lamps 1.91 % 5 Phoenix Lamps 12.97 % JMA Industries -34.36 % S. No. Average 3.24 % 1 Maximum 12.97 % 2 Upper Quartile 8.17 % 3 Median 2.69 % 4 Lower Quartile 1.91 % 5 Minimum -34.36 % From the From the above, it would be observed the average of the comparable compies worked out to be (-) 3.24 % as against (-) 0.05 based on three years average, which was given in Transfer Pricing Study ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f royalty to the AE, an internal CUP is also applicable. These submissions have been made based on the fact that it was only during this assessment year that M/S Stanley Electric Co. Corporation, Japan has become its AE, because it acquired 19.41 % in the paid up capital and has also appointed Executive Director of the assessee has entered into a commercial relationship with Stanley much before it become its AE in assessment year 2004-05. It has also been submitted and clarified that the assesse was paying royalty @ 4% to the Stanley Electric Co. till assessment year 2003-04, when it was not its AE. However, after it becomes an AE i.e. from assessment year 2004-05, the royalty has been paid @ 3%. To that extent, it was submitted that so far as the royalty payment is concerned, it satisfies all the ingredients of an internal CUP. The courts are continuously taking a view that if internal CUP is available, then there is no need to follow any other method. To that extent, the payment of royalty to the AE by the assessee during the year under consideration is also justified based on internal CUP. Following judgements are relevant for the proposition. VVF Ltd vs. DCIT [2010-TII-04-I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1.99 0.23 11.87 3.96 Other manufacturing Expenses 1.45 6.32 11.19 0.66 17.12 1.34 Selling and Administration Expenses Miscellaneous Expenses Total Expenses 43.77 73.21 59.11 5.83 115.62 14.40 Operating Profit 11.39 1.45 5.35 0.51 34.68 (3.26) Adjustment for (6.93) (9.47) (3.61) (0.37) (15.49) (0.51) Adjusted Operating Profit (A) 4.46 (8.02) 1.74 0.14 19.19 (3.77) Net Sales (B ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt year 2006-07 has been filed before me in support of this contention. It has also been claimed that Phoenix was not comparable even on FAR analysis and ratio analysis and ratio analysis adopted by the TPO was not the correct basis for selecting Phoenix as the lone comparable. FINDING 6. I have carefully gone through the order passed by the AO/TPO and also the submissions made by the appellant, both in writing as well as oral arguments advanced during the course of proceedings. 7. I have also examined the search process carried out by the assessee ass contained in its T.P. Study compiled by M/S Ernest Young. The assessee has selected TNMM as the most appropriate method (NAM) as the net margins are less affected by transactional differences than are prices of the products. The search criteria based on functions performed, assets employed and risks assumed based on two data base, i.e. Prowess and Capitalline was deployed, the comparables which were initially selected on a broad basis were narrowed down by referring to the brief description of business, activities undertaken based on financial statements and annual reports in which finally six comparables were selected ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ming the rate of royalty has rather been reduced from 4 % 3 %. The appellant is also paying royalty to other two concerns viz, Robert Bosch, gmbh, Germany and Value Vision, France @ 4 % of its sales, as also observed by the AO in his order in para 7.2. 10. Keeping in view the facts as also the legal submissions made by the appellant, I am of the considered view that AO/TPO was not justified in disallowing the amount of royalty paid by the assessee to its AE. The appellant had been paying royalty at higher rate than paid during the year under consideration to the same entity i.e. Staley Electric Co. Ltd. Japan in assessment year 2003-04. The assessee has also paid royalty to other non AEs @ 4% whereas the royalty to the AE has been paid@ 3 % during the year under consideration. The agreement had been entered into by the appellant in 1984, which is continuing after seeking necessary approval from the Reserve Bank of India on year to year basis. The existence of such agreement cannot be disregarded, especially in view of the judgement of Sony Sony India Ltd. 114 ITD 448 (Del-ITAT). Even the Rule 10B (2) (c) of the Income-tax rules give recognition to this proposition the comparabil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... visits coupled with the fact that expats are put by AE on assessee s production base go to prove that assessee was actually getting technical assistance from AE to whom royalty has been paid. 13. The TPO has taken another note of the fact to disallow the royalty payment that the appellant purchased moulds, design and drawings from the associated enterprises. The TPO has drawn his inference based on these items being imported that most of the items are bulbs, sockets, lenses, which do not require any further processing, are likely to be rejected as mere conjectures and surmises because merely obtaining of moulds, designs and drawings have no meaning unless the appellant also knows how to use these drawings, designs and moulds. It is noteworthy to mention that the TPO has not alleged and has also held that international transactions for purchase of these items require no adjustment to the value of its imports. This, to my mind would mean that proper technology and manufacturing process was required to make use of these moulds, designs and drawings for which the payment of royalty was definitely required. 14. Yet another reason given by the TPO in his order is that the appellan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... comparables because these are huge losses making entities and may require some sort adjustments as per TP Rules. This leaves me with 3 comparable companies i.e. India Japan Lighting. Fiem Industries Ltd. and Jagan Lamp Ltd. whose PLI on a single year basis is as under :- Comparabales F.Y. 2003-04 India Japan Lightings : 8.17 % Fiem Industries Ltd. : 2.69 % Jagan Lamps Ltd. : 1.91 % 12.77 Average 4.26 This PLI when compared with the PLI of the appellant as has been accepted by the TPO also in his order is 6.50% which is found to be arm s length and therefore, the addition made by the TPO cannot be sustained and the same is hereby deleted. This PLI comparison of the assessee reveals that international transactions on account of royalty as well as purchase of raw material gets benchmarked on an overall TNMM basis also and no addition could be made by the TPO on these two international t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... payment of royalty was merely a paper document. 17. With regard to this observation of the TPO, it is seen that there are two limbs of this observation; that the agreement concerning royalty is a mere paper document and that even otherwise, the formal agreement between associate enterprises cannot be a basis to determine the arm s length price of the transaction. Now, so far as regards the first limb, i.e., the agreement, according to the TPO, it is a mere paper document, undisputedly, the assessee company is a public limited company, a listed company incorporated under the Companies Act. For years, it has been engaged in the business of manufacture and trade of lighting products for the automotive industry. The assessee company set up its business way back in 1945. At that time, it was a partnership firm. Its business expanded in 1957 and in 1981, it got converted into a private limited company, i.e., Lumax Industries Pvt. Ltd. In 1984, the assessee company went public. It got listed at both NSE and BSE and it was converted into a public limited company. In that very year, i.e., 1984, the assessee company entered into a technical collaboration agreement with Stanley Electric Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llegation whatsoever by either the TPO or the Assessing Officer, that the transaction concerning payment of royalty had been entered into for any purpose other than the one professed and reflected by the parties. That being so, there was no occasion for the TPO to hold the agreement in question to be a mere paper agreement. 19. Likewise, in Abhishek Auto Industries vs. DCIT , 136 TTJ 530 (Del), it has been held that legally binding agreements between unrelated parties cannot be disregarded without assigning any cogent reason therefor. Therein also, like in the present case, there was no allegation by the taxing authorities that the agreements were ingenuine or sham. Rather, those agreements also, like the one involved herein, had been accorded due approval by the RBI and other regulatory agencies. It was reiterated to be a settled legal position that commercial transactions are in the domain of the businessman and the income-tax department cannot intervene in the realm of intricacies of commercial expediencies involved in the concerned arrangements. 20. Thus, there was no reason for the agreement herein to be doubted as a mere paper agreement, particularly when in numerous e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed by Stanley to the assessee company. It was their presence which resulted in the high quality of the products manufactured by the assessee. This high quality could be achieved through various technical discussions with engineers and the vendors of the assessee, who were both Indians as well as foreigners. Such arrangement of obtaining engineers obviously could have come about only on payment and such payment was by way of royalty. The expatriate personnel, i.e., expert qualified engineers, were deputed by the assessee s AE on the rolls of the assessee company and it was thereby, that the technology was provided to the assessee company. As such, it was only because of the commercial relationship of providing technology, for which the royalty was paid and such payment was, undoubtedly justified. In this regard, as correctly found by the Ld. CIT (A), no associated enterprise would make available qualified expatriate engineers, without remuneration. By virtue of sending the expatriate engineers to the assessee, it was ensured that the technology being supplied by Stanley to the assessee was properly applied to the production of licensed products. As correctly noted by the Ld. CIT (A) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Stanley, Japan. As per the record, ten visits were made to Japan and Thailand, where the AEs of the assessee were situated. The purpose of these visits was only to get the requisite training to enable application of the technology made available by the AE only. Obviously, it would not at all be commercially expedient to incur such foreign traveling expenses without business necessity, nor is this the case of the TPO himself. The Ld. CIT (A) has taken due note of the fact that international transactions of import of raw material, spares, etc., had taken place with Thailand also, where the AEs of the assessee existed and where the engineers/directors of the assessee company had visited. The details of the foreign traveling were found by the CIT (A) to be in order. This has not been challenged. Further, it has also come as an unrebutted finding of fact from the Ld. CIT (A), that pursuant to the visits abroad, the expatriate employees were put on the assessee s production base by the assessee s AE, going to prove that the assessee company was actually getting technical assistance from Stanley. Therefore, the payment of royalty was correctly held to be justified on this count also. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er and the same has been rightly rejected by the Ld. CIT (A). 31. The TPO has also observed that since according to him, the reason for making payment of royalty by the assessee to its AE was not receipt of any technology, but a formal agreement only and since the assessee had failed to substantiate that any technology was actually received or even was required to be received by it from its AE, the payment of royalty could not be said to be justified. 32. Here, as noted above, the agreement between the assessee and its AE is not a mere formal agreement, but a long standing contract, which has withstood the test of time and which has been accepted by the department itself, year after year. Thus, the history of the assessee s case is the accepted history, finding its base in the very agreement which the TPO, merely on conjecture and surmise, had tried to dub as a mere paper agreement. In fact, the agreement, renewed from year to year, has been analysed in detail by the Tribunal, as also by the Hon ble Delhi High Court in the assessee s own case. And not only this, as also observed by the Ld. CIT (A), such findings of the TPO are intrinsically mutually contradictory with his own ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 173 of the assessee s paper book, a copy of the assessee s submissions filed with the TPO, on 28.11.2006. Therein (at APB 171- 173), the assessee submitted a detailed note regarding receipt/upgradation of technology during F.Y. 2003-04, the manner of such receipt, and the three orders of models of Japanese OEMs obtained, like Maruti, Honda, etc., for which, technical know-how had been provided on a day-to-day basis. These details cast ample light on the issue of requirement of technology and though these details were placed before the TPO, the TPO made the observation in this regard entirely oblivious to these details. Thus, the observation/finding of the TPO in this regard, besides being based on mere assumptions, conjectures and surmises, is also a result of complete misreading and non-reading of material brought on record by the assessee. We consider it appropriate, as such, to reproduce these details hereunder:- 3. To give details of Receipts of Technology/Upgradation of Technology during the F.Y. 03-04. Also to give exact Form and manner of Receipt with supporting documents. The brief history of payment of royalty is as under :- Royalty is being paid by the company under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... achines, equipment and facilities which are required for the production of the Licensed Products. 1.5 As necessary from time to time, upon the request of LUMAX, STANLEY agrees to dispatch its technical personnel to LUMAX to advise and assist LUMAX in obtaining the best utilization of the Technical Information and to provide additional Know-how regarding the manufacturing of the licensed products. 1.6 As necessary from time to time, upon the request of LUMAX, STANLEY agrees to accept LUMAX s technical personnel at STANLEY s factory at such times and in such numbers as mutually agreed upon for technical instructions and training. 1.7. LUMAX will develop its own Research and Development facilities in order to absorb the technical know-how from STANLEY during the currency of this agreement and STANLEY will provide such technical assistance and advice as shall be reasonably necessary for the purpose. From the above your honour will note that the royalty is being paid on account of the following. Lumax has a right and license to manufacture and sell licensed products in India under Stanley s Patents and/or Technical Information during the tenure of the agreement. Lumax th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shaped for improving the production and also initiatives have taken to plan and absorb new technology like LED applications. It is to be further submitted that collaborators has provided Japanese engineers on deputation as full time employees to Lumax and during the year Mr.Y. Muraga Mr. S.Watanabe were employed with Lumax. Their presence has great impact on the quality of the products manufactured by Lumax and for various technical discussions with engineers of the vendors who are both Indians as well as foreigners. 4. To explain why the comparable have been rejected on the basis of Product differentiation, when exact product similar have not required under TNMM method. Although the rules permit broader product differences in the application of TNMM, they prefer choosing of the best comparables possible as they would provide a more reliable final result. An extract from the Advance Pricing Agreement Program Training Manual is provided below for your ready reference: The basic standard in the regulations is that one should select the most comparable and reliable potential comparables, and only include potential comparables that are not significantly less comparable and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d allowed the royalty as a bona fide payment, 25% thereof had been capitalized. The matter was carried up to the Hon ble High Court and the Hon ble High Court, vide its judgement reported in 173 Taxman 390 (Del), on examining the clauses of the agreement between the assessee and Stanley, held that the royalty was required to be paid by the assessee to Stanley for its bona fide business need and that the same represented revenue expenditure. Undisputedly, all through, the royalty agreement, right from Assessment Year 1984-85, till the year under consideration, has remained essentially the same agreement, in spirit, substance and intent. In Assessment Year 2003-04, the equity stake of Stanley in that of assessee company amounted to 19.41%. Stanley also appointed an Executive Director on the Board of the assessee company. By virtue thereof, Stanley became an AE of the assessee company within the meaning of Section 92A (2) (e) of the Act. In view of this history of payment of royalty, spanning 20 years or two decades, obviously, neither the genuineness of the transaction, nor the business expediency forming the basis of the payment of royalty, attracts even an iota of doubt. The TPO ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gth. Intention of tax evasion could have been imputed to the assessee company in case the payment of royalty had commenced only after the relationship of associate enterprise had been established, or when, if at all, the rate of payment of royalty had undergone an increase. However, neither of these has been shown by the TPO/Assessing Officer to be an existing circumstance here. 37. It is also seen that it remained to be taken cognizance of by the TPO/Assessing Officer, that the payment of royalty was being made by the assessee only on the products being produced under licence from Stanley and no royalty was paid on items manufactured and sold under the assessee s own brand. This is evident from the fact that the sales (APB 101) were of ₹ 230 crores and the royalty paid amounted to only ₹ 2.03 crores, equivalent to less than 1% of the sales. This goes to show that as contended, only about 1/3 of the sales of the material produced under licence from Stanley, which material was sold by the assesse company to Japanese OEMs, was subject to royalty payment. Further, application of tax avoidance provisions could have been justified, if the rate of tax was lower in Japan, a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f by the Ld. CIT (A), in para 9 of the impugned order. The Ld. CIT (A) also noted that besides, the assessee was paying royalty to two other concerns, namely, Rober Bosch Gmbh, Germany and Value Vision, France, @ 4% of the sales. The Assessing Officer had also noted this fact. Thus, whereas the payment of royalty to Rober Bosch and Value Vision during the year was @ 4%, it was @ 3% to Stanley. Indeed, in such a circumstance, application of the internal CUP method, when internal comparison was available, is wholly justified, in keeping with the following decisions:- i) Abhishek Auto Industries , 136 TTJ 530 (Del) ii) Birla Software India vs. DCIT , 136 TTJ 505 (Del) iii) VVF Ltd. vs. DCIT , 2010-TII-04-ITAT-Mum-TP and iv) Diamond Di Chem Ltd. vs. DCIT , 2010-TII-20-ITAT- Mum-TP. v) Serdia Pharmaceuticals India Pvt. Ltd. vs. ACIT , 2011-TII-02- ITAT-Mum-TP. 40.1 Abhishek Auto Industries (supra) holds that the best comparability can be of the transactions of the tested party itself. As per Serdia Pharmaceuticals India Pvt. Ltd. (supra), the CUP method is to be preferred, as long as it can be reasonably applied in determining the arm s length pri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... so. This is so, since, as noted by the Ld. CIT (A), the net margins were less affected than the prices of the products by transactional differences. The FAR analysis by the assessee was based on two data bases, i.e., Provess and Capital-line. Making reference to the brief description of business and activities undertaken, based on financial statements and annual reports, the comparables were narrowed down and six comparables were finally selected in the assessee s TP Report. The Ld. CIT (A) found all necessary filters based on functional tests of the comparables to have been deployed by the assessee. All other relevant care was also found to have been taken by the assessee to select the comparables for the purposes of carrying out a detailed FAR analysis. The TP Study was observed to have taken into cognizance the overall scenario of the auto ancillary industry and other various aspects in relation to the tested party. It was in view of these observations, as made by the Ld. CIT (A) in paras 7 and 8 of the impugned order, that the CIT (A) held that TNMM was the most appropriate method in the assessee s case. It has not been shown as to how this is incorrect. The CIT (A) observed th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erial. The CIT (A) s order in this regard is found to be fully justified as against that of the TPO, who initially observed that an FAR convergence was mandatory and then, simply rejected the comparables on the basis of turnover, without checking out the FAR convergence, and thereafter, chose a single comparable which too (according to him) was not comparable to the assessee company, which observation has correctly been subverted by the Ld. CIT (A). Then, the action of the TPO in not conducting any FAR analysis for the company accepted by him and not making any adjustment in the profits of the single comparable retained by him, as rightly contended, is against Rule 10B(3) of the Rules, as per which Rule [Rule 10B(3)(ii)], an uncontrolled transaction shall be comparable to an international transaction, if reasonably accurate adjustment can be made to eliminate the material facts of difference, if any, existing between the transactions compared, or between the enterprises entering into such transactions. Since Phoenix Lamps, as found by the Ld. CIT (A), was operating in an SEZ, it, in order to be retained as a comparable, would have required adjustments to be made for the purpose, wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eign tours were not undertaken by the Director of the assesse company for any business purpose, as correctly observed by the Assessing Officer. 48. The ld. counsel for the assessee, on the other hand, has strongly relied on the impugned order in this regard, contending that all the details with regard to the two foreign visits were duly filed along with the details of the transactions undertaken with the two countries visited by the Director of the assessee company, either during the year, or in the subsequent year. 49. The Assessing Officer, it is seen, observed that since there had been no import from the two countries, there was no business connection and the expenditure incurred was not commercially expedient. The Ld. CIT (A) has taken due note of the fact that the assessee had exported goods to the two countries visited by its Director, i.e., the USA and Dubai (UAE). These details are as under:- Director Name Country visited Party visited Purpose of the visit Mr. D.K. Jain USA M/s JOHN DEERE 300, North Vine Street, Horicon, WI 53032, USA ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rs.9,14,53,820/- 2 Import of fixed assets Rs.7,86,59,617/- 3. Payment of Royalty Rs.2,68,77,737/- 4 Payment of R D Expenses Rs.11,10,173/- 54. The assessee had selected Transactional Net Margin Method (TNMM) as the most appropriate method for benchmarking of the international transactions at the entity level. The assessee had selected operating profit/operating revenue as the profit level indicator. In annexure 5 of the Report, the PLI of the assessee was computed at 6.5% and the PLI of the 4 comparables was computed at -0.52%, on the basis of multiple year data. The current year margin of the comparables in Annexure 4 of the T.P. Report was shown at 7.55%. On the basis of the above analysis, it was concluded that the international transactions were at arm s length price. 55. The TPO accepted the assessee s selection of the TNMM as the most appropriate method. The TPO observed that the data of the year 2003-04 was not considered to be appropriate for benchmarking the international transactions and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the corresponding arguments made by him for Assessment Year 2004-05. 57. The CIT (A), it is seen, while deleting the addition made, has held, as for Assessment Year 2004-05, that the TPO had erred in holding that the agreement between the assessee and Stanley was merely an agreement; that the TPO erred in disregarding that the assessee was into a commercial relationship with Stanley and the expatriate engineers had been sent to ensure that the technology supplied was properly applied; that mere obtaining of moulds, designs and drawings could not lead to disallowance of the royalty payment, since the technology for use thereof was what required the payment of royalty; that from the fact that the assessee s turnover had increased over the years and that the assessee was establishing its own R D Centre and thereby trying to absorb the technology the company received from its AE, went to show that it could not be said that there was no transfer of intangible, or that no technology had actually been received, or was required to be received; that since Phoenix Lamps was an entity situated in an SEZ, enjoying certain benefits, being in an advantageous position as compared to the ass ..... 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