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TMI Blog2014 (6) TMI 640X X X X Extracts X X X X X X X X Extracts X X X X ..... spect to the Maxopp Investment Ltd. & Others Versus Commissioner of Income Tax [2011 (11) TMI 267 - Delhi High Court] – Decided in favour of Assessee. Disallowance of royalty and technical fees – Held that:- The AO did not have benefit of THE COMMISSIONER OF INCOME TAX-II Versus MUNJAL SHOWA LTD. [2010 (9) TMI 121 - DELHI HIGH COURT] - thus, the matter is required to be remitted back to the AO for fresh adjudication – Decided in favour of Assessee. - I.T.A. No. 4675/Del/2010, I.T.A. No. 4242/Del/2011 - - - Dated:- 30-5-2014 - Shri R. P. Tolani And Shri B. R. Jain,JJ. For the Petitioner : Sh. Ajay Vohra, Sh. Neeraj Jain, Advocates, Sh. Abhishek Agarwal, Sh. Puneet Chugh, CAs For the Respondent : Sh. Peeyush Jain and Sh. Yogesh ORDER Per B. R. Jain, : AM ITA No. 4675/Del/2010 These two appeals by the assessee arise from orders dated 11.10.2010 and 5.9.2011 made u/s. 143(3) read with section 144C of the Income Tax Act by the Assessing Officer, ACIT, Range-5, New Delhi for asstt. Year 2006-07 and Assessing Officer DCIT, Circle 5(1), New Delhi for asstt. Year 2007-08 by raising several grounds in appeal. 2. In asstt. Year 2006-07 briefly facts ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f Rs. 88.48 crores only as against which the assessee s huge turnover was Rs. 596.62 crores. The Assessing Officer, therefore, benchmarked its analysis with the second comparable namely Gabriel India Ltd. and compared operating profit margin on international transactions both for royalty and import of parts etc. He computed adjustment of Rs. 48,958,700/- as under and draft assessment order was passed accordingly. Particulars Rs. In Crores Purchase (Import) of components, parts etc. 801,877,267 Payment of royalty 142,148,282 Value of International transaction 994,025,549 Sales 6,994,100,000 Arm s Length Profit 363,693,200 Actual Profit 314,734,500 Difference 48,958,700 Percentage of value of international transactions 5.18% 6. The Dispute Resolution Panel (DRP) vide its order dated 30.9.2010 considered the objections to the Draft Ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... objections of the assessee carefully and thereafter only it approved the draft assessment order. The directions given are in accordance with law. Hence, there is no fault that can be said to have been committed by the Assessing Authority in following the directions. 9. Heard parties with reference to the material placed on record. The operative portion of the order of the DRP is reproduced as under:- We have gone through the Draft Assessment Order. We have also heard the Authorised Representative (AR) and have considered the objections of the assessee carefully. After considering the same, we are of the opinion that the Draft Assessment Order proposed by the AO is to be approved. The AO is directed to complete the assessment as proposed in the Draft Assessment Order. 10. The said order of the DRP is a laconic order. The speaking order has not been passed by the DRP. It has not given any reason for disposal of the assessee s objections and far reaching its conclusions. It has also not adopted the reasons contained in the draft assessment order nor even the reasons that are contained in the order of the TPO. The appellant has a right to know the reason and Appellate Tribun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he shall have regard to the judgment of the Jurisdictional High court in the case of Maxopp Investments Ltd. vs. CIT 347 IR 272. 14. In Ground no. 4 to 4.3. The assessee has agitated the disallowance of royalty and technical fees. The assessee had paid the royalty of Rs. 14,21,48,282/- to Showa Corporation, Japan being 3% on Ex-Factory sale price of products. The Assessing Officer disallowed the royalty paid holding the same to be in the nature of capital expenditure. The assessee s case is that it had entered into the technical collaboration agreement on 11.3.2002 with Showa Corporation, Japan. The appellant also entered into the administrative agreement with Showa to provide international technical assistance by dispatch of its technical personnel providing technical training and guidance to appellant s employees for providing support, in case of any problem in manufacturing activity. The appellant paid technical fee of Rs. 10,61,534/- to Showa Corporation, Japan for providing its technicians and travelling / stay expenses of these technicians. The agreement provides to grant the appellant an individual and non transferable, non exclusive right and license to manufacture, asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the High Court of Delhi in ITA No. 94, 95 96/Del/2014 in Revenue Appeals for asstt. 2002-03, 2003-04 and 2004-05, when he passed the impugned order. In the interest of justice, we set aside the order in this regard and remit the matter back to the file of the AO for passing an order afresh in accordance with law after having due regard to the aforesaid judgment vis a vis the facts of the case and continuance of the same agreement as such as in the impugned year as well. The assessee shall be afforded reasonable and effective opportunity of being heard before taking the decision in accordance with law. 17. Ground No. 1 is general. No adjudication is considered necessary. ITA NO. 4242 (A.Y. 2007-08) 18. Ground no. 1 in appeal is stated to be general in nature, hence, adjudication thereof is not considered necessary. 19. Ground no. 2 to 2.2 relate to the addition of Rs. 19,47,11,585/- on account of transfer pricing adjustments. 20. The assessee made a claim for royalty for obtaining technology from Showa Corporation and Associate Enterprise. The said claim was made in terms of agreement dated 11.3.2002 and provided the royalty payment @ 3% on internal sales and exp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ting the CUP method and directed that royalty transaction has to be independently benchmarked using CUP method taking ALP at Nil. Accordingly, the Assessee s objections have been rejected. The AO accordingly made the addition of Rs. 18,22,69,037/- with the observation that as the whole of the royalty amount stands adjusted u/s. 92CA, no further adjustment is required for making disallowance of royalty separately at para no. 3.2 of the assessment order. The Assessing Authority concluded that if TPO adjustments on this account is not sustained at appeal stage, then the addition of royalty of Rs. 18,22,69,037/- as discussed above will be considered separately. 23. In appeal Ld. Counsel for the assessee contends that the royalty payment is for obtaining the technology from associate enterprise for manufacture of shock absorbers by the assessee in India. It has never been held to be non business expenditure in any of the income tax assessment of the assessee. The technology agreement dated 11.3.2002 is duly approved and provides for payment of royalty @ 3% on internal sales and export. The payment of royalty and technology fee is clearly on account of business consideration and is a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thod. The operating profit rate of the appellant is 5.58% which is highest average operating profit to four comparables at 3.77%. The international transaction undertaken by the appellant therefore, has to be considered at arm s length price. The assessee also made exhaustive written submissions and laid reliance on several judgments, that are kept on record. That apart the assessee contends payment of royalty has already been held to be expenditure incurred for the purpose of business of the assessee and the Hon ble Delhi High Court has already upheld the deduction of payment of royalty as revenue business expenditure in the case of the assessee for earlier years. It was thus contended the TPO was unjustified in making the adjustments on account of payment of royalty. The same therefore, is liable to be deleted. 24. On the other hand, Ld. D.R. contends that burden is on the assessee to prove that the transaction with associate enterprise is at arm s length. Reliance has been placed on the Coca Cola judgment referred in the order of the DRP. And also Nestle s case reported at 337 ITR 103 (Del with specific reference to para 15 and 16 at page 119. That the assessee s claim that n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the assessee. 27. Ground 4 to 4.3 relates to the disallowance of royalty and technical fee 28. The assessee s case is that it had limited right to use the technology of Showa Japan. The ownership / property rights in technical know how continue to be vested in Showa and the appellant has no authroised approval of company to transfer the know how or any technical information to any third party. There is no explicit or implicit authority to transfer or create ownership in the technology, know how/technical information in the appellant. The expenditure of royalty or technical fee did not result with capital asset or a benefit of enduring nature much less in the capital field. The Appellate Tribunal in the case of the assessee for the asstt. Year 1993-94 to 1995-96 and for Asstt. Year 2002-03 and 2004-05 have deleted the similar disallowance. Revenue appeal for asstt. Year 2002-03 and 2004-05 stands dismissed by the Delhi High Court vide its order dated 6.9.2010 in ITA No. 94, 95 96/Del/2014. 29. Heard parties. In the peculiar fact-situation and the judgment of the Hon ble Delhi High Court in the earlier years in assessee s own case of which, the AO did not have benefit a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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