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TMI Blog2013 (5) TMI 852X X X X Extracts X X X X X X X X Extracts X X X X ..... n for warranty is not scientific. Moreover, similar provision for warranty was not disallowed in the earlier years, upto Assessment Year 2005-06.- Decided in favour of assessee Disallowance of provisions for leave encashment u/s 43B - Held that:- As to whether there has indeed been a double addition, needs to be verified by the Assessing Officer by confirming as to whether or not the assessee had made the disallowance itself and the amount had not been carried to the Profit 12,61,008/-; that however, neither the Assessing Officer, nor the DRP adjudicated on the aspect as to how such disallowance made by the assessee itself was incorrect or not acceptable - Held that:- The matter needs verification by the Assessing Officer, for which purpose, it is remitted to the file of the Assessing Officer. The Assessing Officer shall re-adjudicate the matter in accordance with law on affording adequate opportunity to the assessee, particularly verifying the aforesaid averments made by the assessee. Disallowance of depreciation on computer peripherals @ 60%, is erroneous. See BSES Yamuna Power [2010 (8) TMI 58 - DELHI HIGH COURT] X X X X Extracts X X X X X X X X Extracts X X X X ..... ₹ 84,48,000/- on account of disallowance of provisions for warranty u/s 37(1) of the IT Act. 6. The DRP as well as A.O. has erred in law and facts and circumstances of the case and made additions amounting to ₹ 1,75,26,309/- on account of disallowance of provisions for leave encashment u/s 43B of the IT Act. 7. The DRP and consequently A.O. has erred in law and facts and circumstances of the case and made additions amounting to ₹ 11,26,737/- on account of disallowance u/s 14A of the IT Act r.w. Rule 8D of I Tax Rules. 8. That the adjustment made by the A.O. of ₹ 50,105/- to the total income of the assessee on the ground of disallowance of depreciation on computer's peripherals @ 60% were erroneous, factually incorrect, and not maintainable in law and is prayed not to be confirmed. 9. The DRP and consequently the A.O. have erred in law, on the facts and in the circumstances of the case in charging interest under section 234-B of ₹ 1,30,70,415/- of the Income Tax Act, 1961 on wholly erroneous, illegal and untenable grounds. 10. The DRP and consequently the A.O. have erred in law, on the facts and in the circumstances of the case in charging interest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n, declaring income of ` 17,81,88,750/-. This return was processed u/s 143 (1), on 12.09.2009. A draft assessment order u/s 144C of the IT Act was served on the assessee. The assessee filed its objections before the DRP on 26.12.2011. The said objections were disposed of by the DRP vide Order dated 14.06.2012. The final assessment order was passed on 17.07.2012. The present appeal has been preferred thereagainst. 5. The TPO, vide Order dated 30.10.2011, passed u/s 92CA (3) of the Act, suggested upward assessment of assessee's income by `5,32,07,016/-, observing as follows:- " In the present case the taxpayer has benchmarked the transaction related to payment of royalty under CUP. Hence, the CUP taken by the taxpayer is not acceptable for the reasons discussed above. But as discussed in the preceding paras, the taxpayer has failed to furnish certain vital information like how the royalty rate was determined along with basis thereof, what cost benefit analysis was done, what is the royalty rate paid by other AEs or independent persons, what is the industry rate, what is the cost incurred by the AE for developing the intangible, what was the expected benefit from the use of the int ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... demonstratively boosted the profits of the appellant." In view of the above discussion and particularly keeping in view of the fact that the assessee has neither benchmarked this transaction property by applying the most appropriate method and nor has it furnished the requisite information I am constrained to determine the arm's length price of this transaction at NIL under CUP method. No independent person in similar circumstances would pay any such royalty. I am aware of the ITAT, Delhi's decision in the case of Ekla Appliances (2011-TII-37-ITAT-DEL-TP). However, the aforesaid decision is not applicable as in that case it was found that the technology had helped the taxpayer in reducing its losses significantly. It was also found that there were peculiar reasons for incurring the losses. Thus, the aforesaid decision is of no help. Similarly, the decision of ITAT, Hyderabad in the case of LG Polymers is of no help as in that case the transaction was treated as sham and the matter was restored to the file of the AO/TPO for fresh determination of the ALP. Thus, the arm's length price of royalty is determined at Rs. NIL. a. Payment of Royalty ₹ 5,32,07,016/- b. Arm's l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... andalone basis; that it was not correct to judge the royalty payment on the yardstick of the benefit test, the same not being based on any of the methods prescribed u/s 92C of the IT Act; that it has wrongly not been taken into consideration that it was since 1984, that the assessee was in association with Stanley Electric, Japan; that the assessee's relationship with Stanley Electric, Japan turned into that of an AE in 1994; that it has not been appreciated that royalty payment was being made by the assessee to Stanley Electric, Japan, right from 1984 and this continued even after Stanley Electric, Japan acquired the status of an AE of the assessee; that it has not been appreciated that in 1984, the assessee was a small company, having a turnover of just about ` 2 crores, whereas in the year under consideration, it had evolved into a company having a turnover of ` 600 crores; that no justification has been given as to how the arm's length price has been determined at nil under the CUP method, as against that of ` 5.32 crores claimed by the assessee, notwithstanding the fact that the TPO himself noted that the royalty had been paid by the assessee to its AE @ 3%; that 3% stands acc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e to its AE, for the period from 1.4.07 to 31.3.08, the royalty is about 2.43% of the net sales of ` 2180871964.63; and that the TPO did not deem it fit to do any benchmarking qua the issue of royalty, i.e., no comparable was brought. Besides the case laws mentioned hereinabove, the ld. counsel for the assessee has sought to place reliance on 'KHS Machinery (P) Ltd. vs. ITO', 53 SOT 100 (Ahm.), wherein, it has been, inter alia, held that where the Assessing Officer had not brought on record the ordinary profits which could be earned in the type of business carried on by the assessee, the finding of the Assessing Officer in considering royalty charges as nil as ALP, could not be accepted and that therefore, the payment of royalty was not hit by the provisions of Section 92-C of the Act. 8. On the other hand, the Ld. DR has strongly supported the orders of the authorities below. It has been contended that just because the assessee and its AE are public listed companies, the requirement of establishment of arm's length price cannot be left uncomplied; and that apropos the RBI approval of 3% to 4% of payment of royalty, the assessee did not benchmark its payment of royalty. The Ld. DR ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a). 13. On the issue of consistency, the Ld. DR has contended that it is well settled that a mistake cannot be allowed to be perpetuated; that if in the earlier years, a claim had been mishappenly accepted, such a mistake cannot bind the Department forever; that moreover, in the earlier cases, the payment was considered u/s 37 of the Act and not u/s 92C thereof. Reliance has been sought to be placed on CBDT Circular No.12 of 23.08.2001 (copy placed on record). 14. The Ld. DR has further contended that even otherwise, the royalty should be separately benchmarked, as there is a chance of cross-subsidisation. He further contended that in the present case, there is no intangible involved and the assessee sells products under the brand name 'Lumax' and not 'Stanley.' 15. We have heard both the parties on this ground and have examined the material placed on record with regard thereto. The issue is as to whether the addition of ` 532,07,016/- on account of arm's length price, has correctly been made concerning the payment of royalty by the assessee to its AE. 16. The TPO proposed the enhancement of ` 532,07,016/- to the total income of the assessee company on the basis that the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y.' Later, it was reduced to 3%. In F.Y. 2003- 04, Stanley Electric Company of Japan acquired the status of the AE of the assessee. Thus, it was right from 1984, that technical assistance got started being given by Stanley Electric Company, Japan to the assessee, with regard to the manufacture of automotive lighting equipment. As available from para 1.4 of the agreement in the year under consideration (copy at APB-I, 340-359, relevant portion at page 342), a non-exclusive licence had been granted by Stanley, Japan to the assessee, only for India. As per the conditions thereof, the assessee was to pay royalty on its net sales, after deduction from the net sale price of the licensed products sold by Lumax in India. The basis of calculation of payment of royalty, as agreed to, is contained in Article 4 of the Agreement (APB-I, page 345). Such payment was to be @ 4% on the net sales. However, during the year, royalty was paid @ 2.43% on the sale of licensed products, amounting to ` 218.08 crores, as available at APB-I, page 385. This was so, since the cost of standard imported components, standard local components and certain other deductions had been deducted from the net sales of ` 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... held to be not applicable, since the transaction was with an AE having related party transactions and it was held that there was no external CUP for making any comparison in the relevant year, as the earlier Agency Agreement with the third party had expired and rates applicable in the earlier years could not be made applicable during the relevant year. However, this decision does not have any adverse effect on the case of the assessee. The facts herein are entirely at variance with those of 'CGM Global'. Herein, as opposed to the facts in 'CGM Global', the same Royalty Agreement and the same licence has been in continuance from 1984 till the year under consideration, the licence being renewed from year to year, albeit on the same terms and conditions. Moreover, the following decisions are instances of the external CUP having been employed and this has not been disputed by the Department:- 1. 'Sona Okegawa Precision Forgings Ltd. vs. ACIT' (ITA No.4781/Del/2010) 2. 'ACIT vs. Sona Okegawa Precision Forgings Ltd.' (ITA No.260/Del/2010. 3. 'CIT vs. Federal Mogul TPR India Ltd.' (ITA No.398/2012) 4. 'Climate Systems India Ltd. vs. CIT' (2009) 319 ITR 113 (Delhi) 5. 'CIT vs. Eicher ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a complete variance with those of the assessee's case, wherein payment of royalty for supply of technology and knowhow to manufacture licensed products was held to be for the benefit of the assessee and the same rate of royalty payment was allowed as allowed in the years when the parties were not in an AE relationship, but were having identical transactions as those in the year under consideration before the Tribunal. It was held that the royalty payment was a revenue expenditure incurred wholly and exclusively for the benefit of the assessee. The part of the payment disallowed as capital expenditure was held by the Hon'ble Delhi High Court to be revenue expenditure. It is as such that the invocation of the rule of consistency has been sought on behalf of the assessee and, in our considered opinion correctly so, contending that since the circumstances before and after the coming into existence of the AE relationship between the assessee and Stanley are identical inter se, it cannot at all be said that though in the earlier years, the royalty payment was for the benefit of the assessee, since the inception of the AE relationship, it ceased to be so, due to which, the application of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ansaction' as a number of closely linked transactions. Royalty, then, is a transaction closely linked with production and sales. It cannot be segregated from these activities of an enterprise, being embedded therein. That being so, royalty cannot be considered and examined in isolation on a standalone basis. Royalty is to be calculated on a specified agreed basis, on determining the net sales which, in the present case, are required to be determined after excluding the amounts of standard bought out components, etc., since such net sales do not stand recorded by the assessee in its books of account. Therefore, it is our considered opinion that the assessee was correct in employing an overall TNMM for examining the royalty. The TPO worked out the difference in the PLI of the outside party (the assessee) at 4.09% and the comparables at 7.05%. This has not been shown to fall outside the permissible range. 34. The decision of the Tribunal in 'Ekla Appliances', 2012-TII-01-HCDel- TP, has been sought to be distinguished by the TPO, observing that the facts in that case are not in pari materia with those of the assessee's case. However, therein also, the benefit test had been applied by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that during the year, it had worked out the amount of net warranty liability by applying a multiplying factor on the total sales made during the year on the basis of past results and had made provisions in its books; that since the provision had been made based on the past factor of actual expenses incurred towards warranty liability, deduction claimed with regard thereto u/s 37(1) of the Act was an allowable expenditure. Reliance was placed on the Tribunal decision in the case of 'DCIT, Circle 4 (1) vs. LG Electronics (I) Ltd.' and the Hon'ble Supreme Court decision in the case of 'Rotork Controls India Pvt. Ltd. vs. CIT', 314 ITR 62 (SC), beside other case laws. The Assessing Officer, however, observed that in the case laws referred to by the assessee, the crucial findings were that the claim of the assessee should be on a scientific basis and the assessee should have been regularly following this system of accounting for warranty; that however, in the assessee's case this system of accounting for warranty had been introduced only in F.Y. 2005-06; that thus, it could not be said that the assessee had been regularly employing this method over a number of financial years; and that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and ground No.5 is allowed. 41. Apropos ground No.6, the assessee has challenged the addition of ` 1,75,26,309/- made on account of disallowance of provisions for leave encashment u/s 43B of the Act. 42. The Assessing Officer observed that the assessee's provisions for leave encashment had increased to ` 3,27,47,739/-. The assessee had maintained that the deduction had been claimed in view of the decision of the Hon'ble Calcutta High Court in the case of 'Exide Industries vs. UOI', 292 ITR 470 (Cal). The Assessing Officer asked the assessee to show cause as to why the amount be not disallowed and added back to the assessee's total income, since the decision in 'Exide Industries' (supra) had been stayed by the Hon'ble Supreme Court. The assessee submitted that during the year, it had made provision for leave encashment amounting to ` 1,75,26,309/- as per the actuarial valuation, in compliance of AS-15 of the ICAI and had claimed it as a business expenditure. The Assessing Officer, however, made the disallowance. The DRP upheld the Assessing Officer's action. 43. The assessee's challenge to the action of the Assessing Officer has been on the stated basis that there has been a dou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... directly attributable to any particular income or receipt, an amount computed in accordance with the following formula - AXB/C Where A = amount of expenditure by way of interest other than the amount of interest included in clause (1) incurred during the previous year. B = the average of value of investment, income from which does not or shall not form part of the total income appearing in the balance sheet of the assessee, on the last day and the last day of the previous year. C = the average value of total assets as appearing in the balance sheet of the assesse on the first day and the last day of the previous year. A=4,92,95,768/- B=25,22,01,525/- C=345,18,91,509/- Hence, disallowance = 36,01,639/- 3. An amount equal to on-half per cent of the average of the value of investment, income from which does not or shall not form part of the total income, as appearing in the balance sheet of the assessee, on the first day and the last day of the previous year 1/2 % of average investment of ₹ 25,22,01,525/- = 12,61,008/- Total disallowance Less disallowance made by the assessee in computation of income Balance net disallowance Rs.48,62,647/- Rs.12,61,008/- Rs.36,01,639/- 4 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee company has a turnover of about ` 508 crores from its manufacturing operations; that the Assessing Officer attributed interest cost under Rule 8D of the Rules, overlooking the fact that the assessee was having huge funds of its own and investments were made out of these funds only; that it was also overlooked that the borrowings had been made for specific purposes of working capital and other business operations, due to which, no interest cost was attributable to the earning of dividend income; that it had been specifically stated before the DRP also, that investment of ` 43.72 crores during the year had been made out of capital receipt of ` 56 crores. Reference in this regard has been made to page 478 of the assessee's paper book. Attention has also been drawn to the assessee's balance sheet (APB-31) to show that the assessee's investments went up to ` 46.99 crores from ` 3.44 crores and its capital and reserves increased to ` 143.35 crores from ` 81.46 crores; and that the loan refunds had decreased from ` 97.38 crores to ` 82.84 crores, establishing that no borrowed funds had been utilized. 51. The Ld. DR has placed strong reliance on the impugned order. 52. Here also, ..... X X X X Extracts X X X X X X X X Extracts X X X X
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