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TMI Blog2012 (12) TMI 1041X X X X Extracts X X X X X X X X Extracts X X X X ..... M/s Sumitomo Chemical Co. Ltd., Japan (SCJ) for technical knowhow obtained for use in manufacturing of pesticides etc. He, therefore, made a reference u/s 92CA(1) to the TPO for determining the arms length price in relation to the said international transaction of the assessee company with its AE. The TPO noted from the TP study report furnished by the assessee that the assessee company was having manufacturing agreement with SCJ on the one hand and selling agreement with SCI, another AE, on the other hand. According to him, the assessee thus was a contract manufacturer and there was no justification for payment of royalty made by it to SCJ. He, therefore, required the assessee to show cause why the royalty paid to SCJ should not be disallowed. In reply, it was submitted on behalf of the assessee that the goods were being manufactured by it using the technical knowhow and assistance from SCJ and the same were marketed and sold by SCI. It was contended that the royalty thus was paid to different party and not to the party which had sold the goods. It was also contended that the goods were not manufactured by the assessee company as per the requirement of SCI so as to say that the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee had sold the goods not only to SCI but also to third party customers. It was further submitted that the agreement between the assessee and SCJ did not impose any obligation on the assessee as alleged by the TPO except that the finished goods were to be sold only to the approved parties. It was also contended on behalf of the assessee that while making the TP adjustment, the procedure laid down in the Act was not followed by the TPO inasmuch as there was no determination of any arms length price by him by considering any comparable cases. It was submitted that even none of the methods prescribed in the statute was followed by the TPO for determining the arms length price of the royalty. It was contended that the addition made by the AO/TPO by way of TP adjustment in respect of royalty payment was not sustainable and the same should be deleted. 5. The learned CIT(Appeals) did not find merit in the submissions made on behalf of the assessee mainly for the following reasons given in paragraph No. 3.9 to 3.12 of his impugned order : "3.9 The appellant is having its business model of being exclusive manufacturer for the AE i.e. Sumitomo chemical Co. Ltd., Japan (SCJ). Though the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... O/AO to determine the arms length price, I am of the view that once it is held that the appellant is a contract manufacturer or its business model is that of being exclusive manufacturer and when the free commercial exploitation of the know how is not permissible and that its market is controlled, then the royalty ordinarily will not be payable. Accordingly the method adopted here would be the CUP method as the most appropriate method. In a comparable situation, applying CUP as the most appropriate method, the royalty attributable to such portion of sales which are made to the group company in India would be determined as Nil." 6. For the reasons given above, the learned CIT(Appeals) held that the royalty paid by the assessee to SCJ to the extent it was in respect of sale to third party customer was at arms length whereas the arms length price in respect of balance amount of royalty was Nil. Since the sale to third party customer of the assessee during the year under consideration was Rs. 3.7 crores, he allowed the payment of royalty in respect of the said payment to the extent of Rs. 3,17,273 as at arms length and sustained the adjustment made in respect of the balance royalty o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ning the facts of the case held as under: "19. There is no reason why the OECD guidelines should not be taken as a valid input in the present case in judging the action of the TPO. In fact, the CIT (Appeals) has referred to and applied them and his decision has beer: affirmed by the Tribunal. These guidelines, in a different form, have been recognized in the tax jurisprudence of our country earlier. It has been held by our courts that it is not for the revenue authorities to dictate to the assessee as to how he should conduct his business and it is not for them to tell the assessee as to what expenditure the assessee can incur. We may refer to a few of these authorities to elucidate the point. In Eastern Investment Ltd. v. CIT, (1951) 20 ITR 1, it was held by the Supreme Court that "there are usually many ways in which a given thing can be brought about in business circles but it is not for the Court to decide which of them should have been employed when the Court is deciding a question under Section 12(2) of the Income Tax Act". It was further held in this case that" it is not necessary to show that the expenditure was a profitable one or that in fact any profit was earned". In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... suant to public protest, the word "necessarily" was omitted from the section. 21. The position emerging from the above decisions is that it is not necessary for the assessee to show that any legitimate expenditure incurred by him was also incurred out of necessity. It is also not necessary for the assessee to show that any expenditure incurred by him for the purpose of business carried on by him has actually resulted in profit or income either in the same year or in any of the subsequent years. The only condition is that the expenditure should have been incurred "wholly and exclusively" for the purpose of business and nothing more. It is this principle that inter alia finds expression in the OECD guidelines, in the paragraphs which we have quoted above. 22. Even Rule 10B(1)(a) does not authorize disallowance of any expenditure on the ground that it was not necessary or prudent for the assessee to have incurred the same or that in the view of the Revenue the expenditure was un-remunerative or that in view of the continued losses suffered by the assessee in his business, he could have fared better had he not incurred such expenditure. These are irrelevant considerations for the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ngly claimed in the TP report that the arrangement is in the nature of contract manufacturing. However, as seen from the agreement entered by the erstwhile Home Remedies Ltd with SCCL it is for obtaining license for manufacturing specified products. Since the technology is specific to the manufacturing specific items, the condition is that the intermediates are to be imported from the SCCL. However, after importing the intermediates assessee is also using the indigenous material in manufacturing the specified insecticides and pesticides. It is also acquiring packing material required for packing insecticides and pesticides produced in 5 ltrs and 20 ltrs containers. Since these insecticides and pesticides are for specified for usage (mosquito repellents etc.,) these products are mainly sold to AE and also to other third parties who require the insecticides and pesticides so manufactured. Assessee is also paying excise duty and other taxes. The principal company is not paying any amount to the assessee company towards manufacturing if it were to be considered as contract manufacturing. Even though admittedly assessee mentioned in the TP report that the arrangement is in the nature of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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