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TMI Blog2017 (5) TMI 1513X X X X Extracts X X X X X X X X Extracts X X X X ..... royalty where the TPO has violated the provisions of the Act and proposed the TP adjustment, but no separate adjustment was made on account of another adjustment and the same was subsumed in that; wherein the other TP adjustment was deleted by the DRP and the Assessing Officer in the final assessment order proposed the TP adjustment on account of royalty. Such procedure has not been followed by the TPO/Assessing Officer in the present facts and accordingly, we hold that there is no merit in the ad hoc disallowance of ₹ 7.50 crores. Coming to the merits of the case, where the royalty has been paid by the assessee at a rate lesser than 3% as against which the RBI has approved the rate at 3% for payment of royalty, then the same is at arm's length and this issue also considered by the Pune Bench of Tribunal in M/s. Spicer India Limited v. ACIT (supra). The Hon'ble Bombay High Court in CIT v. SGS India Pvt. Ltd. [2015 (11) TMI 1619 - BOMBAY HIGH COURT] had held the rate of royalty approved by SIA/RBI would constitute cup data and the transaction would be at arm's length price. Accordingly, we hold that where the payment of royalty by the assessee to its associated enterprises ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... beyond the scope of total income as defined in section 5 of the Act. The learned A.O. also erred in not appreciating the fact that the adjustment of ₹ 75,000,000/- does not partake the character of income as defined in section 2 of the Act. In view of the above, the adjustment made by the A.O./DRP are not within the purview of the concept of 'income' as per IT Act and hence, it requires to be deleted. 2.4] The learned A.O. erred in making ad-hoc disallowance of ₹ 7,50,00,000/- on account of royalty paid by the assessee company to its AE. 2.5] The learned A.O. erred in making an ad hoc addition in respect of the royalty paid by the assessee company to its AE without appreciating that no such addition was made by the TPO and even the learned DRP had not given any such directions and accordingly, the addition made by the learned A.O. is not justified at all. 2.6] The learned A.O. failed to appreciate that the assessee company had paid royalty @ 3 on sales to its AE and the same was at ALP and hence, there was no reason to make such ad hoc addition. 2.7] The learned A.O. erred in making an ad hoc addition of ₹ 7 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aharashtra 1993 Package Scheme of Incentives , under which the persons were eligible for either sales tax and purchase tax exemption or deferment of the sales tax and purchase tax collected over a period of 15 years. The assessee initially opted for deferring scheme, as per which, it was authorized for collection of sales tax but payment was to be made after 15 years. Later on in September, 2001, assessee shifted from deferral scheme to exemption scheme. Accordingly, the assessee was entitled to the exemption from sales tax and purchase tax. The assessee treated the sales tax and purchase tax subsidy of ₹ 14,69,36,189/- as capital receipt in its return of income. The case of assessee was that as per the scheme of Government of Maharashtra State, subsidy was granted in order to encourage setting up of units in backward areas. The same was available only to certain industries depending upon fulfillment of the conditions. The Assessing Officer on the other hand, had noted that the subsidy was granted in order to increase profitability of the assessee company. The Assessing Officer acknowledged that there was no doubt that the exemption was allowed for setting up of units in bac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Maharashtra was considered by the Hon'ble Bombay High Court in CIT v. Kirloskar Oil Engines Ltd. (2014) 364 ITR 88 (Bom) and it has been held that the object of assistance under subsidy scheme to enable assessee to set up new unit, was a capital receipt. Following the same parity of reasoning, we hold that the subsidy received by the assessee was capital in nature. Accordingly, grounds of appeal No. 1 and 1.1 are thus, allowed. 8. Now, coming to the second issue raised by the grounds of appeal No. 2 to 2.9, wherein the assessee is aggrieved by the order of Assessing Officer in making ad hoc disallowance of ₹ 7,50,00,000/- on account of royalty paid by the assessee company to its associated enterprises. 9. The learned Authorized Representative for the assessee pointed out that the issue raised in the present appeal by way of grounds of appeal No. 2.4 and 2.5 and the other grounds of appeal i.e. 2.6 to 2.9 are argumentative in nature. The learned Authorized Representative for the assessee however, did not press grounds of appeal No. 2.1 and 2.2 raised by the assessee. 10. Brief facts relating to the issue are that, the assessee had entered into various internationa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... final assessment proceedings after following the directions of the Dispute Resolution Panel (DRP), wherein the TPO was asked to make certain verification, the TP adjustment of ₹ 43.63 crores was deleted. However, since the TP adjustment was deleted, the Assessing Officer observed that the question of double adjustment with respect to royalty payment did not arise. Since the show cause notice had already been issued to the assessee and its submission in response to the same was on record. The Assessing Officer held that the said adjustment of ₹ 7.50 crores needs to be made and the same was added back to the total income of the assessee. 12. The assessee is in appeal against the said disallowance of ₹ 7.50 crores out of payment of royalty to its associated enterprises. 13. The learned Authorized Representative for the assessee pointed out that ad hoc addition has been made by disallowing the royalty paid by the assessee to its associated enterprises to the extent of ₹ 7.50 crores. He further pointed out that the total royalty paid was ₹ 46.05 crores. He also referred to the show cause notice issued by the TPO for making the aforesaid ad hoc disallo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er Book. He further referred to the reply of the assessee to the TPO which is placed at pages 73 to 79 of the Paper Book, wherein it was pointed out that rate was less than 3%. He also pointed out that payment of royalty was in accordance with the approval of the RBI. Vis- -vis, the merits of allowability of payment of royalty, the learned Authorized Representative for the assessee placed reliance on the ratio laid down by the Pune Bench of Tribunal in M/s. Spicer India Limited v. ACIT (supra). 15. The learned Departmental Representative for the Revenue on the other hand, pointed out that the TPO had issued show cause notice and had suggested the said disallowance but no issue was raised before the DRP, so there was no order of DRP on this aspect. The learned Departmental Representative for the Revenue stressed that the matter may be referred back to the Assessing Officer for deno proceedings. 16. We have heard the rival contentions and perused the record. The assessee was wholly owned subsidiary of John Deere India Pvt. Ltd. after stake of Larsen Toubro Limited (L T), India in the joint venture was acquired by it. M/s. John Deere India Pvt. Ltd. was wholly owned subsidiary ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctors. The TP adjustment made by the TPO in respect of export of tractors was deleted in view of the directions of the DRP. The Assessing Officer in the final assessment order, thereafter proposed that since the show cause notice has already been issued to the assessee and its submissions on that was already on record, the said adjustment of ₹ 7.50 crores needs to be disallowed. Accordingly, the same was disallowed and added back to the total income of the assessee. 17. In respect of international transactions undertaken by the assessee, the mode of computation of adjustment with regard to the same is provided in section 92C of the Act and thereafter in section 144C of the Act. As per section 92C of the Act, arm's length price in relation to international transactions is to be determined by any of the methods prescribed being the most appropriate method, having regard to the nature of transaction. Under section 92CA of the Act, first reference is made by the Assessing Officer to the TPO where the person has entered into any international transaction and the Assessing Officer considers it necessary or expedient to refer the computation of arm's length price in relat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... per sub-section (8), the DRP may confirm, reduce or enhance the variation proposed in the draft order. However, it shall not set aside any proposed variation or issue any direction for further enquiry or passing of the assessment order. As per sub-section (10), every direction issued by the DRP shall be binding on the Assessing Officer. Further, it is provided in the Act that upon receipt of directions issued, the Assessing Officer shall in conformity with the directions complete, notwithstanding contrary contained in section 153/153B of the Act, the assessment, without providing any further opportunity of being heard to the assessee, within one month from the end of month in which such directions are issued. The Assessing Officer thus, has to apply the order of TPO subject to the directions of DRP and not to provide further opportunity of being heard to the assessee and such an order is to be passed within one month, from the end of month in which the directions are so received. 18. Now, coming to the preset case where reference was made to the TPO under section 92CA of the Act to benchmark the international transactions undertaken by the assessee and whether the same are at a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent of royalty where the TPO has violated the provisions of the Act and proposed the TP adjustment, but no separate adjustment was made on account of another adjustment and the same was subsumed in that; wherein the other TP adjustment was deleted by the DRP and the Assessing Officer in the final assessment order proposed the TP adjustment on account of royalty. Such procedure has not been followed by the TPO/Assessing Officer in the present facts and accordingly, we hold that there is no merit in the ad hoc disallowance of ₹ 7.50 crores. 19. Coming to the merits of the case, where the royalty has been paid by the assessee at a rate lesser than 3% as against which the RBI has approved the rate at 3% for payment of royalty, then the same is at arm's length and this issue also considered by the Pune Bench of Tribunal in M/s. Spicer India Limited v. ACIT (supra). The Hon'ble Bombay High Court in CIT v. SGS India Pvt. Ltd. in Income Tax Appeal No. 1807 of 2013, judgment dated 18.11.2015 had held the rate of royalty approved by SIA/RBI would constitute cup data and the transaction would be at arm's length price. Accordingly, we hold that where the payment of royalty ..... X X X X Extracts X X X X X X X X Extracts X X X X
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