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TMI Blog2018 (4) TMI 1735X X X X Extracts X X X X X X X X Extracts X X X X ..... our of the Assessee and against the Revenue. Transfer pricing adjustment on account of royalty paid on sales to associated enterprises - HELD THAT:- As decided own case [ 2017 (5) TMI 469 - DELHI HIGH COURT] Referring to comparative clauses based on the agreement in the case of the assessee and its sister concern were pari materia and-consequently the payments were revenue in nature. Disallowance of royalty and technical guidance fee, alternatively made under section 37(1) - HELD THAT:- Respectfully following the decision of the Hon ble high court in assessee s own case the disallowance under section 37 (1) on account of royalty and technical guidance fees cannot be upheld. Therefore ground of the appeal of the assessee is allowed accordingly. Double disallowance of Royalty - payment made by the assessee on account of royalty has already been disallowed by the TPO - HELD THAT:- As per the submissions of the Ld. AR, since the payment of royalty, to the extent of 76,96,000 has already been disallowed in the transfer pricing order, further disallowance to that extent has resulted in double disallowance of the same amount, which is impermissible under the provisions of the Act. Since t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1. That the assessing officer ('AO') erred on facts and in law in making addition to the income of the appellant to the extent of ₹ 11,34,76,600 on account of the alleged difference in the arm's length price of international transactions. Advertisement, marketing and sales promotion expenses: 2. That the AO/Dispute Resolution Panel ('DRP') erred on facts and in law in making transfer pricing adjustment amounting to ₹ 10,54,80,600 in relation to the advertisement, marketing and sales promotion expenses (hereinafter referred to as 'the AMP expenses') incurred by the appellant. 2.1 That on the facts and in the circumstances of the case, the DRP erred in law in making transfer pricing adjustment in respect of expenditure incurred on advertising, marketing and publicity ("AMP expenses"). 2.2 That on the facts and in the circumstances of the case and in law, the DRP erred in directing the assessing officer to determine the Transfer Pricing adjustment in respect of AMP expenses unilaterally incurred by the appellant when the same was duly examined / considered by the TPO in the course of Transfer Pricing assessment proceedings. 2.3 That on the facts and in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The DRP/TPO erred on facts and in law in holding that expenditure incurred by the appellant which resulted in benefit by way of brand building and increases sales for the foreign AE, and therefore resulting in a transaction of creating and improving marketing intangibles for and on behalf of its foreign associated enterprise. 2.12 Without prejudice that the DRP/TPO erred on facts and in law in not appreciating that no adjustment on account of allegedly excessive AMP expenses is warranted in the case of the appellant even if AMP expenses incurred by the appellant are separately benchmarked applying the guidelines prescribed by the Hon'ble Delhi High Court in the case of Sony Ericsson Mobile Communications India Pvt Ltd 374 ITR 118. 2.13 The DRP/TPO erred on facts and in law in not appreciating that such a Transfer Pricing adjustment cannot at all be made in law without determining the Arm's Length Price ("ALP") by applying one of the methods specified in section 92C of the Act. 2.14 Without prejudice that the DRP/TPO erred on facts and in law, in not appreciating that the AMP expenses incurred by the appellant were appropriately established to be at arm's length applying Tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llant to associated enterprises was undertaken on a principal to principal basis, wherein the appellant is acting as a licensed manufacturer. 3.3 3.3. That the assessing officer/TPO erred on facts and in law in arbitrarily holding that "where the assessee company is making a part of its sales to its related parties and the benefit of producing components is reaped by AE, the payment for charges for royalty does not confirm to the arm's length principle". 3.4 That the assessing officer erred on facts and in law in not appreciating that the royalty is paid by the appellant on net sales after deducting the cost of imported components, standard bought out components and export commission and is a necessary cost incurred by appellant for manufacture of goods. 3.5 That the assessing officer/TPO erred in not appreciating that payment of royalty is a necessary cost incurred by the appellant for manufacture of goods. Corporate tax Issues: Disallowance of Royalty and Technical guidance fees: 4. That the assessing officer/ DRP erred on facts and in law in disallowing royalty amounting to ₹ 18,31,67,000 and technical guidance fee amounting to ₹ 10,20,44,000 paid to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on facts and in law in disallowing provision for service coupons amounting to ₹ 67,31,000, (erroneously mentioned as Rs.l,03,15,000 in the final assessment order), allegedly holding that estimate of provision for service coupons by the appellant was not based on any scientific method and, therefore, not allowable under section 37 of the Act. 5.1 That the assessing officer/ DRP erred on facts and in law in not appreciating that the provision for service coupons was made by the appellant as per consistent method followed year after year and was revenue neutral in nature. 5.2 Without prejudice, that the assessing officer/ DRP erred on facts and in law in not allowing expenses amounting to ₹ 20.83 lakhs, being expenses other than provision of service coupons debited under the head 'service expenses'. 5.3 That the assessing officer/ DRP erred on facts and in law in not allowing the claim of the assesse amounting to ₹ 45.82 lakhs, being the amount of last year's closing provision expended during the current year, which was disallowed in that year, resulting in double taxation. Disallowance of provision for warranty: 6. That the assessing officer/ DRP erre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9,96,000/- to be "NIL" using CUP method . The Draft Assessment Order u/s 143(3) r.w.s. 144C(1) of the Income Tax Act, 1961 was passed on 14.03.2016 at income of ₹ 89,79,11,520/- as against the returned income of ₹ 66,45,79,270/-. The assessee filed objections before the DRP who vide order u/s 144C(5) of the Income Tax Act, 1961 passed on 27.12.2006 issued certain directions. The Final Assessment Order was passed on 31.01.2017 by making addition of ₹ 79,96,000/- on account of transfer pricing adjustment of royalty. The Assessing Officer further made additions of ₹ 19,54,80,6000/- on account of Transfer Pricing Adjustment, ₹ 18,31,67,000/- on account of capitalization of Royalty which is not allowable u/s 37(1) being not wholly and exclusively for the purpose of assessee's business. Further the Assessing Officer made addition of ₹ 10,20,44,0000/- on account of capitalization of Technical Guidance Fees and disallowance of ₹ 103,15,000/- in respect of provision of service coupon as well as ₹ 11,13,000/- in respect of provision of warranty. 4. Being aggrieved by the Assessment Order passed u/s 143(3) r.w.s. 144C(13) of the Income Tax Act, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llowed wholly or partly because it incidentally benefits the third party. This was in context of Section 37 (1) of the Act. Reference was made to the decision in Sassoon J David & Co Pvt. Ltd. v. CIT (1979) 118 ITR 26 (SC). The Supreme Court in the said decision emphasised that the expression 'wholly and exclusively' used in Section 10 (2) (xv) of the Act-(.Indian Income Tax Act, 1922) did not mean 'necessarily'. It said: "The fact that somebody other than the Assessee is also benefitfed by the expenditure should not come in the way of an expenditure being allowed by way of a deduction under Section 10 (2) (xv) of the Act (Indian Income Tax Act, 1922) if it satisfies otherwise the tests laid down by the law." 39. The OECD Transfer Pricing Guidelines, para 7.13 emphasises that there should not be any automatic inference about an AE receiving an entity group service only because it gets an incidental benefit for being part of a larger concern and not to any specific activity performed. Even paras 133 and 134 of the Sony Ericsson judgment makes it clear that AMP adjustment cannot be made in respect of a full-risk manufacturer. 40. Certain additional fac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he said finding of the Tribunal has not been challenged by the Revenue before the Hon'ble High Court. Therefore, the order of the Tribunal has attained finality with regard to the issue of payment of royalty on sales made to associated enterprise. The Hon'ble Delhi High Court in the appellant's case for assessment year 2008-09 held that 'the question of re-characterizing the assessee as a contract manufacturer was unwarranted". In view of the aforesaid, the Ld. AR submitted that submitted that the adjustment made by the TPO holding the appellant .a be a contract manufacturer is bad in law and is liable to be deleted. 9. As related to Ground Nos. 3 to 3.5, the Ld. DR relied upon the Assessment Order and order of the TPO as well as directions of the DRP. 10. We have heard both the parties and perused the material available on record. The submission of the Ld. AR that this issue is also covered in favour of the assessee, is justified by the order passed in ITA No. 5713/Del/2011, 6023/Del/2012, orders dated 25/07/2014 & 12/12/2014 respectively as well as the Hon'ble High Court decision in assessee's own case for Assessment Year 2008-09 being ITA No. 538/2015 order dated 14/1/2016 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee. Accordingly heavy reliance was placed on the order in its own case for the ^ immediately preceding assessment year. 11. The Ld. CIT DR placed reliance upon the assessment order and the order of the DRP. 12. We have heard the rival submissions and perused the material available on record. The record would show that the DRP refused to interfere on the reasoning that the issue was still alive as a result thereof the relief granted in appeal in 2007-08 assessment year by the First Appellate Authority was not followed. The Ld. AR has placed copy of the order in assessee's own case for 2007-08 assessment year wherein ITA No.-5713/Del/2011 the Co-ordinate Bench following the view taken in M/s Hero Motor Corp Ltd. Vs ACIT order dated 23.11.2012 in ITA No.- 5130/Del/2010 rendered by the Delhi "C" Bench of the Tribunal by detailed finding in paras 7.4 to 7.7 pages 22 to 40 confirmed the relief granted by the CIT(A) holding that the comparative clauses based on the agreement in the case of the assessee and its' sister concern_were pari materia and-consequently the payments were revenue in nature. Respectfully following the order of the Co-ordinate Bench in the immediate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n assessment year 2009-10, the Tribunal likewise deleted the addition following Tribunal orders for the preceding assessment years. The Tribunal, in the aforesaid cases, placed reliance on the decision of Delhi Bench of the Tribunal in the case of Hero MotoCorp Ltd. v. ACIT: ITA No. 5130/Del/2010 for assessment year 2006-07 and held that the royalty agreements entered into between the parties in both the cases was identical. In the aforesaid cases, the Tribunal has, on an analysis of the respective agreements, come to the conclusion that payment made under the agreements was deductible revenue expenditure. The Ld. AR pointed out that the Hon'ble jurisdictional High Court in the case of CIT v. Hero Honda Motors Ltd. 372 ITR 481 was concerned with similar agreement qua payment of royalty to Honda Motor Co., Japan. On examining the terms of the agreement under consideration, the Court was pleased to dismiss the appeal of the Revenue authorities and conclusively hold that expenditure incurred for payment of royalty shall be revenue in nature. Referring to the aforesaid decision, in assessee's own case for assessment years 2007-08 and 2008-09, this issue has been confirmed by the Hon'bl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons of the DRP. 13. We have heard both the parties and perused all the records. the Ld. AR pointed out the findings of the Tribunal made in order passed or Assessment Year 2011-12, reproduced below, wherein the impugned disallowance has been deleted even on this alternative ground raised by the Revenue: "16. Ground No. 4 is against disallowance of amount of royalty paid of ₹ 76,00,000/- and technical guidance fees of ₹ 6,11,000/- held to under section 37(1) of the Act. 17. On this issue, Ld. AR submitted that it is conclusively covered in favour of the assessee that payment of royalty and technical guidance fees is revenue in nature in view of the decision of the Hon'ble High Court dated 14/01/2016 in case of the assessee wherein for assessment year 2008- 2009, Hon'ble high court did not admit similar question. He further submitted that for assessment year 2010- 2011 the assessing officer himself has accepted the claim of the assessee and did not make any disallowance on the aforesaid issue. He further submitted that issue is also squarely covered in favour of the appellant in assessee's own case for assessment year 2009 - 10 and 2010 - 11 by order of trib ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d in double disallowance of the same amount, which is impermissible under the provisions of the Act. Since the Royalty issue is already decided in Ground Nos. 3 to 3.5 and 4 to 4.5, this contention of the assessee is accepted. 17. As relates to Ground Nos. 5 to 5.3 regarding disallowance of provision for service coupons of ₹ 67,31,000/- (erroneously mentioned as R.1,03,15,000/- in the final assessment order), the Ld. AR submitted that this issue is squarely covered by the order of the Tribunal, in assessee's own case, for the assessment year 2011-12. 18. As related to Ground Nos. 5 to 5.3, the Ld. DR relied upon the order of Assessing Officer, TPO and DRP Directions. 19. We have heard both the parties and perused the material available on record. As per the submissions of the Ld. AR, this issue is also covered by the decision of the Tribunal in the assessee's own case for Assessment Year 2011- 12 being ITA No. 1573/Del/2016 order dated 26/8/2016. The Tribunal held as under: "25. Therefore in view of the above decision of the Hon'ble Supreme Court in Rotork Controls India (P) Limited vs. CIT (supra) wherein the warranty provisions, which are similar to the after sales ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed by the Tribunal following the aforementioned order for AY 1996-97. The Ld. AR further pointed out that no disallowance of provision for warranty was made in any of the preceding assessment years and the said provision has been consistently allowed as revenue deduction in all preceding years, apart from the above mentioned years which have also been conclusively decided in favor of the assessee company. Thus, the Ld. AR submitted that the disallowance of provision of warranty is based on incorrect appreciation of facts and position in law. Accordingly, the provision for warranty made by the assessee, in accordance with the consistent method and practice, is neither an unascertained liability nor excessive. 21. As relates to Ground Nos. 6 to 6.2, the Ld. DR relied upon the assessment order and DRP directions. 22. We have heard both the parties and perused the material available on record. The warranty provisons were disallowed in subsequent years for 1997- 98, 1998-99 & 2001-02 which was deleted by the Tribunal vide order dated 31/7/2006 since no disallowance of provisions for warranty was made in any of the preceding year and the said provision was consistently allowed by the R ..... X X X X Extracts X X X X X X X X Extracts X X X X
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