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TMI Blog2023 (2) TMI 1326X X X X Extracts X X X X X X X X Extracts X X X X ..... cing Order passed should be quashed as being bad in law or illegal or void ab initio. 2. General ground challenging the transfer pricing adjustment of INR 5,63,47,440 Erred in law and in facts in making upward transfer pricing adjustment of INR 5,63,47,440 to the returned income of the Appellant in respect of the development, enhancement, maintenance, protection and exploitation ('DEMPE') activities. 3. Inappropriate allegation of the appellant performing DEMPE functions with respect to the brand Erred in law and in facts in concluding that the Appellant is engaged in performing DEMPE activities with respect to the brand without appreciating that the Appellant, being a licensee, is incurring the advertisement and sales promotion expenses to promote products sold by the Appellant. 4. Inappropriate allegation of the appellant performing DEMPE functions through Advertisement and Marketing expenditure incurred in India and inappropriately treating the same as an international transaction under section 92B of the Act Erred in law and in facts concluding that the Appellant is engaged in performing DEMPE activities through Advertisement and Marketing expenses incurred ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... order under section 143(3) r.w.s. 144C(13) of the Act dated 29 July 2022 by Jurisdictional Assessing Officer (ACIT, Circle 8, Pune) and not by the National Faceless Assessment Centre, thereby making the entire assessment proceedings as void-ab-initio and is liable to be quashed. 11. Final assessment order barred by limitation Erred in law in passing the final assessment order on 29 July 2022, i.e. beyond due date (30 September 2021) as per section 153 of the Act, without appreciating that the time limit prescribed under section 153 is the outer time limit for passing the final assessment order and hence, the final assessment order dated 29 July 2022 is time barred and liable to be quashed. 12. Erroneous levy of interest under section 234D of the Income-tax Act, 1961 Erred on the facts and in circumstances of the case and in law by levying interest under section 234D of the Act. 13. Non-consideration of Tax Credit of Tax Deducted at Source (TDS) available to the Appellant Erred in facts by not allowing the TDS credit to the extent of INR 1,85,168 available to the credit of the Appellant for AY 2018-19 14. Initiation of penalty proceedings under section 270A of the Act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llowed - Refer para 85 to 102 from page 44 to 54 of the order and page 567 to 577 of the factual paperbook 2001-02 Allowed - Refer para from 25 to 31 from page 596 to 599 of the factual paperbook for AY 2000-01 and para 55 on page 606 of factual paper book for AY 2001-02 2000-01 Accordingly, the Assessee submits that this aspect is entirely covered by Hon'ble ITAT‟s order in Assessee's case and, hence, the entire royalty paid as revenue be allowed as a deduction for AY 2018-19. 4. We find in ITA No. 1859/PUN/2018 for A.Y. 2014-15 in Assessee's own case, order dated 24-08-2022 on the same issue with regard to disallowance of royalty expenditure whether the same is capital or revenue expenditure, it was observed as follows: "The first issue is with regard to disallowance of royalty expenditure whether the same is a capital or revenue expenditure. We find that in ITA No. 495/PUN/2017 (supra) in Assessee's own case this issue has been discussed by the Tribunal and has been held that the royalty expenditure is revenue in nature. The relevant paragraph of the I.T.A.T. order is as follows: "27. Ground No. 16 is with regard to the disallowance of royalty expenditure. The as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... In fact the agreement states that copyright of the technical product documentation, including any modifications as well as the know-how and any patents contained therein would remain the property of Daimler AG. There are restrictions placed on MB India from divulging confidential information obtained under the agreement to any third party. Upon the termination of the agreement, MB India is required to immediately discontinue all assembling/ manufacturing and sales operations of the licensed products (c) From the above terms and conditions, it is clear that MB India's rights under the agreement ends on termination of the agreement. It also evident that MB India has neither acquired any assets on an outright basis nor secured any enduring advantage. The benefit secured by MB India is essentially a license right to use the know-how for the period of the agreement and the royalty expenditure in this regard is therefore revenue in nature. (e) In relation to AY 2012-13, as mentioned above, the Ld. AO relying on the orders passed by the erstwhile AO‟s during the assessment proceedings for AY 2004-05 to AY 2011-12 and further relying on the Hon'ble DRP‟s direc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d as revenue expenditure by the Hon'ble ITAT for AY 2009- 10, AY 2010-11 and AY 2011-12. 31 July 2019(Refer page 1540 of the Legal Paperbook AY 2013-14 Hon'ble DRP upheld AO‟s order considering royalty expenditure to be capital in nature Not Applicable Pending before Hon'ble ITAT AY 2014-15 Expenditure allowed by the Hon'ble CIT(A) as revenue deduction Not Applicable AY 2015-16 AY 2016-17 and AY 2017-18 Disallowed by the Hon'ble AO based on the decisions in previous years - Pending before Hon'ble CIT(A) AY 2018-19 Disallowance made by the DRP in the DRP directions. Final order pending to be issue Final order is yet to be issued Appellant to file an appeal once final order is issued (g) Respectfully following the aforesaid decision of Pune Tribunal in Assessee's own case on the same parity of reasoning, facts and circumstances, we hold that the royalty expenditure in this regard is revenue in nature. Accordingly the Ground No. 16 stands allowed." 3. The ld. D.R fairly conceded that the issue has been covered in favour of the assessee. 4. Having heard the parties and considering the decision in ITA No. 495/PUN/2017 (supra) on the same parity of reaso ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... - (5) being royalty adjustment computed as difference of royalty paid on sales less royalty paid on cost of sales 6 5,63,47,440 7. The ld. T.P.O made this adjustment on account of excess royalty on a protective basis, however, the ld. D.R.P while giving its directions deleted the adjustment stating that the royalty is paid @ 5% on value added and not as a percentage of sales. The ld. T.P.O has himself worked out the percentage at 1.23% which is arbitrary and the assessee had nowhere mentioned that the royalty was paid @ 1.23% on sales. The ld. D.R.P stated that while applying the transfer pricing provision, it is important to consider whether the price paid by the assessee is comparable to the price paid by an unrelated party for similar services. The T.P.O has nowhere stated that the royalty paid by the assessee was higher than the royalty that could have been paid by an unrelated party and merely mentioned that royalty should not be paid on net profits. Considering the above ground, the ld. D.R.P deleted the protective addition made by the ld. T.P.O for excess royalty payment amounting to Rs. 5,63,47,440/-. In addition to the T.P adjustment of excess royalty payment, the T.P.O ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re-conditions for determining the arm's length price Assessee's Submission 1 Existence of international transaction The learned TPO/ Hon'ble DRP has failed to establish the existence of an international transaction between the Assessee and its AE in relation to so called DEMPE functions. 2 Inappropriately not using one of the prescribed methods The learned TPO in TP order has not used any of the six prescribed method to make the TP adjustment. 3 Failed to bring any comparable uncontrolled transaction for determining the arm's length price The Hon'ble DRP mentioned that the learned TPO has used "Other Method" for computation of the TP adjustment. In any case, Rule 10AB - "Other method of determination of arm's length price" prescribes comparing the international transaction with the price which has been charged or paid, or would have been charged or paid, for the same or similar uncontrolled transaction, with or between non-associated enterprises, under similar circumstances, considering all the relevant facts. In the current scenario, the learned TPO/ Hon'ble DRP has not brought anything on record to compare the alleged international transaction wit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... For distribution of vehicles, components and parts purchased by the Assessee from Daimler AG in India. As per agreement, the Assessee is asked to develop the market in India, use logos/ trademarks in India. Such efforts, including the marketing, leads to enhancement of brand value of AE The functions mentioned in the agreement are routine functions for development of sales and service network which is critical for every automobile original equipment manufacturer. The functions results in increase in sales of the Assessee and thereby reward for such functions is retained by the Assessee only by way of the profits earned. 2 General Supply Agreement ('GSA') dated 1 January 2008 - For purchasing the parts for the purpose of manufacturing in India. Referring to the process of ordering contractual goods by the Assessee, TPO concluded it is required to develop market in India. There is no reference to development of market by the Assessee. Accordingly, the reliance placed by TPO is incorrect. 3 Technology License Agreement ('TLA') dated 2 March 2009 - To provide the Assessee with the licensed technology comprising of know-how, patents, copyrights and other inte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons. The assessee has also contended ld. T.P.O has not used any of the prescribed method to make T.P adjustment. It has been further alleged that the ld. T.P.O/D.R.P has not brought anything on record to compare the alleged international transactions with comparable uncontrolled transactions to test the ALP of such transactions. We are of the considered view therefore, in the interest of justice, the issue should be remanded back to the file of the A.O/T.P.O for re-adjudication as per law while complying with the principles of natural justice. We order accordingly. Grounds No. 1 to 8 of the appeal are allowed for statistical purposes. 14. At the time of hearing, the ld. Sr. Counsel for the assessee did not press Grounds No. 10 and 11 of the appeal. Hence these grounds are dismissed as not pressed. 15. Ground No. 12 of the appeal is consequential. 16. Referring to ground No. 13 of the appeal, the ld. Sr. Counsel for the assessee submitted that this ground may be remanded back for verification. The ld. D.R did not raise objection in this regard. Ground No. 13 is also remanded back to the file of the A.O/T.P.O for verification. Therefore, ground No. 13 is also allowed for statistic ..... X X X X Extracts X X X X X X X X Extracts X X X X
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