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Judgment
PER MANISH AGARWAL, AM :
The captioned cross-appeals are filed by the assessee and the Revenue against the order dated 15.11.2018 by Ld. Commissioner of Income Tax (A)-XXVI, New Delhi [“ld. CIT(A)”] in Appeal No. 10303/17-18 passed u/s 250 of the Income Tax Act, 1961 [“the Act”] arising from the assessment order dated 30.11.2017 passed u/s 263/153A/143(3) of the Act pertaining to Assessment Year 2011-12.
Brief facts of the case are that the assessee had filed its return of income, declaring total income of NIL. As a result of search carried out in the case of J.P. Minda Group on 20.09.2013, the assessee company being part of the group was also covered. Thereafter proceedings were initiated in the case of assessee by issue of notice u/s 153A of the Act on 08.06.2015. In response, assessee filed return of income on 28.06.2015, declaring NIL income. The AO after considering the submissions made, passed the assessment order dated 30.06.2016 at NIL income i.e. income declared by the assessee was accepted. Thereafter, ld. Principal Commissioner of Income Tax (PCIT) initiated the revision proceedings and passed the order u/s 263 of the Act wherein it is held that the assessee has entered into international transactions with its Associated Enterprises (“AEs”) however, the AO has passed the assessment order without waiting for the order of Transfer Pricing Officer (TPO) and therefore, accordingly set aside the assessment order being erroneous and pre-judicial to the interest of the Revenue and direct the AO to pass a fresh order after considering the order of TPO. In compliance, the AO proceeded with the directions given by Ld. PCIT and considered the order of TPO passed u/s 92CA dated 28.10.2016 wherein adjustments of INR 23.23 crores were made on account of Arm’s Length Price (ALP) of international transactions carried out by assessee with its Associate enterprises (AEs). The, AO than passed the order u/s 263 r.w.s. 153A r.w.s. 143(3) dated 30.11.2017 wherein addition of INR 23,23,00,000/- was made towards ALP adjustment of manufacturing functions of involving international transactions of purchase of raw material and sale of finished goods and purchase of machinery of INR 12.93 Lakhs, payment of Royalty and technical knowhow and charges for technical services of INR 10.30 crores.
Against the said order, assessee preferred an appeal before ld. CIT(A), who vide impugned order dated 15.11.2018 partly allowed the appeal of the assessee wherein addition for adjustments on account of purchase of raw material, sale of finished goods and purchase of machines were confirmed and addition towards adjustment of INR 10.3 crores on account of payment of Royalty, technical knowhow and technical services was deleted.
Aggrieved by the order of Ld. CIT(A), both the parties preferred appeal before the Tribunal by raising following Grounds of appeal:-
ITA No.897/Del/2019 [Assessment Year 2011-12]
[Assessee’s appeal]
1.“The order of the learned Commissioner of Income Tax (A) is arbitrary, against law and facts on record.
2.On the facts and circumstances of the case and in law the learned Commissioner of Income Tax (A) failed to appreciate that the issuance of notices u/s 263/153A/143(3)) of the Income Tax Act, 1961 and the proceedings conducted there under are against the provisions contained in the Income Tax Act, 1961 and is bad in law and hence liable to be quashed.
3.On the facts and circumstances of the case and in law the learned Commissioner of Income Tax (A) failed to appreciate that during the course of search no incriminating documents have been found and as such order passed u/s 263/153A/143(3) is against the provision contained in the Income Tax Act, 1961.
4.On the facts and circumstances of the case and in law, the learned Commissioner of Income Tax (A) failed to consider that the upward adjustment to the tune of Rs. 12.93 cr. towards the international transactions of payment of raw materials and components, sale of finished goods and purchase of machinery entered into by the appellant with its associated enterprises is bad in law and is contrary to the facts on records.
5.On the facts and circumstances of the case and in law that the Ld. CIT (A) erred on the facts and in law in rejecting certain comparable companies which are functionally comparable to the appellant.
6.On the facts and circumstances of the case and in law the Ld. CIT(A) erred on the facts and in law in not considering the correct operating profit margins of the final comparable companies.
7.On the facts and circumstances of the case and in law the Ld. CIT (A) erred in not allowing the working capital adjustment allegedly holding that a specific claim for claiming the said adjustment has not been made by the appellant.
That the appellant craves the leave to add, modify, amend or delete any of the grounds of appeal at the time of hearing and all the above grounds are without prejudice to each other.”
ITA No.728/Del/2019[Assessment Year : 2011-12]
[Revenue’s appeal]
1.“Whether on the facts and circumstance of the case and in law the Ld. CIT(A) was justified in deleting the addition on account of royalty' when there was payment made for technical 'know how' over and above 'royalty for the same technology, leading to shifting of profit out of India circumstance of the case and in law the Ld. CIT(A) was justified in deleting the addition on account of 'royalty' when there was payment made for technical 'know how' over and above 'royalty for the same technology. leading to shifting of profit out of India.
2.The appellant craves leave to add, amend any/all the grounds of appeal before or during the course of hearing of the appeal.”
First we take assessee’s appeal in ITA No. 897/Del/2019 for Assessment Year 2011-12.
ITA No.897/Del/2019 [Assessment Year 2011-12]
Before us, Ld.AR for the assessee submits that Ground of appeal No.1 raised by the assessee is general in nature and Ground of appeal Nos.2 & 3 raised by the assessee are not pressed hence, Ground of appeal Nos. 1 to 3 raised by the assessee are dismissed.
The remaining Ground of appeal Nos. 4 to 7 raised by the assessee are with respect to the confirmation of transfer pricing adjustment of INR 12.93 crores towards international transaction of payment of raw material and components, sale of finished goods and purchase of machinery entered into by the assessee with its AEs. The assessee further challenged the rejection of certain comparables and inclusion of few comparables by the TPO in the final set of comparables for benchmarking and further challenged the action of not allowing the working capital adjustments.
Before us, ld.AR submits that assessee has shown OP/OR at 3.83 % and by applying TNMM for benchmarking the transactions selected three comparable companies and worked out OP/OR at 5.52%. Since the difference between OP/OR of the comparable companies of the assessee was falling with [+][-] range of 5%, therefore, no adjustments were made by the assessee as per its TP study report.
On the other hand, TPO has rejected one comparable namely, Bright Brothers Ltd. and further included Five new comparables and worked out the OP/OR at 9.42% and since the said percentage is more than the tolerance range of 5% made upward adjustment of INR 12.93 crores to the ALP of international transactions of purchase of raw material and components, sale of finished goods and purchase of machinery entered into with its AEs. Ld.AR submits that AO/TPO has excluded comparable i.e. Bright Brothers Ltd. by observing that it is functionally dissimilar and it was engaged in the business of manufacturing of products like Umbrella, ladies Cigarette cases, table lamps, wash basins fabricated out of ‘Perspex’ (acrylic) sheets etc. which function is altogether different with of the assessee.
Ld.AR drew our attention to page 10 to 12 of the CIT(A)’s order wherein submission of assessee is reproduced according to which the assessee has tried to demonstrate that one of the products and services provided by Bright Brother Ltd. includes automative parts and system automative parts such as front and rear bumper system, headlight cover, green house system, Green House system as exterior system of automotive and cockpit system, Overhead system and side wall system as part of interior system of the automotive. Ld. AR further submits that it is settled preposition that under TNMM, broad functional comparability is to be seen and not the product similarity. Since one of the function of Bright Brothers Ltd. is similar to the function carried out by the assessee therefore the same cannot be excluded. The AO/TP has excluded the said company merely because it is engaged in other products also more particularly when the said company qualifies all the filters applied by AO/TPO as well as by the assessee. It is further submitted by ld. AR that ld. CIT(A) in page 54 of part (v) observed that, the company cannot be included as the basic comparability is simply missing which observations are contrary to the fact as stated above, and requested to include it as a valid comparable in the final set of comparables for benchmarking the transactions.
On the other hand, Ld. CIT DR for the Revenue submits that TPO has stated in its order at pages 9 & 10 that company, Bright Brothers Ltd. is engaged in manufacturing of plastic products and process of manufacturing is entirely different and thus, is not a valid comparable. He requested for confirmation of the order of the lower authorities in this regard.
Heard the contentions of both parties at length and perused the material available on record. The TPO has excluded the Bright Brothers Ltd. by holding that it is manufacturing entirely different products and had not entered into automobile sector. From the perusal of the submission of the assessee as reproduced at page 10 to 12 of ld. CIT(A)’s order, wherein the assessee has submitted the screen short of website of company, Bright Brothers Ltd., according to which one of the products line of the said company is exterior and interior parts and system used in automobile industry like bumper, head light cover, etc. Besides this, certain other products which are used as interior of the vehicle such as cockpit system, overhead system etc. are also manufactured by it. Therefore, Bright Brothers Ltd. is broadly functionally similar with the assessee company and as observed above, under TNMM method broad functional comparability as a whole is to be considered and not the products similarity. Once it is observed that functions performed are broadly similar, the company cannot be excluded.
This view is further supported the judgement of Hon’ble Delhi High Court in ITA No.461, 526, 590/2017 in the case of M/s. MCKINSEY KNOWLEDGE CENTRE (INDIA) PVT. LTD. vs PR. COMMISSIONER OF INCOME TAX. Accordingly, by respectfully following the judgement of Hon’ble Delhi High Court and looking to the fact that company Bright Brothers Ltd. had passed all the filters applied by the TPO and functionally similar therefore, it should be included as a valid comparable. We order accordingly.
Now coming to the issue of exclusion of certain comparables which are included by TPO in the final set of comparables. Before us, ld. AR submits TPO has included five new comparables which are includes PMP Auto Components Pvt. Ltd. having OP/OR of 13.69% and REIL Electricals India Ltd. having OP/OR of 15.69%. Ld.AR submits that these two comparables are incorrectly selected by the TPO. With respect to PMP Auto Components Pvt. Ltd., ld. AR submits that data for this company for FY 2010-11 are not available therefore, it had not qualified one of the filters of current year data and therefore, it should be excluded from the final set of comparable. Ld. AR submits that ld. CIT(A) though in its order at page 54 in para (vi) has observed that if the data of FY 2010-11 is not available in the domain, the same should be excluded however, no specific finding is given.
Regarding REIL Electricals India Ltd., Ld.AR submits that this company is having turnover which is not comparable with the turnover of the assessee and therefore, it is to be excluded. He therefore, requested for the exclusion of these two comparable included by AO/TPO.
On the other hand, Ld. CIT DR supported the orders of AO/TPO and submits that the TPO at page 12 of the order has given the reasons as to why these two comparables should be included and stated that these are functionally similar therefore, these should be included in the final set of comparable. He prayed accordingly.
Heard the contentions of both parties at length and perused the material available on record. With respect to PMP Auto Components Pvt. Ltd., as observed above, ld. CIT(A) had admitted that data for FY 2010-11 are not available in the domain however, asked the AO for verification of the facts and decide accordingly. In our opinion once it is established that company has failed one of the main filter of current year data, it could not be included as a valid comparable and accordingly, we direct the AO/TPO to exclude this company from the final set of comparable for benchmarking the transaction with respect to the purchases of raw material, sale of finished goods and purchase of machinery.
Regarding REIL Electricals India Ltd., assessee’s contention is that this company has low turnover however, TPO/AO has considered this fact and observed that once the company is engaged in the manufacturing of similar kind of products and has functionally similarly therefore, we do not find any force in the arguments of the assessee and accordingly, we hold that AO/TPO has rightly included this company in the final set of comparables. We order accordingly.
With respect to the claim of the assessee of working capital adjustment, the assessee has made this claim for the first time before ld. CIT(A) and has not made any adjustment towards working capital in its TP study report. The ld. CIT(A) dismissed this plea by observing that since the assessee has not made specific claim in this regard therefore, the same could not be allowed. In our considered view, claim of working capital adjustment is a valid claim and it should be allowed while working the transfer pricing adjustment therefore, we direct AO/TPO to allow working capital adjustment. At the same time assessee is also directed to file all the necessary details and data in support of the claim made.
With these observations, Ground of appeal Nos.4 to 7 raised by the assessee are partly allowed.
In the result, appeal of the assessee is partly allowed.
Now we take appeal of the Revenue in ITA No.728/Del/2019 [Assessment Year : 2011-12]
ITA No.728/Del/2019 [Assessment Year : 2011-12]
The solitary ground taken by the Revenue is with respect to deletion of TP adjustment on account of payment of Royalty, technical knowhow and payment for technical services.
Heard the contentions of both parties at length and perused the material available on record. The claim of the Revenue is that assessee has paid Royalty fee for technical services and technical knowhow which were benchmarked by taking CUP method however, AO/TPO has rejected the claim of the assessee and value shown by the assessee at INR 10.30 crores has been taken as ALP adjustment. Ld. CIT(A) after considering the submissions of the assessee, deleted such adjustment by observing as under:-
D. “In ground 4 the appellant has challenged the action of the AO/TPO in disallowing the payment of royalty, technical know-how fees and charges for technical services cumulatively amounting to Rs. 10,30,16,871 paid by the appellant to its associated enterprises.
i.It has been submitted by appellant that Nippon Seiki Company Limited (Nippon Seiki) has entered into a Technical Assistance Agreement with JNS Instruments Limited (JNS) dated 25 September 1998 for manufacture of contracted products i.e. Instrument Clusters and their component parts for 2 Wheelers and 4 Wheelers by use of technical design over which Nippon Seiki has specialization, industrial rights and manufacturing knowhow. Further, Nippon Seiki and JNS have entered into further amendments and supplementary agreements from time to time in respect of new products. As per the Technical Assistance Agreement, Nippon Seiki agreed to provide technical Knowhow and Design & Engineering for development of product as specified in the agreement i.e. Instrument Clusters and parts of Automobiles, Technical Assistance by deploying its engineers to JNS for providing technical and managerial guidance relating to the products manufactured quality control etc and also, Nippon Seiki gives information against contracted products as per Technical Assistance agreement i.e. drawings of finished products and its component parts. It has been submitted by appellant that whenever JNS customers viz Maruti, Hero, Honda etc. gives the requirement for new models, JNS approaches Nippon Seiki to prepare the drawings, specification etc. for those models. Nippon Seiki also does interaction with Nippon Seiki customer's parent companies in Japan Suzuki, Honda, and Yamaha etc. during the phase of development. Only after receiving the aforesaid technical know-how, assistance and support of Nippon Seiki, JNS is able to manufacture moulds and dies, line equipment etc. In consideration of the technical know-how, assistance and support extended by Nippon Seiki, JNS, during the relevant previous year has made the payments to Nippon Seiki. The appellant, for the purpose of benchmarking analysis applied TNMM as the most appropriate method since the international transactions of payment of royalty, technical know-how fees and technical charges was inextricably and closely linked to the appellant's main business of manufacturing of instrument clusters for automobile industry. Also, associated enterprise had not rendered any such similar service to any unrelated party in India. Based on comparability analysis under TNMM, the appellant concluded in its transfer pricing documentation that under TNMM, the operating margins of JNS are higher than that of comparable companies, and accordingly the international transaction of payment of royalty, technical know-how fees and technical charges are concluded at arm's length price.
ii.The TPO rejected TNMM holding that the payment of royalty, technical know-how fees and technical charges is a separate class of transaction and needs to be benchmarked separately. TPΟ proceeded to benchmark said transaction by applying CUP method and held that since no benefit has been passed on to the appellant from such payment, the arm's length price of such transaction shall be NIL.
iii.It has been submitted that appellant do not possess any technical know-how in creating designs, diagrams & drawings for manufacturing of said automotive components. The appellant cannot commence the production of the said automotive products until the designing, drawing and documentation of the product is completed and for accomplishing this purpose, the appellant entered into Technical Assistance Agreement dated 25 July 1998 with Nippon Seiki since Nippon Seiki has acquired specialization in designing of automotive products over which it owns and maintains Industrial Rights and Know-how in many countries. Accordingly, Nippon Seiki has agreed to provide JNS the technical information in relation to the products contracted in the agreement. It has been submitted that only after receiving the aforesaid technical information for the products, the appellant is in a position to provide quotation to its customers and thereafter commence production of the orders secured. The technical know-how of the associated enterprises is the very essence of the appellant's business, without which the appellant's cannot run the business operations. Further Nippon seiki is one of the biggest manufacturing company in automobile parts having Global presence and their designs are acceptable to customers.
Further said technical agreement have been entered between Nippon Seki Co Ltd and JNS Instruments Ltd in the year 25th July 1998 and in the preceding years no adverse inference have been made by the Income tax department in respect of payment made to Nippon Seki Co Ltd on the basis of said agreement. The appellant submitted Balance sheet of the appellant company for the FY 2008-09 and FY 2009-10 and in these years appellant made payment to Nippon Seki Co Ltd in respect of royalty and for technical fees and no adverse inference have been made by Income tax department in respect of the said payment. In continuation of agreement dated 25 July 1998 supplementary agreement dated 12/06/2009 have been entered into between Nippon Seki Co Ltd and JNS Instruments Ltd for providing technical information in respect of instruments clusters for YY4 model to Maruti Suzuki India Ltd for the manufacture of four wheelers and drawings for finished products and its components parts and components parts list for the part number OP-0394-001K0CO-00, OP-0394-002K0CO-00,OP-0394-003K0CO-00 and OP-0394-004K0CO-00, A Supplementary Agreement dated 16/12/2009 have also been entered into between Nippon Seki Co Ltd and JNS Instruments Ltd for providing technical information in respect of instruments clusters for TMOA (Model 2PS) and Similar Models of Honda Seil Cars India Ltd categorized into instruments clusters for four wheelers and drawings for finished products and its components parts and components parts list for the part number HR-0388-012K0CO-00 and HR-0388-012K0CO-00. The payment of Rs 10.3 crores is in pursuance of the above agreement and has been shown under the head payment for technical knowhow, payment of royalty and payment of payment of technical assistance. In respect of Payment for Technical Knowhow the appellant paid a sum of Rs 65,141,795/- and the said payment have been made as per the supplementary agreement dated 12/06/2009 for providing technical information in respect of instruments clusters for YY4 model (which is known as SX4 model manufactured by Maruti Suzuki India Ltd) and drawings for finished products and its components parts and as per the supplementary agreement dated 16/12/2009 for providing technical information in respect of instruments clusters for Honda City and Similar Models of Honda Seil Cars India Ltd categorized into instruments clusters for four wheelers and drawings for finished products and its components parts. It has been submitted that appellant received requirement from Maruti Suzuki India Ltd and Honda Seil Cars India Ltd for the drawings and design and on receiving the said requirement the appellant approached Nippon Seiki. Nippon Seiki worked on the requirement received from Maruti Suzuki India Ltd and Honda Seil Cars India Ltd and various correspondences and exchange of technical information takes place to finalize the said design and drawing which was suitable to Maruti Suzuki India Ltd and Honda Seil Cars India Ltd and the copy of various correspondence in this regard have been submitted. The payment made under the head Technical knowhow is onetime payment to Nippon Seiki for providing technical information SX4 model manufactured by Maruti Suzuki India Ltd and Honda City and Similar Models manufactured by Honda Seil Cars India Ltd and drawings for finished products and its components parts as per the payment terms given in the supplementary agreement enclosed above. Apart from onetime payment given for technical knowhow the appellant has also paid a sum of Rs 31,399,542 during the year under the head Royalty. As per the technical agreement entered into with Nippon Seiki apart from technical know which is onetime payment, it has also been agreed that Nippon Seiki will charge 2.5% of the sale of the product which have been developed on the basis of technical information and drawing and drawings provided by Nippon Seiki and is in accordance clause no 8.2 of Technical Assistance agreement dated 25/07/1998 read with clause no 4.2 of supplementary agreement dated 12/06/2009 and supplementary agreement dated 12/06/2009 and 16/12/2009. The appellant also incurred expenses of Rs 6,475,534 under the head technical assistance fees. Nippon Seiki sent technicians to India for providing technical guidance concerning the manufacturing/assembling of goods manufactured by appellant and for giving advice relating to the work of installation of manufacturing/assembling facilities, test and adjustment trail of the above manufacturing facilities, guidance as to the method of operation of the above manufacturing facilities. The payment of technical assistance fee is the re reimbursement of expenses incurred by technician and for availing service of technician during their visit to India as per the clause Article IV of the agreement dated 25 July 1998. During the course of assessment proceeding the said agreement dated 25th July 1998 along with the documentary evidence with regard to expenses incurred of Rs 6,475,534/- under the head payment of technical Assistance fees have also been submitted to TPO.
iv.It was submitted by the Ld. AR that to corroborate the actual receipt of the aforesaid technical know-how by Nippon Seiki to the appellant, the appellant had furnished before learned TΡΟ various correspondence between appellant, Maruti Suzuki India Ltd/Honda Seil Cars India Ltd and Nippon Seiki Sample copies of emails exchanged between the appellant and Nippon Seiki for design and drawings along with the various designs, drawings technical information in relation to that, request for technicians for onsite assistance in relation to technology, design, testing etc and the copy of emails exchanged between the appellant and Nippon Seiki along with the various designs, drawings have been furnished. As such Technical Assistance Agreement with Nippon Seiki, the learned TPO was duly provided with the data, documentation, drawings and specifications relating to products requested by the appellant. As such entire business model of the appellant is largely dependent upon the technical support provided by the associated enterprise which possesses the necessary expertise in manufacturing the automotive and related products and components. As such technical know-how used in the appellant's business is the essence or the heart of the appellant's manufacturing process. In absence of the technical know-how provided by Nippon Seiki, the entire business operations of the appellant would come to a halt. As the appellant is operating in the Indian automotive and products market which is extremely competitive and wherein new and improved models of every products are launched by the competitors on a continuous basis and therefore, in order to survive in the market, the appellant has to continuously stay in touch with its associated enterprises. It was under such circumstances that the appellant was required to pay royalty, technical know-how fees and technical assistance fees to Nippon Seiki for obtaining technical know-how, designs and drawings, assistance etc for serving its customers in the Indian market. It is an undisputed fact that that the technology is a key value driver in the automotive sector. It has also been acknowledged by the Hon'ble Delhi Bench of the Tribunal in the case of Maruti Suzuki India Ltd vs Addl. CIT (ITA No 5237/Del/2011).
v.It was also submitted that in the present case also, the payment of royalty, technical know-how and technical assistance has been made in terms of technical assistance agreement in consideration of technical know how and technical information, assistance, etc., provided by the Nippon Seiki for manufacturing the automotive components. In other words, the aforesaid payment was necessary cost incurred for obtaining know-how for manufacture of all products. Further, the appellant submitted that due to the continuous technical support lent by the associated enterprises, the appellant was in a position to achieve higher sales on year to year basis. In this regard it has been submitted that in financial Year 2008-09 turnover of the appellant was 210 crore which increased to 494 crore during FY 2010-11. It has also been submitted that Transactional Net Margin Method (TNMM) as the most appropriate method for justifying the arm's length price of the international transactions entered into by it during the relevant previous year as per rule 10B(1)(e) of the Income Tax Rules, 1962 which defines TNMM as a method. TNMM requires comparison between the incomes derived from the operations of the uncontrolled parties and income derived by an associated enterprise from similar operations.Net margin is indicated by the rate of return and this forms the basis for TNMM, i.e., net margin or any other measure of profitability that the same taxpayer earns in comparable uncontrolled transactions, or where it is not possible, that an independent enterprise would have earned in comparable transactions. Herein, as submitted in the TP Documentation, the operating profit margin of the Appellant has been 3.83%. The Appellant maintains a profit level which is within the arm's length range vis a vis comparable companies. It has been submitted that once a most appropriate method has been applied i.e. TNMM and all the international transactions entered into by the assessee have been aggregated for the purposes of benchmarking; segregation of transaction is not in accordance with the provisions of the law. The TNMM examines the net profit margin relative to an appropriate base (e.g. cost, sales, and assets) that a taxpayer realizes from a controlled transaction (or transactions that are appropriate to aggregate under the transfer pricing principles). TNMM determines an arm's length price for the transfer of tangible property by reference to an objective measure of profitability of an uncontrolled party, or comparable, that engages in similar transactions or operates under similar circumstances. The method compares the profitability of either the controlled party buyer or seller to the profitability of the comparable. It has also been submitted that the transaction of royalty, technical know-how and technical assistance fee is closely linked with the overall operations of the assessee therefore, entity level TNMM has been correctly applied by the assessee for the purpose of benchmarking the international transaction of royalty, technical know-how and technical assistance fee.
vi.It is submitted that the assessee applied Transactional Net Margin Method (TNMM) for determining the arm's length price of international transaction of royalty, technical know-how and technical assistance fee being the most appropriate method in the facts and in the circumstances of the case and the aforesaid international transactions are established to be at arm's length applying such most appropriate method. TNMM has been applied as the most appropriate method considering that the other methods could not validly be applied on the facts and circumstances of the case. CUP requires very robust comparability which has to find an apple fo an apple type of comparability. This is not done in the instant case. Further, it has been contended by the appellant that expenses cannot be disallowed by arriving at 'Nil' ALP by the TPO relying on the decisions of the Hon'ble Delhi High Court in the case of CIT vs EKL Appliances Ltd: [2012] 345 ITR 241 (Del). In his order, the TPO has proposed to apply CUP method to benchmark the international transaction of payment of royalty, technical knowhow and technical assistance fee without providing any cogent reason for the same. The mode and manner to determine the computation of ALP by the TPO under different methods as per rule 10B must be strictly in compliance with statutory provisions. For determining ALP under CUP method, the TPO at first has to find out the price charged or paid for property transferred or services provided in a comparable uncontrolled transaction, or a number of such transactions. Thereafter, necessary adjustments to such price, on account of differences between the international transaction and comparable uncontrolled transactions or between the enterprises entering into such transactions, which could materially affect the price in the open market are made to determine the ALP. TPO has not provided any comparable to justify arm's length rate of payment of royalty, technical knowhow and technical assistance fee payable in comparable uncontrolled circumstances, which is an essential requirement of the CUP method. In absence of robust comparable data, the TPO was not correct in selecting CUP as the MAM based on the facts of the case under consideration. The perusal of material on record clearly shows the benefits accruing to appellant on account of the agreement. The appellant clears the benefit test as is seen on the facts of the case basis payment of royalty, technical know-how and technical assistance fees. The benefit test for determination of Arm's length Price is to be viewed from the perspective of the recipient of the services/ facilities.
vii.It was also pointed out that the AO/TPO had accepted the transaction at arm's length for earlier and subsequent periods on same set of agreements. This shall bind the AO/TPO with res Judicata, as the factual matrix has remained same. Further, the appellant has amply demonstrated passing benefit test in this regard.
viii.In view of the above addition made of INR 10.3 crores being difference in the arm's length price of the international transaction of payment of royalty, technical know-how fees and technical charges is hereby deleted.”
It is further observed that assessments for Assessment years 2008-09 to 2010-11 were completed u/s 143(3) r.w.s 153A wherein no adjustment was made on account of payment Royalty, technical knowhow and technical services by the AO. Further, in subsequent assessment years i.e. in AY 2012-13 and AY 2013-14 also, reference was made to the TPO however, no adjustment was proposed towards the payments made to its AE i.e. Nippon Seiki Co. Ltd., Japan on account of payment of Royalty, technical knowhow and technical services. Thus, by following the principal of consistency also and further, looking to the facts of the present case that the Revenue has failed to controvert the findings given by Ld. CIT(A) werein the ld. CIT(A) after appreciating the entire facts has observed that “…..TPO has not provided any comparable to justify arm's length rate of payment of royalty, technical knowhow and technical assistance fee payable in comparable uncontrolled circumstances, which is an essential requirement of the CUP method. In absence of robust comparable data, the TPO was not correct in selecting CUP as the MAM based on the facts of the case under consideration. The perusal of material on record clearly shows the benefits accruing to appellant on account of the agreement. The appellant clears the benefit test as is seen on the facts of the case basis payment of royalty, technical know-how and technical assistance fees. The benefit test for determination of Arm's length Price is to be viewed from the perspective of the recipient of the services/ facilities.
In view of the specific findings of the ld. CIT(A), we uphold the order of Ld. CIT(A) in deleting the transfer pricing adjustment on this score. Accordingly, only effective Ground of appeal raised by the Revenue is dismissed.
In the result, appeal of the Revenue is dismissed.
In the final result, appeal of the assessee in ITA No.897/Del/2019 [Assessment Year 2011-12] is partly allowed and appeal of the Revenue in ITA No.728/Del/2019 [Assessment Year 2011-12] is dismissed.