Income Tax Appellate Tribunal - Delhi
Dcit, New Delhi vs M/S Bestexx Mm India Pvt Ltd, New Delhi on 15 February, 2018
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH "I-2" NEW DELHI
BEFORE SHRI AMIT SHUKLA, JUDICIAL MEMBER
&
SHRI PRASHANT MAHARISHI, ACCOUNTANT MEMBER
I.T.A. No.544/DEL/2015
Assessment Year: 2009-10
DCIT, Circle-4(2), vs. M/s. Bestexx MM India Pvt. Ltd.,
New Delhi. JE-9/104, Khirki Extn. Malviya
Nagar, Opp. M-Block Market,
Tikona Park, New Delhi.
TAN/PAN: AACCB 8837H
(Appellant) (Respondent)
Appellant by: None
Respondent by: H.K. Chaudhary, CIT-DR
Date of hearing: 08 02 2018
Date of pronouncement: 15 02 2018
ORDER
PER AMIT SHUKLA, J.M.:
The aforesaid appeal has been field by the Revenue against the impugned order dated 19.11.2014, passed by ld. CIT(Appeals)-44, New Delhi for the quantum of assessment passed u/s.144C r.w.s. 143(3) for the Assessment Year 2009-
10. The Revenue has raised following grounds:-
1. The Ld. CIT (A) has erred in law and on facts in deleting the addition of Rs. 91,42,654/- made on account of transfer pricing adjustment in respect of royalty.
2. The Ld. CIT (A), has allowed the relief to the assessee without appreciating that the CUP was never furnished before the TPO.I.T.A. No.544/DEL/2015 2
3. The Ld. CIT (A), has erred in law and on facts accepting the fresh documentation which is in contravention of Rule 10D read with section 92D of the Income Tax Act, 1961.
4. The Ld. CIT (A) has erred in law and on facts without appreciating the fact that the assessee company had made payment of royalty of Rs. 91,42,654/- without any benefit accruing to it.
5. The Ld. CIT (A) has erred in ignoring the fact that the assessee was also making payment of fee for technical know- how.
6. The CIT (A) has erred in not appreciating that no independent party would have made payment of royalty under these circumstances.
7. The appellant craves leave for reserving the right to amend, modify, alter, add or forego any ground(s) of appeal at any time before or during the hearing of this appeal"
2. Notice was sent to the respondent-assessee through speed post at the address mentioned in 'Form-36', however, the said notice has been returned back unserved as on the given address the respondent company was not there, accordingly, we are proceeding to decide the appeal exparte qua the respondent on merits after considering the material on record and hearing the learned Department Representative.
3. The brief facts are that assessee-company is a subsidiary of Bestex Kyoei Company Ltd. and is primarily engaged in the business of manufacturing of automotive components. The assessee has entered into following international transactions.I.T.A. No.544/DEL/2015 3
International Transaction Method Value (INR) Class-I Purchase of fixed assets (including supervisory fees of R.s 8012947, capitalized during the year") CPM/TNMM 12045798 Purchase of raw material 1386622 Class-II Reimbursement of travelling expenses CUP 25804228 Reimbursement of salary CUP 22270853 Class-Ill Payment of technical fee CUP 54747151 Class-IV Interest on external commercial loan CUP Class-V Payment of royalty CUP 9142654 Class-VI Sale of sample CPM 33255
4. So far as the transaction of royalty payment is concern, the TPO observed that royalty payment amounting to Rs.91,42,654/- was paid to its AE, which has been stated to be for non exclusive right of license to use of the technology including knowhow of its AE for the purpose of carrying on manufacturing of automotive components in India. In consideration to the license and rights availed, the assessee had to pay royalty to its AE @ 3% of sales in terms of the agreement. For the purpose of bench marking the said transaction, the assessee applied CUP method as the most appropriate method, considering the rate of royalties specified under FEMA regulations. The assessee has also submitted that M/s. Hindustan Motors Ltd. had entered into an agreement for provision of technology with 'Mitsubishi I.T.A. No.544/DEL/2015 4 Corporation' for provision of technology, for which Hindustan Motors Ltd. was paying @ 5% of sales apart from 'technical assistance fee'. Since the rate which has been paid by the assessee is below 5%, therefore, it was stated that it meets the arm's length requirement. Apart from that, the limit prescribed by the Reserve Bank of India in cases of royalty is @ 5%; and by that standard also, assessee is within the arm's length range. However, the learned TPO has computed the arms length price of the international transaction of payment of royalty at 'Nil', holding that no benefit has been received by the assessee for the use of technology. His relevant observations reads as under:-
"The transaction is therefore being benchmarked by applying the 'benefit test' which is an internationally accepted method. Under this test it is to be seen as to whether the taxpayer has received any tangible benefit from the use of the intangible which would help it in earning greater economic benefit. In arm's length situation a person would pay royalty only if the use of technology will give him greater economic benefit. In the present case, as discussed above, despite the use of the intangible, the assessee has a loss at the net level. This clearly shows that techniques or branding has not provided any benefit to the assessee. No independent person in such a situation will pay any royalty. This view is also supported by the ITAT, Delhi's decision in the case of Abhishek Auto [2010-TII-54-ITAT-DEL-TP] wherein the ITAT held as under:
'If the tested party without the use of imported technology and imported raw material can make additional margins, then it would be a case which may require an adjustment, but in this I.T.A. No.544/DEL/2015 5 case the international transactions have demonstratively boosted the profits of the appellant."
In view of the above discussion and particularly keeping in view the fact that the assessee has neither benchmarked this transaction properly by applying the most appropriate method and nor has it furnished the requisite information I am constrained to determine the arm's length price of this transaction at NIL under CUP method. No independent person in similar circumstances would pay any such royalty."
5. Various decisions of the Tribunal as relied upon by the assessee in support of its case have been distinguished by the AO. Accordingly, the entire royalty payment has been adjusted after taking the ALP at Nil and addition of Rs. 91,42,654/- was made.
6. Before the ld. CIT (A), the assessee besides making elaborate submissions, filed additional evidences in the form of instances of royalty paid in comparable cases by the uncontrolled third parties for the purpose of bench marking the international transaction of payment of royalty. Various external comparables were given for the purpose of external CUP to demonstrate that average rate of royalty across the industry was around 3%, whereas assessee has paid royalty to its AE effectively @ 3.15% of the net sales which is comparable to the royalty paid in comparable uncontrolled transactions. The list of such comparables submitted by the assessee are as under:-
I.T.A. No.544/DEL/2015 6Effective Licensor Licensee Royalty Database Licensor Licensee Date Description country country Rate relied David T. St. Turbodyne Montecito, Carpinteria 10/15/ 2.00% Royalty Exclusive technology James, Systems, CA CA 2001 Stat and patent license to individual Inc.; make use and sell Turbodyne products related to an Technologies, Inc. electrically assisted engine charging system, an intelligent engine air intake system, and an exhaust gas driven electric generating system, with right to sublicense.
E.T.C. Direction Vancouver Blaine, WA 1/9/ 2.00% Royalty Exclusive license under
Industries 1999 Stat technology, trademark
Technologies Inc.
Ltd. and copyright to
manufacture and
market electric vehicles.
M.C.D. Ltd. March Motors United United 12/15/ 2.50% Royalty Exclusive technology,
Ltd. Kingdom Kingdom 1995 Stat copyrights, patent and
trademark license to
manufacture, market
and sell motor vehicle
engines, specifically a
750 cc, 4 cylinder, twin-
cam engine, drivetrain
and gear box for use
with the superbike
motorcycle.
Edmond B. Williams Michigan Michigan 11/1/ 3.00% Royalty Exclusive patent,
Cicotte, Controls, 1998 Stat technology and know-
individual Inc. how license to make,
use and sell adjustable
automotive brake,
clutch, and accelerator
pedals and parts, but
excluding supplemental
components such as
wiring harness,
electronic sensors and
electrical controls, with
right to sublicense.
I.T.A. No.544/DEL/2015 7
Norman C. Natural New York California 2/9/ 3.00% Royalty
Amendment to exclusive
1990 Stat
Fawley; Gas patent, technology and
NCF Vehicle know-how license to
Industries, Systems, manufacture, use,
Inc. Inc. exploit, sell and
sublicense composite
reinforced metallic
cylinders and tubes,
and non-metallic
rehabilitation systems
produced to prevent
propagating ductile
fractures or to increase
the burst pressure.
Environmen- Global London Farmington 6/23/ 3.00% Royalty Exclusive patent and
Tech Hills 2008 Stat
-tal knowhow license to
Recycling International, Inc. make, use, sublicense,
Technologies and sell automotive
plc products or components
which do not feature as
part of its manufacture
the essential
encapsulation of a
magnesium part.
Allied Signal, Inc. California Torrance 1/28/ 3.70% Royalty Exclusive patent license
Stat
1999 to make, use and sell
electrically assisted
Turbodyne
charge air products or
Technologi
other engine products,
es, Inc. and
including electrically
Turbodyne
assisted turbochargers
Systems,
and turbochargers
Inc.
employing an electric
motor or generator for
power assist or take-off.
Edmond b. Williams Controls Inc And Proactive 11/1/ 3.00% Royalty Exclusive right and
1998 Stat
Cicotte Acquisition Corporation license to use the
technical information
and know-how and to
apply patents owned or
developed by LICENSOR
on matters pertaining to
the engineering, design,
and manufacture of
automotive brake, clutch
and/or accelerator
I.T.A. No.544/DEL/2015 8
including those
developed in
conjunction with said
consulting agreement.
Electronic Hybrid fuel systems, Inc. 3.50% Royalty
Stat Exclusive right to use,
Controls
manufacture, lease
Technology
and/ or sell products
LIC
and/or systems
embodying five U.S.
patents and related
technical knowhow to
commercialize the
technology embodied
in five issued and one
pending US patent in
the field of fuel
conversion systems.
Electro- SMH A UTOMOBILE S.A.I 3/14/ 3%- Royalty Worldwide license,
1997 5% Stat
source Inc. unlimited in time and
with authority to issue
sub-license, restricted
to the use of the
background know-how
for micro passenger
cars with hybrid power
and four wheels.
Nissan Samsung 1.6%- Royalty Licensing of
Motor Co group 1.9% Stat manufacturing
Ltd -SP technology to build an
ADR auto manufacturing
business from scratch
to South Korean
conglomerate;
includes state- of-the-
Sumitomo Sapura Motors BHD 3.0% Royalty Technical Assistance
(SEI) Brake Stat Agreement to produce
Systems Inc Brake Caliper
Assembly.
Average 3.0%
7. The additional evidence filed by the assessee was
forwarded to the TPO to submit his remand report which has been incorporated by the ld. CIT (A) from pages 11 to 15 of the appellate order. In the said remand report, the TPO submitted that the CUP I.T.A. No.544/DEL/2015 9 data relied upon by the assessee is unreliable and cited the OECD Transfer Pricing Guidelines and the decision of ITAT Mumbai Bench in the case of UCB India Pvt. Ltd. vs. ACIT (2009) 30 SOT 95, but failed to examine the external comparables or any comments on merits. Ld. CIT (A), after considering the entire material facts on record and the submissions made by the assessee as well as the remand report of the TPO, held that the royalty paid by the assessee to its AE @ 3.15% on net sales meets the arm's length requirement and it is comparable to the royalty paid by uncontrolled third parties. He further held that no meaningful conclusion was provided by the TPO to hold that the entire royalty payment should be reduced to Nil. The entire revenue of the assessee is from products manufactured by the technology provided by its AE. The assessee has been supplying automobile component to various reputed automobile manufacturers such as Honda Siel Cars India Ltd. There is an agreement between the assessee and the AE dated 1.04.2008 in consideration for the license and rights availed and no independent company would provide such license to use a technology including knowhow vary of charge without any charge or royalty. Accordingly, he directed the TPO/Assessing Officer to delete the addition of Rs.91,42,654/-.
8. Before us, learned DR strongly relied upon the order of the Assessing Officer/TPO.
9. After considering the relevant findings given in the impugned orders, we find that it is an undisputed fact that the assessee in terms of agreement dated 1.04.2008 had entered into an agreement with its AE for granting the use of non-exclusive right I.T.A. No.544/DEL/2015 10 and license to use technology including the knowhow of the AE for the purpose of carrying on the business of manufacturing of automotive components in India. The assessee has been paying royalty ranging @ 3% to 5% of the sales. As noted in the impugned order, the actual royalty paid in this year was @ 3.15% of the net sales. The assessee has bench marked the ALP of the royalty payment by applying CUP as MAM, firstly, by considering the rate of royalty specified by the Central Government under the FEMA regulation; and secondly, before the TPO, assessee relied upon one external comparable of Hindustan Motors Pvt. Ltd. which was paying royalty @ 5% to Mitsubishi Corporation Ltd. Before the ld.
CIT (A), the assessee has given various external comparables from Royalty Stats, the details of which had already been incorporated above, wherein the average royalty paid across the industry for the license to use technology and knowhow is approximately 3%. Thus, the assessee's payment of royalty to its AE was justified by using the external CUP, that is, by placing catena of comparable uncontrolled transaction of the third parties. The learned TPO without actually carrying out any analysis of the comparables during the remand proceedings or assigning any basis had simply held that royalty should be taken at Nil, because assessee has incurred loss at entity level and that is why the technical knowledge or knowhow from AE has not provided any economic benefit to the assessee. Such an observation or reasoning cannot be upheld at all, because once there is a valid agreement for transfer of non-exclusive right for use of license to use technology including knowhow of AE for the purpose of carrying out manufacturing of automotive parts from which assessee has earned substantial revenue receipts, then such a use of technology and knowhow is directly linked with manufacturing and I.T.A. No.544/DEL/2015 11 resultantly sales. Incurring of loss cannot be the parameter to hold that the technological knowhow or license was of no benefit hence there was no requirement to pay the royalty. Loss cannot be co- related with the economic benefit of use of technology or knowhow because profit and loss are market driven and host of other economic factors. The TPO was only required to see, whether the payment of royalty meets the arm's length requirement of ALP or not. Even when the chance was given to the TPO in the remand proceedings by the Ld. CIT (A), he has failed to examine the external CUP. We find that Ld. CIT (A) has analyzed all the factors and various comparable uncontrolled transactions to reach to a conclusion that royalty payment @ 3.15% is at ALP, and accordingly, we do not find any reason to deviate from such a finding and the same is upheld.
10. In the result, the appeal of the Revenue is dismissed.
Order pronounced in the open Court on 15th February, 2018.
Sd/- Sd/-
[PRASHANT MAHARISHI] [AMIT SHUKLA]
ACCOUNTANT MEMBER JUDICIAL MEMBER
DATED: 15th February, 2018
PKK: