Income Tax Appellate Tribunal - Panji
Dy. Cit, Circle - 9, Pune vs M/S. Kalyani Hayes Lemmerz Ltd., Pune on 11 December, 2017
आयकर अपीऱीय अधिकरण पण
ु े न्यायपीठ "बी" पण
ु े में
IN THE INCOME TAX APPELLATE TRIBUNAL
PUNE BENCH "B", PUNE
सुश्री सुषमा चावऱा, न्याययक सदस्य एवं श्री अयिऱ चतुवेदी, ऱेखा सदस्य के समक्ष
BEFORE MS. SUSHMA CHOWLA, JM AND SHRI ANIL CHATURVEDI, AM
आयकर अपीऱ सं. / ITA Nos.999 & 1000/PUN/2013
यििाारण वषा / Assessment Years : 2003-04 & 2005-06
The Dy. Commissioner of Income Tax,
Circle-9, Pune .... अऩीऱाथी/Appellant
Vs.
Kalyani Hayes Lemmerz Ltd.,
Gat No.635, Village: Kuruli,
Taluka Khed, Chakan,
Pune - 410501 .... प्रत्यथी / Respondent
PAN: AAACK7841A
अऩीऱाथी की ओर से / Appellant by : Shri Vivek Aggarwal
प्रत्यथी की ओर से / Respondent by : Shri Kishore Phadke
सन
ु वाई की तारीख / घोषणा की तारीख /
Date of Hearing : 20.09.2017 Date of Pronouncement: 11.12.2017
आदे श / ORDER
PER SUSHMA CHOWLA, JM:
Both the appeals filed by the Revenue are against consolidated order of CIT(A)-IT/TP, Pune, dated 25.02.2013 relating to assessment years 2003-04 & 2005-06 against respective orders passed under section 143(3) of the Income Tax Act 1961 (in short the 'Act').
2. Both the appeals filed by the Revenue on similar issue were heard together and are being disposed of by this consolidated order for the sake of 2 ITA Nos.999 & 1000/PUN/2013 Kalyani Hayes Lemmerz Ltd.
convenience. In order to adjudicate the issue, reference is being made to the facts in assessment years 2003-04 and 2005-06.
3. The Revenue in ITA No.999/PUN/2013, relating to assessment year 2003- 04 has raised the following grounds of appeal:-
1. Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) was justified in setting aside the adjustment made by the TPO to royalty payment on the ground that there was no consistency in the approach of the A.O. in the intermediate year and subsequent year when in the intermediate A.Y. i.e. A.Y. 04-05 there was no royalty payment and when comparison with subsequent A.Yrs i.e. A.Y. 2006-07 onwards cannot be made due to a separate benchmarking of royalty w.e.f. 1.1.2005.
2. Whether on the facts and circumstances of the case, the Ld. CIT(A) was justified in not going into the merits of the case when the doctrine of res judicata does not apply to income tax proceedings as has been held by the ITAT Mumbai in the case of M/s. Onward Technologies vs. DCIT ITA No.7985/Mum/2010.
4. Briefly, in the facts of the case, the assessee for the year under consideration had furnished return of income declaring Nil income. The assessee was engaged in the manufacture of wheel Rims for light, medium and heavy commercial vehicles. The assessee was jointly promoted by Kalyani Group and Lemmerz Werke Gmbh with 75% : 25% equity. The assessee had acquired Wheel Rim division of Bharat Forge Ltd. and had commenced manufacture of wheel rims from 04.06.1996. On 30.06.1997, Hayes Corporation, USA acquired Lemmerz Werke Gmbh and in August, 1998, the Hayes group increased its holding in the company to 85% by acquiring additional 60% equity held by Kalyani group. The issue which has been raised by the Revenue in the present appeal is in relation to the royalty payments and hence, we refer to the royalty payments made to associated enterprises and refer to the TP adjustments in the case. The Assessing Officer had made reference under 3 ITA Nos.999 & 1000/PUN/2013 Kalyani Hayes Lemmerz Ltd.
section 92CA(1) of the Act to the Transfer Pricing Officer (in short 'the TPO'), who in turn, passed the order under section 92CA(3) of the Act. In addition to export of finished goods being Truck and Trailer Wheel Rims and import of Moulds & Dies, the assessee had also paid royalty for use of technical know-how of Rs.33.29 lakhs. The assessee had benchmarked the international transactions by applying TNMM method. The TPO noted that the assessee had paid royalty for use of technical know-how @ 3% to 4.5% to its associated enterprises M/s. Hayes Lammerz Werke BmbH (in short 'Hayes'). The plea of assessee was that it was paying royalty to Hayes for use of technical know-how to manufacture wheel rims in India. The assessee was of the view that since Hayes does not receive royalty from any unrelated party in India and also the assessee does not avail similar technical know-how and pay the royalty to any unrelated party, the internal CUP was not available and because of inherent product and technology uniqueness of the transactions, no external CUP was also available for benchmarking royalty payments. However, the assessee proceeded to benchmark the royalty payments by relying on the requisite approval from RBI. The TPO was of the view that RBI/SIA were not transfer pricing authorities and they do not examine the transaction with transfer pricing perspective. The TPO noted that the assessee had failed to establish if other group entities were being charged royalty at all and the assessee was not only paying royalty for the domestic sales but for exports, which were made to the group entities also at a rate which was higher than for domestic sales. Further, he rejected the reliance of assessee on RBI/SIA's approvals. In view thereof, the assessee was show caused to explain its case. The TPO rejecting the plea of assessee and holding that where the assessee has failed to establish that its royalty payments were at arm's length price, hence the total amount of royalty 4 ITA Nos.999 & 1000/PUN/2013 Kalyani Hayes Lemmerz Ltd.
shown as having been paid to associated enterprises amounting to Rs.33,28,797/- was determined as Nil. The Assessing Officer thereafter, made addition on account of the same at Rs.33,28,797/-.
5. In assessment year 2005-06, the TPO determined the arm's length price of international transactions of payment of royalty at Nil since the assessee failed to furnish any evidence for the fact that it was in receipt of specific technology for which royalty was paid. The TPO also noted that the assessee did not pay royalty during June, 2002 to December, 2004. Further, the other group companies had not entered into similar agreements at the same time i.e. during 01.01.2005 to 31.03.2005. The TPO also noted that there was no documentation except for correspondence regarding certain updates, which the assessee may have received. The next objection of the TPO was that the assessee has failed to establish how the parent company arrived at the figure of 2% for royalty and how the charge of 2% would recover value of technology and further, what was life cycle of technology.
6. Before the CIT(A), the assessee explained that the TPO was inaccurate in his conclusion; firstly the assessee pays royalty only on non-associated enterprises sales. It had paid royalty of Rs.33 lakhs on total sales of Rs.93.26 crores; thus, the effective royalty payment works out only 0.36% of total sales. Vis-à-vis queries of the TPO, the assessee explained that it could not furnish the data relatable to expenditure incurred by associated enterprises in the development of technology and the basis for charging the same, as, such information was not available with it. It was pleaded that the said information pertained to records of many years prior to the transfer pricing proceedings. The 5 ITA Nos.999 & 1000/PUN/2013 Kalyani Hayes Lemmerz Ltd.
assessee emphasized that the associated enterprises provided continuous support and updates of new technological developments to the assessee and it also provided designs and drawings and training to the assessee. The assessee claimed the said payment to be at arm's length price considering the rate on royalty was paid by the comparable companies on application of TNMM method and according to RBI data. Vis-à-vis assessment made for assessment year 2005-06, the assessee admitted that it did not pay royalty from June, 2002 to December, 2004 since it was in the process of entering into new agreement. The assessee also filed detailed submissions as to how it receives technical support from the parent company for the use of technology and technology updates under the new agreement, before the CIT(A). The last plea raised by the assessee before the CIT(A) was that except for assessment years 2003-04 and 2005-06, no adjustment was made to royalty payment in the years other than two years in spite of royalty transactions remaining the same in subsequent years. The CIT(A) held that there was no need to decide the issues on merits since the TPO during assessment year 2004-05 and in subsequent year had not made any adjustment to the royalty payment. He further observed that royalty payment agreement was in force during all the years and every year royalty was being paid based on the same agreement. The TPO in the years had concluded that technology was received by the assessee, whereas contrary decision was reached only in assessment years 2003-04 and 2005-06. The CIT(A) thus, held the said adjustment could not be sustained in assessment years 2003-04 and 2005-06.
7. The Revenue is in appeal against the observations of CIT(A), where in the intermediate year / subsequent year i.e. assessment year 2004-05, there was no 6 ITA Nos.999 & 1000/PUN/2013 Kalyani Hayes Lemmerz Ltd.
royalty payments. Further objection of the Revenue is that no comparison could be made with subsequent years i.e. assessment years 2006-07 onwards as there was separate benchmarking of royalty w.e.f. 01.01.2005. The Revenue is also aggrieved by the order of CIT(A) in applying doctrine of res judicata which is not applicable to the Income-tax proceedings.
8. The learned Departmental Representative for the Revenue after taking us through factual aspects of the case pointed out that vide original agreement between Bharat Forge and Lemmerz Werke Gmbh dated 17.06.1992, there was an agreement to pay fixed technical fees and royalty fees. Our attention was drawn to the agreement placed at pages 28 to 37 in the Paper Book. He further pointed out that in 1996, both these concerns entered into Joint Venture. That the said JV which commenced on 17.06.1996, was in existence for seven years and the agreement entered into on 17.06.1992 ended on 17.06.2002. In assessment year 2003-04 royalty payment was made for part of the year. In assessment year 2004-05, no royalty payment was made and in assessment year 2005-06, new agreement was entered into and the assessee paid royalty for the period 01.01.2005 to 31.03.2005. He further pointed out that the TPO had determined royalty at Nil as against sum of Rs.33,28,797/- paid by the assessee in assessment year 2003-04. Our attention was drawn to observations of the TPO in this regard. The assessee had applied TNMM method in its transfer pricing study report, on the basis of RBI's approval, which as per the learned Departmental Representative for the Revenue was not correct approach.
9. The learned Authorized Representative for the assessee on the other hand, referring to the order of TPO at page 5 pointed out that the assessee had 7 ITA Nos.999 & 1000/PUN/2013 Kalyani Hayes Lemmerz Ltd.
aggregated three international transactions and had applied TNMM method. He further pointed out that export of finished products was to the tune of Rs.13.71 crores. With respect to royalty, there were no sales and the said transactions subsumed into total international transactions. He further pointed out that once he accepts TNMM method for several transactions, how the TPO could carve out royalty and benchmark the same separately. He further pointed out that agreement on 17.06.1992 clearly provided the payment of royalty. In the year under appeal, JV was between Kalyani with 15% shareholding and 85% of shareholding by Lemmerz Werke Gmbh. The original understanding for payment of royalty was same and since now there was JV, how the same could be disturbed and be held to be not at arm's length. He referred to the ratio laid down by the Mumbai Bench of Tribunal in Addl. Director of Income Tax (IT) Vs. Ballast Nedam Dredging (2013) 154 TTJ (Mumbai) 280. In respect of application of TNMM method, the learned Authorized Representative for the assessee pointed out that the RBI had approved the same and hence, the transaction was at arm's length price. He relied on the decision of Pune Bench of Tribunal in John Deere India (P.) Ltd. Vs. ITO (2017) 82 taxmann.com 201 (Pune-Trib.).
10. The next plea of learned Authorized Representative for the assessee was that since 1996, the assessee was paying royalty every year which has been accepted. He pleaded on consistency basis, the said payment is not to be disturbed in the hands of assessee. He further pointed out that the assessee was tested party and was paying royalty as per agreement and hence at arm's length price. He placed reliance on the ratio laid down by the Mumbai Bench of Tribunal in Thyassenkrupp Industries India (P) Ltd. Vs. Addl.CIT (2013) 154 TTJ (Mumbai) 689. The learned Authorized Representative for the assessee further 8 ITA Nos.999 & 1000/PUN/2013 Kalyani Hayes Lemmerz Ltd.
pointed out that in assessment year 2005-06 a fresh agreement was entered into, under which the assessee was paying royalty @ 2%. He further stressed that no adjustment on account of payment of royalty was made from assessment year 2006-07 onwards.
11. We have heard the rival contentions and perused the record. The issue which arises in the present appeal is against international transaction of payment of royalty and its benchmarking. The Assessing Officer had made reference to the TPO to benchmark various international transactions undertaken by the assessee and whether the same were at arm's length price. The assessee claims that it had paid the said royalty to its associated enterprises as per terms of the agreement dated 17.06.1992 which was in operation till 17.06.2002. The royalty was being paid to get technical information and updates in the field, from its associated enterprises. The TPO had determined the arm's length price of international transactions of royalty payment at Nil for various reasons. The first part of the order of CIT(A) is that the said royalty payment was being accepted to be at arm's length price in the hands of assessee in various years and hence, there is no necessity of discussing the issue on merits. He makes reference to the order of TPO for assessment year 2004-05 and in the subsequent year when no adjustment to the royalty payment has been made. The case of Revenue on the other hand, is that the assessee had paid royalty only upto 17.06.2002 i.e. for part of assessment year 2003-04 and has not made any payment of royalty in assessment year 2004-05. Further, the assessee has entered into new agreement w.e.f. 01.01.2005 and for assessment year 2005-06, the payment of royalty was for part of the year again.
9
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12. The first issue which arises in the present appeal is in respect of payment of royalty on account of agreement which is dated 17.06.1992. The assessee before us has filed events chart which is placed at page 83 of the Paper Book. On 17.06.1992, Lammerz Werke BmbH and Bharat Forge Ltd. entered into Technology License Agreement for payment of royalty. Both the parties at the relevant time were independent. On 25.06.1992, Bharat Forge Ltd. filed an application to the Reserve Bank of India for foreign collaboration agreement with Lammerz Werke BmbH in respect of use of technical know-how. On 01.07.1992, Reserve Bank of India approved the foreign collaboration agreement. Consequent thereto, in January, 1996, the assessee company was formed with share capital holding pattern of Kalyani group shareholding at 75% and Lammerz Werke BmbH at 25%. In March, 1996, Bharat Forge Ltd. paid royalty for the quarter ending 31.03.1996. The assessee company had commenced the business on 15.03.1996. In April, 1996, RBI approved transfer of its earlier approval in July, 1992 in respect of foreign collaboration agreement in the name of assessee company, which is placed at pages 50 to 54 of the Paper Book. In June, 1996, there was payment of royalty by Bharat Forge Ltd. for period 01.04.1996 to 03.06.1996. However, from 04.06.1996 onwards, royalty was paid by the assessee company. Transfer Agreement dated 04.06.1996 between Bharat Forge Ltd. and Kalyani group is placed at pages 132 to 144 of the Paper Book. Thereafter, in June, 1997, Hayes Corporation, USA acquired Lemmerz Werke Gmbh and name of German company was changed to M/s. Hayes Lammerz Werke BmbH. In August, 1998, Hayes Corporation, USA acquired 60% holding in the assessee company from Kalyani group and shareholding pattern changed to Kalyani group at 15% and Hayes Corporation holding at 85%. On 17.06.2002, Technical Know-how License Agreement i.e. for payment of 10 ITA Nos.999 & 1000/PUN/2013 Kalyani Hayes Lemmerz Ltd.
royalty entered into on 17.06.1992 expired. The assessee in assessment year 2003-04 paid royalty for part of the year. However, there was no agreement for subsequent period i.e. from July, 2002 to December, 2004 since Hayes Lammerz Werke, was under the process of Chapter XI proceedings and went through re- organization / restructuring. The new Royalty Agreement was entered into between Hayes Lammerz Werke holding and the assessee company w.e.f. 01.01.2005.
13. The first License Agreement between Lammerz Werke BmbH and Bharat Forge Ltd. was entered into on 17.06.1992, which is placed at pages 28 to 49 of the Paper Book. However, the commencement of commercial production by Bharat Forge Ltd. was on 01.03.1996. As per terms of Technology License Agreement entered into on 17.06.1992, payment of royalty was for period of ten years from the effective date of agreement or seven years from the date of commencement of commercial production, whichever was earlier. Ten years from the effective date of agreement i.e. 17.06.1992 ended on 17.06.2002. However, seven years from the date of commencement of commercial production started on 01.03.1996 and ended on 01.03.2003. Since 17.06.2002 was earlier to 01.03.2003, the period of payment of royalty as per agreement dated 17.06.1992 ends on 17.06.2002. We are concerned with the said payment for part of the year i.e. starting from 01.04.2002 to 17.06.2002, which falls within assessment year 2003-04. The assessee has also placed on record tabulated details of payment of royalty assessment year wise starting from assessment year 1997-98, which is as under:-
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Assessment Year Royalty Paid (Rs.) Disallowance of Royalty
AY 1997-98 1,47,07,391 No disallowance
AY 1998-99 1,06,35,058 No disallowance
AY 1999-2000 1,22,73,450 No disallowance
AY 2000-01 1,75,90,031 No disallowance
AY 2001-02 (Data N.A.) -
AY 2002-03 1,72,48,487 No disallowance
AY 2003-04 33,28,797 Disallowance of Royalty
14. The assessee in the years 1997-98 to 2002-03 and 2003-04 part, was paying royalty to its associated enterprises on the basis of old royalty agreement which was between Bharat Forge Ltd. and Lammerz Werke BmbH, Germany, wherein the rate of royalty varied from 2.5% to 4.5%. The said agreement as referred in the paras hereinabove was approved by the Reserve Bank of India vide its communication dated 01.07.1992. The assessee company came into existence thereafter i.e. in January, 1996. The first aspect of the issue is that payment of royalty was vide an agreement which was entered into between two independent parties on 17.06.1992 i.e. date prior to the existence of assessee company also. The said agreement was approved by the RBI. Under the said agreement, rate of payment of royalty was varied from 2.5% to 4.5% depending on number of units. The royalty payment by the assessee in all the preceding years from assessment years 1997-98 to 2002-03 have been allowed and no adjustment has been made on account of arm's length price of international transactions, which arises from June, 1996 i.e. 04.06.1996. Further, the Revenue has failed to bring on record any evidence to show that there was any change in facts and in the absence of the same, no adjustment is warranted in the instant assessment year. Further the two parties were independent at the time of signing the agreement for payment of royalty and where payment of royalty was pursuant to such an agreement between independent entities and not associated enterprises; and where the concern become associated enterprise in a later period and where the price paid to associated enterprises 12 ITA Nos.999 & 1000/PUN/2013 Kalyani Hayes Lemmerz Ltd.
was the same as entered when it was an independent entity, then the same has to be considered as uncontrolled transaction. Such was the proposition laid down by the Mumbai Bench of Tribunal in Addl. Director of Income Tax (IT) Vs. Ballast Nedam Dredging (supra). Applying the said principle, we hold that on this count also, there is no merit in making any adjustment on account of the international transactions of payment of royalty. Accordingly, we hold that there is no merit in the order of TPO/Assessing Officer in holding the arm's length price of international transactions of payment of royalty at Nil. We reverse the same.
15. Now, coming to the second aspect of the issue, where the assessee was making payment of royalty to its associated enterprises at the rates which have been approved by the RBI. We find that the Hon'ble Bombay High Court in CIT Vs. SGS India (P.) Ltd. in Income Tax Appeal No.1807/2013, judgment dated 18.11.2015 had held that rate of royalty approved by SIA/RBI would constitute CUP data and the transaction would be at arm's length price. The said proposition has been applied by the Pune Bench of Tribunal in John Deere India (P.) Ltd. Vs. ITO (supra) and vide para 19, it was held as under:-
"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 Vs. ACIT (supra). The Hon'ble Bombay High Court in CIT Vs. 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 by the assessee to its associated enterprises is at rate less than 3%, then the same is liable to be considered at arm's length rate and no addition is warranted on this account. Accordingly, we hold so. The grounds of appeal No.2.4 and 2.5 are thus, allowed and the grounds of appeal No.2.6 to 2.9 are also allowed. The grounds of appeal raised by the assessee are thus, partly allowed."
16. In the facts of present case, where the assessee has paid royalty to its associated enterprises as per the rates which were approved by RBI, which is 13 ITA Nos.999 & 1000/PUN/2013 Kalyani Hayes Lemmerz Ltd.
not in dispute, then the said transaction would be at arm's length price. Accordingly, we hold that no addition is warranted on this count under Transfer Pricing provisions. Accordingly, we hold so.
17. Now, coming to the issue raised in assessment year 2005-06, where new Technology License Agreement was entered into between Lammerz Werke BmbH, Germany and the assessee w.e.f. January, 2005. The assessee had paid said royalty @ 2% as per terms and conditions of new Royalty Agreement entered into between the assessee and Lammerz Werke BmbH. The said royalty was paid from assessment year 2005-06 onwards as detailed below:-
Assessment Year Royalty Paid (Rs.) Disallowance of Royalty AY 2005-06 64,02,106 Disallowance of Royalty AY 2006-07 2,51,17,638 No disallowance AY 2007-08 3,14,45,703 No disallowance AY 2008-09 3,70,08,034 No disallowance AY 2009-10 2,98,15,224 No disallowance AY 2010-11 2,71,99,126 No disallowance AY 2011-12 5,88,60,983 No disallowance AY 2012-13 6,45,18,221 No disallowance AY 2013-14 6,08,16,072 No disallowance
18. The learned Authorized Representative for the assessee stressed that the said payment of royalty in succeeding years has been accepted to be at arm's length price and no adjustment has been made to the said international transactions of payment of royalty. First of all, the TPO has proposed an adhoc adjustment without following any provisions of the Act, for benchmarking said international transactions of payment of royalty. The objection of TPO in this regard was that the assessee had failed to provide the details of cost of development of technology by its associated enterprises and how the associated enterprises recover or intended to recover the same from third parties or from other group entities. The second objection was that the assessee had not 14 ITA Nos.999 & 1000/PUN/2013 Kalyani Hayes Lemmerz Ltd.
established if other group entities charged royalty at all. The next plea of theTPO was the assessee having paid royalty not only for domestic sales but exports also. The role of the TPO while benchmarking any international transactions is to determine the arm's length price of said transactions on the basis of provisions of the Act. He is not empowered to ask the assessee to provide details of cost of development of technology by the associated enterprises and how the associated enterprises intended to recover the same and whether it had charged royalty from other group entities. The assessee was paying royalty to its associated enterprises as per old royalty agreement which expired on 17.06.2002. As pointed out by the learned Authorized Representative for the assessee, no royalty was paid for the period from 18.06.2002 to 31.12.2004. The new royalty agreement between assessee and Hayes Lammerz Werke was entered into and the royalty was paid from 01.01.2005. The License agreement between Hayes Lammerz Werke and the assessee dated 29.10.2004 for granting license for use of royalty starting from 01.01.2005 is placed at pages 7 to 28 of Paper Book-I for assessment year 2005-06. Reference of the CIT(A) to the order of TPO for assessment year 2004-05 for not making any adjustment on account of royalty payment is in this regard was not correct. However, his finding vis-à-vis subsequent years is correct. In the case of assessee, no adjustment has been made on account of arm's length price of said international transactions by the TPO/Assessing Officer in assessment year 2006-07 onwards; copies of which are placed at pages 66 to 82 of the Paper Book. The payment of royalty is on the basis of agreement which was starting from 01.01.2005. The Revenue has failed to bring on record any difference in factual aspects vis-à-vis payment of royalty in instant assessment year when compared to the subsequent years. In view thereof, once the payment of royalty to associated enterprises had been 15 ITA Nos.999 & 1000/PUN/2013 Kalyani Hayes Lemmerz Ltd.
held to be at arm's length price in the succeeding years and which is substantial amount as is evident from the chart above, then there is no merit in the order of TPO in holding that arm's length price of international transactions of payment of royalty is to be taken at Nil for part of assessment year 2005-06.
19. We find that similar issue arose before the Tribunal in John Deere India (P.) Ltd. Vs. ITO (supra) and the Tribunal vide para 18, it was held as under:-
"18. Now, coming to the preset case where reference was made to the TPO under section 92CA(1) of the Act to benchmark the international transactions undertaken by the assessee and whether the same are at arm's length or not. Then, it was incumbent upon the TPO to follow the provisions of the Act in order to benchmark the said transaction of payment of royalty and whether it warrants any adjustment on account of arm's length price. The TPO is at liberty to make any separate adjustment on this account, where adjustment is made in respect of any other international transaction. However, the TPO is not empowered to propose an adhoc adjustment which admittedly, is not as per law. The objection of the TPO was that the assessee is paying royalty to associated enterprises both on old products and new products and as per the TPO, the payment of royalty on old products does not appear to be justified. It is not the role of TPO to determine whether the payment of royalty is justified or not, on adhoc basis but the arm's length price of same has to be determined by following the procedures laid down in the Income Tax Act. The TPO has failed to do so. Further, since the TPO had not proposed the adjustment as per the Act, there was no occasion for the assessee to raise any objections before the DRP and hence, the order of DRP is silent on this issue. The Assessing Officer while passing final assessment order under section 144C(13) of the Act, has made the said addition in the hands of assessee on the ground that show cause notice was issued by the TPO in this regard and the assessee had already replied. However, such adhoc disallowance of royalty is not warranted by applying the provisions relating to transfer pricing. The procedure laid down under the transfer pricing provisions has not been followed by the TPO and hence, there is no merit in the adhoc disallowance of royalty. In any case, as is evident from the order of TPO relating to assessment year 2010-11, the assessee has also undertaken the international transactions of payment of royalty to its associated enterprises in the succeeding year also and that transaction has been accepted to be at arm's length. The learned Departmental Representative for the Revenue has failed to point out any difference in factual aspects vis-à-vis payment of royalty in the instant assessment year and in the succeeding year. The learned Authorized Representative for the assessee has referred to the decision of Pune Bench of Tribunal in M/s. Spicer India Limited Vs. ACIT (supra), wherein there was similar case of payment 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 adhoc disallowance of Rs.7.50 crores."16
ITA Nos.999 & 1000/PUN/2013 Kalyani Hayes Lemmerz Ltd.
20. Accordingly, we hold that international transactions of payment of royalty is to be accepted at arm's length price and we reverse the order of TPO/Assessing Officer in holding the value of international transactions at Nil. The findings of CIT(A) are reversed but claim of assessee is allowed on other grounds. Thus, the grounds of appeal raised by the Revenue are dismissed.
21. In the result, both the appeals of Revenue are dismissed.
Order pronounced on this 11th day of December, 2017.
Sd/- Sd/-
(ANIL CHATURVEDI) (SUSHMA CHOWLA)
ऱेखा सदस्य / ACCOUNTANT MEMBER न्याययक सदस्य / JUDICIAL MEMBER
ऩुणे / Pune; ददनाांक Dated : 11th December, 2017.
GCVSR
आदे श की प्रयतलऱपप अग्रेपषत/Copy of the Order is forwarded to :
1. अऩीऱाथी / The Appellant;
2. प्रत्यथी / The Respondent;
3. आयकर आयुक्त(अऩीऱ) / The CIT(A)-IT/TP, Pune;
4. The CIT-V / DIT (TP/IT), Pune;
5. ववबागीय प्रतततनधध, आयकर अऩीऱीय अधधकरण, ऩुणे "फी" / DR 'B', ITAT, Pune;
6. गार्ड पाईऱ / Guard file.
आदे शािस ु ार/ BY ORDER, सत्यावऩत प्रतत //True Copy// वररष्ठ तनजी सधिव / Sr. Private Secretary आयकर अऩीऱीय अधधकरण ,ऩण ु े / ITAT, Pune