Income Tax Appellate Tribunal - Delhi
India Yamaha Motor Pvt. Ltd., New Delhi vs Acit (Ltu), New Delhi on 12 February, 2018
IN THE INCOME TAX APPELLATE TRIBUNAL
(DELHI BENCH 'I-2' : NEW DELHI)
BEFORE SHRI B.P. JAIN, ACCOUNTANT MEMBER
and
SHRI KULDIP SINGH, JUDICIAL MEMBER
ITA No.297/Del./2015
(ASSESSMENT YEAR : 2010-11)
M/s. India Yamaha Motor Private Ltd., vs. ACIT, LTU,
First Floor, The Great Eastern Centre, New Delhi.
70, Nehru Place, Behind IFCI Tower,
New Delhi - 110 019.
(PAN : AABCI7552F)
(APPELLANT) (RESPONDENT)
ASSESSEE BY : Shri Ved Jain, Advocate
Ms. Rano Jain, Advocate
Shri Ashish Goyal, CA
REVENUE BY : Shri Sanjay Kumar Yadav, Senior DR
Date of Hearing : 09.01.2018
Date of Order : 12.02.2018
ORDER
PER KULDIP SINGH, JUDICIAL MEMBER :
The Appellant, M/s. India Yamaha Motor Pvt. Ltd.
(hereinafter referred to as 'the taxpayer') by filing the present appeal sought to set aside the impugned order dated 17.12.2014, passed by the AO in consonance with the orders passed by the ld.
DRP/TPO under section 143 (3) of the Income-tax Act, 1961 (for 2 ITA No.297/Del/2015 short 'the Act') qua the assessment year 2010-11 on the grounds inter alia that :-
"1. On the facts and circumstances of the case, the order passed by the learned Assessing Officer is bad, both in the eye of law and on the facts.
2. On the facts and circumstances of the case, the learned A.O. has erred, both on facts and in law, in assessing the loss of the assessee at Rs.238,92,49,906/- as against loss of Rs.263,71,10,5311- declared by the assessee.
3. On the facts and circumstances of the case, the learned DRP has erred, both on facts and in law, in confirming addition to the extent of Rs.24,78,07,5251- as difference in arm's length price claimed by the Assessee.
4(i) On the facts and circumstances of the case, the learned DRP has erred, both on facts and in law, in confirming adjustment on account of arm's length price of Rs.24,78,07,525 on account of royalty paid by the assessee.
(ii) On the facts and circumstances of the case, the DRP has erred, both on facts and in law in ignoring the contention of the assessee that it has been able to get tangible benefit in the form of manufacturing motor cycles by making this royalty payment.
(iii) On the facts and circumstances of the case, the DRP has erred, both on facts and in law in rejecting the contention of the assessee that royalty payment is not related to and has no relevance with the profit or loss the assessee may make by use of the said technology.
(iv) On the facts and circumstances of the case, the DRP has erred in accepting the TPO's contention that the assessee is making three separate payments for the same set of services, without appreciating the facts of the case.3 ITA No.297/Del/2015
5. On the facts and circumstances of the case, the determination of the arm's length prices of royalty at Rs. NIL is without benchmarking and without applying anyone of the approved method of determination of the arm's length price.
6. On the facts and circumstances of the case, the DRP has erred, both on facts and in law in rejecting the contention of the assessee that Rule 10B(1)(a) does not authorize disallowance of royalty expenditure on the ground that it was not necessary or prudent for the assessee to incur the same.
7. The Assessee craves leave to add, amend or alter any of the grounds of appeal."
2. Briefly stated the facts necessary for adjudication of the controversy at hand are : The taxpayer is into manufacturing motorcycles under 'Yamaha' brand name and its spare parts.
During the year under assessment, the taxpayer entered into international transactions with its Associated Enterprises as under:-
S.No. Nature of Transaction Method Arm's length price (as per the assessee) (INR)
(i) Import of components/spare CPM 2,04,59,04,263 parts from AEs
(ii) Import of capital goods CPM 1,36,37,40,983
(iii) Export of spare parts CPM 5,82,41,276
(iv) Export of Motorcycles RPM 1,17,43,01,910
(v) Royalty CUP 18,77,26,589
(vi) Model Fee CUP 20,11,65,967
(vii) Technical Guidance Fee CUP 16,98,99,424
(viii) Interest on short term financing CUP 36,91,245
(ix) Reimbursement of warranty - 42,12,004 claims to AEs
(x) Reimbursement/support - 11,51,64, 916 received 4 ITA No.297/Del/2015
3. The Transfer Pricing Officer (TPO) on the basis of transfer pricing study submitted by the taxpayer found all the international transactions made by the taxpayer with its AE at Arm's Length except transaction recorded at Sl.No.(v) as to payment of 'royalty' and made adjustment at ALP as under :-
Sl. Nature of ALP ALP Adjustment
No. International determined determined u/s 92CA
transaction by assessee by this office (NR)
(INR) (INR)
1. Payment of 24,78,07,525/- Nil 24,78,07,525/-
royalty
Total 24.78 crores
4. The taxpayer carried the matter before the ld. DRP by filing objections who has disposed of the objections. Feeling aggrieved, the taxpayer has come up before the Tribunal by way of filing the present appeal.
5. We have heard the ld. Authorized Representatives of the parties to the appeal, gone through the documents relied upon and orders passed by the revenue authorities below in the light of the facts and circumstances of the case.
GROUNDS NO.1 & 26. Grounds No.1 & 2 are general in nature more specifically elaborated in the subsequent grounds, need no adjudication.
5 ITA No.297/Del/2015 GROUNDS NO.3 TO 67. The ld. TPO, by applying the CUP method, determined the ALP of international transaction qua payment of royalty came to the conclusion that the taxpayer has not proved any real tangible economic benefit that has been passed to him by the technology received from AE nor it has provided comparable cases where independent parties are making payment for royalty under similar circumstances and has also declined to follow decision rendered by the Hon'ble High Court in CIT vs. EKL Appliances Ltd. - (2012) 345 ITR 241 and proceeded to propose the ALP at Rs.24,78,07,535/-.
8. Ld. AR for the taxpayer contended that the issue in controversy has been covered by the decision of the coordinate Bench of the Tribunal in taxpayer's own case for AY 2009-10 vide ITA No.1720/Del/2014 order dated 27.04.2017. However, on the other hand, the ld. DR for the Revenue relied on the orders of the authorities below.
9. Undisputedly, there is no change in the business model of the taxpayer. It is also not in dispute that royalty has been paid at a pre-determined rate on the basis of number of units of particular models sold by the taxpayer.
6 ITA No.297/Del/201510. Undisputedly, the TPO has disallowed the royalty payment on the ground that the taxpayer has not been able to prove any real tangible benefit that has passed to him by technology received from its AE. This reasoning of the TPO as well as DRP has not been upheld by the coordinate Bench of the Tribunal in taxpayer's own case for AY 2009-10 and deleted the proposed adjustment on account of royalty payment of Rs.18.78 crores by returning the following findings :-
"14. On going through the facts, we note that this royalty has been paid by the assessee to its AE i.e. Yamaha Motor Co. Ltd., Japan which has granted an exclusive, non-transferable and non-divisible license to use the technical information for manufacture or process locally manufactured parts at its factory premises and to sub-contract the same to manufacture motorcycles at its factory premises, right to use "Yamaha" Trademark and permit the company dealers to use "Yamaha" trademark in the course of marketing activities in India, Nepal and Bhutan. The technology provided by the AE has been developed specifically for the assessee and similar technology is not available with non-AE. This royalty is being paid at a predetermined rate on the basis of number of units of particular model sold by the assessee company.
15. The learned TPO had disallowed the payment of royalty on the allegation that there is no rationale for making payment of royalty when AE is not passing any economic benefit to the assessee as assessee is not able to make any profit out it. In response to the allegation of the TPO, the assessee had submitted a detailed reply vide letter dated 05.11.2012 giving the nature and description of the intangible licensed by its AE i.e. Yamaha Motor Co. Ltd. , Japan to the assessee company which reads as under:-
"1. Nature & Description of intangibles licensed - Yamaha Motor Co. Ltd., Japan (YMC) has granted the Company an exclusive, non-transferable and non-divisible to use the technical information -
- To manufacture or process locally manufactured parts at its factory premises and to sub-contract the same;
- To procure local parts and import imported parts;
- To manufacture motorcycles at its factory premises;7 ITA No.297/Del/2015
- To sell, distribute, market and service motorcycles and parts in India, Nepal and Bhutan;
- To export motorcycles and part; and - Right to use "Yamaha" Trademark for the purpose of
doing above-stated activities, and permit the Company's dealers to use the Yamaha trademark in the course of marketing activities in India, Nepal & Bhutan.
- Technical information here means the technical information contained in below documents, which shall be provided by YMC to the Company:-
- Master part lists with respect to motorcycles;
- Drawings with respect to motorcycles and parts thereof;
- Yamaha Design Standards and Yamaha Quality Standards specified in the Drawings;
- Inspection standards for completed motorcycles and parts thereof;
- Process standards, which specify and give technical explanation of the basic manufacturing methods and processes required for manufacture of locally manufactured parts for the motorcycles.
2. When was the technology developed - The technology is developed from time to time depending on the Company's requirements to introduce new products in the market, which again depends on various factors, including current market demand.
3. The nature of technical collaboration between the Assessee and YMC does not necessitate obtaining upgrades or modifications. However, whenever any support is required by the Assessee in connection with the Technical Collaboration Agreements, the same is duly provided by YMC.
4. The technical and other information licensed by YMC to the Assessee are unique in the sense that the said information is not readily available in the open market, and is developed by YMC specifically for the Assessee. There is no restriction on the period up to which these intangibles can be used by the Assessee. The Assessee can continue to use these intangibles for an unlimited period.
5. As stated above, the technology provided by YMC is developed specifically for the Assessee. Accordingly, the said technology is not usable for YMC for any other purpose.
6. It may be noted that similar technology is not available with non-AEs and is not readily available in the open market, and is developed by YMC specifically for the Assessee.
7. The payments for technology provided by YMC are made by the Company in two modes:-
- Payment towards lump sum technical know-how fees equivalent to 50% of the variable research and development 8 ITA No.297/Del/2015 cost incurred by YMC for the development of new models of motorcycles; and
- Royalty at a pre-determined rate on the basis of number of units of the particular model sold by the Company. The royalty is paid towards the balance cost incurred by YMC for development of new models of motorcycles.
8. No cost benefit analysis is done at the time of technology transfer. It may be appreciated that the royalty is required to be paid by the Assessee to YMC only on sale of motorcycles and not on production. If there will be no sale, there will be no royalty payments.
9. As mentioned above no cost benefit analysis is done and hence this question is not applicable.
10. It may be noted that similar technology is not available with non-AEs and is not readily available in the open market, and is developed by YMC specifically for the Assessee. Accordingly it is not possible to undertake any benchmark analysis to compare payment of royalty with any non-AEs at the time of execution of agreement for royalty.
11. The benefit derived by the Assessee from use of technology provided by YMC is very well evidenced by the fact that the Assessee is able to manufacture motorcycles by using the said technology. Without the technology provided by YMC, the Assessee cannot manufacture motorcycles. Similarly, the grant of license for using the trademarks enables the Assessee to sell the products manufactured by the Assessee. Without a known trademark, the Assessee will not be able to sell its products.
12. As mentioned above, the grant of technology and license for use of trademarks enable the Assessee to manufacture, as well as, sell its products. In view of the same, it may be appreciated that whatever sales are made by the Company can be attributed to technology licensed by YMC to the Assessee.
It is not possible to quantify the benefit derived by the Assessee by payment of royalty to YMC as required by you in view of the fact that the Assessee has incurred substantial losses.
13. YMC has been charging the royalty from its other AEs at similar rates.
In this respect, we invite your kind attention towards the Transfer Pricing Analysis Report. YMC has entered into a similar technical collaboration agreement with Dawood Yamaha Ltd., Pakistan ("DYL"). As per the terms of agreement entered into between YMC and DYL for provision of technical know-how by the former, YMC charges royalty from DYL as per the following rate:-
3% of Net wholesale price 9 ITA No.297/Del/2015 Where, Net wholesale price = (Ex-factory price) - (Sales Tax) - (CKD landed cost) Since YMC is charging royalty from the Assessee at an average rate of 2.94%, it may be appreciated that the transaction of payment of royalty has been carried out at an arm's length."
16. In this letter it was further clarified that royalty is being paid since the year 1984 when YML entered into technical collaboration agreement with Escorts Limited. From 1984 to 1999, by using the technology provided by YML, the Escorts Limited and subsequently Yamaha Motor India Private Limited made substantial profits.
17. It was further clarified that the technology provided cannot be the basis for the losses incurred by the company since payment of royalty and the assessee incurring losses are two separate independent matters. Just because the assessee company is running into losses it cannot refuse to pay royalty for the use of the intangibles from its AE.
18. We note that the TPO in its order has arbitrarily rejected the above explanation submitted by the assessee by saying that assessee's claims are preposterous to say the least. The TPO further has arbitrarily stated that the technical information passed on by the AE to the assessee company is of no use to the assessee. We are of the view that this observation of the TPO is incorrect and unsustainable. There is no denial to the fact that the assessee company is using the technology provided by its AE for manufacture or process locally manufactured parts. It is using the trademark "Yamaha". The intangibles, as stated hereinabove, have been used by the assessee company and as such it cannot be said that these are of no use to the assessee.
19. The next allegation of the TPO is that the introduction of the technology has signalled the beginning of a phase of spiralling losses for the assessee. Firstly it is incorrect observation and even otherwise losses cannot be a ground for not paying royalty for the services availed from the AE.
20. The reasoning of the TPO that in this competitive market, the mere presence of a brand name is not enough to ensure commercial success and the quality of the product will be one of the factors that will play a decisive role in the case of the assessee, that factor is missing and the assessee was not supposed to pay the royalty to AE, we are of the view that this reasoning of the TPO is also unsustainable. If one entity uses the brand name of another entity it is supposed to make payment for the use of the brand name to the other entity. The brand name per se may not be enough to ensure commercial success. It is also a fact that assessee company has used the trademark "Yamaha" and that trademark belongs to Yamaha 10 ITA No.297/Del/2015 Motor Co. Ltd., Japan. If that be so, then assessee company is required to pay for use of the trademark "Yamaha". The TPO was required to make out a comparative analysis so as to determine the arm's length price in the facts and circumstances, taking into consideration the three factors i.e. function performed, assets deployed and risks assumed. In the present case, from the facts, it is evident that the royalty has been paid for the intangible license which has been granted by the AE to the assessee company and accordingly the assessee is required to make payment of the same.
21. This issue is squarely covered by the judgment of the Hon'ble jurisdictional Delhi High Court relied upon by the learned AR, in the case of CIT vs. EKL Appliances Ltd. [2012] 345 ITR 241 dated March 29, 2012 wherein the Hon'ble High Court has held as under:-
" 22. Even Rule 10B(1)(a) does not authorise disallowance of any expenditure on the ground that it was not necessary or prudent for the assessee to have incurred the same or that in the view of the Revenue the expenditure was unremunerative or that in view of the continued losses suffered by the assessee in his business, he could have fared better had he not incurred such expenditure. These are irrelevant considerations for the purpose of Rule 10B. Whether or not to enter into the transaction is for the assessee to decide. The quantum of expenditure can no doubt be examined by the TPO as per law but in judging the allowability thereof as business expenditure, he has no authority to disallow the entire expenditure or a part thereof on the ground that the assessee has suffered continuous losses. The financial health of assessee can never be a criterion to judge allowability of an expense; there is certainly no authority for that. What the TPO has done in the present case is to hold that the assessee ought not to have entered into the agreement to pay royalty/ brand fee, because it has been suffering losses continuously. So long as the expenditure or payment has been demonstrated to have been incurred or laid out for the purposes of business, it is no concern of the TPO to disallow the same on any extraneous reasoning. As provided in the OECD guidelines, he is expected to examine the international transaction as he actually finds the same and then make suitable adjustment but a wholesale disallowance of the expenditure, particularly on the grounds which have been given by the TPO is not contemplated or authorised."
22. The above view has also been upheld by the Hon'ble Punjab & Haryana High Court in the case of M/s Knorr-Bremse India Pvt. Ltd. vs. ACIT, ITA No. 182 (2013) dated 6th November, 2015 where the Court held as under:-
11 ITA No.297/Del/2015"20. A reading of the orders of the TPO, the DRP and of the Tribunal makes it clear that one of the main reasons for not accepting the assessee's case was that the assessee had not been able to substantiate that the payment for the services had actually increased its profits. As we noted earlier, the TPO, in fact, further held that the assessee should have been able to show the level of increase in profit post the said transactions.
21. We are unable to agree with this finding. The answer to the issue whether a transaction is at an arm's length price or not is not dependent on whether the transaction results in an increase in the assessee's profit. This would be contrary to the established manner in which business is conducted by people and by enterprises. Business decisions are at times good and profitable and at times bad and unprofitable. Business decisions may and, in fact, often do result in a loss. The question whether the decision was commercially sound or not is not relevant. The only question is whether the transaction was entered into bona fide or not or whether it was sham and only for the purpose of diverting the profits.
22. The TPO observed that regular increase in profits is a normal incidence in business. This is entirely incorrect. All businesses are not profitable. All decisions do not enhance profitability. Losses are also an incidence of business. Many are the failed business ventures of people and enterprises.
23. Enterprises, businessmen and professionals constantly experiment with different business models, theories and ventures. The aim indeed is to further the business, to enhance their profits. So long as that is the aim, it is sufficient for the purpose of the Income Tax Act. In a given case, profit may not even be the motive. Even so it would not indicate that the transactions in question are not at an arm's length price. Whether a transaction is entered into at an arm's length price or not must depend upon the facts of each case relating to the transaction per se, i.e., the transaction itself. Profit is only a possibility and a desired result with or without the aid of an international transaction. Every business venture is not necessarily profitable or successful. All business ventures do not succeed equally or uniformally. Indeed, if an assessee is able to establish financial or other commercial benefits arising from a transaction, it would further strengthen its case. But if it cannot do so, it does not weaken it.
24. The profit earned by an assessee could be for reasons other than those relating to the international transactions or by virtue of international transactions as well as by virtue of other factors. In that event, the assessee having profited from 12 ITA No.297/Del/2015 the venture involving the international transactions, obviously, would not establish that the arm's length price was correct or justified.
25. It would make no difference even if the profit is entirely on account of the international transaction. In fact, even if it is established that on account of an international transaction an assessee's venture has profited, it does not necessarily establish that the transaction was entered into at an arm's length price. Mere profitability does not indicate that the transaction which was responsible for the enhancement of the profits was at an arm's length price. That an international transaction has enabled an assessee to earn profit is one thing and the price paid for the same is another thing altogether. Profit is a motive and the aim of a venture. The factors that are involved in achieving this objective are the means of achieving this end. Absent any special term in the contract, the seller of goods or the provider of services is not concerned whether its purchaser profits from the use that the goods or services are put to. It is concerned with the same only in so far as the usefulness of its products and services enhances the value thereof and consequently furthers its own commercial interests. Merely because an assessee profits by the use of the goods supplied or the services rendered, it does not follow that the same were sold or supplied at an arm's length price. Conversely, merely because an assessee does not profit from the use of the goods or services it does not follow that they were not sold at an arm's length price.
26. A view to the contrary would cause considerable confusion and lead to arbitrary, if not illogical, results. A view to the contrary would then raise a question as to the extent of profitability necessary for an assessee to establish that the transaction was at an arm's length price. A further question that may arise is whether the arm's length price is to be determined in proportion to the extent of profit. Thus, while profit may reflect upon the genuineness of an assessee's claim, it is not determinative of the same."
23. As regards comparative analysis, on going through the record we note that assessee has benchmarked its transaction by applying CUP method. The AE has provided similar services to other entities for which it has charged royalty of 3% of the net wholesale price. The comparable selected by the assessee are also located in the same geographical location and the rate at which the royalty has been paid by the assessee being 2.94% which is less than the rate at which the royalty has been paid by the non-AE. Accordingly, the arm's length price determined by the assessee does not warrant any adjustment. The learned TPO as well as the DRP have not controverted the above facts. During the course of the hearing also the learned DR at a 13 ITA No.297/Del/2015 specific query from the bench could not dispute these facts. No adverse material has been brought on record either by the TPO or the DRP against the assessee. We have also gone through the submission made by the assessee before the DRP where the assessee has submitted a list of the various companies which are paying royalty and are still incurring losses. There is no dispute to the facts that Yamaha Motor Co. Ltd., Japan has provided the technology and it is the owner of the "Yamaha" trademark.
24. Taking into consideration the above facts we are of the view that assessee has been able to sufficiently demonstrate the justification for payment of the royalty and determination of its arm's length price and accordingly the DRP was not justified in confirming the order of the TPO in proposing disallowance of Rs.18.78 crores on account of the royalty paid by the assessee. Accordingly, we direct the AO to delete this addition made on account of the royalty."
11. In view of what has been discussed above and the decision rendered by the coordinate Bench of the Tribunal, we are of the considered view that when AE has granted exclusive non-
transferable and non-divisible licence to use the technical information for manufacture, to use Yamaha trademark and permit the company dealers to use the Yamaha trademark in the course of marketing activities in India and then paid the royalty at pre-
determined rate, it is not the prerogative of the TPO to decide if any tangible benefit has been transferred to the taxpayer from the technical know-how received from its AE because decision of a businessman for business expenditure or payment of royalty for running the business cannot be interfered by the TPO in any manner. Moreover, liability of the business expenditure and adjustment of ALP cannot be made on the basis of the fact no 14 ITA No.297/Del/2015 benefit has been accrued to the taxpayer. It is only for the businessman to see as to how to execute the decision for better running of the business. So, in view of the matter, we are of the considered view that TPO/DRP have erred in making adjustment of ALP of Rs.24,78,07,525/- on account of royalty payment by the taxpayer to its AE. Hence, grounds no.3 to 6 are determined favour of the taxpayer.
GROUND NO.7
12. Ground No.7 is general in nature, hence needs no specific adjudication.
Order pronounced in open court on this 12TH day of February, 2018.
SD/- SD/-
(B.P. JAIN) (KULDIP SINGH)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Dated the 12TH day of February, 2018
TS
Copy forwarded to:
1.Appellant
2.Respondent
3.CIT
4.CIT (A)
5.CIT(ITAT), New Delhi. AR, ITAT
NEW DELHI.