Income Tax Appellate Tribunal - Delhi
M/S. Denso India Limited, New Delhi vs Dcit, New Delhi on 7 March, 2018
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCHES : I-1 : NEW DELHI
BEFORE SHRI R.S. SYAL, VICE PRESIDENT
AND
SHRI KULDIP SINGH, JUDICIAL MEMBER
ITA No.1857/Del/2014
Assessment Year : 2009-10
ITA No.1128/Del/2015
Assessment Year : 2010-11
Denso India Limited, Vs. DCIT,
B-1/D-4, Ground Floor, Circle-10(1),
Mohan Co-operative Industrial New Delhi.
Area,
Mathura Road,
New Delhi.
PAN: AAACD4255F
(Appellant) (Respondent)
Assessee By : Shri Ravi Sharma
Department By : Shri Kumar Pranav
Date of Hearing : 06.03.2018
Date of Pronouncement : 07.03.2018
ORDER
PER R.S. SYAL, VP:
These two appeals for the Assessment years 2009-10 and 2010-11 involve some common issues. We are, therefore, proceeding to dispose them off with this common order for the sake of convenience. ITA No.1857/Del/2014 ITA No.1128/Del/2015 Assessment Year 2009-10
2. This appeal by the assessee is directed against the final assessment order passed by the Assessing Officer (AO) on 27.02.2014 u/s. 143(3) r/w section 144 C of the Income tax Act, 1961 (hereinafter also called `the Act') in relation to the A.Y. 2009-10.
3. The first issue raised in this appeal is against determination of the arm's length price (ALP) of the international transaction of 'Payment of application cost' at nil.
4. Briefly stated, the facts of the case are that the assessee, earlier known as Nippondenso Ltd., was promoted in 1985 as a joint venture between SRF group and Nippondenso of Japan. SRF later on sold its stock in the market. Thereafter, Denso Japan along with its affiliates held 52.9% equity in Denso India. This company is a leading manufacturer of automobile components and is engaged in the business of manufacture and sale of starters, wiper motors, fan motors, ventilators, fuel pumps, windshield wash, print motors and other auto electrical parts. The assessee reported 13 international transactions in Form no. 3CEB including 'Payment of 2 ITA No.1857/Del/2014 ITA No.1128/Del/2015 application cost' of Rs.6,63,24,025/-. The A.O. referred the matter of determination of the ALP of the international transactions to the Transfer Pricing Officer (TPO). The Transactional Net Margin Method (TNMM) was applied by the assessee at entity level for demonstrating that its international transactions were at arm's length price (ALP). The TPO did not accept the application of the TNMM as the most appropriate method, inter alia, for the international transaction of 'Payment of application cost'. He adopted Comparable Uncontrolled Price (CUP) Method for determining the ALP of this international transaction. In support of the payment, the assessee contended that as a part of its operations, it designs the products to suit local environments and needs. However, for customization of special products, it sought the help of Denso Japan for designing the products for which such application cost was paid. The TPO observed that when the assessee was making payment of running royalty @ 3% on conventional type of products and 4% on new type of products, there was no need for making a separate payment on account of application cost. He treated the consideration for payment of Application cost as covered in Royalty and hence determined Nil ALP of such international transaction. The DRP 3 ITA No.1857/Del/2014 ITA No.1128/Del/2015 countenanced the addition on account of transfer pricing adjustment for `Payment of application cost' at Rs.6.63 crore, against which the assessee has come up in appeal before the Tribunal.
5. Here, it is important to mention that the assessee also paid Royalty of Rs.11.48 crore in addition to Technical fees of Rs.1.42 crore to its AE and both of these transactions were reported as well. The TPO accepted payment of Royalty at ALP. However, the ALP of payment of Technical fee and payment of Application cost was determined at Nil. The assessee carried the matter before the Dispute Resolution Panel (DRP), which accepted the assessee's contention qua the payment of Technical fee and deleted the transfer pricing adjustment on that score.
6. We have heard both the sides and perused the relevant material on record. The assessee paid royalty @ 3%/4% to Denso Japan pursuant to the Agreement dated 30.03.2005, whose copy has been placed on record. The Agreement provides that Denso Japan, being, the Licensor owns and maintains patents relating to various kinds of electrical equipments for automotive vehicles and substantial amount of technical information 4 ITA No.1857/Del/2014 ITA No.1128/Del/2015 embedded in the design of such products. The Licensor agreed to transfer such Patents/Technical information to the assessee-Licensee for compensation at 3% for contract products listed as 'Conventional type' in Schedule-I and 4% for products listed as 'New products' in Schedule-I. The term 'Technical information', as used in the Agreement, has been defined in Article 1.1(4) as under:-
(4) "TECHNICAL INFORMATION":
i) Designs, engineering data, manufacturing and process data, basic machinery and facility layouts, testing and quality control data (including specifications and material standards therefor) and production and testing equipment data (excluding drawings of dies and special machines and equipment of LICENSOR's design, and drawings of general machines and equipment that LICENSOR has purchased from third parties) released in and used by LICENSOR during the term of this Agreement in the commercial production of CONTRACT PRODUCTS at LICENSOR'S facilities, however, specifically excluding:
1) information for innovative technology or outstanding developments different from those available at EFFECTIVE DATE,
2) such information concerning integral components and materials per se which, although forming part of or used in the manufacture of CONTRACT PRODUCTS, involve techniques or relate to fields of research, development design, engineering or manufacture separate and distinct from CONTRACT PRODUCTS (such as but not limited to, semiconductor devices, computer software in source code, integrated circuits, custom IC, capacitors, resistors, seals, bearings, springs, wires, cables, paints, plastics, chemicals, metals, and other. components and 5 ITA No.1857/Del/2014 ITA No.1128/Del/2015 materials including bolts and nuts which are not manufactured in LICENSOR's facilities), and
3) information regarding the design method.
ii) Purchase specifications and available material standards for the purchase of those integral components and materials excluded in the above as not being manufactured in LICENSOR's facilities.
(italicized emphasis supplied by us)
7. A careful perusal of the definition of `Technical information', whose supply necessitated the payment of Royalty, divulges that it includes designs, engineering data, manufacturing and process data, lay outs etc. for the Contract products at the assessee's facility, but, does not include such design etc. for the manufacture of separate and distinct from regular contract products.
8. Article III of the Agreement defines 'Technical information and services to licensee.' Clause 3.9 of the Article III, which is relevant for our purpose, reads as under:-
3.9 Upon written request made, from time to time, by LICENSEE, LICENSOR will make modifications, new application or new design works (including training of LICENSEE) regarding PRODUCTS applicable only to or in particular to any vehicles manufactured in TERRITORY; plan manufacturing processes and lines thereof, and/or perform other work which may be necessary for LICENCEE with 6 ITA No.1857/Del/2014 ITA No.1128/Del/2015 respect to the manufacture of such PRODUCTS at LICENSEE, if LICENSOR is in a position to do so, at a fee to be borne by LICENSEE which does not form part of the payments being made under any provisions herein and therefore shall be charged separately. Details of these works shall be agreed upon by the parties hereto in advance from time to time.
(italicized emphasis supplied by us)
9. A bare perusal of Clause 3.9 of the Agreement deciphers that the assessee can request Denso Japan for making modifications, alterations or new design work etc. regarding products, applicable only to any particular vehicles manufactured in India. However, when such a requirement is made, then it will be done by Denso Japan at a fee to be borne by the assessee, which does not form part of the Royalty payment made under the Agreement. On going through the definition of 'Technical information' in juxtaposition to para 3.9 of the Agreement, it becomes evident that the Technical information supplied by Denso Japan in normal course to Denso India shall be subject to royalty @ 3%/4%. If, however, Denso India requires modifications or new design to be customized for a particular customer in India, it shall have to pay a separate fee. In such a scenario, no royalty payment will be required on the goods manufactured by the use of 7 ITA No.1857/Del/2014 ITA No.1128/Del/2015 such customized technical information. This separate fee in the extant case has been characterized as 'Application cost' paid to the tune of Rs.6.63 crore. The fact that the assessee did not pay any regular royalty @ 3%/4% as stipulated in the Technical assistance agreement on the products for whose manufacture `Application cost' was paid, is further substantiated from the fact that as against the total sale of Rs.530.64 crore, the assessee paid royalty of Rs.11.48 crore (separate from the Application cost of Rs.6.63 crore), which is roughly 2.16% of the sales value as against the stipulated royalty at the rate of 3%/4%. The above analysis of the Technical assistance Agreement along with the figures from the Annual accounts of the assessee makes one thing clear that where the assessee paid application cost for customization of designs etc., it did not pay any royalty. This belies the view point canvassed by the TPO as well as the DRP who categorically held that the payment of application cost was in addition to royalty and, hence, its ALP is nil.
10. This brings us to the situation that the assessee, in fact, paid `Application cost' for customization of designs of products on which no royalty was paid. In view of the fact that the payment of application cost is 8 ITA No.1857/Del/2014 ITA No.1128/Del/2015 a separate international transaction unrelated with royalty, the next question is the determination of its ALP. The TPO as well as the DRP have taken Nil ALP of the international transaction of payment of `Application cost' under the CUP method for the reason adduced in their respective orders, which has been found above to be not sustainable. In such a situation, a separate benchmarking of this international transaction is required. However, we find that no data for determining the ALP of payment of application cost is available, nor has it been discussed by the TPO. Under these circumstances, we are of the considered opinion that the ends of justice would meet adequately if the impugned order on this score is set aside and the matter is remitted to the file of Assessing Officer/TPO for determining the ALP of the international transaction of payment of `Application cost' afresh as per law after allowing a reasonable opportunity of being heard to the assessee. Discussion made in para 16 infra holds good here as well, which justifies restoration of the issue.
11. The next issue raised in this appeal is against the addition of Rs.1,22,00,104/- for receipt of services. The assessee paid Rs.1.22 crore for intra group services. On being called upon to explain the nature of 9 ITA No.1857/Del/2014 ITA No.1128/Del/2015 services, the assessee stated that the following services were provided by Denso Japan:-
(1) Corporate, managerial, financial or other business planning and coordination and adjustment associated therewith; (2) Development or preparation of the budget and control or administration thereof;
(3) Accounting, tax paying or legal services; (4) Administration, collection or recovery of the credit or financial claims and procurement, or operation of the corporate funds; (5) Operation, maintenance or administration of the information systems;
(6) Management or administration of the cash flow or the solvency; (7) Risk management for the interest rates or the foreign exchange rates;
(8) Assistance in the production, purchasing, distribution, logistics, sales or installation, adjustment, use, repair or maintenance of the production machines, tools and dies, the production and quality control (which does not involve the manufacturing know-how), the 10 ITA No.1857/Del/2014 ITA No.1128/Del/2015 safety control, the cost management and building or repairing the facilities;
(9) Assistance in recruiting or employment and the employee training;
or (10) Other business performed in behalf and/or for the benefit of the BENEFICIARY.
12. On a perusal of an Agreement dated 30th July, 2004, through which the assessee claimed to have received services, the TPO found that requisite format required the request for consigned work for shared services to be sent for availing them. The assessee could not produce such forms vide which the request for shared services was made. The TPO observed that the assessee incurred Legal and professional charges to the tune of Rs.91.6 lac; Financial charges of Rs.3.07 lac; and Salary, wages and bonus at Rs.48.42 crore. In view of the assessee incurring the above expenses at a high level and not furnishing the requisite requests for shared services, the TPO determined Nil ALP of the international transaction of `Payment for receipt of services', which led to the transfer pricing adjustment of Rs.1.22 crore. 11 ITA No.1857/Del/2014 ITA No.1128/Del/2015 The DRP did not allow any relief, against which the assessee has come up in appeal before the Tribunal.
13. We have heard both the sides and perused the relevant material on record. The assessee received the intra group services pursuant to a Service Agreement and the Training Agreement, a part of which has been referred to by the TPO on page 22 of his order. `Scope of application' from such Agreement has been reproduced by the TPO at pages 22/23 of his order, which we have extracted above, namely, services from sr. no. 1 to 10. The assessee claimed before the TPO that the above services were received pursuant to the Agreement. A brief description of the above services amply shows that the assessee paid for availing such services. The TPO has simply brushed aside the assessee's contentions and determined Nil ALP of the international transaction basically on the premise that either no services were received or in the alternate, the services, if any, received by the assessee amounted to duplication of services.
14. It is found that the TPO applied the `Benefit test' for determining the ALP of such services at Nil. In this regard, it is noticed that the Hon'ble 12 ITA No.1857/Del/2014 ITA No.1128/Del/2015 Punjab & Haryana High Court in Knorr-Bremse India P. Ltd. vs. ACIT (2016)380 ITR 307 (P&H) has held that the question 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. 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. It went on to hold that 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. Reverting to the facts of the extant case, we find that the assessee placed on record copies of several e-mails showing the factum of having received the services, which deciphers that the international transaction entered in to by 13 ITA No.1857/Del/2014 ITA No.1128/Del/2015 the assessee with its AE was genuine. However, the fact remains that the assessee failed to produce copies of requisite requests for the shared services.
15. It is manifest that the TPO applied the CUP method for determining the ALP of the international transaction. While applying the CUP method, it was obligatory upon him to bring on record some comparable uncontrolled instance availing similar services as per the mandate of rule 10B(1)(a)(i). Not even a single comparable instance has been brought on record to facilitate a comparison between the price for the services availed by the assessee vis-à-vis that paid by other comparables in similar circumstances.
16. Even otherwise, we notice that the action of the TPO in determining Nil ALP of the international transaction on the ground that no such services were required to be availed or it was a duplication of services and then the AO making addition simply on the basis of recommendation of the TPO, is not in accordance with the judgment of the Hon'ble jurisdictional High Court in CIT v. Cushman & Wakefield (India) (P.) Ltd. (2014) 367 ITR 14 ITA No.1857/Del/2014 ITA No.1128/Del/2015 730 (Del), in which it has been held that the authority of the TPO is limited to conducting transfer pricing analysis for determining the ALP of an international transaction and not to decide if such service exists or benefits did accrue to the assessee. Such later aspects have been held to be falling in the exclusive domain of the AO. In that case, it was observed that the e-mails considered by tribunal from Mr. Braganza and Mr. Choudhary dealt with specific interaction and related to benefits obtained by assessee, providing a sufficient basis to hold that benefit accrued to assessee. As the details of specific activities for which cost was incurred by both AEs (for activities of Mr. Braganza and Mr. Choudhary), and attendant benefits to assessee were not considered, the Hon'ble High Court remanded the matter to file of concerned AO for an ALP assessment by TPO, followed by AO's assessment order in accordance with law considering the deductibility or otherwise as per section 37(1) of the Act.
17. When we advert to the facts of the instant case, it turns out that the TPO proposed the transfer pricing adjustment equal to the stated value of three international transaction at Rs.1.22 crore and odd by holding that no benefit was received by the assessee as a result of availing the services or 15 ITA No.1857/Del/2014 ITA No.1128/Del/2015 these amounted to duplication of services and hence no payment on this score was warranted. The AO in his draft order has taken the ALP of the international transaction at Nil on the basis of recommendation of the TPO without carrying out any independent investigation in terms of the deductibility or otherwise of such payment in terms of section 37(1) of the Act. This addition has been made by the AO in his final assessment order giving effect to the direction given by the DRP and not by invoking section 37(1) of the Act. As per the ratio decidendi of Cushman & Wakefield India (P.) Ltd. (supra), the TPO was required to simply determine the ALP of the international transaction, unconcerned with the fact, if any benefit accrued to the assessee and thereafter, it was for the AO to decide the deductibility of this amount u/s 37(1) of the Act. As the TPO in the instant case initially determined Nil ALP by holding that no benefit accrued to the assessee etc. and the AO made the addition without examining the applicability of section 37(1) of the Act, we find the actions of the AO/TPO running in contradiction to the ratio laid down in Cushman & Wakefield (supra). Following this decision, we remit the matter to the file of AO/TPO for deciding it in conformity with the law laid down by the Hon'ble 16 ITA No.1857/Del/2014 ITA No.1128/Del/2015 jurisdictional High Court in this case. Needless to say, the assessee will be allowed a reasonable opportunity of hearing in such proceedings. Assessment Year 2010-11
18. This appeal by the assessee is directed against the final assessment order dated 20.01.2015 passed by the AO u/s. 143(3) r/w section 144 C of Act in relation to the A.Y. 2010-11.
19. The first issue raised in this appeal is against the addition on account of transfer pricing adjustment amounting to Rs.6,64,44,523/-, being, the ALP of the international transaction of `Payment of application cost' taken by the authorities at Rs. Nil and Rs.84,03,856/-, being, the ALP of `Payment for intra group services' taken by the authorities at Rs. Nil.
20. Both the sides are in agreement that the facts and circumstances of both the issues are mutatis mutandis similar to those for the assessment year 2009-10. Following our above order for the assessment year 2009-10, the impugned order for this year is also set aside and the matter is restored to the file of Assessing Officer/TPO for determining the ALP of the international transactions of payment of application cost and payment of 17 ITA No.1857/Del/2014 ITA No.1128/Del/2015 intra group services afresh as per law, after allowing a reasonable opportunity of being heard to the assessee.
21. In the result, both the appeals are allowed for statistical purposes.
The order pronounced in the open court on 07.03.2018.
Sd/- Sd/-
[KULDIP SINGH] [R.S. SYAL]
JUDICIAL MEMBER VICE PRESIDENT
Dated, 07th March, 2018.
dk
Copy forwarded to:
1. Appellant
2. Respondent
3. CIT
4. CIT (A)
5. DR, ITAT
AR, ITAT, NEW DELHI.
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