Income Tax Appellate Tribunal - Hyderabad
R A K Ceramics India Private Limited, ... vs Dcit, Circle-3(1), Hyderabad, ... on 29 November, 2017
ITA No 193 of 2017 RAK Ceramics India P Ltd Hyderabad.
IN THE INCOME TAX APPELLATE TRIBUNAL
Hyderabad ' B ' Bench, Hyderabad
Before Smt. P. Madhavi Devi, Judicial Member
AND
Shri S.Rifaur Rahman, Accountant Member
ITA No.193/Hyd/2017
(Assessment Year: 2012-13)
M/s. RAK Ceramics India Vs Dy. Commissioner of Income
Private Limited Tax, Circle 3(1)
Secunderabad Hyderabad
PAN: AACCR 6424 N
(Appellant) (Respondent)
For Assessee : Shri Abhiroop Bhargav
For Revenue : Smt. Pallavi Agarwal, CIT(DR)
Date of Hearing: 17.10.2017
Date of Pronouncement: 29.11.2017
ORDER
Per Smt. P. Madhavi Devi, J.M.
This is assessee's appeal for the A.Y 2012-13 against the assessment order, dated 20.12.2016 passed u/s 143(3) r.w.s. 144C(1) of the Act.
2. Brief facts of the case are that the assessee company, engaged in the business of manufacture of ceramic vitrified tiles and sanitary wares, filed its return of income for the A.Y 2012-13 on 29.11.2012 admitting an income of Rs.5,76,24,860. The return was initially processed u/s 143(1) of the Act, but subsequently the AO noticed that the assessee has entered into international transactions with its AEs. Therefore, the matter was referred to the TPO u/s 92CA of the Act for determination of the ALP. The Page 1 of 12 ITA No 193 of 2017 RAK Ceramics India P Ltd Hyderabad.
TPO observed that the assessee has entered into various international transactions and held all the transactions to be at ALP except for the payment of royalty. He observed that the assessee has paid a sum of Rs.11,96,02,712 to its AE which is calculated at 3% of its net sales. He observed that as per the royalty agreement dated 1.4.2009, the royalty is being paid for the technology upgradation and assistance, ongoing process, product design and improvement and complete knowhow assistance including any technology or services provided during the period prior to the agreement. He observed that in the T.P document, the assessee has adopted CUP method for its T.P study and that the database used by the assessee is for U.S based companies wherein the copies of the agreements of those companies have not been furnished. The TPO held that the benchmarking, if any, has to be done in respect of Indian Companies engaged in similar trade, making royalty payment, and not that of US companies. Further, the TPO has also observed that the assessee has not been able to conclusively establish the benefit derived by it by the receipt of technology. Therefore, he held that the ALP of the royalty should be at 2% of its net sales and accordingly computed the adjustment u/s 92CA of the Act. The AO passed the draft assessment order based on the TP pricing adjustment proposed by the TPO. Aggrieved, the assessee preferred its objections before the DRP which confirmed the order of the TPO and in accordance with the same, the final assessment order was passed and the assessee is in further appeal before us.
3. The learned Counsel for the assessee, while reiterating the submissions made by the assessee before the authorities Page 2 of 12 ITA No 193 of 2017 RAK Ceramics India P Ltd Hyderabad.
below, submitted that the TPO has held that the assessee has failed to establish the benefit test on receipt of the technology for payment of royalty and further failed to adopt any of the methods prescribed under the Act justifying the payment of royalty while rejecting the CUP method adopted by the assessee to determine the ALP and has given no reason or basis for arriving at 2% as the ALP. Therefore, according to him, the order of the TPO is not sustainable. He also placed reliance upon the decision of the ITAT in assessee's own case for the A.Y 2010-11 wherein this issue has been considered at length and at Para 10 to 11 it was held as under:
"10. We are really surprised to see the reasoning of TPO in fixing the ALP of royalty payment at 2%. It is manifest from TPO's order he has rejected assessee's TP analysis under TNMM. Further, in para 6.4 of his order, TPO has mentioned of undertaking an independent analysis under TNMM for selecting comparables and determining ALP. However, even after repeatedly scanning through his order, we failed to find any such analysis being done by him. Similarly, though in para 5.1.1, ld. DRP has observed that TPO has benchmarked intangible transactions by using CUP, but, the order passed by TPO does not support such conclusion. It is an accepted principle of law that TPO has to determine the ALP by adopting any one of the methods prescribed u/s 92C of the Act. Mode and manner of computation of ALP under different methods have been laid down in rule 10B. Even, assuming that TPO has followed CUP method for determining ALP of royalty payment, as held by ld. DRP, it needs to be examined if it is strictly in compliance with statutory provisions. Rule 10B(1)(a) lays down the procedure for determining ALP under CUP method. As per the said provision, TPO at first has to find out the price charged or paid for property transferred or services provided in a comparable uncontrolled transaction, or a number of such transactions. Thereafter, making necessary adjustments to such price, on account of differences between the international transaction and comparable uncontrolled transactions or between the enterprises entering into such transactions, which could materially affect the price in the Page 3 of 12 ITA No 193 of 2017 RAK Ceramics India P Ltd Hyderabad.
open market, TPO will determine the ALP. It is patent and obvious from TPO's order, the determination of ALP at 2% is not at all in conformity with Rule 10B(1)(a). The TPO has not brought even a single comparable to justify arm's length percentage of royalty at 2% either under CUP or TNMM method. On the contrary, observations made by TPO gives ample scope to conclude that adoption of royalty at 2% is neither on the basis of any approved method nor any reasonable basis. Rather it is on adhoc or estimate basis, hence, not in accordance with statutory provisions. The approach of TPO in estimating royalty at 2% by applying the benefit test, in our view, is not only in complete violation of TP provisions but against the settled principles of law. ITAT, Mumbai Bench in case of M/s Castrol India Ltd. Vs. Additional CITY, ITA No. 1292/Mum/2007 dated 20/12/2013 while examining identical issue of determination of ALP at 'Nil' by applying the benefit test held as under:
"11. We have considered the rival submissions and perused the relevant material on record. It is observed that the impugned royalty was paid by the assessee company to its AE namely Castrol Ltd. UK at 3.5 % of the net ex-factory sale price of products manufactured and sold in India as per the technical collaboration agreement. This international transaction involving payment of royalty to its AE was bench-marked by the assessee by following CUP method in its TP study report and since average rate of royalty of three comparables selected by it was higher at 4.67% than the rate at which royalty was paid by the assessee to its AE, the transaction involving payment of royalty was claimed to be at arm's length. A perusal of the order passed by the TPO u/s 92CA (3) of the Act shows that neither these comparables selected by the assessee in its TP study report were rejected by her nor any new comparables were selected by her by making a fresh search in order to show that the payment of royalty by the assessee to its AE was not at arm's length. She simply relied on the approval of SIA to hold that any royalty paid by the assessee on exports and other income was not allowable and disallowed the royalty payment to the extent of Rs. 40,51,486/- treating the same as the royalty paid by the assessee in respect of exports sale and other income. We are unable to agree with this strange method followed by the TPO to make a TP adjustment in respect of royalty payment which is Page 4 of 12 ITA No 193 of 2017 RAK Ceramics India P Ltd Hyderabad.
not sustainable either in law or on the facts of the case. She has neither rejected the method followed by the assessee to bench-mark the transaction in respect of payment of royalty nor has been adopted any recognized method to determine the ALP of the said transactions. The approval of SIA adopted by the TPO as basis to make TP adjustment in respect of royalty payment was untenable and even going by the said basis wrongly adopted by the TPO, no TP adjustment in respect of royalty payment was liable to be made. As per the said basis, the net sales of the assessee after excluding export sale and other income were to the extent of Rs. 1118.70 crores and the royalty paid thereon at Rs. 24.38 crore being less than the rate of 3.5% approved by SIA, there was no case of any excess payment made of royalty by assessee than approved by SIA to justify its disallowance by way of TP adjustment. In our opinion, the ld. CIT (A) could not appreciate these infirmities in the order of the TPO despite the same were specifically brought to his notice on behalf of the assessee and confirmed the TP adjustment made by the TPO in respect of royalty payment which was totally unjustified. We therefore, delete the addition made by the AO/TPO and confirmed by the ld. CIT on account of TP adjustment in respect of royalty payment and allow ground no. 3 of the assessee's appeal."
11. Similar view has also been expressed in the other decisions relied upon by ld. AR. At the cost of repetition, it needs reiteration, assessee has benchmarked the royalty payment by bringing comparables both under TNMM as well as CUP. Whereas, TPO has rejected the analysis done by assessee under both the methods without any reasonable basis nor has brought a single comparable to justify ALP of royalty at 2%. Unfortunately, ld. DRP has approached the entire issue in rather mechanical manner without examining whether approach of the TPO is in accordance with statutory mandate. Therefore, determination of ALP of royalty at 2% cannot be supported, hence, deserves to be struck down. Moreover, theory of benefit test applied by TPO also falls flat considering the fact that TPO does not question the necessity of paying royalty but only objects to the quantum. Further, quantum increase in sale with no apparent increase in production, minimal product recalls, low after sales maintenance cost certainly goes to prove Page 5 of 12 ITA No 193 of 2017 RAK Ceramics India P Ltd Hyderabad.
assessee's claim that these could be achieved due to utilization of advanced technical know-how transferred by AE. The TPO has not been able disprove these facts with any sound argument. Considering the totality of facts and circumstances, we are of the opinion, reduction of rate of royalty by TPO from 3% to 2% is without any basis, hence, cannot be accepted. Accordingly, we delete the addition made on account of TP adjustment to royalty payment. Grounds raised are allowed".
4. The learned Counsel for the assessee has also drawn our attention to the order of the jurisdictional High Court in the assessee's own case for the A.Y 2010-11 wherein the Hon'ble High Court has confirmed the above order of the ITAT.
5. The learned DR, on the other hand, supported the orders of the authorities below.
6. Having regard to the rival contentions and the material on record, we find that the issue as to whether the assessee is required to establish the benefit derived by it and also the ALP rate of royalty has been considered by the Hon'ble jurisdictional High Court in the assessee's own case in ITTA No.595/2016 for the A.Y 2010-11 and vide orders dated 23.12.2016 it was held as under:
"8. Having considered the rival submissions, we find that the assessee offered two transfer pricing studies in relation to payment of royalty. In so far as the acceptable study adopting the Comparable Uncontrolled Price method is concerned, it is not in dispute that the assessee offered three comparables with an average royalty payment of Page 6 of 12 ITA No 193 of 2017 RAK Ceramics India P Ltd Hyderabad.
3.65% as against its own rate of royalty at 3%. Significantly, the TPO rejected these comparables on the ground that they were US based, while the AE of the assessee was UAE based. Having rejected these comparables, it was for the TPO to come up with other comparables so as to justify reduction of the royalty payment. However, no such exercise was undertaken by the TPO and by going into the whys and wherefores of the improvement in the net sales and profit of the assessee, the TPO determined that the reason for the same was increased marketing along with offer of discounts and that there was no justification for payment of royalty at 3% to the AE by the assessee. This reasoning is without legal basis of law as it is not for the TPO to decide the best business strategy for the assessee.
9. In Walchand & Co. (P.) Ltd. (supra), the Supreme Court observed in the context of the Income Tax Act, 1922 that when a claim is made for an allowance by the assessee, the income tax authorities have to decide whether the expenditure claimed as an allowance was incurred voluntarily and on grounds of commercial expediency. The Supreme Court pointed out that in applying the test of commercial expediency for determining whether the expenditure was wholly and exclusively for the purpose of business, it has to be adjudged from the point of view of the businessman and not of the revenue. The Supreme Court concluded that it is open to the revenue to come to the conclusion that the alleged payment was not real or that it had not been incurred by Page 7 of 12 ITA No 193 of 2017 RAK Ceramics India P Ltd Hyderabad.
the assessee in the character of a trader or that it was not laid out exclusively for the purpose of the business so as to disallow it but it is not the function of the revenue to determine what remuneration should be paid to an employee by the assessee.
10. Applying the same logic to the case on hand, once it is admitted by the Revenue that the assessee entered into a royalty agreement with the AE and the assessee claimed benefit from such agreement, in the form of quantum increase in sales with no apparent increase in production, minimal product recalls and low after sales maintenance cost, and consequently paid royalty in terms thereof, it was not for the TPO to determine as to what could be the other reasons for increase in the assessee's sales and profit.
11. Above all, there is no explanation forthcoming as to why the TPO decided upon 2% instead of the contractual rate of 3% for payment of royalty. No reason is offered by the TPO for picking on 2%. This whimsical fixation by the TPO amounts to an arbitrary and unbridled exercise of power. In consequence, we find that the TPO, having rejected the comparables cited by the assessee, did not take the trouble to examine alternate comparables so as to justify reduction of the rate for payment of royalty and by applying a wholly inapplicable methodology of determining the benefit from payment of such royalty, he capriciously reduced the rate for payment of such royalty from 3% to 2%.Page 8 of 12
ITA No 193 of 2017 RAK Ceramics India P Ltd Hyderabad.
12. On the above analysis, we find no grounds to interfere with the cogent and well reasoned order passed by the Tribunal. No question of law, much less a substantial question of law, therefore arises for consideration in this appeal".
7. Since the issue is the same for the relevant A.Y before us, the assessment order on this issue is set aside and the royalty payment at 3% of the net sales is confirmed to be at Arm's Length. Grounds of Appeal No. 2 & 3 are accordingly allowed.
8. As regards Ground of appeal No.4 against the disallowance of employee's contribution to ESI after the due date prescribed in the statute u/s 36(1)(va) and consequent addition to the returned income u/s 2(24)(x) of the I.T. Act of Rs.1,53,432, the learned Counsel for the assessee submitted that except for the payment of Rs.1,24,057, which was made with a delay of only one day, all other payments have been made before the prescribed due date as is evident from page 3 of the assessment order. He submitted that the said issue is covered in favour of the assessee by the decision of the Hon'ble Supreme Court in the case of CIT vs. Alom Extrusions Ltd (2009) reported in 319 ITR 306 (SC).
9. The learned DR, however, placed reliance upon the judgment of the Hon'ble Gujarat High Court in the case of CIT Vs. Gujarat transport corporation (2014) 366 ITR 170 (Guj) and Kerala High Court in the case of Commissioner of Income-tax, Cochin vs. Merchem Ltd (378 ITR 443)(Ker.). She submitted that Page 9 of 12 ITA No 193 of 2017 RAK Ceramics India P Ltd Hyderabad.
in the case of CIT Vs. Alom Extrusions Ltd, the Hon'ble Supreme Court was considering the disallowance made by the AO u/s 43B of the Act, whereas in the case before us, the AO has not invoked the provisions of section 43B but has invoked the provisions of section 36(1)(va) and therefore, the disallowance has to be sustained.
10. Having regard to the rival contentions and the material on record, we find that the assessee has remitted the employee's contribution to the Govt. A/c within the prescribed due dates, except for one day delay, with respect to a sum of Rs.1,24,657. Clause (va) of section 36(1), clearly lays down that the deduction of employees contribution received by the assessee shall be allowed only, if such sum is credited by the assessee to the employee's a/c in the relevant fund or funds on or before the due date, and for the purpose of this clause, "due date" means, the date by the assessee is required as an employer to credit an employee's contribution to the employee's account in the relevant fund. Therefore, in the strict sense, the sum which has not been credited to the employee's a/c in the relevant fund is to be disallowed. However, we find that the assessee has all along been remitting the amount before the due date except for the delay of one day with regard to the sum of Rs.1,24,657. As the delay is not inordinate, we are inclined to delete the disallowance and the consequent addition made to the returned income of the assessee. Ground of appeal No.4 is accordingly allowed.
Page 10 of 12ITA No 193 of 2017 RAK Ceramics India P Ltd Hyderabad.
11. As regards Ground No.5, it is submitted by the learned Counsel for the assessee that the DRP has directed the AO to verify the claim of the assessee with reference to the dividend distribution tax of Rs.2,08,89,625 paid by the assessee as disclosed in the ROI and to refund the tax of Rs.4,85,806 claimed by the assessee in accordance with law, but the AO, while giving effect to the order of the DRP, has failed to give the said credit. We, therefore, direct the AO to verify the claim of the assessee and allow the benefit of credit of tax so paid and process the refund accordingly.
12. As regards Ground No.6 for the credit of the MAT credit carried forward from previous years, we direct the AO to verify the assessee's claim and allow the same in accordance with law.
13. In the result, assessee's appeal is treated as partly allowed for statistical purposes.
Order pronounced in the Open Court on 29th November, 2017.
Sd/- Sd/-
(S.Rifaur Rahman) (P. Madhavi Devi)
Accountant Member Judicial Member
Hyderabad, 29th November, 2017.
Vinodan/sps
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ITA No 193 of 2017 RAK Ceramics India P Ltd Hyderabad.
Copy to:
1 M/s. R.A.K. Ceramics India Private Limited, PB No.11, IDA Peddapuram, ADB Road, East Godavari Distt. Samalkot 533440 2 Dy. CIT, Circle 3(1) Signature Towers, Hyderabad 3 DRP-1, G-16 Central Revenue Building, Queens Road, Bengaluru 560001 4 TPO-2, 3rd Floor, B Block IT Towers, AC Guards, Hyderabad 500004 5 The DR, ITAT Hyderabad 6 Guard File By Order Page 12 of 12