ACIT, New Delhi v. M/s. Sona Okegawa Precision Forgings Ltd., New Delhi

ITA 260/DEL/2010 | 2004-2005
Pronouncement Date: 23-07-2010 | Result: Dismissed

Appeal Details

RSA Number 26020114 RSA 2010
Bench Delhi
Appeal Number ITA 260/DEL/2010
Duration Of Justice 6 month(s) 4 day(s)
Appellant ACIT, New Delhi
Respondent M/s. Sona Okegawa Precision Forgings Ltd., New Delhi
Appeal Type Income Tax Appeal
Pronouncement Date 23-07-2010
Appeal Filed By Department
Order Result Dismissed
Bench Allotted G
Tribunal Order Date 23-07-2010
Date Of Final Hearing 10-05-2010
Next Hearing Date 10-05-2010
Assessment Year 2004-2005
Appeal Filed On 18-01-2010
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL (DELHI BENCH G DELHI) BEFORE SHRI A.D. JAIN AND SHRI A.K. GARODIA ITA NO. 260(DEL)2010 ASSESSMENT YEAR: 2004-05 ASSTT.COMMISSIONER OF INCOME TAX M/S. SONA OKEGAWA PRECISION CIRCLE 9(1) CR BLDG. NEW DELHI. V. FORGING S LTD. INDRA PRAKASH BLDG. BK ROAD NEW DELHI. (APPELLANT) (RESPONDENT) APPELLANT BY: SHRI NIKHIL CHAUDHARY SR. DR RESPONDENT BY: S/SHRI VIDUR PURI & BALDEV RAJ CAS ORDER PER A.D. JAIN J.M . THIS IS DEPARTMENTS APPEAL FOR THE ASSESSMENT YEAR 2004-05 TAKING THE FOLLOWING GROUND:- THE LD.COMMISSIONER OF INCOME TAX(APPEALS) ERRED IN LAW AND ON THE FACTS AND CIRCUMSTANCES OF THE CASE IN DELETIN G THE ADDITION OF RS. 43 68 838/- BEING THE DIFFERENCE IN THE ARMS LENG TH PRICE AND THE VALUE OF THE INTERNATIONAL TRANSACTION ON ACCOUNT O F ROYALTY. THE AO MADE THIS ADDITION ON THE BASIS OF TPOS ORDER P ASSED U/S 92CA(3) OF THE I.T. ACT. 2. THE FACTS ARE THAT DURING THE ASSESSMENT PROCEED INGS THE AO NOTICED THE FOLLOWING INTERNATIONAL TRANSACTIONS ENTERED IN TO BY THE APPELLANT DURING THE FINANCIAL YEAR 2003-04 AS REPORTED IN FORM 3CE B FILED ALONG WITH THE ITA 260(DEL)10 2 RETURN OF INCOME. S.NO. TYPE OF INTERNATIONAL TRANSACTION METHOD SELECTED VALUE OF TRANSACTIONS 1. PURCHASE OF RAW MATERIAL DIES JIGS AND SPECIAL TOOLS TNMM 1 19 43 197 2. PURCHASE OF CONSUMABLES &RAW MATERIALS TNMM 6 9 98 605 3. SALE OF FINISHED GOODS TNMM 6 05 40 938 4. SALES RETURN OF FINISHED GOODS SOLD - 4 30 104 5. ROYALTY CUP 1 00 32 469 6. PAYMENT OF COMMISSION TNMM 70 933 7. PAYMENT OF DIVIDEND CUP 43 31 250 3. A REFERENCE WAS MADE BY THE AO UNDER SECTION 92C A(1) OF THE ACT TO THE TRANSFER PRICING OFFICER (TPO) FOR COMPUTATION OF ARMS LENGTH PRICE IN RESPECT OF THESE INTERNATIONAL TRANSACTIONS. T HE TPO HOWEVER DID NOT AGREE WITH THE ANALYSIS UNDERTAKEN BY THE ASSESSEE FOR DETERMINATION OF THE ARMS LENGTH PRICE OF ROYALTY TO ASSOCIATED ENTERPR ISES (INTERNATIONAL TRANSACTION) THE ASSESSEE HAD WITH ITS ASSOCIATED ENTERPRISES AND CONSEQUENTLY THE TPO MADE/SUGGESTED AN ADJUSTMENT O F RS. 43 68 838/- ON ACCOUNT OF DIFFERENCE IN ARMS LENGTH PRICE TO THE VALUE OF INTERNATIONAL TRANSACTIONS. 4. THE TPO AFTER GOING THROUGH THE TRANSFER PRICING DOCUMENTATION AND OTHER DETAILS FILED BY THE ASSESSEE DURING THE PROC EEDINGS UNDER SECTION 92CA OF THE I.T. ACT DETERMINED THE ARMS LENGTH P RICE OF ROYALTY PAID TO ITA 260(DEL)10 3 ASSOCIATED ENTERPRISES (INTERNATIONAL TRANSACTION) AFTER TAKING INTO ACCOUNT THE FOLLOWING: I) THE ASSESSEE USED THE CUP METHOD FOR DETERMINING TH E ARMS LENGTH PRICE FOR ROYALTY PAID TO COLLABORATOR I.E. AE AND COMPARED THE RATE OF ROYALTY WITH THE RATE ALLOWED 8% ON DOMESTIC SALE AND 5% ON EXPORT SALE AS PERMITTED AN D ALLOWED UNDER THE REGULATIONS OF GOVERNMENT OF INDIA. AS THE APPELLANT HAS NOT ENTERED INTO AGREEMENT OR PAYMENT OF ROYALT Y WITH ANY OTHER UNRELATED ENTERPRISE IN INDIA OR ELSEWHERE. THUS THERE ARE NO COMPARABLE UNCONTROLLED TRANSACTIONS. ACCORDIN GLY TPO HELD THAT THE APPELLANT HAD NOT DETERMINED THE ARM S LENGTH PRICE FOR THE PAYMENT OF ROYALTY IN ACCORDANCE WITH THE PROVISION OF SEC. 92C(1) AND (2). II) THE TPO FURTHER OBSERVED THAT ROYALTY HAS BEEN PAID ON TOTAL SALE IRRESPECTIVE OF SALES MADE TO SAME ASSOCIATED ENTERPRISE OR OTHER ENTERPRISES. ROYALTY HAS BEEN PAID @ 3% OF HE SALES. SALES MADE TO THE AE AMOUNTED TO RS. 6 05 40 938/-. ACCORDINGLY THE CORRESPONDING ROYALTY PAID TO THE AE ON THESE SALES COMES TO RS.18 16 228/- THEREFORE TPO HELD THAT IT SHOULD NOT ALLOW AND TO THAT EXTENT IT IS AN EXCESS PAYMENT AND THE ROYALTY PAYMENT IS NOT AT ARMS LENGTH TO THAT EXTENT. ACCORDINGLY AN ADJUSTMENT OF RS. 18 16 228/- IS MA DE ON THE ROYALTY ACCOUNT. ITA 260(DEL)10 4 III) THE TPO FURTHER NOTICED THAT THE ASSESSEE HAS INCU RRED FOLLOWING EXPENSES IN RESPECT OF THE TWO PERSONNEL OF THE ASSOCIATED ENTERPRISES EXPENSES INCURRED ON MR. KEICHI OSAWA (TECHNICAL ADVISOR) SALARY RELATED EXPENSES 4 26 415 PAYMENT MADE FOR CAR 1 67 356 PAYMENT MADE FOR RESIDENTIAL ACCOMMODATION 2 82 000 TOTAL 8 75 771 EXPENSES INCURRED ON MR. TADAO KATSUCHI (JOINT MANAGING DIRECTOR) SALARY RELATED EXPENSES 10 38 649 PAYMENT MADE FOR CAR 1 58 190 PAYMENT MADE FOR RESIDENTIAL ACCOMMODATION 4 80 000 TOTAL 16 76 839 5. THE TPO WAS OF THE OPINION THAT SINCE AS PER THE AGREEMENT THE ROYALTY PAYMENT WAS ALSO TOWARDS THE IMPROVEMENT OF TECHNICAL INFORMATION RELATING TO PROCESS WHICH IS DEVELOPED BY THE AE T HEREFORE THE ASSESSEE WAS NOT REQUIRED TO INCUR THE EXPENDITURE ON THE TWO PE RSONNEL DEPUTED BY THE AE. HENCE THE TPO HELD THAT THE AMOUNT OF RS. 25 52 610/- PAID TO THE MR. KEICHI OSAWA (TECHNICAL ADVISOR) AND MR. TADAO KATS UCHI (JOINT MANAGING DIRECTOR) IS NOT AT ARMS LENGTH AND THEREFORE TO T HAT EXTENT ADJUSTMENT IS REQUIRED. ITA 260(DEL)10 5 6. THUS THE AO/TPO MADE AN ADJUSTMENT OF RS. 43 68 838/- ON ACCOUNT OF ARMS LENGTH PRICE OF ROYALTY PAID TO ASSOCIATED ENTERPRISE AS WELL AS OF EXPENSES INCURRED ON THE PERSONNEL SEND BY THE AE T O THE ASSESSEE. 7. BY VIRTUE OF THE IMPUGNED ORDER THE LEARNED CIT (A) HAS DELETED THE ADDITIONS MADE BY THE AO WHICH BRINGS THE DEPARTME NT BEFORE US BY WAY OF THE PRESENT APPEAL. 8. CHALLENGING THE IMPUGNED ORDER THE LD. DR HAS A RGUED THAT THE LD. CIT(A) HAS ERRED IN DELETING THE ADDITION OF RS. 43 68 838/- CORRECTLY MADE BY THE AO BEING THE DIFFERENCE IN THE ARMS LENGTH PRICE AND THE VALUE OF INTERNATIONAL TRANSACTION ON ACCOUNT OF ROYALTY OV ERLOOKING THAT THE AO HAD MADE THE ADDITION ON THE BASIS OF THE TPOS ORDER P ASSED U/S 92CA(3) OF THE I.T. ACT. 9. THE LEARNED COUNSEL FOR THE ASSESSEE ON THE OTH ER HAND HAS PLACED STRONG RELIANCE ON THE IMPUGNED ORDER. IT HAS BEEN CONTENDED THAT THE LD. CIT(A) HAS RIGHTLY DELETED THE ADDITION WRONGLY MAD E BY THE AO; AND THAT THE TPO DID NOT BRING ANY MATERIAL ON RECORD TO SHO W THAT THE PRICES WERE NOT AT ARMS LENGTH. 10. WE HAVE HEARD THE PARTIES AND HAVE PERUSED THE MATERIAL ON RECORD. THE ADDITION OF RS. 43 68 838/- COMPRISES OF TWO CO MPONENTS I.E. THE EXPENDITURE ON DEPUTATION OF PERSONNEL OF ASSOCIATE D ENTERPRISE (ADDITION OF ITA 260(DEL)10 6 RS.25 52 610/-) AND ROYALTY PAID TO AE ON SALE MADE TO AE (ADDITION OF RS. 18 16 228/-). 11. APROPOS THE EXPENSES OF PERSONNEL ON DEPUTATION OF ASSOCIATED ENTERPRISE IT IS SEEN THAT THE ASSESSEE HAD APPOIN TED ONE MR. TADAO KATSUCHI AS JOINT MANAGING DIRECTOR OF THE COMPANY AS PER SH AREHOLDING OF THE COMPANY OF MMC JAPAN. DURING THE ASSESSMENT YEAR 2004-05 I.E. THE YEAR UNDER CONSIDERATION THE ASSESSEE PAID TO HIM A SUM OF RS.16 76 839/- BY WAY OF SALARY ALLOWANCE AND PERQUISITES. THIS EXPENDITURE DID NOT RELATE TO THE PAYMENT OF ROYALTY THE JOINT MANAGING DIREC TOR HAVING NOT BEEN APPOINTED UNDER THE KNOW-HOW LEASE AGREEMENT WITH M MTL. THE REMUNERATION WAS DETERMINED BY THE COMPANY ON THE B ASIS OF SIMILAR PAYMENT TO THE ASSESSEES OWN EMPLOYEES. IT WAS NO T SHOWN OTHERWISE. THIS PAYMENT DID NOT QUALIFY THE TEST FOR ARMS LEN GTH PRICE CONCERNING PAYMENT OF ROYALTY. 12. FURTHER THE ASSESSEE APPOINTED AS TECHNICAL AD VISER MR. KEICHI OSAWA. HE WAS APPOINTED UNDER THE AGREEMENT. ON T HE ASSESSEES REQUEST HE WAS DEPUTED BY MMTL. DURING THE YEAR PAYMENT OF RS.8 75 771/- WAS MADE TO HIM. THE DEPUTATION OF THE SAID TECHNICAL ADVISER DID NOT AFFECT THE AMOUNT OF ROYALTY DUE TO ASSOCIATED ENTERPRISE (AE FOR SHORT) AND THE PAYMENT OF ROYALTY TO MMTL. THE EXPENSES BY WAY O F PAYMENT OF SALARY ITA 260(DEL)10 7 ALLOWANCE AND PERQUISITES WERE NOT A PART OF ROYAL TY PAYMENT AND IT COULD NOT HAVE BEEN REDUCED FROM THE ACTUAL ROYALTY PAYME NT SO AS TO COMPUTE THE ROYALTY PAYMENT AT AN ARMS LENGTH PRICE. IT IS T HESE TWO AMOUNT OF RS. 16 76 839/- AND RS.8 75 771/- THAT GO TO MAKE UP T HE AMOUNT OF RS.25 52 610/- WHICH WAS ADDED ON THE FIRST COUNT BY THE AO WHICH ADDITION HAS BEEN DELETED BY THE LD. CIT(A). THE P AYMENT WAS AN OBLIGATION OF THE ASSESSEE AS PER THE KNOW-HOW LICENCE AGREEME NT AS NOTED BY THE LD. CIT(A). BESIDES THE TPO FAILED TO TAKE INTO ACCO UNT THE FACT THAT THE ASSESSEE NEVER BORE THE COST OF ABOUT RS. 75.38 LAK HS REPRESENTING THE COST OF SALARY PAID IN JAPAN TO THE EX-PATRIATES DEPUTE D . IT IS NOTEWORTHY THAT IN ASSESSMENT YEAR 2002-03 THE TPO HAD ACCEPTED THE P AYMENT OF ROYALTY TO MMTL. THE SAME HAD ALSO BEEN DONE BY THE AO FOR A SSESSMENT YEAR 2003- 04. SUCH PAYMENT WAS HELD TO BE AT AN ARMS LENGT H PRICE. THERE WAS NO NEXUS OF MR. TADAO KATSUCHI AS JOINT MANAGING DIREC TOR OF THE ASSESSEE COMPANY WITH THE PAYMENT OF ROYALTY. SUCH APPOIN TMENT HAD BEEN MADE UNDER THE SHAREHOLDER AGREEMENT. SECTION 6 OF THE SHAREHOLDER AGREEMENT PROVIDES FOR THE PAYMENT OF TECHNICAL ADVISORY SERV ICES IN INDIA. AS PER SECTION 6.01 AFTER THE EFFECTIVE DATE OF THE AGREE MENT AND ON THE WRITTEN REQUEST OF SOPF (THE ASSESSEE) MMTL MAY DESPATCH A TECHNICALLY QUALIFIED ENGINEER OF MMTL TO THE ASSESSEE AS A TECHNICAL ADV ISER. AS PER SECTION ITA 260(DEL)10 8 6.2 (2) THE ASSESSEE WAS TO BEAR INTER ALIA GASO LINE IN INDIA POSTAGE TELEPHONE AND FACSIMILE COST INCURRED BY THE TECHNI CAL ADVISER IN PERFORMING THE SERVICES UNDER THE AGREEMENT. IN F ACT THE AGREEMENT MADE IT CLEAR THAT MMTL WAS TO DEPUTE A TECHNICAL ADVISE R ON THE ASSESSEES REQUEST AND THE REMUNERATION PAID TO THE TECHNICAL ADVISER WAS TO BE BORNE BY THE ASSESSEE. PERTINENTLY SUCH REQUEST FOR DE PUTING THE TECHNICAL ADVISER WAS MADE BY THE ASSESSEE TO MMTL ONLY IN TH E YEAR 2003-04. THE AGREEMENT DID NOT STATE THAT THE DEPUTATION OF TECH NICAL ADVISER AND THE PAYMENT OF ROYALTY TO MMTL INTER ALIA WOULD AFFEC T THE QUANTUM OF ROYALTY BEING PAID TO THE AE. AS SUCH THERE WAS NO REASO N FOR THE TPO TO HOLD THAT THE EXPENSES INCURRED ON THE DEPUTATION OF TECHNICA L ADVISER OUGHT TO BE INCURRED BY THE AE AND NOT BY THE ASSESSEE SINCE I T WAS THE ASSESSEE WHO WAS PAYING THE ROYALTY. THE EXPENDITURE IN QUESTI ON WAS NO DOUBT INCURRED FOR BUSINESS PURPOSES AND IT WAS THIS WHICH WAS THE DETERMINING THE FACTOR AS RIGHTLY NOTED BY THE LD. CIT(A). IT HAS NOT BEE N SHOWN THAT THE PAYMENT WAS NOT AS OUGHT TO HAVE BEEN MADE BY A PRUDENT BUS INESS-MAN UNDER SIMILAR CIRCUMSTANCES IN THE COURSE OF ITS/HIS NOR MAL BUSINESS ACTIVITIES. 13. THE PAYMENTS MADE BY THE ASSESSEE TO THE JOINT MANAGING DIRECTOR AND THE TECHNICAL ADVISER WERE THUS CORRECTLY FOUND BY THE LD. CIT(A) TO BE GENUINE BUSINESS EXPENDITURE. ITA 260(DEL)10 9 14. SO FAR AS REGARDS THE OTHER LIMB OF THE ADDITIO N THE ASSESSEE WAS PAYING ROYALTY @ 3% ON EXPORT AS WELL AS DOMESTIC S ALES NET OF IMPORTED RAW MATERIAL AND BROUGHT OUT COMPONENTS. THE ACTU AL PAYMENT OF ROYALTY WAS OF RS. 12.82 LAKHS. THIS WAS ERRONEOUSLY COMP UTED FOR SALES TO MMTL AT RS. 18 16 228/-. AS PER THE CONTRACT TH E ASSESSEE WAS TO PAY ROYALTY @ 3% ON EXPORT AND DOMESTIC SALES NET OF IM PORTED RAW MATEIAL AND BROUGHT OUT COMPONENTS WHEREAS THE TPO WRONGLY COM PUTED IT @ 3% ON GROSS SALES. THIS DESPITE THE FACT THAT THE ASSE SSEE HAD SUBMITTED BEFORE THE TPO A DETAILED WORKING IN THIS REGARD. THEREIN IT HAD BEEN CLEARLY MENTIONED THAT THE PAYMENT OF ROYALTY TO THE AE WAS OF RS.12.82 LAKHS. MOREOVER THIS ROYALTY OF 12.82 HAD BEEN RECOVERED AS A PART OF SALE CONSIDERATION OF THE COMPONENTS SOLD TO THEM AT AN ARMS LENGTH PRICE IN ACCORDANCE WITH THE COST PLUS METHOD AND THE TNM ME THOD WHICH WAS ACCEPTED BY THE TPO. ALSO THE SALE PRICE IN THE CASE OF BUY BACK OF COMPONENTS WAS UNDISPUTEDLY A NEGOTIATED PRICE DETE RMINED ON THE ACTUAL COST TO THE ASSESSEE WHICH INCLUDED ROYALTY PAID. THE BREAK UP THEREOF WAS DULY SUBMITTED BY THE ASSESSEE BEFORE THE TPO. ON THE BASIS OF THIS THE ARMS LENGTH PRICE STOOD JUSTIFIED ON ACCEPTABLE MA RGIN UNDER TNM METHOD. 15. IT REMAINS UNDISPUTED THAT AS PER THE OECD GUID ELINES THE ASSESSEE WAS NOT A CONTRACT MANUFACTURER. RATHER IT WAS AN INDEPENDENT COMPANY. ITA 260(DEL)10 10 16. THE ROYALTY WAS PAID BY THE ASSESSEE UNDER THE TECHNOLOGY AGREEMENT COMPUTED ON THE BASIS OF THE ENTIRE PROD UCTION/SALES. THIS REMAINS UNDISPUTED. FURTHER IT IS ALSO UNDISPUTE D AS NOTED BY THE LD. CIT(A) THAT FOR THE PURPOSE OF COMPUTING THE FEES TO BE PAID FOR PRODUCTION NO DISTINCTION WAS MADE BETWEEN THE PRODUCTS SOLD T O THE AE OR TO INDEPENDENT PARTIES. AS SUCH THE FEE WAS PAID ON THE SALES MADE TO THE AE ALSO. THERE WAS NO MATERIAL BROUGHT BY THE TPO TO DEMONSTRATE THAT THE PRICE ON SALES MADE TO THE AE WAS NOT AT AN ARMS L ENGTH . THAT BEING SO IT WAS AT MARKET DETERMINED PRICES THAT THE SALES WERE MADE BY THE ASSESSEE. MOREOVER IT GOES UNCHALLENGED THAT THE FEES PAID U NDER THE TECHNOLOGY AGREEMENT COMPRISES AN INTEGRAL PART OF THE COST OF PRODUCTION WHICH WAS RECOVERED FROM THE SALE PRICE. IT WAS THUS THAT S O FAR AS REGARDS THE SALES MADE TO THE AE THE AMOUNT OF FEES PAID UNDER THE T ECHNOLOGY AGREEMENT WAS RECOVERED BY THE ASSESSEE FROM THE AE AS PART O F SALE PRICE. THIS BEING SO SUCH FEE PAID BECAME REVENUE NEUTRAL THAT IS T O SAY IN CASE THE ASSESSEE DID NOT PAY THE FEES ON THE SALES MADE TO THE AE A CORRESPONDING REDUCTION IN THE PRICE CHARGED TO THE AE WOULD HAVE TO BE GIV EN BY THE ASSESSEE LEST THE COST FOR THE SALE COME DOWN. SUCH LATTER METH ODOLOGY WAS NOT ADVISABLE FOR IT WOULD CREATE PROBLEMS IN THE ACCO UNTING. ALSO THE IMPACT ON THE TAXABLE PROFITS WOULD BE NIL. ITA 260(DEL)10 11 17. IT WAS ON TAKING INTO CONSIDERATION ALL OF THE ABOVE THAT THE LD. CIT(A) DELETED THE ADDITION WRONGLY MADE BY THE AO. WE DO NOT FIND ANY REASON TO RECORD ANY VARIANCE WITH THE WELL REASONED ELABORAT E FINDINGS OF FACT RECORDED BY THE LD. CIT(A). THE SAME ARE HEREBY UP HELD. THE GRIEVANCE SOUGHT TO BE RAISED BY THE DEPARTMENT IS THUS FOUND TO BE WITHOUT SUBSTANCE AND SHORN OF MERIT. THE SAME IS HEREBY REJECTED. 18. IN THE RESULT THE APPEAL FILED BY THE DEPARTME NT IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 23.07.2010. SD/- SD/- (A.K. GARODIA) (A.D. JAIN) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED: 23.07.2010 *RM COPY FORWARDED TO: 1. ASSTT.COMMISSIONER OF INCOME TAX CIRCLE 9(1) CR BLDG. NEW DELHI. . 2. M/S. SONS OKEGAWA PRECISION FORGINGS LTD. INDRA PRAKASH BLDG. BK ROAD NEW DELHI. 3. CIT 4. CIT(A) 5. DR TRUE COPY BY ORDER DEPUTY REGISTRAR