J.Sudhakar Reddy, Member (A) -
(1.) THIS is an appeal filed by the assessee against the order dated March 31, 2007 of the learned Assistant Commissioner of Income -tax, Transfer Pricing Officer -I(2), New Delhi pertaining to the assessment year 2007 -08. The facts in brief: The assessee -company filed its return of income declaring total income of Rs. nil on October 27, 2007. Subsequently it filed a revised return of income on October 29, 2007 declaring total income of Rs. 31,49,18,923. During the course of assessment proceedings the Assessing Officer noticed that the assessee is paying royalty of Rs. 4,83,87,010 and a technical guidance fee of Rs. 1,53,20,390. The Assessing Officer also noticed that the assessee has entered into international transactions. Reference was made to the Transfer Pricing Officer. The Transfer Pricing Officer at paragraph 1.1 of his report dated August 10, 2010 listed out the international transactions entered into by the assessee which is extracted for ready reference.
(2.) OUT of the total royalty payment of Rs. 4,83,87,010, the Assessing Officer treated royalty payment of Rs. 10,77,900 as payment at arm's length price, being royalty paid in accordance with the terms of the agreement and on the products specifically mentioned in the agreement. The case of the Transfer Pricing Officer is that, the balance of the royalty has been paid on products which are not specifically mentioned in the technical collaboration agreement entered between the parties "Honda Motor, Japan" and "Shri Ram Power Equipment Ltd.," now called as "Honda Siel Power Products Ltd.," dated October 18, 1985, which is renewed from time to time and the latest amendment, which is the seventh amendment to the technical collaboration contract was entered on September 13, 2009. The most appropriate method chosen by the assessee for its transfer pricing study and the claim made by the assessee in its transfer pricing report, that the rate at which royalty is paid is at arm's length. The case of the Transfer Pricing Officer is that the technical collaboration agreement in question does not authorise payment of "royalty" on the "variants of the products", which are not listed in the technical collaboration agreement (TCA) and hence no royalty need to have been paid on the products and hence the payments are not at arm's length price (ALP). At paragraphs 9 and 10 of his order the Transfer Pricing Officer held as follows:
"9. By the application of comparable uncontrolled price, the arm's length price in respect of payment is determined at 'nil' as against Rs. 3,78,40,919 determined by the assessee. Similarly, in the case of payment of royalty the arm's length price of this transaction is determined at Rs. 10,77,900 as against Rs. 4,83,87,010 determined by the assessee. The Assessing Officer shall enhance the returned income by Rs. 4,73,09,110 on account of the transaction of payment of royalty and by Rs. 3,78,40,919 on account of the transaction related to payment of export commission. The cumulative enhancement of the returned income thus stands at Rs. 8,51,50,029.
10. The transfer pricing approach in this order may be summarised as below:
(i) The issues dealt with in this order are the payment of royalty and payment of export commission by the assessee to its associated enterprise.
(ii) A show cause was issued to the assessee wherein it was argued that the assessee need not make this payment under the arm's length principle. The show -cause notice is reproduced at paragraph 3 of this order.
(iii) The assessee's reply and the arguments of this office on that reply are at paragraph 4 onwards.
(iv) The arm's length price on account of the transaction of payment of royalty amounting to Rs. 4,73,09,110 has been reduced to nil. The arm's length price on account of the transaction related to payment of export commission amounting to Rs. 3,78,40,919 has been reduced to nil. The cumulative enhancement of the returned income thus stands at Rs. 8,51,50,029.
(v) The assessee was allowed reasonable opportunity of being heard which included personal hearing on various dates mentioned in column 7 of page 1 of this order.
(vi) In respect of other transaction no adverse inference is drawn."
The Assessing Officer further came to a conclusion that the royalty and technical guidance fees were to be capitalised. He allowed 25 per cent depreciation on these amounts after capitalising the same. On export commission the Assessing Officer considered the terms and conditions of the agreement, found that the export commission in question is clearly in the nature of royalty/fees for technical services. As no tax was deducted at source, the payment of Rs. 3,78,41,000 was not allowed as a deduction by invoking section 40(a)(i) of the Income -tax Act, 1961. Alternatively the Assessing Officer held that the expenditure in question is purely for the use of licence acquired by the assessee, which was for a long period and thus would constitute a capital asset. Accordingly the payment of export commission was disallowed.
(3.) THE assessee carried the matter in appeal before the Dispute Resolution Panel. The Dispute Resolution Panel -I, New Delhi in its order at page 6, directed the Transfer Pricing Officer to delete the addition of Rs. 3,78,40,919 being payment of export commission on the following ground.
"The assessee felt that the Assessing Officer made the disallowance not appreciating that payment of export commission was not in the nature of royalty and fee for technical services, and the same did not constitute income which accrues or arises to Honda in India. The Assessing Officer also did not appreciate that payment of export commission was for acquiring any capital asset and did not result in any enduring benefit to the assessee. Without prejudice, it is also stated that payment to the extent of Rs. 3,78,40,919 has already been disallowed in the transfer pricing order and therefore to disallow it again would tantamount to double disallowance.
It is found that in the transfer pricing portion of the order, export commission has been disallowed and therefore its disallowance again would be double disallowance. As the Dispute Resolution Panel has already upheld the disallowance in the transfer pricing portion, disallowance again would lead to double disallowance. Hence the Assessing Officer is directed not to disallow export commission on grounds of capital expenditure or by treating it as royalty/fee for technical service.";