Pr Commissioner Of vs M/S Luwa India Private Limited
2021 Latest Caselaw 2474 Kant

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     IN THE HIGH COURT OF KARNATAKA AT BENGALURU

         DATED THIS THE 29TH DAY OF JUNE 2021

                       PRESENT

         THE HON'BLE MR. JUSTICE ALOK ARADHE

                         AND

 THE HON'BLE MR.JUSTICE HEMANT CHANDANGOUDAR

                 I.T.A. NO.296 OF 2017
BETWEEN:

1.     PR. COMMISSIONER OF INCOME TAX-4
       BMTC COMPLEX, KORAMANGALA
       BANGALORE.

2.   THE ASST. COMMISSIONER OF INCOME TAX
     CIRCLE-11(5), BANGALORE.
                                  ... APPELLANTS
(BY SRI. T.N.C. SRIDHAR, ADV.)

AND:

M/S. LUWA INDIA PRIVATE LIMITED
NO.95, INDUSTRIAL SUB-URB
2ND STAGE, TUMKUR ROAD
YESHWANTHPURA
BANGALORE-560022
PAN: No. AAA CL3106 B.
                                         ... RESPONDENT
(BY SRI. SURYANARAYANA T, ADV.,)
                        ---

      THIS I.T.A. IS FILED UNDER SECTION 260-A OF
I.T.ACT, 1961 ARISING OUT OF ORDER DATED 26.08.2016
PASSED      IN     IT(TP)A   NO.581/BANG/2012     &
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C.O.No.31/B/2015, FOR THE ASSESSMENT YEAR 2007-08,
PRAYING TO:
I. DECIDE THE FOREGOING QUESTION OF LAW AND/OR
SUCH OTHER QUESTIONS OF LAW AS MAY BE FORMULATED
BY THE HON'BLE COURT AS DEEMED FIT AND.
II. SET ASIDE THE APPELLATE ORDER DATED 26.08.2016
PASSED BY THE INCOME TAX APPELLATE TRIBUNAL 'A'
BENCH, BANGALORE, IN APPEAL PROCEEDINGS IN IT(TP)A
No.581/B/2012 & C.O.No.31/BANG/2015 FOR ASSESSMENT
YEAR 2007-08 AS SOUGHT FOR IN THIS APPEAL AND TO
GRANT SUCH OTHER RELIEF AS DEEMED FIT IN THE
INTEREST OF JUSTICE.

    THIS I.T.A. COMING ON FOR HEARING, THIS DAY,
ALOK ARADHE J., DELIVERED THE FOLLOWING:

                         JUDGMENT

This appeal under Section 260-A of the Income Tax

Act, 1961 (hereinafter referred to as 'the Act', for short) has

been filed by the revenue. The subject matter of the appeal

pertains to the Assessment Year 2007-08. The appeal was

admitted by a Bench of this Court on the following

substantial question of law:

"Whether on the facts and in the circumstances of the case, the Tribunal was right in holding that the Transfer Pricing Officer/Assessing Authority is not right in treating Arms length Price for royalty payment as 'NIL' eventhough the TPO had clearly established that

assessee had not derived any benefit out of royalty payment?"

2. Facts leading to filing of this appeal briefly stated are

that the assessee filed the return of income for the

Assessment Year 2007-08 declaring a total income of

Rs.3,87,19,390/-. The Assessing Officer initiated proceeding

under Section 148 of the Act. As the assessee had entered

certain international transactions, the Assessing Officer made

a reference to the Transfer Pricing Officer for determination

of Arms Length Price of the transactions. One of the

international transactions entered into by the assessee was

with its associated enterprises in respect of payment of

Rs.4,30,33,562/- being royalty. The assessee, in its transfer

pricing study, bench marked the international transaction of

payment of royalty along with other international

transactions at entity level by choosing the transactional net

margin method as the most appropriate method. In this

behalf, the Transfer Pricing Officer picked up the international

transaction of payment of royalty for determination of Arms

Length Price and rejected the method adopted by the

assessee of aggregating all the transactions in an

independent manner. On the basis of the application of

comparable uncontrolled price method, the Transfer Pricing

Officer determined the Arms Length Price of the said

transaction as NIL and held that the assessee has not shown

any proof that other group concerns or third parties are

charging identical royalty and that the assessee had not

derived any economic benefit from the transaction. The

Transfer Pricing Officer determined the transfer pricing

adjustment of Rs.4,30,33,562/-. The Assessing Officer

thereupon passed an order on 17.02.2011 by incorporating

the aforesaid adjustment. The assessee thereupon filed an

appeal before the Commissioner of Income Tax (Appeals),

who by an order dated 28.02.2012, deleted the adjustment

by holding that the method adopted by the assessee of

bench marking the international transaction at entity level by

adopting the net margin method is correct. The

Commissioner of Income Tax (Appeals) determined the

adjustment on the aggregated international transaction.

Being aggrieved by the aforesaid order passed by the

Commissioner of Income Tax (Appeals), the revenue filed an

appeal before the Tribunal. The assessee also filed the

cross-objection in the appeal.

3. The Tribunal, by a common order dated 26.08.2016

dismissed the appeal preferred by the revenue and affirmed

the order of the Commissioner of Income Tax (Appeals) to

the extent of bench marking the transaction of payment of

royalty along with other transactions by applying the

transactional net margin method. The Tribunal further held

that the Arms Length Price cannot be determined as NIL as

the evidence establishes that the royalty payment was made

against the use of or right to use the technical know-how

which was produced before the Commissioner of Income Tax

(Appeals) and the Assessing Officer and the Transfer Pricing

Officer does not have jurisdiction to examine the allowability

of the claim by applying the benefit test or the conditions as

provided under Section 37 of the Act. Accordingly, the

appeal preferred by the revenue was dismissed and the

cross-objection filed by the assessee was disposed of. In the

aforesaid factual background, this appeal has been filed.

4. Learned counsel for the revenue submitted that the

Tribunal erred in holding that the Transfer Pricing Officer is

not right in treating the Arms Length Price of royalty as NIL

even though the Transfer Pricing Officer had clearly

established that the assessee had not derived any benefit out

of royalty payment. It is further submitted that the Tribunal

ought to have appreciated that the Assessing Authority /

Transfer Pricing Officer had rightly held that the assessee had

failed to prove that it had obtained the benefit by receiving

the tangible / know-how against the payment of royalty. It

is also pointed out that the copy of the agreement was

neither produced before the Assessing Officer nor before the

Tribunal and the assessee did not derive any benefit from the

payment of royalty. It is contended that the order passed by

the Tribunal is therefore, liable to be set aside.

5. On the other hand, learned counsel for the assessee

submitted that the finding recorded by the Tribunal that the

international transaction of payment of royalty ought to be

bench marked in a correct manner at entity level of

application of net margin method, has not been challenged

by the revenue before this Court. It is further submitted that

since the revenue has accepted the aforesaid finding, the

issue involved in this appeal is rendered academic. It is also

submitted that the Tribunal, while recording the aforesaid

finding, has relied on a decision of co-ordinate bench of the

Tribunal in 'DCIT Vs. TOYOTA KIRLOSKAR MOTORS PVT.

LTD.' i.e. order dated 30.06.2016 passed in IT(TP)A

No.16/Bang/2015. It is also pointed out that the aforesaid

order was challenged by the revenue in ITA No.25/2017 and

a Bench of this Court by a judgment dated 27.08.2018

passed in ITA No.25/2017 has dismissed the appeal preferred

by the revenue. It is also submitted that the issue that the

Transfer Pricing Officer can only determine the Arms Length

Price of an international transaction in the manner prescribed

under the Act and the Rules framed thereunder is no longer

res integra and is covered by the decisions of High Court of

Delhi and Bombay in 'CIT Vs. EKL APPLIANCES LTD.' and

'CIT Vs. LEVER INDIA EXPORTS LTD.'. It is also

submitted that concurrent finding of fact has been recorded

by the authorities which has not been demonstrated to be

perverse.

6. We have considered the submissions made on both

sides and have perused the record. The issue whether the

Transfer Pricing Officer, while exercising the jurisdiction

under Section 92KA(3) of the Act, can only determine the

Arms Length Price of an international transaction, is no

longer res integra and the same has already been

adjudicated by the decisions of Delhi and Bombay High

Courts respectively in 'CIT Vs. EKL APPLIANCES LTD.' and

'CIT Vs. LEVER INDIA EXPORTS LTD', supra. The

aforesaid issue is no longer res integra and is covered by the

decision of aforesaid High Courts. The Transfer Pricing

Officer cannot derive any benefit from the transaction. The

relevant extract of the decision of High Court of Bombay in

LEVER INDIA EXPORTS LTD. is reproduced below for the

facility of reference.

"7. We note that the Tribunal has recorded the fact that the respondent assessee has launched new products which involved huge advertisement expenditure. The sharing of such expenditure by the respondent assessee is a strategy to develop its business. This results in improving the brand

image of the products, resulting in higher profit to the respondent assessee due to higher sales.

Further, it must be emphasized that the TPO's jurisdiction was to only determine the ALP of an International Transaction. In the above view, the TPO has to examine whether or not the method adopted to determine the ALP is the most appropriate and also whether the comparables selected are appropriate or not. It is not part of the TPO's jurisdiction to consider whether or not the expenditure which has been incurred by the respondent assessee passed the test of Section 37 of the Act and/or genuineness of the expenditure. This exercise has to be done, if at all, by the Assessing Officer in exercise of his jurisdiction to determine the income of the assessee in accordance with the Act. In the present case, the Assessing Officer has not disallowed the expenditure but only adopted the TPO's determination of ALP of the advertisement expenses. Therefore, the issue for examination in this appeal is only the issue of ALP as determined by the TPO in respect of advertisement expenses. The jurisdiction of the TPO is specific and limited i.e. to determine the ALP of an International Transaction in terms of Chapter X of the Act read with Rule 10A to 10E of the Income Tax Rules.

The determination of the ALP by the respondent assessee of its advertisement expenses has not been disputed on the parameters set out in Chapter X of the Act and the relevant Rules. In fact, as found both by the CIT(A) as well as the Tribunal that neither the method selected as the most appropriate method to determine the ALP is challenged nor the comparables taken by the respondent assessee is challenged by the TPO. Therefore, the ad-hoc determination of ALP by the TPO dehors Section 92C of the Act cannot be sustained."

7. Besides that, the finding recorded by the Tribunal

that the international transaction of payment of royalty ought

to be bench marked in an aggregated manner at entity level

on application of transactional net margin method has not

been challenged by the revenue before this Court.

Therefore, the issue involved in this appeal is covered by the

decisions of Bombay as well as Delhi High Court.

8. For the aforementioned reasons, the substantial

question of law is answered in favour of the assessee and

against the revenue.

We do not find any merit in the appeal. The same fails

and is hereby dismissed.

Sd/-

JUDGE

Sd/-

JUDGE

RV