Bellsonica Auto Component India Private Limited Vs ACIT (ITAT Delhi)
Royalty Cannot Be Nil; Omitted Domestic TP Provision Cannot Sustain Adjustment
The controversy
The Delhi ITAT considered two substantial transfer pricing adjustments: one reducing the arm’s length royalty payable to a foreign associated enterprise to nil, and another concerning domestic manufacturing transactions covered by the erstwhile section 92BA(i).
The Tribunal directed adoption of 1.9% of net sales for royalty and fees for technical services, following the assessee’s earlier-year decision based on its Unilateral Advance Pricing Agreement (UAPA). It also deleted the manufacturing adjustment of ₹11,22,35,872, following the Karnataka High Court’s decision in Texport Overseas (P.) Ltd.
The appeal, involving consolidated adjustments of ₹18,72,59,249, was partly allowed.
The background: Technical know-how for automobile components
The assessee was established in India in 2006 as a joint venture between Bellsonica Japan and Maruti Suzuki India Ltd. (MSIL). It manufactured components for automobiles produced by MSIL and its associated companies.
Under an agreement, Bellsonica Japan permitted the assessee to use licensed information and technical know-how for its manufacturing process. The assessee paid royalty at 2% of sales.
The Assessing Officer referred the international transactions to the Transfer Pricing Officer under section 92CA(1). The TPO concluded that the assessee had failed to establish tangible benefits from the technical know-how and had not adequately substantiated its claim regarding research and development activities performed by the foreign associated enterprise.
On that basis, the TPO held that there was no commercial or business justification for paying royalty and determined its arm’s length price at nil. The CIT(A) upheld this approach.
The royalty dispute: Benchmarking versus the benefit test
Before the Tribunal, the assessee submitted that it had benchmarked royalty using the Comparable Uncontrolled Price method, which yielded a median rate of 3%, whereas the actual payment was only 2%.
It argued that the TPO had rejected the benchmarking exercise altogether because the assessee allegedly failed to demonstrate benefits.
The assessee explained that its associated enterprise supplied technical information, proprietary data and expertise for development, manufacturing, testing and quality control. Without that know-how, it could not manufacture the specified products supplied to MSIL.
As an alternative, the assessee relied on its UAPA with CBDT dated 29 November 2022, which accepted 1.9% of net sales for consolidated royalty and technical service payments. It also referred to the Tribunal’s decision in its own case for AY 2014-15, dated 17 June 2026, adopting that rate.
The Revenue opposed extending the UAPA to a year outside its coverage and maintained that the assessee had not demonstrated the necessary nexus between the know-how and its income.
The Tribunal adopts the UAPA rate
The Tribunal followed the coordinate Bench’s decision in the assessee’s own case.
That earlier decision had relied on Ranbaxy Laboratories Ltd., ITA No. 196/Del/2013, recognising that an APA’s methodology and comparability principles can have persuasive or guidance value for other years where the transactions and functional circumstances are similar.
Accordingly, the Tribunal substituted 1.9% for both the TPO’s nil rate and the assessee’s claimed 2% rate. The royalty grounds were therefore partly allowed.
The decision thus granted substantial relief without accepting the assessee’s entire royalty claim.
Domestic manufacturing adjustment: Effect of omission of section 92BA(i)
The second dispute concerned purchases of raw materials from MSIL. The assessee had applied the Transactional Net Margin Method, but the TPO changed the filters and comparables, resulting in an adjustment of ₹11.22 crore.
Apart from challenging comparability, the assessee raised a legal objection. The Finance Act, 2017 omitted section 92BA(i) with effect from 1 April 2017, removing expenditure paid to persons covered by section 40A(2)(b) from that category of specified domestic transactions.
The assessee relied on Texport Overseas (P.) Ltd. (2020) 114 taxmann.com 568 (Karnataka) and Kolhapur Canesugar Works Ltd. v. Union of India (2000) 2 SCC 536.
The Revenue countered with Fibre Boards (P.) Ltd. (2015) 376 ITR 596 (SC), disputing the omission-versus-repeal reasoning and arguing that the amendment could not affect AY 2015-16.
The Tribunal nevertheless followed Texport Overseas, which directly concerned the omission of section 92BA(i) and earlier assessment years. It also noted supporting Tribunal decisions, including Raipur Steel Casting India, Ammann India and Softel Overseas.
The manufacturing adjustment was deleted.
Author’s comments
The royalty ruling illustrates the practical value of an APA beyond its expressly covered years. Here, the Tribunal used the agreed rate through the assessee’s earlier-year precedent; it did not declare that every APA automatically binds the Department for every other year.
The domestic transaction ruling is particularly relevant because it follows Karnataka High Court authority, despite the Revenue’s express reliance on Fibre Boards.
However, omission of section 92BA(i) must not be confused with omission of section 40A(2). The ruling deletes the disputed transfer pricing adjustment; it does not establish that all related-party expenditure is immune from examination under the ordinary provisions.
A nil royalty requires more than disbelief in its benefits, and a domestic TP adjustment requires a statutory foundation capable of sustaining it.
Cases Discussed
- Bellsonica Auto Component India Private Limited (ITAT Delhi), ITA No. 1049/Del/2023, dated 17/06/2026 (AY 2014-15)
- Softel Overseas Pvt. Ltd. Vs ACIT (ITAT Kolkata), [2023] 155 taxmann.com 616
- Ammann India (P.) Ltd. Vs ACIT (ITAT Ahmedabad), [2022] 134 taxmann.com 10
- Shree Shai Smelters (P.) Ltd. Vs ACIT (Gauhati High Court), [2020] 118 taxmann.com 350
- Raipur Steel Casting India (P.) Ltd. Vs PCIT (ITAT Kolkata), [2020] 117 taxmann.com 944
- PCIT Vs Texport Overseas (P.) Ltd. (Karnataka High Court), [2020] 114 taxmann.com 568
- Fibre Boards (P.) Ltd. (Supreme Court), 376 ITR 596 (2015)
- Kolhapur Canesugar Works Ltd. Vs Union of India (Supreme Court), (2000) 2 SCC 536
- Ranbaxy Laboratories Ltd. (ITAT Delhi), ITA No. 196/Del/2013
FULL TEXT OF THE ORDER OF ITAT DELHI
1. This appeal arises from order dated 10.02.2023, passed u/s 250 of the Income Tax Act, 1961 (hereafter as “the Act”), by Ld. CIT(A), Delhi-44.
1.1 In this case, the assessee was established in 2006 in India as a Joint Venture (JV) between Bellsonica Japan (AE) and Maruti Suzuki India Limited (MSIL). The assessee’s primary business is to manufacture products for the production requirements of Automobiles being manufactured by MSIL and its associated companies. The AE of the assessee has permitted it to utilize licensed information & technical know-how for the entire manufacturing process, through an agreement denoting the same. Through this agreement, the assessee would pay the AE royalty @ 2% of sales.
1.2 The Ld. AO made a reference to the TPO u/s 92CA(1) of the Act for determining the Arm’s Length Price (ALP) in respect of the International Transactions between the assessee and its AE. The Ld. AO followed the TPO’s order, wherein it has been held that the assessee could not substantiate his reply regarding all research and development activities being performed by the AE, which benefits the assessee. The TPO thereafter held that there was no commercial or business expediency for the payment of royalty and therefore it deserved to be a reduce to “NIL” instead of 2% claim by the assessee. It is seen that these findings of the TPO are recorded on pages 19 to 21 of that order and it deserves to be reiterated that the TPO has laid stress on the fact that the assessee could not establish tangible benefits accruing to it as a result of the technical know-how supplied by the AE (para 6.11 at page 21 of TPO).
1.3 The aggrieved assessee approached the Ld. CIT(A) where also he could not succeed on the basis of findings given on pages 48 to 51 of the impugned order. Briefly, the reason for denying any relief to the assessee was on account of a perceived failure of the assessee to justify the royalty payment vis-à-vis tangible benefits accruing to it.
1.4 Further aggrieved, the assessee has now approached the ITAT with four grounds (with sub-grounds) challenging the action of Ld. AO in terms of denying the validity of royalty payment altogether and also the adjustment on account of manufacturing activity, following the provisions of Section 40A(2) of the Act. In all a consolidated upward adjustment of Rs.18,72,59,249/- has been challenged through the four grounds of appeal. Grounds 1 & 2 are general in nature and hence, are not proposed to be specifically adjudicated.
2. Before us the Ld. AR argued with respect to grounds 3.1 to 3.6, regarding the TP Adjustment on account of royalty paid to AE by the assessee. It was the submission that while the assessee had adopted the Comparable Uncontrolled Price (CUP) Method to arrive at a median value of 3% even when the assessee had paid only 2% on account of royalty. It was the submission that the Ld. TPO rejected the Transfer Pricing methodology altogether on the ground that the assessee had not been able to provide evidence that due to the know-how supplied by the AE, the assessee had actually benefitted. The Ld. AR stated that through the agreement with the AE technical information, proprietary data, etc. for the purposes of development, manufacturing, testing and quality control of specified products was supplied by the AE. It was submitted by the Ld. AR that without such know-how the assessee was in no position to manufacture the goods which would eventually be supplied to MSIL. It was also argued that the Ld. TPO has erred in all together denying that any benefit flowed as a result of the agreement between the assessee and the AE. It was the argument that the Ld. TPO/AO had totally failed to consider the detailed contractual agreement between the assessee and the AE. The Ld. AR referred to various pages in the detailed paper book filed to aver that the know-how provided by the AE was absolutely essential for manufacturing of specified products by the assessee. The Ld. AR thereafter, put forth, as an alternative argument, that the assessee had entered into a UAPA with CBDT on 29.11.2022, wherein a rate of 1.9% of the net sales was agreed for consolidated payment on account of royalty and fees for technical services. It was also informed that the assessee has moved another application for renewal of UAPA on 28.03.2023. The Ld. AR relied on the coordinate bench order in the case of Ranbaxy Laboratories Ltd. [ITA No.196/Del/2013] to canvass the point that a UAPA entered into by an assessee with CBDT would have persuasive value for years not covered thereon. It was argued that the UAPA entered on 29.11.2022, wherein a rate of 1.9% of the net sales was agreed for consolidated payment on account of royalty and fees for technical services, should be considered as a good benchmark determining the ALP. It was also informed that the assessee has moved another application for renewal of UAPA on 28.03.2023. The Ld.AR stated that while 1.9% of royalty was agreed between the assessee and the CBDT, the royalty payment for this year was only marginally higher at 2%. The Ld. AR also relied on a coordinate bench order in the assessee’s own case for AY 2014-15 [ITA 1049/Del/2023, order dated 17.06.2026] to emphasize the point that following the UAPA dated 29.11.2022, the ITAT had directed for computing royalty payment at 1.9%.
2.1 Regarding the issue of adjustment on account of manufacturing activity amounting to Rs.11,22,35,872/- it was the submission that during the year under consideration the assessee purchased raw materials from MSIL and on this transaction the assessee had applied the TNMM Method to bench mark such transactions and had come to the conclusion that the said transaction was at Arm’s Length. It was the submission that the Ld. AO/TPO rejected the filters applied by the assessee and proceeded to apply new filters which resulted in the impugned addition. It was submitted by the Ld.AR that the comparables utilized by the Ld. TPO were functionally dissimilar to the assessee. The Ld. AR pointed out pages 400 to 426 of the paper book for detailed submissions in this regard. As an alternative argument the Ld. AR stated that even if the adjustment was restricted to the sale value of the International Transaction, then the adjustment would have been in the region of Rs.1.37 lakhs only. It was submitted that transactions between two entities subjected to the same Indian Tax laws would not result in any undue gain by reducing or enhancing values in one hand, as against the other company. It was also argued that the Finance Act, 2017 the tax provision was amended so that expenditure in respect of which payment has been made by an assessee to a person referred u/s 40A(2)(b) of the Act, are to be excluded from the scope of Section 92BA of the Act. It was argued that such a change in the extant provisions of law would have a consequential effect on this year as well following the case of Kolhapur Canesugar Works Ltd. vs. UOI [(2000) 2 SCC 536]. It was pointed out that the Hon’ble Apex Court has clearly interpreted that the effect of repealing a statute or deleting a provision is to obliterate it from the statute book as if it had never been passed. The Ld. AR also relied on the case of Texport Overseas (P) Ltd. reported in 114 taxmann.com 568 (Karnataka) [2020], to canvass the point that since the clause (i) of Section 92BA has been omitted by Finance Act, 2017 w.e.f. 01.04.2017 from the statute, then the resultant effect is that as if it had never been passed and, hence, decision taken by the AO under effect of Section 92BA and reference made to Transfer Pricing Officer u/s 92CA, was invalid and bad in law. The Ld. AR argued that no adjustment was legally possible u/s 40A(2)(b) of the Act.
3. Per contra, the Ld. DR stated that a UAPA was applicable on the facts of the years under consideration only. It was the submission that a UAPA for one year could not be extrapolated and juxtaposed on the facts of another year. The Ld. DR supported the arguments and reasoning adopted in the orders of authorities below to state that the assessee had not been able to plausibly demonstrate a clear nexus between the so-called supply of know-how and expertise by the AE, with the income of the assessee.
3.1 Regarding the issue of adjustment made u/s 40A(2)(b) of the Act, the Ld. DR relied on the case of Fiber Boards (P) Ltd. reported in 376 ITR 596 (SC) to canvass the point that the case of Kolhapur Canesugar (supra) was per incuriam. The Ld. DR read out para 29 as under: –
“29. A reading of this Section would show that a repeal can be by way of an express omission. This being the case, obviously the word “repeal” in both Section 6 & Section 24 would, therefore, include repeals by express omission. The absence of any reference to Section 6A, therefore, action undoes the binding effect of these two judgments on an application of the ‘per incuriam’ principle.”
It was the submission that the case of Texport Overseas case (supra) relied exclusively on the case of Kolhapur Canesugar (supra) in arriving at the conclusion that with the omission of clause (i) of Section 92BA of the Act it would mean as if the said section had never been there to be considered as a law. Since the Kolhapur Canesugar case (supra) was held to be per incuriam in the Fiber Boards case (supra), by the Hon’ble Supreme Court, hence, this case law should not be used to set aside the action of Ld. TPO. The Ld. DR also stated that the amendment was w.e.f. 01.04.2017 and hence would not apply for AY 2015-16.
4. We have considered the rival submissions and have gone through the records before us. It is seen that the issue of applicability of rate (percentage) of payment by way of royalty or fees for technical services to the AE stands concluded in favour of the assessee by a coordinate bench decision in the assessee’s own case for AY 2014-15. We can do no better than to extract the relevant finding from the said order of the ITAT as under: –
“7. The appellant/assessee submitted that assessee has entered UAPA (Unilateral Advance Pricing Agreement) with Central Board of Direct Taxes (“CBDT”) on November 29, 2022 (attached as Annexure 1 to the Synopsis) wherein, rate of 1.9% of the net sales was agreed for consolidated payment on account of royalty and fees for technical services. The assessee has also moved an application for renewal of UAPA on March 28, 2023 which is in the final stage and has requested Hon’ble Tribunal to cap the rate of royalty and fees for technical services at 1.9%.
7.1 Hon’ble ITAT in RANBAXY LABORATORIES LTD (supra) ITA No. 196/Del/2013 (supra) has held as:
“the concluded APA had been agreed on the whole mechanism of computation of ALP of International transactions of the assessee. The principals laid down for comparability analysis in that does have a greater persuasive value. ITAT further noted that assessee’s plea was not for applying the APA for this year, but that principles laid down by the highest revenue authority should be accepted by revenue at least for the purpose of starting the first step of comparability analysis for this year, since the nature of international transactions, FAR of appellant and AEs respectively were similar. ITAT observed that the concept and the methodology laid down in APA can have the guidance value for the revenue authorities for the purposes of comparability analysis. Stating that the main intent of APAs is to protect the fair share of the revenue of the states in simple and efficient manner and to protect the tax base, ITAT held that, Therefore, the agreement entered into by CBDT with the assessee, which has considered all the aspects of the manner of determination of ALP which are also similar for the this year, should be given highest sanctity and therefore mechanism suggest in that agreement should be necessarily followed in determining ALP of the transactions for this year”.
8. In view of above material facts and ratio of judgment the impugned addition being excessive is set aside and Ld. AO is directed to cap the rate of royalty in fees for technical services as per the rates accepted by the CBDT with the Annexure ‘A1’. In the given case, it is accepted @ 1.9% of the net sales. The same is directed to be followed. Hence, the Grounds raised by the assessee are allowed.”
Respectfully following this finding, we hold that a rate of 1.9% as against “NIL” determined by the Ld. TPO and 2% offered by the assessee will need to be substituted with a rate of 1.9% as per the UAPA of November, 2022. Accordingly, ground 3 and its sub points, are partly allowed.
4.1 Regarding the TP Adjustment made by the Ld. TPO on account of manufacturing activity (ground no.4), we have considered the legal position as put forth by both the sides. A reading of the Kohlapur Canesugar case (supra) reveals that the Hon’ble Apex Court has observed that in a case where a particular provision in a statute is omitted and in its place another provision dealing with some contingencies is introduced without a saving clause in favour of pending proceedings, then it can be reasonably inferred that the intention of the legislature is that the pending proceeding shall not continue but a fresh proceeding for the same purpose may be initiated under the new provision. The Hon’ble Apex Court has further held that there is a difference between an “omission” and “repeal”. Section 6 of the General Clauses Act applied only to repeal and not to omission. Whenever any provision or rule is omitted, all actions under the omitted rule or provision must stop where the omission finds them. In the present matter, we find that the provision relating to 40A(2)(b) of the Act has been excluded from the scope of Section 92BA of the Act w.e.f. 01.04.2017. Admittedly, the year under consideration is 2015-16, however, based on the direct case of Texport Overseas [(2020) 114 taxmann.com 568 (Kar)] on this issue, pertaining to assessment years 2013-14 & 2014-15, we find that the decision in Kohlapur Canesugar (supra) is still relevant. Thus, that case law will apply squarely to the facts of the present case. We also find that a similar view has been taken by various coordinate benches, some of which are listed below:
i. Shree Shai Smelters (P) Ltd. vs. ACIT [2020] 118 taxmann.com 350 (Gauhati);
ii. Raipur Steel Casting India (P) Ltd. vs. PCIT [2020] 117 taxmann.com 944 (Kolkata – Trib.);
iii. Ammann India (P) Ltd. vs. ACIT [2022] 134 taxmann.com 10/192 ITD 680 (Ahmedabad – Trib.); &
iv. Softel Overseas Pvt. Ltd. vs. ACIT [2023] 155 taxmann.com 616 (Kolkata – Trib.)/(ITA No.1942/Kol./2019).
Since no contrary judgment to the case of Texport Overseas (supra) has been cited at the bar, we deem it fit to follow the same and hold that no upward adjustment was possible in the case of the assessee and thus, the adjustment made by the Ld. AO/TPO is directed to be deleted.
5. In the result, the appeal of the assessee is partly allowed.
Order pronounced in the open court on 07.10.2026
