M/s. Carraro India Private Limited Vs DCIT (ITAT Pune)
In this case it is apparent that the AO deviated from the order passed by the TPO u/s. 92CA(3) of the Act. The primary question which requires adjudication is as to whether the action of the AO in this regard can be treated as valid? Section 92CA(4), prior to its substitution by the Finance Act 2007 w.e.f. 1.6.2007, provided that on receipt of the order passed by the TPO, the AO shall proceed to compute the total income of the assessee having regard to the ALP determined by the TPO. The Finance Act, 2007 substituted the hitherto sub-section (4) with a new sub-section w.e.f. 0 1-06-2007 providing that “on receipt of the order under sub-section (3), the Assessing Officer shall proceed to compute the total income of the assessee under sub-section (4) of section 92C in conformity with the arm’s length price as so determined by the Transfer Pricing Officer”. A conjoint reading of the earlier and existing sub-section (4) of section 92CA makes it explicitly manifest that whereas under the earlier provision, the report of the TPO was not binding on the AO and he could compute the total income of the assessee by just having regard to the ALP determined by the TPO. If the AO was not satisfied with the TPO’s opinion on any point determined by the latter, he could deviate from the TPO’s order and proceed in his own way. However, w.e.f. 01-06-2007, the legal position has undergone change. Now, the AO is bound by the order passed by the TPO as he is required to compute total income in conformity with the ALP determined by the TPO.
FULL TEXT OF THE ITAT JUDGEMENT
These are two cross appeals – one by the assessee and the other by the Revenue – arise out of a common order of CIT(A)-13, Pune passed on 27-04-2018, inter alia, for the assessment year 2009-10.
2. The first issue raised by the assessee in its appeal is against the confirmation of addition of Rs.75,41,558/- made by the Assessing Officer (AO) on account of transfer pricing adjustment recommended by the Transfer Pricing Officer (TPO). The Revenue in its appeal is aggrieved by the direction of the ld. CIT(A) to treat the entire amount of royalty as a revenue expense as against capital expenditure taken by the AO.
3. Briefly stated, the facts of the case are that the assessee, an Indian company, was set up in 1997 as a joint venture of Carraro Spa of Italy (51%) and Carraro International SA. Luxemburg (49%). The assessee is engaged in the business of designing, manufacturing and marketing mechanical and transmission systems for on-road and off-road vehicles and for stationary application, clutches, hydraulic lifts, axles for agricultural tractors, transmission for loaders and backhoe and planetary drives for construction equipments and other off–highway applications. The assessee reported certain international transactions in Form 3CEB. The AO referred the matter of determination of the arm’s length price (ALP) of the international transactions to the TPO. One of the reported international transactions is payment of “Royalty” with transacted price at Rs.1,01,87,033/-. The assessee applied Comparable Uncontrolled Price (CUP) method as the most appropriate method for demonstrating that the international transaction was at ALP. The TPO noticed that the assessee entered into an Agreement dated 15-12-2008 w.e.f. 01-07-2008 with Carraro SpA, Italy, in terms of which a sum of Rs.75.41 lakh was paid as royalty @ 0.50% of sales. It was opined that there was no justification for making new additional claim of royalty when the earlier royalty agreements were expiring after the period was getting over. The TPO further observed that the assessee paid royalty for use of ‘Carraro’ brand name, which term was part of its own name and all the products manufactured by it legitimately carried the same. He still further noticed that most of the assessee’ s customers were Original Equipment Manufacturers (OEMs) and they did not need to look for any logo on the components. It was, therefore, held that there was no justification for a new agreement for the current year pursuant to which royalty of Rs.75,41,558/- was paid. This is how he determined Nil ALP of such transaction of royalty payment. When the matter came up before the AO, he, vide his final order passed u/s. 143(3) r.w.s.144C(3) of the Income-tax Act, 1961 (hereinafter also called ‘the Act’), came to hold that the knowledge obtained through the designs/drawings etc. became the property of the assessee company and hence, it was a capital expenditure. Allowing depreciation @ 25% on Rs.1,08,81,033/- (as against the correct amount of total royalty paid by the assessee during the year at Rs.1,01,81,033/-), he allowed depreciation of Rs.27,20,258/- and made addition for the remaining sum of Rs.81,60,774/-.
4. The ld. CIT(A) noticed that there were two aspects of this issue. The first, being, determination of ALP on brand royalty by the TPO at NIL and second, being, the action of the AO in holding that the brand royalty was a capital expenditure. Relying on the Tribunal order in the case of the assessee for the A.Yrs. 2003-04 to 2008-09, the ld. CIT(A) held that the brand royalty could not be considered as a capital expenditure. On the other aspect, he upheld the action of the TPO in determining the NIL ALP of the international transaction. Whereas the Revenue is aggrieved by the direction given by the ld. CIT(A) in treating the royalty payment as revenue expenditure, the assessee is aggrieved by the upholding of the determination of Nil ALP of the international transaction of payment of royalty to the tune of Rs.75,41,558/- by the TPO.
5. We have heard both the sides and gone through the relevant material on record. It is noted above that the assessee paid total royalty of Rs.1,01,81,033/- in respect of two agreements viz., Rs.26,39,475/- pursuant to the agreement dated 05-04-200 1, which was paid @ 2% both for use of technical knowhow and brand name ; and Rs.75,41,558/- pursuant to the agreement dated 0 1-07-2008 for use of name and logo of its foreign/associated enterprise @ 0.5%. On a reference made by the AO, the TPO determined Nil ALP in respect of Royalty payment of Rs.75.41 lakh pursuant to agreement dated 01-07-2008. Impliedly, he accepted that payment of Royalty, namely, Rs.26.39 lakh pursuant to the agreement dated 5.4.2001 was at ALP. When the matter came up before the AO for finalizing the assessment, he treated total amount of royalty paid by the assessee under both the agreements, as capital expenditure. After allowing depreciation @25%, he made an addition of Rs.81,60,774/-. Thus, it is apparent that the AO deviated from the order passed by the TPO u/s. 92CA(3) of the Act.
6. The primary question which requires adjudication is as to whether the action of the AO in this regard can be treated as valid? Section 92CA(4), prior to its substitution by the Finance Act 2007 w.e.f. 1.6.2007, provided that on receipt of the order passed by the TPO, the AO shall proceed to compute the total income of the assessee having regard to the ALP determined by the TPO. The Finance Act, 2007 substituted the hitherto sub-section (4) with a new sub-section w.e.f. 0 1-06-2007 providing that “on receipt of the order under sub-section (3), the Assessing Officer shall proceed to compute the total income of the assessee under sub-section (4) of section 92C in conformity with the arm’s length price as so determined by the Transfer Pricing Officer”. A conjoint reading of the earlier and existing sub-section (4) of section 92CA makes it explicitly manifest that whereas under the earlier provision, the report of the TPO was not binding on the AO and he could compute the total income of the assessee by just having regard to the ALP determined by the TPO. If the AO was not satisfied with the TPO’s opinion on any point determined by the latter, he could deviate from the TPO’s order and proceed in his own way. However, w.e.f. 01-06-2007, the legal position has undergone change. Now, the AO is bound by the order passed by the TPO as he is required to compute total income in conformity with the ALP determined by the TPO.
7. Adverting to the facts of the instant case, it is seen that the TPO, vide his order dated 24.1.20 13, accepted payment of Royalty of Rs.26.39 lakh, pursuant to the earlier agreement, at ALP, but proposed transfer pricing adjustment at full for the remaining amount of Rs.75.41 lakh paid pursuant to the new The AO, vide his final assessment order dated 29.4.2013, treated the entire royalty payment made by the assessee pursuant to both the agreements, as capital expenditure. The view so adopted by the AO, in our considered opinion, is not in accordance with law. The AO ought to have made a transfer pricing addition of Rs.75.41 lakh pursuant to the second agreement only. As the AO proceeded to treat the entire amount as capital expenditure, including the one in respect of which the TPO did not propose any TP adjustment to the tune of Rs.26.39 lakh, we cannot countenance the view of the AO pro tanto.
8. It can be seen from page 4 of the final assessment order that the assessee paid a sum of Rs.1,01,81,033 (sic Rs. 1,08,81,033) to Carraro SpA, Italy, on account of royalty for use of technical knowhow and brand name and logo `Carraro’. It has been mentioned in the order that there were following five agreements :-
