Case Law Details
Bellsonica Auto Component India Private Limited Vs ACIT (ITAT Delhi)
The Income Tax Appellate Tribunal (ITAT), Delhi, partly allowed the assessee’s appeal for Assessment Year 2014-15 by restricting the transfer pricing adjustment relating to royalty and fees for technical services (FTS) to the rate accepted by the Central Board of Direct Taxes (CBDT) under a Unilateral Advance Pricing Agreement (UAPA). The Tribunal directed the Assessing Officer (AO) to apply a rate of 1.9% of net sales instead of sustaining the adjustment determined by the Transfer Pricing Officer (TPO).
The assessee had filed its return declaring a loss of ₹1.68 crore. During scrutiny assessment, a reference was made to the TPO under Section 92CA(1) to determine the arm’s length price (ALP) of international transactions. The TPO proposed an adjustment of ₹8.47 crore in respect of payments made towards royalty and technical fees to the associated enterprise. The draft assessment order incorporated the adjustment, and the Commissioner of Income Tax (Appeals) [CIT(A)] subsequently upheld the addition.
Before the Tribunal, the assessee contended that the TPO and the CIT(A) had wrongly rejected its transfer pricing documentation, economic analysis, and benchmarking under the Comparable Uncontrolled Price (CUP) method. It also argued that reimbursement of expenses amounting to ₹18.24 lakh, relating to items such as water charges, electricity charges, and land development charges recovered by the associated enterprise on a cost-to-cost basis, had been incorrectly included in the royalty and technical fee adjustment, although no adverse finding had been recorded regarding those reimbursements. The assessee further submitted that its associated enterprise followed a group policy of charging technical know-how fees to subsidiaries, including charging 2% from its Indonesian subsidiary, and that supporting agreements had been furnished.
The assessee also relied on a Unilateral Advance Pricing Agreement entered into with the CBDT on 29 November 2022, under which a consolidated rate of 1.9% of net sales was accepted for royalty and fees for technical services. It submitted that the continuous receipt of technology and technical know-how had been examined during the APA process and that an application for renewal of the UAPA had also been filed. Relying on the Tribunal’s decision in Ranbaxy Laboratories Ltd., the assessee argued that although the APA did not directly apply to the relevant assessment year, the principles and methodology accepted by the CBDT should guide the determination of the arm’s length price.
The Revenue contended that the assessee had not demonstrated any benchmarking analysis or cost-benefit analysis at the time of entering into the agreement and had failed to establish that the services had actually been received.
The Tribunal noted that the AO had made the transfer pricing adjustment of ₹8.47 crore, which was affirmed by the CIT(A). Referring to its earlier decision in Ranbaxy Laboratories Ltd., the Tribunal observed that while an APA may not directly govern earlier assessment years, the principles and methodology adopted by the CBDT in determining the arm’s length price have significant persuasive value and should guide the comparability analysis where the nature of transactions and functional profile are similar. Holding that the adjustment made in the present case was excessive, the Tribunal set aside the impugned addition and directed the AO to cap the royalty and fees for technical services at 1.9% of net sales, being the rate accepted by the CBDT under the UAPA. The remaining grounds were left open or treated as consequential. Accordingly, the appeal was partly allowed.
FULL TEXT OF THE ORDER OF ITAT DELHI
The appeal filed by the assessee is against order dated 10th February, 2023 of the Ld. Commissioner of Income Tax (Appeals), Delhi-44 (hereinafter referred to as “The CIT(A)”) u/s 250 of the Income Tax Act, 1961 (hereinafter referred to as “the Act”) arising out of assessment order dated 18.01.2018 of the Ld. Assessing Officer/ACIT, Circle 1(1), Gurugaon (hereinafter referred to as “the AO”) u/s 143(3) r.w.s. 144C of the Act for A.Y. 2014-15.
2. Brief facts of the case are that on 29.11.2014. the assessee electronically filed return of income declaring a loss of Rs. 1,68,40,482/-. The case was selected for scrutiny. Notice u/s 143(2) of the Act dated 28.08.2015 was issued. Notices u/s 143(2) and 142(1) of the Act alongwith a detailed questionnaire were issued on 23.06.2016. Sh. Sanjay Kumar, Goyanka, FCA, authorized representative of the assessee attended assessment proceedings, and filed information/submissions and produced book of accounts.
2.1 Reference u/s 92CA(1) of the Act was made to Transfer Pricing Officer, new Delhi vide letter dated 14.09.2016 after due approval of Pr.CIT, Gurgaon for determining the Arm’s Length Price (“ALP”) u/s 92CA(3) of the Act in respect of the international transactions entered into by the assessee company during the Financial Year (“FY”) 2013-14 relevant to Assessment Year (“AY”) 2014-15. Vide order dated 13.10.2017 u/s 92CA(3) of the Act, DCIT, TPO 1(3)(1), New Delhi determined the adjustment/ difference on account of Arm’s Length Price in respect of international transactions with associated enterprises at Rs. 8,47,87,697/-. Draft Assessment Order was passed on 15.12.2017 by ld. AO u/s 143(3)/144C of the Act making addition of Rs. 8,47,87,697 for adjustment/difference on account of arm’s length price. Against assessment order dated 18.01.2018 of ld. AO, the assessee filed appeal before Ld. CIT(A) which was dismissed vide order dated 10.02.2023.
3. Being aggrieved, the assessee preferred present appeal on following grounds: –
“1. That on the facts and circumstances 1. That on the facts and circumstances of the case and in law, the Ld. CIT under Section 250 of the Act is bad in law and liable to be quashed to the extent it confirms the additions/disallowances made in the CIT(A) order.
2. That on the facts and circumstances of the case and in law, the Ld. CIT (A)/Ld. Assessing Officer (“Ld. AO”)/ Learned Transfer Pricing Officer (“Ld. TPO”) have erred in confirming the action to assess the income of the Appellant at INR 67,947,215 as against a loss of INR 16,840,482 declared by the Appellant in its Return of Income (“ROI”) for AY 2014-15.
3. That on the facts and circumstances of the case and in law, the Ld. CIT(A) /Ld. AO/Ld. ΤΡΟ have erred in enhancing the income of the Appellant by INR 84,787,697/- pertaining to the payments made for royalty and technical fees that allegedly do not satisfy the arm’s length principle envisaged under the Act and in doing so, have grossly erred in:
3.1. erroneously rejecting the economic analysis undertaken by the Appellant in the Transfer Pricing (“TP”) documentation maintained by it in terms of section 92D of the Act read with Rule 10D of the Income-tax Rules, 1962 (“the Rules”);
3.2. erroneously rejecting the approach adopted by the Appellant under Comparable Uncontrolled Price (“CUP”) method of benchmarking of considering comparable agreements similar to that entered into between of associated enterprise (“AE”) and the Appellant as per the provisions of Rule 10B of the Rules and holding the arm’s length value of the transaction as NIL;
3.3. not carrying out an independent benchmarking analysis and providing comparable agreements, thereby violating the basic condition for application of CUP method provided under Rule 10B(1)(a) of the Rules;
3.4. assuming that neither did the Appellant receive any assistance service or any commensurate direct and tangible benefit in lieu of the payments made for the royalty technical service thereby challenging the commercial wisdom of the Appellant in making such payments while passing the order in contrast with the judicial pronouncements in this regard;
3.5. not appreciating the detailed documentary evidences submitted before Ld. CIT(A)/ Ld. TPO to demonstrate the need for availing technical know-how in lieu of the payments made for royalty and technical fee;
3.6. erred in including an additional amount pertaining to reimbursement of expenses made by the Appellant to its AE amounting to INR 1,824,825 to the international transactions pertaining to payment of royalty and technical know and computing the proposed adjustment accordingly; and
3.7. disregarding judicial pronouncements in India in undertaking the TP adjustments.
Other Grounds
4. That on the facts and circumstances of the case and in law, the Ld. AO has erred in charging interest under Sections 234A, 234B and 234C of the Act.
5. That on the facts and circumstances of the case and in law, the Ld. AO erred in initiating penalty proceedings under Section 274 read with section 271 (1)(c) of the Act mechanically on the additions made.”
4. Ld. Authorized Representative for appellant/assessee regarding Grounds of Appeal Nos. 3, 3.1 to 3.7 submitted that Ld. CIT(A)/Ld. AO/ Ld. TPO erred in enhancing the income of assessee by Rs. 8,47,87,690/- pertaining to payment made for royalty and a technical fee. Ld. CIT(A) grossly erred in rejecting economic analysis undertaken by the assessee in the Transfer Pricing documentation in terms of /section 92D of the Act read with Rule 10D. Ld. CIT(A)/AO erroneously rejected approach adopted by the assessee under Comparable Controlled Price (“CUP”) method of benchmarking. Ld. CIT(A)/Ld. AO erred in including an additional amount pertaining to reimbursement expenses made by assessee to AE amounting to Rs. 18,24,824/- to the international transaction pertaining to payment of royalty and technical know-how:
i. Reimbursement of expenses: The Ld. TPO had erred in including an additional amount of INR 1,824,825 pertaining to reimbursement of expenses paid by the Appellant in payment of royalty and technical fees. It is highlighted that the Ld. TPO had not questioned the transaction of reimbursement of expenses and neither drawn any adverse inference in the TP order for the same.
However, while determining the arm’s length price of payment of royalty and technical fee, the TPO has erroneously added the amount of reimbursement of expenses. These expenses were in the nature of water bills, electricity bills, land development charges etc. and were charged on a cost-to-cost basis by the AE (refer page 53 of the Merit Appeal). Hence, the same ought to be reduced from the adjustment on account of payment of royalty and technical fees on a without prejudice basis.
ii. Further, the AE for the year under consideration had a group policy to provide technical know-how to all its subsidiaries. It charged 2% from its subsidiary in Indonesia (Refer pages 212 to 219 of the PB for the agreement of PCJ with PT. Bellsonica Indonesia). The Ld. TPO/AO/CIT(A) erred in ignoring the details of payments made by such group subsidiaries to the parent AE and copy of agreements provided by ‘A’.
iii. Unilateral Advance Pricing Agreement Further, on a without prejudice basis the Appellant would like to highlight a fact that, BACI entered a UAPA with Central Board of Direct Taxes (“CBDT”), Department of Revenue, Ministry of Finance, Government of India on November 29, 2022 (attached as Annexure 1 to the synopsis) wherein, a rate of 1.9% of the net sales was agreed for consolidated payment on account of royalty and fees for technical services.
-The continuous receipt of technology and know-how was duly vetted by the APA authorities while concluding the APA. (Extract of relevant receipt of know-how documentation attached as Annexure 2 to the synopsis)
-Furthermore, the Assessee has also moved an application for renewal of UAPA on March 28, 2023 which is in the final stage. Hence, taking view of the above fact on without prejudice basis the appellant requests Hon’ble Tribunal to cap the rate of royalty and fees for technical services at 1.9%.
-Reliance is placed on RANBAXY LABORATORIES LTD. [ITA No. 196/Del/2013]
5. Ld. Departmental Representative submitted that appellant/assessee failed to show as to what benchmarking analysis and cost benefit analysis was done at the time of entering into agreement. The assessee could not substantiate the claim that services received had actually been availed.
6. From examination of record in light of aforesaid rival contention, it is crystal clear that Ld. AO vide final assessment order dated 18.01.2018 made an addition of Rs. 8,47,87,697/- on account of Arm’s Length Price for royalty and technical fees. Ld. CIT(A) vide order dated 10.02.2023 confirmed the adjustment and dismissed the assesse’s appeal.
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. 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.
9. Grounds of Appeal Nos. 1 and 2 being general and Grounds of Appeal Nos. 4 to 5 being consequential in nature are left open.
10. In the result, the appeal filed by the assessee is partly allowed.
Order pronounced in the open court on 17.06.2026
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