The Commissioner Of Income Tax-Ii Appellantthrough: Mr. Shikhar Garg, Advocate Formr. Kamal Sawhney, Senior Standing Counsel v. Lumax Industries Limited. Respondentthrough: Mr. Satyen Sethi, Advocate Withmr. Arta Trana Panda, Advocate

$~ *IN THE HIGH COURT OF DELHI AT NEW DELHI +ITA102/2014 THE COMMISSIONER OF INCOME TAX-II AppellantThrough: Mr. Shikhar Garg, Advocate forMr. Kamal Sawhney, Senior Standing counsel. versus LUMAX INDUSTRIES LIMITED. RespondentThrough: Mr. Satyen Sethi, Advocate withMr. Arta Trana Panda, Advocate. With + ITA 103/2014 THE COMMISSIONER OF INCOME TAX-II Appellant Through: Mr. Shikhar Garg, Advocate forMr. Kamal Sawhney, Senior Standing counsel. versus LUMAX INDUSTRIES LIMITED Through: Mr. Satyen Sethi, Advocate withMr. Arta Trana Panda, Advocate. Respondent With ITA 104/2014 COMMIS SIGNER OF INCOME TAX-II Appellant Through: Mr. Shikhar Garg, Advocate forMr. Kamal Sawhney, Senior Standing counsel,versus LUMAX INDUSTRIES LIMITED Respondent Through: Mr. Satyen Sethi, Advocate withMr. Arta Trana Panda, Advocate. Signature Not Verified And + ITA 587/2014 COMMISSIONEROFINCOMETAX AppellantThrough: Mr. Shikhar Garg, Advocate forMr. Kamal Sawhney, Senior Standing counsel. versus LUMAX INDUSTRIES LTD. LTD. RespondentThrough: Mr. Satyen Sethi, Advocate withMr. Arta Trana Panda, Advocate. CORAM:JUSTICE S.MURALIDHARJUSTICE VIBHU BAKHRU ORDER%28.10.2015 1. ITA Nos. 102, 103 and 104 of 2015 are appeals by the Revenue underSection 260A of the Income Tax Act, 1961 ('Act') against the impugnedorder dated 12^*^ July 2013 passed by the Income Tax Appellate Tribunal('ITAT') in ITA No. 6086/Del/2010 for the Assessment Year ('AY')2005-06, ITA No. 5252/Del/2011 for the AY 2007-08 and ITA No.4715/Del/2010 for the AY 2004-05 respectively. ITA No. 587 of 2014 isan appeal by the Revenue against the order dated 3U^ May 2013 passedby the ITAT in ITA No. 4456/Del/2012 for the AY 2008-09. 2. The facts leading to the filing of the present appeals are that theRespondent-Assessee is engaged in the business of manufacturing andsale of lighting products for automobiles. The Assessee entered into a technical collaboration agreement with Stanley Electric Co. Ltd., Japan('Stanley') in 1984 in terms of which the Assessee was granted a nonexclusive right, and licence to manufacture and sell licensed productsunder Stanley's patents and technical information in India as well asoutside India except Japan. Under the said agreement, the Assessee wasto pay royalty on the sale of the licenced products on a fixed percentage.Initially the royalty was fixed at 4% and later on 2"'' February 1990 wasreduced to 3%. The agreement which was initially for 7 years has beenrenewed from time to time. 3. In 1994 Stanley acquired a 12.61% stake in the Assessee. Accordingto the Assessee, it has been immensely benefitted from its collaborationwith Stanley. Its turnover was Rs. 53 crores in AY 1994-95 and Rs.230.08 crores in AY 2004-05. In AY 2005-06 its turnover was Rs. 294crores. The Assessee states that it enjoyed a 60% market share of theIndian auto lighting industry. Another fact which has relevance andwhich has not been disputed is that the expenses incurred by theAssessee on account of payment towards royalties to Stanley for AY1985-86 to 2003-04 has been allowed by the Revenue under Section 37(1) of the Act as expenditure incurred wholly and exclusively for thepurposes of business of the Assessee. 4. The Assessee states that during the previous years relevant to AYs2004-05 and 2005-06, Stanley's stake amounted to 19.41% which wasless than the minimum percentage of 26% which was necessary to makeit an Associated Enterprise ('AE'). During this time the share of Indianpromoters in the equity share capital of the Assessee was 39.06%. Theremaining shares were held by public and financial institutions.However, on account of the presence of one Executive Director as therepresentative of Stanley on the Board of the Assessee, by virtue ofSection 92A (2) of the Act, Stanley became an AE of the Assessee.5. During AYs 2004-05 and 2005-06 the Assessee entered into thefollowing the international transactions: 4. The Assessee states that during the previous years relevant to AYs2004-05 and 2005-06, Stanley's stake amounted to 19.41% which wasless than the minimum percentage of 26% which was necessary to makeit an Associated Enterprise ('AE'). During this time the share of Indianpromoters in the equity share capital of the Assessee was 39.06%. Theremaining shares were held by public and financial institutions.However, on account of the presence of one Executive Director as therepresentative of Stanley on the Board of the Assessee, by virtue ofSection 92A (2) of the Act, Stanley became an AE of the Assessee.5. During AYs 2004-05 and 2005-06 the Assessee entered into thefollowing the international transactions: 6. The Assessee filed its return of income for AY 2004-05 on 29^*^October 2004 showing income at Rs. 12,36,46,429 which was set offagainst the unabsorbed depreciation to the extent of Rs. 12,36,46,429. It had computed book profits under Section 115-JB of the Act at Rs.8,54,55,963. The return of the Assessee was picked up for scrutiny andnotice was issued by the Assessing Officer ('AO') under Section 143 (2)of the Act on 28'"^ April 2005. 7. As regards the computation for the purpose of Section 115-JB of theAct, the explanation offered by the Assessee for the expenses on accountof the provision of retirement benefits was not accepted. The AO heldthat the Assessee had deliberately concealed particulars of income/filedinaccurate particulars of income so as to evade tax. On the aspect ofpayment of royalty, and purchase of raw materials, which wereinternational transactions, the AO made a reference to the TransferPricing Officer ('TPO') under Section 92CA of the Act. 8. The TPO by his report dated 15^*^ December 2006 determined the ArmsLength Price ('ALP') as regards the payment of royalty as Nil. Afterapplying the Transactional Net Margin Method ('TNMM'), the TPO heldthat the formal agreement between the Assessee and Stanley could not bethe basis for determining the ALP of royalty. It was observed that apartfrom drawings, the Assessee did not receive any^ technology. It wasobserved by the TPO that there was no need for any technology becauseStanley's technical personnel were in full-time employment of the Assessee. Further since the moulds, drawings and other raw materials hadbeen purchased from Stanley, no further technology was required formanufacturing the auto lights. It was also observed that the Assessee'sEngineers did not visit Japan for training. However, no separate additionon account of royalty was made because the adjustment under TNMMwas more than the royalty payment. 9. The AO passed an assessment order dated 20"^ December 2006 on thebasis of the aforementioned report of the TPO and made additions bothon account of payment of royalty and disallowance of foreign travellingexpenses. 10. The appeal by the Assessee against the said order was disposed of byan order dated 30^*^ September 2010 by the Commissioner of Income Tax(Appeals) ['GIT (A)']. For AY 2004-05 the GIT (A) observed that theadjustment made on the basis of net profit margin of Phoenix LampsLimited ('Phoenix') was not justified since Phoenix was situated in aSpecial Economic Zone ('SEZ') and as such, was enjoying certainbenefits which were not available to the Assessee. It was also noticed thatin the current AY 2006-07, the TPO itself did not consider Phoenix as acomparable case. Excluding Phoenix, operating profit of othercomparable cases was 4.26% whereas operating profit of the Assessee was 6.50%. Therefore, the CIT (A) held the payment of royalty wasjustified on the comparable uncontrolled price ('CUP') method. Theadditions were accordingly deleted. 11. As regards the disallowance of Rs. 2,59,434 on account of foreigntravelling expenses, the CIT (A) held that the Director of the Assesseehad undertaken visits for the purpose of business of the Assessee andtherefore, the addition made on this ground is also not justified. was 6.50%. Therefore, the CIT (A) held the payment of royalty wasjustified on the comparable uncontrolled price ('CUP') method. Theadditions were accordingly deleted. 11. As regards the disallowance of Rs. 2,59,434 on account of foreigntravelling expenses, the CIT (A) held that the Director of the Assesseehad undertaken visits for the purpose of business of the Assessee andtherefore, the addition made on this ground is also not justified. 12. For AY 2005-06 also, a similar adjustment pursuant to the order ofthe TPO dated 10^*^ October 2008 resulted in the CIT (A), by an orderdated 26 thNovember 2010, deleting the addition on account of royaltypayment. 13. As regards AY 2007-08 the AO passed an order dated 17^*^ October2011 making a similar addition regarding payment of royalty on the basisof the report of the TPO as well as the order passed by the DisputeResolution Panel dated 8"^ October 2010. This was taken up in appealbefore the ITAT by the Assessee by filing ITA No. 5252/Del/2011. Asregards AY 2008-09, the Assessee filed ITA No. 4456/Del/2012 beforethe ITAT against the final assessment order dated 17^'' July 2012. 14. The appeal for the AY 2008-09 was first decided by the ITAT by order dated 31®^ May 2013. The ITAT allowed the appeal of the Assesseeas regards adjustment on account of royalty for the following reasons: (i) The agreement with Stanley was not a paper agreement. Thepayment of royalty is about the trade mark, patent and technologyin the technical collaboration agreement between the Assessee andStanley since 1984. (ii) In terms of the agreement the Assessee was to pay royalty onits net sales, after deduction from the net sale price of the licensedproducts sold by it to Stanley. Although such payment was to be4% on the net sales during the year, i.e. AY 2008-09, the royaltywas paid @ 2.43% on the sale of licensed products, amounting toRs. 218.08 crores. This is because the cost of standard importedcomponents, standard local components and certain otherdeductions had been deducted from the net sales of Rs. 218.08crores. (iii) In terms of Rule lOB (2) (c), contractual terms could not begiven go-bye to determine ALP of the international transaction. 15. A similar approach was adopted by the ITAT in dealing with theappeals related to AYs 2004-05 and 2005-06. It was held that theAssessee had actually received technical assistance from Stanley. Furtherthe employment of the expatriates of Stanley ensured that the technologyprovided was properly applied by the Assessee to the production oflicensed products. Further, no mark-up on remuneration of expatriates was charged by Stanley. It was also factually found that during AY 2004-05 technology in respect of the new models of Maruti, Honda wasreceived. Merely because the Assessee had purchased moulds, designs,bulbs, sockets, lenses etc. from Stanley, it did not mean that thetechnology was not required. Importantly it was noticed by ITAT that forAYs 2004-05 and 2005-06 the entire sale (on which royalty was paid as apercentage) was made to Original Equipment Manufacturers ('OEM').Therefore, had there been no collaboration agreement with Stanley, therewould have been no sales to the OEM's which were in collaboration withJapanese companies. The ITAT also observed that the determination ofALP by the TPO in respect of payment of royalty at Nil did not refer to acomparable case. 16. On the question of addition made by the AO on account of ALP forthe payment of royalty, learned counsel for the Assessee has rightlyreferred to the decision in Commissioner of Income Tax v. SonyEricsson Mobile Communication (2015) 374 ITR 118 where thedetermination of the ALP of the royalty paid as Nil was not approved.The Court's attention has also been drawn to the decision inCommissioner of Income Tax v. EKL Appliances Limited (2012) 345ITR 241 wherein it was held that Rule lOB (1) (a) did not authorizedisallowance of any expenditure on the ground that it was not necessary 16. On the question of addition made by the AO on account of ALP forthe payment of royalty, learned counsel for the Assessee has rightlyreferred to the decision in Commissioner of Income Tax v. SonyEricsson Mobile Communication (2015) 374 ITR 118 where thedetermination of the ALP of the royalty paid as Nil was not approved.The Court's attention has also been drawn to the decision inCommissioner of Income Tax v. EKL Appliances Limited (2012) 345ITR 241 wherein it was held that Rule lOB (1) (a) did not authorizedisallowance of any expenditure on the ground that it was not necessary for the Assessee to have incurred such expense. It was observed thatthough the quantum of expenditure could be examined, the entireexpenditure could not be disallowed on the ground that it was notnecessary. 17. There is merit in the contention of learned counsel for the Assesseethat once the TPO found that no adjustment was called for under theTNMM method, no adjustment could have been made by applying someother method as that would be contrary to Section 92C(1) of the Act. 18. The Court also finds that there is no justification for the TPO to cometo the conclusion that the payment of royalty was not necessary in thepresent case particularly since the collaboration agreement between theAssessee and Stanley has been continuing since 1984. As held by theITAT, after a detailed examination of the clauses of the collaborationagreement, the Assessee did receive full technical assistance from Stanleyfor which the royalty payment was made. 19. In the circumstances, the Court is not inclined to frame a question onthe issue of deletion of the addition sought to be made by the AO for theAYs in question on account of ALP of the payment of royalty. 20. As regards the adjustment under Section 115JB on account of provision for retirement benefits, the ITAT noted that the provision wasmade on the basis of actual valuation and was not a contingent liability.Reference was made to the decision in Bharat Earth Movers v.Commissioner of Income Tax (2000) 245 ITR 428 (SC). The order ofthe ITAT upholding the order of CIT (A) is not found to be perverse. TheCourt declines to frame a question on this issue. 21. The CIT (A) has deleted the disallowance of expenses on account offoreign trips of the Director of the Assessee after holding that the visitsmade to USA and Dubai were for the business purposes. Thedisallowance by the AO of the said expenses was found to be notjustified. Since the above finding turned purely on facts, the order of theCIT (A) as affirmed by the ITAT, does not give rise to any substantialquestion of law. 22. On the issue of disallowance of the expenses on account of provisionfor warranty, the ITAT deleted it since the provision was made by theassessee based on actual warranty expenses incurred for the unexpiredwarranty period. As rightly pointed out by learned counsel for theAssessee the question is covered in its favour by the decisions in RotorhControls Pvt. Ltd. v. Commissioner of Income Tax (2009) 314 ITR 62(SC) and Commissioner of Income Tax v. Becton Disckinsion (2013) 29 Taxmann.com 80 (Del). Therefore, no substantial question of law arises as regards this issue as well. 23. On the last issue concerning depreciation on computer peripherals @60%, learned counsel for the Revenue does not dispute that the questionstands answered in favour of the Assessee by the decision inCommissioner of Income Tax v. BSES Rajdhani Power Limited (2013)358ITR 47 (Del). 24. For the aforementioned reasons, no substantial question of law arises in any of these appeals. They are accordingly dismissed with no order asto costs. S. MURALIDHAR, J OCTOBER 28, 2015Rk VIBHUBAKHRU, J