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2014 (9) TMI 601 - AT - Income TaxTransfer pricing adjustment Payment of royalty Payment made on product not specifically mentioned in agreement Held that:- The contract as amended under the seventh amendment authorize payment of royalty for certain products as well as minor variations - The wording "and includes variations thereof from design changes or minor model changes" puts the issue beyond debate - the TPO has erred in coming to such a conclusion on facts - Change in type of fuel used or changing the start mechanism, or change in the crank shaft, etc. would be versions of variants of the same products - These are not new products - Even if the product is a result of design change then also the clause authorized payment of royalty - in the definition given in the collaboration agreement, "Product" means "a model of portable generator" and includes variation thereof from design changes and minor model changes made by Honda the approvals in a way would support the contentions of the assessee that the payment of royalty in question is governed by the agreement - It is nobodies case that illegal or unauthorized payments of royalty and consequent remittances of foreign exchange has been made by the assessee company. The conclusions drawn by the TPO that the assessee is not required to pay any royalty on the products is against the terms of the agreement - the AO cannot sit in the arm chair of the businessman and determine as to what expenditure is necessary to be incurred by the businessman for the purpose of his business - the arguments of the assessee that similar payments were made by the assessee for the last few years and that the TPO as well as the AO have accepted the genuineness of the payments and have approved the claim that the payments were at arm's length assume significance - as the TPO has accepted that MAM followed by the assessee and approved the arm's length price of royalty rate determined by the asseesee, with respect to royalty paid on the products, the claim of the assessee on the payments of royalty on the variants of the products is to be allowed as per the aspects are concerned Decided in favour of assessee. Nature of payment capital or revenue - Whether the royalty paid and the technical guidance fee paid in terms of the Technical Collaboration Agreement are in the capital field or in the revenue field Held that:- Following the decision in M/s Hero MotoCorp Limited Versus Additional Commissioner of Income tax [2013 (9) TMI 796 - ITAT DELHI] - the assessee company made the lump sum payment and also the running royalty - The running royalty was calculated as a percentage of sales - The lump sum payment was treated as capital expenditure by the assessee company and the running royalty was treated as revenue expenditure - the running royalty is allowed as revenue expenditure Decided in favour of assessee. Payment of export commission u/s 40(a)(i) Held that:- Following the decision in M/s Hero MotoCorp Limited Versus Additional Commissioner of Income tax [2013 (9) TMI 796 - ITAT DELHI] export commission was neither royalty nor fee for technical services and, therefore, the assessee was not required to deduct tax at source on the payment of export fee - once the assessee was not required to deduct the tax at source, it cannot be said that the assessee failed to deduct tax at source so as to apply Section 40(a)(ia) - the export agreement was for the benefit or the assessee and not detrimental to the assessee - the finding of the AO that the expenditure incurred by the assessee by way of export agreement was not incurred for the purpose of business of the assessee cannot be upheld - the export commission paid by the assessee was for the purpose of assessee's business Decided in favour of assessee.
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