TMI Blog2014 (10) TMI 651X X X X Extracts X X X X X X X X Extracts X X X X ..... ty payments made by it and restricted the payment to 2% of net sales – the transactions made under Royalty agreement approved by RBI are to be considered to be at arm's-length – Decided partly in favour of assessee. Claim of depreciation @ 25% - Whether non-compete fees paid by the assessee company is eligible to claim depreciation at 25% or not – Held that:- As decided in assessee’s own case for the earlier assessment year, it has been held that applying this principle of construction, if the business or commercial right of a patent, trademark, license, franchise etc, fulfilled the condition of being intangible assets, then, the payment made by the assessee company towards non-compete fee also fulfilled the condition by way of a logical corollary - the non-compete right is eligible for depreciation u/s 32 (1) (ii) of the act - when the provisions of the Act make the assessee eligible for depreciation in respect of an intangible asset, assessee has to be allowed the same, notwithstanding any ambiguity which the Income-tax Rules may give rise to, since the statutory legislation, viz., provisions of a statute prevail over the rules framed thereunder - the revenue allowed depreciat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... against the price charged by the assessee in the international transactions at ₹ 4,40,27,472 and the shortfall of ₹ 2,35,81,168 was treated as transfer pricing adjustment u/s. 92CA of the Act. The AO passed the draft assessment order u/s. 143(3) r.w.s. 92CA r.w.s. 144C on 6.3.2013 making an addition of ₹ 2,35,81,168 towards ALP adjustment as determined by the TPO and disallowed excess claim of depreciation of ₹ 17,51,976. Thus, the AO determined the total income at ₹ 21,04,01,914 as against income returned of ₹ 18,50,68,770. 4. Aggrieved by the draft assessment order and the order passed by the TPO, the assessee has submitted an application on 10.4.1023 to the Dispute Resolution Panel (DRP), Hyderabad raising objection against the addition made by the AO/TPO. The DRP relied on the decisions in assessee's own case for A.Ys. 2001-01 and 2007-08 and granted depreciation on the non-compete and marketing net worth rights. The DRP, however, upheld the restriction made by the TPO of royalty payment to 2.0% instead of 4% of net sales. Both assessee and the Department have come up in appeal against the order of the DRP and we dispose of both the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s, 1962) while determining the ALP for payment of royalty. 2.7 Based on the facts and circumstances of the case and in law, the Learned AO/DRP erred in considering that the Comparable Uncontrolled Price (hereinafter referred to as CUP) method as the most appropriate method under section 92C of the Act to arrive at the ALP of the royalty paid by the appellant to its Associated Enterprise. 2.8 Based on the facts and circumstances of the case and in law, the Learned AO /DRP erred in confirming the TPO's stand in disregarding the Transactions Net Margin Method (hereinafter referred to as 'TNMM ') as the most appropriate method in benchmarking the payment of royalty to the associated enterprise by the appellant. 2.9 Based on the facts and circumstances of the case and in law, the Learned AO/ DRP/TPO erred in disregarding the approval given by the Reserve Bank of India with regard to the rate at which the payment of royalty made to the associated enterprise. 3. The Learned AO/DRP erred in not granting the credit of ₹ 62,22,950 for the brought forward Minimum Alternate Tax (MAT) paid by the Appellant for the AY 2007-08. 4. The Learned AO/DRP erred in compu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d by the assessee where it was seen that the assessee was granted non-exclusive, non- transferable licence to make payments in India and also to sell products to affiliates. The licensor (Owens Corning Invest Cooperatief U.A., Netherlands) granted right to use Owens Corning mark and the royalty agreement further required the licensee (the assessee) to pay the licensor 4% of the net sales. The TPO was given copies of Emails which reflected the tangible assistance rendered to the assessee by the licensor/ payee and the TPO was also provided with PowerPoint Presentation detailing manufacturing process of the assessee. The assessee also submitted to the TPO that the trade mark of glass fibre for non-textile purposes under the name Advantex was supplied by Owens Corning Invest Cooperatief U.A., Netherlands. 11. The TPO held that grant of trade mark is wrongly mentioned as patent in the TPO's order page 8 does not determine the arms length nature of transaction and the royalty right mainly depends on the premium of the intangible commands in the market, the uniqueness of the intangible and also the period for which the uniqueness remains. The TPO instead carried out a stud ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rtmental Representative. The findings of the AO in considering the royalty charges as nil as ALP cannot be accepted since the AO in the present case has not brought on record, the ordinary profits which can be earned in such type of business. Therefore in our view the payment of royalty is not hit by the provisions of s. 92 of the Act and there is no reason to hold that the expenses should not be allowed under s. 37(1) of the Act, since the expenditure has been incurred by the assessee during the course of business and is having the nexus with the business of the assessee. Therefore the payment of royalty is a business expenditure which has been incurred wholly and exclusively for the purpose of business of the assessee and same is to be allowed in toto as a matter of commercial expediency. Therefore, the case laws relied upon by the learned CIT- Departmental Representative are of no benefit to the Revenue. The reasonableness of expenditure in the present circumstances and facts of case cannot be doubted and accordingly the A 0 is directed to allow the claim of the assessee and the order of learned CIT(A) is reversed .... 15. We also draw support from the division of Co- ordin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... proval of the Royalty rates itself implies that the payments are at Arm's Length and hence no further adjustment needs to be made viewed from this angle too. 18. We, therefore, allow the grounds of the assessee with respect to ground no. 2.3 and 2.9 (i.e. the TPO erred m holding that no tangible benefits were derived by the assessee out of royalty payments made by it and restricted the payment to 2% of net sales). We also allow the ground No. 2.9 of the assessee (i.e., transactions made under Royalty agreement approved by RBI are to be considered to be at arm's-length). We do not find the need to adjudicate the other Grounds namely. 2.4 to 2.8 raised by the assessee. 19. The next issue is with regard to non-granting of credit of ₹ 62,22,950 for the brought forward Minimum Alternate Tax (MAT paid by the assessee for A.Y. 2007-08. 20. The learned AR submitted that for the A.Y. 2006- 07, as assessment was completed u/s. 115JB of the Act on 28.10.2010 determining the tax payable at ₹ 52,90,533 and hence it is eligible for MAT credit amounting to ₹ 42,83,132 (after set off of MAT credit amounting to ₹ 10,07,401 in the A.Y. 2008-09) when computing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8.7.2011, the disallowance made by the AO towards depreciation on non-competing fee and marketing net work rights is hereby deleted and the AO is directed to allow the depreciation. 27. We find no reason to controvert the findings of Hon'ble DRP which follows the decision of this Hon'ble Tribunal in AY 2000-01 (ITA No. 439/Hyd/2004), 2006- 07 (ITA No. 1678/Hyd/2010) and AY 2007-08 (ITA No. 1976/Hyd/2011) in the assessee's own case vide orders dt. 29.5.2009, 8.7.2011 and 8.7.2013. Specifically we refer to the Tribunal decision in AY 2000-01 (ITA No. 439/Hyd/2004) which held as follows: 8 At this juncture, we may appreciate the nature of non-compete fee. When a business is taken over, it involves consideration by way of a non-compete arrangements entered into by the parties to the takeover arrangement. The entity whose business is taken over undertakes not to carry on any activity in relation to the business taken over and not to share any know-how, patent, copyright, trademark, licence, franchise or any other business or commercial right of similar nature or information/technique likely to assist in the manufacture or process of goods or providing for services. F ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which are of the same nature as those specified. Applying this principle of construction, if the business or commercial right of a patent, trademark, license, franchise etc, fulfilled the condition of being intangible assets, then, in our considered view, the payment made by the assessee company towards non-compete fee also fulfilled the condition by way of a logical corollary, Hence, the non-compete right is eligible for depreciation under section 32 (1) (ii) of the act. As for the contentions of the Revenue based on the depreciation schedule provided in the Income-tax Rules, it is pertinent to mention here that when the provisions of the Act, discussed above, make the assessee eligible for depreciation in respect of an intangible asset, assessee has to be allowed the same, notwithstanding any ambiguity which the Income-tax Rules may give rise to, since the statutory legislation, viz., provisions of a statute prevail over the rules framed thereunder. Even in the subsequent years, the revenue allowed depreciation for the aforesaid intangible asset in the scrutiny assessment as well. Even though principles of res judicata have no application to income-tax proceedings, principle of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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