TMI Blog2014 (11) TMI 728X X X X Extracts X X X X X X X X Extracts X X X X ..... lars as technical knowhow fee and royalty at 7.5% on domestic sales as per the agreements entered into and approved by the authorities - apart from legal position, even on merits the disallowance of entire technical knowhow payment and part disallowance of royalty payment to AE was not warranted. The agreements were periodically approved by RBI and by Ministry of Industry and assessee was paying the amounts as per the agreements - Even though approval by the other Governmental authorities does not prevent TPO in examining the ALP as per the provisions of the Act, TPO did not examine the issue under the T.P. provisions at all but took upon the role of an A.O. in analyzing the commercial expediency of payment of royalty and technical knowhow under the provisions of section 37(1) - Since the agreements were approved by the authorities and the royalty fee and technical knowhow are at arm’s length and that assessee’s claim should be allowed as such - There is no information brought on record by the TPO that the payment at 7.5% on the net sales is not at arm’s length as there was no other comparable case brought on record - Generally, the Government of India is approving the royalty ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hnical Service Fee Ground Nos. 1 to 9 and 12, (B) Reimbursements Ground Nos. 10 and 11, (C) Other Grounds Ground No.13 imposing interest under section 234B of the Act on transfer pricing adjustments and ground No.14 pertain to initiating the penalty proceedings u/s. 271(1)(c) of the Act. 4. Ground Nos. 1 to 9, 12 pertain to the disallowance of payment of royalty and technical service fee to M/s. Kirby Building Systems, Kuwait analysed under the provisions of transfer pricing. Briefly stated, assessee M/s. Kirby Building Systems India Ltd., is engaged in the business of manufacture of Pre-Engineered Steel Building System (PEB) Products. For the year under consideration, assessee filed return of income declaring total income of ₹ 33,16,30,670 on 30.09.2008. The A.O. vide his draft order has determined the total income of assessee at ₹ 52,68,21,950. The following are the details of international transactions entered into by and between the taxpayer and the AE :- 5. Even though the TPO proposed various adjustments, DRP however confirmed the disallowance / adjustment of Technical service fee and Royalty and mark up on reimbursement costs. With reference t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5% on domestic sales as per the agreements entered into and approved by the authorities. 19. In the guise of examining the payments under T.P. provisions, it is noticed that the TPO has not analysed these payments either under TNMM method or under any other method which require to be analysed as per the provisions. However, the TPO has examined the business necessity of payment of technical knowhow fee and royalty under the provisions of section 37(1) rather than under the provisions of T.P. His decision of not allowing any royalty payment or technical knowhow payment and determining the ALP at NIL cannot be sustained in view of the fact that this technical knowhow fee and royalty were agreed upon when the assessee has originally entered into agreement as on 01.04.2000 much before the T.P. provisions came on statute. It may be another reason that assessee has revised the agreement and paid subsequently, partly in the impugned year, but that does not prevent assessee claiming expenditure which was necessary for its business operations in view of the agreement entered at the time of establishing the unit in India. Had there been no revision of the agreement, the payment of technic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e was wholly and exclusively laid out for the purpose of business, reasonableness of the expenditure has to be judged from the point of view of the businessman and not of the Revenue. It was further observed that the rule that expenditure can only be justified if there is corresponding increase in the profits was erroneous. It has been classically observed by Lord Thankerton in Hughes v. Bank of New Zealand, (1938) 6 ITR 636 that expenditure in the course of the trade which is unremunerative is none the less a proper deduction if wholly and exclusively made for the purposes of trade. It does not require the presence of a receipt on the credit side to justify the deduction of an expense . The question whether an expenditure can be allowed as a deduction only if it has resulted in any income or profits came to be considered by the Supreme Court again in CIT v. Rajendra Prasad Moody, (1978) 115 ITR 519, and it was observed as under: - We fail to appreciate how expenditure which is otherwise a proper expenditure can cease to be such merely because there is no receipt of income. Whatever is a proper outgoing by way of expenditure must be debited irrespective of whether there is rec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lowability thereof as business expenditure, he has no authority to disallow the entire expenditure or a part thereof on the ground that assessee has suffered continuous losses. The financial health of assessee can never be a criterion to judge allowability of an expense; there is certainly no authority for that. What the TPO has done in the present case is to hold that assessee ought not to have entered into the agreement to pay royalty/brand fee, because it has been suffering losses continuously. So long as the expenditure or payment has been demonstrated to have been incurred or laid out for the purposes of business, it is no concern of the TPO to disallow the same on any extraneous reasoning. As provided in the OECD guidelines, he is expected to examine the international transaction as he actually finds the same and then make suitable adjustment but a wholesale disallowance of the expenditure, particularly on the grounds which have been given by the TPO is not contemplated or authorised. 23. Apart from the legal position stated above, even on merits the disallowance of the entire brand fee / royalty payment was not warranted. Assessee has furnished copious material and valid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a mismatch of percentages in the royalty claimed, clarification was sought in the course of argument and Ld. Counsel explained that even though royalty had a fixed percentage of 7.5% agreed, it was not on gross sales but on net sales, as RBI has excluded various amounts. It was also submitted that DRP without studying the terms and conditions of payment of royalty as approved, allowed royalty at 3.5% on gross sales which technically is also almost equivalent to the royalty claimed by the assessee on net sales basis. It was submitted that as percentage of sales, royalty payment in the impugned year was only 5.92%. Be that as it may, we are not in a position to approve the action of the A.O. / DRP in restricting the royalty and total denial of Technical services fee without any basis at NIL under the guise of T.P. provisions. In view of this, we are not in agreement with the action of the TPO / DRP. 20.4. In the course of arguments, Ld. Counsel made various propositions on payments of Royalty and technical services fee and cited the decisions of the Coordinate Benches of the Tribunal in the case of SC ENVIRO Agro India Ltd., Mumbai vs. DCIT 3(3), Mumbai ITA.No.2057 2058/Mum/2009 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n nature. 7. Issue No.2 is on reimbursement costs. Assessee has maintained I.T. Data Centre for maintaining its I.T. net work. The data centre is located in Hyderabad and assessee has incurred cost of maintenance of the data centre. Assessee has used SAP ERP enterprise services across the group for which it engaged SAP India P. Ltd., and Pioneer Online India P. Ltd., The cost of implementation was initially paid by assessee and thereafter, cross charged and recovered from the respective group companies. Assessee has not charged any additional amount other than the cost of actual expenditure and it was considered as reimbursement of cost. The data centre charges were apportioned based on the actual manpower deployed for the implementation. The TPO noticed that amount of ₹ 6.31 crores was recovered from its AEs towards SAP implementation and data centre charges. Since, these transactions are considered as international transactions, TPO was of the opinion that the services provided by Kirby India in implementation of SAP comes under support services which are required to be marked-up. He relied on the Coordinate Bench decision in the case of Exxon Mobile Companies India P. L ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are of the opinion a markup of 5% on the above reimbursement cost would justify the facts of the case. We are supported by the decision of M/s Zydus Atlanta Healthcare P.Ltd in ITA No. 3311,3312/Mum/2008 dt. 22.04.2010 for the above. AO/TPO is directed to re-workout accordingly. 11. Ground No.13 is consequential in nature and ground No.14 is premature. 12. In the result, ITA.No.1759/Hyd/2012 for A.Y. 2008-09 is partly allowed. ITA.No.262/Hyd/2014 A.Y. 2009-2010 13. Assessee has raised 13 grounds in this appeal out of which, ground Nos.1 to 8 pertain to T.P. adjustments. Ground Nos. 9 and 10 are on determination of ALP for reimbursement of expenses received from AEs. Ground Nos. 11(a) and (b) pertains to applicability of provisions of section 92C(2) and Ground Nos. 12(a) (b) pertains to imposing interest under section 234B and 234C of the Act and ground No.13 pertains to initiating the penalty proceedings u/s. 271(1)(c) of the Act In A.Y. 2009-10 vide 14. Ground Nos. 1 to 8 pertain to the disallowance of payment of royalty and technical service fee to M/s. Kirby Building Systems, Kuwait analysed under the provisions of transfer pricing. Briefly stated, assessee M/s ..... X X X X Extracts X X X X X X X X Extracts X X X X
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