TMI Blog2016 (9) TMI 1471X X X X Extracts X X X X X X X X Extracts X X X X ..... certain is, the incurring of the liability. Actual quantification of liability can be done at a later date. TPA qua payment of royalty - MAM - CIT-A rejecting CUP as the most appropriate method for determining Arm’s Length Price of international transaction in respect of payment of royalty - Held that:- AR contended that the issue can be remitted back to the file of Assessing Officer to re-examine the facts in the light of the decision of Tribunal. The ld. AR has fairly accepted the proposal made on behalf of the Department. Thus, in view of the statement made by the representatives of rival sides we deem it appropriate to remit this issue back to the file of Assessing Officer to reexamine the issue in the light of decision of the Tribunal in assessee’s own case in assessment year 2002-03. Characterization of royalty payment - whether revenue or capital in nature? - Held that:- We observe that the facts leading to payment of Project Technical Assistance Fees are identical in assessment years under appeal. The Assessing Officer has not disputed the payment of charges. The only dispute is with regard to the nature of expenditure. The Co-ordinate Bench of the Tribunal has he ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ommissioner of Income Tax (Appeals) to examine agreement between the assessee and module supplier and determine the veracity of payments made. In so far as nature of liability is concerned, we have already held that if it is arising from the agreement the same is ascertained. Accordingly, ground No. 1 raised in the appeal by the assessee is allowed for statistical purpose. Amount representing provision towards octroi has been deducted twice - Held that:-n view of submissions made by rival sides, we are of considered view that this issue needs a revisit to the file of Commissioner of Income Tax (Appeals). The Commissioner of Income Tax (Appeals) shall decide the issue de novo after verification and proper appreciation of facts and records. - ITA No. 1081/PN/2013, ITA No. 1082/PN/2013, ITA Nos. 1108 & 1109/PN/2013, CO Nos. 58 & 59/PN/2014 - - - Dated:- 30-9-2016 - SHRI R.K. PANDA, AM AND SHRI VIKAS AWASTHY, JM For The Assessee : Shri R.R. Vora, Shri Pramod Achuthan For The Revenue : Shri Rajeev Kumar ORDER PER VIKAS AWASTHY, JM : ITA Nos. 1081 1082/PN/2013 for the assessment years 2003-04 and 2004-05 are directed against the order of Commissioner of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3. The assessee has raised following grounds in appeal for assessment year 2003-04. Based on the facts and circumstances of the case, the Appellant respectfully submits that the learned CIT(A) has erred on the following grounds, which are independent of and without prejudice to each other: 1. In computing the book profits under section 115JB of the Act, the learned CIT(A) erred in considering the provision for compensation payable to module suppliers of ₹ 1,11,33,418 as not an ascertained liability and thereby upholding the addition made by the learned Assessing Officer for computation of the book profits under section 115JB of the Act. The Appellant prays that the above addition made in computation of the book profit of the Appellant be deleted for A.Y. 2003-04. 2. In computing the book profits under section 115JB of the Act, after correctly allowing the deduction for octroi, wrongly added by the learned Assessing Officer, the learned CIT(A) erred in holding that an amount of ₹ 1,39,78,291 representing provision / expenditure towards octroi has been deducted twice by the Appellant and thereby directing the learned Assessing Officer to add the amount ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... her observed that such amounts are mostly under dispute and are paid after resolution of the dispute. Hence, the liability is contingent in nature. The observations made by the Commissioner of Income Tax (Appeals) are against the facts of the case. There are four suppliers and the assessee had given the details of payments to all the suppliers. 4.1 The ld. AR submitted that the assessee was liable to pay compensation to the module suppliers, as per the terms of the agreement entered into with the respective module suppliers. The assessee was liable to compensate the suppliers in case of shortfall in procuring minimum agreed quantity. Thus, the liability was contractual. The payment made by the assessee in discharge of liability has not been disputed by the Assessing Officer. The Auditors in the Audit Report have not qualified the liability as contingent in nature. The ld. AR further submitted that the assessee had made provision of ₹ 1,11,33,418/-for assessment year 2003-04, ₹ 78,37,457/- for assessment year 2004-05 and ₹ 2,53,03,903/- for assessment year 2005-06 thus, total provision for 3 years created by the assessee was ₹ 4,42,74,778/-. Against the sa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee created a provision of ₹ 1,32,06,642/- till 31-03-2002 at the rates mentioned by the PCMC. The provision was increased to ₹ 1,39,78,291/- by creating additional provision of ₹ 7.71 lakhs in the books of account for assessment year 2003-04. 5.1 During the assessment proceedings the Assessing Officer added back the amount of provision for octroi in calculating book profits u/s. 115JB of the Act by treating it as contingent liability. Further, the Assessing Officer has separately added the octroi expense recorded in the Profit and Loss Account while calculating book profits u/s. 115JB as the same was not paid till the date of filing of return of income. Thus, there was double disallowance of the same amount in assessment year 2003-04. In assessment year 2004-05 said provision was reversed and re-recorded at the end of year. Such re-recorded provision was again disallowed in assessment year 2004-05. Thus, the same amount got disallowed thrice. The assessee filed a rectification application for the addition of expenditure/ provision of octroi made twice in the assessment order, being a mistake apparent from record. However, the Assessing Officer rejected the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee and the module supplier. As per agreement, the assessee was required to purchase minimum agreed quantity of material from the supplier. In case of any short fall in procuring assured minimum quantity, the assessee was required to compensate the supplier for shortfall. The assessee has given details of actual payment made to module supplier as compensation during the period relevant to the assessment years 2003-04, 2004-05 and 2005-06. The details of the same are as under : Sr. No. Bank payment Document No. Date of payment Amount (Rs.) 1 1304053 01.09.2003 22,20,003 2 1303138 10.07.2003 24,63,213 3 1303138 10.07.2003 8,73,932 4 1302550 10.06.2003 8,45,776 5 1303273 16.06.2003 3,82,436 6 1303937 03.09.2004 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on shall, subject to sub-clause (2) of this clause, mean any amount written off or retained by way of providing for depreciation renewals or diminution in value of assets, or retained by way of providing for any known liability of which the amount cannot be determined with substantial accuracy; (b) the expression reserve shall not, subject as aforesaid, include any amount written off or retained by way of providing for depreciation, renewals or diminution in value of assets or retained by way of providing for any known liability; A bare perusal of the definition of provision would show that the provision includes any amount set apart for any known liability. The amount thereof may not have been determined with substantial accuracy but incurrence of liability is must. 9. In the present case, the liability for payment of compensation to the module supplier has arisen out of agreement entered into between the assessee and module supplier. Thus, the liability to compensate is contractual in nature. Further, the liability to compensate arises when assessee fails to procure minimum agreed quantity of material from the supplier. The Commissioner of Income Tax (Appeals) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d is deductable for calculation of MAT liability. The observations of the Commissioner of Income Tax (Appeals) that the assessee has claimed the same amount as provision for octroi as well as expenditure for octroi on approval basis are against facts on record. The ld. AR has contended that the entry in respect of octroi creating provision in the beginning of the financial year has been reversed at the end of the financial year, thus, there is no double claim. The ld. DR has also admitted that there seems to be some error in understanding the issue by the Commissioner of Income Tax (Appeals). 11.1 In view of submissions made by rival sides, we are of considered view that this issue needs a revisit to the file of Commissioner of Income Tax (Appeals). The Commissioner of Income Tax (Appeals) shall decide the issue de novo after verification and proper appreciation of facts and records. Accordingly, ground No. 2 raised in the appeal by the assessee for assessment year 2003-04 is allowed for statistical purpose. 12. In the result, the appeals of the assessee for impugned assessment years are allowed for statistical purpose. ITA Nos. 1108 1109/PN/2013 (Revenue s Appeal) 13 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the circumstances of the case and in law, the Ld.CIT(A) was justified in directing the A.O. to allow Project Assistance Technical charges as deductible expenditure u/s. 37(1) of the Act, when the assessee has not been able to prove the basis of such payment, the nature of service rendered by the expatriates and also when the payment were not made in accordance with the project assistance agreement dated 11/12/1994. 5. Whether on the facts and circumstances of the case and in law, the CIT(A) was justified in deleting addition made on account of homologation expenses, without calling for such details in support of its claim and remanding the matter to the A.O. 6. Whether on the facts and circumstances of the case and in law, the CIT(A) was justified in directing the A.O. to verify the evidences furnished before him and decide the admissibility of the claim of expenditure of capitalized cars, when the assessee was given sufficient opportunity to furnish such details during the course of assessment proceedings, and the assessee could not produce any material evidence to substantiate use of car was fully and exclusively for business purpose. 7. The appellant craves l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... determining the ALP in the case of assessee. In respect of other grounds raised in the appeal the ld. DR vehemently supported the findings of TPO. 15. Per contra the ld. AR contended that the assessee adopted combined approach and selected TNMM as the most appropriate method to benchmark its international transactions including payment of royalty. Before selecting TNMM as the most appropriate method, the assessee conducted research for selecting comparable companies on widely recognized commercial databases available in public domain. After selecting 7 comparables the assessee computed weighted average margins of comparable companies which is 3.38% as against margin of assessee at 4.16%. Since, the net profit margin earned by the assessee was higher than the weighted average margin of comparable companies, the transactions including payment of royalty were concluded to be at arm s length price. The ld. AR further submitted that similar addition was made in assessment year 2002-03. In first appeal the Commissioner of Income Tax (Appeals) decided the issue in favour of the assessee. The Department carried the issue in appeal before the Tribunal in ITA No. 1107/PN/2013. The Tribuna ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ture of technical service charges is not for any initial outlay or extension of business, but is incurred in order to conduct business more effectively and profitably. The fixed capital of assessee does not get increased or altered due to incurrence of this expenditure and no new asset or advantage/benefit of enduring nature comes into existence. The Project Technical Assistance Fees is regarded as fee for technical services for tax withholding purposes. The assessee debits the fee paid in the profit and loss account under the head Technical Service Charges in the Manufacturing Expenses Schedule. The expenditure on Technical Service Charges is not in the nature of Capital expenditure and the Auditors in the Audit report have not qualified the expenditure as Capital. The assessee is paying Service Tax on the technical service charges under the category Management Consultants under the reverse charge mechanism since March, 2003. The ld. AR further submitted that the issue relating to Project Technical Assistance Fees- Whether capital or revenue in nature was raised by the Revenue before the Tribunal in ITA No.1107/PN/2003 in assessment year 2002-03. The Tribunal held the expendit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t. During the assessment year 2003-04, the assessee had capitalized 32 such cars for own use. During the assessment proceedings the assessee was asked to produce details in respect of the capitalized cars. The assessee furnished the details. However, the Assessing Officer observed that the assessee has not been able to produce complete details of the use and utility of the capitalized cars for the business purpose. The Assessing Officer further observed that so many cars are not needed for top management and advertisement purposes. The Assessing Officer made ad hoc disallowance of ₹ 2,00,000/- out of repairs and maintenance expenses and ₹ 5,00,000 out of power and fuel expenses. The ld. AR contended that it is the prerogative of the assessee to decide the number of cars required for advertisement purpose and for the use of management. The Assessing Officer cannot substitute his commercial judgment over the needs and requirements of assessee. The Assessing Officer in an irrational and unjustified manner has made ad hoc disallowance which has been rightly reversed by the Commissioner of Income Tax (Appeals). The ld. AR in support of his submissions placed reliance on the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ised agreement dated 21-12-1999 is enclosed at paper book page 557 to 586 according to which running royalty @5% on value addition in India to be paid and waiving of the remaining 2 instalments of lumpsum royalty payment as per the first agreement amounting to DM 19 million. For the impugned assessment year the assessee has paid royalty @5% to DCAG amounting to ₹ 4,61,06,328/- for the technical knowhow received. The assessee adopted combined approach and selected TNMM as the most appropriate method to benchmark its international transaction including the payment of royalty in its TP study report. For the application of TNMM, the assessee had conducted search for comparable companies on widely recognized commercial information database for obtaining publicly available financial information. For the purpose of margin of computation, in addition to financial data for the relevant financial year, the assessee also used data for 2 previous financial years as per the TP study conducted on the search of comparable. The weighted average margin of comparable companies was 2.48% whereas the margin of the assessee company was 4.30%. Since the net profit margin earned by the assessee was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ant case is inextricably linked with production and sales activity. In absence of production and sales and sale of products there would be no question arising regarding payment of royalty. We find force in the submission of the Ld. Counsel for the assessee that since the royalty payment is not independent of sales and therefore cannot be examined on standalone basis. Therefore, the assessee has adopted combined transaction approach using TNM method as the most appropriate method to benchmark its international transaction including payment of royalty. 77. We find the Delhi Bench of the Tribunal in the case of Lumax Industries Ltd. Vs. ACIT vide ITA No.5252/Del/2011 has observed as under : 33. The TPO has made the disallowance in question mainly on the basis of the benefit test. In this regard, it is seen that the payment of royalty cannot be examined divorced from the production and sales. Royalty is inextricably linked with these activities . In the absence of production and sale of products, there would be no question arising regarding payment of any royalty. Rule 10A(d) of the IT Rules defines 'transaction' as a number of closely linked transactions. Royal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... /s. Bobst India Pvt. Ltd. Vs. DCIT vide ITA No.1380/PN/2010 order dated 09-10- 2014 has observed as under : 7.9 ..... Without prejudice to above we find that according to TPO / AO has not given cogent reasoning for rejecting TNMM identified-by the Appellant as the most appropriate method for benchmarking its international transactions pertaining to domestic operations. The approach adopted by the TPO i.e. using controlled transaction of the Appellant itself (receipt of commission on marketing, of spares) for benchmarking the international transaction pertaining to receipt of commission for marketing of machines is not appropriate as per the Indian TP regulations. Accordingly international transaction of the appellant pertaining to receipt of commission for marketing of machines benchmarked by assessee by aggregating the same with other international transactions pertaining to domestic operations using TNMM should not be-rejected. 81. The various other decisions relied on by the assessee on this issue also support its case to the proposition that TNM method applied by the assessee is the appropriate method and the CUP method applied by the TPO is not correct where he h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of royalty payment and fee for drawings etc. has been approved or deemed to have been approved by the RBI, then such payment has to be considered at ALP. We, therefore, direct to delete addition of ₹ 4.29 crore made by the A.O. in this regard. 83. We further find in subsequent years also the royalty payment has been benchmarked considering combined transaction approach in TNM method. No separate benchmarking was undertaken to determine the ALP of Royalty. In A.Y. 2007-08 till A.Y. 2011-12 the payment of royalty was held to be at ALP. We therefore find merit in the submission of the Ld. Counsel for the assessee that in view of the rule of consistency the Cit(A) was justified in rejecting the CUP method adopted by the AO and accepting the TNM method followed by the assessee. 84. In view of the above discussion and in view of the detailed reasoning given by the CIT(A) we find no infirmity in his order. Accordingly, the same is upheld and the grounds raised by the revenue on this issue are dismissed. 22. The ld. DR has not been able to controvert the findings of Tribunal on the issue. However, the ld. AR contended that the issue can be remitted back to the fi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd accordingly deleted the addition made by the AO. 98. We find no infirmity in the above decision of the Ld.CIT(A). From the various terms and conditions of the agreement, we find the assessee has neither acquired any asset on an outright basis nor secured any enduring advantage. We find force in the argument of Ld. Counsel for the assessee that the benefit secured by the assessee is essentially a licensed right to use knowhow for the period of the agreement. Therefore, the royalty expenditure in this regard, in our opinion, is revenue in nature. Further royalty being an annual recurring expenditure, directly linked to number of vehicles sold in a financial year, in our opinion, is revenue expenditure fully deductible in computing the taxable income of the assessee . 99. We find the Hon ble Supreme Court in the case of CIT Vs. IAEC Pumps Ltd. reported in 232 ITR 316 has held that amount paid by the assessee to the collaborator for using its patents and design under an agreement was only a license fee and constituted revenue expenditure. The Hon ble Bombay High Court in the case of CIT Vs. Essel Propack Ltd. reported in 325 ITR 185 has held that the assessee did not ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. The assessee has claimed the payment of charges as deductable u/s. 37(1) of the Act whereas the Assessing Officer has held the same to be capital in nature. We find that this issue was also considered by the Co-ordinate Bench of the Tribunal in assessee s own case in ITA No. 1107/PN/2013. The Co-ordinate Bench of the Tribunal rejected the ground raised by the Department and upheld the order of Commissioner of Income Tax (Appeals). The relevant extract of the findings of Tribunal on this issue reads as under : 49. We have considered the rival arguments made by both the sides, perused the orders of the AO and CIT(A) and the paper book filed on behalf of the assessee. We have also considered the various decisions cited before us. We find the AO disallowed part of the Project Assistance Technical fees of ₹ 1,96,31,398/- on the ground that same is non business expenditure due to not being in consonance with the original agreement. We find the Ld.CIT(A) deleted the disallowance on the ground that these payments are neither capital expenditure nor personal in nature and there is no case for considering it to have been made for non business purpose. Further, he held that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The only dispute is with regard to the nature of expenditure. The Co-ordinate Bench of the Tribunal has held expenditure as revenue in nature. The ld. DR has not been able to controvert the findings of Tribunal. Thus, we do not find any merit in the ground raised by the Department. By applying the aforementioned decision of Coordinate Bench in assessee s own case, we dismiss ground No. 4 raised in the appeal by the Revenue. 27. The ground No. 5 raised by the Department in appeal is with respect to deleting of addition made on account of homologation expenses. In assessment year 2003-04 the assessee has incurred expenditure of ₹ 75,44,101/- towards homologation. The Assessing Officer has made ad hoc disallowance of ₹ 10,00,000/-. Similarly, in assessment year 2004-05 the assessee has incurred expenditure of ₹ 63,10,716/- towards homologation. The Assessing Officer made ad nhoc disallowance of ₹ 10,00,000/- in assessment year 2004-05 as well. The disallowance has been made by the Assessing Officer on the ground that the assessee has not furnished specific bills etc and the details of stock submitted to ARAI during the course of assessment proceedings. On t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ere either used in the car pool for all the employees or were used for the purpose of business in events such as exhibition etc. The learned AO has stated that the Appellant has not furnished any documentary evidence to substantiate that the cars were used wholly and exclusively used for the purpose of business. The Appellant has stated before me that it has all necessary evidence in support its claim. In view of this assertion, I direct the learned AO to verify the evidence -and decide admissibility of the claim on the basis of evidence furnished before him. I consider fit to remit the matter to the learned AO rather than admitting the same as additional evidence before me and sending the same to the AO for verification under the IT Rule 46A. 30. After considering the submissions of rival sides and perusing the impugned order, we find no error in the findings of CIT(A) in remitting the matter back to AO. We are of the considered view that the AO should reexamine the issue denovo. Here, we would like to point out that the AO shall not substitute his judgement over that of the assessee to determine the need and quantum of expenditure. The Assessing Officer after considering th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e income during the financial year ended on 31-03-2002 and hence no deduction u/s. 80IB(3) was claimed in the return of income. In the notes to return of income for assessment year 2003-04 the assessee had specifically mentioned that if during the assessment proceedings positive income is determined, then the assessee would claim the deduction u/s. 80IB of the Act. The ld. AR giving the sequence of events pointed that on 18-10-2004 return filed by the by the assessee was selected for scrutiny and notice u/s. 143(2) was issued to the assessee. The assessee participated in the assessment proceedings and furnished the requisite details as required by the Assessing Officer from time to time. The Assessing Officer passed the assessment order u/s. 143(3)on 30-03-2006 disallowing certain expenditure as well as set off of brought forward losses claimed by assessee in the return of income for assessment year 2003-04, thereby determining positive taxable income of the assessee. Further, the Assessing Officer rejected the claim of deduction u/s. 80IB(3) on the basis that the Audit Report in the prescribed form was not filed in the return of income. On 30-08-2006 the assessee filed rectificati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ame should be eligible for deduction under section 80-IB. b. Trading income on sale of spares and CBU cars - As a part of manufacturing activity, the import of spare parts is necessary to ensure the availability of spare parts for providing after sale services and warranty commitments to customers. Further, Your Honours would appreciate the fact that if the after sales service and warranty is not provided by MB India, the customers would no longer be willing to purchase the cars and there is probability that MB India may lose its market share. Therefore import of spare parts is interlinked with its manufacturing activity. Further, import and sale of CBUs is important for assessing the market condition for a particular range of cars which could be targeted for manufacturing by MB India in future or to bring in niche models which will be sold in few numbers and will never be economically viable to manufacture in India. Further, CBU imports are made to bring new products available with AE as CBU, but will take time to supply the same in SKD/CKD/Parts level and also some times to bridge a sudden gap of demand and manufacturing capacity. Hence the trading income is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of sundry balances (housing deposit, customs duty claim not received) (29,87,047) Other receipts (Interest on Income-tax, Sales tax refund etc.) 31,92,264 Creditors written back 62,96,491 Insurance Claim Received For Loss In Transit Claims And Motor Policies 17,62,874 Provision for interest payable on booking amount reversed 14,35,599 Miscellaneous Income Total 1,48,74,203' 36. The ld. DR submitted that this issue can be remitted back to the file of Assessing Officer for reconsideration as the Tribunal has already quashed the reassessment proceedings. 37. Both sides heard. It is an admitted fact that reassessment proceedings initiated against the assessee in assessment year 2003-04 to disallow the benefit of deduction u/s. 80IB of the Act has already been set aside by the Tribunal in the appeal filed by the assessee. Thus, the Commissioner of Income Tax (Appeals) ignorant of the order of Tribunal has erred in holding that in reassessment proceedings t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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