2011 (2) TMI 68 - AT - Income Tax

Depreciation - Capital Expenditure - comparison of margins between two companies - expenses of Rs. 1, 20, 94, 000 towards WHO certification fee - assessee claimed the expenditure as revenue expenditure - AO and CIT(A) considered the same as capital expenditure - Held that it is clear that the expenditure was not for any better working conditions or convenient manufacturing process but it was for recognition of the manufacturing facilities and quality of the product which is necessary for supply to the WHO as well as overseas market. - admissible depreciation on this amount allowed. Arm s Length Price (ALP) - The assessee has adopted ALP by comparing the export operating profits of the assessee company with the valuation of operating profits of the other companies which are taken as comparable companies selected by it. - TPO took the net cost (Plus) margin earned in domestic sale of 65% to be the profit level indicator for computing the ALP of the international transaction relating to export. - Held that the transfer pricing adjustment suggested by the TPO are not as per the provisions of law. At the same time the assessee has also not adopted the correct method of determination of TNMM. Therefore the issue is set aside to the file of the AO for fresh adjudication in accordance with law. Depreciation on motor car - 180 days - commercial vehicle - if such motor car is acquired within the prescribed period indicated in the items as in the instant case then depreciation at the rate of 50% is to be allowed to the cost or written down value of the car. - it is not clear from the record whether this motor vehicle is falling under the commercial vehicle as prescribed in the Note 3A below Table 3 of Appendix-I. - matter remitted back to AO for limited purposes or ascertaining whether the motor vehicle comes under the commercial vehicle or individual vehicle and then allow depreciation as per law. Royalty - dis allowance u/s 92CA(4) - the purchasing of the business of the Aventis Pharma Limited by the joint venture as per the terms and conditions between the parties does not acquire the technology for manufacturing of the vaccine which was in the possession of Chiron Behring GMBH. Therefore as per the agreement the payment of royalty is required for the use of technical know-how by the assessee - royalty for use of technical know-how is required to be paid by the assessee is allowed - on the issue of ALP since we have already remitted the issue of ALP of export to the AO accordingly the ALP of royalty is also required to be determined after due consideration and as per the provisions of law. Hence the issue of ALP in respect of royalty is set aside to the file of the AO in terms of the above order in respect etc. to the AE.

Summary

Issues Involved:

1. Nature of WHO certification charges: Capital or Revenue Expenditure.
2. Determination of Arm's Length Price (ALP) for export of vaccines.
3. Disallowance of depreciation on motor cars.
4. Disallowance of royalty payment.

Detailed Analysis:

1. Nature of WHO Certification Charges: Capital or Revenue Expenditure

The assessee claimed Rs. 1,20,94,000 towards WHO certification fees. The AO disallowed the claim, treating it as capital expenditure, providing enduring benefits. The CIT(A) upheld this view. The assessee argued that the expenditure was routine business expense for regulatory support, necessary for overseas sales. The tribunal noted that the WHO certification provided enduring benefits, essential for overseas market sales, thus confirming it as capital expenditure. However, it allowed depreciation on this amount as directed by the CIT(A).

2. Determination of Arm's Length Price (ALP) for Export of Vaccines

The assessee used the Transactional Net Margin Method (TNMM) for ALP, comparing external comparables with a net cost plus margin of 9.46%. The TPO adjusted the ALP, disallowing royalty payments and comparing export margins with domestic margins, leading to higher ALP for exports. The CIT(A) allowed royalty payments but upheld the ALP adjustment. The tribunal found both the assessee and AO/TPO erred in their methods. The tribunal emphasized that TNMM requires comparing net margins from international transactions with those from comparable uncontrolled transactions. It set aside the issue to the AO for fresh adjudication as per the correct legal provisions.

3. Disallowance of Depreciation on Motor Cars

The AO allowed depreciation at 20% instead of 50%, arguing the assessee was not in the business of hiring commercial vehicles. The CIT(A) allowed the higher rate, considering the vehicles as commercial under the Motor Vehicle Act. The tribunal remanded the issue to the AO to verify if the vehicles qualify as commercial vehicles under the relevant provisions and allow depreciation accordingly.

4. Disallowance of Royalty Payment

The TPO disallowed royalty payments, considering them unwarranted as the price of seed virus included compensation for technology use. The CIT(A) allowed the claim, accepting the assessee's ALP for royalty. The tribunal noted the necessity of royalty payments for using technical know-how, as per agreements and RBI approvals. However, it remanded the issue of ALP determination for royalty to the AO, aligning it with the fresh adjudication of export ALP.

Conclusion:

The tribunal upheld the capital nature of WHO certification charges but allowed depreciation. It directed fresh adjudication for ALP determination of exports and royalty payments, emphasizing correct TNMM application. The issue of depreciation on motor cars was remanded for verification under the Motor Vehicle Act provisions. The appeals were partly allowed for statistical purposes.