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2013 (11) TMI 668 - AT - Income TaxAdjustment of arm's length price - Purchases made from Associate Enterprise - For justifying the costs, assessee had used Transaction Net Margin Method (TNMM) using its operating margin to total cost as Profit Level Indicator - Denial of benefit of plus/minus 5% range - Held that:- arm's length price of the cost has been worked out by the Assessing Officer at Rs. 103.11 Crores by erroneously applying the percentage on the cost, whereas the percentage ought have been applied on operating income. Even if we take the figure worked out by the TPO as correct, difference between the total operating cost of the assessee Rs. 103.90 Crores and arm's length price of such cost, worked out by the TPO at Rs. 103.11 Crores, is 0.79 Crores. Instead of doing this direct work out, TPO endeavoured to go a step further and assign such difference to the purchase cost of the components from the Associate Enterprise - when calculating the non-AE cost, reducing the cost of raw material imported alone from the total cost, will not lead to a logical conclusion. When cost is distributed, it has to be so done evenly. TPO attributed the difference is ALP of cost entirely to the purchase of components made by the assessee from its Associate Enterprise which, in our opinion, will not give fair results. Adjustment that can be carried out at the best is only on the proportionate sale that are relatable to the components imported by the assessee from its Associate Enterprise and not on the whole of the operational income - the issue of determining the arm's length price with respect to the imported components from Associate Enterprise requires a fresh look by the Assessing Officer - Decided in favour of assessee. Capital or revenue expenses - Disallowance of royalty - Whether the assessee has acquired a right to use the 'technology and licence' during the assessment years - Held that:- From the perusal of the agreement it is found that KMC granted the assessee an exclusive right to manufacture and sell the products in India using the licenced technology provided. An exclusive right has been conferred on the assessee for manufacturing and selling the products in India - it is a case where royalty was paid initially and also running expenses towards royalty are being paid year after year. As per this agreement for transfer of know-how as technical aid, initial royalty of 9 lakhs US Dollar has to be paid, and thereafter running royalty at the rate of 3.5% of the net sales is required to be paid by the assessee - The assessee-company has entered into a technical licence agreement with KMC, which had a 50% shareholding in the assessee-company, to manufacture and sell the contract products in India using licenced technology. The assessee-company paid a lump sum amount of 9 lakhs US Dollars to KMC to get this technology. This amount was paid in three instalments of 3 lakhs US Dollars from financial year 1996-97 to 1998-99. Apart from this, the assessee-company has been paying royalty @ 3.5% for products manufactured by using licenced technology supplied by KMC This royalty is paid @ 3.5% of net sales less imported components. As per this agreement, if there is no sales, no royalty is payable by the assessee. Technical assistance contemplated in the agreement covered the establishment of the factory and the operation thereof for the manufacture of transformers of all kinds and types. Thus, the property in that case, i.e, the drawing, was transferred to Indian company and the technical know-how transferred was also for the setting up of the factory which are all in the capital field. In those circumstances, 25% of the payment had been held to be capital because only 25% of the initial lump sum and royalty payment was considered as capital. In the given case, no such property has been transferred to Indian Company nor is the technical data provided to set up the plant - Therefore, royalty has to be allowed as revenue outgo for the impugned assessment year - Following decision of Jonas Woodhead & Sons Ltd. v. CIT [1997 (2) TMI 4 - SUPREME Court] and assessee's own case in [2013 (11) TMI 570 - ITAT CHENNAI] - Decided in favour of assessee.
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