TMI Blog2011 (2) TMI 68X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 k ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... get WHO certification in respect of the products of the company. The assessee submitted before the AO that the objective behind seeking the certification from WHO was to cater to the demand for the vaccines arising from overseas buyers, foreign governments, United Nations Agencies such as UNICEF ETC. WHO certificate gives a comfort to the overseas buyers viz-a-viz quality and manufacturing standard observed by the manufacturer. Further it was likely that the World Health Assembly would identify eradication of rabies as priority project. The assessee could foresee a potentially large demand of vaccine due to the above as countries with rabies incidents. The AO was of the view that the acquisition of the WHO certification given enduring benefit to the assessee company, therefore, the expenses are of capital in nature. The AO accordingly disallowed the claim of the assessee and added the same to the total income of the assessee. 3.1 On appeal, the CIT(A) upheld the disallowance made by the AO and agreed with the view of the AO that the expenditure is capital in nature. 3.2 Before us, the learned AR of the assessee has submitted that the assessee is a joint venture company ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... omparison to the product manufactured by the other non-certified companies. Therefore, the expenditure has given an enduring benefit to the assessee and is in the nature of capital. He has relied upon the orders of the lower authorities. 3.4 We have considered the rival contentions and relevant record. Undisputedly, the assessee has incurred an expenditure for obtaining the certification of the WHO regarding maintaining standard and manufacturing facilities as well as quality of the vaccine. It is the case of the assessee that after getting the certificate, the assessee would be able to cater demand of overseas market for this vaccine. Therefore, the certificate of WHO was necessary for sale of the vaccine to overseas market and Government agencies. From the certificate which is placed at page No.1 of the paper book, it is clear that the certificate granted for safe, effective and acceptable vaccine for supply to the UN purchasing agencies which is the benefit of enduring nature and for a long period also. Thus, in these facts and circumstances of the case, it is clear that the expenditure was not for any better working conditions or convenient manufacturing process but it was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed out as below: ( i ) the arm's length price of royalty of Rs.22,676,376 is computed at NIL ( ii ) on account of arm's length price of export of vaccine is computed at Rs. 114,352,614 as against transactional value of Rs. 87,762,334." 4.2 The TPO has held that the payment of royalty is unwarranted payment in defiance of the agreement between Chiron Corporation USA and Hoecht Marion Roussel Ltd. (HMR). The TPO was of the view that when the assessee was incurring the expenses for undertaking clinical trials and also paying to the Chiron, Germany for obtaining the pre-qualification support, then, a separate payment for royalty has been held as unwarranted. 4.3 As regards the adjustment on account of Arm's Length Price of export of vaccine, the TPO was of the view that the price realization on the vaccine sold outside India would be generally higher than the price realized locally and considering the facts that the assessee has been unable to substantiate the element of realization from end customers. He did not accept the cost plus approach adopted by the assessee for determination of the export price. He has also given the reason that the price is agreed by the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 's net margin from the export transactions is 29% which substantially higher than the comparable, therefore, no adjustment is required under the ALP. He has referred the TPO order and submitted that the TPO has wrongly compared the domestic margin on domestic sale with margin on export sale while passing the order under section 92C(3) which is against the law and statute, therefore no adjustment is required . 4.8 On the other hand, the learned DR has submitted that in this case both the TPO as well as the assessee have erred in not properly appreciating the provisions of law and rules made thereunder while computing the TNMM. He submitted that the TPO has compared the operating margins, at the entry level and suggested adjustments to the ALP admitted by the assessee. He vehemently contended that such methodology is not contemplated under the Income-tax Act. He submitted that under the law, in transfer pricing study, while applying Transaction Net Margin Method (TNMM), what is to be compared is the margin of an international transaction with the margin of a comparable international transaction or a comparison between, the margin of a class of international transaction, with the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... prescribe the manner in which ALP in relation to international transactions has to be determined by applying the most proper method means method prescribed under section 92C. Rule 10B(1)( e ) specifically prescribes the manner for determination of the arm's length price by transactional net margin method for ready reference we quote rule 10B(1)( ie ): "Determination of arm's length price under section 92C. 10B. (1) For the purposes of sub-section (2) of section 92C, the arm's length price in relation to an international transaction shall be determined by any of the following methods, being the most appropriate method, in the following manner, namely : (a) to (d) ** ** ** (e) transactional net margin method, by which, (i) the net profit margin realized by the enterprise from an international transaction entered into with an associated enterprise is computed in relation to costs incurred or sales effected or assets employed or to be employed by the enterprise or having regard to any other relevant base; (ii) the net profit margin realized by the enterprise or by an unrelated enterprise from a comparable uncontrolled transaction or a numbe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s and not comparison of operating the margin of the enterprise with the operating margin of the comparables of enterprise level. Therefore, the comparison of net profits margin realized by the assessee from the international transactions should be compared with the net profit margin of the uncontrolled parties transactions realized by enterprise which is unrelated and from the comparable uncontrolled transactions. 4.11 In view of the above discussions, as well as, the decisions of this Tribunal as relied upon by the learned DR, we hold 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. 4.12 Grounds of appeal No.2 is allowed for statistical purpose. ITA No. 3647/Mum/2006 (By revenue) 5. The revenue has raised the following grounds in this appeal which are as under : " 1. On the facts and in the circumstances of the case and in law, the CIT(A) erred in deleting the disallowance of depreciation on motor cars, without apprecia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f business have to be reckoned as commercial vehicles. Therefore, 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. 28. The findings of the AO is therefore not correct and not in accordance with the provisions of rule and the note given therein itself. The disallowance made by the AO on this account is therefore liable to be deleted. The amount disallowed is hence deleted. Appeal in respect of ground No.2, is thus disposed of as allowed" 6.3 There is no doubt if the vehicle on which the depreciation is claimed by the assessee are falling under commercial vehicle, then in view of the provisions applicable for the assessment year under consideration regarding the rates of depreciation, the depreciation on commercial vehicle as defined in the Motor Vehicle Act is also referred in the note 3A below the table of Appendix-I. Therefore, 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. The CIT(A) has allowed the claim of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le for the use of imported technical know how. For this purpose the RBI granted approval vide letter dated 19-4-1997 for payment of royalty by Aventis Pharma Limited to Chiron Behring GMBH Co. at the rate of 5% of the local sale. In the year 1998, the assessee joint venture was formed by the Aventis Pharma Limited and Chiron Corporation, USA. The assessee joint venture purchased the vaccine business of the Aventis Pharma Limited. According to the existing contract/agreement between the Aventis Pharma Limited and Chiron Behring GMBH its Cell culture rabies vaccine business stood transfer in the name of the assessee joint venture. Consequently, the payment of royalty by the assessee to Chiron Behring GMBH continued after taking the necessary approval from the RBI. Thus, it is clear that 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. Accordingly, we do not find any ..... 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