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TMI Blog2014 (10) TMI 651X X X X Extracts X X X X X X X X Extracts X X X X ..... ts to insulation, roof and stone veneer which is wholly owned subsidiary of OCV Chambery International, France. OCV Reinforcements Manufacturing Ltd., has undergone change of name as Owens Corning Industries (India) Pvt. Ltd. 3. The assessee filed its return of income for A.Y. 2009-10 on 13.9.2009 admitting total income of Rs. 18,50,68,771. A reference u/s. 92CA was made on 15.12.2011 by the DCIT, Circle-16(3), Hyderabad (the AO) with the approval of CIT-IV, Hyderabad to the DCIT (Transport Pricing Officer-II). The TPO-II passed an order u/s. 92CA(3) of the Act on 13.12.2012 in which the arms length price (ALP) was determined at Rs. 2,04,46,304 as against the price charged by the assessee in the international transactions at Rs. 4,40,27,472 and the shortfall of Rs. 2,35,81,168 was treated as transfer pricing adjustment u/s. 92CA of the Act. The AO passed the draft assessment order u/s. 143(3) r.w.s. 92CA r.w.s. 144C on 6.3.2013 making an addition of Rs. 2,35,81,168 towards ALP adjustment as determined by the TPO and disallowed excess claim of depreciation of Rs. 17,51,976. Thus, the AO determined the total income at Rs. 21,04,01,914 as against income returned of Rs. 18,50,68,770. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... everal observations and findings without appreciating evidence and understanding the intricacies of the facts of the case. 2.5 Based on the facts and circumstances of the case and in law, the Learned TPO/AO/DRP erred in disregarding the commercial agreements entered into by the appellant without any valid and cogent reasons. 2.6 Based on the facts and circumstances of the case and in law, the Learned TPO/AO/ DRP has erred by acting in an arbitrary manner and did not follow any prescribed Transfer Pricing methodology (as required under section 92C of the Act read with rule 10B of Income Tax Rues, 1962) while determining the ALP for payment of royalty. 2.7 Based on the facts and circumstances of the case and in law, the Learned AO/DRP erred in considering that the Comparable Uncontrolled Price (hereinafter referred to as CUP) method as the most appropriate method under section 92C of the Act to arrive at the ALP of the royalty paid by the appellant to its Associated Enterprise. 2.8 Based on the facts and circumstances of the case and in law, the Learned AO /DRP erred in confirming the TPO's stand in disregarding the Transactions Net Margin Method (hereinafter referred to as & ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2%. 9. While arriving at this conclusion, the TPO considered the submissions of the assessee and agreed that the assessee received technical assistance while disagreeing with the quantum of royalty payment for the said assistance by the assessee at 5% and 4% of the net of its sales. The TPO held that by these royalty payments there is no comparable increases in turnover or profits for financial year 2006-07, 2007-08 and 2008-09 and hence the value addition of royalty was not apparent. 10. The TPO also perused the royalty agreement and other details submitted by the assessee where it was seen that the assessee was granted non-exclusive, non- transferable licence to make payments in India and also to sell products to affiliates. The licensor (Owens Corning Invest Cooperatief U.A., Netherlands) granted right to use "Owens Corning" mark and the royalty agreement further required the licensee (the assessee) to pay the licensor 4% of the net sales. The TPO was given copies of Emails which reflected the tangible assistance rendered to the assessee by the licensor/ payee and the TPO was also provided with PowerPoint Presentation detailing manufacturing process of the assessee. The asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aw support from the decision of Ahmedabad Bench in KHS Machinery (P) Ltd. vs ITO (146 TTJ 692) where in the Tribunal on the issue of disallowance made by TPO of payment of Royalty held that. "The assessee had not made the one-time payment but making the continuous payment to the know-how provider which has been accepted by the Department in the past. The Assessee has been charging 5 per cent royalty on each and every transaction and therefore the said payment cannot be said to have been paid on the aggregate amount, as argued by learned CIT-Departmental Representative. The findings of the AO in considering the royalty charges as nil as ALP cannot be accepted since the AO in the present case has not brought on record, the ordinary profits which can be earned in such type of business. Therefore in our view the payment of royalty is not hit by the provisions of s. 92 of the Act and there is no reason to hold that the expenses should not be allowed under s. 37(1) of the Act, since the expenditure has been incurred by the assessee during the course of business and is having the nexus with the business of the assessee. Therefore the payment of royalty is a business expenditure which has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... BI approval of royalty rate was obtained the payment was considered to be held at arm's-length. It is also noted that various Tribunals such as Air Liquide Engg. India (P) Ltd, Hyderabad (ITA No.1159, l040/Hyd/2011 & ITA No.1408/ Hyd/ 2010), DCIT vs. Sona Okegawa Precision Forgins Limited (ITA No. 5386/DeI/2010), Hero Motocorp Limited vs. Addl. CIT (ITA No. 5130/Del/2010), ThyssenKrup Industries India Ltd vs Addl. CIT (ITA No. 6460/Mum/2012), Abhishek Auto Industries Ltd. vs. CIT (ITA No. 1433/Del/2009) have taken a view that RBI approval of the Royalty rates itself implies that the payments are at Arm's Length and hence no further adjustment needs to be made viewed from this angle too. 18. We, therefore, allow the grounds of the assessee with respect to ground no. 2.3 and 2.9 (i.e. the TPO erred m holding that no tangible benefits were derived by the assessee out of royalty payments made by it and restricted the payment to 2% of net sales). We also allow the ground No. 2.9 of the assessee (i.e., transactions made under Royalty agreement approved by RBI are to be considered to be at arm's-length). We do not find the need to adjudicate the other Grounds namely. 2.4 to 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ligible to claim depreciation at 25% or not. 26. We find that the DRP in the impugned assessment year 2009-10 held in favour of the assessee, as follows: "Although, the Panel did not allow this claim in the assessee's case for AY 2007-08, by following the decision of the Hon'ble Jurisdictional Tribunal in the assessee's own case M/s. OCV Reinforcements Manufacturing Ltd. Vs. ACIT, 16(3), Hyderabad for the assessment years 2000-01 and 2006-07 vide orders dt. 29.5.2009 and 8.7.2011, the disallowance made by the AO towards depreciation on non-competing fee and marketing net work rights is hereby deleted and the AO is directed to allow the depreciation." 27. We find no reason to controvert the findings of Hon'ble DRP which follows the decision of this Hon'ble Tribunal in AY 2000-01 (ITA No. 439/Hyd/2004), 2006- 07 (ITA No. 1678/Hyd/2010) and AY 2007-08 (ITA No. 1976/Hyd/2011) in the assessee's own case vide orders dt. 29.5.2009, 8.7.2011 and 8.7.2013. Specifically we refer to the Tribunal decision in AY 2000-01 (ITA No. 439/Hyd/2004) which held as follows: "8 At this juncture, we may appreciate the nature of non-compete fee. When a business is taken over, it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion of the term 'intangible assets' and it is an item of similar nature like know-how etc. The principle of ejusdem generic will have to be applied for the definition of intangible assets in section 32(1) (ii) of the Act. The mention of specific items of the same group is followed by the expression of the general or residuary nature pertaining to the same group, Words of a general nature following specific and particular words, should be construed as limited to things which are of the same nature as those specified. Applying this principle of construction, if the business or commercial right of a patent, trademark, license, franchise etc, fulfilled the condition of being intangible assets, then, in our considered view, the payment made by the assessee company towards non-compete fee also fulfilled the condition by way of a logical corollary, Hence, the non-compete right is eligible for depreciation under section 32 (1) (ii) of the act. As for the contentions of the Revenue based on the depreciation schedule provided in the Income-tax Rules, it is pertinent to mention here that when the provisions of the Act, discussed above, make the assessee eligible for depreciation in ..... 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