TMI Blog2014 (11) TMI 552X X X X Extracts X X X X X X X X Extracts X X X X ..... provide an opportunity to this assessee to furnish full details along with bills and vouchers to demonstrate the nature of expenditure incurred, before the AO, so that after proper investigation about the nature of expenditure can be determined – thus, the matter is remitted back to the AO for fresh consideration – Decided in favour of assessee. Treatment of software expenses – capital expenses or not – Held that:- The fact of incurring of expenditure for SAP on account of user licencee fee and on account of reimbursement is not in dispute – in CIT vs. Asahi India Safety Glass Ltd. [2011 (11) TMI 2 - DELHI HIGH COURT] it has been concluded that the expenditure incurred by assessee on software is allowable as Revenue expenditure more so as the expenditure acquired by the assessee was an application software which enable it execute tasks in the field of accounting, purchases and inventory maintenance – also in IBM India Ltd. vs. ACIT [2006 (3) TMI 196 - ITAT BANGALORE-B] the same is held that the expenditure on purchase of application software is allowable as revenue expenditure as it is an aid in manufacturing process rather than the tool and though there is an enduring benefit t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n two parties who are not related to each other. SKF transaction is not eligible to be treated as CUP as it is with related party - The another contention of the assessee is that the TPO and CIT(A) has relied upon the rates of royalty paid by the assessee during the earlier years - this transaction is also with related parties as it is given to a related party of the assessee for the earlier period - no material is available on record that any enquiry of any nature has been carried out by any person including TPO to conclude that the transactions of SKF and for the earlier years for the assessee were the correct ALP or were done in circumstances so as to be at the ALP - The contention is that the only available option is to adopt TNMM as the method for determination of the ALP - CIT(A) and TPO were not justified in adopting the CUP method and the CIT(A) is upheld to adopt the method of TNMM for determination of the ALP and recompute the ALP in respect of the royalty – Decided in favour of assessee. Expenses incurred on repairs to building – Held that:- Following the decision in B.V.Ramachandrappa & Sons [1991 (1) TMI 67 - KARNATAKA High Court ] wherein it was held that Tribunal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 377; 25,95,51,168/-. Aggrieved by the order of A.O., assessee carried the matter before the CIT(A) who vide order dated 27.01.2006 granted partial relief to the assessee. Aggrieved by the aforesaid order of CIT(A), the assessee and Revenue are now in appeal before us. 4. We first take up assessee s appeal in ITA No. 793/Ahd/2006 and the grounds raised are as under: 1. The learned Commissioner of Income Tax (Appeals) erred in fact and in law in confirming the addition of ₹ 84.32 lacs on account of interest received by the appellant on Income Tax Refund despite the fact that the said interest had not become final during the year under consideration. 2. The learned Commissioner of Income Tax (Appeals) erred in fact and in law in confirming the action of the AO in treating repairing expenses to plant and machinery of ₹ 133.77 lacs as capital expenditure instead of revenue expenditure as claimed by the appellant. 3. The learned Commissioner of Income Tax (Appeals) erred in fact and in law in confirming the action of the AO in treating repairing expenses to plant machinery of ₹ 120.16 lacs as capital expenditure instead of revenue expenditure as claimed by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lty and Fees for Technical Services paid in excess of 1.5 % of the sales value is excessive and therefore deserved to be disallowed and thus confirming the disallowance of ₹ 375.91 lacs. a. The Ld. C1T (A) also erred in fact and in law in holding that if for any reason the adjustment made U/s. 92 on the count of Royalty payment is deleted, then it may be confirmed on the ground of it being excessive by invoking the provisions of section 375.91 lacs. 8. The learned Commissioner of Income Tax (Appeals) erred in fact and in law in confirming the action of the AO in considering repairs to building amounting to ₹ 40.18 lacs as capital expenditure instead of revenue expenditure claimed by the appellant. 9. The learned Commissioner of Income Tax (Appeals) erred in fact and in law in confirming the action of the AO in considering software expenses of ₹ 14.91 lacs as capital expenditure. 10. The learned Commissioner of Income Tax (Appeals) erred in fact and in law in confirming disallowance of ₹ 0.93 lacs made by the AO invoking provisions of section 14A of the Income Tax Act, 1961. 11. The learned Commissioner of Income Tax (Appeals) erred in fact and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pecial Bench in case of Avada Trading Company (supra). Before us, no binding contrary decision in support of assessee has been placed on record. We, therefore, respectfully following the decision of Special Bench in case of Avada Trading Company (supra) and the decision of co-ordinate Bench in the case of assessee for preceding year, find no reason to interfere with the order of CIT(A) and thus, this ground of assessee is dismissed. 10. Ground no.2 3 are with respect to treating repairing expenses ₹ 133.77 lacs ₹ 120.16 lacs as capital expenses. 11. During the course of assessment proceeding, A.O. on perusing the details submitted by the assessee, noticed that it had claimed ₹ 1,33,77,052/- ₹ 1,20,16,250/- respectively on account of modification of various machines as revenue expenses. A.O. also noticed that the amount of expenditure incurred was almost consistent with the quantum of the expenditure incurred in the immediately preceding year. A.O. was of the view that the expenses have resulted in quality improvement, technology upgradation and better fuel efficiency and has thus resulted into bringing into existence an asset or advantage of endu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case in the year under appeal are identical to that of earlier year, the matter in the year under consideration be also similarly, restored to the file of A.O. Ld. D.R. on the other hand submitted and pointed out to the findings of A.O. where A.O. has noted that assessee did not submit the required details called for by the A.O. He, therefore, submitted that in such circumstances, A.O. was fully justified in disallowing the claim of assessee. He, thus, supported the orders of A.O. and CIT(A). 15. We have heard the rival submissions and perused the material on record. Before us, it was submitted that in the assessee s own case identical issue was before the Tribunal for A.Y. 2001-02 and the matter was remitted back to the file of A.O. We find that the co-ordinate Bench of Tribunal in ITA Nos. 792 816/Ahd/2006 had held as under: 12. Having heard the submissions of both the sides and on careful perusal of the compilation filed before us, one thing is evident that certain explanations were furnished before the AO but those were not supported by the requisite evidences. Even in the compilation from pages 211 to 289, the assessee has furnished certain details of the bills of re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he view that SAP application provides for a standard solution for many of the business processes and the payment was made as fees for having access to this software for business purpose. He was therefore of the view that assessee has acquired a new asset or new advantage of enduring nature. He accordingly considered the entire expenditure to be capital in nature for intangible assets but however, allowed depreciation on the same. 18. Aggrieved by the order of A.O., the assessee carried the matter before the CIT(A). CIT(A) decided the issue by holding as under: 9.2 I have considered the submissions of the appellant. The appellant has filed the copy of agreement dated 1-1-2001 copies of bills for expenditure. It is seen that during the year, the assessee has made two types of payments in connection with SAP software. The payment of ₹ 84,24,564/- is towards monthly charges for operating and licence fee. This issue has been discussed by me while dealing with ground of appeal No. 8 for the Assessment year 2001-02 and it has been held by me that the expenditure is revenue in nature. For the reasons discussed in my appellate order for Assessment year 2001-02, in the current ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9.2.1.2 In view of the above, it is held that by incurring the expenditure of 105 lakhs, the assessee has obtained license for long term use of the software and thus obtained advantage of enduring nature. The expenditure has to be treated as capital expenditure. It is, therefore, held that the expenditure of ₹ 105 lakhs was rightly treated as capital expenditure by the Assessing Officer. The ground of appeal No.5 is partly allowed. 19. Aggrieved by the order of CIT(A), the assessee is now in appeal before us. 20. Before us, ld. A.R. reiterated the submission made before A.O. and CIT(A) and further submitted that the issue in the present case is covered in favour of the assessee by the decisions Hon ble Delhi High Court in case of CIT vs. Asahi India Safety Glass Ltd. in ITA Nos. 1110/2006 1111/2006, decision in the case of JCIT vs. Citicorp Overseas Software Ltd. 85 TTJ 87 (Mum), IBM India Ltd. vs. ACIT 105 ITD 1 (Bang.) and other decisions. Ld. D.R. on the other hand supported the order of A.O. 21. We have heard the rival submissions and perused the material on record. The fact of incurring of expenditure for SAP on account of user licencee fee and on account ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... owever, allowed depreciation. 24. Aggrieved by the order of A.O., the assessee carried the matter before the CIT(A). CIT(A) upheld the order of A.O. 25. Aggrieved by the order of CIT(A), the assessee is now in appeal before us. 26. Before us, at the outset, ld. A.R. submitted that the issue in the present case is directly covered in favour of the assessee by the decision of Tribunal in assessee s own case for A.Y. 2001-02. He further submitted that since the facts of the case in the year under appeal are identical to that of A.Y. 01-02, the issue of expenditure on knowhow fees be allowed in favour of the assessee. Ld. D.R. on the other hand supported the orders of A.O. and CIT(A). 27. We have heard the rival submissions and perused the material on record. We find that the issue of payment on knowhow fees by the assessee to FAG Automobiltechnik AG, Germany by the agreement dated 30.03.2000 was before Tribunal in ITA Nos. 792 816/Ahd/2006 for A.Y. 01-02. The issue was decided in favour of the assessee vide order dated 30.09.2011 by holding as under: 6. We have heard the parties at some length. We have carefully perused the orders of the authorities below in the ligh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -II) dated 9th July, 1969. If a know-how is acquired under an agreement is merely a licence for the user, if it is for a limited period, if the knowhow is without the right to use the patents and trade marks then if any payment made would no bring into existence an asset of enduring advantage to the Indian participants. This Circular therefore states that the payment should be regarded if expenditure incurred fop the purpose of running the business during the period of agreement. An another argument has also been extended that there were series of agreements, however, the know-how initially was acquired out of an agreement dated 30/08/1996. The changes in the provisions of section 32 were made subsequently from 1st day of April, 1998, therefore not applicable in the case of the assessee. It has been clarified that the agreements executed later on, had in fact, arose out of the original agreements which were in operation since inception of the company. In the light of the factual background, we have scrutinized the case laws cited before us. We have noted that in one of the case it was held that if the payment is made for exclusive acquisition of technical know-how, then the expendi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g Adjustment The present submissions are without prejudice to the oral arguments advanced during the course of hearing of appeal. Brief Facts 1. The Appellant is in the business of manufacture of ball and roller bearings. The company is one of the largest manufactures of bearings in India. During year the Appellant had benchmarked its international transactions with associated enterprises (AEs) using Transaction Net Margin Method ( TNMM ). The economic analysis for the purpose of benchmarking the international transactions was carried out by segmental division of the activities of the company in the manufacturing segment and distribution segment. Following table gives the comparative figures as per the Transfer Pricing Study: Segment Manufacturing Distribution PLI - Appellant 9.55 % 15.08% PLI - Comparables 9.79 % 2.19% Upward Adjustment made Accepted 2. The Additional Commissioner of Income Tax, Transfer Pricing - I, Mumbai ( the TPO ) has acc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rinding wheels and shield 3,571,481 26,421,834 29,993,315 DTA EOU (vi) Purchase of Rubber Seals 4,291,279 Nil 4,291,279 Only DTA (vii) Purchase of Retainers 3,037,495 10,983,860 14,021,355 DTA EOU (viii) Purchase of Capital Goods 51,925,936 Nil 51,925,936 Capital Goods (ix) Export of Tools 1,467,658 Nil 1,467,658 Income (x) Guarantee Commission for foreign currency loan Nil 114,497 114,497 Only EOU (xi) Charges for SAP / R3 and connectivity 15,732,397 3,191,000 18,923,397 DTA EOU (xii) Advertisement Materials 242,177 Nil 242,177 Only DTA (xiii) Training other Costs 4,043,445 Nil 4,043,445 Only DTA (xiv) Fees for use of technology (a) FAG Kuglefischer Georg Schaefer AG Nil 8,194,643 8,194,643 Royalty (b) FAG Industrial Bearings AG 42,172,305 6,907,060 49,079,365 Ro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tivity of import of raw material and export of goods are closely inter-linked and continuous and the same are not evaluated separately, by the assessee as well as this office. The ultimate result of the manufacturing activity of sale of finished products, reflect into the income earned by the entity. In the present case, as computed earlier, the operating profit requires to be adjusted upward by an amount of ₹ 13.84 crores. This adjustment, is not being allocated to various international transactions, as the assessee did not compute the Arm's Length Price of these transactions separately. In view of the fact that the transactions are inter-related and the pan of income generating activity, therefore, it will be appropriate to make the upward adjustment to the income of the assessee by the amount of ₹ 13.84 crores. Therefore, on account of bench marking the manufacturing activity of the DTA Unit of the company, an upward adjustment of ₹ 13.84 Crores is made. It was submitted that the TPO therefore concluded that the benchmarking of all the transactions should be done in a combined manner and not separately. 8. The Appellant submits that at no point in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ansactions of the manufacturing segment, the CIT (A) observed that the TNMM is appropriate method. However, the CIT (A) observed that the adjustment should be restricted to the International Transactions and not to all the transactions and accordingly applied the differential rate of 7.01 % in PLI to international transactions of DTA, other than Royalty, computed by her at ₹ 8,43,42,316. The CIT (A) accordingly confirmed adjustment of ₹ 59.12 lacs on account of other transactions of DTA. It is separately submitted and demonstrated in these submissions that the said computation of the CIT (A) is erroneous on several counts. Artificial Bifurcation of DTA and EOU is de hors the provisions of Law 13. The Appellant contents that based on Functions, Assets and Risks ( FAR ) analysis the Appellant has already bifurcated the Manufacturing Segment and Distribution Segment. Further dividing the manufacturing segment into DTA and EOU is not permissible under law. Rule 10 B (2) providing for criteria on which the transactions are to be compared. These include the specific characteristics of the property transferred or services rendered, FAR analysis, contractual terms of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TA (A) in Para 10.7.14 observed that the adjustment to the ALP should be restricted to the international transaction and cannot be made to the total sales including the transactions with unrelated parties. The CIT (A) has then worked out a figure of ₹ 8,43,42,316 as the international transaction on which the adjustment should be made. While the said observation of the CIT (A), that the adjustment should be restricted to the international transaction, is correct, it is submitted, without prejudice, by the Appellant that the computation of the said sum of ₹ 8,43,42,316 is completely baseless. Attention is invited to Page 3 of the TPO's order read with Page 41 of the CIT (A)'s order. It can be seen that the figure of ₹ 8,43,42,316 is arrived at by the following method: a. International Transactions in the nature of Revenue Expenses debited to the Profit and Loss Account (other than Royalty) of ₹ 4,01,14,355 (Rs. 8,88,38,750 minus 4,87,24,395 of Royalty); b. Added to above, the Royalty of the DTA Segment of ₹ 4,87,24,395 giving aggregate of ₹ 8,88,38,750. c. Added to above, the International Transaction in the nature of Revenue Expen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... epted. What is therefore left is purchases from Non- AES or Sales to Non-AEs. Therefore the adjustment made in the DTA segment is nothing but the adjustment of the purchase price or sales price of transactions with Non-AEs. This is not permissible under the Transfer Pricing Provisions. 20. We rely on Panasonic India Pvt. Ltd. v. ITO (Delhi) 6 ITR (Trib) 502 (Delhi). In this decision the business of the company was organized under three distinct segments, the consumer product division (CPD), the system product division (SPD) and the industrial sales division (ISD). The CPD and SPD divisions performed trading functions whereas the ISD performed commission agency functions. For the purpose of transfer pricing analysis the results of the CPD and SPD were aggregated and the results of the ISD were considered separately. The Arm's length margin was arrived at 2.48 per cent which being lower than net profit margin at 6.15 per cent; it was concluded in TP report that outcome of assessee's international transactions satisfied arm's length standard. In transfer price proceedings, TPO, however, observed that aggregation of results of two divisions, CPD and SPD, was not proper a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dia) Ltd. v. DCIT (2012) 17 taxmann.com 119 (Mum) The dispute is regarding the addition on account of GP rate and TP adjustment made by the AO. In making TP adjustment, the AO has followed the TNMM method, about which there is no dispute. The dispute raised is only about not giving the benefit of 5% adjustment and making the adjustments in relation to the entire sales and not limiting to the transactions with the AE. The adjustments on account of transfer pricing are to be restricted only to the international transactions with the AE, and not to the entire turnover of the assessee as held by the Mumbai Bench of the Tribunal in case of Starlite (supra) and in several other cases, (emphasis supplied) b. M/s. Genisys Integrating Systems (India) Pvt. Ltd. v. DCIT [2013] 152 TTJ 215 (Bangalore) Section 92C of the Income-tax Act, 1961 - Transfer pricing - Computation of arm's length price - Assessment year 2006-07 - Whether while determining ALP, transfer pricing adjustments should be restricted to only international transactions between associated enterprises either or both of whom are nonresident - Held, yes - c. Pennzoil Quaker State India Ltd. [2012] 26 taxmann.com 12 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... visions of the Act, which is then compared with the price at which international transactions are actually entered into and recorded in the books of account. The difference between the ALP and the actual price, if leading to the lowering of income due in India, is added by way of transfer pricing adjustment. From the scheme of Chapter X, containing the sections as afore-referred, it is manifest that the addition on account of transfer pricing adjustment can be made only in respect of international transactions with the AEs and not the non-AEs. It is quite natural also because there can be no scope for arranging the transactions with non-AEs so as to reduce the due tax in India. That is the reason for which the transactions with non-AEs have been excluded from the ambit of Chapter X of the Act. Royalty / Fees for Use of Technology 23. The TPO during the course of transfer pricing analysis had called for various details with respect to payment of royalty. The Appellant duly submitted the same. The TPO in para 5.8 at page 22 has held that the transaction of royalty is not at arm's length but has not made any upward adjustment on the count that under TNMM transactions cannot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a class of transactions is considered in that case the method is to be applied on that class and segregation is not possible. a) Mainetti India Pvt. Ltd. v. ACIT [2012] 149 TTJ 767 (Chennai) In the given case, the assessee is in the business of manufacturing plastic garment hangers. The assessee was part of the global group of Mainetti, the assessee used to buy and sell the hangers. The assessee was also in the business of manufacturing of the same. For determining the ALP the Assessing Officer had taken into account only those transactions where the sale price to Associate Enterprise (AE) was lower than the sale price to non-Associated Enterprise (non-AE) and ignoring the instances where the purchase-price from and sale price to AE exceeded the purchase-price from and the sale price to non-AE. While applying CUP method for determining the ALP, Transfer Pricing Officer (TPO) had considered only positive deviations and had ignored negative deviations. Further, the margin of plus or minus 5% as per Proviso to Section 92C(2) was also not considered. On further appeal the Hon'ble Bench has held that this is not case where the assessee is only purchasing the products or onl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on of royalty for AY 2001-02 u/s. 40A(2) it has been held that royalty @ 1.5% is reasonable. The CIT(A) has also relied on the royalty payments made by SKF for coming to the conclusion that royalty @ 1.5% represent ALP. It is the observation of the CIT(A) that the provisions of section 92 to 92F are similar to section 40A(2) similar adjustment is made in the current year also [refer para 10.7.5 of CIT(A) order]. It is submitted that for A.Y. 2001-02, the Appellant challenged the order of the CIT (A) before the Hon'ble ITAT. Before the Hon'ble ITAT it was contended by the Appellant that majority of the Royalty was paid to the Parties which are not covered by the provisions of Section 40 A (2) (b) of the Act. The ITAT for examining the said matter has set aside the order of the AO and has directed the AO to examine it further. Use of Controlled Transactions as CUP 31. The CIT (A) erred in relying upon the rates of royalty for the controlled transaction of SKF. Your attention is invited to Page 545 of the Paper Book, which contains the Annual Report of SKF Bearings India Limited. On Page 576 of the said report, there is a listing of Related Party Transactions . On Pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e at arm's length. 36. With respect to the approval of rates by SIA / RBI we submit that in case of Sona Okegawa Precision Forgins Ltd. v. Addl. [2012] 143 TTJ 516 (Delhi) it has been held that when royalty to related concern is approved by the RBI and DIPP also considers the same as reasonable at a certain percentage, the same can be taken as justified under the CUP method. In this case the assessee was engaged in the business of manufacturing of certain goods. It entered into eight international transactions with associated enterprises [AE]. It paid royalty to the AE at the rate of 3 per cent in respect of the goods sold to them and claimed deduction of the same. The royalty at the rate of 3 percent was paid on the basis of letter dated 30.04.1993 written by the Reserve Bank of India, Exchange Control Department, to Sona Steering Systems Ltd., in which payment of royalty @ 3% on domestic sales was allowed to be paid for a period of five years. The Assessing Officer referred the matter to the TPO, who came to the conclusion that the royalty paid by the assessee to the AE was not allowable, because (i) the royalty paid did not stand justified under the comparable uncontro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpany .................................. This contention of the company, is duly considered. The transaction of Royalty payment by SKF India Ltd. is a controlled transaction and as a principle, the controlled transactions are not used for computing the Arm's Length Price. On the issue of use of controlled transaction, Para 1.70 of the 1995 OECD Report refers that evidence from enterprises engaged in controlled transactions with associated enterprise may be used in understanding the transaction under review or as a pointer to further investigation. The dealings between associated enterprises, for comparison, can also be used in the cases of last resort where: (i) There is sufficient data available to demonstrate their reliability. (ii) Related party comparable data provides the most reliable available data upon which to determine or estimate an Arm's Length outcome. Therefore, the rate of royalty paid by SKF India Ltd. serves as a useful guide for determining the Arm's Length Rate of Royalty. 39. We most respectfully submit that there is no material on record to prove that the data extracted from SKF is sufficient to demonstrate its reliability. Except ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tured and the technology used for unique and had restored the matter to the TPO to work out the ALP using any other method. 43. In the case of the Appellant your kind office would appreciate that no data is available on record to prove that the CUP is the most appropriate method for benchmarking the transaction of royalty. No data is brought on record by the TPO nor by the CIT(A) for application of CUP. The transaction of SKF is a controlled transaction and this fact has been accepted by the TPO and also the CIT(A). In view of the same considering the decision of Tecnimont supra and Cabot supra the same cannot be used for benchmarking the transaction of royalty. Under the said circumstances we submit that the method applied by the Appellant (TNMM) is the correct method of computing the ALP of transaction of royalty more so when the margins of EOU have been accepted at arm's length. We therefore request your kind office to delete the adjustment made. 44. Regarding the rates of royalty we submit that the rates at which royalty is paid by the Appellant are generally accepted rates. In the case of SC Enviro Agro India Ltd. v. DCIT [2013] 143 ITD 195 (Mumbai - Trib.) dated 7-1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arking Royalty separately can be only ₹ 2.56 lacs, as contended herein. Attention is invited to Page 311 of the Paper Book. As it can be seen that for the running royalty paid for DTA exclusively is of only ₹ 3.67 lacs. In all other cases, the payment is either lump sum amount, for which no such addition can be made, or is paid at the same rates for EOU. As has been submitted earlier, that even after payment of this Royalty, the EOU has earned significantly higher margins as compared to the comparable companies. There is therefore no justification for making any adjustment of Royalty for the EOUs. Accordingly the rates applicable to the EOU have to be accepted. If the same rates are accepted for the same agreement for EOU then there is no reason why the same rate for the same agreement cannot be accepted for the DTA. This therefore leaves Royalty paid @ 5 % amounting to ₹ 3.67 lacs. If the said royalty is adjusted to 1.5 % then the adjustment will be of only ₹ 2.56 lacs. It is submitted that even if the matter is decided against the Appellant, the maximum adjustment for the Royalty should be restricted to ₹ 2.56 lacs and nothing more. 48. Should the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his reasons for treating the EOU as a separate and totally independent Unit on page 9 of his order. In view of the fact that the EOU has been set up independently and admittedly, is being maintained as an independent unit, it is liable to be treated as a separate unit. The functional profile of the EOU is also different as it is catering to a separate captive market and its products are not being sold in the open market while in respect of DTA, the products are being sold in open market. 5. As regards comparable, the assessee itself has admitted before the TPO (discussion on page 16 of TPO order) that the comparable selected are similar and have similar functional profile. Para 5.8, page 22 of the order. The various international transactions in the DTA segment are seamless and continuous and hence TNMM at DTA level justified. 6. Reason for rejection of explanation relating to royalty is on page 20-21 of the TP order wherein it has been held that the payment of royalty is not at arm's length and that the increase in royalty rates to 5% has not been negotiated by the assessee. Further, no information has been furnished whether the parent is charging royalty at same rate f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der. The assessee has failed to given information on whether royalty has been charged on same products from other AEs or not. 2. The TPO has brought on record that the payment made for royalty is excessive and unreasonable as on the same technology, royalty was being paid at 1.5% in the last 15 to 20 years and hence there was no technology transfer subsequent to renewal of royalty payment agreement. In fact, the tax is borne by the assessee resulting in still higher charges for the assessee company, Absolutely no justification for increase has been provided by the assessee company. 3. However, since the adjustment has been made at TNMM level, no separate arm's length study for royalty has been done by TPO - para 5.8 Case Laws Relied upon: 1. Benetton India Pvt Ltd 17 taxmann.com 5(Delh)(2012): Whether since in assessee's case, there were different segmental activities, which were independent of each other, they were required to be analyzed on transaction to transaction basis and not by combining all , activities - Held, yes 2. Tecnimount 1CB Pvt Ltd : 7098/Murn/2010. The Bench has held that, Now, coming to the main issue whether the segmental results are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ial Bifurcation of DTA and EOU is de hors the provisions of Law, DTA Segment has no exports but comparable companies has exports and incorrect computation by the ld.CIT(A). It is pointed out by the ld. counsel for the assessee that it can be seen that the figure of ₹ 8,43,42,316/- is arrived at by the following method:- a. International Transactions in the nature of Revenue Expenses debited to the Profit and Loss Account (other than Royalty) of ₹ 4,01,14,355 (Rs.8,88,38,750 minus 4,87,24,395 of Royalty). b. Added to above, the Royalty of the DTA Segment of ₹ 4,87,24,395 giving aggregate of ₹ 8,88,38,750. c. Added to above, the International Transaction in the nature of Revenue Expenditure CREDITED to at the P L Account of ₹ 74,03,728. d. Added to above, the International Transaction in the nature of capital Goods, part of the Balance Sheet of ₹ 5,19,25,936, aggregating to ₹ 14,81,68,414. e. From the above, reduction of the Royalty (of DTA and EOU Segment both) of ₹ 6,38,26,098. It may be noted that Royalty of EOU of ₹ 1,51,01,703 was not included in the above aggregate. Despite this fact, it was reduced from the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on the basis of the appellate order pertaining to AY 2001-02. It is also held that the benchmarking of royalty is to be done for EOU as well as DTA. The grievance of the assessee is that the ld.CIT(A) erred in relying upon the rates of royalty for the controlled transaction of SKF. The contention of the assessee is that the fundamental principle of CUP is that the comparable transaction has to be uncontrolled Transaction , meaning thereby that it has to be a transaction between two parties who are not related to each other. SKF transaction is not eligible to be treated as CUP as it is with related party. The another contention of the assessee is that the TPO and ld.CIT(A) has relied upon the rates of royalty paid by the assessee during the earlier years. The contention is that this transaction is also with related parties as it is given to a related party of the assessee for the earlier period. It is also the contention of the assessee that no material is available on record that any enquiry of any nature has been carried out by any person including TPO to conclude that the transactions of SKF and for the earlier years for the assessee were the correct ALP or were done in circumst ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se expenses merely consisted of replacement of old False Ceiling with new False Ceiling. The Assessing Officer treated the expenditure as capital expenditure and allowed depreciation thereon. 11.1 Before me, the appellant submitted that the expense was incurred for replacement of Old False Ceiling with New False Ceiling. It was contended that in A.Y. 1998-99, the CIT(A) had allowed deduction for replacement of old ceiling with new ceiling as revenue expenditure. It was stated that since these expenses are comparable with the expenses for A.Y. 1998-99 deduction may be given to the appellant. 11.2 I have carefully considered the facts of the case and the appellant's submission. The assessee has incurred this expenditure on replacement of old false ceiling. The expenditure is not on preservation or maintenance of existing asset. By incurring the expenditure, the assessee has obtained an advantage of enduring nature. In the case of Assam Bengal Cement Co. 27 ITR 34, the Hon'ble Supreme Court laid down that if the expenditure is made for acquiring an asset or advantage of enduring nature, it is in the nature of capital expenditure. In the case of BaIlimaI Naval Kishore A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inning Weaving Mills v. CIT 31 ITR 427 (Nag.). He, therefore submitted that following the decision of Tribunal of earlier years, the ground of assessee be allowed. The ld. D.R. on the other hand supported the order of A.O. 35. We have heard the rival submissions and perused the material on record. We find that in A.Y. 1998-99 in ITA No. 1943/Ahd/2001 the issue before Tribunal in assessee s own case was about the expenditure incurred on construction of compound wall by replacing barbed wire fence. The issue was decided in favour of assessee by holding as under: 22. The next dispute is with regard to disallowance of expenses of ₹ 18,21,888/- on construction of compound wall by replacing barbed wire fence. The above expenditure was incurred on replacement of old assets and the same was claimed as revenue expenditure. He Assessing Officer noticed that the compound wall was not in existence earlier and a new asset of capital .nature has come into existence. He, accordingly, disallowed ₹ 18,21,888/-. He, however, allowed depreciation at the rate of 10%, The disallowance was upheld by the CIT(A) by holding that it is a capital expenditure. 23. We have heard the par ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation on same. 38. Aggrieved by the order of A.O., the assessee carried the matter before the CIT(A). CIT(A) following the order for A.Y. 01-02 upheld the disallowance made by A.O. 39. Aggrieved by the order of CIT(A), the assessee is now in appeal before us. 40. Before us, at the outset, ld. A.R. submitted that issue in the present case is covered in favour of the assessee by the decision of Tribunal in assessee s own case for A.Y. 01-02. He placed the copy of aforesaid decision on record. Ld. D.R. on the other hand supported the orders of A.O. and CIT(A). 41. We have heard the rival submissions and perused the material on record. We find that issue of payment of fees for use of MS Office was before the Tribunal in assessee s own case for A.Y. 01-02. The issue was decided in favour of the assessee in ITA Nos. 792 816/Ahd/2006 as under: 17.1. The assessee has incurred expenditure on computer software, details as under:- (a) Fees paid for use of Microsoft office 9,45,005/- (b) Expenses incurred for use of e-mail facility 2,72,500/- (c) Cost of Auto card for bearing design 4,57,160/- (d) Expenses incurred for upgradation of Software/maintenance of compute ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2003 for A.Y. 2000-01. He, therefore, fairly conceded that the ground be decided against assessee. Ld. D.R. supported the orders of A.O. and CIT(A). 49. We have heard the rival submissions and perused the material on record. We find that the identical issue was before the Tribunal in assessee s own case in ITA No. 3880/A/2003 for A.Y. 2000-01and the issue was decided against the assessee by holding as under: 7. We have heard both the parties and gone through the facts of the case and the decision relied upon by the Id. AR. We find that Hon'ble Madras High Court in the case of India Pistons Ltd(supra) relied upon by the Id. AR found that the conditions for supply of goods by the non-resident to the assessee in that case were that the payment of purchase price in instalments was to be made with the condition that the assessee will compensate the supplier by means of interest on the unpaid instalments. Accordingly, the Hon'ble High Court held that the unpaid instalment was not the same as loan and therefore, interest paid could not be treated as paid on-the loan and hence, deduction of tax at source was not attracted. Since it is not the case of the Revenue that interes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d by the Revenue are as under:- 1. On the facts and in the circumstances of the case and in law, the learned CIT(A), Baroda has erred in I deleted the disallowance of claim of ₹ 30,96,721/- being amount of lease rental paid to IDBI Ltd. and SBI Capital Markets Ltd. II reduced the addition of ₹ 18923999/- to ₹ 1,05,00,000/- on account of payment of operating and licence fees for use of SAP R3 Software, allowing relief of ₹ 84,24,564/-. III deleted the disallowance of ₹ 4,77,64,000/- on account of payment for transfer of Technical Know-how. IV Reduced the addition of ₹ 13,84,00,000/- to ₹ 4,35,03,396/- on account of Transfer Pricing. 53. First ground is with respect to the disallowance of claim of ₹ 30,96,721/-. 54. During the course of assessment proceeding, A.O. noticed that assessee had debited ₹ 30,96,721/- as pre-paid rent paid to financial institutions. A.O. noticed that expenses pertained to subsequent period and was in the nature of advances and was therefore not incurred for the relevant financial year. He, therefore, disallowed the claim of assessee. 55. Aggrieved by the order of A.O., the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
