TMI Blog2011 (8) TMI 1083X X X X Extracts X X X X X X X X Extracts X X X X ..... ot disclosed - HELD THAT:- Following the ratio laid down in the case of AMWAY INDIA ENTERPRISES. VERSUS DEPUTY COMMISSIONER OF INCOME-TAX, CIRCLE - 1(1), NEW DELHI. [ 2008 (2) TMI 454 - ITAT DELHI-C] , we come to the conclusion that in the present case, since the assessee had purchased the user of brand name, trademark, logo for 3 years, we hold that the expenditure incurred in this regard as valued by the approved valuer is capital expenditure on which the claimed depreciation was allowable. We accordingly direct the A.O to allow the claimed depreciation on the above assets - Decision in favour of Assessee. Method for determination of ALP in respect of Exports - Assessee adopted comparable Un-controlled price method (CUP) for determining (ALP) in respect of Exports transaction undertaken with the AE. TPO held such method is not applicable for determining ALP, thus adopted Cost Plus Method(CPM) - HELD THAT:- . In our view, the Ld TPO was not justified in comparing the gross margin in export segment vis- -vis gorss margins in domestic segment. There are various differences in the functions performed and the risk assumed in these two segments and therefore, the same cannot be co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ue raised in the additional ground is legal in nature which goes to the root off the matter and adjudication of which does not require consideration of fresh material outside the record. The ld. D.R opposed the above application. 7. Considering the above submission, we find substance in the submission of the ld. A.R that the issue raised in the additional ground is legal in nature which goes to the root of the matter, and adjudication of which does not require consideration of fresh material outside the record. We thus allowed this additional ground for our consideration and adjudication. 8. In ground Nos. 4, to 4.15, the assessee has basically questioned the action of the A.O/DRP in making an addition of ₹ 58,54,128/- u/s 92C of the Income Tax Act without appreciating that the CUP or TNMM method was the most proper method for determining the ALP of the international transaction relating to export of finished goods to its Associated Enterprises (AE). 9. We have heard and considered the arguments advanced by the parties in view of orders of authorities below, material available on record and the decisions relied upon by them. Ground No.2, 2.1 and 2.2 10. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and leasehold are used in connection with land property, these are two different ways in which property can be owned. Leasehold rights in a property are nothing but a tool to enjoy and exploit that property. Until the end of the lease period, the leasehold has the right to remain in occupation as an assured tenant paying an agreed rent to the owner. The Ld. D.R. has submitted as no depreciation is allowable on land, no depreciation can be allowed on the road to use that land. She submitted that on perusal of Section 32 of the Act as amended w.e.f. 1.4. 1998, it can be seen the Legislature has extended depreciation to the enjoyable asset which was only then restricted to buildings, machinery, plant or furniture. Even after amendment, the depreciation u/s. 32 of the Act is restricted to the tangible/intangible assets which are specifically enumerated therein and depreciation is not allowable on all tangible/intangible assets. The Ld. D.R. submitted that the intangible assets on which depreciation is made allowable u/s. 32(1)(ii) of the Act are, know-how, patterns, products, trademarks, licenses, franchises or any other business or commercial rights on similar nature acquired on o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inly, this would lead to a conflicting situation where land acquired on freehold basis would not be eligible for depreciation but similar land acquired on leasehold basis would be eligible for depreciation that too at a higher rate. Under these circumstance, we are not inclined to interfere with the action of the A.O in disallowing the claimed depreciation in question on leasehold rights over the land treating the same as intangible asset u/s. 32(1)(ii) of the Act. The ground Nos. 2 2.1 are thus rejected. 14. Since no argument has been advanced in support of the alternative ground ground No. 2.2 to justify the claim of the assessee that A.O should have allowed amortization of cost of the leasehold right while computing income of the assessee company, the same is rejected as not pressed. Ground Nos. 3, 3.1 and 3.2. 15. The relevant facts are that the assessee claimed according to the working done by Registered Valuer, the market value of the user of the Greaves brand at ₹ 2.67 Crore as royalty expenditure, since the assessee was allowed to use this brand for a period of 3 years. The claim was disallowed by the A.O on the basis that there was a clear clause in the agree ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for a period of 3 years. 17. The Ld. A.R. drew our attention to Clause 1.2.6 on page 243 of the paper book stating that assessee would be acquiring all intellectual property rights such as designs, drawings, manufacturing processes and technical knowhow in respect of the products manufactured by the unit. Accordingly, it is clear that the assessee had acquired technical knowhow from Greaves Cotton Ltd. The Ld. A.R. submitted that the A.O has referred to Annexure 8 of the agreement wherein there is no mention of technical knowhow (page No. 277 of paper book). Thus, the A.O has stated that since no knowhow has been acquired, the claim of depreciation cannot be allowed. The Ld. A.R. submitted that enclosure 8 of the agreement gives the book value of the assets of Greaves as on 31st March 2005 as per books of account of Greaves and it is not the comprehensive list of the assets acquired by the assessee. Technical know was not shown in the balance sheet and hence, it is not shown there. He submitted further that since knowhow is not reflected in the balance sheet of Greaves Cotton, it does not mean that there was no knowhow available. The fact that the assessee is being able to manu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l expenditure and if it is for less than 2 years, it is a revenue expenditure. 23. Without prejudice to the above submissions, the Ld. A.R. submitted that as per the agreement, the trade mark, logo and brand name can be used by the assessee for a limited period of 3 years ( 7.1, page 251), therefore, since the assessee s right of user of these assets is limited to only for 3 years, amount paid should be allowed as a revenue expenditure. In this context, the Ld. A.R. also advanced an alternative argument on the following additional ground : : 1] Without prejudice to the grounds of appeal raised, the appellant requests that the amount of ₹ 5.09 Crs. Paid to Greaves Cotton Ltd. for acquiring know how and brand name, trademark and logo be allowed as a revenue expenditure. 24. The Ld. CIT- D.R. has basically placed reliance on the assessment order. He reiterated the basis on which the authorities below have disallowed the claimed depreciation as the agreement had permitted the assessee to use the Greaves logo free of cost for a period of 3 years. He submitted that when a written contract is available and terms of the contract are unambiguous and clear, it is not permis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ible assets in the form of technical knowhow, drawings, designs etc., The Ld. A.R. submitted that the valuation report was submitted before the A.O as well as before the DRP. The A.O. has held that amount paid by assessee towards technical knowhow is in fact, payment made towards goodwill and since depreciation is not allowable on goodwill, the amount of depreciation claimed by assessee has been disallowed by him. However, the A.O has never stated that the valuation made by assessee towards technical knowhow and royalty is very high. He submitted that as per the agreement entered into with Greaves, it has paid ₹ 2.41 Crores for technical knowhow and ₹ 2.67 Crores for brand name, trademark and logo and hence, depreciation on the same should be allowed while computing the income. 28. Considering the above submissions, we find substance in the contention of the Ld. A.R. Both the sides in their arguments have stated that the contents of sale/purchase agreement between the assessee and Greaves cotton Ltd. should be read in its totality for clear understanding of terms and conditions agreed upon therein. It is also an undisputed fact that the assessee has paid the agreed c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... esent case as per the valuer s report. The approved valuer has valued the knowhow acquired at ₹ 2.41 Crores and royalty payable for use of brand name, trademark, logo at ₹ 2.67 Crores (Page No. 303 of the paper book). The authorities below have not disputed the above values determined by approved valuer. The Special Bench of the Tribunal in the case of Amway India (supra) has held that if the software is useable/used for more than 2 years, it is a capital expenditure and if it is for less than 2 years, it is revenue expenditure. We thus following the ratio laid down therein come to the conclusion that in the present case, since the assessee had purchased the user of brand name, trademark, logo for 3 years and similarly, the intellectual property right such as design, drawings, manufacturing processes and technical knowhow in respect of the products manufactured by unit was acquired, we hold that the expenditure incurred in this regard as valued by the approved valuer is capital expenditure on which the claimed depreciation was allowable. In this regard we also find support from the cited decision of Delhi Bench of the Tribunal in the case of Hindustan Coca Cola Beverage ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee company, the transactions entered into by the assessee with its AE are at ALP. In this regard, he referred page Nos. 144 and 162 of the paper book wherein details of the products sold by Greaves to the AE of assessee are given. The Ld. AR submitted that as per the Ld TPO, the comparable prices are available only for 9 products while the assessee has sold around 61 products to its AE and therefore, the CUP method cannot be considered as the most appropriate method. 31. The Ld. A.R submitted that there are evidences of comparable prices in respect of 9 products and the rates charged by the assessee is much higher. Therefore, this fact indicates that the transactions entered into by assessee with its AE are at ALP. Simply because, the comparable transactions are available in respect of 9 products, it does not mean that CUP method is to be rejected. On the other hand, the fact that the assessee has charged higher rates in respect of 9 products clearly indicates that the assessee s transactions with its AEs are at ALP. On the basis of these 9 products, one can contend that all the transactions with the AE are at ALP. 32. Without prejudice to the above submissions, the Ld. A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... antial brand which has been valued in Crores of Rupees. An appropriate adjustment will have to be considered in the alleged brand value as well. He submitted further that if the issues raised in the quantum appeal such as those of royalty payments, owning of intangibles etc., raised in the same appeal are allowed in favour of assessee, there will be a change in assessee s PLI as well as business profile. 35. On the contention of the Ld. A.R. that domestic market and the export market are not comparable, the ld. D.R. submitted that the external comparable selected by the assessee United Drilling does not show any export income, still the company is assessee s favourite comparable. The Ld. D.R. submitted further that the assessee has taken about marketing risk, bad debt risk etc., but has not given quantification of the adjustment on this account. He submitted that it is an accepted premises that risk adjustments cannot be allowed as a standard adjustment. In support, he referred the decision in the case of Systematic Software and Solutions Pvt. Ltd., 2011 T11 6- - ITAT Mum TP. 36. The Ld. D.R. submitted that the cost allocation claimed by the assessee between the domes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ence, he has made addition of ₹ 58,54,128/-. The gross margin in the domestic segment has been computed by him at 23.54% and the gross margin in the export segment has been computed by him at 5.42% (page No. 39 of his order ). 39. On the applicability of different method to find out Arms Length Price, the parties have argued at length. Applicability of CUP Method 40. On the applicability of CUP methods for determining the ALP, the submission of the Ld. A.R. remained that the assessee has purchased the running unit of Greaves Cotton Ltd. Earlier Greaves Cotton Ltd. used to sell products to Driltools Dubai. Since similar products were sold by Greaves Cotton to its AE in the earlier years and the rate charged by Greaves was lesser than the rate charged by the assessee company, the transactions entered into by assessee with its AE are at ALP. The relevant details of the products sold by Greaves to the AE of the assessee are given at page Nos. 144 162 of the paper book. The Ld TPO has held that CUP method cannot be considered as most appropriate method since the comparable prices are available only for 9 products while the assessee has sold around 61 products to its ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eaves Cotton Ltd. and the assessee. Thus, we are of the view that the date of Greaves transaction is irrelevant and should be considered. Greaves sale transactions are ranging in the period from December 2004 to April 2005 and assessee s transactions are ranging during the period from August 2005 to March 2006. Even though, the Rule 10B(4) states that the comparable date should be relating to the Financial Year in which the international transaction is entered into, when the transactions are entered into by the Greaves and the assessee in the same calendar year though the Financial Year is different, still the same should be treated as comparable transactions. Secondly, the proviso to Rule 10B(4) provides date relating to period not being more than 2 years prior to the F.Y. can be considered. Thus, as per the proviso, the date of earlier F.Y can certainly be considered. The Ld CIT DR has referred to the decision of ITA Mumbai Bench in the case of Systematic Software Solutions (P) Ltd., (Supra) for the proposition that earlier year data cannot be used unless a case has been made under proviso to Rule 10B(4). We note that in that case, the assessee was not able to demonstrate that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee has elaborately clarified on page Nos. 146 and 147 of the paper book that these 5 companies are comparable, hence TNMM method should have been adopted for determining ALP. Ld TPO has rejected the submission of the assessee on the basis that 5 companies selected are not comparable with the assessee company. The Ld TPO has stated that but for United Drilling Ltd., all other companies are operating in different field. Regarding United Drilling, the Ld TPO has further stated that it also manufactures hole tools, gas lift equipment, wire line etc. The contention of the Ld. AR in this regard remains that the 5 companies selected by it are comparable and the details of the companies are given on page 146 of the paper book. Applicability of CMP 45. The Ld TPO has adopted the CPM on the basis that the assessee had a joint facility arrangement or a Long Term buy and supply arrangement with its AE. The contention of the Ld A.R. remained that the assessee company had purchased the running unit of Greaves Cotton Ltd. It was submitted that a joint facility arrangement is where a company purchases some finished goods from the principal, carries out operations and sells the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee has to bear the said risks in domestic segments. There is no product liability risks (Like retention money, bank guarantee, warranty etc.,), in exports segment, but the assessee has to bear the said risks in the domestic segments. The contractual terms also defer in the domestic segment vis- -vis the export segment. The Ld. AR submitted further that in the domestic segment, the Public Sector Undertakings are the main customers of the assessee, wherein more follow up at every stage till the recovery of due payment is required to be done. 47. Without prejudice to the above submissions, the Ld. A.R. submitted that the addition made by the Ld TPO by adopting the CPM is not justified. The Ld TPO has computed the gross profit margin in the domestic segment at 23.54% while in the export segment at 5.42%. The difference between the 2 is calculated at 18.12% and the same is applied to the total cost of production of goods sold to the AE and the addition of ₹ 58,54,128/- has been made. He submitted that the working of the gross margins has been given by the Ld TPO at page No. 9 of its order. In this working, the Ld. AR submitted that certain points are important. In th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 49. Apart from the above factors, the Ld AR submitted that in respect of transactions with AE, the assessee does not have to bear the bad debt risk, product/warranties etc., at least 40 % deduction should be given in the margin computed of the domestic segment for the above risks. He submitted that this view has been accepted in the case of Soni (India) Ltd., 118 TTJ 865, wherein on account of difference in the various factors/functions performed, the Tribunal gave reduction of 20%. He submitted that because of the difference in the functions performed and the risk undertaken, such benefits has to be allowed. 50. Considering the above submissions, vis- -vis the method i.e. CPM (Cost Plus Method) adopted by the Ld TPO to determine the Arms Length Price, which has been relied upon by the Ld. D.R, we find that the Ld TPO while adopting CPM has failed to appreciate several material aspects of the issue as discussed above. In our view, the Ld TPO was not justified in comparing the gross margin in export segment vis- -vis gorss margins in domestic segment. There are various differences in the functions performed and the risk assumed in these two segments and therefore, the same c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... freight expenses, bank interests etc., which cannot be ignored as ultimately the income tax is levied on net profit and therefore, comparison of the net profit of the domestic export segment is more proper. The assessee at page No. 141 of the paper book has given working of the net profit of the 2 Divisions as per which, the net profit of the domestic segment is 13.04 % and that of the export segment is 12.55%. We find that there is hardly any difference between 2 segments. We also find substance in the submission of the Ld AR that in respect of transaction with AE, the assessee also does not have to bear bad debt risks, product/warranty risks etc., hence some % of reduction should he given in the margin computed for the domestic segment for the above risk. 52. Considering the above material facts in totality, we are of the view that the Ld TPO was not justified in adopting the Cost Plus Method (CPM) as the most appropriate method. On the basis that the assessee had a Joint Facility Arrangement or a Long Term Buy and Supply Arrangement with its AE, as we have discussed hereinabove, we find that there was no sufficient reasons with the Ld TPO to reject CUP method or TNMM adopted ..... X X X X Extracts X X X X X X X X Extracts X X X X
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