TMI Blog2015 (10) TMI 2607X X X X Extracts X X X X X X X X Extracts X X X X ..... g block of asset concept. We cannot ignore that when an asset is placed in block of asset, individual asset comprising within the block received through individual identity and therefore, the existence and use of individual asset fall within a block of assets is not of any relevance for the purpose of adjudication of the claim of the assessee for depreciation on plant and machinery. In the case of CIT vs Oswal Agro Mills Ltd. (2010 (12) TMI 947 - Delhi High Court) it was held that assets forming part of block of asset attracts depreciation of entire block of assets even if not used in the relevant financial year. In this case, undisputedly, DRP allowed depreciation of plant and machinery for AY 2007-08, however, the AO did not give effect to this order. In the second appal before the ITAT, the issue was decided in favour of the assessee by Tribunal. We further note that for AY 2008-09, the DRP allowed depreciation on plant and machinery during the course of rectification proceedings vide order dated 12.3.13 and for AY 2009-10, the AO himself accepted and allowed depreciation in the assessment order passed u/s 143(3) of the Act dated 28.2.2014. In view of above, depreciation on plan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... said to be part and parcel of capital structure of the company. On the basis of foregoing discussion, we respectfully follow the order of the Tribunal on this issue in favour of the assessee and hold that the technical fee paid by the assessee to DIL under TCA ought to be allowed as revenue expenditure. Refund form custom department - Held that:- Since the assessee could not submit and furnish any reply, submissions and documentary evidence on this issue, therefore, the department has no serious objection if the issue is restored to the file of AO/DRP for a fresh verification and examination of the assessee’s claim. In view of above, we clearly note that during the draft assessment proceedings, the assessee could not submit relevant explanation, submission and documentary evidence supporting to its claim regarding refund from custom department and in absence of the same, the AO presumed that the AO has nothing to say in this regard and he made impugned addition without considering the totality of the facts and circumstances, therefore, we are inclined to hold that the assessee was not provided due opportunity to explain his claim during the proceedings before the lower authorit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... appellant by concluding that the appellant should have been compensated for its marketing efforts in India. 2.4 That on the facts and circumstances of the case and in law, the TPO/AO/DRP has erred in not appreciating that the appellant undertakes marketing activities to increase its own business sales in India and all marketing activities in relation to its distribution business are undertaken by the appellant for its own purpose and not for the direct benefit of or on behalf of any associated enterprise. 2.5 The learned TPO/AO/ORP has erred in law and on facts, by disregarding the material placed on record, and by concluding that the AMP expenses are incurred by the appellant under an arrangement with associated enterprises. That there was no transaction between the appellant and associated enterprises which warranted application of section 92 of the Act. 2.6 The TPO/AO/ORP has erred in not carrying out the determination of arm's length price in accordance with section 92C of the Act read with rule 100 of Income Tax Rules, 1962. 2.7 That on the facts and circumstances of the case and in law, the TPO/AO/DRP erred in making a mechanical comparison between the AMP exp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... royalty treated as capital expenditure. 5. PROVISION FOR DOUBTFUL DEBTS AND DOUBTFUL ADVANCES 5.1 That on the facts and circumstances of the case and in law, the AO/ DRP has erred in adding back ₹ 12,424,949 on account of provision for doubtful debts and doubtful advances written back during the year and credited to the profit and loss account and not appreciating that such amount had not been claimed as deduction in the year in which such provisions were created. 5.2 That on the facts and circumstances of the case and in law, the AO/ DRP has erred in holding that appellant did not furnish the details of nature of such provisions written back. 6. DISALLOWANCE OF TECHNICAL FEES 6.1 That on the facts and circumstances of the case and in law, the AO/ DRP has erred in disallowing ₹ 9,135,000 by treating technical fee paid by the appellant during the year as capital expenditure. 6.2 That on the facts and circumstances of the case, the AO/ DRP has erred in concluding that during the year the appellant has paid only USD 100,000 as technical fee but claimed ₹ 9,135,000 as expense in the return of income, for which no basis has been provided by the appell ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sed the relevant material placed on record, inter alia written synopsis filed by the assessee and other comparative charts and all three paper books of the assessee. 4. Ld. Counsel of the assessee submitted that the assessee is engaged in the business of purchase and resale of Daikin products in India and during the relevant assessment year, the assessee imported finished goods from DIL and end users in India. Ld. Counsel also pointed out that besides the main activity of purchase of Daikin products for the purpose of resale, the assessee also rendered market support service to DIL. Ld. Counsel has specifically drawn our attention to this fact that the assessee acts an independent distributor and marketer and distributes Daikin products on principal to principal basis. Since the assessee undertakes normal risks including market risk, price risk etc. and all cost of spending and maintaining market for Daikin products are to the amount of the assessee, therefore, the assessee can be characterised full risk distributor. 5. Ld. Counsel further pointed out that for FY 2005-06, the assessee entered into international transaction with its AE which were duly accepted to be at Arm s L ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ut that if the functions performed by the assessee are different from those performed by a comparable company, then an adjustment is required to be made so as to bring the AMP functions performed by the assessee as well as the comparable on the same pedestal. 9. On careful consideration of above submissions of both the sides, we note that in the instant case, no detail of AMP function performed by the assessee is available on record. At the same time, we further note that there is no reference in the order of the TPO to only AMP functions performed by comparables. In view of above, no such analysis or comparison has been made or undertaken by the TPO because of applying the bright line test for determining the value of the international transaction of AMP expenses and then applying cost + method for determining its ALP. In the present case, the ld. Counsel of the assessee s well as ld. DR failed to enlighten us towards any material divulging the AMP functions performed by the assessee as well as comparables adopted by the TPO to determine the ALP of the AMP expenses at our end. Therefore, there is lack of relevant facts before us on this issue. Under above noted facts and circum ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on plant and machinery rightly alleging that under block of assets, concept, uses of asset is a fundamental requirement to claim depreciation and no manufacturing activities were carried out by the assessee during the relevant financial period and therefore no depreciation should be allowed. Ld. DR further contended that the DRP upheld the disallowance since no manufacturing activity had taken place and plant and machinery cannot be said to have been used for the purpose of manufacturing activity. However, ld. DR fairly accepted that on the similar set of facts and circumstances, the DRP-I, New Delhi in assessee s own case for AY 2008-09 has allowed the claim of depreciation on plant and machinery of the assessee following its own order for AY 2007-08 (supra). 11. On careful consideration of above submissions of both the sides, we note that ITAT I Bench, Delhi in the order dated 13.7.13 for AY 2007-08 and 2008-09 in assessee s own case while dealing with ground no. 3 has decided this issue in respect to depreciation on plant and machinery in favour of the assessee with following observations and conclusion:- 7. Ground no. 3 for the A.Y. 2007-08 is on the claim of the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... In the second appal before the ITAT, the issue was decided in favour of the assessee by Tribunal order dated 31.7.2013 (supra), We further note that for AY 2008-09, the DRP allowed depreciation on plant and machinery during the course of rectification proceedings vide order dated 12.3.13 and for AY 2009-10, the AO himself accepted and allowed depreciation in the assessment order passed u/s 143(3) of the Act dated 28.2.2014. In view of above, depreciation on plant and machinery should be allowed to the assessee for AY 2006-07 and thus, ground no. 3 of the assessee is allowed and the AO is directed to allow the depreciation. Ground No.4 13. Apropos ground no.4, we have heard arguments of both the sides and carefully perused the relevant material placed on record. Ld. Counsel of the assessee submitted that the assessee claimed deduction for royalty payments amounting to ₹ 25,98,620 in accordance with the provisions of section 40(a)(i) of the Act as the assessee had entered into a Technology Collaboration Agreement (TCA) with Daikin Industries Ltd. , Japan (DIL) (pages 336 to 462 of Volume II) under which DIL agreed to grant the non-transferable right and licence to use Dec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd . Ld. Counsel also pointed out that in the case of Southern Switchgear (supra), technical aid and information remained with the licensee even after the agreement was terminated which is not the factual position in the present case because as per TCA Article 11 the royalty shall be payable from the date of commencement of commercial production @4% of licensees net ex factory price for all sales of licensed products including export. Ld. Counsel pointed out that when the payment of royalty is related to the ex factory sale price of licensed products including exports, then it cannot be treated as capital expenditure of enduring benefit and the same should be treated as revenue expenditure. 15. Replying to the above, ld. DR strongly supported the draft assessment order, the DRP order and the impugned assessment order and submitted that the assessee has claimed impugned amount of royalty by including the same as prior period adjustment which have been claimed below the line i.e. profit for computation of income in the computation of income before charging of tax and other provisions and losses. Ld. DR further submitted that in view of the decision of Hon ble Madras High Court in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the source of procurement, including ocean freight, insurance, customs duties. For the purpose of this Agreement, Standard Bought Out Components are those which are separately agreed between DAIKIN and LICENSEE. 11.3 The above-mentioned royalty shall be payable for ten (10) year period from EFFECTIVE DATE or for seven (7) year period from the commencement of commercial production of the LICENSED PRODUCTS by LICENSEE, whichever expires earlier, in accordance with current Government of India policy. This period may be extended should the policy of the Government of India change .during the currency of this Agreement and/or in the event the parties hereto agree for extension 'of this Agreement in writing subject to obtaining relevant Government of India approvals. 11.4. Except as otherwise provided for herein, the sale of LICENSED PRODUCTS shall be deemed to have been made when delivered or invoiced by LICENSEE, whichever occurs earlier. 17. In view of Article 11.1, sub-article (2), we clearly note that royalty shall be payable from the date of commencement of commercial production of LICENSED PRODUCTS including export from the territory @4% of licencees net ex-fac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be allowed as business expenditure. In this case, the assessee Hero Honda Motors Ltd. entered into a joint venture agreement with Honda Japan for manufacture and sale of motorcycle using technology licenced by Honda. The assessee and Honda Japan entered into an agreement called licence and technical assistance agrement in terms which assessee paid royalty to Honda. The assessee claimed deduction of said payment u/s 37(1) of the Act whereas the assessee rejected the same by holding that it was in the nature of capital expenditure. The Tribunal, however, allowed assessee s claim. The Hon ble High Court considered the substantial question of law that whether the income tax appeal the Tribunal was right in holding that payment made to Honda Japan under the know how agreement dated 2.6.1995 is revenue expense and not partly or wholly capital expenses. Speaking for Hon ble Jurisdictional High Court, their lordships after considering the ratio of the relevant judgment/orders including judgment of Hon ble Supreme Court in the case of Southern Switchgear Ltd. vs CIT 232 CTR 359 (SC) held that since the payment in question was for acquiring rights to sue technical know how and the ownershi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve market of two/three wheelers. 17. Model fee, subject matter of appeal pertaining to assessment year 2001-02 is merely ₹ 4.09 lakhs and the said issue is not raised in other years. Royalty on the other hand is substantive and payment made in the assessment year 2001-02 was ₹ 17.88 crores. The said royalty paid to Honda, if paid for right to use of technical knowhow and intellectual property right, would possibly be taxed in India in terms of the Double Taxation Avoidance Agreement between India and Japan. But the said payment might not be taxable in India if it is held that there was absolute and complete transfer of ownership in the intellectual property right by Honda to the Indian assessee in absence of a Permanent Establishment (See Articles 7 and 12 of the Double Taxation Avoidance Agreement between India and Japan). 18. In the appeal for the assessment year 2000-01, Revenue has also challenged the tax treatment of ₹ 33.07 lakhs paid as technical guidance fee. Copy of the agreement on the basis of which the said fee was paid has not been placed on record by the appellant Revenue. In the absence of any document and even details as to the nature and cha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ments made by respondent to Honda were revenue expenditure and not capital. On the said finding on merit, the Tribunal observed that there was no error in the order passed by the Assessing Officer. Power under Section 263 can be invoked by the Commissioner only when the order passed by the Assessing Officer is erroneous and not otherwise. It is in these circumstances, that no specific question of law with reference to power under Section 263 of the Act, has been framed in the appeal relating to assessment year 2001-02. 21. In view of the aforesaid discussion, the substantial questions of law are answered in favour of the respondent assessee and against the appellant Revenue. 19. Accordingly, we hold that the AO/DRP was not right in making disallowance in regard to the payment of royalty made by the assessee under TCA and the payment of royalty should be allowed as a revenue allowance/expenditure. However, we may point out that the issue of payment of royalty was not before the Tribunal in ITA No.1328/D/11 for AY 2005-06, therefore, we decline to accept the submission of the ld. Counsel of the assessee that the issue is covered in favour of the assessee by the said order of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssue against the assessee by simply observing that no documentary evidence in support of its contention has been filed by the assessee along with letter dated 9.12.09 and the assessee has not furnished the nature of advances written back as to whether they are of capital or revenue in nature. Subsequently, the AO proceeded to make impugned disallowance by observing that in the absence of any clarification claim of the assessee is disallowed and added to the income of the assessee company. During the argument, ld. Counsel of the assessee has drawn our attention towards page no. 354 of assessee s paper book Volume II and submitted that in the computation of taxable income, the assessee added provision for doubtful debts to the taxable income of the assessee as per Note no. 1 to the Notes of accounts, therefore, when consistently, the assessee has not claimed provisions for doubtful debts and doubtful advances, then when the amount is reversed, it should not be added back to the taxable income of the assessee. At this juncture, we note that ld. DR during the argument, has fairly submitted that the department has no serious objection if the issue is restored to the file of AO/DRP fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... paid by the assessee to DIL during AY 2006-07. 24. Ld. Counsel of the assessee submitted that the Tribunal, in assessee s own case for AY 2005-06, order dated 30.11.12 has allowed the deduction of technical fees expenditure, therefore, the issue is squarely covered in favour of the assessee by the order of the Tribunal. Ld. counsel further pointed out that there is no creation or acquisition of capital asset by the assessee by making payment of technical fee to DIL and there is no acquisition of any tangible or intangible asset by the assessee as against the said payment. Ld. Counsel further pointed out that technical fee paid to DIL is incurred exclusively for the purpose of business and accordingly the assessee claimed such payment as revenue expenditure. Ld. counsel also pointed out that the assessee merely acquired licences to use technology and technical assistance from DIL to manufacture, assemble, distribute and sell specified licensed products and asseseee did not have absolute control over the technical information and know how and DIL continues to be the owner of such technology and thus there was no transfer of ownership of said technology and know how in favour of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vance written approval from Daikin. As per article 5 sub licensing of the agreement by licensee was permissible only with the prior written consent of Daikin. As per article 11.3 the period of agreement was for 10 years from the effective date or for 7 years from the commencement of commercial production of the license products by the licensee. Thus, it was not an agreement in perpetuity. Article 14.3 had put restriction on improvement of license products by licensee. This article reads as under: - 14.3 Improvements in any items of LICENSED PRODUCTS which LICENSEE wishes to put into production shall be subject to a prior written approval of DAIKIN. Any improvements made by LICENSEE in respect of DAIKIN TECHNOLOGY as provided herein shall be licensed back/grantback perpetually to DAIKIN by LICENSEE with the right of sublicensing and without payment of any fees or costs by DAIKIN, any may be used by DAIKIN in its own production of DAIKIN products in Japan or elsewhere as it may, in its unfettered judgment, deem fit. 21. Article 17 contemplated for confidentiality and nondisclosure and article 17.1 read as under: - 17.1 LICENSEE shall keep strictly secret and confidential ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g apparatus can only be said to be in capital field but where the technology only facilitated in improving the manufacturing process, it could not be said to be part and parcel of capital structure of company. We find that this issue is squarely covered by the decision of Hon ble Jurisdictional High Court in the case of JK Synthetics (supra), wherein Hon ble Delhi High Court has, inter-alia held as under: - (v) expenditure incurred for grant of License which accords access to technical knowledge, as against, absolute transfer of technical knowledge and information would ordinarily be treated as revenue expenditure. In order to sift, in a manner of speaking, the grain from the chaff, one would have to closely look at the attendant circumstances, such as............. 26. Similarly, we find that this issue is also covered by the decision of Hon ble Jurisdictional High Court in CIT vs. Goodyear India Ltd., 243 ITR 235 (supra), wherein it has been held that consideration paid for betterment of the product was in revenue field. 27. Similarly in the case of Shriram Pistons Rings Ltd. vs. CIT, 307 ITR 363, it has been held that where there is no absolute transfer of any ri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... serving that the assessee has not furnished in reply on this issue and in absence of any submission or documentary evidence it is presumed that the assessee has nothing to say in this regard and therefore, amount of refund totalling to ₹ 67,61,720 was treated as income of the assessee for the year under consideration. Subsequently, DRP upheld the AO s contention and declined to interfere with the draft assessment order. In the final assessment order, the AO following the DRP directions treated the refund of custom duty as income of the assessee. 29. Ld. Counsel of the assessee submitted that during the relevant financial period, the assessee paid amount of custom duty which is appearing in Schedule F to the audited balance sheet under the head balance with central excise authorities . The assessee s paper book Volume I page 330 wherein amount of ₹ 2,00,00767 has been shown in Schedule F current assets, loans and advances. Ld. Counsel also pointed out that group in central excise authority demonstrated that the amount in question is included in schedule F to the balance sheet. He has further drawn our attention towards assessee s paper book Volume II page 445 a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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