TMI Blog2018 (10) TMI 1630X X X X Extracts X X X X X X X X Extracts X X X X ..... a contract manufacturer. Accordingly the issues relating to Royalty and Technical knowhow requires fresh examination at the end of the AO/TPO. Disallowance of Annual charges of Microsoft licence fees - determine the ALP at NIL - Held that:- The reasoning given by the tax authorities to determine the ALP at NIL is not justified. The Ld A.R submitted that the Sulzer management AG and Sulzer Management Ltd are one and same company. The Tax authorities were under the impression that there is variation between the transactions reported in Form 3CEB and the actual agreement submitted by the assessee due to existence of different names, which according to assessee refers to same company, referred above. The assessee has furnished a document from Commercial Register of the Canton of Zurich to show that both the names refer to the same company. In any case, this transaction has also not been benchmarked under any of the recognised methods by the TPO. Accordingly we restore this issue also to the file of AO/TPO for examining it afresh. Disallowance of Provision for Diwali gifts to employees - allowable business expenditure - AO took the view that this expenditure is akin to bonus and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ngly disallowed the Royalty and Technical knowhow expenses - Held that:- The facts available on record would show that the assessee has been selling goods to Non-AEs also. Accordingly we hold that the assessee should be considered as a Licence Manufacturer in the facts and circumstances of the case. Since we have held that the assessee is licenced manufacturer, the basic foundation on which the disallowances of royalty and technical knowhow expenses were made would fail. The assessee has also pointed out that the TPO has not adopted any of one of the prescribed methods for benchmarking the transactions and the aggregation of intrically connected transactions and determining the ALP of the transactions at entity level under TNMM method was justified. We notice that the TPO had no occasion to examine all these contentions, since he considered the assessee to be a contract manufacturer. Accordingly the issues relating to Royalty and Technical knowhow requires fresh examination at the end of the AO/TPO. Disallowance of Annual charges of Microsoft licence fees - determine the ALP at NIL - Held that:- The reasoning given by the tax authorities to determine the ALP at NIL is no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tions to the satisfaction of the AO. The Ld CIT(A) also was not convinced with the contentions of the assessee and hence he has confirmed the disallowance. Since the disallowance has been made on estimated basis on certain short falls, we do not find any infirmity in the disallowance so made. Accordingly we confirm the order passed by Ld CIT(A) on this issue. Addition made on the basis of 26AS statement - Held that:- Before us the assessee has filed a reconciliation statement, which requires examination at the end of AO. Accordingly we set aside the order passed by Ld CIT(A) on this issue and restore the same to the file of the AO for examining it afresh.- Appeal filed by the assessee is treated as partly allowed for statistical purposes. - I.T.A. No. 6059/Mum/2013 - - - Dated:- 31-10-2018 - Shri B.R. Baskaran (AM) Shri Ramlal Negi (JM) For the Appellant : Shri Ajit Kumar Jain For the Respondent : Shri Manoj Kumar ORDER Per B.R. Baskaran (AM) : The assessee has filed this appeal challenging the order dated 24-01- 2013 passed by Ld CIT(A)-15, Mumbai and it relates to the assessment year 2008-09. The assessee is aggrieved by the decision of Ld CIT( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ransaction. Since the agreement was between the AE and Microsoft and further, since the auditor did not report this transaction in Form 3CEB, the TPO determined the ALP of this transaction also at NIL. 6. The Ld CIT(A) also upheld the view of the TPO in rejecting the aggregation of the international transactions. The Ld CIT(A) also characterised the assessee as Contract Manufacturer . Accordingly he confirmed the disallowance of Royalty and Technical knowhow fees. With regard to technical knowhow fee, the Ld CIT(A) adduced one more reason for disallowance. The Ld CIT(A) noticed that the assessee has obtained approval from RBI for payment of Technical knowhow fee under automatic route. The said provisions of RBI allows payment of technical knowhow fee @ 5% and 8% respectively for domestic sales and Export sales. The Ld CIT(A) noticed that the payment made by the assessee has exceeded the above limits. Accordingly the Ld CIT(A) held that the disallowance is required to be made on this reason also. With regard to Annual charges paid towards Microsoft licencing fee, the Ld CIT(A) took the view that the payment has been made to M/s Sulzer Management AG from whom the assessee has not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anufacturer then the commercial arrangement between the Assessee and its AE would have been on cost plus mark-up basis (i.e. the Assessee would have earned limited steady mark-up on its cost). Thus, the Assessee cannot be considered as contract manufacturer. 4.1.5 Further, the Assessee also wishes to submit that the learned TPO has not used any of the prescribed transfer pricing method to determine arm's length price of royalty as NIL. On this point the Assessee wishes to place reliance on following ruling where it was held that one of the prescribed transfer pricing method should be used to benchmark international transaction: LG Electronics India Private Limited [TS-96-HC-2015(DEL)-TP] (Para 22.10 and 22.11 at page 128 and 129 of the ruling), Det Norske Veritas A/S [TS-76-ITAT-2016(Mum)-TP] (Para 9 at page 6 and 7 of the ruling); and Johnson Johnson Ltd [TS-171-HC-2017(BOM)-TP] (Para 4(d) at page 6 of the ruling) 4.1.6 The Assessee has benchmarked this transaction using one of the prescribed transfer pricing method i.e. Transactional Net Margin Method ('TNMM'). Since the transaction of payment of royalty is closely and intrinsically linked to the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... les as per the RBI circular, (page 19 of CIT(A) order). The payment of fixed technical know-how of CHF 246,300 by the assessee to its AE is above the 5% and 8% of the net sales in the domestic and export sale respectively. Accordingly, the payment was also disallowed on this ground. (Page 19 of CIT(A) order). On this point the Assessee wishes to submit that under the RBI circular [RBI/2004/74 dated 24 February 2004] relating to automatic route, RBI has permitted payment of lump-sum technical fees not exceeding USD 20 lacs under automatic route and such lump-sum fees is over and above royalty at rate of 5% on domestic sales and 8% on export sales (page 159 ofPB). Accordingly, the lump-sum technical knowhow paid by the Assessee should be not be disallowed. 4.2.4 Further, the Assessee also wishes to submit that the payment of lump-sum technical know fee is capitalized by the Assessee in its books (page 12 and 17 of PB). Without prejudice to above submission, even if adjustment is to be made it should be restricted to value of depreciation/amortization during FY 2007-08. 4.3 Annual charges of Microsoft Licensing fees 4.3.1 The contention of learned TPO and CIT(A) is that the t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... w that the assessee has been selling goods to Non-AEs also. Accordingly we hold that the assessee should be considered as a Licence Manufacturer in the facts and circumstances of the case. 10. Since we have held that the assessee is licenced manufacturer, the basic foundation on which the disallowances of royalty and technical knowhow expenses were made would fail. Further the assessee has also pointed out that the TPO has not adopted any of one of the prescribed methods for benchmarking the transactions. Further the assessee has also taken support of certain case laws to contend that the aggregation of intrically connected transactions and determining the ALP of the transactions at entity level under TNMM method was justified. We notice that the TPO had no occasion to examine all these contentions, since he considered the assessee to be a contract manufacturer. Accordingly we are of the view that the issues relating to Royalty and Technical knowhow requires fresh examination at the end of the AO/TPO. Accordingly we set aside the order passed by Ld CIT(A) on these two issues and restore the same to the file of AO/TPO for examining them afresh in accordance with the law. 11. W ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e find merit in the alternative submissions of the assessee. The assessee claims to have reversed the provision in the succeding year, meaning thereby, the assessee has offered the amount of ₹ 9.00 lakhs as its income in AY 2009-10. Since the disallowance has been confirmed by us, the same would result in double assessment of same item of income, if the income of ₹ 9.00 lakhs voluntarily offered by the assessee in AY 2009-10 is not reduced. Accordingly we direct the AO to examine the claim of the assessee and reduce the amount of ₹ 9.00 lakhs in AY 2009-10, if he is satisfied with the claim of the assessee. The assessee may also move appropriate petition before the AO in this regard. 15. The next issue relates to the disallowance of gift articles. The assessee claimed a sum of ₹ 40.26 lakhs towards expenses on gift articles. The AO noticed that they consisted of expenses on purchase of dry fruits, purchase of sony camera, decorative pieces etc. The AO took the view that the assessee has not demostrated as to how these gifts would benefit the company. He noticed that the assessee has also debited/provided expenses on gifts given to employees, which amounte ..... X X X X Extracts X X X X X X X X Extracts X X X X
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