TMI Blog2011 (12) TMI 720X X X X Extracts X X X X X X X X Extracts X X X X ..... issue has already been decided in favour of the assessee by the Tribunal. In reply, the ld. CIT/DR Shri Anadi Varma invited our attention to pages 2 to 5 and para 37 of page 13 of the assessment order. 2. We have considered the rival submissions and perused the material available on file. Since common grounds are involved, therefore, these can be disposed of by this common consolidated order for the sake of brevity. Without going into much deliberation, we are reproducing hereunder the relevant portion of the order for assessment year 1999-00 to 2002-03 (ITA Nos.112 to 115/Ind/2007), order dated 30.4.2010: 2. The facts, in brief, are that the assessee company is a manufacturer of dydroelectric and turbo-generators for hydel and turbo projects and selling the same in India and abroad. The assessee is a 100% subsidiary of VA TECH HYDRO GmbH Austria from 1.4.2001. VA TECH Hydro is an established name in the world in the field of manufacturing and erection of Hydro and Turbo projects since last about 100 years. The Assessing Officer, on scrutiny of books of accounts of the assessee company and Form No. 27 for the assessment years, in question, found that though th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fter that it is of no use to the assessee. Therefore, design of a generator cannot be equated with software package or any other copy righted articles whose unlimited number can be sold in market. 6.4. No outright sale of designs has taken place. It is only the limited use for manufacturing that the assessee company is holding authority to use design. Assessee company cannot purchase these design from any other third company as the trade name under which assessee company and non-resident Austrian Company are manufacturing and selling the generator is same and both the companies are known for their specific designs of generators. It has specifically been mentioned on the designs that it is the property of the parent Austrian Company. The assessee had right to use a particular design for single time. The assessee has been barred to sale the design as such to another manufacturer by the specific condition and warning printed on the design. When the design cannot be sold as above how it can be termed as outright purchase as claimed by the assessee. Thus, the assessee has only been given the right to use the design. 6.5. The designs are not purchased through open ten ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... yalty means ..(ii) the imparting of any information concerning the working of ..design, secret formula or process 6.11. The facts along with the case laws have been examined in para 4 and 5. After the detailed examination of facts and circumstances of the case it is held that VA TECH HYDRO India Pvt. Ltd. has failed to deduct tax on sums paid to the Parent Austrian company which was chargeable to tax within India by virtue of the IT Act, 1961 and as per the provisions of DTAA between India and Austria. 6.12. Assessee company is manufacturing Generator and its accessories i.e. only the electrical part of the complete Turn key Project for generation of electricity. Turbine is manufactured by the VATECH ESCHER VYAS Floval Ltd., Faridabad, which is again Austria 100% subsidiary company of Austria in India. International orders for supply of generators are received through its parent company in Austria for which the assessee company supplies generator and its accessories to its parent Austrian company. Turbine and erection infrastructure is supplied by the Austrian company in such projects. Projects in India are completed by the assessee company with the Turbine ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ther parameters. These parameters are for the help of detailed design which is prepared in India by the assessee VA Tech India. The parent Austrian company has neither given the sophisticated computer programs nor the algorithms to VA Tech India. Only the output of the sophisticated computer programs and algorithms is provided to the assessee VA Tech India which it calls as design . Rights over these designs is with parent Austrian company. The assessee company further prepares detailed designs on the basis of the parameters and designs provided by its parent company. The rights over these detailed designs prepared by the assessee VA Tech India with VA Tech India itself. Thus it is clear that there are two sets of designs, one prepared by the Parent Austrian company for which assessee makes payment and another in house detailed design prepared by VA Tech India based on the original design. 6.16. From the discussion, it is clear that with the design and other parameters supplied by the parent Austrian company, the assessee cannot create another output in Austria different case or even Austria similar case. From all the discussion and case laws cited above, it is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pt of royalty under the Double Taxation Avoidance Agreement between India and Austria and, therefore, the A.O. is not justified in applying the provisions of section 9(1)(vi) of the IT Act. As regards the ownership is concerned, as rightly explained by the learned counsels that the transfer of ownership in the case of movable goods is governed by the Sales of Goods Act. The sale bill issued by the selling party contains the terms and condition on the basis of which the goods are being sold against the price. In the sale bills issued by the non-resident Austrian company, there is no mention that despite the sale of drawings and designs against the price, they have retained the ownership in the drawings and designs. The A.O. has failed to establish as to how the income arising to the nonresident company from the sale of the drawings and designs from outside country to the appellant company is chargeable to tax in India, when the non resident company is not having any permanent establishment in India, is taxable in India and, therefore, in the absence of any concrete finding that such payments are chargeable to tax in India, section 195 has no application. Having regard to the detaile ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r properlty, if such income is payable in pursuance of an agreement made before the Ist day of April, 1976, and the agreement is approved by the Central Government. Provided further that nothing contained in this clause shall apply in relation to so much of the income by way of royalty as consists of lump sum payment made by a person, who is a resident, for the transfer opf all or any rights (including the granting of a licence) in respect of computer software supplied by a nonresident manufacturer along with a computer or compute-based equipment under any scheme approved under the Policy on Computer Software Export, Software Development and Trading, 1986 of the Government of India. Explanation 2.- For the purpose of this clause. royalty means consideration (including any lump sum consideration but excluding any consideration which would be the income of the recipient chargeable under the head Capital gains ) for (i) the transfer of all or any rights (including the granting of a license) in respect of a paten, invention, model, design, secret formula or process or trade mark or similar property. (ii) the imparting of any information conc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The learned CIT DR contended that as per the meaning of the term royalty , as per both these provisions, the transaction between the assessee company and its parent non-resident company, fell within the realm thereof, hence, the assessee should have deducted the tax at source. The learned CIT DR thereafter also drew our attention to the observations of the Assessing Officer as regard to procurement of the same designs for the same contract, which also indicated that it was a case of royalty and not a case of out-right purchase thereof. The learned CIT DR placed heavy reliance on the conclusions drawn by the Assessing Officer which have already been reproduced hereinbefore. The learned CIT DR, thereafter, contended that the parent company was not selling the designs in the open market i.e. to any other party other than its subsidiaries. Hence, it was not a case of sale of copy righted articles. The learned CIT DR further emphasized on the fact that it was used by the assessee in manufacturing of the turbine/generator and was not sold as such in the open market like purchase and sale of a copy righted book or software, etc. The learned CIR DR further emphasized on the fact that if t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rned counsel for the assessee thereafter controverted the factual findings of the Assessing Officer, particularly in regard to the Assessing Officer s contention that the assessee had paid money for the same drawing three times and referred to the various pages of the paper book in this regard. The learned counsel for the assessee also submitted that the action of the Assessing Officer was a case of change of opinion in respect of the same transaction which had been found to be of the nature of purchases, both in the course of proceedings under section 144A as well as under section 92CA of the Act. Hence, for this reason also, the action of the Assessing Officer was not justified. The learned counsel for the assessee thereafter contended that it was a settled law that the sale transaction did not result in royalty and in this regard again submitted that the transfer of such designs by the assessee to the buyers of generators in an unbridled manner established this fact. The learned counsel for the assessee further reiterated the submissions made before the learned Commissioner of Incometax (Appeals), particularly in respect of drawings being goods and the acquisition of drawings on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nce, the ratio laid down in this case is squarely applicable to the present case. The learned counsel for the assessed, thereafter, referred to the decision of the Tribunal in the case of Lucent Technologies Hindustan Limited v. ITO as reported in 270 ITR 62 (AT) wherein the assessee had acquired hardware and software and the department bifurcated the transaction as one of supply of hardware and the other of the software, treating the software part as royalty, the Tribunal held that the assessee s transaction with the non-resident company was for the purchase of integrated equipment which consisted hardware as well as software and it was inseparable and having regard to the nature of agreement, what the assessee had purchased was a copy righted article and not copy right of the rights and similar was the position here, hence, this decision of the Tribunal also supported the claim of the assessee. The learned counsel for the assessee thereafter referred to the decision of the Tribunal in the case of Indian Hotels Co. Ltd. v. ITO in ITA No.553/Mum/00 (refer pages 163 to 167 of the paper book),wherein Indian Oil had obtained the services of a foreign company to prepare the interior de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ose designs/drawings along with the plant and machinery, whereas in the present case, the assessee manufactured turbine/generator and sold such turbine/generators. The CIT DR further submitted that the decision of the Tribunal in the case of Lucent Technoligies Hindustan Limited (supra) rather supported the case of the revenue. The CIT Departmental Representative further submitted that the basic design obtained by the assessee company was further modified and such modified design was given to the buyer of the turbine/generator and not basic design, as contended by the learned counsel for the assessed. 9. We have considered the submissions made by both the sides, material on record and the orders of the authorities below. It is noted that the assessee is engaged in manufacturing of turbine/generator as per the specifications/requirements of its customers. For this purpose, the assessee procures basic design from its parent company and accordingly manufactures such plant and machinery. It is also noted that such basic design is also given to the buyer of plant and machinery by the assessee company. The dispute before us is regarding the nature of payment made by the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ale of such drawings. Hence, when the same provisions of DTAA are applicable then this action of such revenue authorities also supports the claims of the assessee. To sum up, even at the cost of repetition, we state that it is a case of purchase of a copy-righted article on principal to principal basis and not a case of payment for transfer of right in the copy right of such designs. In this view of the matter, we confirm the findings of the learned Commissioner of Incometax (Appeals). 10. In the result, all the appeals of the revenue fail and are dismissed. Order pronounced in open Court on 30th April, 2010. 3. In the aforesaid order, an elaborate discussion has been made by the Tribunal. If the aforesaid facts are kept in juxtaposition with the facts of the appeal in hand, we find that the assessee purchases technical drawings and design for ₹ 4,14,18,313/- from its Austrian Joint Venture Company i.e. VA Space Tech Elin, Austria and the said expenditure was directly claimed to be manufacturing expenses and was claimed in its P L account under the head manufacturing expenses which were disallowed by the ld. Assessing Officer doubting the ge ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing that the expenses were duly incurred for business expediency. 5. We have considered the rival submissions and perused the material available on file. The facts, in brief, are that in its P L account, the assessee claimed ₹ 9,06,541/- as foreign travelling expenses, which were disallowed by the ld. Assessing Officer on the plea that the assessee did not procure contract from foreign agency and the contracts are subcontracted by its parent company in Austria by further observing that the assessee did not travel outside India for realisation of debts as the invoices of sales were also made in favour of parent company in Austria, therefore, he doubted the genuineness of these expenses. However, we find that the assessee was regularly getting export orders from its Austrian joint venture company and the assessee was getting orders for specific items at predetermined prices, that too, under the specified terms conditions as agreed upon. Admittedly, for smooth functioning of business, there may be hundreds of reasons like finalisation of accounts, procurement of contracts to check the quality of the implements and other business needs for which the employees and th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e is the best judge of its business. The Assessing Officer is not expected to sit as an armchair philosopher in the needs of business expediency. The periodical training of the workers/employees rather fortifies their skills in enhancing more productivity. Therefore, we find no infirmity in the stand of the ld. CIT(A). This will cover ground no.4 of ITA No.253/Ind/2007 (assessment year 2001-02) and ground no.3 of ITA No.254/Ind/2007 (assessment year 2002-03) also. 8. The last ground in ITA No.29/Ind/2005 pertains to deleting the addition of ₹ 5 lacs under the head vehicle hire expenses . The ld. CIT/DR defended the disallowance whereas the learned counsel for the assessee supported the impugned order. We have perused the record and find that the assessee claimed ₹ 23,25,134/- towards vehicle hire charges out of which ld. Assessing Officer disallowed ₹ 5 lacs on presumptive basis that the same were incurred for nonbusiness purposes. Detailed questionnaire was issued to the assessee to which the assessee filed its explanation on each point along with the copy of P L account and necessary bills/vouchers. However, an adhoc disallowance was made on the ple ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve also affirmed the stand of the ld. CIT(A) (supra) with regard to expenditure incurred by the assessee on technical drawings designs which forms part of the cost of the manufacturing, therefore, we find no infirmity in the impugned order wherein it was held that the provisions of the Section 145 of the Act are not applicable to the facts of the present appeal, consequently, this ground of appeal of the Revenue is also having no merit. Our view will cover ground no.1 of ITA No.254/Ind/2007 (assessment year 2002-03) also. 10. The next ground pertains to allowing relief of ₹ 81,72,801/- made on sale of Bhandar Dhara Project. The learned counsel for the Revenue supported the assessment order whereas the learned counsel for the assessee defended the impugned order. 11. On perusal of record and after hearing the rival submissions, we find that the Assessing Officer estimated net profit on the Bhandar Dhara Project and the invoice value stood at ₹ 4.10 crore as has been discussed by the ld. Assessing Officer at page 6 (para 3) (d) wherein it has been recorded that the cost of the project, as arrived in calculations, showed nominal profit, consequently, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f, being net profit on despatch of turbo generator and on sale item of compensation of high cost. The ld. CIT/DR supported the assessment order by inviting our attention to the relevant portion from assessment as well as from impugned order whereas learned counsel for the assessee defended the impugned order. We find that the ld. Assessing Officer has discussed the addition in para 9 10 of the assessment order. The following table shows the breakup of the sales: Sales as parts components 56760601 Renovation of excitation 2346000 Compensation for high cost 24000000 Design of Turbo generator 4300800 87407401 The relevant portion from the impugned order is reproduced hereunder: The counsel of the appellant submitted before me has also drawn my attention to the audited profit loss account of the assessee and submitted that in the relevant year, the aggregate turnover shown is ₹ 261915153 which incl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e amount received for the sale of designs and whatever the income arisen on such receipts has already formed a part of the total operating profit and, therefore, separate addition on assumptions is not justified. If the aforesaid finding of the ld. CIT(A) and the submissions of the assessee along with facts are analysed, admittedly, no defect has been pinpointed by the Assessing Officer in the accounts of the assessee. Even otherwise, no basis has been given in the assessment order in arriving at a conclusion, therefore, we affirmed the stand of the ld. CIT(A). 14. The remaining grounds in ITA No.255/Ind/2007 (2003-04) pertain to deleting the disallowance of ₹ 15,88,080/- made on account of warrant expenses. The CIT/DR supported the assessment order whereas the contention on behalf of the assessee is that for executing a loan contract of substantial value and also in terms of the contract, the warrant clauses are business necessity. It was also submitted that as per accounting standards, notified under sub-section 2 of Section 145, vide notification no.9949 dated 25.1.1996, provision is to be made for all loan liabilities and losses even though the amount ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 24 months from operation Total 15,88,080 The details of warranty provision and its reversals are reproduced hereunder: S. No. Assessment Year Warranty provision created during the period (in Rs.) Warranty provision of earlier years reversed during the period (in Rs.) 1 2003-04 1588080 - 2 2004-05 3024128 680100 3 2005-06 6954871 529718 4 2006-07 6810422 487755 5 2007-08 6572822 2872949 TOTAL 24950323 457 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as made for assessment year 2001-02 and the same was affirmed, therefore, in view of uncontroverted factual position, we find no infirmity in the stand of the ld. CIT(A). Even otherwise, in the absence of any infirmity in the books of account, no adhoc disallowance is required, that too, without pinpointing any defect in the audited books of account. 18. The last ground pertains to deleting the disallowance of ₹ 1,91,487/- on account of bed debts. The submission of ld. CIT/DR is in support to the assessment order whereas the contention on behalf of the assessee is that during the previous year relevant to the impugned assessment year, the assessee written off the impugned amount in its account due to rejection of goods from vendors and were debited to the P L account which were disallowed by the Assessing Officer on the plea that no efforts were made by the assessee to recover the amount. We are of the view that after 1.4.1989, it is not necessary for the assessee to establish that the debt, in fact, has become irrecoverable, it is enough if the bad debt is written off as irrecoverable in the accounts of the assessee. Effect of amendment to Section 36 (1) (vii) r. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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