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TMI Blog2017 (2) TMI 1415X X X X Extracts X X X X X X X X Extracts X X X X ..... ther and being disposed-of by this common order for the sake of convenience and brevity. The Assessee and the Revenue has taken following grounds of appeal in - T.P.A. No. 157/Ind/2015:A.Y. 2010-11 Transfer Pricing Grounds 1. The Learned Transfer Pricing Officer (Ld. TPO)/ Dispute Resolution Panel (DRP) erred on the facts and circumstances of the case and in law, by not accepting the economic analysis undertaken by the Appellant which was in accordance with provisions of the Act read with Rules for establishing arm`s length price of the international transactions. 2. Based on the facts and circumstances of the case, the Ld. TPO/ DRP has erred in law and in facts in making adjustment of Rs. 43,11,705/- to the transaction related to ''Contract revenue from projects'' In doing so, the Ld. TPO/DRP erred in a) In not considering the internal Cost Plus Method (CPM) analysis undertaken by the Appellant using combined transaction approach which was in accordance with the provisions of the Act read with Rules and internationally accepted principles. Applying on a project-by-project basis, despite agreeing to various functional risk differences between individual projects, which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f technical services. Corporate Tax Grounds 5. Based on the facts and circumstances of the case, the Ld. Assessing Officer ( the Ld.AO) DRP had erred in law and fact by disallowing the payments of INR 10,699,464 made by the Appellant to its overseas parent company for the purchase of technical drawings and designs and alleging the same to be in the nature of royalty on which tax had to be withheld at the time of payment. In doing so, the Ld.AO further erred in not following the ruling of the Hon`ble ITAT in Appellant`s own case on this issue. Common Grounds 6. Based on the facts and circumstances of the case, the Ld.AO has erred in proposing to initiate penalty proceedings under section 271(1)(c) of the Act against The Appellant. 7. Erred in giving short credit of tax deducted at source of INR 26,920. The above grounds are independent and without prejudice, to each other unless mentioned specifically. T.P.A. No. 316/Ind/2016:A.Y. 2011-12 Transfer Pricing Grounds On the facts and circumstances of the case and in law, the learned AO based on directions of DRP 1. erred on the facts and circumstances of the case and in law, by not accepting the economic analy ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ervices is held to be covered by Technical Collaboration Agreement (TCA) entered in to by the Appellant` with its AE's , the overall payments under TCA is within the limits of the rates agreed in TCAs. 4. Ld TPO/ DRP have erred in not allowing set-off of surplus revenue / profit exceeding the arm`s length price (ALP) earned from other transactions with Associated Enterprises (AE's)while computing the ALP under transaction-by-transactions analysis approach. Corporate Tax Grounds 5. Erred is disallowing the payments of INR 3,21,61,710 made by the Appellant to its overseas parent company for the purchase of technical drawings and designs and alleging the same to be in the nature of royalty on which tax had to be withheld at the time of payment. In doing so, the Ld.AO/ Hon`ble DRP further erred in not following the ruling of the Hon`ble ITAT in Appellant`s own case on this issue. 6. Erred in giving short credit of tax deducted at source of INR 1,81,109 while passing the final assessment order. Common Grounds 7. Erred in proposing to initiate penalty proceedings under section 271(1)(c) of the Act against The Appellant. The above grounds are independent and without p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Es and Projects with Non-AEs for CPM analysis. The GP mark- up earned by the assessee from sales to unrelated parties was computed and was added to the direct and indirect cost of production to arrive at the ALP of the products sold to AEs during the year. The assessee computed overall GP Margin from sale to AEs at 14.32% and GP Margin on sales to Non-AEs at 14.72%. Taking recourse to Proviso to section 92C(2), it was claimed by the assessee that the transaction is within tolerance band of +/-5% Margin. 2.2. The TPO made the comparison with the assessee margin reflected in respect of controlled transactions with its AEs for each projects separately. The TPO held that all the projects of the assessee with the AE were independent projects and, therefore, transfer pricing provision were to be applied on individual transaction basis. The assessee contended that there was functional and risk difference between the individual controlled transactions and aggregate uncontrolled transactions. The assessee, is therefore, objected to the action of the TPO in looking at different individual related party transactions instead of aggregating the same. It was argued that the assessee had under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as one transaction and benchmarked, and only where considering it as separate transaction is impractical. Such is not the case here. Since all the AE projects of the assessee are independent and different projects, the benchmarking needs to be carried out separately on individual transaction basis. The application of gross profit margin on global basis will lead to lower than non-arm`s length price of one transaction being marked by high price of another in the same or another AEs case, which is not in accordance with provisions of law. The contention of aggregating as helping to reduce the impact of differences in terms and conditions as the accounting treatment given by the assessee is incorrect. If there are differences and such differences are material, then they must be explicitly recognized and provided for in the comparability analysis, but this does not mean that transaction with AEs must be aggregated. The assessee has contended that it has charged lower margin for some projects with AE as it was able to command a higher margin for other projects from same AE so that as a portfolio, the assessee has realized arm`s length margin from AE on aggregate basis. However, in absen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e year. Accordingly, unrelated party transactions cannot be reliably compared with related party transactions on individual transaction basis. Thus, to eliminate the impact of such differences, the arithmetic mean of gross margins earned by the assessee from all related party transactions should be compared with arithmetic mean of gross margins of all unrelated transactions which has been done by the assessee. 2.4.2. It was submitted that it is not possible to find a project with reference to its AE which is completely with similar functionalities to a project, and which has been undertaken by the assessee for Non AE enterprises as each project operates in a different life cycle. With projects operating in different life cycles with different level of completions, the margin needs to be compared on an aggregate basis as project wise one-on-one comparison is not possible. Moreover, in view of the nature of business of the assessee, the overall profitability of the projects depends upon various factors such as nature of work, bidding process, location etc. The assessee accordingly compared the gross margins earned from the aggregate transaction entered with Non AE's. The Ld. TPO/DR ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... higher gross margins in unrelated party transactions than related party transactions. 2.4.8. The learner TPO/DRP further grossly erred in not appreciating the fact that the assessee is a risk bearing entity. The assessee is full of risk bearing manufactures and supply of all power generation equipment's and as such the assessee is likely to earn low gross margins inserting transactions based on the quotient of risk involved. The same is also evident from the fact that the assessee has earned lower then mean gross margins in unrelated party transactions also. 2.4.9. The Ld. A.R. Further submitted that the TPO/DRP has grossly erred in ignoring the individual projects specific functional differences. As reiterated above, the overall profitability of the projects depends upon various factors such as nature of work, bidding process, location etc. Thus, in some projects during the overall profitability margins earned lower, it would be inappropriate to hold that the assessee should earn more than the rest of the projects. Without prejudice to above, it was submitted that the margin of XE Kaman- Andritz India Projects is marginally lower when compared individually with two other proje ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng TNNM method. It was noticed that the assessee was aggregating all transactions undertaken by both Units Mandieep and Prithla comparing the average gross margin of comparable transactions. As per Indian TP regulations, TNNM is to be applied on transaction basis. Since in this case, gross margin earned on the transaction is separately, there was no requirement of aggregating all of them and then calculating the average gross margin. The Ld. D.R. referred to para 1.42 of OECD Guidelines which suggest that ideally ALP should be applied on transaction-by-transaction basis, however, where separate transactions are closely linked or continuous that they cannot be evaluated adequately on a separate basis. Such transaction should be evaluated together using the most appropriate arm`s length method or methods. It can be seen from the aforesaid para of the OECD guidelines that it recommends evaluation / benchmarking on transaction by transaction basis and only in certain situations when they cannot be evaluated on separate basis that combined approach has been suggested. Further, some examples have been given the International transactions, which may warrant an aggregated approach for benc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... GP Margin from sale to AEs at 14.32% and GP Margin on sales to Non-AEs at 14.72%. Taking recourse to Proviso to section 92C (2), it was claimed that the transaction is within tolerance band of +/-5% Margin. 2.6.1. We find that there is no dispute between TPO and the assessee as regards the method, which is CPM and benchmarking based on internal comparable. The only dispute whether the assessee has justified for considering the aggregation of all the projects with AE (the AEs are different) and compared the mean CPM of the projects of related party transactions. In contrast, the TPO has rejected the aggregation of related party transactions and applied the benchmarking analysis on project-by-project transaction with AE. It is seen that that the gross margin earned by the assessee from transaction with unrelated parties range from (-) 486.10% to 3867.84% of which average being 14.72%, which has been compared with the average, gross margin of transactions with AE's. The assessee recognizes revenue on Percentage of Completion Method (POCM) in accordance with Accounting Standard 7. While recognizing revenue of POCM basis, yearly gross margins from each transaction may vary as the proj ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fair market value, the arm`s length principle should be applied on a transaction-by-transaction basis. However, there are often situations where separate transaction are so closely linked or continuous that they cannot be evaluated adequately on separate basis. Examples may include 1. Some long-term contracts for the supply of commodities or services, 2. Right to use intangible property, and 3. Pricing a range of closely-linked products ( e.g. in a product line) when it is impractical to determine pricing for each individual product or transaction. Another example would be the licensing of manufacturing know-how and the supply of vital components to an associated manufacture; it may be more reasonable to assess the arm`s length terms for the two items together rather than individually. Such transactions should be evaluated together using the most appropriate arm`s length method or methods. A further example would be the routing of a transaction through another associated enterprise; it may be more appropriate to consider the transaction of which the routing is a part in its entirety, rather than consider the transaction on separate basis." 2.6.4. We find that in the case of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as various factors such as nature of work, bidding process, location etc. as different. Therefore, overall profitability in some projects may be lower margin earned; therefore, it would not be appropriate to hold that the assessee should earn more than the rest of the projects. For example, the margin of XE Kaman- Andritz India Projects is marginally found to be lower when compared individually with 2 other projects as risk is covered through the 3rd party consortium. The risk being mitigated, the margins are less as per the common business practices. Therefore, adjustment made on account of the difference in margins of XE, Kaman Projects is not justified. We also find that in the case of Ashlucreek projects, the reason for earning lower gross margin was on account of extraordinary cost of Rs. 87,28,333 incurred by the assessee during financial year 2008-09 of Rs. 56,78,653 which has been allowed in A.Y. 2009-10 in proportion to the total cost to be incurred over the life cycle of the project. If the effect of the extra ordinary event is ignored, then revised Adjusted Gross Margin comes to 18.8% as compared to 14.70% average gross margin earned from non-AEs projects and thus we fin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... However, the TPO reproduced some provisions of Technical Collaboration Agreement (TCA) dtd. 1st day of January 2006 and viewed that the licensor has provided know-how and available technical information and assistance for marketing, layout, basic design, manufacture, installation and servicing of contract products to the assessee. The term "technical information" means engineering and manufacturing information available with the licensor which inter-alia includes processes and products related to manufacture, testing, application, installation, of Rs. 1, 39, 79,990/- commissioning and servicing of contract products. It is clear that as per the royalty agreement, the associate's enterprise is required to provide all the information, which relates to marketing as well as installation and servicing of the contract products to the assessee, which are already covered under TCA and thus, it is duplicate in nature. Accordingly, the TPO found that an amount of Rs. 1,39,79,990/- is covered under the royalty agreement in respect of Mandideep unit hence, its ALP was determined at NIL and disallowance of Rs. 1,39,79,990/- were proposed. Similarly an amount of Rs. 3,02,21,072/- in respect of P ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rned Counsel for the assessee, submitted that the DRP has grossly erred in confirming addition of Rs. 1,17,23,967/- for A.Y. 2010-11 and Rs. 34,18,088/- for A.Y. 2011-12 on the following grounds "That the expenditure on account of technical services amounting to Rs. 1,17,23,967/- as confirmed by the DRP are not covered under the royalty agreements and as such no adjustment is warranted on the same. The receipts of technical service by the assessee is not in dispute. The amount paid for technical services for Mandideep Unit, the royalty is paid only for manufacturing and selling rights (Article 5) and does not cover other services such as Training of License Personal (Article 2), Deputation of licensor`s personal to licensee (Article 3) and transmission of Technical Information (Article 4) . The payments made thus, are on account of service covered vide Article 2, Article 3 and Article 4 and cannot be deemed to be covered by Royalty payable as envisaged for service mentioned in Article 5 . The payments for technical services are thus, over and above the consideration towards Manufacturing and Selling rights and is thus, allowable deduction. Similarly, the amounts paid for technic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ticle 2, Article 3, and Article 4 of the agreement in case of Manideep Unit and Article 4.2 in respect of agreement in the case of Prithla Unit. The additions made in A.Y. 2012-13 amounting to Rs. 34,12,846/- pertained to sums, details of which were furnished by the assessee himself, which were covered under Royalty Agreements and that whose ALP was taken at Nil. Therefore, in the line of course of action taken by the TPO for A.Y. 2012-13, the Ld. A.R. furnished the details of adjustments vide Anx-A for A.Y. 2010-11 and Anx-B for A.Y. 2011-12 which are wrongly sustained by the DRP in connection with payments for technical services wrongly held to be already covered in Royalty agreement specifying the exact nature of the sum so paid along with the exclusion clauses relating to Royalty agreements to substantiate the claim of the assessee that amounts so adjusted by the TPO /DRP for A.Y. 2010-11 and A.Y. 2011-12 were unjustified as the same were on account of payments not covered vide Royalty Agreement. 3.3.4. The details of Technical services received from AEs- amounts in dispute before ITAT for the A.Y. 2010-11 are submitted as per ANX-A below : No Name Of Associated Enterprise ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7 ANDRITZ Hydro GmbH,Austria Mandideep Site support, site visit travel Insurance 75,991 Amount Paid for need based onsite job-work support. Covered by Exclusion clause in 3.2 of the agreement relating to General technical assistance by active participation in establishing marking, design, Production, assembly, quality control, testing, application, installation, commissioning and servicing. 8 ANDRITZ Hydro GmbH, Austria Mandideep Quality Inspection- forging 192,433 Paid for engineering support for specific tasks. Covered by exclusion clause in 3.2 of the agreement relating to general technical assistance by active participation in establishing marketing, design, Production, assembly, quality control, testing, application, installation, commissioning and servicing. 9 ANDRITZ Hydro GmbH, Austria Mandideep Rotor hub machining and support from Haw 479,672 Paid for engineering support for specific tasks. Covered by exclusion clause in 3.2 of the agreement relating to general technical assistance by active participation in establishing marketing, design, Production, assembly, quality control, testing, application, installation, commissioning and servicing. 10 ANDRITZ H ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bly, quality control, testing, applications, installation and servicing. Further, it also Includes reimbursement of local costs such as hotel expenses, daily allowance, car, petrol, etc. for the expatriates working on erection commissioning site for Teesta 16 ANDRITZ Hydro GmbH, Germany Prithla Hydraulic layout and data schedule for bid Documentation 269,249 Paid for support in respect of bid documentation (hydraulic layout and data schedule) for a specific project (Singoli Batwari). Covered by exclusion under Article 4.2 of TCA dated 26 April 2006. Therefore, Separately Chargeable. 17 ANDRITZ Hydro GmbH, Germany Prithla Engineering Services 1,835,876 Paid for detailed engineering services for a specific project (Rangit). Total 11,723,967 3.3.3. Similarly detail of technical services rendered are as under for A.Y. 2011-12: No Name Of Associated Enterprise Unit Particulars/Scope Of Work TP Adjustment Amount (INR) Appellant's Comments 1 ANDRITZ Hydro GmbH, Austria Prithla Basic Design & Engineering for Butterfly Valve 1,077,972 Covered by exclusion Clause in 4.2 of the agreement relating to general technical assistance by act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rice for the international transactions representing receipt of contract revenue. Therefore, the payment of technical services cannot be considered ALP based on TNNM analysis undertaken by the assessee. 3.5. We have heard the rival submissions of both the parties and have perused the material available on record. We find that the assessee has considered aggregation of transaction into its TPSR. When that international transaction pertaining to import of raw material, contract revenue from for Associates were closely linked with main business and thus, applied TNMM method where OP/OR was computed at 10-10% for the assessee as against 6.66% of the comparables. It was argued that the TPO has not provided cogent reasons for rejecting economic analysis undertaken by the assessee. We find that the TPO has applied CUP method, without bringing any comparable on record. We, further find that the TPO has questioned the business decision of entering into technical services agreement, which is beyond his jurisdiction and not permissible in law. It is not for the TPO to advise as to how the business has to be run by the assessee and what type of contract agreement has to be entered in to by t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te of completion of the training. 2.4. A man-month as used in this Article 2 is based upon the regular working time of five days per week with seven hours each, with no working on holidays. Article 3-Deputation of THE LICENSOR'S personnel 3.1 Subject to THE LICENSEE obtaining the approval of the concerned Indian Government authorities if any and upon mutual agreement of the parties, THE LICENSOR shall make available to THE LICENSEE for periods to be agreed upon by the parties suitable specialists who are required by THE LICENSEE in INDIA in order to train its personnel at the licensee's factory and to provide general technical assistance by active participation in establishing marketing, design, production, assembly, quality control, testing, applications, installation, commissioning and servicing at THELICENSEE factory of CONTRACT PRODUCTS or sites where such products assembled, instead and /or tested. 3.2 THE LICENSOR'S technical personnel shall be made available to THE LICENSEE on the VA TECH HYDRO rates according to the transfer price Regulation and the periods to be mutually agreed upon. Article 4-Trasmission of Technical information 4.1 The documentation to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the source of procurement (including ocean freight, insurance custom duty etc.). Royalties are not applicable on CONTRACT PRODUCTS sold to the LICENSOR. 6.2 All Payments due based on this Agreement will be considered as effected only when they are at free disposal of THE LICENSOR. THE LICENSEE will pay any duty, taxes and similar charges payable in India and related to these payments. 6.3 Within three months from March 31th and September 30th of each year THE LICENSEE shall render to THE LICENSOR A report showing the total ex-factory selling prices of each of the CONTRACT PRODUCTs invoiced by THE LICENSEE during the preceding half year, the amount invoiced for foreign supplied components in accordance with Article 6.1 as well as the corresponding royalties due. 6.4 The royalties which are due shall be payable in Euro at the market rate of exchange existing at the time of remittance. The amount shall be remitted to THE LICENSOR at their bank account in Austria within four months (subject to the current regulatory framework) after the end of the respective half year THE LICENSEE shall send a copy of the respective documents (application for transfer of royalties) to THE ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of DRP`s order in the case of the assessee. The perusal of Article 4 of TCA shows that payments relating to delivery of documentation by Air carrier, custom duties and other levies under the head of Transmission of Technical Information are not covered by Royalty clause falling under Article 5 of TCA. We find that the consideration mentioned in Article 6 talks about services of royalty in nature and not the services rendered under Articles 2, 3 and 4 of TCA. The assessee has claimed that the payment disallowed by the AO/TPO pertained to service rendered under Article 2 ,3 and 4 of TCA , hence, the same are exclusive of services of royalty nature as mentioned under Article 5 of TCA . Therefore, the AO/TPO was not justified of having considered the same as falling under Article 5 of TCA. 3.5.2. We are of the considered opinion that that the payment for technical services of Articles 2, 3 and 4 of TCA are over and above the consideration paid towards manufacturing and selling and is therefore, allowable deduction. Similarly, the amounts paid for technical services for Prithla Unit are also covered under the specific exclusion clause 4.2 of the Royalty Agreement and as such is allow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7 and as such is allowable as deduction. We find that the learned that TPO/DRP has failed to appreciate the fact that the payment of royalty and technical services serve two different purposes. We also find that the TPO has accepted the use of TNNM method in A.Y. 2008-09 as most appropriate method for the purpose of benchmarking the impugned International, whereas the approach proposed by the TPO for the year under appeal is absolute contradiction of the approach adopted earlier in TP order for A.Y. 2008-09. 3.5.5. We further find that in the succeeding years i.e. A.Y. 2012- 13 and A.Y. 2013-14, the TPO has accepted this factual position by not making any adjustment for amounts paid for services covered under Article 2, Article 3, and Article 4 of the agreement in case of Manideep Unit and Article 4.2 in respect of agreement in the case of Prithla Unit. The additions made in A.Y. 2012-13 amounting to Rs. 34,12,846/- pertained to sums, details of which were furnished by the assessee himself, which were covered under Royalty Agreements and that whose ALP was taken at Nil. The learned Counsel for the assessee, has furnished the details of adjustments vide Anx-A for A.Y. 10-11 and A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... therefore, prayed that the same may be granted in the interest of natural justice. 4.2. We have heard the rival submissions of both the parties and have perused the material available on record. We find that this amount is covered by ground no. 3 above. We also find that this amount is appearing at Serial No. 11 of the details of payment which relates to payment made for support in respect of business development and not for design and drawing of contract products hence, same is covered by exclusion clause in 3.2 of the agreement relating to general technical assistance by active participation in establishing marketing, design, production, assembly, quality control testing application, installation, commissioning and servicing. Therefore, this amount is not covered by Ro agreement; hence, it is required to be deleted. Hence, this grounds of appeal is allowed. 5. Ground NO. 4 for A.Y. 2011-12 relates to not allowing setoff of surplus revenue / profit exceeding the arm`s length price earned from other transaction while computing the transactionby- transaction analysis approach. 5.1. We have heard the parties. We are of the view that the decisions rendered in above ground would ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pany has not obtained the design from anywhere else and it manufactures every generator on the design provided by the Parent Austrian Company with its 100% subsidiary company only. Thus the income accruing/in India is directly through the connection of Austrian Company in India, as envisaged in section 9(1)(vi) of Income Tax Act,1961 and Article 12 of DTAA. He therefore, held that payments are in the nature of royalty on which no TDS was done; therefore, these were disallowed under section 40(a) (ia) of the Act. 6.2. The DRP observed that careful study of technical services proves and agreement within parent company show that the technical drawings and designs for use of the assessee are rights granted to use scientific work, patent, design, plan, secret formula, process, or industrial commercial or scientific experience. Hence, technical drawings and designs can be held to be falling under one or more of the various items listed in the Treaty. The service provided under the agreement are also technical in nature. Therefore, the payments made as per agreement is taxable in India as per Article 12 of tax Treaty as well as section 9(1) (vi) and section 9(1) (vii) of the Act. The DR ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of tax at source. The designs so purchased are given to the customers of the assessee as part of the terms of contract between the assessee and its customers, which is specifically provided for consolidated consideration to be charged for the supply of generators as well as the technical drawings and designs used in their manufacture. The supply of the design is imperative for the customers of the assessee to ensure maintenance and smooth running of the generators. That the transaction of purchase of drawings is the outright purchases is further substantiated by the fact that the said drawings are considered as ''goods'' under the Customs Act and are chargeable to custom duty at the appropriate rates. The hard copies of technical drawings and design are retained by Andritz Austria are accordingly accompanied by a bill of entry and subject of payment of customs duty while being imported in India. 6.3.1. The Ld. Counsel further submitted that the transaction is thus a purchase of the copyrighted article and not the purchase of copyrights therein. The assessee does not possess any rights of whatsoever nature in the copyrights contained in the design, which continues to be owned by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iness or business connection in India or the Non-resident has rendered services in India. Both amendments are not applicable to the facts of the case. The observations of the DRP are thus misplaced and not sustainable. 6.3.3. The learned Counsel stated with reference to the contention of the DRP, relying on that the agreement entered by the assessee with Andritz Austria wherein consideration payable is designated as royalty @ 5% on sales in India and adjacent countries and @8% of exports to other countries, the assessee submits that the terms and conditions mentioned in the agreement relating to transactions of sales of generators which have been developed based on the expertise of Andritz Austria. However, in certain cases, looking at the complexities of the project involved it becomes imperative that the specific designing of the Generators is made looking at the specific needs of the clients and their projects. The assessee does not possess the requisite expertise to create such designs. Accordingly, in such cases, the designs are sold by Andritz Austria to the assessee for further delivery to the clients along with Generators as part of the terms of contract. The assessee mere ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of customers. Accordingly Australian Parent Company prepares and sales design to the assessee on the principal-to-principal basis with retaining the rights therein with him. Thus, the copyright in design is retained by Andritz Austria, thus, the assessee has right to use the product of design so purchased ""as is basis"" and not authorized to modify, edit, reproduced. We find that the technical know-how relating to design and drawings is not transferred to the assessee and same is retained by the parent company. Thus, the purchase of technical drawings and designs is outright purchase in the nature. We also note that that these drawings supplied to the assessee by Parent company are also treated as goods as per Customs Act, on which custom duty is payable. In view of these facts, we are of the view that the transaction of purchase of drawings and design is not in the nature of royalty. 6.5.1. So far, observation of the DRP that technical services agreement entered in 2006 altered the position and decisions as given by Tribunal prior to year 2006, and there is amendment in Income Tax Act, 1961 which has increased the scope of royalty to cover such supply of technical drawings and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are placed on Andritz Austria for the supply of technical drawings and designs to manufacture the generators customized to the needs of the customers. Copies of some of the sample Purchase Orders are attached as Exhibit 35 of the Paper book) to substantiate the fact that orders are place by the Assessee for purchase of the Designs and not obtaining a limited right to use them. * It has been submitted to the AO that Andritz Austria sells the technical drawings and designs to the assessee on a principal-toprincipal basis and does not retain any right in such drawings and designs. The drawings procured from Andritz Austria are used in the manufacture of generators and supplied along with the generators to the customers. * The terms of the contract between the assessee and its customers specifically provide for a consolidated consideration to be charged for the supply of generators as well as the technical drawings and designs used in their manufacture. (Copy of relevant extracts of contract agreements as enclosed as Exhibit 36 of the Paperbook). * The hard copies of technical drawings and design obtained from Andritz Austria are accompanied by a bill of entry and subject to p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... No 112 to 115/IND-2007) * Davy Ashmore India Ltd. vs CIT - 190 ITR 626 * Pro-Quip Corporation Vs CIT - 255 ITR 354 9. With regard to the payment made for design and drawing imported by it from its group companies in Austria, the AO held that such import of design is not in nature of 'purchase of raw materials', however, the AO treated the same as payment of royalty as per Section 91(vii). While reaching to this conclusion the AO has relied upon the order passed u/s.201(1). As no tax was deducted on these payments, the AO disallowed the same by invoking provisions of Section 40(a)(i) and which was confirmed by CIT(A). We do not find any merit in the conclusion of the lower authorities insofar as the design and drawings was purchased on a principle to principle basis and same was in the nature of purchase of goods. Precisely the drawing is in the nature of purchase of 'copyright articles' and not of purchase of 'copyright" itself in the drawings. Hence, the same is in the nature of business expenditure and not in the nature of royalty. The payments of technical drawings and design have been incurred to procure such drawings and designs along with all the rights attached to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee company has spent huge amounts as expenditure on technical drawings and designs on account of payments to parent company, neither the tax was deducted at source, nor the assessee company obtained no deduction certificate from the Assessing Officer. The Assessing Officer, called for the explanations of the assessee and after considering the same, made the following observations :- "6.1 Arguments of the assessee are hovering around incorrect reasoning that a) it has purchased the design on out right basis as commodity and b) on the dictionary meaning of Royalty. 6.2. Royalty has been given wider meaning both in the Income Tax Act and DTAA, which includes payment for design/drawing. Assessee has relied on judgment in the case of CIT V/s DAVY ASHMORE INDIA LTD. 190 ITR, CIT Vs. Neyveli Lignite Corporation Ltd. 243 ITR 459,etc. However, these cases are distinguishable on facts which are different and not of any support to the assessee. The design purchased by the assessee are not in respect of commissioning of plant but these are in respect of a IT(TP)A No.5/Ind/2011, IT(TP)A No.313/Ind/2011, IT(TP)A No.616/Ind/2012,& IT(TP)A No.120/Ind/2014 18 particular generator wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to use the design. 6.5. The designs are not purchased through open tender or bid because assessee is manufacturing generators with a unique technology which is possessed by the parent Austrian company only hence the designs are specific to the parent company. Because of this special relationship assessee is bound to purchase the design from its parent Austrian company only. The design is first received through Internet and its hard copy along with bill is received through Customs to justify the payments made to the parent company from the angle of allowability of expenditure. 6.6. There is no agreement/terms and conditions in purchase of the designs from the parent Austrian company. Assessee is just placing the orders for supply of the designs to its parent company IT(TP)A No.5/Ind/2011, IT(TP)A No.313/Ind/2011, IT(TP)A No.616/Ind/2012,& IT(TP)A No.120/Ind/2014 19 and in each case the cost of the design is also determined by the Austrian company on its own parameters. 6.7. The design purchased by the company are not available off the shelf. These designs are prepared and supplied exclusively as per the specification and requirements of the customers which is provided to A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tructure is supplied by the Austrian company in such projects. Projects in India are completed by the assessee company with the Turbine supplied by the another 100% subsidiary company i.e. VATECH ESCHER VYAS FLOVAL Ltd., Faridabad. In all the cases design of generator is supplied by the parent Austria company only. 6.13. The 'V Austria Tech India' has stated that its Parent Austrian Company does not have Austria permanent establishment. In fact, there is no need for the Austrian company to have another permanent establishment in India, as they have their 100% subsidiary company in India (VA Tech India') which is acting on their behalf for procuring orders etc. Further the 'VA Tech India' is manufacturing every generator on the basis of design provided by the Austrian company. Thus the assessee company 'VA Tech India' is means for accrual of income to the Austrian company on account of its business activities in India. moreover, for taxability of Royalty, Permanent Establishment is not an essential criterion. (Also held in Leonhardt Andra Und Partner, Gmbh v. Commissioner of Income Tax; 249 ITR 418 (CAL). In view of the above it is held in the case of 'VA Tech India' that the pay ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ustria different case or even Austria similar case. From all the discussion and case laws cited above, it is beyond doubt that the payments made by the assessee 'VA Tech India' are in the nature of Royalty and are squarely covered by the decision of Royalty both in the DTAA and IT Act, 1961. I hold that the payments made by the assessee 'VA Tech India' are in the nature of Royalty and that the assessee 'VA Tech India' having failed to deduct tax has committed default within the meaning of sec.195(1) read with DTAA between Austria and India and read with sec.9(1)(vi) of the Income Tax Act, 1961." The Assessing Officer, for the reasons mentioned above, finalised the proceedings initiated earlier culminating in the order under section 195(1) read with section 9(1)(vi) and 201(1)/ 201(1A), by holding that the payments made by the assessee company to its parent Austrian company VA TECH Hydro GmbH Austria, for the purchase of design, during the F.Y.2002-03, 2001-02, 2000-01 and 1999-2000, are treated as 'Royalty' within the meaning of Explanation 2 to section 9(1)(vi) and article 12 of the DTA Agreement, on which the assessee has failed to deduct tax at the rate of 10% under section 195 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hold that the payments made for the purchase of drawings and designs do not give rise to any income in India and no tax needs to be deducted u/s 295 of the IT Act. The said payments are also not in the nature of royalty as defined in the DTAA entered into between India and Austria. In any case, it is not a case of the A.O. that there is a transfer of copyright by the Austrian company in favour of the appellant company but its is a case of sale of copyrighted articles and therefore also the payments made by the Indian company to non resident company are not in the nature of royalty. Hence the demands raised u/s 201(1A) for interest payable from the date of default in not deducting the tax at source till passing of the order by the A.O. in Financial Years 1999-2000, 2000-01, 2001-02 & 2002-03 are cancelled." 5. Now, the revenue is in appeal before us. 6. The learned CIT DR submitted that on the hard copy of drawings and designs supplied by the foreign company, it was specifically mentioned that such drawing was the property of that company and it could neither be kept, nor could be used in any other manner, without the written consent of the foreign concern. The learned CIT DR ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se of any patent, invention, model, design, secret formula or process or trade mark or similar property; (iv) the imparting of any information concerning technical, industrial, commercial or scientific knowledge, experience or skill; (iva) the use or right to use any industrial, commercial or scientific equipments but not including the amount referred to in section 44AB (v) the transfer of all or any rights (including the granting of a license) in respect of any copyright, literary, artistic or scientific work including films or video tapes for use in connection with television or tapes for use in connection with radio broadcasting, but not including consideration for the sale, distribution or exhibition of cinematographic films; or (vi) the rendering of any services in connection with the activities referred to in sub-clauses (i) to (iv), (iva) and (v)" The term Royalties and fees for Technical Services has been defined in Article 12 of DTAA with Austria which reads as under :- "Article 12 : royalties and fees for technical services - (1) Royalties and fees for technical services arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... very transaction would become a case of royalty, to which the learned CIT DR could not give any effective reply. The learned CIR DR thereafter placed reliance on the order of the Assessing Officer. 7. The learned counsel for the assessee submitted additional evidence as regards the treatment of such transactions in the books of non-resident parent company which was admitted as the learned CIT DR did not object for admission of the same. The learned counsel for the assessee submitted that as per this information, it was abundantly clear that such transactions were treated as transactions of sale and purchase in the books of parent company and had been taxed as business profits and not as a royalty. It was further pointed out that the tax rate on business profit was higher than the tax rate applicable to royalties. The learned counsel for the assessee thereafter contended that the ownership in such drawings was transferred to the assessee company on delivery of drawings by such company to the assessee. However, as per the condition of such sale transaction, the assessee could not reproduce it on its own or could use it in a manner not being permitted by the seller. Thus, the sale ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arned CIT DR also did not disagree. The learned counsel for the assessee thereafter placed reliance on the decision of the Hon'ble Calcutta High Court in the case of Davy Ashmore India Limited v. CIT; 190 ITR 626, wherein the Hon'ble High Court had pointed out that the transferor retained the proprietary right in the designs and allowed the use of such rights, the consideration received for such user was in the nature of royalty. However, in the present case, the assessee company was not allowed to use such right i.e. to make similar designs at its level and to sell the same to third parties and to pay consideration out of such sales to the parent company as it was an undisputed fact that such design was used for a specified project and had been handed over to the buyer of the plant and machinery for their reference, if the situation so required. He further contended that the decision of the Hon'ble Calcutta High Court in the case of Leonhardt Andhra UND Partner,GMBH v. CIT; 249 ITR 418 was not applicable as in that case the royalty was not defined in DTAA between India and Germany and in the absence of such definition, the statutory definition as contained in section 9(1)(vi) was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... kground, the Tribunal held that the assessee company had purchased and acquired interior design on a principal to principal basis i.e. as a buyer and in that view of the matter, the payment by that company did not amount to royalty. The learned counsel for the assessee relied upon the decision of the Tribunal in the case of Wipro Limited v. ITO as reported in 94 ITD 9 for the proposition that where the payment was for obtaining the data and use it the way the assessee wanted to use it, it was the use of a copy-righted article and not a case of transfer of right in the copy-right of that article and similar was the case here wherein the assessee company got the right to use of a copy-righted article and no right in the copy-right of the drawings/designs and the note on the hard copy of such designs confirmed this position i.e. the assessee had no right in the copy right of these drawings/designs i.e. the assessee had no right in the copy right of these drawings/designs and it could use only as per the terms and conditions of the agreement with its parent company for its own purposes in the capacity of the owner thereof. Thereafter, the learned counsel for the assessee referred to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pon by both the sides. In our opinion, if the view of the Assessing Officer is accepted, then there will not be any transaction of sale and purchase in such situations and every transaction would come within the meaning of term 'royalty'. Further, in our opinion, the basic distinction between a transaction of 'royalty' and of outright sale and purchase is transfer of ownership to the buyer and this distinction has been maintained even in the provisions of section 9(1)(vi) as well as of DTAA. We have also perused the note on the hard copy of such designs. In our opinion, substance of such note is nothing but an indication that such product is sold only for specific use and no right in copy-right thereof has been given to the buyer by the transferor/seller, meaning thereby that such article/goods in the form of designs could be used for specific purposes and cannot be used for other commercial gains by the buyer. This can be put in different words i.e. it is a case of purchase of copy righted article and not of copy rights therein. Thus, on this very fact, we do not consider any necessity to go into the issue further and deal with the judicial decisions cited by both the sides. Howev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re us is that the expenses were incurred for purchase of technical drawings and design from its joint venture company for business expediency. Uncontrovertedly, the impugned expenditure was fully supported by bill of entries, custom clearance, shipping agents documents, payments through banking channel with compliance of rules and regulation of Foreign Regulation Act (at the relevant time). All these documents were not disputed by the Assessing Officer and were duly examined by the ld. CIT(A), meaning thereby, the expenses were claimed to be genuine business expenditure. There is categorical finding in the impugned order that the genuineness of the expenses for incurring the technical drawings and design was duly established as the copies of the invoices, purchase orders were duly produced right from assessment stage. Even otherwise, the ld. Assessing Officer has nowhere mentioned in the assessment order that the payments for the impugned expenses were not made. The suspicion of the ld. Assessing Officer is that the transactions relating to drawings & design expenses are nothing but an afterthought. However, noting concrete has been brought on record by the Assessing Officer in sup ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Therefore, the AO is directed to allow due credit of TDS, as claimed by the assessee after due verification. Accordingly, these grounds of appeal are, treated, as allowed for statistical purposes. I.T.A. No. 265/Ind/2015: REVENUE`s APPEAL FOR ASSESSMENT YEAR 2010-11 I.T.A. No. 349/Ind/2016: REVENUE`s APPEAL FOR ASSESSMENT YEAR 2011-12. 9. Ground No. 1: For A.Y. 2010-11 and A.Y. 2011-12 pertained to disallowance of warranty provisions of Rs. 3,47,53,202/- for A.Y. 10-11 and Rs. 3,52,88,923/- for A.Y. 11-12 of which facts are identical except figures hence, same are being considered together and being disposed-of accordingly. 9.1. The assessee has debited an amount of Rs. 3,47,53,202/- for the assessment year 2010-11 and Rs. 3,52,88,923/- for the assessment year 2011-12 as warranty under the head selling expenses. The AO called upon the assessee to furnish the project-wise details, in respect of warranty provision and substantiate the provision for warranty claimed in the books of accounts. The AO noted that the statement filed by the assessee gives the value, which is said to be the basis for making provision, rather than value of contract executed. The said claim is merely a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ND-2007. The DRP further observed that no appeal has been filed by the tax authorities against the order of the Ld. CIT(A) for AY 2004-05. The facts of the current appeals are same as those covered in the previously mentioned orders. The assesse has also relied on Hon`ble Apex Court decision in the case of Bharat Earth Movers vs. CIT[200] 245 ITR 428 (SC) for the proposition that if a business liability has arisen in the accounting year, the deduction should be allowed although the liability may have to be quantified and discharged at a future date. Based on the facts and circumstances of the case, the DRP has directed the AO to allow the assessee as deduction, while computing the income of the assessee as it has created the provision for warranty. 9.3. Being, aggrieved the Revenue has filed this appeal before the Tribunal. The Ld. CIT (DR) submitted that the AO also disallowed provision of warranty expenses on the plea that warranty provision is a 'contingent liability'. The Ld. DRP vide order dated 23. 12. 2014 for the assessment year 2010-11 has held that the assessee has made such estimate and at approximately 1% of COGS from the details furnished for A.Y. 2006-07 to A.Y. 201 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on of warranty flows from the contract of sale. During the warranty period, the assessee is committed to take remedial action at his cost should there be failure in quality or performance of its products (i.e. generators and equipment's) sold. We also note that making a provision for all known liabilities is a fundamental principle of the mercantile system of accounting and the assessee by provisioning for the liability arising from warranty clauses of the long- term contracts has to abide by such accounting principles. It is seen that the assessee had debited the relevant expenses to the warranty provision account. For this purpose, the assessee has furnished project-wise details of the warranty expenses booked during the year and also explanation regarding the basis of claiming the same as business expenditure. It was also submitted to the Ld. AO that once the warranty period specified under the contract lapses, the surplus balance lying in the warranty provision account is transferred back to the profit and loss account. 9.5.1. We find that for A Y 2003-04 and A Y 2004-05, the provision for warranty has been held to be in the nature of ascertained liability and not contingent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e for the assessment year 2003-04 vide order dated 28-12-2011 in ITA No.255/Ind/2007, wherein it was held that the provision of warranty was not a 'contingent liability'. The precise observation of Tribunal were as under:- "15. We have considered the rival submissions and perused the material available on file. We find that the following provision was made of the warranty claim in the accounts of the assessee: Project Name Total Cost incurred (in Rs.) Provision @1% (in Rs.) Warranty Period. The details of warranty provision and its reversals are reproduced hereunder: Project Name Total Cost incurred (in Rs.) Provision @1% (in Rs.) Warranty Period Rs.) Bhandardhara 53230000 532300 18 months from Test Run Triveni Sugars 12000000 120000 2 crushing seasons Vajra 6550000 65500 18 months from supply Chaskaman 7550000 75500 18 months from supply Rana Sugars 5190000 51900 2 crushing seasons Triveni Turbo 4915000 49150 24 months from supply HPCL 6600000 66000 24 months from supply Renuka Sugars 9150000 91500 2 crushing seasons Na Loi 25450000 254500 24 months/8 hrs. of operation Pa ..... X X X X Extracts X X X X X X X X Extracts X X X X
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