TMI Blog2017 (2) TMI 1415X X X X Extracts X X X X X X X X Extracts X X X X ..... saction with Non AE s which is improper as individual margins are being compared with aggregate margin which is impermissible under law. We find that in the case of the assessee, there are long- term contracts for supply of commodities, and separate transactions are closely linked or continuous that they cannot be evaluated adequately on a separate basis as per examples given in the light of OECD Guidelines para 1.42 as quoted above, we are, therefore, of the view that the combined approach of transaction and aggregation of transaction is the most appropriate method. Contracts of the assessee with AEs run over a period of 2 to 4 year and as such are long-term contracts justifying as a combined transaction approach as taken by the assessee. We also observe that the assessee had earned lower than mean gross margin in some individual unrelated party transactions also. Therefore, comparing margin of individual contracts with AE s with margin calculated the average margins entered with Non AE s does not appear to be as per the principal of transfer pricing. The assessee is a risk bearing entity and is full of risk bearing manufactures and supply of all power generation equipmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee, has furnished the details of adjustments vide Anx-A for A.Y. 10-11 and Anx-B for A.Y. 11-12, 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. Since the TPO has accepted the fact that above nature of services does not fall under the clause of royalty as per TCA, we are of that view that no adjustment is called for in the case of the assessee. Therefore, the TPO was not justified in making adjustment as the same were on account of payments not covered under the Royalty Agreement. We are of the considered view that the payments made in respect of Mandideep and Prithla Units as sustained by the DRP by holding as covered by royalty agreement are not sustainable in law as the same are not covered under the royalty clause of respective TCA dtd. 01.01.2006 in respect of Mandideep units and dtd. 26.04.2006 in respect of Prithla Unit for aforesaid units. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at 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. As submitted to the 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. As concluded that the provision for warranty is in the nature of an ascertained liability (with a reasonable estimate of the quantum) and not a contingent liability , hence, a deduction for the same should be allowed while computing the total income of the assessee for the relevant assessment years. We find that the assessee has made provision for warranty for each project separately taking into consideration all the factors with regard to the scope of work, terms of warranty agreed with the customers and estimated cost of warranty based on earlier years experience. This method of warranty provisions was consistently followed over the years, which is also in accordance with the Accounting Standa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) 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 would lead to unreliable results when compared on project-by-project basis. b) Not accepting the margin on individual projects to be at arm`s length which was consist margin earned by the AE on project from third party customers. c) Not taking cognizance of the facts that same international transaction of Appellant has been accepted by the Revenue authorities to be at arm`s length in previous years. d) Not accepting use of Transaction Net Margin Method (TNNM) as a most appropriate method on without prejudice basis, due to non-applicability of CPM, to benchmark the aforesaid transaction, In doing so, the Ld. TPO/DRP further erred in not accepting the order of Hon`ble ITAT for earlier years 3. The Ld. TPO/DRP has erred in making an adjustment of ₹ 11,723,967 to the transac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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. erred in law and in facts in making adjustment of INR 17,71,095 to the transactions related to Contract revenue from projects In doing so, the Ld. TPO/Hon`ble DRP erred in a) Inappropriately rejecting the Transaction Net Margin Method (TNNM) as most appropriate method using Cost plus Method (CPM) without providing any cogent reasons. b) Not considering the internal Cost plus Method (CPM) analysis submitted by the Appellant, which was in accordance with the provisions of the Ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rent 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 prejudice, to each other unless mentioned specifically. TPA. No. 265/Ind/2015: REVENUE`s APPEAL FOR A.Y. 2010-11 Ground:No.1: Whether on the facts and circumstances of the case, the Hon`ble Dispute Resolution Panel, Mumbai was justified in deletion the addition of ₹ 3,47,53,202/- on account of provision of warranty expenses when there was failure on the part of the assessee to fulfill three conditions needed in respect of goods sold to create warranty liability and also ignoring the finding of the AO that the liability arisin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 undertaken the transaction with its parent company, which is a single large customer and therefore, the project instituted by the assessee for its AEs is broadly similar in respect of the product output and, therefore, such transaction should be aggregated. It was argued that the assessee is a risk bearing entity and, therefore, it is quite likely that the return on some projects would be lower than the others. It was pointed out that even in the unrelated transactions, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ther 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 absence of any evidence in this regard, this contention of the assessee was not found acceptable by DRP. The DRP has observed that a higher margin in one project cannot be the reason for a margin not as per ALP in another project. Further, the assessee has not provided functional differences, if any in the scope of projects for AEs as well as Non-AEs nor mentioned the same in TP documentation. Hence, this argument of the assessee was rejected. The DRP hel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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/DRP however, grossly erred in comparing individual projects margins of transaction with AE with aggregate margins earned from transaction with Non AE s which is improper as individual margins are being compared with aggregate margin which is impermissible under law. 2.4.3. The Ld. TPO assumed that each project transaction with AE is separate transaction and needs to be analyzed separately ignoring the fact that the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sactions 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 projects as its risk is covered through the third party consortium. The risk being mitigated, the margins are less as per the common business practices. The addition made because of the difference in margins of XE, Kaman Projects; thus, deserves to be deleted on this fact as well in the interest of natural Justice. 2.4.10. The learned Counsel further submitted withou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o 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 benchmarking. It can be further seen that in the case of the assessee, separately in respect of its International transaction sale relating to receipt of revenues from each project has been found to be feasible, which in fact has been provided by the assessee itself in TP documentation. The case of the assessee does not fall in any of the categories/ e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 project span is for the periods over one year. Therefore, we are of the view that unrelated party transactions cannot be reliably compared with related party transactions on individual transaction basis. In view of this matter, we are of the opinion the arithmetic mean of gross margins earned by the assessee from all rel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g-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 assessee, there are long- term contracts for supply of commodities, and separate transactions are closely linked or continuous that they cannot be evaluated adequately on a separate basis as per examples given in the light of OECD Guidelines para 1.42 as quoted above, we are, therefore, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 ₹ 87,28,333 incurred by the assessee during financial year 2008-09 of ₹ 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 find that there is no reason to make adjustment on this account also. 2.6.9. We also find force in the submissions of the Ld. A.R. for the assessee that the assessee has also in the alternate performed TP analysis using transitional net mar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tance 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 ₹ 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 ₹ 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 ₹ 1,39,79,990/- were proposed. Similarly an amount of ₹ 3,02,21,072/- in respect of Prithla unit is found to be covered under royalty agreement hence, same was disallowed by not considering to be ALP. Accordingly, the TPO proposed adjustment of ₹ 4, 42, 01,062/- in this regar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 77; 34,18,088/- for A.Y. 2011-12 on the following grounds That the expenditure on account of technical services amounting to ₹ 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 technical services for Prithla unit, the amounts paid, are covered under a specific exclusion under Article 4.2 of the royalty agreem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... respect of agreement in the case of Prithla Unit. The additions made in A.Y. 2012-13 amounting to ₹ 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 Un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation) (Item 29 of the Paper book) 5 ANDRITZ Hydro GmbH,Austria Mandideep Engineering support for scada portion of the project 1,477,770 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. 6 ANDRITZ Hydro GmbH,Austria Mandideep Reimbursement of expenses incurred for training 293,460 Reimbursement of training costs on actual basis. Other similar Payment has been accepted at ALP(Please refer from 3CEB) 7 ANDRITZ Hydro GmbH,Austria Mandideep Site support, site visit travel Insurance 75,991 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... elating to General technical assistance by active participation in establishing marking, design, Production, assembly, quality control, testing, application, installation, commissioning and servicing. 12 ANDRITZ Hydro GmbH, Austria Mandideep Cooler, bearing, retaining rings procurement support 619,008 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. 13 ANDRITZ Hydro GmbH, Germany Prithla Reimbursement of expenses incurred for general training for the Projects Heads-Large hydro 269,869 Reimbursement of training costs on actual basis. Other similar Payment has been accepted at ALP(Please refer from 3CEB) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 active participation in establishing marketing, design, production, assembly, quality control, testing, applications, installation and servicing. 2 ANDRITZ Hydro GmbH, Austria Mandideep GH-DE Design support for Turbo Q 3 4 830,114 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ased 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 the assessee. It is the decision of commercial expediency, which is not permissible to be disturbed by the TPO. We also find that rendering of ser ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r 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 be supplied to THE LICENSEE by THE LICENSOR hereunder shall b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... RACT PRODUCT exclusive of cost of imported components irrespective 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cle 5 of TCA. Such nature of payment has been reflected in Anx-A of the Table mentioned in para 7.3.15 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 Prith ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he licensor personal in Article 4 and as such payments made in pursuance of the same are distinct from the royalty consideration as specified in the Article 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 ₹ 34,12,846/- pertained to sums, details of which were furnished by the assessee himself, which were covered unde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted on the same. The said relief due to some typographical error remained to be given to the appellant against which the appellant has preferred a rectification application and the same is pending. The learned Counsel 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 / prof ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ld.AO also placed reliance in the case of CIT vs. Davy Ashmore India Ltd. and CIT vs. Neyveli Lignite Corporation Ltd. and AAR ruling in the case of Ishikawajima Harima Heavy Industries Company Ltd. 271 ITR 193 (SC) in support of his view. 6.1.2. The AO held that the assessee company 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 un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is not authorized to modify, edit, reproduce the same. Even the technical know-how in relation to the drawings so made is retained by the Andritz Austria and is not transferred to the assessee. The transaction is thus if it transaction of purchase of drawings and not in the nature of royalty warranting deduction 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 b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act 2010, w.e.f. 1. 6. 1976, whereby, under the Act, the scope of royalty on fees for technical services is been expanded which were not considered by the Hon`ble ITAT. iii. There were only 2 retrospective amendments made by Finance Act, 2010 which are referred by the DRP. First pertains to right to use a computer software and second is with reference to income deeming to accrue on arising India whether or not, the Non-resident has a residence or place of business 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 expertis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he parties and have perused the material available on record. We find that the supply of generators to its customers as per terms of contract which is specifically provided for consolidated consideration is to be charged consisting of generators as well as 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 generators. The assessee makes purchases of technical drawings and designs to manufacture generators as per needs 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... electrical equipment s for supply to Hydro Power Plants. The assessee enters into contracts with its customers for supply of generators and equipment s as per their specifications of frequency, current, capacity, speed, efficiency etc. Such contracts include supply of technical drawing and design to the customers along with the equipment s The assessee does not possess the requisite skills and technical expertise for the designing of the generators and in this regard seeks assistance from its overseas parent entity. For the above purpose, purchase orders 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 dr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... een upheld by the same bench of the Hon'ble ITAT vide order dated 28 December 2011 (ITA No 29/IND-2005 for AY 2000-01, ITA No 253 and 254/1ND- 2007 for AY 2001-02 and AY 2002-03, ITA No 255/IND- 2007 for AY 2003-04). Further, 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 aforesaid orders. In this regard Appellant has relied on following key judicial precedents: DCIT-3(1), Bhopal vs VA TECH Hydro India Private Limited (ITA No 255/IND-2007) ACIT, 3(1), Bhopal vs VA TECH Hydro India Private Limited (ITA 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee 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 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 c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 Compan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f 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 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 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 non-resident 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 detailed and exhaustive submission and the case laws relied upon by the appellant, I 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 c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 concerning the working of, or the use of a patent, invention, model, design, secret formula or process or trade mark or similar property. (iii) the use 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 amo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... usions 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 the view of the assessee was accepted then every transaction would become a case of sale and in that case, provisions relating to royalty would become redundant. At this stage, a question was posed to him that if the view of the revenue is accepted, then every 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 n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 out-right purchase basis could not be considered as a transaction of the nature of royalty. The learned counsel for the assessee further submitted that the provisions of DTAA were to supercede the provisions of the Income Tax Act and for this proposition the learned 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 all ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 design which had to be used by the Indian company for the purpose of re-designing or renovating the interiors of Taj Mahal Hotel at Mumbai and the design supplied by the foreign company became the property of Indian Hotel Company Limited (assessee) and in that background, 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 Li ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 assessee company to its parent nonresident company for obtaining such designs. The conclusions of the Assessing Officer as well as the findings of the learned Commissioner of Incometax (Appeals) have already been reproduced which contain details of judicial decisions relied upon 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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 genuineness of the expenses. Admittedly, the audited accounts, Trading and P L Account and details of technical drawings expenses were duly furnished by the assessee before the Assessing Officer as well as before the ld. CIT(A). The stand of the assessee before the Revenue authorities as well as before 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 wit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion 40(a)(ia) of the Act by The AO/TPO and sustained by the DRP is not justified hence, directed to be deleted. Thus, ground No. 5 of A.Ys. 2010-11 and 2011-12 of assessee`s appeal is allowed. 7. Ground No.6:for A.Y. 2010-11 and Ground No. 7 for A.Y. 2011-12 relates to initiation of penalty proceedings under section 271(1) (c) of the Income-tax Act 1961. 7.1. We find that the assessee is aggrieved with the initiation of penalty proceedings under section 271 (1) (c) of the Act. No appeal lies against mere initiation of penalty proceedings. These grounds of appeals, are therefore, premature and accordingly dismissed. 8. Ground No. 7 for A.Y. 10-11 and ground no. 6 for A.Y. 11-12 : relates to not giving credit of TDS of ₹ 26,920/-(A.Y. 10-11) and ₹ 1,81,109/- for A.Y. 11-12 . 8.1. We have considered the facts and are of the view that due credit of TDS paid is allowable to the assessee. 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 APPEA ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nciple of mercantile system of accounting. The assessee has submitted 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 submitted that once the warranty period specified under the contract lapses, the surplus balance lying in the warranty provision is transferred back to Profit Loss Account. The assessee has also produced before the Ld. AO, orders of CIT(A) on similar issues of the assessee arising in AY 2003-04 and AY 2004- 05, wherein the CIT(A) has allowed the provision for warranty as deductible expense. Further, the CIT(A) order for A Y 2003-04 has also been upheld by the Indore Bench of the Income Tax Appellate Tribunal vide order dated 28 December 2011 in I.T.A. No. 255/Ind/2007 and vide order dated 03.07.2014 for A.Y. 2006-07,2007-08, 2008-09 and 2009-10 in lTA No. IT(TP)A.No.5/Ind/2011, IT(TPA)No.313/Ind/2011, IT(TP)A No.616/Ind/2012, IT(TP)A No.120/Ind/2014 255/IND-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 covere ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed the addition as the similar additions were deleted by the Tribunal in earlier years in assessee`s own case. The activity of the assessee is being turnkey contracts, EPC contract, and supply of turbines/generators stipulate warranty obligations. The assessee has made warranty provisions approximately 1% of cost of goods sold (COGS) which has been held to be non- excessive considering data for A.Ys. 2006-07 to 2010-11. The learned Counsel placed reliance in the case of Rotork Control (P) India Ltd. 314 ITR 62(SC)/(2009-TIOL-64-SC). 9.5. We have heard the rival submissions of both the parties and have perused the material available on record. We find that the assessee has entered into contracts with its customers for the sale of generators and other equipments required by Hydro power plants. Such contracts contain the essential warranty clause, which serves as an assurance, or guarantee by a seller of goods about the character, quality or fitness of the product under sale for the agreed period. The obligation 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 qua ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the Income Tax Appellate Tribunal vide order dated 03.07.2014 in I T A No. 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 12 255/IND-2007 in para 6 to 8 of the order observed as under : 6. We have considered the rival contentions, carefully gone through the orders of the authorities below and found that assessee has made provision for warranty for each project separately taking into consideration all the factors with regard to the scope of work, terms of warranty agreed with the customers, estimated cost of warranty based on earlier years experience. This method of warranty provisions was consistently followed over the years, which is also in accordance with the Accounting Standard u/s.145(2). Thus, we found that the basis of provision was not an ad-hoc or contingent as alleged by the AO. With regard to the reasonableness of the warranty provision, we had verified from the warranty provision reversed on yearly basis and the same was found to be reasonable. Exactly similar issue was dealt by the Tribunal in assessee s own case for the assessment year 2003-04 vide order dated 28-12-2011 in ITA No.255/Ind/2007, wherein ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... West Coast 12200000 122000 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 200607 6810422 487755 5 2007-08 6572822 2872949 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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