TMI Blog2017 (4) TMI 1437X X X X Extracts X X X X X X X X Extracts X X X X ..... . We find that the international transactions carried out by the assessee would. be both on capital as well as on revenue account. The entire international transactions would have to be referred by the ld. AO to the ld. TPO u/s 92CA. As we had already stated that the scope of enquiry of the ld. TPO is merely restricted to determination of ALP of international transactions which would. be both on capital and on revenue account. Hence the order of ld. TPO on royalty payment and addition made thereon would. not come to the rescue of the assessee. We find that the CIT considered the order of the AO to be erroneous at the show cause notice stage by stating the royalty payment should be construed as capital expenditure and hence should. be disallowed, he later on in the order passed u/s 263 of the Act changed the track and considered the order to be erroneous for lack of enquiry‟ on the part of the ld. AO. This finding of the ld. CIT recorded on altogether new footing without giving opportunity of being heard to the assessee, itself rendered the revision order u/s 263 of the Act as invalid and bad in law. CIT erred in invoking revisionary jurisdiction u/s 263 in the insta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... - to its Associated Enterprise (AE) (DIC Asia Pacific PTE Ltd of Singapore and DIC Corporation of Japan) as revenue expenditure for using technical knowhow and upgrading manufacturing technology and right to use the trade names and brand names and reported in Form 3CEB as required u/s 92E of the Act. He observed that as per detail submitted in Form 3CEB, Column No. 9 and agreement dated 1.7.2008 between DIC India Ltd and DIC Asia Pacific India Ltd of Singapore (Holding Company having 71.27% shares) and DIC Corporation of Japan (Ultimate Holding Company) established that the payment of royalty was in composite manner and the charges of all (i) Technical Know-how (ii) Licences (iii) Trademarks (iv) Brand name, was paid to acquire the business/ commercial rights of intellectual property in the form of intangible assets for the period of seven years. He stated that assessee has acquired the aforesaid intangible rights on technical knowhow for upgrading manufacturing technology. 4.1. The ld. CIT further observed on scrutiny of copy of the agreement relating to Royalty payment‟ dated 1.7.2008 , that there was no embargo on the assessee to continue to manufacture th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... /quarterly basis aligned to the sales effected and were in the nature of periodical payments. The quantum of royalty payment was commensurate with sales achieved in given quarters meaning thereby that the royalty paid was directly correlated with the assessee‟s regular trade i.e. the sales and therefore the benefit derived from the same could not be said to be of enduring nature. It is also not a case one-time lump sum payment made by assessee for transfer of technology or knowhow which may raise a question as to the nature of expense. In terms of the agreement dated 01.07.2008 with DIC Asia Pacific Pte Ltd. the assessee was allowed the use of technology trademarks in the manufacture sale of printing inks only in the Indian Territory. In consideration the assessee was required to pay royalty @ 2% of the net sale printing inks subject to certain conditions. For the relevant AY 2010-11, pursuant to the aforesaid agreement dated 01.07.2008, the assessee had paid royalty of ₹ 6,33,74,362/- to DIC Asia Pacific Pvt Ltd. Similarly the assessee had also entered into a technical collaboration agreement dated 01.04.2007 with DIC Corporation, Ja ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... htly. Instead the case is exactly opposite. The License Agreement provided only for the use of technical knowhow information by the assessee which at all material times during the period of license even thereafter is to be owned by DIC Asia Pacific Pte Ltd. The royalty paid by the assessee is only a license fee for use of technical knowhow and not the price for acquisition of a capital assets . The royalty paid, without an iota of doubt was therefore revenue in character and hence fully deductible from the profits of the business. On appreciation of these material facts therefore the AO rightly allowed the deduction of these material facts therefore the AO rightly allowed the deduction for royalty paid as revenue expenditure. The assessee also stated that it may also be relevant to invite attention to Clause 2.2 of the agreement which states that DIC India Limited is granted a non-exclusive right to sell the products in any countries except the countries where parent company has its plant, its subsidiaries or other joint venture arrangements for manufacture of the product, where parent company is engaged in the ordinary sale activity of the products, and where parent company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed information contained technical knowhow concerning operations of plant machineries to manufacture of the licensed products. The fact that by using the technical knowhow the assessee was able to use its plant machinery more efficiently or profitably cannot make the annual royalty payments as a percentage of sales to be capital in nature. Attention in this regard is made to the decision of the Apex Court in the case of Commissioner of Income Tax Vs IAEC Pump Limited, reported in 232 ITR 316. The facts and circumstances in that case were identical as those involved in the assessee‟s case. In that case the technical knowhow was licensed to the assessee for a period of 10 years non-transferable basis. The assessee in that case was also not entitled to disclose the documents information to any third party. The AO treated the payment towards technical knowhow as capital expense. On appeal the Apex Court held that the amount paid to the parent company is only a license fee and not the price for acquisition of a capital asset . It was concluded that the entire payment constituted revenue expenditure and addition made by the AO was deleted. 5 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the business by the ld. AO. 5.4. The assessee further submitted that the royalty was paid to its foreign associated enterprises. The royalty payments made to these companies were reported in transfer pricing report furnished in Form 3CEB , this was submitted along with the return of income. The Transfer Pricing Audit Report containing information about royalty paid to foreign associate enterprises was referred for transfer pricing scrutiny u/s 92CA(1) of the Act by the AO for the A.Y. 2010-11. In the course of transfer pricing scrutiny, the assessee was specifically required by TPO to furnish details of royalty payments along with relevant agreements with Associated Enterprises vide his letter dated 01.03.2012. In response the assessee vide letter date 23.03.2012 furnished the details of payment of royalty and copies of relevant agreements with the associated enterprises. The TPO in his show cause notice date 15.01.2014 asked the assessee to justify the arm‟s length value of the deduction claimed in respect of royalty payment of ₹ 6,42,47,978/- to associated enterprises from the profits of the business. In response; detailed submissions dated 22.01.2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nterest of the revenue. 2) For that on the facts and in the circumstances of the case, in spite of the fact that the company's representative had appeared before the PCIT in compliance to the show cause notice and made the written representation countering the reasons set out in show cause notice, the PCIT was grossly unjustified in passing the impugned order by ignoring the explanations put forth. 3) For that on the facts and in the circumstances of the case, the PCIT was grossly unjustified in considering the assessment order as erroneous on the ground that royalty paid by the appellant constituted capital expenditure and therefore only the depreciation was permissible in respect of royalty payment. 4) For that on the facts and in the circumstances of the case, the finding recorded by the CIT that royalty was paid for indefinite use of the technical knowhow for manufacture of products was contrary to the provisions of the agreement available on record and therefore the finding of the CIT that royalty was capital expenditure liable for disallowance was contrary to the jurisdictional facts... 5) For that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... also be applied to conclude the issue of royalty payment as an capital expenditure instead of revenue which was allowed to the assessee for past several years. He argued that the said judgement itself specified that as to whether a particular outlay is capital or revenue in nature had to be judged from the facts of each case and there cannot be any conclusive proof for the same. Having said so, without bringing any material on record , the ld. CIT had simply categorized the royalty payment as capital expenditure , without appreciating as to how the royalty payment had assisted in acquisition of knowhow and without appreciating the terms and conditions of technical collaboration agreement entered into by the assessee. He argued that in the past , similar expenditure was allowed as revenue expenditure by the ld. AO u/s 143(3) of the Act and hence it could be concluded that the ld. AO had taken one of the possible views in the matter and accordingly the wisdom of the ld. AO in this regard cannot be questioned by the ld. CIT u/s 263 of the Act. He placed reliance on several decisions of Hon‟ble Supreme Court, High Courts and Tribunal in support of his various contentions. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in India in its various factories located at Calcutta, Delhi, Mumbai, Chennai, Noida and Ahmedabad. The assessee was desirous of upgrading its overall technology and introduction of new technology for manufacturing printing inks and allied products of all types viz., manufacturing of flushed pigments, sheetfed offset inks, gravure inks, web offset inks, news inks, screen printing inks, varnishes of all types including flush varnish, adhesives including packaging adhesives on a continuous basis. The assessee had approached DIC Japan to make available to it the said technical knowhow for the purpose of upgrading its manufacturing technology for the existing as well as future products relating printing inks and allied products on a continuous basis in its plants located at Calcutta, Mumbai, Noida, Ahmedabad , New Delhi , Madras or any other future place as may be determined by assessee from time to time. It is further stated that the DIC Japan would. make available to assessee the technical knowhow as aforesaid and the right to use the trade names and brand names. In this regard, the following clauses in the said agreement would. be relevant:- 1.3. Products will als ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to disclose it to any third party provided that the information of the following nature shall be excluded from these secrecy obligations: (a) Information that is in public domain. (b) Information that COATES has in its possession at the Effective date which is not subject to an Agreement of Confidentiality. (c ) Information which COATES has received rightfully from other sources before or after at the Effective Date. 7.2. The obligation under this article shall survive any termination of this Agreement for ten (10) years. 9. Period of Agreement 9.1. This Agreement will remain in force for 7 years from the Effective Date, provided that DIC, directly or indirectly, owns more than fifty (50) percent of the shares of COATES. 9.2. One (1) year prior to the expiration of this Agreement, the parties shall meet and shall decide jointly either to renew this Agreement for the further period fo five (5) years at the expiration of this Agreement or whether it shall not be renewed after the normal date of expiration. 10. Termination 10.1. Eithe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... such licensed information by the assessee. We have gone through the agreement entered into between the assessee and DIC Asia Pacific Pte Ltd, Singapore and DIC Corporation, Japan and we find that nowhere it was mentioned that the assessee had acquired the business/ commercial rights of IPR so as to fall within the ambit of an asset having enduring nature in the capital field.. On the contrary it is very clearly stated in both the agreements that DIC Asia Pacific Pte Ltd, Singapore and DIC Corporation, Japan has granted license to use technology, knowhow and other license information for a specified period and hence it cannot be said that the assessee had acquired any business / commercial rights thereon. We find that the ld. CIT had persuaded himself to incorrect assumption of facts that assessee by using the licensed information obtained from DIC Asia Pacific Pte Ltd, Singapore and DIC Corporation, Japan had upgraded its P M and also changed the setting up of P M to make its finished products viable for the market. This assumption is factually incorrect and does not emanate out of the jurisdictional facts on record. The ld. CIT had not brought any material evidence on record to ju ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of facts and circumstances by invoking his revisionary powers u/s 263 of the Act which in our considered opinion is not permissible in law. 9.3. We find that similar issue was addressed by the co-ordinate bench of this tribunal in the case of DCIT vs Bata India Ltd in ITA Nos. 1826 to 1828/Kol/2012 dated 23.5.2013. In this case also, it had secrecy confidentiality clause and termination clause similar to what is present in the technical collaboration agreement entered into by the assessee herein. The Tribunal after examining the relevant clauses of the agreement held. as below:- 16. The ld. AR drew our attention to the royalty agreement which was at pages 8 to 28 of the paper book. He drew our attention to para 2.5 of the agreement which specifically says that all the drawings and other documents comprising the technical knowhow and all notes and copies made there from by licensee shall be marked with the words Secret and Confidential-property of Wolverine World Wide, Inc. . He further drew our attention to Article 6.1 wherein it has been agreed that the technical know-how imparted to licensee is and shall remain the exclusive and valuable secret ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of lumpsum royalty as the agreement was for non-transferable license to manufacture licensed products in India. Out of several questions raised by the revenue before the Hon‟ble Calcutta High Court, only question no. (iv) was admitted by the Court and all other questions were either disposed of on merits or on the ground that they do not involve any substantial question of law. 9.4. We find that the assessee had filed chartered accountant‟s certificate in Form 3CEB for its international transactions which included payment of subject mentioned Royalty to its AE which was certified to be at Arm‟s Length by the Chartered Accountant. The assessee benchmarked its royalty transactions by following CUP method and by comparing the royalty percentage made by the comparable companies and arrived at the arithmetic mean of 8.55% on sales. Since assessee paid only 2% as royalty on sales, the assessee justified its royalty payment to be at Arm‟s Length. The Transfer Pricing Documentation in this regard was also filed during the hearing wherein at pages 44 to 54 of the TP Study Report, the details of benchmarking of royalty and justificatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l transactions carried out by the assessee would. be both on capital as well as on revenue account. The entire international transactions would have to be referred by the ld. AO to the ld. TPO u/s 92CA of the Act. As we had already stated that the scope of enquiry of the ld. TPO is merely restricted to determination of ALP of international transactions which would. be both on capital and on revenue account. Hence the order of ld. TPO on royalty payment and addition made thereon would. not come to the rescue of the assessee. 9.5. We also find that the issue of allowability of royalty as revenue expenditure was considered by the Hon ble Calcutta High Court in the case of Timken India Ltd vs CIT reported in (2014) 51 taxmann.com 184 (Calcutta) dated 30.7.2014 which considered the decisions relied upon by the ld. AR [i.e CIT vs I.A.E.C. (Pumps) Ltd 232 ITR 316 (SC) and ld. DR (i.e Alembic Chemical Works Co. Ltd vs CIT 177 ITR 377 (SC) ]. The Hon‟ble Calcutta High Court held. as under:- 5. Mr. Majumdar, learned advocate appearing in support of the appeal, submitted that the facts and circumstances of the present case are identical with those in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat the assessee may have already had an existing plant and machinery. It may also be true that the assessee was pursuing the same line of business, but it cannot be denied that by paying the sum of USD 200,000 the assessee acquired a new technology. There was as such accretion to the capital of the assessee in the sense that the company became better equipped to do its business with the help of technology. Therefore, the expenditure has to be treated as a capital expenditure. On the top of that, from the agreement entered into between the assessee and the non-resident it would. appear that the benefit of such payment is of an enduring nature which is to continue to benefit the assessee for a period of six years. It was, as such, a plain case of a capital expenditure on which the assessee was entitled to claim depreciation. The assessee has already been allowed depreciation at the rate of 25%. Accordingly, more than just treatment was given to the assessee and this court should. refrain from interfering with the order under challenge. 10. We have considered the rival submissions of the learned advocates for the parties. The submissions advanced by Ms. Gutgutia are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ession and will keep no copies thereof. Moreover, assessee in the instant case was given by its AE only a non-exclusive and non-transferable license to use Licensed Information for manufacture of products. Assessee was not granted any right to sublicense to any third parties or make available any licensed information to any third parties and is also directed to maintain the secrecy and confidentiality of the licensed information by not disclosing to any third party and such secrecy confidentiality clause shall be binding even after termination of the agreement for ten years. Hence it is a restrictive usage privilege given to the assessee in the instant case and hence the facts before the Hon‟ble Madras High Court are squarely distinguishable. 9.6. We find that the ld. CIT considered the order of the ld. AO to be erroneous at the show cause notice stage by stating the royalty payment should be construed as capital expenditure and hence should. be disallowed, he later on in the order passed u/s 263 of the Act changed the track and considered the order to be erroneous for lack of enquiry‟ on the part of the ld. AO. This finding of the ld. CIT recorded on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rroneous thereby invoking revisionary jurisdiction u/s 263 of the Act. It is pertinent to note that the ld. CIT had mentioned about the existence of the royalty agreement in the show cause notice issued by him itself and had also scrutinized the said agreement before issuing the show cause notice. This goes to prove that the assessee had already filed the said agreements during the assessment proceedings on request from the ld. AO. The ld. CIT was trying to substitute his own view against the view taken by the ld. AO on the basis of the very same agreement when there being no change in the facts and circumstances of the case as compared to that of the earlier years. In this regard, we would. like to place reliance on the decision of the Hon ble Bombay High Court in the case of CIT vs Nirav Modi reported in (2016) 71 taxmann.com 272 (Bombay) dated 16.6.2016 wherein it was held. as below:- 7. Firstly, the Revenue contends that the exercise of powers under Section 263 of the Act is justified as in this case, as no inquiry in respect of the gifts received during the subject years was done by the Assessing Officer for the Assessment orders for Assessment Years 2007-08 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... giving the evidence. It is only in cases where the evidence produced gives rise to suspicion about its veracity that further scrutiny is called for. If there is nothing on record to indicate that the evidence produced is not reliable and the Assessing Officer was satisfied with the same, then it is not open to the CIT to exercise his powers of Revision without the CIT recording how and why the order is erroneous due to not examining the donors. Thus, this objection to the impugned order by the Revenue is also not sustainable. 9. It was next submitted that no enquiry was done by the Assessing Officer to find out whether the donor Mr Deepak Modi (father) had received money from M/s. Chang Jiang as claimed. Nor any inquiry was done to find out whether the sister had in fact earned amounts on account of Foreign Exchange Transactions as claimed by her. We find that this enquiry of a source of source is not the requirement of law. Once the Assessing Officer is satisfied with the explanation offered on inquiry, it is not open to the CIT in exercise of his revisional powers direct that further enquiry has to be done. At the very highest, the case of the Revenue is that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nder Section 263 of the Act has merely restored the Assessment to the Assessing Officer to decide whether the gifts were genuine and, if not, then the Assessment could. be completed on application of Section 68 of the Act. In this case, the order passed by the Assessing Officer is not per se erroneous and further the CIT has not given any reasons to conclude that the order is erroneous. In fact, he directs the Assessing Officer to find out whether the order is erroneous by making further enquiry. This the decision of the Delhi High Court in D.G. Housing Projects Ltd. (supra), clearly negates. In the above view, the decision of Delhi High Court in D.G. Housing Projects Ltd. (supra) would. not assist the Revenue in the present facts. 11. Further, reliance is placed upon by the Revenue upon the decision of the Apex Court in Amitabh Bachchan (supra) to impugn the order of the Tribunal. In the facts of the Supreme Court decision, the Respondent-Assessee had filed a revised return, claiming additional expenses. During the Assessment Proceedings, the Assessing Officer called upon the Assessee to furnish the details with regard to the expenses claimed to be incurred. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a further enquiry. It is made clear that our above observations should. not be inferred to mean that it is open to the Assessing Officer to enquire into the source of source for the purpose of the present facts. This is a case where a view has been taken by the Assessing Officer on enquiry. Even if this view, in the opinion of the CIT is not correct, it would. not permit him to exercise power under Section 263 of the Act. In fact, the Apex Court in Amitabh Bachchan (supra) has observed that there can be no doubt that where the view taken by the Assessing Officer is a possible view, interference under Section 263 of the Act, is not permissible. 13 In view of the above, the questions as framed stands concluded by the decision of this Court in Gabriel (India) Ltd. (supra). Thus no substantial questions of law arises for our consideration. 14. Accordingly, Appeals dismissed. No order as to costs. We hold that the principles laid down by the Hon‟ble Bombay High Court in the aforesaid case would. be squarely applicable to the facts of the instant case. 10. In view of our aforesaid findings and respectfully follow ..... X X X X Extracts X X X X X X X X Extracts X X X X
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