TMI Blog2019 (7) TMI 1751X X X X Extracts X X X X X X X X Extracts X X X X ..... cision of the Tribunal, we hold that receipts on account of sample design and development charges are export turnover and represents the business income of the assessee and this cannot be excluded from the receipts under Explanation (baa) of section 80HHC. DEPB receipts - CIT(A) directed the Assessing Officer to exclude the DEPB receipts for the calculation of deduction u/s 80HHC by accepting the contention of the assessee and without examining the actual profit component or loss. Since the computation along with evidence was not submitted by the assessee either before the Assessing Officer or before the CIT(A) and since no such details are available in the audited accounts of the assessee as in the P L Account, there is only one entry i.e., receipt on account of DEPB, therefore, we agree with the argument of the ld. DR that this matter should be restored to the file of the Assessing Officer with a direction to examine the profit element in the sale of DEPB licence and to recompute the deduction u/s 80HHC in the light of the decision of the Hon'ble Supreme Court in the case of Topman Exports [ 2012 (2) TMI 100 - SUPREME COURT] . The Assessing Officer shall decide the issue ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t justified which has rightly been deleted by the ld. CIT(A). We, therefore, considering the totality of the facts, do not see any valid ground to interfere with the findings given by the ld. CIT(A). We further find some force in the argument of the ld. counsel for the assessee that the transaction is revenue neutral as the royalty expenses are embedded in the sale price from the AEs to whom goods are sold and pays to other AE i.e., PRC, USA. The price to be charged to buyer is determined on the basis of cost plus mark up. Further, the assessee is consciously recovering royalty from AEs by including it in the price quoted to the buyer and royalty is also part of cost of production and, therefore, arm s length nature of expenses is established while benchmarking the international transaction of export of sales. We also find force in the argument of the ld. counsel for the assessee that the agreements with PRC, USA are for providing technical know-how and allowing use of trade names and trade marks by PRC, USA to the assessee and not a contract manufacturing agreement and, therefore, the action of the TPO in re-writing the agreement is not permissible in law. Further, for the purp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d by the Revenue. For the sake of convenience, these were heard together and are being disposed of by this common order. 2. Facts of the case, in brief, are that the assessee is a company engaged in the business of manufacturing and export of garments. It filed its return of income on 01.11.2004 declaring total income of ₹ 1,23,23,444/- after claiming deduction of ₹ 35,20,656/- u/s 80HHC. Since the assessee has entered into certain international transactions, the Assessing Officer referred the matter to the TPO for determination of the arm s length price (ALP). The TPO, during TP assessment proceedings, noted that the assessee has undertaken the following international transactions with its group companies:- S.No. Description of transaction Method Value (in Rs.) 1. Garments Home Furnishings CPM 37,20,22,974 2. Charge for samples provided for various styles TNMM 13,52,700 3. Payment of royalty CUP ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4961 (Del) of 2002. 2. In the facts and circumstances of the case, the Ld.CIT(A) has erred in law and on facts in deleting addition of ₹ 217032/- on account of disallowance of extra depreciation on computer peripherals/accessories ignoring that as per the IT Rules 60% depreciation is allowable only on computer and computer software and not on computer peripherals and accessories. 3. The Ld. CIT(A) has erred on facts and in law in deleting addition of ₹ 16707324/- on account of Arm s Length Price u/s 90CA(3) ignoring the fact that each International transaction must be benchmarked separately. The approach of amalgamating transactions should be followed only where the transaction are closely interlinked. The TPO has brought out that in the assessee s arrangement with its AE, the rewards of the marketing and fruits of intangible would be enjoyed by the AE. Hence, the assessee need not make a payment for the same. Ld. CIT(A) has erred in ignoring this fact. 4. The appellant craves leave for reserving the right to amend, modify, alter, add or forego any ground(s) of appeal at any time. 5. The assessee has raised the following grounds in the Cross Objection:- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed wholly and exclusively for the purpose of business. 3. The CIT-A erred on facts and in law in restricting the rate of depreciation to 25% on UPS and failed to appreciate that depreciation @60% is available on UPS. 7. After hearing both the sides, the additional grounds raised by the assessee in the Cross Objection are admitted since all material facts are available on record and no new facts are required to be investigated. 8. In ground of appeal No.3 the Revenue has challenged the order of the CIT(A) in deleting the addition of ₹ 1,67,07,324/- on account of ALP of the international transaction. 9. Facts of the case, in brief, are that the Pike River Corporation (PRC) is a body incorporated under the laws of State of Vermont, United States of America. This is an AE of the assessee company and is engaged in the business of designer s garments which include study of latest fashion trends in the market, developing styling the market and conceptualizing designs. It is the owner of brand in the name of Apprel Cornell The trademark is patented with office of United States. PRC has entered into agreement with Cornell Overseas Pvt. Ltd. (the assessee) for permitting ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .2 of the agreement, the assessee is under obligation to prepare and submit to the associated enterprise designs for prior written approval in the form of products to be manufactured, sold or distributed which shall include approval of workmanship material, fabric and colours. The TPO noted that the design of the product manufactured is provided by the AE, the details of fabric to be used is prescribed by the AE, the technology and the process to be employed is prescribed by the AE, the place at which the logo is to be fixed is conveyed by AE and the mode of delivery is determined by the AE. The AE having common control through Cornell Shareholders exercises full control over the affairs of the assessee company. Therefore, he inferred that the assessee company was a mere contract manufacturer of its overseas related parties. The risk and reward matrix in respect of a contract manufacturer is entirely different from an independent entrepreneur. According to him, an independent entrepreneur may require technical know-how, logo, market access, designs and help of an expert whereas the contract manufacturer requires none out of the above. Rejecting the various explanations given by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is oral arguments as well as detailed written synopsis he submitted that the TPO made TP Adjustment of ₹ 16707324/- on account of payment for different intra group services and use of trade mark to M/s Pike River Corporation (AE) by computing ALP at NIL. The ld. CIT(A) allowed the appeal of the assessee on the ground that the Royalty Payment is included in the sales of garments to AEs and the TPO has not taken any adverse view. Thus it follows that the Royalty transactions are also at arm's length. The above argument is highly erroneous and non-judicious. The Ld. CIT(A) has effectively held that the international transactions can be benchmarked at entity level and there is no requirement of benchmarking each of the international transactions separately which is against the specific provision of the Income Tax Act. It has been held in plethora of decisions that each international transaction is needed to be benchmarked separately unless they are inextricably linked. Reference is made to the judgement of Hon'ble Punjab and Haryana High Court in case of Knorr-Bremse India (P.) Ltd. v. Assistant Commissioner of Income-tax [2015] 63 taxmann.com 186 (Punjab Haryana). In t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er the same terms of the agreement has been accepted at ALP by the TPO in assessment year 2002-03. He submitted that the case for assessment year 2002-03 was reopened by the Assessing Officer u/s 147 on the ground that royalty is a capital expenditure. The Assessing Officer had accepted that the assessee had derived benefit under the agreement and the only dispute was whether the expense is a capital expenditure or revenue expenditure. The assessee went to the Tribunal and the Tribunal vide order dated 30th March, 2016, held that royalty expenses is a revenue expenditure. Similarly, for the assessment year 2003-04, the Tribunal, following the principle of consistency, held that the assessee had derived benefit under the royalty agreement and royalty payment during assessment year 2003-04 was at arm s length. Further, royalty paid to PRC, USA has been assessed in its hands in India and tax has been paid by PRC, USA thereon. He submitted that the transaction is revenue neutral as royalty expenses are embedded in the sale price. He submitted that the functions, assets and risk profile of the assessee remain the same in the current year as in the previous year, therefore, treating the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le of the assessee also remained the same in the current year. We find merit in the above argument of the ld. counsel. A perusal of the royalty agreement w.e.f. 1st April, 2003 shows that the terms and conditions of the agreement are same as that of royalty agreement applicable during assessment years 2002-03 and 2003-04. The agreement effective as on 01.04.2001 as applicable during assessment years 2002-03 and 2003-04 was a single agreement which dealt with both technical know-how and assistance and trade mark whereas in the current year the assessee had split the royalty agreement into two separate agreements i.e., technical know-how and assistance agreement and use of trade mark made under the label of corporate agreement. 16. We find the Tribunal in assessee s own case for assessment year 2003-04, vide ITA No.2166/Del/2011, order dated 2nd May, 2017 has decided an identical issue and dismissed the appeal filed by the Revenue on this issue by observing as under:- 42. We have considered the submissions of both the parties and carefully gone through the material available on the record. In the present case, it is not in dispute that the assessee entered into an agreement wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2.2 The License herein granted shall only extend to the top quality products, designed, manufactured, promoted, advertised and sold according to the highest standards of the industry and in full compliance with the terms and conditions Hereof, so as to maintain, enhance and protect the image and prestige associated with the Name. 3.1 LICENSEE shall only use the Name, the Label and the Marks as authorized and, provided herein and in full compliance with the terms and conditions hereof and only for the duration of this Agreement. The license herein granted shall confer unto LICENSEE no proprietary rights whatsoever in the name or APRIL CORNELL , the Marks or the goodwill now attached or hereafter to become attached thereto. 4.6 (LICENSEE, its agents and its employees shall keep any and all elements of LICENSOR's know-how strictly confidential and w111 refrain from using such ( know-how for any purpose other than the purpose of this Agreement. Upon termination thereof for any reason whatsoever, LICENSEE will return to LICENSOR any and all elements of LICENSOR s know-how fixed in a tangible medium of expression. 8.2 A perusal of the provisions of Agreement (supra) goes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... having attained finality, expenditure incurred by assessee was revenue in nature - Held, yes 8.5 Ld. A.R. also relied upon the judgements cited as CIT Vs IAEC (Pumps) Ltd. 232 ITR 316 (S.C.), CIT Vs IAEC (Pumps) Ltd. 110 ITR 353 (Mad.), CIT Vs Steel Plant (P) Ltd. 17 Taxman 301 (Bom.) and CIT Vs Southern Pressings (P) Ltd. 125 Taxman 714 (Mad.). By applying the ratio of judgements cited above relied upon by the Ld. A.R., to the facts and circumstances of the present case, we are of the considered view that when the expenditure on account of payment of royalty have been paid by the assessee for having access to the technical knowhow, that too for a limited period, the payment was made as a licensee @ 5% of net sales of the product for making use of the knowhow, label and mark and technical assistance and it has not a right to retain the knowhow, mark or label as absolute owner, such an expenditure cannot be capitalized and the same are revenue expenditure. Consequently, ground No.2 is determined against the revenue. 43. In the present case, it is not brought on record that the aforesaid decision of the ITAT has been reversed by the higher form, therefore, by keeping in view t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee and not a contract manufacturing agreement and, therefore, the action of the TPO in re-writing the agreement is not permissible in law. Further, for the purpose of computing the ALP on export garments, the assessee has compared itself with companies which are full-fledged risk bearing manufacturers, a comparison which has been accepted by the TPO. Hence, the TPO has himself acknowledged that for the purpose of manufacture and export of garments, the assessee is a full-fledged manufacturer and not a contract manufacturer. The TPO has also accepted the functional, assets and risk profile of the assessee given in the TP documentation which is that of full-fledged risk bearing manufacturer. We find from para 3.5 of the order that the TPO has mentioned that the contract manufacturer does not carry the risk of marketing and, therefore, is not worried about the latest trends in the market, this risk is borne by the entity providing work to the contract manufacturer. However, the assessee in its TP report has clearly mentioned that the assessee is undertaking market risk as it trades in open market condition and bears risk of excessive supply, presence of competitors, risk o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 21. Facts of the case, in brief, are that the Assessing Officer noted that the assessee has claimed depreciation @ 60% on computer accessories and peripherals, namely, UPS and printers. According to the Assessing Officer as per the depreciation rate mentioned in Appendix I (Rule 5 of IT Rules) only computers and computer software were entitled to depreciation @ 60%. He, therefore, recomputed the depreciation and restricted the same to 25% on computer accessories and peripherals as against 60% claimed by the assessee. 22. In appeal, the ld.CIT(A) allowed depreciation @ 60% on printers. However, she restricted the same to 25% on the UPS. 23. Aggrieved with such order of the CIT(A), the Revenue is in appeal before the Tribunal and the assessee has raised the ground in the Cross Objection. 24. After hearing both the sides, we find the issue relating to depreciation on computer peripherals, namely, printers and UPS at 60% stands decided in favour of the assessee by the coordinate Benches of the Tribunal where it is being consistently held that printers and UPSs are integral part of the computer system and are entitled to depreciation @ 60%. We, therefore, uphold the order ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oes not form part of the Profit and gains of business or profession and even 10% of such interest cannot be considered for 80HHC deduction. So far as the DEPB is concerned, he held that since the assessee had the option to choose DEPB and Duty Drawback and since the rate of DEPB is more than that of Duty Drawback, therefore, the benefit of DEPB cannot be granted to the assessee while computing deduction u/s 80HHC. So far as sample design and development charges received amounting to ₹ 13,52,700/- is concerned, the Assessing Officer, following the order for assessment year 2001-02, held that the same is receipts of similar nature including any such profits referred to in Explanation (baa) and, therefore, such income in principle is excludible to the extent of 90% out of profits of the business in terms of Explanation (baa). 27. In appeal, the ld.CIT(A) directed the Assessing Officer not to exclude the sample design and development charges receipts amounting to ₹ 13,52,700/- while calculating deduction u/s 80HHC. She further directed the Assessing Officer to exclude DEPB receipts amounting to ₹ 1,73,08,013/- for the calculation of deduction u/s 80HHC. She, ho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce was not submitted by the assessee either before the Assessing Officer or before the CIT(A) and since no such details are available in the audited accounts of the assessee as in the P L Account, there is only one entry i.e., receipt of ₹ 1,73,08,013/- on account of DEPB, therefore, we agree with the argument of the ld. DR that this matter should be restored to the file of the Assessing Officer with a direction to examine the profit element in the sale of DEPB licence and to recompute the deduction u/s 80HHC in the light of the decision of the Hon'ble Supreme Court in the case of Topman Exports reported in 342 ITR 49. The Assessing Officer shall decide the issue as per fact and law, after giving due opportunity of being heard to the assessee. We hold and direct accordingly. The issue relating to DEPB as per the first additional ground of the Cross Objections is allowed for statistical purposes. 29. So far as the issue relating to interest income of ₹ 37,82,419/- on fixed deposits for the computation of deduction u/s 80HHC is concerned, the ld. counsel for the assessee fairly conceded that this issue has been decided against the assessee by the Hon'ble High C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and taken policy under Master proposal for group for payment of gratuity on 1.7.2003, and is contributing the sums to the LIC of India towards the group gratuity on actuarial basis. The assessee has not made any provision and made the payment before filing the return of income. On happening the event, the assessee bank is receiving the gratuity payment from the LIC which is being paid to the employee concerned and no further deduction is being claimed by the assessee as expenditure. Thus no double deduction is claimed. The expenditure claimed by the assessee under group gratuity scheme to LIC of India was allowed in the earlier years prior to the previous year relevant to the assessment year 2007-08, the A.O. disallowed the same since the payment made to LIC of India towards group gratuity scheme is not covered by section 36(1)(v), 40A(7)(b) 40A(9) of the Act because the assessee has not satisfied the conditions. The argument of the assessee is that since the payments were made to LIC of India in Master policy scheme, the premiums contributed to the LIC of India is allowable deduction and relied on the decisions of coordinate bench of Hyderabad in the case of Capital IQ Informati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nditure of the assessee, but laid out and expended wholly and exclusively for the purposes of the business or profession, while computing income chargeable to tax. The main contention of the Revenue is that under sec. 36(1)(v), the payment made by the assessee as employer could be allowed only in respect of approved gratuity fund. Since the Group Gratuity Scheme is not approved by the CIT, according to the Revenue, it cannot be allowed. However, the contention of the assessee is that in view of the judgement of the Madras High Court in the case of Premier Spinning Mills Ltd. (supra) and the judgement of the jurisdictional High Court in the case of Warner Hindustan Ltd. (supra), it has to be allowed. 5. We have carefully gone through the judgement of the jurisdictional High Court in the case of Warner Hindustan Ltd. (supra). In the case before the jurisdictional High Court, the Provident Fund was not approved by the CIT. The Andhra Pradesh High Court after referring to the judgement of the Bombay High Court in Tata Iron Steel Co. Ltd. v. D. V. Bapat, ITO (1975) 101 ITR 292, and the judgement of the Supreme Court in Metal Box Company of India Ltd. vs. The Workmen (1969) 73 ITR 5 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Bitoni Lamps Ltd. 144 Taxman 33 held that Section 40A(7) of the Income-tax Act, 1961 - Business disallowance - Gratuity - Assessment year 1979-80 - Assessee-company claimed deduction under section 40A(7) (b) (i) on account of gratuity actually deposited in fund created by it - Whether such a claim could only have been disallowed if it had been proved that gratuity, in respect of which said payment had been made, had not become payable during previous year - Held, yes Whether in absence of such a case made out by revenue, Tribunal was right in holding that grant of approval of gratuity fund was not relevant for purpose of instant case as said deduction was not being claimed on account of any provision and amount of gratuity was an allowable deduction - Held, yes . 5. Considering the above aspects, we do not find any infirmity in the order of the learned CIT(A) in deleting the addition. There is no merit in the departmental appeal. Same is accordingly dismissed. 10. In the case of Verizon Data Services India Pvt. Ltd. (supra) the coordinate bench of Madras held that payment made to gratuity fund maintained with LIC has no control over the irrevocable trust created exclu ..... X X X X Extracts X X X X X X X X Extracts X X X X
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