9911796707
|
Home
Forgot password New User/ Regiser ⇒ Register to get Live Demo
2013 (7) TMI 35 - AT - Income TaxTransfer pricing adjustment - TPO/AO held the position of the appellant company with regard to manufactured goods sold to the AEs is that of a contract manufacturer - Transfer Pricing Adjustment to royalty - Held that - Royalty payment on exports sales by the assessee to the AE s @ 8% at ₹ 266,81,794/- has been rightly paid the royalty paid is at arms length and no adjustment in this regard is called for. See Sona Okegawa Precision Forgings Ltd. Versus ACIT 2011 (12) TMI 174 - ITAT DELHI Treating royalty as capital expenditure - Held that - The facts of the case and the terms of agreement clearly point out the fact that royalty is being paid as revenue expenditure and it cannot be termed that the same is paid for acquiring benefit of enduring nature. DRP has erred in linking the supply of know-how with setting up the business. Terms of the agreement clearly showed that know how was provided in the instant case to help in continued production of mobile handsets i.e. to help in manufacture of handsets. As per the details of royalty paid, it is clear that royalty is being paid at sales minus cost of sales i.e. the value addition taking place in the factory. Payment of royalty to SEC has nothing to do with setting up the business. Assessee is only getting a right to use of know how from SEC. The ownership of know-how is with SEC only. Furthermore, royalty is not being paid in a lumpsum, but is paid as percentage of sales made. Hence, since the royalty in the instant case is continuous process, it will be revenue expenditure. DRP has confused the royalty payment with payments made for hiring/ training of employees of SEC. Under the agreement, separate considerations has been provided for (a) royalty for right to use the know-how and (b) for imparting hiring / training. AO has made the disallowance of only royalty and not of hiring /training fee paid. Thus, revenue authorities have wrongly relied upon the provisions of section 32(1)(ii). The perusal of the agreement clearly states that assessee is not the owner of technical information / technology received by it from SEC. All the case laws relied upon by the assessee are germane and supports the case of the assessee. Depreciation on UPS - Held that - UPS being a computer accessory / peripheral is entitled for depreciation @ 60% as decided in C.I.T. vs. BSES Yamuna Powers 2010 (8) TMI 58 - DELHI HIGH COURT Disallowance of loss incurred in connection with Foreign Exchange Forward Covers - Held that - As relying on C.I.T. vs. SurajmalNagarmull 1980 (9) TMI 69 - CALCUTTA High Court & C.I.T. vs. BadridasGauridu (P) Ltd. 2003 (1) TMI 61 - BOMBAY High Court assessee in this case is not a dealer in foreign exchange. The assessee was dealing in electronic products -mobile phones. The assessee had entered into hedging contracts in foreign exchange in the normal course of business. Hence, these transactions cannot be termed as speculative u/s. 43(5). Accordingly set aside the orders of the authorities below and decide the issue in favour of the assessee.
Issues Involved:
1. Transfer Pricing Adjustment to Royalty 2. Treatment of Royalty as Capital Expenditure 3. Depreciation on UPS 4. Disallowance of Loss Incurred in Connection with Foreign Exchange Forward Covers Issue-wise Detailed Analysis: 1. Transfer Pricing Adjustment to Royalty: The Assessee challenged the Transfer Pricing Officer's (TPO) determination of the arm's length price (ALP) of royalty paid to an associated enterprise (AE) at 'nil'. The TPO argued that the Assessee acted as a contract manufacturer and thus, royalty paid on export sales to AEs was not at arm's length. The Assessee contended that it operated as a full-fledged licensed manufacturer, not a contract manufacturer, and that the royalty was paid for technical know-how, not for the use of the brand name. The Tribunal found that the TPO's reasoning was flawed, noting that the Assessee's sales to AEs were driven by open market conditions and that the royalty rates were approved by the Ministry of Commerce and Industry. The Tribunal concluded that the royalty payment was at arm's length and no adjustment was required. 2. Treatment of Royalty as Capital Expenditure: The Assessing Officer (AO) treated the royalty payment as capital expenditure, arguing that it provided an enduring benefit to the Assessee. The Assessee countered that the royalty was for the use of technical know-how, not for acquiring any enduring benefit, and was based on a percentage of sales. The Tribunal agreed with the Assessee, noting that the agreement was for a non-exclusive, non-transferable license to use technical information and could be terminated with 60 days' notice. The Tribunal held that the royalty payment was a revenue expenditure and not capital in nature. 3. Depreciation on UPS: The AO allowed depreciation on UPS at 15%, treating it as general plant and machinery. The Assessee argued that UPS is a computer accessory and should be eligible for depreciation at 60%. The Tribunal sided with the Assessee, citing a decision by the Delhi High Court which held that computer accessories and peripherals form an integral part of the computer system and are entitled to higher depreciation rates. 4. Disallowance of Loss Incurred in Connection with Foreign Exchange Forward Covers: The AO disallowed the loss on foreign exchange forward contracts, treating them as speculative transactions under Section 43(5) of the Act. The Assessee contended that these were hedging contracts entered into in the normal course of business and should not be considered speculative. The Tribunal agreed with the Assessee, referencing decisions by the Calcutta and Bombay High Courts which held that hedging contracts in the normal course of business are not speculative. The Tribunal set aside the AO's order and allowed the loss as a business expense. Conclusion: The Tribunal ruled in favor of the Assessee on all counts, holding that the royalty payment was at arm's length, the royalty was a revenue expenditure, UPS was eligible for higher depreciation, and the loss on foreign exchange forward covers was a business expense.
|
