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2013 (11) TMI 194 - AT - Income TaxDisallowance of Royalty - Held that - Amount of royalty being paid was allowable as revenue expenditure and it cannot be treated as capital expenditure Relying upon Gotan Lime Syndicate v. CIT 1965 (11) TMI 35 - SUPREME Court - The amount of royalty had to be allowed as revenue expenditure, as the said expenditure was in relation with the excavation of raw material - More you take the more royalty you pay - as amount of royalty in the case was directly linked with the volume of contract products - The more assets will produce, the amount of royalty will increase - In case assessee stops manufacturing of contract products the amount of royalty will not be payable - the amount of royalty which was linked with the volume of production was allowable as revenue expenditure. Disallowance of Know-How Fees Held that - The design acquired was not in relation to setting up of the plant or machinery but related to the process of manufacturing, the payments have to be considered as revenue expenditure as the acquirer does not obtain any asset of enduring nature - It was only the acquisition of information, guidance or payment for consultancy which is received by way of drawing and design and explains how the production process was to be carried on which will result into only revenue expenditure and not for acquisition of any capital asset - The amendment w.e.f 1.4.98 had not alter the situation - Whatever are capital expenditure which were in the nature of intangible assets and which were not eligible for depreciation earlier, were only now eligible for claim of depreciation u/s 32 but cannot be expended to mean that what were revenue expenditure was now to be treated as capital expenditure after the amendment Thus, the amount being revenue expenditure, was allowable as such u/s 37(2) of the Act. Relying upon Commissioner Of Income-Tax, Bombay City I Versus Tata Engineering And Locomotive Co. Pvt Limited 1979 (2) TMI 20 - BOMBAY High Court - The assessee merely acquired technical know-how so that it could manufacture the products as required but such know-how was not in relation to setting up of the plant or machinery - It will thus amount to acquisition of non-guidance and payment for consultancy and for which the assessee had received the design, drawing etc. so that the products were manufactured as required - Accordingly, the amount will be allowable as revenue expenditure. Disallowance for Use of Intranet Facility Held that - The network was being used by Denso group companies in India and cost incurred was shared - We are unable to uphold the finding of the AO that the expenditure in question cannot be allowed, as the cost sharing agreement is a sham agreement - When costs were being shared, we do not understand as to how specific charges or quantification of charges are asked to be mentioned in the agreement - Non-mentioning of the same in the agreement cannot be a ground for disallowance - No R.B.L approval was required or payments were made in India - The Assessing Officers of Denso Haryana Pvt. Ltd. and the assessee were the same - When Denso Haryana Pvt. Ltd. made a payment to a foreign company, the AO had not doubted that expenditure - When Denso Haryana Pvt. Ltd. was recovering a part of the expenditure from the assessee, cost reduction is accepted but the expenditure was doubted in the hands of the assessee - When an understanding was arrived at between different entities, the A.O. cannot sit in judgment as to the date of implementation etc. On these facts, we are of the opinion that the disallowance was made based on conjectures and surmises. Disallowance of Technical Service Expenses Held that - The expenses incurred for technical services provided by Benson Corporation, Japan, we found that during the course of assessment, the Assessing Officer had disallowed, the same was rectified u/s 154 and the same was reduced - We found that assessee had incurred these expenditure for conducting training of its employees in India as it facilitated the assessee s trading and manufacturing operation in India under agreement with Denso Corporation, Japan Following Hindusthan Aluminium Corporation Limited Versus Commissioner Of Income-Tax 1986 (1) TMI 88 - CALCUTTA High Court and Commissioner Of Income-Tax, Gujarat II Versus Mehta Transport Company 1985 (7) TMI 22 - GUJARAT High Court - the CIT(A) deleted the addition and held that assessee had incurred the above expenditure for training of its employees which facilitated the assessee s trading operation to be carried on more efficiently or more profitably - No interference is required in the order of the CIT(A) for deleting the disallowance of expenditure incurred on training of the employees. Additions Made u/s 92CA(3) - Whether the CIT(A) had erred in deleting the addition made by the A.O. on account of TPO-1 s order u/s 92 CA(3) dated 21.02.2005 on account of adjustments in the ALP of international transactions of the assessee Held that - Sec. 92C(1) referred to ALP in relation to an international transaction - Rule 10B(1)(e) read with section 92C deals with TNMM, and it refers to only net profit margin realized by an enterprise from an international transaction or a class of such transaction, but not operational margins of enterprises a whole. The net margins on the transaction was the basis of comparison - Only in cases where profits of an enterprise were attributable to similar transactions and when an enterprise does not have any other transaction or activity which was not similar, and which distorts the profits, then probably the net margin derived by an enterprise may also be the net margin of a transaction - In other words, when in an enterprise, only similar transactions were undertaken, i.e., all the transactions were of the same type, same class and of similar variety, and the enterprise does not have any other transaction which was not similar, in such a situation, the operating margins of the enterprise would be the TNMM of a class of transaction - The assessee imports raw-materials and components - In our view the most appropriate method is the CUP method As there was a high degree of product comparability, in our considered opinion CUP method was the most appropriate method to be followed in the case on hand - The finding of the learned CIT(A) on this issue does not convince us - If there were significant difference in the facts and circumstances between the transactions of import of raw-material and components from Japan vis-a-vis procurement of raw-material and components from local Indian vendors, suitable adjustments can be made for the same - The method itself cannot be rejected. Hence, this issue is decided in favour of the Revenue. Whether future data can be taken for the purpose of comparables - On this issue we uphold the order of the Commissioner of Income-tax (Appeals) that the Transfer Pricing Regulations do not contemplate taking into account future data for the purpose of bench marking - Hence in respect of 7 components, the TPO s action in using future data is rightly held as not in consonance with Transfer Pricing Provisions. Whether the valuation of goods accepted by the customs authority should be considered for the purpose of arriving at ALP - The valuation of goods by the customs authorities are done for the different purpose and in different context. When the imports are over-valued, the Customs Authorities are most likely do not disturb the value for the reason that, they could charge higher customs duty, whereas under Transfer Pricing Regulations, an attempt is being made to determine the arm s length price.
Issues Involved:
1. Deletion of addition on account of adjustments in the ALP of international transactions. 2. Acceptance of additional grounds of appeal without providing an opportunity to the TPO or AO. 3. Deletion of addition on account of royalty expenses. 4. Deletion of addition on account of know-how fees. 5. Deletion of addition on account of payment for the use of the intranet. 6. Deletion of addition on account of technical service expenses. 7. Deletion of addition under Section 35AB. 8. Adoption of threshold limit for turnover while selecting comparables. 9. Ad hoc working capital adjustment. 10. Deletion of addition on account of ALP of raw material purchases. 11. Deletion of addition on account of payment of know-how fees. 12. Deletion of addition on account of NECNET charges. 13. Deletion of addition on account of technical services and training expenses. 14. Deletion of addition on account of deduction under Section 35AB. Detailed Analysis: 1. Deletion of Addition on Account of Adjustments in the ALP of International Transactions: The Tribunal upheld the CIT(A)'s decision to delete the addition of Rs. 1,36,31,665/- made by the AO on account of TPO-I's order under Section 92 CA(3). The Tribunal found that the TNMM method was correctly applied by the assessee, and the CUP method used by the TPO was not appropriate due to significant differences in the transactions. 2. Acceptance of Additional Grounds of Appeal Without Providing an Opportunity to the TPO or AO: The Tribunal found that the CIT(A) had not violated Rule 46A(3) of the Income Tax Rules, 1962, as the additional grounds of appeal were accepted based on the facts and circumstances of the case. The Tribunal upheld the CIT(A)'s decision. 3. Deletion of Addition on Account of Royalty Expenses: The Tribunal upheld the CIT(A)'s decision to delete the addition of Rs. 3,91,89,710/- on account of royalty expenses. The Tribunal found that the royalty payment was for the use of technical know-how and was linked to the volume of production, making it a revenue expenditure. 4. Deletion of Addition on Account of Know-How Fees: The Tribunal upheld the CIT(A)'s decision to delete the addition of Rs. 37,80,796/- on account of know-how fees. The Tribunal found that the payment was for the modification of existing designs and not for setting up the plant or machinery, making it a revenue expenditure. 5. Deletion of Addition on Account of Payment for the Use of the Intranet: The Tribunal upheld the CIT(A)'s decision to delete the addition of Rs. 22.51 lacs paid to Denso Haryana for the use of the intranet. The Tribunal found that the payments were genuine and incurred wholly and exclusively for the purposes of the assessee's business. 6. Deletion of Addition on Account of Technical Service Expenses: The Tribunal upheld the CIT(A)'s decision to delete the addition of Rs. 1,41,11,636/- paid to Denso Corporation (Japan) for technical services and training. The Tribunal found that the expenses were for training employees and facilitating the assessee's trading and manufacturing operations, making them revenue expenditures. 7. Deletion of Addition Under Section 35AB: The Tribunal upheld the CIT(A)'s decision to delete the addition of Rs. 64,19,573/- under Section 35AB. The Tribunal found that the expenses were for acquiring technical know-how for manufacturing and were allowable as revenue expenditures. 8. Adoption of Threshold Limit for Turnover While Selecting Comparables: The Tribunal found that the CIT(A) had erred in adopting a threshold limit for turnover as Rs. 50 crores while selecting comparables. The Tribunal held that each assessment year is a separate unit and the principle of res judicata is not applicable in income tax proceedings. 9. Ad Hoc Working Capital Adjustment: The Tribunal found that the CIT(A) had erred in allowing an ad hoc working capital adjustment. The Tribunal held that adjustments should be made to eliminate the material effects of differences as stipulated in Rule 10B(3)(ii) of the Income Tax Rules, 1962. 10. Deletion of Addition on Account of ALP of Raw Material Purchases: The Tribunal upheld the CIT(A)'s decision to delete the addition of Rs. 97,44,630/- made by the AO on account of the ALP of raw material purchases from SCJ. The Tribunal found that the transactions were at arm's length. 11. Deletion of Addition on Account of Payment of Know-How Fees: The Tribunal upheld the CIT(A)'s decision to delete the addition of Rs. 62,10,292/- on account of payment of know-how fees. The Tribunal found that the payment was for the modification of existing designs and not for setting up the plant or machinery, making it a revenue expenditure. 12. Deletion of Addition on Account of NECNET Charges: The Tribunal upheld the CIT(A)'s decision to delete the addition of Rs. 13,13,332/- made by the AO on account of NECNET charges paid to Denso Haryana for the use of the internet. The Tribunal found that the payments were genuine and incurred wholly and exclusively for the purposes of the assessee's business. 13. Deletion of Addition on Account of Technical Services and Training Expenses: The Tribunal upheld the CIT(A)'s decision to delete the addition of Rs. 1,00,02,674/- paid to Denso Corporation, Japan, for technical services and training. The Tribunal found that the expenses were for training employees and facilitating the assessee's trading and manufacturing operations, making them revenue expenditures. 14. Deletion of Addition on Account of Deduction Under Section 35AB: The Tribunal upheld the CIT(A)'s decision to delete the addition of Rs. 64,19,573/- made by the AO on account of deduction under Section 35AB. The Tribunal found that the expenses were for acquiring technical know-how for manufacturing and were allowable as revenue expenditures. Conclusion: The Tribunal upheld the CIT(A)'s decisions on most issues, finding that the expenses incurred by the assessee were genuine and allowable as revenue expenditures. The Tribunal also provided guidance on the appropriate methods for determining the arm's length price and the application of transfer pricing regulations. The appeals were allowed in part, with some issues remanded to the AO for fresh adjudication.
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