2014 (10) TMI 651 - AT - Income Tax

Transfer pricing adjustments - Restriction of payment of royalty to 2% instead of 5% and 4% of net sales Held that - The assessee was being rendered technical assistance through the royalty agreement entered into with Owens Corning Invest Cooperatief U.A., Netherlands and the royalty agreement has been in application from 1.7.2008 - the TPO was incorrect in going into the business expediency of payment of royalty and arriving at the conclusion of the quantum of the royalty relying upon CIT vs. EKL Appliances 2012 (4) TMI 346 - DELHI HIGH COURT - if the expenditure has been incurred or laid out for the purposes of business it is no concern of the TPO to disallow the same on any extraneous reasons - the assessee has claimed that the royalty payments were based on agreement which was approved by RBI and hence the TPO cannot question the same. Once the RBI approval of royalty rate was obtained the payment was considered to be held at arm s-length - the TPO erred in holding that no tangible benefits were derived by the assessee out of royalty payments made by it and restricted the payment to 2% of net sales the transactions made under Royalty agreement approved by RBI are to be considered to be at arm s-length Decided partly in favour of assessee. Claim of depreciation @ 25% - Whether non-compete fees paid by the assessee company is eligible to claim depreciation at 25% or not Held that - As decided in assessee s own case for the earlier assessment year, it has been held that applying this principle of construction, if the business or commercial right of a patent, trademark, license, franchise etc, fulfilled the condition of being intangible assets, then, the payment made by the assessee company towards non-compete fee also fulfilled the condition by way of a logical corollary - the non-compete right is eligible for depreciation u/s 32 (1) (ii) of the act - when the provisions of the Act make the assessee eligible for depreciation in respect of an intangible asset, assessee has to be allowed the same, notwithstanding any ambiguity which the Income-tax Rules may give rise to, since the statutory legislation, viz., provisions of a statute prevail over the rules framed thereunder - the revenue allowed depreciation for the aforesaid intangible asset in the scrutiny assessment as well - Even though principles of res judicata have no application to income-tax proceedings, principle of consistency has to be respected and followed - payments made towards acquiring marketing network rights have also to be treated as payments made for acquiring commercial/business rights akin to know-how, patent, trade mark, licences, franchises, etc. which are eligible for depreciation thus, the order of the CIT(A) is to be set aside and the AO is directed to allow the claim for depreciation on payments made by the assessee by way of non-compete fee and for acquiring rights over market network Decided against revenue.

Issues Involved:
1. Transfer Pricing Adjustments
2. Non-granting of credit for brought forward Minimum Alternate Tax (MAT)
3. Computation of interest liability under sections 234C and 234D
4. Eligibility of non-compete fees and marketing network rights for depreciation

Detailed Analysis:

1. Transfer Pricing Adjustments:
The primary issue revolves around the adjustment made by the TPO regarding the royalty payments made by the assessee to its associated enterprise. The TPO restricted the royalty payment to 2% of net sales, as opposed to the 4% claimed by the assessee, resulting in an adjustment of Rs. 2,35,81,168. The TPO benchmarked this rate using a comparable company, Asahi India Glass Ltd., which paid 1.91% of its turnover as royalty. The DRP upheld the TPO's restriction but directed the AO to consider both AE and non-AE sales, deducting only the excise duty component.

The Tribunal found that the TPO was incorrect in questioning the business expediency of the royalty payments and referred to the Delhi High Court's decision in CIT vs. EKL Appliances (345 ITR 241) which held that the TPO should not disallow business expenditures unless they are not incurred for business purposes. The Tribunal also cited various other decisions, including those of the Ahmedabad Bench in KHS Machinery (P) Ltd. vs ITO (146 TTJ 692) and the Co-ordinate Bench in M/s. Air Liquide Engg. India (P) Ltd., vs DCIT, which supported the view that RBI approval of royalty rates implies that the payments are at arm's length.

The Tribunal allowed the grounds of the assessee regarding the TPO's error in holding that no tangible benefits were derived from the royalty payments and restricting the payment to 2% of net sales. The Tribunal also held that transactions under a royalty agreement approved by the RBI are to be considered at arm's length.

2. Non-granting of credit for brought forward Minimum Alternate Tax (MAT):
The assessee claimed that it was eligible for MAT credit amounting to Rs. 62,22,950 for the brought forward MAT paid for A.Y. 2007-08. The Tribunal directed the AO to examine the balance brought forward tax credit and set off the same in accordance with the law.

3. Computation of interest liability under sections 234C and 234D:
The Tribunal noted that the computation of interest liability under sections 234C and 234D is consequential in nature and, therefore, need not be adjudicated.

4. Eligibility of non-compete fees and marketing network rights for depreciation:
The Department's appeal contested the DRP's decision to allow depreciation on non-compete fees and marketing network rights. The Tribunal upheld the DRP's decision, which was consistent with previous Tribunal decisions in the assessee's own case for AY 2000-01, 2006-07, and 2007-08. The Tribunal reiterated that non-compete fees and marketing network rights are intangible assets eligible for depreciation under section 32(1)(ii) of the Act.

The Tribunal referred to the decision in AY 2000-01 (ITA No. 439/Hyd/2004), which held that non-compete fees and marketing network rights are business/commercial rights of a similar nature to know-how, patents, trademarks, etc., and are eligible for depreciation. The Tribunal emphasized that the principle of consistency should be followed unless there are specific and valid reasons for deviation.

Conclusion:
The Tribunal partly allowed the assessee's appeal for statistical purposes and dismissed the Revenue's appeal. The Tribunal's decision was pronounced in the open court on 13th October 2014.

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