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TMI Blog2012 (4) TMI 226X X X X Extracts X X X X X X X X Extracts X X X X ..... de be deleted. 4. The Learned C.I.T. (Appeals)-VIII, Ahmedabad has erred in not allowing Royalty payment of Rs. 1,15,32,819/- being claimed as expenses U/s 40(a) for the year under consideration relates to A.Y. 2003-04 explained. The addition made be deleted. 5. The appellant craves, leave to add, amend, alter, edit, delete, modify or change all or any of the grounds of appeal at the time of or before hearing of this appeal." 2. Ground Nos. 1 and 5 of the assessee are general in nature and therefore do not require any adjudication. 3. As regards to ground No.2, the brief facts are that the assessee has claimed deduction u/s.80IB of the Act which is available as Small Scale Industry (SSI for short) unit as per clause (ii) of sub-section 3 of Section 80 of the Act. It was observed that total value of plant and machinery was of Rs. 2,04,69,540/- whereas as per norms set by the government, a company with investment in plant and machinery of less than Rs. 1 crore is considered to be small scale industries. Accordingly, the Assessing Officer issued a show-cause notice to the assessee asking it to justify how its unit can be considered as SSI unit for the purpo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of the most important tools and equipments used in the process of assembly and testing of its business. These are not for the purpose of its maintenance. The AO observed that such equipments can not be treated as peripheral or subsidiary tools and that these are the actual main tools. As for example, the AO observed that vernier calipers of very high cost are very necessary for correct joining and erection of different parts of big machinery and without them, assembly can not take place and constitute the main assembly equipments. Under no circumstances, the same can be treated as tools for maintenance. Similarly equipments, like injection moulds can never be treated as maintenance equipments. The assessee has only considered cranes, air compressors, rectifiers and three other equipments only as plant and machinery and rest of the equipments, machineries as tools, jigs, moulds, etc., for the purpose of maintenance. According to the AO under no circumstances, the assessee can claim manufacturing and sale of heavy equipments to the extent of Rs.64 crores just by using cranes, compressors, rectifiers and a few other equipments and definitely a very large number of the plants and mac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he value of plant and machinery cost of equipment such as tools jigs, dies, moulds, spare parts for maintenance and cost of consumable stores have to be excluded as per clause (i) of note (b) of the aforesaid notification No.857 dated 10.12.199. The AO in his order observed that the taxpayer had reflected net WDV of Rs.11,90,001 on account of tools and jigs in annexure B forming part of form 3CD while value of assts as on 1.4.202 reflects total value of plant and machinery at Rs.1,97,64,860 beside computes, furniture, vehicles and office equipment. In their submissions before the AO, the taxpayer adopted different value for moulds, dies, etc., The AO declined to exclude the actual cost of tools jigs, dies, moulds and spare parts on the ground that these are used in the process of assembly and testing in its business and these are not for maintenance Such equipments are main tools in the business of the taxpayer. The ld. CIT(A) has not adverted to the aspect of tools jigs, dies moulds and spare parts in his order and only concentrated on value of vehicles and computers and held that value of plant and machinery exceeded Rs.1 crore. Since clause (i) in note 2(b) specifically excludes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... led for the purpose of manufacturing bottling plants in the industrial undertaking and thereafter, determine the status of industrial undertaking as an SSI and consequently entitlement to deduction u/s.80IB of the Act, in accordance with law after allowing sufficient opportunity to the taxpayer. (f) Vehicles 9.33 As regards vehicles, total value of plant and machinery includes vehicles of the value of Rs.78.15 lacs, the ld. CIT(A) observed that since vehicles have not been excluded in the note (2)(b) of the aforesaid notification dated 10.12.1999, accordingly these have to be considered for determining the value of plant and machinery. Hon'ble Andhra Pradesh High Court in the case of Hyderabad Deccan Cigarettes Factory v. CIT 238 ITR 615 (AP) while adjudicating the issue of determining the status of industrial undertaking as an SSI in the content of provisions of sec. 32A of the Act held that 'since there is an independent definition in the context of defining a small-scale industrial undertaking, section 43(3) is not applicable to the definition of a small-scale industrial undertaking. If section 439(3) defining plant including vehicles is not applicable, the value of the vehic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of AO with the direction to ascertain as to whether or not all the computers are installed in office or as to whether some of these are installed for the purpose of manufacturing the bottling plants in the industrial undertaking and thereafter determining this status of industrial undertaking as an SSI and consequently entitlement to deduction u/s 80IB of the Act in accordance with law after allowing sufficient opportunity of being heard to the assessee. As regards vehicles the same have to be excluded while determining the value of plant and machinery for the purpose of determining the status of industrial undertaking as SSI and consequently for entitlement of deduction u/s. 80IB of the Act. 9. The Assessing Officer accordingly shall re-compute the value of the plant and machinery installed in the industrial undertaking of the assessee for the purpose of business of the undertaking as on the last day of the previous year. If the value so worked out is below Rs.1 crore, the industrial undertaking should be treated as SSI and the deduction u/s. 80IB of the Act may be allowed in accordance with law. Thus, ground No.2 of the assessee is allowed for statistical purpose. 10. As rega ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inative of Arms Length Price of royalty payment as these regulatory bodies did not and could not have examined the assessee's international transactions with a transfer pricing perspective. Further, the provisions on Arms Length Price came on the Statute recent and in that perspective the assessee's contentions were held as not tenable on the facts as well as in the eye of law. Accordingly, the TPO held that the TNMM used by the assessee was not appropriate and rejected it. In the alternative the TDPO adopted the Cost Plus Method and cost being Nil as to the development of technical know-how transfer, the Arms Length Price of the transaction was determined at Nil vide para 5.9 of his order. 4.2.2 In view of the appellant's failure to furnish the complete and relevant details as to the development cost of the know-how, which was shared by the AE with the appellant company, the TPO has correctly taken the Arms Length Price at Nil. It is also to be seen that even as penalty the written submissions, for the A.Y. 2002-03, the royalty was shown as waived by the German parent company that means there was no consistency as claimed by the appellant in that the royalty was payable only with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g, Germany (KHS Germany) in the year 1997. Under the agreement the said M/s. KHS Germany agreed to provide know-how technology, designs, information, training for variety of different machines required by the industries such as soft drinks, breweries, mineral water, pharmaceutical etc. The agreement was duly approved by SIA in the year 1997. The agreement also contemplates user of trade name 'KHS' as also use of trademark 'KHS' in relation to various products. This had provided significant benefits to the assessee as reflecting affiliation with the world leader. The know-how provided by M/s. KHS Germany is invaluable and said M/s. KHS Germany appears to command a very sizable share of the bottling industry. The know-how has been provided in phases. It is on account of this know-how that the assessee has been ale to build up its turnover from Rs. 5,06,248/- in the year 1997-98 to Rs. 67,74,73,307/- in the current financial year i.e. 2002-03. During the term of the agreement, there is a covenant on the part of the know-how provider to impart the improvements to the assessee. The machines are sophisticated and there is continuous up gradation in the technology front. As part of the ob ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s been approved by SIA. It is unthinkable that SIA would have approved an agreement if it was for know-how of no relevance or no value or was eyewash. (2) It is wholly incorrect for one to even suggest that know-how possessed by a person who commands significant share in the industry at a global level and which has enabled the assessee to build up turnover of 67 crores in the current year and which has enabled the assessee's entry into majors like coca cola and pepsi did not have any value at all; as if, anyone has the capacity to build these machines. (3) The royalty expenditure has been admitted in scrutiny assessments in the past. There has been no change in the facts of the case. It is well settled that if there has been no change in the facts, it is incorrect for an assessing officer to depart from his earlier conclusion. (4) The TPO/AO fail to realize that compensation of know-how can be in one of the two or three accepted practices viz., upfront payment, recurring royalty, combination of the two. The recurring royalty payment that too, within the norms permitted by SIA, is one of the safer ways of paying compensation inasmuch as that the user does not ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ngth price and the assessee had failed to show such method. The method so adopted as mentioned hereinabove is not a correct method as has rightly been confirmed by the Ld. CIT(A). The Ld. CIT- DR relied upon the decisions of various courts of law in support of his arguments as under : (i) UCB India (P) Ltd. v. Asstt. CIT [2009] 124 TTJ 289/121 ITD 131 (Mum.) at Departmental paper book (DPB) page-29-35 (ii) Dy. CIT v. Starlite [2010] 113 TTJ 425/40 SOT 421 (Mum) (DPB) at pages 36-44 of (DPB) (iii) Aztec Software & Technology Services Ltd. v. Asstt. CIT [2007] 109 TTJ 892/162 Taxman 119 (SB) (Bang) pages76-90(DPB) (iv) Coca Cola India Inc. v. Asstt. CIT [2009] 221 CTR 225/177 Taxman 103 (Punj. & Har.) pages 91-96 (DPB) (v) Panasonic India (P) Ltd. v. ITO [2011] 135 TTJ 43/43 SOT 68/[2010] 7 taxmann.com 117 (Delhi) pages 120-127 (DPB) Ld. CIT-DR also invited our attention to Circular of the Board available at DPB pages-16 in para-55.1 to 55.3 16. We have heard the rival contentions and perused the facts of the case. There is no dispute to the fact that assessee had entered into an agreement with KHS Germany in the year 1997 by which the said ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ayment but making the continuous payment to the know-how provider which has been accepted by the Department in the past. The assessee has been charging 5% royalty on each and every transaction and therefore the said payment cannot be said to have been paid on the aggregate amount, as argued by Ld. CIT-DR. The findings of the Assessing Officer in considering the royalty charges as nil as arms length price cannot be accepted since the AO in the present case has not brought on record, the ordinary profits which can be earned in such type of business. Therefore in our view the payment of royalty is not hit by the provisions of Section 92 of the Act and there is no reason to hold that the expenses should not be allowed u/s.37(1) of the Act, since the expenditure has been incurred by the assessee during the course of business and is having the nexus with the business of the assessee. Therefore the payment of royalty is a business expenditure which has been incurred wholly and exclusively for the purpose of business of the assessee and same is to be allowed in toto as a matter of commercial expediency. Therefore, the case laws relied upon by the Ld. CIT-DR are of no benefit to the Revenue ..... X X X X Extracts X X X X X X X X Extracts X X X X
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