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TMI Blog2014 (6) TMI 6X X X X Extracts X X X X X X X X Extracts X X X X ..... ture on software claimed u/s 37(1). 4. On the facts and circumstances of the case and in law, the ld CIT(A) has erred in deleting addition of Rs. 80,40,300/- made by the Assessing Officer on account of Transfer Pricing Adjustment (difference in arm's length price in international transactions of purchase of spare parts) 5. The appellant craves to leave, to add, alter or amend any ground of appeal raised above at the time of the hearing." 3. The grounds of appeal preferred by the assessee ITA No. 2045/Del/2011are as follows:- "1. That the CIT(Appeals) erred on facts and in law in upholding the action of the Assessing Officer in deleting the benefit of deduction under section 80HHC of the Act on the custom duty benefit under DEPB Scheme, amounting to Rs. 16,31,41,138/-. 1.1 That the CIT(Appeals) erred in facts and in law in reducing the entire amount of DEPB benefit from the profits of the business, without appreciating that only profit on transfer of DEPB licenses ought to be excluded in terms of proviso to sub-section (3) of section 80HHC read with section 28(iiid) of the Act. 1.2 That the CIT(Appeals) erred on facts and in law in treating interest income of Rs. 2,40,81,432/- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he said agreement entered into with Honda. 6. In the assessment order, the Assessing Officer while relying upon the decision of the Apex Court in the case of southern Switchgear Ltd. Vs. CIT: 232 ITR 359 held that 25% of royalty constituted capital expenditure. 7. On appeal, the ld CIT(A) deleted the disallowance treating the expenditure incurred on account of royalty as revenue expenditure while following its earlier order passed in the assessment year 2002-03. 8. Aggrieved by the said order of the ld CIT(A) the revenue is before us. Ld DR contended that a perusal of the "License and Technical Agreement'comprising of 41clauses, it is very clear that the Intellectual Property Rights developed by Honda has been transferred to the assessee. The agreement states that Honda has acquired and possesses certain Intellectual Property Rights, manufacturing information and know-how, quality standards and marketing methods relating to such 2/3 wheelers. Thus, as asset of enduring benefit which was the exclusive property of Honda has been transferred for use by the assessee company. 9. The ld DR contended that the patent over the new developed project has also been transferred to licensee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve at the finding which of the decisions is applicable in the case of the assessee. 27. In our opinion, the facts of the assessee's case are identical to the facts in the case of Climate Systems India Ltd. (supra). In the case of Climate Systems India Ltd. (supra), the assessee company made the lump sum payment and also the running royalty. The running royalty was calculated as a percentage of sales. The lump sum payment was treated as capital expenditure by the assessee company and the running royalty was treated as revenue expenditure. The Assessing Officer disallowed the running royalty holding it to be capital expenditure which was confirmed by the learned CIT(A) as well as the ITAT. The Hon'ble Jurisdictional High Court allowed the appeal. The facts of the assessee's case are identical because the assessee also in the year 1984 entered into an agreement by which the assessee was provided with technical assistance for setting up of the plant and also for manufacture, assembly and service of the motorcycles. The assessee made lump sum payment of $5,00,000 for the technical assistance for construction of plant and paid a running royalty as a percentage of sales in re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t by which technical assistance was provided for setting up of the factory and also manufacture and sale of product. The payment of royalty was lump sum payment and, therefore, the Hon'ble Apex Court upheld the view of the Revenue that 25% of the payment is capital in nature. In the case of the assessee also, the collaboration agreement was for grant of technical assistance for setting up of the factory and also for the manufacture and sale of the product. But the assessee made separate payment for the technical assistance for setting up of the factory which was $5,00,000. This sum was treated as capital expenditure by the assessee itself. The annual payment for the royalty was based upon the percentage of sale of the motorcycles. Thus, the facts in the case of the assessee are distinguishable than the facts before the Hon'ble Apex Court. On the other hand, the facts of the assessee's case are identical to the facts before the Hon'ble Jurisdictional High Court in the case of Climate Systems India Ltd. (supra) and Sharda Motor Industrial Ltd. (supra) and also the decision of ITAT in assessee's own case cited supra. We, therefore, respectfully following the above ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s reported as Hero Honda Motors Ltd. Vs. JCIT: 95 TTJ (Del) 782. The ld counsel brought to our notice that the Hon'ble Delhi High Court has not entertained the appeal filed by the department on the said issue. The decision of the High Court was accepted by the Department and has become final, as no SLP has been filed there against. It was further submitted that the Tribunal in the assessment years 1997-98 and 1999-2000 allowed similar expenditure on payment of model fee, following the decision of the Tribunal for assessment year 1996-97. The Tribunal in Assessment Year 2001-02, allowed royalty and technical guidance fee paid to Honda u/s 37(1) of the Act as revenue expenditure on the ground that payment was only for right to use the technical know-how and did not result in transfer of ownership in any intellectual property, which continued to remain with Honda. Similar view has been held by the Tribunal in the Assessment Year 2006-07, 2007-08 and 2002-03. 16. In assessee's own case for Assessment Year 2001-02 in ITA No. 716/Del/2008, ITA No. 1312/Del/2008, ITA No. 718/Del/2008, ITA No. 1648/Del/2007 and ITA No. 1623 & 1624/Del/2008 the co-ordinate Bench has held as under:- "Here ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e expenditure was incurred for facilitating day to day operations and conduct of business and satisfy the test laid down by the Special Bench of the Tribunal in the case of Amway Indian Enterprises Vs. DCIT: 111 ITD 112. Aggrieved by the said order of the ld CIT(A) the Revenue is before us. According to the ld DR the said expenditure was incurred by the assessee to gain enduring benefit in the capital field. According to the ld DR, software is an asset acquired for use in business and assessee's claim that it involves rapid obsolescence by itself does not undermine the real character of the asset. Thus according to the ld DR, the ld CIT(A) erred in deleting the said addition and so he pleads that the order of the ld CIT(A) may be reversed and the order of the Assessing Officer restored. On the other hand the ld counsel Shri Ajay Vohra contended that the said expenditure does not constitute profit earning apparatus and merely enable the assessee to efficiently conduct is business. Further, according to the ld counsel, it need to be appreciated that none of the software was in relation to the production function of the assessee, to be considered as resulting in an enduring benefit in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o so and it is limited to only use of the software during the subsistence of the agreement between the licensor. 20. The aforesaid expenditure, according to the ld counsel is allowable revenue deduction, as the same is meant for better conduct and improvement of the existing business and does not result in any enduring benefit in the capital field or creation of a capital asset. The expenditure merely resulted in facilitating the assessee's trading operations or enabling him to manage and conduct his business more efficiently or more profitably, while leaving the fixed capital untouched. The ld counsel relied on the following decisions: Empire Jute Co. Ltd. Vs. CIT: 124 ITR 1 (SC) CIT Vs. Associates Cement Companies Ltd.: 172 ITR 257 (SC) Alembic Chemical Works Co. Ltd. Vs. CIT: 177 ITR 377 (SC) 21. According to the ld counsel, in view of the aforesaid facts and circumstances of the case and in the light of various tests as laid down by Special Bench in Amway India Enterprises (Supra) , the expenditure incurred by the assessee in relation to the application of software for carrying routine day to day operations of the business is allowable revenue expenditure. The ld counsel p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bench marking the CUP method. The TPO, however, in his order applied CUP method by comparing the international transaction of import of components with prices of purchase of similar components after they are indigenizing from the domestic vendor. According to the assessee the CUP method evaluates whether the amount charged in a controlled transaction is at arm's length with reference to the amount charged in a comparable uncontrolled transaction to provide a direct estimate of the price of parties would have agreed to, had they resorted directly to an open market alternative to the controlled transaction. And it was the contention of the assessee that minor differences in contractual terms or economic conditions could materially affect the amount charged in an uncontrolled transaction. And the method becomes less reliable substitute for arm's length dealings if not all significant characteristics of the uncontrolled transactions are comparable. And the prices of international transactions of import of components and spare parts would not be compared with the prices of such components sourced from local manufacturers in the domestic market after their indigenization. Therefore the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has made purchase of spare parts from its AE at Rs. 20,43,68,023/-. The assessee has adopted TNMM method as the most appropriate method in its transfer pricing documentation. The transaction was referred to the learned TPO by the Assessing Officer who did not accept the TMNN method adopted by the assessee. He determined the arms length price of the international transaction of import of components by applying CUP method and recommend the adjustment at Rs. 10,27,90,237/-. Leaned CIT(Appeals) on an analysis of the details has observed that learned TPO ought to have not rejected the TNMM method. According to her, application of CUP method is not appropriate. Therefore, she deleted the adjustment recommended by the learned TPO in the value of international transaction entered with the associate enterprises by the assessee. 42. We find that the similar issue has been considered by the ITAT in the findings extracted supra and since there is no change in facts or law, we respectfully follow the order of the co-ordinate Bench and we set aside the order of the ld CIT(A) and restore these issues to the file of the Assessing Officer for re-adjudication. The Assessing Officer shall follow the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... business income returned by the appellant. (d) without prejudice, not netting off the interest expenditure of Rs. 1,73,23,592/- against interest income for computing deduction under section 80HHC of the Act. 32. The CIT(A) accepted the claim of the appellant in excluding sales tax and excise duty from the total turnover for the purposes of computing deduction under section 80HHC of the Act. However, the ld CIT(A) upheld the action of the Assessing Officer in reducing the amount of deduction under section 80HHC by not treating custom duty benefit under DEPB scheme as taxable under section 28(iiib) and by treating interest income as income from other sources. 33. Aggrieved by the said order of the ld CIT(A), the assessee is before us. 34. According to the ld counsel, Shri Ajay Vohra, the benefit is provided by way of credit to the pass book on exports of specified goods at prescribed rates. Such credit is recognized in the books of accounts as income on export sale by debiting "DEPB receivable account" and crediting "DEPB income account" which is grouped under the heading "other income". The ld counsel reiterated that assessee utilizes the said credit subsequently against import ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed out that Hon'ble Court has upheld the constitutional validity of the Act but held that it cannot be applied with retrospective effect. He further submitted that assessing officer in the assessment order has held that benefit under DEPB scheme was covered u/s 28 (IV) and was not to be regarded as export incentives u/s 28(III) (a) /(b) or (c) of the Act. Thus, the assessing officer has reduced 90% of DEPB benefit from profits while computing the deduction admissible u/s 80HHC. He pointed out that this issue was considered by the special bench of the ITAT in the case of Topman Export. Wherein it was held that only the profit on sale of DEPB credit would fall within the ambit of (IIId) of Section 28. This decision of the tribunal was reversed by the Hon'ble Bombay High Court in the case of Kalpataru Colours and Chemicals Vs. additional CIT reported in 31/ ITR page 87, however, the Hon'ble Supreme Court has upheld the view of the tribunal in the case of Topman Export Vs. CIT reported in 342 ITR page 49. He also pointed out that after the decision of Hon'ble Supreme Court, Hon'ble Delhi High Court has also held that where the assessee itself had utilized the DEPB credit for its busine ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Delhi High Court decision in the case of Shri Ram Honda Power Equipment 289 ITR 475 (Del). After citing the case of Shriram Honda (supra)co-ordinate Bench of this Tribunal has held that Clause (baa) of the explanation to Section 80HHC envisages two step process in computing profit derived from export. In the first step assessing officer is required to apply section 28 to 44 in order to compute the profits and gains of business or profession. In doing so, the Assessing Officer may find that certain incomes, which have no nexus to the export business of the assessee, are not allowable and therefore ought to be treated as income from other source. Once, Assessing Officer computed what is business income, then, he should proceed to the next step of deducting 90% of the receipts referred in clause (baa) of the explanation to section 80HHC, in order to arrive at the profits derived from the exports. The co-ordinate bench of this tribunal after quoting the said decision of jurisdictional High Court held in para 33 of its order which is reproduced as follow:- "13. This decision has been approved by the Hon'ble Supreme Court in the case of AC associate Capsules Pvt. Ltd. Vs. CIT repor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he issue before us and since there is no change of facts or law, we respectfully follow it and set aside the impugned order on this issue and remand the issue back to the file of the Assessing Officer to verify and adjudicate afresh this issue as stated above. 41. Apropos disallowing deduction u/s 80IA of the Act, amounting to Rs. 2,28,86,196/-, claimed by the appellant in respect of the captive power generating unit at Gurgaon and that the ld CIT(A) erred on upholding the action of the Assessing Officer in computing profits of the power generating unit by adopting the rate of supply of power at Rs. 4.05 per unit, at which power was supplied by State Electricity Board, as the "market price'of the power, as against rate of Rs. 5.92 per unit (cost of generation of power at Rs. 5.15 per unit + mark-up of 15%) adopted by the appellant for the purposes of computing deduction u/s 80IA of the Act for captive power generating unit. In view of the power supply constraints in the area of Gurgaon, Haryana, where the assessee had set-up its manufacturing facility, the appellant had set-up power plant in order to meet the captive consumption requirement of power. The appellant claimed deductio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... argued that the rate at which electricity was supplied by HSEB cannot be said to be expression of market price since for the following reasons:- HSEB was not in a position to provide assured, committed and continuous supply of electricity, as per the appellant‟s requirement, or even of other manufacturing companies operating in that areas; as a result, till recently, Maruti Udyog Ltd, an independent supplier of electricity, generating electricity using the same technology as adopted by the appellant, was charging rate of supply of power @ Rs. 7.50 per unit, from its associated factories located in vicinity and the companies were purchasing at that price since no electricity supply was available from HSEB. 43. The ld Counsel therefore submitted that the price charged by HSEB in Darahera Plant can, by no stretch of imagination, be treated or considered as the price of power in the open market. According to the ld counsel Shri Ajay Vohra the rate charged by HSEB at Dhruhera plant is not, therefore, the rate which the power could be said to be available in the open market in Gurgaon area. When the fact remains that HSEB could not assure providing uninterrupted power and the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he accounts of the eligible business does not correspond to the market value of such goods (or services) as on the date of the transfer, then, for the purposes of the deduction under this section, the profits and gains of such eligible business shall be computed as if the transfer in either case, had been made at the market value of such goods (or services) as on that date: Provided that where, in the opinion of the Assessing Officer, the computing of the profits and gains of the eligible business, in the manner hereinbefore specified presents exceptional difficulties, in the Assessing Officer may compute such profits and gains on such reasonable basis as he may deem fit. (Explanation- for the purpose of this sub-section, "market value", in relation to any goods or services, means the price that such goods or services would ordinarily fetch in the open market._" 40. From the above, it is evident that where the goods or services held for the purposes of eligible business are transferred to another business, carried on by the assessee, then for the purpose of deduction under this section, the profits and gains of such eligible business shall be computed as it transfer had been made ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d onwards. Ld counsel relied heavily on the on the following decisions:- DIT Vs. Jacabs Civil Incorporated: 330 ITR 578 (del) (HC) ITO Vs. Ekta Promoters Private Limited: 113 ITD 719 (Del)(SB) 48. Ld DR pointed out that section 234D has been amended by the Finance Act, 2012 w.e.f. 01.06.2003, whereby Explanation 2 has been inserted in the section to provide that provisions of said section will be applicable to assessment years prior to 01.06.2003 also, provided assessment for such years is completed after said date. And according to the ld DR, in the present case, the assessment being completed on 28.02.2006, in view of the aforesaid amendment, the said ground need to be decided against the assessee. 49. We have heard both the sides and has gone though the case laws cited by both the parties and has carefully perused the records. Let us see Section 234D of the Act:- "234D. (1) Subject to the other provisions of this Act, where any refund is granted to the assessee under sub-section (1) of section 143, and- (a) no refund is due on regular assessment; or (b) the amount refunded under sub-section (1) of section 143 exceeds the amount refundable on regular assessment, the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X
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