9911796707
TMI Blog2014 (12) TMI 437X X X X Extracts X X X X X X X X Extracts X X X X ..... fied in rejecting the assessee’s point of view of combining several transactions under the TNMM - the CUP is the most appropriate method to determine the ALP of an international transaction provided the appropriate comparable uncontrolled data is available - The CUP is considered as a most preferred method because it seeks to compare the price charged or paid for property transferred or services provided - It is under this method alone that the price charged or paid is directly compared with the price charged or paid in an uncontrolled comparable transaction - Rest of the four specific methods seek to make comparison of the price charged or paid indirectly through the medium of normal profit accruing or arising in a comparable uncontrolled transaction - the appropriate comparable uncontrolled data of the international transaction of royalty payment is available, which was furnished by the assessee and considered by the TPO as well as the DRP - the CUP is the most appropriate method for determining the ALP of Royalty transaction under the present circumstances. Whether rate of Royalty approved by the RBI is binding – Held that:- Certain benches of the Tribunal have held that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h the re-negotiable royalty clause and thus paid royalty during the year at the maximum permissible domestic rate of 5% coupled with the payment of Design and Drawing Fees and also undertaking to pay Additional Model(s) fee - It is but natural to factor the effect of such temporary lull in the rate of royalty to be charged as per the commercial realities, so as to set off the possible loss due to temporary non-user of technical information after the termination of the agreement - This tends to increase the rate of royalty in a case of fixed term license - as there can be no such possibility of non-user of technical know-how in the case of an agreement with perpetuity, other things being equal, the rate of royalty in a perpetual agreement is bound to be low. The international transaction is for payment of royalty under a perpetual agreement and the comparable uncontrolled transactions have a fixed term agreements commanding higher rate of royalty, there is a need to adjust the price of such uncontrolled transactions in conformity with subclause (ii) of rule 10B(1)(a) so to bring it at par with the international transaction under consideration - This can be done by suitably reduci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd the addition on account of transfer pricing adjustment of royalty payment at 5% be made accordingly. International transaction of payment of ‘Export commission’ – Held that:- Assessee claimed that LG Korea rendered numerous services for which commission was paid at the rate of 4.5% - in the absence of any positive and speaking evidence of services, there can be no question of allowing any deduction - apart from theoretically listing several activities allegedly performed by LG Korea, the assessee failed to file any evidence worth the name, either before the TPO or the DRP to show that such services were actually rendered - the assessee failed to adduce any positive evidence about the rendering of services by LG Korea - the assessee made a claim made before the DRP about LG Korea having rendered several services to promote the export of Colour TVs in Middle East and South Asian countries - the TPO proposed transfer pricing adjustment with the Nil ALP of the Commission transaction on the ground that no evidence of any services rendered by the foreign AE, was furnished – thus, the very factum of the assessee having availed any services from its AE has not been proved with any po ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the assessee for creating or improving the marketing intangibles for and on behalf of its foreign associated enterprises, is permissible. The second question as to whether the assessee should have earned a mark-up from its AE in respect of such AMP expenses incurred for and on behalf of the AE, has also been answered by eventually restoring the matter to the file of TPO for de novo adjudication in the light of certain guidelines outlined in the order. Now, this Division Bench is bound by the Special bench decision and cannot tinker or amend the conclusions so drawn, as was argued by the ld. AR in an attempt to persuade us for re-deciding this issue or sending it back to the AO/TPO for a fresh decision as per law. In fact, the Special bench order, passed in this appeal alone, constitutes an integral part of this order. Respectfully following the view taken by the Special Bench, we send the matter back to the TPO/AO for deciding it in accordance with the Special bench verdict. Accordingly, Ground No. 3 is allowed for statistical purposes. 5. Ground No. 4 is against the addition made on account of transfer pricing adjustment for the international transaction of payment of Royalt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The DRP, vide its direction dated 27.9.11, partly agreed with the assessee s contentions. It was held that the TPO ought to have considered some other companies also as comparable which were dealing in the same product as selected by the TPO, viz., Colour television. Two companies, namely, Kenwood Design Corporation (Licensor) and Videocon International Ltd. (Licensee) with 5% royalty rate and Victor Company of Japan (Licensor) and Mirc Electronics Ltd. (Licensee) with 5% royalty, were also held to be comparable. Thus, three companies in total, including the one which was selected by the TPO, were shortlisted by the DRP. It was, therefore, directed that these three companies, using technical know-how for manufacturing of Colour televisions, be considered as comparable. Resultantly, the average rate of royalty of these three companies was computed at 4.5%, as against 3.5% computed by the TPO. Considering the fact that the assessee had entered into a perpetuity agreement for using technical know-how of the licensor, as against the agreements of the three comparable companies with a limited period licenses, the DRP directed that a reduction of 1% should be allowed from the average rat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uted effective from 1.1.2005 stipulating the same rate of royalty of 5%, but with payment on quarterly basis as against the earlier annual payments. Still another Addendum dated 14.1.2006 was signed w.e.f. 1.1.2006, a copy of which is available on page 401 onwards of the paper book, providing for the payment of royalty @ 5% as permissible by the RBI Circular. By this Addendum, the range of products to be manufactured by the assessee increased to five with the further addition of Microwave. That is how, the assessee paid royalty @ 5% to LG Electronics Inc. for the period relevant to the assessment year under consideration. As against the international transaction of royalty payment at the rate of 5%, the TPO initially determined arm s length rate of royalty at 1.5% and then on the direction of the DRP, such rate of royalty stood increased in the final assessment order to 3.5%. The assessee is aggrieved against the addition on account of transfer pricing adjustment to the extent of 1.5% (5% minus 3.5%). The ld. AR assailed the orders of the authorities below in making such addition on several counts, which we will espouse one by one for consideration and decision. I. Whether TNMM ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thods, being the most appropriate method . A brief reference to the above provisions divulges that the transfer pricing legislation contemplates determination of arm s length price of an international transaction, which means for each transaction separately. The term transaction has been defined in Rule 10A(d) to mean a number of closely linked transactions. A conjoint reading of the provisions discussed above along with Rule 10A(d) makes it amply clear that the ALP is required to be determined in respect of each international transaction separately. If, however, there are a number of closely linked transactions, then, such closely linked plural transactions can be considered as a singular transaction for the purposes of benchmarking. In other words, a number of closely linked transactions can be categorized as one transaction for the purposes of determination of ALP. To put it conversely, the transactions which are not closely linked, should be processed under the transfer pricing regime independently and not on a consolidated basis. This issue has been dealt with by the Special Bench of the Tribunal in LG Electronics (supra) in para 21.4 of its order. It has been held that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ansacted value income). When we consider more than one separate transaction under the combined umbrella of TNMM on an entity level, it is quite possible that a probable addition on account of transfer pricing adjustment arising from one international transaction may be usurped by the income from the other international transaction giving higher income on transacted value. That is the reason for which the legislature has provided for determining the ALP of each international transaction separate from the others. As the international transaction of royalty payment is a separate transaction and not closely linked with the other transactions with which the assessee has merged it, we cannot allow such merger for the purposes of the determination of its ALP on entity level under TNMM. We, therefore, reject this contention raised on behalf of the assessee. 7.4. Having held that the authorities below were justified in rejecting the assessee s point of view of combining several transactions under the TNMM, let us examine if the application of CUP method is in order for determining the ALP of Royalty payment. By now, it is fairly settled through a catena of decisions that the CUP is the m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s under :- (i) Abhishek Auto Industries Ltd. Vs. CIT (ITA No.1433/Del/2009) (ii) Sona Okegawa Precision Forgings Ltd. Vs. Addl.CIT (ITA No.4781/Del/2010) (iii) SGS India Pvt. Ltd. Vs. ACIT (ITA No.2406/Mum/2006). 8.3. On the contrary, some of the decisions which have not approved this line of thinking that the rate of royalty as allowed by the Government of India/Reserve Bank of India should be construed as a arm s length rate, are as under :- (i) Serdia Pharmaceuticals (India) (P) Ltd. Vs. ACIT (ITA No.2469/Mum/2006). (ii) Perot Systems TSI (India) Ltd. Vs. JCIT (ITA No.2320-2322/Del/2008). (iii) Skol Breweries Ltd. Vs. ACIT (ITA No. 6175/Mum/2011) 8.4. In view of the diagonally divergent decisions of the tribunal on the point, we would have ordinarily referred this issue for consideration by the Special bench to evolve consensus. However, the fact of the matter is that this issue has crossed the tribunal forum and has come up for consideration by the Hon ble High Courts. As such, the cleavage of the opinion amongst various benches of the tribunal, should be presumed to have extincted with the advent of the High Court judgments, which we will shortly advert ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... isions is same in so far as the payment for expense to related parties is concerned. 8.6. Now we take up the decision in the case of Coca Cola (supra). The assessee in that case filed a writ petition requesting to quash the notices issued under ss. 148 and 92CA(3) of the Act. The Hon ble Punjab Haryana High Court framed four questions for consideration and decision, inter alia, question no. (iii) reading as under :- (iii) Whether provisions of Chapter X are attracted when both the parties to a transaction are subject to tax in India, in absence of allegation of transfer of profits out of India or evasion of tax? 8.7. All the four questions were decided against the petitioner. While dealing with question no. (iii) above, the Hon ble High Court held in para 54 of the judgment that : The contention that according to the permission granted by the RBI under the FERA, the assessee cannot charge more than particular price, can also not control the provisions of the Act, which provides for taxing the income as per the said provision or computation of income, having regard to ALP in any international transaction, as defined. From the above observations of the Hon ble High Cou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re the authorities as per law. It was further made clear that the authorities will decide the matter uninfluenced by any of the observations made in the impugned judgment. The material fact to be noted is that the Hon ble Supreme Court did not vacate the principles laid down by the Hon ble High Court on merits, but simply held that in the absence of factual position concerning that case in writ petition, the authorities under the Act were to decide the proceedings independent of such principles. In so far as the legal principles articulated by the Hon ble High Court, including the applicability of the Transfer Pricing provisions even on the transactions which have been approved by the RBI, are concerned, these stand as such. If these are not affirmed by the Hon ble Supreme Court, the same cannot be equally considered as overruled as well. Be that as it may, there is no doubt about the availability of the judgment of the Hon ble Delhi High Court in Nestle India (supra) on the issue, which unmistakably provides that the permission granted by the RBI under the FERA cannot control the provisions of the Act. 8.10. When we view the original approval granted by the RBI to the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pproved by the RBI has a persuasive value in the process of determination of ALP of Royalty for a particular case and cannot be considered as conclusive. 8.13. It is relevant to mention that the ld. AR initially argued and also submitted Synopsis in support of the contention, that if the payment of royalty has been made as per the rate approved by the RBI, then no further benchmarking is required and the question of determination of ALP should be deemed as set to rest. However, in the rejoinder, he fairly conceded and rightly so, that such approval has only a persuasive value and is not conclusive. The contrary contention initially advanced on behalf of the assessee in this regard is, therefore, jettisoned on merits, which has also become infructuous in view of the ld. AR s stand in the rejoinder. III. Selection of some companies as comparable: 9.1. It is pertinent to note that the assessee chose eight companies as comparable. The TPO reduced it to one and the DRP enhanced their number to three. The ld. AR insisted on the inclusion of other five companies also in the list of comparables. Before examining the comparability of these five companies, we need to note that the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ine etc. Thus, this company is also held to have been rightly excluded. 9.5. The last case is Vilter Manufacturing Corporation (licensor) and Frick India Ltd. (licensee). In this case, payment of royalty was made for obtaining technical know-how for the manufacture of Refrigeration compressors. There is hardly any need to accentuate that refrigeration compressors, being a component of refrigerator, cannot be compared with refrigerator as such. We, therefore, hold that the authorities below were right in excluding this company also from the list of comparables. 9.6. The other three cases which find mention in the list of comparables have paid royalty for obtaining technical know-how for the manufacture of Colour TVs. Since the assessee has also paid royalty for obtaining technical know-how for manufacture, inter alia, of Colour TVs, these three companies were rightly included. 9.7. The ld. AR submitted that it sought to include certain other companies in the list of comparables before the DRP but without any success. Referring to pages 206 and 207 of the appeal set, being the part of objections before the DRP, the ld. AR invited our attention towards the assessee s reques ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reement with LG Electronics Inc. The ld. AR contended that although there was no fixed term prescribed for licensing of technical know-how in the agreement between the assessee and LG Electronics Inc. and was thus perpetual, yet it provided for its termination in certain circumstances. It was submitted that the fixed tenure of the agreements for supply of know-how of three comparable companies chosen by the authorities below ranged from 5 to 7 years. He stated that instead of reducing the average rate of royalty by 1%, there should have been enhancement of 1% because a person with a perpetual agreement is always in a disadvantageous position because of the fear of obsolescence of technology. The ld. DR opposed such submissions by contending that a perpetual agreement assures the licensor of the licensing of technical know-how and other rights on a long-term basis without any hassle of venturing into the hazardous exercise of repeatedly finding a new customer after the conclusion of the earlier tenure. Accordingly, it was put forth by the ld. DR that an agreement for a fixed small period normally gets high rate of royalty vis-a-vis the perpetual agreement. 10.2. We find that ther ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... obsolescence of technology calling for upward adjustment in the profit rate of comparables. 10.3. At this stage, it is significant to mention that the perpetual agreement between the assessee and LG Electronics Inc. is not subject to a fixed rate of royalty. With every increase allowed by the Government of India, the assessee and its AE have revised upwards the rate of royalty starting with 1% and going upto 5%. It can be seen that the review of the rate of royalty clause has been stipulated in the Agreement dated 1st July, 2001. Article 4.1 (a) with the caption Review of the Royalty provides that The parties agree to review and re-negotiate the rate of Royalty, Technical Assistance Fees, if required, within 90 days before the commencement of every third (3rd) year starting from the Effective Date, i.e., July 1, 2001, subject to prior approval of the Government of India, if required . It, is thus evident that with this clause of the Agreement, the rate of royalty, which was fixed at 1% vide Agreement dated 1st July, 2001, increased to 3% w.e.f. 1.1.2003 and then zoomed to 5% w.e.f. 1.1.2004, in conformity with the increase allowed by the Government of India. 10.4. At this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation of the agreement. This tends to increase the rate of royalty in a case of fixed term license. As there can be no such possibility of non-user of technical know-how in the case of an agreement with perpetuity, other things being equal, the rate of royalty in a perpetual agreement is bound to be low. 10.6. In an earlier para, we have upheld the application of CUP as the most appropriate method for the determination of ALP of the international transaction of Royalty payment. Rule 10B(1)(a) of the I.T. Rules, deals with the computation of arm s length price under the CUP method. Sub-clause (i) provides that the price charged or paid in a comparable uncontrolled transaction or a number of such transactions is identified. Sub-clause (ii) stipulates that such price is adjusted to account for differences if any, between the international transaction and the comparable uncontrolled transactions .. . Sub-clause (iii) provides that the adjusted price arrived at under sub-clause (ii) is taken as arm s length price. When we view these three sub-clauses of Rule 10B(1)(a), it comes to the fore that the price charged or paid in a comparable uncontrolled transaction is required to be adj ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rent charged by the landlord or paid by the tenants in the afore discussed two situations is nothing but a discount allowed to a tenant of longterm on the available market rate of rent. This analogy can be applied to the present facts by considering the discount which a licensor with a perpetual license may allow or the premium which a licensor with a fixed term license may charge. It can be seen that the TPO downgraded 2% on this score and reduced the unadjusted comparable rate of 3.5% to the adjusted 1.5%. To put it differently, the TPO treated the premium charged by the comparable licensors on account of fixed term licenses at 57% (2/ 3.5*100), or in other words, the discount at such rate to the prevalent market rate on account of perpetual license. However, the DRP treated such discount for perpetual license at 22% (1/4.5*100). Considering the entirety of the facts and circumstances of the instant case, we find that the rate of premium on the license with fixed term at 22% is on a higher side. In our considered opinion, the rate of such premium should be restricted to 10% of the average rate of royalty of the comparable cases. 10.9. It has been held above that the DRP rightl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unctus officio by sticking to such a wrong view in later year as well, even after having realized the mistake committed in earlier year. As a mistake committed by the AO in wrongly deciding an issue against the assessee in an earlier year can be corrected by deciding it in accordance with law in assessee s favour in a succeeding year, similarly a mistake committed by the AO in wrongly deciding an issue in favour of the assessee in an earlier year can be equally checked by deciding it correctly against the assessee in a succeeding year. The crux of the matter is that the law should take its own course and the assessment should be made strictly in conformity with the provisions of the Act. If a particular issue was wrongly decided in an earlier year, then it must be set right in the subsequent year, rather than harping on the principle of consistency to support the continuation of such a wrong view. 11.3. Coming to the facts of the instant case, it can be seen that the assessee benchmarked the international transaction of royalty by clubbing it along with the other international transactions, such as, import of raw material and components, service spares, export of finished goods ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... /- on account of international transaction of payment of Export commission . Ground no. 11 is also connected with the ground no. 5, by which the action of the AO has been challenged in treating the amount of ₹ 11.11 crore as diversion of profits to LG Korea and thus a non genuine business expenditure. Briefly stated, the facts apropos this issue are that the assessee paid commission of ₹ 11.11 crore to LG Korea for exports of Colour TVs. The TPO observed that the commission was paid to assessee s AE in Korea for exports made to other countries. On being called upon to furnish the details of services rendered by its AE to promote the assessee s sales outside India, the assessee stated that its AE provided marketing support through its network all over the world. In the absence of any concrete evidence of such services having been rendered to promote the export of goods from India, the TPO held that the commission payment was only a mechanism for extracting profits from India. The ALP of this international transaction was taken at Nil, which resulted into TP adjustment of ₹ 11.11 crore. The assessee objected to such addition before the DRP made by the AO in the dra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that transaction by transaction approach was to be followed for determining the ALP of international transactions. Since the payment of commission is a separate class of transaction, the DRP opined that the same ought to have been benchmarked separately from the rest of the international transactions. In the absence of any evidence for rendering of actual services by its AE, the DRP came to hold that the ALP of this transaction was rightly taken at Nil. The assessee is aggrieved against the addition made by the AO pursuant to the DRP s direction. 13.3. We have heard the rival submissions and perused the relevant material on record. The claim of the assessee is that LG Korea rendered numerous services for which commission was paid at the rate of 4.5%. It is just basic that a deduction for commission can be allowed only if the rendition of services is proved. In the absence of any positive and speaking evidence of services, there can be no question of allowing any deduction. On a consideration of the entire factual prevailing position, we find that apart from theoretically listing several activities allegedly performed by LG Korea, as briefly narrated above, the assessee failed to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng that the mere existence of an agreement between the assessee and its sole selling agents or payment of certain amounts as commission, assuming there was such payment, did not bind the ITO to hold that the payment was made exclusively and wholly for the purpose of the assessee's business. Although there might be such an agreement in existence and the payments might have been made, it was still open to the ITO to consider the relevant factors and determine for himself whether the commission said to have been paid to the selling agents or any part thereof is properly deductible under s. 37 of the Act. Considering the ratio of this judgment, we find no hesitation in holding that the AO was fully justified in holding on page 29 of the assessment order that : For a commission payment, it is to be established as a genuine commission, provisions of services by receipt has to be established . In view of the fact that there is no tangible evidence whatsoever indicating the rendering of services by LG Korea, the deductibility fails on the preliminary test itself. 13.5. Having found that the assessee failed to adduce any positive evidence about the rendering of services by LG Korea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n, because the sale price will naturally have the element of profit to compensate for the effort in making sale. In a nutshell, the Agreement between the assessee and LG Korea mandating a commission payment @ 4.5% on sale of Colour TVs is simply for procuring orders by LG Korea on behalf of the assessee, which is covered under clause 1 of Article 4. Having seen the nature of services to be rendered by LG Korea as per the Agreement, we find that there is a great mismatch between the assessee making a huge claim of several activities done by LG Korea, as summarized in an earlier para with sr. nos. i. to vi., as quid pro quo for 4.5% commission. It is further significant to note that the assessee stated before the DRP that export commission was paid to LG Korea in respect of export of Colour TVs to Middle East and South Asian countries. The ld. AR was required to file a year-wise chart showing product-wise exports to AEs and non-AEs. Such chart has been placed on page 3104 of the paper book. A perusal of this chart shows that the total exports of the assessee for the year are ₹ 894.01 crore (Preceding year figure of ₹ 586.26 crore). Export of Colour TVs for the current yea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thstanding 10% increase in exports of Colour TVs, we find that there is an increase of 65% (83 crore/ 127 crore *100) in the export of Refrigerators, 10.5% (1.50 crore / 14.28 crore *100) in the export of PCs and 51% (3.64 crore / 7.04 crore *100) in the export of Monitors. We fail to appreciate the contention of the assesse that the efforts put in by LG Korea led to 10% increase in exports of CTVs, when this fact is seen in juxtaposition to the overall increase in the exports by 52% on entity level and much higher increase in export of Refrigerators (65%) and Monitors (51%), for which no commission was paid at all. 13.8. Another significant factor, which needs to be considered is that the assessee entered into agreement with LG Korea for paying commission @ 4.5% w.e.f. 1st January, 2005 and prior to that also, the assessee was making exports of Colour TVs but without paying any commission whatsoever. Let us see examine the result of entering into the so-called agreement for rendering of services for promotion of export of Colour TVs. For the Financial year 2003-04, that is, when no such agreement was in force, the export of Colours TVs was ₹ 169 crore as against the total ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le. We find that there is contrary evidence galore. The assessee not only exported Products, other than CTVs, to foreign destinations without paying any commission during the instant year, but was also regularly exporting CTVs prior to the entering of the instant Agreement for commission. How the assessee could effect exports without having any infrastructure, is beyond our comprehension. 13.11. A bald contention that because of the efforts put in by LG Korea, the assessee s export of Colour TVs registered an increase by 10%, cannot be accepted unless such increase in exports is linked with the positive services rendered by the LG Korea, which link is miserably missing here. Be that as it may, we find that there is no special increase in export of CTVs because of the alleged services rendered by LG Korea. What is relevant to note is that, there is rather more convincing increase in the overall exports and also of specific products for which no export commission has been paid. The position appears to be rather upside down. 13.12. The reliance of the ld. AR on the tribunal order in the case of Hero Motor Corp, is also inconsequential. That was a case in which the Indian entity ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the earlier ground about the payment of royalty. The same reasoning is adopted to hold that the international transaction of commission payment is not closely linked with the other international transactions of import and export etc. and, hence, the same is required to be separately benchmarked. This argument of the ld. AR is, therefore, repelled. 13.17. As regards the other contention about the Revenue stepping into the shoes of the assessee for deciding as to whether the commercial decision of paying commission should have been taken or not, we find that the extant position is quite different. There is a remarkable difference in a situation in which the Revenue challenges the commercial decision of an assessee in availing a particular service and, a situation in which the authority to take the commercial decision is not challenged but the factum of the assessee having not received any such service is established for lack of any positive and direct evidence to substantiate the receipt of services. Necessity of availing some service and adducing no evidence for having availed such service, are two altogether different situations. The cases relied on by the ld. AR fall in the ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... port commission as provision of services by LG Korea to the assessee was not established. That is how, the AO disallowed the amount. Thereafter, the AO held that since the TPO has also made an adjustment of ₹ 11.11 crore in the ALP of this transaction, no separate addition was called for. 13.20. Applying the ratio decidendi of Cushman and Wakefield India Pvt. Ltd. (supra) to the facts of the instant case, we find that the TPO was required to simply determine the ALP of this transaction unconcerned with the fact, if any benefit accrued to the assessee and thereafter, it was for the AO to decide the deductibility of this amount u/s 37(1) of the Act. Thus, whereas the TPO did not decide this issue in conformity with the judgment in Cushman (supra), the AO rightly did his part of the job. Going by this judgment, even if the TPO had determined ALP of the transaction of commission at some positive figure instead of Nil, the AO still could have made the disallowance for the reasons so given by him in the assessment order. On a specific query that - if the view point of the AO is upheld by the tribunal about the nongranting of the deduction for the reasons assigned by him - would ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee is aggrieved against this addition. 16.1. We have heard the rival submissions and perused the relevant material on record. In order to decide as to whether the royalty paid by the assessee is of a capital or revenue nature, it is appropriate to see the relevant clauses of the Agreement dated 01.07.2001, pursuant to which such royalty was paid. The preamble part of the Agreement states that the Licensor allows use of Technical Information and Industrial Property Rights for the manufacture, production and sale of the products. Article 1 of the Agreement defines Technical Information to mean all the technical knowledge, knowhow, process, specification, lay outs, designs, drawings, and qualities standards, standards calculation, data and information developed or otherwise generally used by the licensor pertaining to the manufacture, production, assembly, use and sale of the agreed products. Article 2 of the Agreement states that: Subject to the terms and conditions set forth in this Agreement, Licensor hereby grants to Licensee an exclusive, nontransferable license, without the right to sub-license, and the right to manufacture, produce, use, sell, or otherwise dispose of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... greement. Now the moot question which arises is as to whether the royalty paid for the use of technical knowhow and IPRS in the given circumstances be held as a capital expenditure as has been held by the AO or revenue expenditure as claimed by the assessee. 16.2. The Hon ble Supreme Court in CIT Vs Ciba of India Ltd. (1968) 69 ITR 692 (SC) considered a situation in which that assessee was enabled to acquire the right to draw for the purpose of carrying on its business as a manufacturer and dealer of permissible products upon the technical knowledge available from the foreign company for a limited period with stipulation not to divulge the information to third parties and further return such information on the conclusion of agreement with the prohibition of not using the same after termination of the agreement. The payment made for this purpose was eventually held to be an admissible revenue expenditure. In that case the information supplied was to be surrendered on the termination of the agreement and not to be put to use thereafter. In CIT Vs I.A.E.C (Pumps) Ltd. (1998) 232 ITR 316 (SC), the Hon ble Supreme Court considered a case in which payment was made for use of patents a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pital expenditure, the payment made for use of such technical know-how is a revenue expenditure. A divider in the capital and revenue expenditure in the circumstances as are presently prevailing can be placed by ascertaining the correct nature of the right vested in the licensee. If licensee is allowed not only the simplictor use of technical know-how, but such use is coupled with the divesting of ownership in favour of the user, then it can be considered as a case of capital expenditure. If on the other hand, the licensee is allowed a simple use without anything else, then it can be only a revenue expenditure. The mere fact that the expenditure is resulting into bestowing a benefit of enduring nature in the shape of user of technical know-how, with whose assistance the assessee is carrying on its main activity of business, cannot be the sole determinative test of the nature of expenditure. The Hon ble Apex Court in Empire Jute Co. Ltd. VS. CIT (1980) 124 ITR 1 (SC) has held that there may be cases where expenditure, even if incurred for obtaining advantage of enduring benefit, may, none the less, be on revenue account and the test of enduring benefit may break down. Their Lordship ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ivulging the relevant information during continuation of the agreement or any time thereafter; on the termination of the agreement, respective rights or obligations under the agreement shall cease; and there is no power with the assessee to sub-license. On the other hand, the factors which weigh against the assessee are that the license is exclusively granted to the assessee; and the license is not for a limited period but perpetual. On considering the cumulative effect of all the factors, both for and against the assessee, we have no hesitation in holding such royalty payment to be of a revenue nature. The reason is ostensible, being the factors pointing towards revenue expenditure predominantly overshadowing the factors pointing against revenue expenditure. The factors which are against the assessee are albeit material, but stand outshined by the factors which are in favour of the assessee. It is a case of royalty payment in lieu of the use of license devoid of conferring any ownership rights in the licenseeassessee. 16.7. The judgment in the case of Ram Kumar Pharmaceutical Works VS. CIT (1979) 119 ITR 33 (All) as relied by the AO is not germane to the issue under considera ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
