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TMI Blog2015 (8) TMI 610X X X X Extracts X X X X X X X X Extracts X X X X ..... its AE's and the payment of royalty and technical services under a common agreement for both technical knowhow fees and royalty to its AE at Kuwait was one of the transaction. As per the said agreement, assessee paid royalty @ 7.5% on the sales amounting to Rs. 9,39,74,409 and Rs. 61,77,041 towards technical fee. He observed that royalty and fee for technical services are transactions for intangible services and therefore, TPO accepted the CUP method adopted by the assessee as the most appropriate method and further observed that two independent comparables i.e. M/s Cold Steel Corporation and Tiger Steel Engineering (P) Ltd were adopted by the TPO in the assessee's own case in the earlier A.Ys and the assessee had raised similar objections against these companies before the TPO for the relevant A.Y also. After considering assessee's objections at length, the TPO held that these two comparables were selected for comparison and analysis on the basis of information furnished by the tax payer itself. Further, TPO also observed that for financial year 2009-10 and the preceeding previous years from the P&L a/c, it is evident that most of the work is outsourced by the assessee on job wor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... held that the applicant was not able to substantiate that any benefit was derived by the tax payer by the services provided by the AE requiring such payments. 5. The ld Counsel for the assessee, on the other hand, reiterated the submissions made by the assessee before the authorities below and has also relied upon the decision of the Tribunal in assessee's own case for the earlier A.Ys wherein similar transactions have been analysed by the Tribunal and thereafter relief granted to the assessee. A copy of the said order of the Tribunal is filed before us. 6. Having regard to the rival contentions and also the material on record, we find that the assessee had entered into international transactions for payment of royalty and fee for technical services vide agreement dated 1.4.2000. Further we find that this agreement had undergone several amendments and the assessee had started paying royalty only from the P.Y 2005-06 onwards. Therefore, the ALP adjustment of these transactions has arisen only from P.Y 2005-06 onwards. This Tribunal, in assessee's own case for A.Ys 2006-07 onwards, had considered this issue at length and had come to the conclusion that it is not required by the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e tax payer has debited an amount of Rs. 17,71,37,206/- towards royalty at the rate of 7.5% on sales. During F.Y. 2004-05, the taxpayer has paid royalty at Rs. 6,77,67,700/- to Kirby, Kuwait (AE) at the rate of 3.5% on sales. As per the agreement entered by and between the taxpayer and it's AE at clause-4, the rates for payment of royalty are given. Except that, nothing is mentioned. What is the basis for which royalty is paid by the taxpayer remained unsubstantiated. In its reply dated 10.03.2009, the taxpayer in response to query no.10 has replied as under : "Kirby India has technology collaboration with Kirby Kuwait. In this regard, Kirby India has entered into a TSA with Kirby Kuwait. The initial term of the agreement was for 7 years starting from 1st April, 2000 to 31st March, 2007. However, owing to business exigencies, the TSA was amended intermittently to provide for waiver of the royalty during the years 2000 to 2004. The amendments have resulted in deferring the payment of royalty to subsequent years. However, the amendment in the royalty rates and the payments terms are subject to the condition that the royalty payments will not exceed the potential outflow as agreed i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... han what by a clever devide of drafting it is made to appear." 10.3. Shifting of profits to no tax jurisdiction : Rule of substance over form is the key in examining the agreements entered by and between the taxpayer and it's A.E. in respect of payment made towards royalty and technical fees as these transactions are controlled. After examining the available information/evidence on record and analysis thereon, the only inference that can be drawn is that these two transactions that is payment towards royalty and technical services is that they are not at arms length. In the guise of these payments, the taxpayer is shifting profits to no tax jurisdictions like Kuwait and Mauritius, thereby enriching themselves without paying taxes that are due in the country where the taxpayer operates. The profits declared by the taxpayer are not comensurating with the functions performed and risk assumed in the country of operations. 10.4. Brand value : The taxpayer has also taken brand value as one of the factors for payment of the so-called technical services/royalty. Kirby, India sets its footprint in the country in the year 2000. What brand value Kirby, Kuwait commands in a country like In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re material provided by the taxpayer and after extensive discussion of the TPO, we are of the view that Kirby India has established a plant In the outskirts of Hyderabad with technical assistance from its AE. Definitely, the AE has to be paid in terms of royalty and technical knowhow fee for the same. The main question here is whether the technical fee/royalty paid vis-a-vis the profit earned by the taxpayer and the services rendered by the AE are adequate or whether they are within the ALP. The following table gives the fee for technical services debited into the Profit & Loss Account by the taxpayer during the last so many years as under : Financial Year Technical Fees paid in Rs. 2005-06 59,20,536 2004-05 1,90,05,260 2003-04 1,02,87,965 2002-03 63,84,953 2001-02 10,74,145 2000-01 2,43,259 Total 4,29,16,118 8.4. As seen from the above table, the taxpayer during the last six years has debited to the Profit & Loss Account to the tune of Rs. 4,29,16,118/- on account of technical services. The benefit derived by the taxpayer from the above technical services, we are of the view is adequately compensated and hence further technical fee payment in this year is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llion US Dollars as technical service fee. This amount was to be paid, 1/3rd on approval of collaboration agreement from Reserve Bank of India, 1/3rd on delivery of knowhow documentation and balance in 4 years after the proposal was approved by the RBI. However, vide amended agreement dated 07.09.2001 it was understood that lump sum amount of 2 Million USD would be paid in 5 equal installments beginning from the year December, 2002 with modified terms of payment of Royalty and Technical fee. Since the assessee company was incurring losses and was in requirement of working capital, there was further amendment on November 12, 2002 with further modifications. Since assessee paid only an amount of 0.4 Million US dollars as on that date, the technical fee was to be paid at 2,67,000 USD in the year 2003 and 1,00,000 USD each from 2004 to 2016 and balance 33000 US Dollars in the year 2017. It was submitted that lump sum technical fee payable at the time of initial operations of the company was in fact deferred so as to suit the assessee company in its working capital requirement. Accordingly, it was submitted that assessee paid US $1,00,000 as technical fee in the year under consideration ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Counsel relied upon the decisions of the Hon'ble High Court of Delhi in the case of CIT vs. EKL Appliances Ltd. 1068 of 2011 dated 29.03.2012 which in turn, was followed by Coordinate Benches of ITAT, Mumbai in SC Enviro Agro India Ltd. vs. DCIT ITA.Nos. 2057, 2058/Mum/2009 dt.07-11-2012 and in the case of Thyssen Krupp Industries India P ltd vs. ACIT, Mumbai ITA.No.7032/Mum/2011 dated 27.11.2012 and also by the Coordinate Bench at Hyderabad in the case of DCIT vs. Air Liquide Engineering India P. Ltd., in ITA.No.1040/Hyd/ 2011 and others dated 13.02.2014. It was the submission that A.O. cannot disallow the amount in its entirety without examining the arms length price of the transaction. 12. Coming to the observations of the TPO that there was shifting of profits to no tax jurisdiction, it was submitted that this argument cannot be accepted in view of the provisions of T.P. and also on further fact that assessee has paid the taxes on the amounts in India. It was submitted that the royalty and technical fee payable are on net basis. Therefore, assessee has grossed-up the amounts and to an extent of about 32% assessee has paid taxes including service tax, cess and other taxes. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1.2012 v. The benefit derived by the assessee is also not relevant for considering the payment of royalty and technical knowhow fee and relied on the following case laws (i) DCIT, Circle1(1), Hyderabad vs. M/s. Air Liquide Engineering India P. Ltd., Hyderabad ITA.No.1040/Hyd/2011 etc., dt. 13.02.2014 (ii) ACIT, Cir.4, Ahmedabad vs. Hitachi Home & Life Solutions (India) Ltd., ITA.No.2361 & 2362/Ahd/2008 etc., dated 24.09.2013. 15. Learned D.R. however, relied on the detailed orders of the TPO and DRP to submit that there is no necessity to pay royalty at higher amount and so the authorities are within the jurisdiction to restrict the amount at NIL on technical services fee and 3.5% on gross sales as far as royalty is concerned. He relied on the orders of the authorities. 16. Ld. Counsel, in reply, also clarified various issues raised and placed on record a cumulative payment of royalty and technical services fee by the assessee over a period to submit that effective rate of royalty is very much less. It was submitted that the assessee has paid cumulative royalty as percentage of cumulative sales at 3.75% up to A.Y. 2009-2010. It was submitted that the payment of technical knowh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er, the TPO has examined the business necessity of payment of technical knowhow fee and royalty under the provisions of section 37(1)rather than under the provisions of T.P. His decision of not allowing any royalty payment or technical knowhow payment and determining the ALP at NIL cannot be sustained in view of the fact that this technical knowhow fee and royalty were agreed upon when the assessee has originally entered into agreement as on 01.04.2000 much before the T.P. provisions came on statute. It may be another reason that assessee has revised the agreement and paid subsequently, partly in the impugned year, but that does not prevent assessee claiming expenditure which was necessary for its business operations in view of the agreement entered at the time of establishing the unit in India. Had there been no revision of the agreement, the payment of technical knowhow fee would have been over by the year 2002 itself. Assessee paid in a sense belatedly the same amount which was payable originally due to rescheduling in payment period. No extra amount was required to be paid. Moreover, on the entire turnover in the intervening years, assessee also would have paid royalty. However ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has been classically observed by Lord Thankerton in Hughes v. Bank of New Zealand, (1938) 6 ITR 636 that "expenditure in the course of the trade which is un-remunerative is none the less a proper deduction if wholly and exclusively made for the purposes of trade. It does not require the presence of a receipt on the credit side to justify the deduction of an expense". The question whether an expenditure can be allowed as a deduction only if it has resulted in any income or profits came to be considered by the Supreme Court again in CIT v. Rajendra Prasad Moody, (1978) 115 ITR 519, and it was observed as under: - "We fail to appreciate how expenditure which is otherwise a proper expenditure can cease to be such merely because there is no receipt of income. Whatever is a proper outgoing by way of expenditure must be debited irrespective of whether there is receipt of income or not. That is the plain requirement of proper accounting and the interpretation of Section 57(iii) cannot be different. The deduction of the expenditure cannot, in the circumstances, be held to be conditional upon the making or earning of the income." It is noteworthy that the above observations were made in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the present case is to hold that assessee ought not to have entered into the agreement to pay royalty/brand fee, because it has been suffering losses continuously. So long as the expenditure or payment has been demonstrated to have been incurred or laid out for the purposes of business, it is no concern of the TPO to disallow the same on any extraneous reasoning. As provided in the OECD guidelines, he is expected to examine the international transaction as he actually finds the same and then make suitable adjustment but a wholesale disallowance of the expenditure, particularly on the grounds which have been given by the TPO is not contemplated or authorised. 23. Apart from the legal position stated above, even on merits the disallowance of the entire brand fee / royalty payment was not warranted. Assessee has furnished copious material and valid reasons as to why it was suffering losses continuously and these have been referred to by us earlier. Full justification supported by facts and figures have been given to demonstrate that the increase in the employees cost, finance charges, administrative expenses, depreciation cost and capacity increase have contributed to the continuo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... --- 1.03 1.02% 0.58% 2005-06 193.34 17.46 5.36 1.78 3.69% 1.78% 2006-07 231.69 13.05 13.26 0.45 5.92% 3.08% 2007-08 282.78 23.01 15.82 0.44 5.56% 3.79% 2008-09 390.54 29.33 15.75 0.39 4.14% 3.88% 2009-10 816.69 54.08 33.06 0.49 4.11% 3.96% 20.3. Further as there was a mismatch of percentages in the royalty claimed, clarification was sought in the course of argument and Ld. Counsel explained that even though royalty had a fixed percentage of 7.5% agreed, it was not on gross sales but on net sales, as RBI has excluded various amounts. It was also submitted that DRP without studying the terms and conditions of payment of royalty as approved, allowed royalty at 3.5% on gross sales which technically is also almost equivalent to the royalty claimed by the assessee on net sales basis. It was submitted that as percentage of sales, royalty payment in the impugned year was only 5.92%. Be that as it may, we are not in a position to approve the action of the A.O. / DRP in restricting the royalty and total denial of Technical services fee without any basis at NIL under the guise of T.P. provisions. In view of this, we are not in agreement with the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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