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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 ..... d upon the decision of the Hon’ble Delhi High Court in the case of CIT vs. EKL Appliances (2012 (4) TMI 346 - DELHI HIGH COURT). This decision of the Tribunal was also followed by the Coordinate Bench of this Tribunal in assessee’s own case for A.Ys 2008-09 and 2009-10 holding that the royalty paid by the assessee was at ALP. DRP has only followed the decision of the ITAT in assessee’s own case for earlier A.Ys. As the DRP has only followed the precedent on the issue in the assessee’s own case and has accordingly issued directions to the AO and the assessment order is in consonance with such directions of the DRP, we do not find any reason to interfere with the same. - Decided against revenue. - ITA No.316/Hyd/2015 - - - Dated:- 7-8-2015 - Smt. P. Madhavi Devi and Shri Inturi Rama Rao, JJ. For The Revenue: Shri D. Srinivas, DR For The Assessee: Shri Farrokh V. Irani ORDER Per Smt.P. Madhavi Devi, J.M. This is a Revenue appeal for the A.Y 2010-11 against the order u/s 143(3) r.w.s. 144C(1) of the I.T. Act, 1961, dated 30.01.2015. 2. Brief facts of the case are that the assessee company is engaged in the business of manufacture of pre-engineered build ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... her at ALP, the ALP of such payment of royalty would have to be treated as either Nil or only to the extent it is shown that the benefit actually was derived from such payment. He observed that since the assessee has not received any technical assistance from its AE, the ALP of the payment made by the assessee to its AE s on account of intangible/royalty and technical service fees is nil. He accordingly made adjustment of the entire amount of Rs.,9,39,74,409 and ₹ 61,77,041 u/s 92CA of the I.T. Act. Similarly, the TPO also made adjustment of ₹ 1,07,99,889 as an ALP adjustment on reimbursement of expenses received. On the basis of the said T.P. order, AO proposed the draft assessment order dated 19.03.2014. Against the said order, assessee preferred objections before the DRP. The DRP, vide order dated 24.12.2014 observed that the assessee had entered into similar international transactions with its AE in the earlier A.Ys i.e. A.Ys 2006-07, 2007-08, 2008-09 and 2009-10 and the issue had travelled upto the Tribunal and the Tribunal by its order dated 18.07.2014 in ITA Nos.1651/Hyd/2010 ITA No. 1975/Hyd/2011 and orders dated 19.11.2014 in ITA Nos. 1759/Hyd/2011 and ITA ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... roduced hereunder for the sake of ready reference: 4. Ground Nos. 1 to 8 pertain to the disallowance of payment of royalty and technical service fee to M/s. Kirby Building Systems, Kuwait analysed under the provisions of transfer pricing. Briefly stated, assessee M/s. Kirby Building Systems India Ltd., is engaged in the business of manufacture of Pre-Engineered Steel Building System (PEB) Products. For the year under consideration, assessee filed return of income declaring total income of ₹ 6,82,39,910/-. A.O. noticed that it had international transactions with its AE to an extent of ₹ 15,96,89,713/-. The following are the details of international transactions entered into by and between the taxpayer and the AE : Name of the AE International transaction Value in INR Kirby Kuwait 1. Payment of royalty technical services fee 137,037,502 2. Payment of interest (ECB in Kuwait Dinar) 1,473,502 3. Payments towards reimb ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of years up to 2017. Taxpayer failed to furnish any FAR analysis in respect of royalty payment. It is pertinent to note that no royalty was paid by the taxpayer from year 2000 to 2004. Just because RBI fixed the limits of royalty rates, the same is taken as bench mark for payment of royalty. However, one has to understand that the RBI limits is nothing to do with determination of arms length price under the provision contained under section 92 of I.T. Act, 1961. RBI limits are meant to regulate foreign exchange as part of forex management. The reason give for not paying royalty by the taxpayer between the years 2000 to 2004 is that there were no profits made during the said financial years. This is not correct. In fact, for F.Y. 2003-04, the taxpayer has earned a net profit margin of 6.67%. The claim of the taxpayer that there is a substantial expansion of the manufacturing facility during the F.Y. 2003-04 is also not correct. No significant expansion took place during that year. Plant machinery valued at ₹ 2,64,35,261 is only added. A net profit of ₹ 6,71,10,235 was made on sale of ₹ 108,38,57,968. These are not valid reasons for paying royalty in some years ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ial sector. PESBs are not consumer products which can be bought off the shelf from any store. Also it is important to note that brand value is developed from the contributions made by all the group entities of MNEs. Therefore, Kirby, India has developed its own brand value by spending huge amounts on marketing, development and advertisements as discussed in the earlier part of this order. Significant costs have been incurred by Kirby, India in marketing of its product in the country. Also, the PESBs are customized to the needs of the customers with reference to locations and functionality of the business. The PESBs which are prevalent in Kuwait cannot be simply replicated here in India. Kirby, India has spent huge amounts in marketing development and business promotion to familiarize their products. Developed in-house expertise and most of the works are also outsourced on job work basis. Therefore, creation of brand value is from all sides and from all entities of a multinational group. No payment on account of brand value by the taxpayer to its AE is not justified. In view of the above discussion, it is concluded that the payment made by the taxpayer to its A.E. on account of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... services, we are of the view is adequately compensated and hence further technical fee payment in this year is not necessary. The action of the TPO in taking technical fee payable for this year as nil is upheld. In respect of royalty, during the financial year under consideration the taxpayer was paying the royalty @7.5% on sales and debited an amount of ₹ 17.71 crores. As one could see, the AE is declaring 15% profit and the taxpayer has declared nearly 6% profit, whereas the royalty payment is @7.5% of the sales. Besides, this makes us to infer that there is a shifting of profit from India to its AE. We also tend to believe that since shifting of profits to its AE in countries non taxable, there would be a tendency to shift the profit from the taxpayer to its parent companies. Now the question is how to quantify them. During the FY 2004-05, the taxpayer has paid the royalty @ 3.5% on sales of ₹ 6,77,67,700/-. We are of the view that during this year also the royalty payment of 3.5% on sales would meet the requirement of ALP. To this extent, the TPO s report is modified i.e. ALP in respect of royalty payment is calculated as under : Price Received vis-a-vis the Ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly 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. 9. With reference to royalty, it was submitted that in the original agreement dated 01.04.2000 royalty was payable on domestic sales at 2.5% in the first year and 5% from second year i.e., 2002 onwards up to 31.03.2007. However, assessee has not paid any royalty in the year 2000-2001 and vide agreement dated 07.09.2001, the terms were changed to pay royalty at 5% on domestic sales and 5% on export sales from the year 2002 to March, 2007. In spite of that, assessee did not pay any royalty in the years 2002 and 2003. Therefore, vide agreement dated 12.11.2002, this was changed to no royalty up to March 2003 and 7.5% on domestic sales and 8% on export sales for 3 years up to M ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Ld. Counsel referred to the detailed submissions made before the DRP on this issue. 13. It was further contended that assessee s agreements with AE were approved by RBI and also by the Department of Industries and therefore, the TPO/DRP has no role to deny the claim which was approved by other Government Authorities. Ld. Counsel on a clarification about the working of royalty clarified that even though the rate agreed/approved stood at 7.5% of domestic sales or 8% of export sales, as per the policy of the RBI there are various exclusions in considering the turnover. Therefore, the effective date of royalty was much less whereas, the DRP has approved the rate at 3.5% o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 knowhow and royalty should be allowed in full. 17. We have considered the rival contentions and examined the orders of the authorities, documents placed on record and relevant case law relied upon. Kirby Building Systems India P. Ltd., is a wholly owned subsidiary of Alghanim Industries, a Kuwait based Multi-Billion Conglomerate. It is one of the world s largest producers of Pre- Engineered Steel Buildings (in short PEB ) and has been operational for more than 38 years since 1976. To pioneer the PEB concept, it has set up a plant in India in the year 1999 with a manufacturing facility with a capacity of 60,000 MT per annum at Hyderaba ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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, due to business requirements, both the parties agreed to revise the royalties. TP provisions does not empower the TPO to decide about the commercial decisions and determining the ALP at NIL thereby, denying the entire claim instead of allowing the amount on the basis of ALP to be determined under the provisions. 20. The Hon ble Delhi High Court in the case of CIT vs. EKL Appliances ITA.No.1068 of 2011 and 1070 of 2011 dated 29th March, 2012 considered similar issue whether the TPO has power to restrict in determining the ALP at NIL under the provisions of T.P. when he was supposed to have determined the arms length price o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 the context of Section 57(iii) of the Act where the language is somewhat narrower than the language employed in Section 37(1) of the Act. This fact is recognised in the judgment itself. The fact that the language employed in Section 37(1) of the Act is broader than Section 57(iii) of the Act makes the position stronger. 20. In the case of Sassoon J. David Co. Pvt. Ltd. v. CIT, (1979) 118 ITR 261 (SC), the Supreme Court referred to the legislative history and noted that when the Income Tax Bill of 1961 was introduced, Section 37(1) required that the expenditure should have been incurred wholly, necessarily and exclus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en 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 continuous losses. The comparative position over a period of 5 years from 1998 to 2003 with relevant figures have been given before the CIT (Appeals) and they are referred to in a tabular form in his order in paragraph 5.5.1. In fact there are four tabular statements furnished by assessee before the CIT (Appeals) in support of the reasons for the continuous losses. There is no material brought by the revenue either before the CIT (Appeals) or before the Tribunal or even before us to show that these are incorrect figures or that even on merits the reasons for the losses are not genuine. 24. We are, therefore, unable t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s no other comparable case brought on record. Generally, the Government of India is approving the royalty payments at 7.5% of the sales and this approval given by the RBI and Ministry of Industry is at par with similar agreements being approved in other contracts/agreements. Considering these aspects, we are of the opinion that royalty and technical knowhow payments made by the assessee to its AE are considered at arm s length and thereby, the grounds raised by the assessee on this issue are allowed. A.O. is directed to allow the amounts as claimed . Taking the said decisions into consideration and also the fact that the TPO has followed his approach for the earlier A.Ys in holding that the ALP adjustment was necessary, we are inclined to apply the decision of the Coordinate Bench for the earlier A.Ys also to the A.Y in the appeal before us. We find that the DRP has only followed the decision of the ITAT in assessee s own case for earlier A.Ys. As the DRP has only followed the precedent on the issue in the assessee s own case and has accordingly issued directions to the AO and the assessment order is in consonance with such directions of the DRP, we do not find any reason to int ..... X X X X Extracts X X X X X X X X Extracts X X X X
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