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TMI Blog2016 (9) TMI 393X X X X Extracts X X X X X X X X Extracts X X X X ..... drashekar. CIT(DR). ORDER Per INTURI RAMA RAO, AM : This is an appeal filed by the assessee directed against the order of assessment order passed u/s 143(3) r.w.s. 144C(13) of the Income-tax Act,1961 ['the Act' for short] dated 04/11/2011 for the assessment year 2007-08. 2. The assessee raised the following grounds of appeal: I. Transfer Pricing Adjustment 1. The Honourable DRP, the Ld. AO and the Ld. TPO have erred in determining the Arm's Length Price [ALP] of the royalty payment to be NIL, and thereby making the transfer pricing adjustment of ₹ 32,918,381. 2. In determining the ALP of royalty payment at "Nil", the Honourable DRP, the Ld. AO and the Ld. TPO have grossly erred in: a. Not analysing or providing any Comparable Uncontrolled Price [CUP] contracts for the application of CUP method; b. In rejecting the analysis of aggregation under Transactional Net Margin Method [TNMM] conducted by the Appellant in the transfer pricing report without providing any cogent reasons for such rejections; c. In disregarding the external comparable uncontrolled transaction (External CUT) search performed by the appellant and provided as a supplementary anal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enefit derived by the appellant in using the global brand name of its Parent i.e. "Praxair" to bid for contracts, avail loans from the banks, increase the presence in domestic market, etc. 5. The appellant craves leave to add, to alter or amend all or any of the afore-stated grounds of appeal. II. Corporate Tax 1. Brought forward unabsorbed depreciation The learned Assessing Officer and the Honourable DRP have erred in setting off brought forward unabsorbed depreciation pertaining to Assessment Year 1997-98 amounting to ₹ 33,060,114 instead of the eligible sum of ₹ 36,834,436. 2. Carry forward of unabsorbed depreciation The learned Assessing Officer and the Honourable DRP have erred in computing the amount of unabsorbed depreciation to be carried forward to future assessment years at Rs.,17 1,544,189,037 instead of ₹ 1,919,416,420 claimed in the return of income. 3. Briefly, facts of the case are that the assessee is a company incorporated under the provisions of the Companies Act, 1956. It is wholly owned subsidiary of M/s.Praxair Pacific Ltd., Mautitius. It is engaged in the business of manufacture of industrial gases. The assessee-compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eiving technology would like to see the profitability from future revenue streams before fixing a royalty rate. 2. The taxpayer did not produce any cash flow study at the time of entering into technical assistance agreement with its AE showing that the royalty rate is not fixed based on expected benefit. 3. There is no proof that the other group concerns or third parties are also charged identical royalty. 4. The taxpayer has also not been able to show that it derived any economic benefit from the alleged know how received the AE. 5. The profit that accrues to the licensee may not arise solely through the engine of the technology. There are returns from the mix of assets it employs such as fixed and working capital and the returns from intangible assets such as distribution systems, trained workforce, etc. Allowances need to be made for them. In the absence of any data provided by the taxpayer, it is impossible to know what percentage of profits the licensee would like to share at an arm's length after removing the returns from assets employed and other economic factors which may not arise solely through the engine of the technology. 6. The taxpayer did not give the detai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... support of royalty payment. He further submitted that royalty paid is less than 5% of the sale which is also approved by the Reserve Bank of India. Therefore, he submitted that payment of royalty to its AEs is at arm's length and does not require any adjustment. 5.2 On the other hand, ld.CIT(DR) relied on the orders of the lower authorities. 5.3 We heard rival submissions and perused material on record. First we deal with the contention of the assessee that transaction payment of royalty should be aggregated with all international transaction and should be computed by following TNMM. The principle of aggregation are laid down in rule 10A(d) of the IT Rules. The circumstances in which transaction should be aggregated are laid down in rule 10A(d) of the IT Rules which are as follows: "10A. For the purposes of this rule and rules 10AB to 10E,- ..................................................... (d) 'transaction includes a number of closely linked transactions. 5.4 The only contention urged by the learned counsel for assessee is that royalty forms part of the manufacturing cost and royalty expenditure is very minimum and therefore should be aggregated. This is not one of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing use of technology and technical know-how in the field of electro mechanical components and also the brand name of its foreign AE. In lieu of such use of technical know-how and brand name, the assessee became liable to pay a licence fees and royalty as stated in Schedule II to this Agreement. This Schedule provides for payment of royalty and fees for technical services each @ 8% calculated on the basis of the net ex-factory sale price of the product, exclusive of excise duty minus the cost of the standard bought out components and the landed cost of imported components, irrespective of the source of procurement, including ocean freight, insurance, custom duties, etc. Apart from this Agreement, the assessee also entered into another Agreement dated 25.6.2009 with Gruner AG, Germany, for availing certain Management services. A copy of such Agreement is available on page 107 onwards of the paper book. Under this Agreement, the assessee agreed to pay at the hourly rates. It is the payment pursuant to the Agreement dated 25.6.2009 and 8% fees for technical services under the Agreement dated 6.3.2009, that the assessee paid total fees for technical services at ₹ 4.72 crore. Roya ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reduced, inter alia, by ₹ 60/-. The essence of the matter is that royalty and fees for technical services is required to be calculated on the basis of ex factory sale price of the goods as reduced by the expenses and not on import of raw materials. It is further pertinent to note that the assessee is not obliged to make 100% purchases and sale to its AEs alone. The assessee is free to purchase raw materials and other components from and also sell its goods to its non-related parties as well. This explicitly proves that the payment of royalty and fees for technical services has relation with the total sales made by the assessee and it cannot be construed as interlinked with import of raw materials from its AE alone. 5.7 It is simple and plain that cross subsidization of the international transactions in a combined approach is impermissible. It is clear from section 92(1) that if an international transaction is recorded showing a lower income than its ALP income, then it is the higher ALP income, which should be considered for the purpose of computation of the total income. Section 92(3) of the Act manifests that the provisions of this section shall not apply in a case where t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gh Court in the case of EKL Appliances (supra) the burden is on the assessee prove that technical services are actually rendered by the AE to the assessee. In identical circumstances, in the case of 3M India Ltd. vs. ACIT, LTU, in ITA Nos.725 & 727/Bang/2011 dated 13/05/2016 it was held by us as under: "The co-ordinate bench of the Tribunal, to which one of us i.e. the Accountant Member is the author of the order, in the case of M/s.B Fouress Pvt. Ltd. vs. DCIT in ITA Nos.847/Bang/2014 dated 30/12/2015 held as follows: ............Thus, the assessee failed to discharge the burden of proving that the expenditure laid out were incurred wholly and exclusively for the purpose of business. We may further add that the Hon'ble Supreme Court in the case of CIT Vs Imperial Chemical Industries (Ind.) Pvt. Ltd (1969) 74 ITR 17 has unequivocally held that the burden of proving that a particular expenditure had been aid out or incurred wholly and exclusively for the purpose of business entirely lies on the assessee. The discharge of the burden had to be effective and meaningful and not to cover up by merely book entries and paper work. The mere fact of payment of commission by account payee c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any relationship on the basis of which M/s Ram Agencies procured some orders for the assessee for which it was entitled to receive commission. Moreover, we find that the understanding between the parties was an oral understanding and it appears to be doubtful that such an oral understanding can be arrived at without any long standing relationship having been established between the assessee and M/s Ram Agencies. It seems a bit out of place that the parties entered into an oral business relationship involving such huge amounts of money over a period of time". 13, The Co-ordinate Bench of Delhi in the case of Printer House Pvt.Ltd. Vs DCIT (Del.) authored by Accountant Member, after referring to the above precedence on this issue held as follows: "Thus, having regard to the ratio laid down in the above cases that in the absence of proof in support of the services rendered by the commission agent, no commission can be allowed as a deduction. Therefore, we dismiss the appeal filed by the assessee and allow the appeals filed by the revenue". 14. In the present case, the learned CIT(A) had not examined any evidence to show that the agents have actually rendered their services. The l ..... X X X X Extracts X X X X X X X X Extracts X X X X
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