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TMI Blog2015 (10) TMI 2607X X X X Extracts X X X X X X X X Extracts X X X X ..... That on the facts and circumstances of the case and in law, the TPO/AO/DRP has erred in making an adjustment of Rs. 68,906,377 to the income of the appellant and in holding that the transactions between the appellant and its associated enterprises were not at an arm's length price as defined under section 92F(ii) of the Act. 2.3 That on the facts and circumstances of the case and in law, the TPO/AO/DRP has erred in making an addition to the income of the appellant by concluding that the appellant should have been compensated for its marketing efforts in India. 2.4 That on the facts and circumstances of the case and in law, the TPO/AO/DRP has erred in not appreciating that the appellant undertakes marketing activities to increase its own business sales in India and all marketing activities in relation to its distribution business are undertaken by the appellant for its own purpose and not for the direct benefit of or on behalf of any associated enterprise. 2.5 The learned TPO/AO/ORP has erred in law and on facts, by disregarding the material placed on record, and by concluding that the AMP expenses are incurred by the appellant under an arrangement with associated enterprise ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g depreciation in accordance with the provisions of the Act. 4. ROYALTY 4.1 That on the facts and circumstances of the case and in law, the AO/ DRP has erred in disallowing Rs. 649,655 by treating 25% of the royalty paid during the year as capital expenditure. 4.2 Without prejudice to the above, on the facts and circumstances of the case and in law, the AO/ DRP has erred in not allowing depreciation on the amount of royalty treated as capital expenditure. 5. PROVISION FOR DOUBTFUL DEBTS AND DOUBTFUL ADVANCES 5.1 That on the facts and circumstances of the case and in law, the AO/ DRP has erred in adding back Rs. 12,424,949 on account of provision for doubtful debts and doubtful advances written back during the year and credited to the profit and loss account and not appreciating that such amount had not been claimed as deduction in the year in which such provisions were created. 5.2 That on the facts and circumstances of the case and in law, the AO/ DRP has erred in holding that appellant did not furnish the details of nature of such provisions written back. 6. DISALLOWANCE OF TECHNICAL FEES 6.1 That on the facts and circumstances of the case and in law, the AO/ DRP has erre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income in respect of each item of disallowance/addition and in initiating penalty proceedings under section 271(1)(c ) of the Act." Ground No.2 3. Apropos ground no.2 pertaining to transfer pricing adjustment on account of AMP expenses incurred by the assessee during the relevant financial period, we have heard arguments of both the sides and carefully perused the relevant material placed on record, inter alia written synopsis filed by the assessee and other comparative charts and all three paper books of the assessee. 4. Ld. Counsel of the assessee submitted that the assessee is engaged in the business of purchase and resale of Daikin products in India and during the relevant assessment year, the assessee imported finished goods from DIL and end users in India. Ld. Counsel also pointed out that besides the main activity of purchase of Daikin products for the purpose of resale, the assessee also rendered market support service to DIL. Ld. Counsel has specifically drawn our attention to this fact that the assessee acts an independent distributor and marketer and distributes Daikin products on principal to principal basis. Since the assessee undertakes normal risks including marke ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Replying to the above, ld. DR submitted that since the assessee is engaged in the business of purchase and sale of compressor and air-conditioner parts from other associated enterprises , therefore, the issue of AMP attracts ratio o the decision in the case of Toshiba India Pvt. Ltd. vs DCIT reported as TS-226- ITAT-2015(Del). Ld. DR also pointed out that if the functions performed by the assessee are different from those performed by a comparable company, then an adjustment is required to be made so as to bring the AMP functions performed by the assessee as well as the comparable on the same pedestal. 9. On careful consideration of above submissions of both the sides, we note that in the instant case, no detail of AMP function performed by the assessee is available on record. At the same time, we further note that there is no reference in the order of the TPO to only AMP functions performed by comparables. In view of above, no such analysis or comparison has been made or undertaken by the TPO because of applying the bright line test for determining the value of the international transaction of AMP expenses and then applying cost + method for determining its ALP. In the present c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... also submitted a copy of the rectification order of the DRP dated 12.3.2013 for AY 2008-09 and submitted that the DRP following its order for AY 2007-08 dated 9.8.2011 had decided the matter of allowing of depreciation on plant and machinery in favour of the assessee. Replying to the above, ld. DR submitted that the AO disallowed depreciation on plant and machinery rightly alleging that under block of assets, concept, uses of asset is a fundamental requirement to claim depreciation and no manufacturing activities were carried out by the assessee during the relevant financial period and therefore no depreciation should be allowed. Ld. DR further contended that the DRP upheld the disallowance since no manufacturing activity had taken place and plant and machinery cannot be said to have been used for the purpose of manufacturing activity. However, ld. DR fairly accepted that on the similar set of facts and circumstances, the DRP-I, New Delhi in assessee's own case for AY 2008-09 has allowed the claim of depreciation on plant and machinery of the assessee following its own order for AY 2007-08 (supra). 11. On careful consideration of above submissions of both the sides, we note that I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... swal Agro Mills Ltd. (2012) 341 ITR 467, it was held that assets forming part of block of asset attracts depreciation of entire block of assets even if not used in the relevant financial year. In this case, undisputedly, DRP allowed depreciation of plant and machinery for AY 2007-08, however, the AO did not give effect to this order. In the second appal before the ITAT, the issue was decided in favour of the assessee by Tribunal order dated 31.7.2013 (supra), We further note that for AY 2008-09, the DRP allowed depreciation on plant and machinery during the course of rectification proceedings vide order dated 12.3.13 and for AY 2009-10, the AO himself accepted and allowed depreciation in the assessment order passed u/s 143(3) of the Act dated 28.2.2014. In view of above, depreciation on plant and machinery should be allowed to the assessee for AY 2006-07 and thus, ground no. 3 of the assessee is allowed and the AO is directed to allow the depreciation. Ground No.4 13. Apropos ground no.4, we have heard arguments of both the sides and carefully perused the relevant material placed on record. Ld. Counsel of the assessee submitted that the assessee claimed deduction for royalty paym ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... company any manufacturing information, licences, rights for any one of the scheduled products in India, thus conferring an exclusive benefit on the respondent company to manufacture and sell the scheduled products under a stamp embossed as "Manufactured under Licence from Brush Electrical Engineering Company Limited of England". Ld. Counsel also pointed out that in the case of Southern Switchgear (supra), technical aid and information remained with the licensee even after the agreement was terminated which is not the factual position in the present case because as per TCA Article 11 the royalty shall be payable from the date of commencement of commercial production @4% of licensees net ex factory price for all sales of licensed products including export. Ld. Counsel pointed out that when the payment of royalty is related to the ex factory sale price of licensed products including exports, then it cannot be treated as capital expenditure of enduring benefit and the same should be treated as revenue expenditure. 15. Replying to the above, ld. DR strongly supported the draft assessment order, the DRP order and the impugned assessment order and submitted that the assessee has claimed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... payable from the date of commencement of commercial production of LICENSED PRODUCTS. (b) The term "Net Ex-Factory Sale Price" shall mean, Ex- Factory sale price, 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, customs duties. For the purpose of this Agreement, "Standard Bought Out Components" are those which are separately agreed between DAIKIN and LICENSEE. 11.3 The above-mentioned royalty shall be payable for ten (10) year period from EFFECTIVE DATE or for seven (7) year period from the commencement of commercial production of the LICENSED PRODUCTS by LICENSEE, whichever expires earlier, in accordance with current Government of India policy. This period may be extended should the policy of the Government of India change .during the currency of this Agreement and/or in the event the parties hereto agree for extension 'of this Agreement in writing subject to obtaining relevant Government of India approvals. 11.4. Except as otherwise provided for herein, the sale of LICENSED PRODUCTS shall be deemed to have been made when d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... T vs Hero Honda Motors Ltd. 372 ITR 481 (Del) and submitted that the payment of royalty to a foreign company being merely acquiring rights to use technical knowhow whereas ownership of intellectual property rights in knowhow remained with the foreign company, the payment in question was to be allowed as business expenditure. In this case, the assessee Hero Honda Motors Ltd. entered into a joint venture agreement with Honda Japan for manufacture and sale of motorcycle using technology licenced by Honda. The assessee and Honda Japan entered into an agreement called 'licence and technical assistance agrement' in terms which assessee paid royalty to Honda. The assessee claimed deduction of said payment u/s 37(1) of the Act whereas the assessee rejected the same by holding that it was in the nature of capital expenditure. The Tribunal, however, allowed assessee's claim. The Hon'ble High Court considered the substantial question of law that whether the income tax appeal the Tribunal was right in holding that payment made to Honda Japan under the know how agreement dated 2.6.1995 is revenue expense and not partly or wholly capital expenses. Speaking for Hon'ble Jurisdictional High Court, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... echnical upgradation and state-of-the-art know-how is injected every year in the automobile industry. Failure to keep up and upgrade would result in product rejection and fall in sales. Persistent upgradation and cutting edge technology is mandate and business requirement in the competitive market of two/three wheelers. 17. Model fee, subject matter of appeal pertaining to assessment year 2001-02 is merely Rs. 4.09 lakhs and the said issue is not raised in other years. Royalty on the other hand is substantive and payment made in the assessment year 2001-02 was Rs. 17.88 crores. The said royalty paid to Honda, if paid for right to use of technical knowhow and intellectual property right, would possibly be taxed in India in terms of the Double Taxation Avoidance Agreement between India and Japan. But the said payment might not be taxable in India if it is held that there was absolute and complete transfer of ownership in the intellectual property right by Honda to the Indian assessee in absence of a Permanent Establishment (See Articles 7 and 12 of the Double Taxation Avoidance Agreement between India and Japan). 18. In the appeal for the assessment year 2000-01, Revenue has also c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2-03 is quashed. Since we have quashed the 263 order passed by CIT, subsequent proceedings i.e. AO‟s and CIT(A)‟s consequential orders thereon are also quashed." A reading of the aforesaid reasoning clearly elucidates that the Tribunal has held that payments made by respondent to Honda were revenue expenditure and not capital. On the said finding on merit, the Tribunal observed that there was no error in the order passed by the Assessing Officer. Power under Section 263 can be invoked by the Commissioner only when the order passed by the Assessing Officer is erroneous and not otherwise. It is in these circumstances, that no specific question of law with reference to power under Section 263 of the Act, has been framed in the appeal relating to assessment year 2001-02. 21. In view of the aforesaid discussion, the substantial questions of law are answered in favour of the respondent assessee and against the appellant Revenue. 19. Accordingly, we hold that the AO/DRP was not right in making disallowance in regard to the payment of royalty made by the assessee under TCA and the payment of royalty should be allowed as a revenue allowance/expenditure. However, we may point ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncome, the write back of such provision ought to be allowable as deduction. 22. On careful consideration of above submissions, at the very outset, we note that in the final assessment order para 6 at page 6, we note that the AO has decided the issue against the assessee by simply observing that no documentary evidence in support of its contention has been filed by the assessee along with letter dated 9.12.09 and the assessee has not furnished the nature of advances written back as to whether they are of capital or revenue in nature. Subsequently, the AO proceeded to make impugned disallowance by observing that in the absence of any clarification claim of the assessee is disallowed and added to the income of the assessee company. During the argument, ld. Counsel of the assessee has drawn our attention towards page no. 354 of assessee's paper book Volume II and submitted that in the computation of taxable income, the assessee added provision for doubtful debts to the taxable income of the assessee as per Note no. 1 to the Notes of accounts, therefore, when consistently, the assessee has not claimed provisions for doubtful debts and doubtful advances, then when the amount is reverse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e AO's stand and contentions and held that the treatment of technical fees as capital expenditure is based on concrete arguments and facts. Finally, the AO, following the directions of the DRP disallowed the entire amount of technical fee paid by the assessee to DIL during AY 2006-07. 24. Ld. Counsel of the assessee submitted that the Tribunal, in assessee's own case for AY 2005-06, order dated 30.11.12 has allowed the deduction of technical fees expenditure, therefore, the issue is squarely covered in favour of the assessee by the order of the Tribunal. Ld. counsel further pointed out that there is no creation or acquisition of capital asset by the assessee by making payment of technical fee to DIL and there is no acquisition of any tangible or intangible asset by the assessee as against the said payment. Ld. Counsel further pointed out that technical fee paid to DIL is incurred exclusively for the purpose of business and accordingly the assessee claimed such payment as revenue expenditure. Ld. counsel also pointed out that the assessee merely acquired licences to use technology and technical assistance from DIL to manufacture, assemble, distribute and sell specified licensed pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y it exclusively through Daikin to outside the territory. Article 4 of the agreement further imposed restriction on the licensee in regard to use of sub-contractors and suppliers. For this purpose licensee was required to obtain advance written approval from Daikin. As per article 5 sub licensing of the agreement by licensee was permissible only with the prior written consent of Daikin. As per article 11.3 the period of agreement was for 10 years from the effective date or for 7 years from the commencement of commercial production of the license products by the licensee. Thus, it was not an agreement in perpetuity. Article 14.3 had put restriction on improvement of license products by licensee. This article reads as under: - 14.3 "Improvements in any items of LICENSED PRODUCTS which LICENSEE wishes to put into production shall be subject to a prior written approval of DAIKIN. Any improvements made by LICENSEE in respect of DAIKIN TECHNOLOGY as provided herein shall be licensed back/grantback perpetually to DAIKIN by LICENSEE with the right of sublicensing and without payment of any fees or costs by DAIKIN, any may be used by DAIKIN in its own production of DAIKIN products in Japa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... acturing but it did not essentially formed part of the revenue earning apparatus viz. plant and machinery of assessee. The expenditure incurred for acquiring technology which becomes part and parcel of revenue earning apparatus can only be said to be in capital field but where the technology only facilitated in improving the manufacturing process, it could not be said to be part and parcel of capital structure of company. We find that this issue is squarely covered by the decision of Hon'ble Jurisdictional High Court in the case of JK Synthetics (supra), wherein Hon'ble Delhi High Court has, inter-alia held as under: - "(v) expenditure incurred for grant of License which accords 'access' to technical knowledge, as against,' absolute' transfer of technical knowledge and information would ordinarily be treated as revenue expenditure. In order to sift, in a manner of speaking, the grain from the chaff, one would have to closely look at the attendant circumstances, such as............." 26. Similarly, we find that this issue is also covered by the decision of Hon'ble Jurisdictional High Court in CIT vs. Goodyear India Ltd., 243 ITR 235 (supra), wherein it has been held that consider ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of custom duty paid amounting to Rs. 56,76,403 and Rs. 10,85,317 was received by the assessee in FY 2009-10 and 2010-11. In the draft assessment order, the AO made addition on this amount by observing that the assessee has not furnished in reply on this issue and in absence of any submission or documentary evidence it is presumed that the assessee has nothing to say in this regard and therefore, amount of refund totalling to Rs. 67,61,720 was treated as income of the assessee for the year under consideration. Subsequently, DRP upheld the AO's contention and declined to interfere with the draft assessment order. In the final assessment order, the AO following the DRP directions treated the refund of custom duty as income of the assessee. 29. Ld. Counsel of the assessee submitted that during the relevant financial period, the assessee paid amount of custom duty which is appearing in Schedule 'F' to the audited balance sheet under the head 'balance with central excise authorities'. The assessee's paper book Volume I page 330 wherein amount of Rs. 2,00,00767 has been shown in Schedule 'F' current assets, loans and advances. Ld. Counsel also pointed out that group in central excise aut ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... while computing tax payable on assessed income as against advance tax deposited/taxes deducted at source aggregating to Rs. 24,484,513, thus granting a short credit of Rs. 2,250,417. Ld. DR contended that the issue is pertaining to the verification of credit for advance tax deposited/tax deducted at source and the same may be sent to the AO for re-calculation and verification. Accordingly, ground no. 8 of the assessee is allowed by directing the AO to give credit against the advance tax deposited/tax deducted at source during the relevant financial period. Accordingly, ground no. 8 of the assessee is deemed to be allowed for statistical purposes. Ground no. 9 32. This ground pertaining to the allegation of the assessee regarding penalty for concealment of income. On careful consideration of submissions of both the sides we observe that ground no. 9 of the assessee being premature pertaining to the issue of penalty for concealment of income requires no adjudication at this end and the same is dismissed being premature. 33. In the result, the appeal of the assessee is partly allowed on corporate issue of royalty and technical fee and deemed to be partly allowed for statistical pur ..... X X X X Extracts X X X X X X X X Extracts X X X X
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