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TMI Blog2017 (5) TMI 1639X X X X Extracts X X X X X X X X Extracts X X X X ..... pt under Explanation (baa) of Section 80HHC of the Act. Additional depreciation - Held that:- In the present case, it appears that inadvertently the assessee could not make the claim for additional depreciation before the AO but in the appellate proceedings before the ld. CIT(A) the assessee made the claim and furnished the additional evidences in support of its claim. It is well settled that the powers of the ld. CIT(A) are coterminous with the powers of the AO, therefore, considering the totality of the facts, we are of the view that the CIT(A) rightly directed the AO to examine the claim of the assessee and allow after verification. We do not see any valid ground to interfere with the findings of the ld. CIT(A). Addition on account of Arm s Length Price - Disallowance under wrong section - addition on the grounds that the payment of royalty is not wholly and exclusively for business purposes and has been made u/s 92C(4) read with section 92CA(4) - Held that:- The assessee derived benefit under the royalty agreement and it was accepted by the AO for the assessment year 2002-03. However, the only dispute raised by the AO in the said assessment year was as to whether the royalty pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to allow the claim of the assessee on account of additional depreciation amounting to ₹ 20,61,050/- ignoring that documentary evidence in support of the asessee's claim for additional depreciation u/s 32(iia) of the I.T. Act is not available on record. Further, the assessee also failed to file the audit report even before the completion of the assessment. 4. The Ld. CIT(A) has erred on facts and in law in deleting addition of ₹ 1,57,35,495/- on account of Arm's Length Price u/s 90CA(3) ignoring the fact that each international transaction must be benchmarked separately. The approach of amalgamating transactions should be followed only where the transaction are closely interlinked. The TPO has brought out that in the assessee's arrangement with its AE, the rewards of the marketing and fruits of intangible would be enjoyed by the AE. Hence, the assessee need not make a payment for the same. Ld. CIT(A) has erred in ignoring this fact. 5. The appellant craves leave for reserving the right to amend, modify, alter, add or forego any grounds of appeal at any time." 3. Vide Ground No. 1, the grievance of the department relates to the inclusion of the DEPB receipt amountin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 7. Now the department is in appeal. The ld. DR strongly supported the order of the AO and also filed the written submission which read as under: "The AO has held that since the assessee failed to furnish any evidence that the rate of Duty Drawback was higher than the rate of DEPB as per the amended provision (3rd proviso of Section 80HHC read with 28(iiid)) hence the amount of DEPB of ₹ 1,27,73,524/- shall not be included in 90% of the amount to be added to "profits of business". The assessee submitted before the CIT(A) that only the profit component on the sale of DEPB License was needed to be included for the computation of deduction u/s 80HHC and not the face value and since in this case there was a loss hence the entire amount needed to be excluded. The Ld. CIT(A) has directed the AO to exclude the DEPB receipt amounting to ₹ 1,27,73,524/- for the calculation of deduction u/s 80HHC (third proviso). The Ld. CIT(A) accepted the contention of the assessee without examining the actual profit component or loss. This computation, along with evidence, has not been submitted by the assessee either before the AO or before the CIT(A). No such details are available in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n Exports v. CIT [2012] 18 taxmann.com 120 (SC) Hon'ble Apex Court upheld the order passed by Special Bench of the Tribunal (Mumbai) and the crux of the findings returned is as under for ready reference: "The aforesaid discussion would show that where an assessee has an export turnover exceeding ₹ 10 crores and has made profits on transfer of DEPB under. clause (iiid) of section 28, he would not get the benefit of addition to export profits under third or fourth proviso to sub-section (3) of section 80HHC but he would get the benefit of exclusion of a smaller figure from 'profits of the business' under Explanation (baa) to section 80HHC and there is nothing in Explanation (baa) to section 80HFic to show that this benefit of exclusion of a smaller figure from 'profits of the business' will not be available to an assessee having an export turnover exceeding ₹ 10 crores in other words, where the export turnover of an assessee exceeds ₹ 10 crores, he does not get the benefit of addition of ninety per cent of export incentive under clause (iiid) of section 28 to his export profits, but he gets a higher figure of profits of the business, which ultimately results in co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iled to furnish the requisite evidence to prove that he rate of duty drawback was higher than the rate of DEPB. 7.5 However, Ld. A.R. contended that the assessee has claimed the addition under 3rd proviso to Section 80HHC(3) at ₹ 6,61,653/- i.e. 90% of ₹ 7,35,170/-. Ld. A.R. further contended that 3rd and 4th proviso to section 80HHC(3)(c) operate only prospectively and relied upon the judgement cited as Pawan Kumar Jain v. Union of India [2014] 46 taxmann.com 341 (Delhi). 7.6 The Assessing Officer denied the benefits claimed by the assessee by invoking provisions under Section 80HHC and Section 28(iiid) w.r.e.f Assessment Year 1998-99 with retrospective effect according to which any profits on transfer of DEPB scheme deem duty addition scheme under export and import policy shall be charged under the head 'profits & gains from the business or profession' with further consideration that as per 3rd proviso to Section 80HHC, assessee having export turnover up to ₹ 10 crores will get deduction of 90% of export incentive on account of transfer of profits on account of DEPB license. However, the assessee having export turnover exceeding 10 crores will get this deduc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot excluded from the computation of deduction. No reply has been filed in this regard, it may be pertinent to refer to the assessment and appellate proceedings in the case of the assessee for A.Y. 2001-02 in order to arrive at a conclusion regarding the treatment of these receipts. During the aforesaid proceedings it was stated by the assessee that the consideration on account of such sales did not have an element of profit, being in the nature of reimbursement of expenses. Also as per the provisions of explanation (baa) of section 80HHC, for computing profits of business", 90% of sums referred to in clauses (iiia) to (iiie) of section 28 or of any receipts by way of brokerage, commission, interest, rent, charges or any other receipt of a similar nature included in such profits have to be deducted from profits and gains of business or profession. I therefore hold the receipts of ₹ 96,13,655/- as receipts of similar nature included in "such profits" referred to in explanation (baa), in this regard, reliance is placed on the decision of Hon'ble ITAT, Delhi in the case of Beekay Engineering & Castings Ltd. Vs Joint Commissioner of income Tax in IT Appeal No. 4961 (Delhi) of 2000 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he purpose of excluding receipts like interest, Commission, other receipt etc. from the ambit of the profits of the business is to exclude such receipts which do not have an element of turnover. Whereas in the case of appellant the development of sample designs is core business activity regularly carried on by the appellant; the proceeds from the export of sample designs satisfy the test of 'Export Turnover' laid down in clause (b) to Explanation to Section 80HHC. Further the proceeds from export of sample designs have been upheld to be 'Export Turnover' by the Hon'ble ITAT in the case of assesses during AY 01-02 (copy of the order of ITAT is enclosed for your reference Attachment 3). It may also be noted that amounts received from overseas customers towards 'Sample design and Development 'is export turnover it is also evident from the fact that the appellant has received Duty Drawback on the same. Therefore, one cannot say that the export of sample designs by the appellant is not an integral part of the business carried on by the appellant. Hence the profits reported by the appellant under the head Profits and Gains from Business including sale proceeds of sample designs forms ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) * Asstt. CIT v. Herbal Isolates (P.) Ltd. [2002] 83 ITD 310 (Cochin) 15. The ld. CIT(A) after considering the submissions of the assessee held that the reimbursement of sample design and development charges constitute export turnover of the business and hence represent business income of the assessee, the same could not be included as other receipt under Explanation (baa) to Section 80HHC of the Act. 16. Now the department is in appeal. The ld. DR submitted that the AO had reduced 90% of ₹ 96,13,655/- which the assessee had shown receipt on account of "sample design and development charges", as per the provisions of Explanation (baa) of Section 80HHC of the Act. It was further submitted that the assessee had not claimed before the AO that the aforesaid receipt was not to be excluded as other receipts under Explanation (baa) of Section 80HHC of the Act and that the ld. CIT(A) failed to confront the AO with the above submission of the assessee. 17. In her rival submissions the ld. Counsel for the assessee at the very outset stated that this issue is fully covered in favour of the assessee vide order dated 31.03.2007 in ITA No. 1260/Del/2005 for the assessment year 2001-0 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which is the numerator in the formula prescribed by the section, it cannot be said that the assessee exported samples, since sending samples is a means to procure export orders. The same goes for the design and sample charges. However, since the assessee has not been able to prove that there is no profit element imbedded in the receipt and we have on the ground held that the receipt is includible as part of the total turnover, it will be inconsistent to hold that the receipt cannot be included in the export turnover. For this reason - for the sake of consistency alone - it is held that the alternative claim of the assessee can be allowed. We hold accordingly and direct the Assessing Officer to recompute the deduction. Thus ground No. 5 is rejected, but Ground No.6 is allowed. " 19. So, respectfully following the aforesaid referred to order of the ITAT, we do not see any infirmity in the order of the ld. CIT(A) who rightly held that the receipts on account of sample design and development charges are export turnover and represents the business income of the assessee and thus, cannot be excluded as the receipt under Explanation (baa) of Section 80HHC of the Act. 20. The next issue ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s an additional evidence for claim of additional depreciation u/s 32(l)(iia) filed with your goodself vide letter dt. 26.10.2006." 23. Reliance was placed on the following case laws: * CIT v. Magnum Exports (P.) Ltd. [2003] 262 ITR 10/130 Taxman 702 (Cal.) * CIT v. Jayant Patel [2001] 117 Taxman 707/248 ITR 199 (Mad.) * CIT v. Shahzadanand Charity Trust [1998] 96 Taxman 494/[1997] 228 ITR 292 (Punj. & Har.) * CIT v. Hardeodas Agarwalla Trust [1992] 198 ITR 511 (Cal.) 24. The ld. CIT(A) after considering the submissions of the assessee asked the remand report from the AO and after considering the submissions of the assessee and the remand report of the AO, observed that the assessee had inadvertently not filed the evidence to claim additional depreciation u/s 32(iia) of the Act alongwith the return of income. He, therefore, accepted the addition evidence during the appellate proceedings and directed the AO to inquire the claim of the assessee and made necessary modification, if any. 25. Now the department is in appeal. The ld. DR submitted that this claim for additional depreciation was not made by the assessee to the AO, therefore, additional depreciation was not allowab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he TPO for determination of Arm's Length Price. 30. The TPO noticed that the assessee had undertaken following international transactions with its groups companies: S. No. Description of transaction Method Value (in Rs.) 1 Garments made ups CPM 35,10,62,665 2 Receipts Charges for samples provided for various styles TNMM 95,80,428 3 Payment of royalty CUP 1,57,35,495 The assessee benchmarked its major international transaction of sale of garments using cost plus method and had earned gross profit of 19% as calculated in Annexure B of Transfer Pricing Report whereas the comparables had earned 12% to 16% as per Annexure C of Transfer Pricing Report. The assessee treated the transaction at Arm's Length Price on the basis that it had earned better net margins as compared to the comparables. The TPO noticed that during the relevant year PRC had entered into an agreement with the assessee for licensing its designs and as per the agreement, the assessee will be entitled to the following: "(a) to manufacture, distribute or sell products from designs created by PRC. (b) to manufacture, distribute or sell products reproduced from designs prepared by the assessee compan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... designs and its production technology was being provided by the AE to ensure that the quality of goods which will be supplied by the assessee company after its production should match to the requirements of the AE so that it does not suffer any risk in selling them in the competitive market and that in an arrangement, where the reward of the marketing was enjoyed by the AE and similarly the fruits of intangibles such as logo are being plucked by the other party, the contract manufacturer cannot have been load with the expenses of those items. According to him, the contract manufacture should be more concerned about markup on the cost of manufacturing of the products being manufactured on behalf of the other party. The TPO referred to the guidelines of OECD in respect of exploitation of intangibles and stated that these guidelines are very useful in determination of price and benefits to the respective parties to the agreement of authorizing the use of intangibles. The said guidelines read as under: "6.14 Arm's length pricing for intangible property must take into account for the purposes of comparability the perspective of both the transferor of the property and the transferee. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in countries that impose royalty withholding taxes." 34. The TPO pointed out that the assessee company was making its total sales to the related parties and the benefit of producing quality of garments was reaped by overseas entity, the payment of charges for royalty or technical know-how did not confirm to arm's length principle. The payment of royalty/technical know-how to the extent of ₹ 1,57,35,495/- in an international transaction was treated to be a payments against services having arm's length value at Nil. 35. The AO on the basis of recommendation of the TPO made the addition of ₹ 1,57,35,495/- in the hands of the assessee by observing in para 4.3 of the assessment order dated 28.03.2006 which read as under: "4.3 Vide order sheet entry dated 17.03.2006, the assessee was shown a copy of the order of the TPO which anyway the A.R. of the assessee acknowledged having received already, it was asked to show cause as to why the amount of ₹ 1,57,35,495/- being shown as royalty paid be not disallowed and added back to the income of the assessee u/s 92CA (4) read with 92C(4). It was further required to show cause as to why, without prejudice to the order of TPO, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly and exclusively for business purposes. In reaching the above conclusion, the AO has disregarded the findings of his predecessor who has not only concluded that the payment of Royalty has been made wholly and exclusively for business purposes but has also agreed to the quantum of royalty. For the year ended March 31, 2002, the payment of Royalty was considered a payment laid out wholly and exclusively for the business purposes and the amount paid was considered well within the ALP. These findings were recorded in the order passed by the AO under section 143(3) of the IT Act. Subsequently, the AO issued a notice under section 148 and after hearing the matter, concluded that the Royalty paid was a capital expenditure and not a revenue expenditure. The CIT(A) - VI, New Delhi heard the appeal and held that the Royalty was a revenue expenditure and was expended wholly and exclusively for the purposes for the business of the assessee. A copy of the order is attached for your perusal (attachment -2). Further, the AO has not respected the established judicial principle that the business expediency of a particular payment has to be judged by the assessee and not by the AO. Further t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l be applied, for determination of arm's length price, in the manner as may be prescribed: [Provided that where more than one price is determined by the most appropriate method, the arm's length price shall be taken to be the arithmetical mean of such prices, or, at the option of the assessee, a price which may vary from the arithmetical mean by an amount not exceeding five per cent of such arithmetical mean.] (3) Where during the course of any proceeding for the assessment of income, the Assessing Officer is, on the basis of material or information or document in his possession, of the opinion that- (a) the price charged or paid in an international transaction has not been determined in accordance with sub-sections (1) and (2); or (b) any information and document relating to an international transaction have not been kept and maintained by the assessee in accordance with the provisions contained in sub-section (1) of section 92D and the rules made in this behalf; or (c) the information or data used in computation of the arm's length price is not reliable or correct; or (d) the assessee has failed to furnish, within the specified time, any information or document which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... v. DCIT. A copy of the case is attached for your ready reference. D. The TPO has erred in holding that the appellant is a Contract Manufacturer The TPO in his order has held the appellant to be a contract manufacturer. In arriving at this conclusion, the TPO has grossly erred in appreciating the functional profile of the appellant. In this connection it is stated that the appellant is a full fledged, risk bearing manufacturer and is not a limited risk contract manufacturer. In support of this contention, the following points are submitted: 1. For the purposes of establishing the ALP of the export of garments, the appellant has compared itself with full fledged and risk bearing manufacturers, a comparison which has been accepted by the TPO. Hence the TPO has himself acknowledged that for the purposes of manufacture of garments, the appellant is a full fledged manufacturer and is not a contract manufacturer; 2. According to the Her Majesty's Revenue and Customs (HMRC) Transfer Pricing Manual para 465060, a contract manufacturer is the first step away from a licensed manufacturer. It still owns plant & machinery and employs a skilled labour force, but instead of making goods, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uly 2010 outlines the relationship between the contract manufacturer and the principal by way of an example. Suppose now that a principal hires a contract manufacturer to manufacture products on its behalf, using technology that belongs to the principal. Assume that the arrangement between the parties is that the principal guarantees to the contract manufacturer that it will purchase 100% of the products that the latter will manufacture according to technical specifications and designs provided by the principal and following a production plan that sets the volumes and timing of product delivery, while the contract manufacturer is allocated a guaranteed remuneration irrespective of whether and if so at what price the principal is able to re-sell the products on the market. Although the day-to-day manufacturing would be carried on by the personnel of the contract manufacturer, the principal would be expected to make a number of relevant decisions in order to control its market and inventory risk, such as: a. the decision to hire (or terminate the contract with) that particular contract manufacturer, b. the decision of the type of products that should be manufactured, including th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e associated enterprise itself-complies with the arm's length standard when the taxpayer is not a contract manufacturer and the royalty payment is recovered from the associated enterprise as part of the selling price. ACIT v. Sona Okegawa Precision Forging Ltd. [2010-TII-41-ITAT-DEL-TP] The case is briefly explained in the paragraphs below: Background During Financial Year 2003-04, the taxpayer paid a royalty to its associated enterprise, and the royalty payment was benchmarked under the Comparable Uncontrolled Price (CUP) method-by relying on the ceiling under the Foreign Exchange Management Regulations- as the arm's length price. During the course of transfer pricing assessment proceedings, the Transfer Pricing Officer proposed a transfer pricing adjustment in relation to the royalty transaction, based on the following: • The taxpayer had not entered into an agreement for the payment of a royalty to any independent third party; hence, there was no comparable uncontrolled data. • The royalty was paid on total sales of the taxpayer, including sales made to the associated enterprise, and a royalty paid to an associated enterprise computed on the basis of sales ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ricing documentation for financial year (FY) 2003-04, the taxpayer had stated that the raw material imported from the associated enterprise was not available from any other supplier and, hence, it was difficult to ascertain an arm's length price for this transaction. In relation to the transaction for payment of the royalty and technical know-how, it was asserted that because the payments were made in accordance with agreements approved by regulatory agencies, the question of arm's length compliance did not arise. Additionally, before the Transfer Pricing Officer, the taxpayer compared the gross profitability of its associated enterprise and of non-associated enterprise operations for demonstrating compliance with the arm's length standard. The Transfer Pricing Officer rejected the arm's length analysis of the taxpayer, based on the following observations: • The arm's length price of the international transactions for the payment of royalty and technical know-how fees was "nil" because no transfer of technology had taken place, and these payments are already bundled in price of the raw material imported from the associated enterprise. The taxpayer appealed to the Commi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y was recovered by the taxpayer from the associated enterprise as a part of the sale price; thus, the transaction was revenue neutral." In view of the above, the addition made by the AO was deleted. 38. Now the department is in appeal. The ld. DR strongly supported the order of the AO and reiterated the observation made in the assessment order dated 28.03.2006. He further submitted that the ld. CIT(A) effectively held that the international transactions can be benchmarked at entity level and there is no requirement of benchmarking each of the international transaction separately which is against the specific provision of the Income Tax Act. It was also submitted that each international transaction is needed to be benchmarked separately unless these are inextricably linked. The reliance was placed on the judgment of the Hon'ble Punjab & Haryana High Court in the case of Knorr Bremse India (P.) Ltd. v. Asstt. CIT [2015] 63 taxmann.com 186/[2016] 236 Taxman 318/380 ITR 307. It was further submitted that the decision of the ITAT Delhi Bench relied by the ld. CIT(A) is not applicable to the facts of the present case because in the said case bulk of goods were sold to independent parti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f royalty expenses was established while benchmarking international transaction of export of sales. It was stated that the royalty agreement was effective from 02.04.2001 and the TPO had accepted in assessment year 2002-03 that the assessee was a full fledged risk bearing manufacturer and entitled to pay royalty to AEs. A reference was made to page nos. 146 & 147 of the assessee's paper book. It was further stated that the functional, and risk profile of the assessee remain the same in the assessment year under consideration as was in the preceding year, therefore, treating the assessee as contract manufacturer in the year under consideration, despite same underlying facts amounts to taking inconsistent stand by the TPO year on year. The reliance was placed on the following case laws: * Radhasoami Satsang v. CIT [1992] 193 ITR 321/60 Taxman 248 (SC) * Hoystead v. CIT [1926] AC 155 (PC) * Parashuram Pottery Works Co. Ltd. v. ITO [1977] 106 ITR 1 (SC) * CIT v. Excel Industries Ltd. [2013] 358 ITR 295 (SC) * CIT v. Dalmia Promoters Developers (P.) Ltd. [2006] 151 Taxman 202/281 ITR 346 (Delhi) 40. It was contended that the agreement with PRC, USA was for licensing of techni ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... c. It was contended that the design and technical know-how was being provided under the technical know-how and trade name licensing agreement. Therefore, the TPO was factually incorrect in inferring that since the assessee was contract manufacturer, therefore, it was being provided with this guidance and was required to adhere to basic quality parameters under the licensing agreement so that trade name of licensor was not damaged which was present in every technical assistance and trade name licensing agreement done in the open market conditions. It was stated that the TPO was factually incorrect in stating that all the sales were to the AEs, particularly when, the assessee had exported to non AEs as well. It was also stated that the assessee purchased raw material and semi-finished goods from third parties on its own behalf and not on behalf of AEs, with whom the assessee transacted on principal to Principal basis in open market conditions, so it was free to manufacture and sell to outside world as there was no restriction and the assessee in fact had sold to third parties during the year, which had increased substantially in subsequent years. It was submitted that the assessee wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e goods are made for principal and that the contract manufacturer has none of the risks associated with holding finished goods, or selling those goods and the principal will guarantee to buy all the goods manufactured, provided it meets a specified quality and quantity, but in the assessee's case none of the characteristics of contract manufacturer were present. It was further submitted that the TPO acknowledged in the assessment year 2002-03 that the benefit was derived under the "technical assistance, trademark and royalty agreement" which was effect from 02.04.2001 and even the AO accepted that the assessee had derived benefit under the royalty agreement and only dispute was raised whether it was capital expenditure or revenue expenditure. It was stated that the benefit derived under the agreement was proved before the TPO by explaining the Royalty Agreement, the necessity of obtaining designs and business practice in which the assessee operated. It was further stated that technical know-how assistance and designs received under the agreement was backbone of assessee's production & sale and under the licensing agreement, the assessee had also got right to use on its finished pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rporation (PRC), USA under "Technical Assistance, Trade-Mark and Royalty Garments" for use of technical know-how, designs, logos, trade names, and trade-marks. The royalty was paid @ 5% on net sale of products manufactured with the technical assistance of PRC, USA. The royalty agreement was effective from 02.04.2001 and for the assessment year 2002-03, the royalty payment was accepted by the TPO at arm's length. However, the AO considered that the royalty was a capital expenditure and not the revenue expenditure. Being aggrieved the assessee carried the matter to the ITAT in ITA No.4739/Del/2010 wherein vide order dated 30.03.2016 it has been held as under: "8. Ground No. 2: The assessee has debited sum of ₹ 1,26,58,195/- on account of royalty payment, which has been disallowed by the Assessing Officer on the ground that the said amount is capital in nature as the assessee in its reply has himself used the words "product from the design and know-how". Ld. A.R. contended that the royalty payment has been made only for the purpose of running the business being an integral part of the profits earning process and not for acquiring an asset / enduring advantage. 8.1 To decide th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the royalty payment to manufacture/sell products designed by licensor and also used its name, the label and the mark and has also availed technical assistance having limited right during subsistence of agreement for the aforesaid technical knowhow / use of name label and mark and technical assistance of the licensor. Assessee paid 5% of the net sales of the product during each year of the agreement. Now, the question arises for determination is, "as to whether payment of ₹ 1,26,58,195/- on account of royalty payment is to be capitalized or is revenue expenditure? " 8.3 A perusal of the terms and conditions of agreement (supra) goes to prove inter alia; that the same was made for a specific period of seven years i.e. w.e.f 01.04.2001 to 31.03.2008; that the assessee was made to pay 5% of the net sales of the product during such term and year of agreement for the use of knowhow, label and mark and to avail of consequent technical assistance; that only non- transferable and limited rights to use the aforesaid know how etc have been granted to the assessee; that as per terms of agreement, assessee was made to return to the licensor any and all the elements of licensor's know ho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d view that the ld. CIT(A) was fully justified in deleting the addition of ₹ 1,57,35,495/- made by the AO, particularly, when the benefit derived under the agreement dated 02.04.2001 was not doubted by the TPO and the assessee by using the technical know-how assistance and designs received under the said agreement was manufacturing the finished products which were sold to the AE as well as to the other parties. Therefore, the assessee derived benefit under the royalty agreement and it was accepted by the AO for the assessment year 2002-03. However, the only dispute raised by the AO in the said assessment year was as to whether the royalty payment was a capital expenditure or revenue expenditure. The said dispute has been settled by the ITAT vide aforesaid referred to order dated 30.03.2016 and it was held that the royalty payment was revenue expenditure and not the capital expenditure. In the present case, the royalty expenditure by the assessee was fully and exclusively incurred in the regular course of business and after incurring this expenditure the assessee declared profit @19% which was better than the GP rate of 12 & 16% declared by the comparables. Therefore, it was a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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