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TMI Blog2017 (4) TMI 1437X X X X Extracts X X X X X X X X Extracts X X X X ..... addition had been made thereon by the TPO and AO. Hence it amounts to application of mind by the AO. We find that the international transactions carried out by the assessee would. be both on capital as well as on revenue account. The entire international transactions would have to be referred by the ld. AO to the ld. TPO u/s 92CA. As we had already stated that the scope of enquiry of the ld. TPO is merely restricted to determination of ALP of international transactions which would. be both on capital and on revenue account. Hence the order of ld. TPO on royalty payment and addition made thereon would. not come to the rescue of the assessee. We find that the CIT considered the order of the AO to be erroneous at the show cause notice stage by stating the royalty payment should be construed as capital expenditure and hence should. be disallowed, he later on in the order passed u/s 263 of the Act changed the track and considered the order to be erroneous for lack of enquiry on the part of the ld. AO. This finding of the ld. CIT recorded on altogether new footing without giving opportunity of being heard to the assessee, itself rendered the revision order u/s 263 of the Act as invalid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s revenue expenditure for using technical knowhow and upgrading manufacturing technology and right to use the trade names and brand names and reported in Form 3CEB as required u/s 92E of the Act. He observed that as per detail submitted in Form 3CEB, Column No. 9 and agreement dated 1.7.2008 between DIC India Ltd and DIC Asia Pacific India Ltd of Singapore (Holding Company having 71.27% shares) and DIC Corporation of Japan (Ultimate Holding Company) established that the payment of royalty was in composite manner and the charges of all (i) Technical Know-how (ii) Licences (iii) Trademarks (iv) Brand name, was paid to acquire the business/ commercial rights of intellectual property in the form of intangible assets for the period of seven years. He stated that assessee has acquired the aforesaid intangible rights on technical knowhow for upgrading manufacturing technology. 4.1. The ld. CIT further observed on scrutiny of copy of the agreement relating to "Royalty payment‟ dated 1.7.2008 , that there was no embargo on the assessee to continue to manufacture the product in question even after expiry of the agreement. It was also observed that the assessee has been upgrading thei ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsurate with sales achieved in given quarters meaning thereby that the royalty paid was directly correlated with the assessee‟s regular trade i.e. the sales and therefore the benefit derived from the same could not be said to be of enduring nature. It is also not a case one-time lump sum payment made by assessee for transfer of technology or knowhow which may raise a question as to the nature of expense. In terms of the agreement dated 01.07.2008 with DIC Asia Pacific Pte Ltd. the assessee was allowed the use of technology & trademarks in the manufacture & sale of printing inks only in the Indian Territory. In consideration the assessee was required to pay royalty @ 2% of the net sale printing inks subject to certain conditions. For the relevant AY 2010-11, pursuant to the aforesaid agreement dated 01.07.2008, the assessee had paid royalty of ₹ 6,33,74,362/- to DIC Asia Pacific Pvt Ltd. Similarly the assessee had also entered into a technical collaboration agreement dated 01.04.2007 with DIC Corporation, Japan; in terms of which the assessee was permitted to use the technology for manufacture & sale of poly-resins only in Indian territory. In consideration for use o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f license & even thereafter is to be owned by DIC Asia Pacific Pte Ltd. The royalty paid by the assessee is only a "license fee" for use of technical knowhow and not the price for acquisition of a "capital assets". The royalty paid, without an iota of doubt was therefore revenue in character and hence fully deductible from the profits of the business. On appreciation of these material facts therefore the AO rightly allowed the deduction of these material facts therefore the AO rightly allowed the deduction for royalty paid as revenue expenditure. The assessee also stated that it may also be relevant to invite attention to Clause 2.2 of the agreement which states that DIC India Limited is granted a non-exclusive right to sell the products in any countries except the countries where parent company has its plant, its subsidiaries or other joint venture arrangements for manufacture of the product, where parent company is engaged in the ordinary sale activity of the products, and where parent company licenses the exclusive sale right to third party. However, in the event parent company agrees in writing on prior written request of DIC India Limited, it may export the products to such co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hinery more efficiently or profitably cannot make the annual royalty payments as a percentage of sales to be capital in nature. Attention in this regard is made to the decision of the Apex Court in the case of Commissioner of Income Tax Vs IAEC Pump Limited, reported in 232 ITR 316. The facts and circumstances in that case were identical as those involved in the assessee‟s case. In that case the technical knowhow was licensed to the assessee for a period of 10 years non-transferable basis. The assessee in that case was also not entitled to disclose the documents & information to any third party. The AO treated the payment towards technical knowhow as capital expense. On appeal the Apex Court held that the amount paid to the parent company is only a "license fee" and not the price for acquisition of a "capital asset". It was concluded that the entire payment constituted revenue expenditure and addition made by the AO was deleted. 5.2.1. The assessee also placed reliance on the decision of the Hon'ble Jurisdictional High Court in the case of CIT vs Bata India Limited in GA No. 3482 of 2013 dated 12.11.2014 . In the said case, the assessment framed u/s 143(3) the AO observed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tted along with the return of income. The Transfer Pricing Audit Report containing information about royalty paid to foreign associate enterprises was referred for transfer pricing scrutiny u/s 92CA(1) of the Act by the AO for the A.Y. 2010-11. In the course of transfer pricing scrutiny, the assessee was specifically required by TPO to furnish details of royalty payments along with relevant agreements with Associated Enterprises vide his letter dated 01.03.2012. In response the assessee vide letter date 23.03.2012 furnished the details of payment of royalty and copies of relevant agreements with the associated enterprises. The TPO in his show cause notice date 15.01.2014 asked the assessee to justify the arm‟s length value of the deduction claimed in respect of royalty payment of ₹ 6,42,47,978/- to associated enterprises from the profits of the business. In response; detailed submissions dated 22.01.2014 were filed by the assessee. After examination of the facts, agreements with DIC Corporation & DIC Asia Pacific Pte Ltd, the TPO proposed a transfer pricing adjustment of ₹ 82,88,935/- on account of royalty payments in the Transfer Pricing Order passed u/s 92CA(3) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as grossly unjustified in passing the impugned order by ignoring the explanations put forth. 3) For that on the facts and in the circumstances of the case, the PCIT was grossly unjustified in considering the assessment order as erroneous on the ground that royalty paid by the appellant constituted "capital expenditure" and therefore only the depreciation was permissible in respect of royalty payment. 4) For that on the facts and in the circumstances of the case, the finding recorded by the CIT that royalty was paid for indefinite use of the technical knowhow for manufacture of products was contrary to the provisions of the agreement available on record and therefore the finding of the CIT that royalty was capital expenditure liable for disallowance was contrary to the jurisdictional facts... 5) For that on the facts and in the circumstances of the case, since the entire premise on which the CIT proceeded to hold the order of assessment to be erroneous was factually incorrect, order of the CIT revising the assessment in exercise of power u/s 263 be held to be bad in law and be therefore set aside. 6) For that on the facts and in the circumstances of the case, the order o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... T had simply categorized the royalty payment as capital expenditure , without appreciating as to how the royalty payment had assisted in acquisition of knowhow and without appreciating the terms and conditions of technical collaboration agreement entered into by the assessee. He argued that in the past , similar expenditure was allowed as revenue expenditure by the ld. AO u/s 143(3) of the Act and hence it could be concluded that the ld. AO had taken one of the possible views in the matter and accordingly the wisdom of the ld. AO in this regard cannot be questioned by the ld. CIT u/s 263 of the Act. He placed reliance on several decisions of Hon‟ble Supreme Court, High Courts and Tribunal in support of his various contentions. 8. In response to this, the ld. DR argued that the proceedings before the ld. TPO and he making an adjustment to ALP on the royalty transactions has got no relevance at all as the scope of enquiry before the ld. TPO was totally different from that of the ld. AO. He argued that the assessee never replied before the ld. TPO or ld. AO justifying the royalty payment as eligible as revenue expenditure. Hence no enquiry in this regard was made by the ld. AO ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n a continuous basis. The assessee had approached DIC Japan to make available to it the said technical knowhow for the purpose of upgrading its manufacturing technology for the existing as well as future products relating printing inks and allied products on a continuous basis in its plants located at Calcutta, Mumbai, Noida, Ahmedabad , New Delhi , Madras or any other future place as may be determined by assessee from time to time. It is further stated that the DIC Japan would. make available to assessee the technical knowhow as aforesaid and the right to use the trade names and brand names. In this regard, the following clauses in the said agreement would. be relevant:- 1.3. "Products" will also include the right of COATES to use the Trade Names, Brand Names relevant to the Products, whether the same be registered or otherwise (hereinafter referred to as "Trademarks"), provided, however, it shall be the responsibility of COATES to ensure compliance with local laws relating to use of such names and marks. 1.4. Licensed Information means such technical information in possession of, and at free disposal of , DIC, on the Effective Date of the Agreement in relation to the Produc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9.1. This Agreement will remain in force for 7 years from the Effective Date, provided that DIC, directly or indirectly, owns more than fifty (50) percent of the shares of COATES. 9.2. One (1) year prior to the expiration of this Agreement, the parties shall meet and shall decide jointly either to renew this Agreement for the further period fo five (5) years at the expiration of this Agreement or whether it shall not be renewed after the normal date of expiration. 10. Termination 10.1. Either party may terminate this Agreement forthwith: (1) if the other party is in breach of any of the provisions of this Agreement and fails or is unable to remedy the same within 30 days after receiving notice in writing thereof from the other party. (2) if the other party becomes insolvent, bankrupt or is placed liquidation. 10.2. If under the provisions of this Agreement COATES ceases to be entitled to use the Licensed Information COATES shall deliver up to DIC all such Licensed Information in tangible form which may then be in its possession and will keep no copies thereof. 9.1. We find from pages 27 to 29 of the Paper Book, a copy of the approval, from Government of India, Ministry ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... had persuaded himself to incorrect assumption of facts that assessee by using the licensed information obtained from DIC Asia Pacific Pte Ltd, Singapore and DIC Corporation, Japan had upgraded its P&M and also changed the setting up of P&M to make its finished products viable for the market. This assumption is factually incorrect and does not emanate out of the jurisdictional facts on record. The ld. CIT had not brought any material evidence on record to justify this incorrect assumption thereby leading to incorrect conclusion. We find that the assessee had all along been in the business of manufacture of printing inks and it had not ventured into any new business as could. be evident from its financial statements. We find that the knowhow was provided for upgrading the existing business. This payment of royalty has been allowed as a revenue expenditure in the past by the ld. AO u/s 143(3) of the Act. The ld. CIT merely made a bald statement by stating that the assessee by using the licensed information had entered into new dimensions of business from time to time and hence the payment of royalty could. not be equated with the nature of royalty paid in earlier years, which statemen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... says that all the drawings and other documents comprising the technical knowhow and all notes and copies made there from by licensee shall be marked with the words "Secret and Confidential-property of Wolverine World Wide, Inc.". He further drew our attention to Article 6.1 wherein it has been agreed that the technical know-how imparted to licensee is and shall remain the exclusive and valuable secret property of licensor. He drew our attention to para 6.5 wherein it has been specifically mentioned that on termination of the agreement the technical know-how papers, instruments, documents etc. both original and all copies and translations thereof and all shop or working notes shall be returned to the licensor. He further drew our attention to Article 11.6 when specified the effects of the termination to show that in the event of termination or expiry of the agreement the licensed products were not to be manufactured nor was its trade marks to be used and all to be returned to the licensor. It was the submission that in view of the decision of the Hon'ble Calcutta High Court in the case of CIT vs Hindusthan Motors Ltd. 192 ITR 619 it clearly ITA Nos1826-1828/Kol/2012 & C.O.Nos.10 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ales. Since assessee paid only 2% as royalty on sales, the assessee justified its royalty payment to be at Arm‟s Length. The Transfer Pricing Documentation in this regard was also filed during the hearing wherein at pages 44 to 54 of the TP Study Report, the details of benchmarking of royalty and justification of ALP for the same is reflected. The case was referred to the ld. Transfer Pricing Officer u.s 92CA of the Act after obtaining the prior approval of the ld. CIT. The ld. TPO found that the CUP method is not the suitable method for benchmarking the Royalty Payment and other international transactions and adopted Transaction Net Margin Method (TNMM) and made an upward adjustment of ₹ 4,87,70,886/- on various international transactions of the assessee including the payment of royalty. Based on this ld. TPO order examining the aspect of ALP of royalty payment, the ld. AR argued that the issue of royalty payment had been duly examined by the subordinate authorities and the ld. AO had also made an addition of ₹ 82,88,935/- attributed towards royalty which is included in the total TP addition of ₹ 4,87,70,886/- and accordingly the same cannot be construed as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . DR (i.e Alembic Chemical Works Co. Ltd vs CIT - 177 ITR 377 (SC) ]. The Hon‟ble Calcutta High Court held. as under:- 5. Mr. Majumdar, learned advocate appearing in support of the appeal, submitted that the facts and circumstances of the present case are identical with those in the case of Alembic Chemical Works Co. Ltd. v. CIT [1989] 177 ITR 377/43 Taxman 312 (SC). The assessee company, he contended, was already in existence and the assessee was also engaged in the business of ball bearings. The assessee entered into an agreement with the foreign company for the purpose of acquiring a new technology. In an identical situation in the aforesaid case of Alembic Chemical Works Co. Ltd. (supra), the Apex Court held. that "it appears to us that the answer to the questions referred should. be on the basis that the financial outlay under the agreement was for the better conduct and improvement of the existing business and should., therefore, be held. to be a revenue expenditure. Reference may also be made to the observations of this Court in CIT v. CIBA of India Ltd." 6. Mr. Majumdar also relied upon a judgment in the case of CIT v. I.A.E.C. (Pumps) Ltd. [1998] 232 ITR 316 (S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hould. refrain from interfering with the order under challenge. 10. We have considered the rival submissions of the learned advocates for the parties. The submissions advanced by Ms. Gutgutia are no doubt meritorious and certainly represent one way of looking at the things. Sight cannot however be lost of the fact that the payment made by the assessee is on account of license fee. By making such payment, the assessee has got a permission to use the technology. The money paid is irrecoverable. In case the business of the assessee for some reason or the other is stopped, no benefit from such payment is likely to accrue to the assessee. The license is not transferable. Therefore, it cannot be said with any amount of certainty that there has been an accretion to the capital asset of the assessee. In case, the assessee continues to do business and continues to exploit the technology for the agreed period of time, the assessee will be entitled to take the benefit thereof. But in case it does not do so, the payment made is irrecoverable. It is in this sense that the matter was looked into by the High Court of Madras and was endorsed by the apex Court in the case of IAEC (Pumps) Ltd. (s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ack and considered the order to be erroneous for "lack of enquiry‟ on the part of the ld. AO. This finding of the ld. CIT recorded on altogether new footing without giving opportunity of being heard to the assessee, itself rendered the revision order u/s 263 of the Act as invalid and bad in law. 9.7. We find that the Hon‟ble Madras High Court supra had held. that 25% of the said expenditure would. have to be treated as capital in nature and balance 75% had to be treated as revenue in nature. Hence this was the third view that was possible in the impugned matter. We hold. that this itself makes the issue debatable and hence the same cannot be the subject matter of revision u/s 263 of the Act. We find that the Hon'ble Calcutta High Court in the case of CIT vs J L Morrison (India) Ltd reported in (2014) 366 ITR 593 (Cal) at page 619 had held. as under:- 61. The point as regards the disallowance of 25 percent of the royalty paid by the assessee is evidently based on omission on the part of the Commissioner of Income-Tax to notice that the assessee was not entitled to use the technical know-how after the expiry of the contract as discussed above. The point as regards th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng Officer for the Assessment orders for Assessment Years 2007-08 and 2008-09. This according to the Revenue is evident from the Assessment Orders dated 31st December, 2009 and 30th December, 2010 which does not even make a mention of the gifts received much less discuss and/or deal with the same. This issue is no longer res integra as this Court in Idea Cellular Ltd. v. Dy. CIT [2008] 301 ITR 407 (Bom.) has held. that if during Assessment proceedings queries were raised and the assessee responded to the same, then even if an Assessment order does not mention the same, it does not mean that the Assessing Officer has not applied his mind to the issues. It would. be well-nigh impossible for an Assessing Officer to complete all assessments assigned to him under Section 143(3) of the Act if he is required to deal with all issues which arose during the Assessment Proceedings. Thus, the Assessment Order primarily deal with only those issues in respect of which the Assessee has not been able to satisfy him and give reasons for his conclusion. This would. enable the Assessee to challenge the same, if aggrieved. In fact the Gujarat High Court in CIT v. Nirma Chemical Works Ltd. [2009] 309 I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t, the case of the Revenue is that this is a case of inadequate inquiry and not of "no enquiry." It is well settled that the jurisdiction under Section 263 of the Act can be exercised by the CIT only when it is a case of lack of enquiry and not one of inadequate enquiry. This view has been taken by this Court in the matter of CIT v. Shreepati Holdings & Finance (P.) Ltd. [ITA 1879 of 2013 dated 5th October, 2013], by the Delhi High Court in CIT v. Vikas Polymers [2012] 341 ITR 537/194 Taxman 57 and in D.G. Housing Projects (supra). In fact the Delhi High Court in D.G. Housing Projects (supra) while so holding placed reliance upon the decision of this Court in Gabriel (India) Ltd. (supra). It is very important to note that the CIT in his order under Section 263 of the Act has recorded the fact that there has been no adequate inquiry. Thus, this is not a case of no inquiry, warranting order under Section 263 of the Act. Thus, this objection on the part of the Revenue, is also not sustainable. 10. The Revenue placed reliance upon the decision of the Delhi High Court in D.G. Housing Projects Ltd., (supra) that as the Assessing Officer had not enquired into the source of the source o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d. The Assessee therein pointed out that the payments for expenses had come out of cash balance available with him. When the Assessing Officer commenced enquiry in respect of the claim of expenditure out of cash balance available, seeking to invoke Section 69(C) of the Act and treat the expenditure claimed as unexplained expenditure, the Assessee therein withdrew his revised return of income. Once this was done, the Assessing Officer accepted the same and did not make any further enquiry. The CIT in exercise of its powers under Section 263 of the Act noticed that the Assessee had after having pressed his claim for expenditure in cash, withdrew the claim by withdrawing the revised return of income. This was done only after the enquiry had commenced. This withdrawal of revised income and consequent claim for cash expenditure was contrary to the stand of the Assessee himself. This change on the part of the Assessee on commencement of enquiry, made further enquiry into his claim for cash expenditure necessary. In the above facts, the CIT while exercising his powers under Section 263 of the Act found that the facts on record per se mandated an enquiry to be made into the claim of the As ..... X X X X Extracts X X X X X X X X Extracts X X X X
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