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TMI Blog2015 (10) TMI 2794X X X X Extracts X X X X X X X X Extracts X X X X ..... did not produce any break-up of the amounts as well as advances and as per the AO the advances were capital in nature - HELD THAT:- New facts have been brought before us by the assessee stating that the assessee has now restricted the claim after netting the amount payable to WMS to the balance of amount ₹ 1,34,000/- only which was to be written off on this account as against the original claim of ₹ 1,14,05,413/-. Further, the assessee has produced additional evidence which is required to be verified and examined. Accordingly, in the facts and circumstances and in the interest of justice, we set aside this issue to the record of the AO to adjudicate the same after considering the facts as well as the additional evidence brought before us. This ground is partly allowed for statistical purposes. Disallowance of administrative fee by invoking the provisions of sec.40A(2) - excess payment to the related party - assessee has submitted that the provisions of sec.40A(2) are not applicable to the said transaction when the assessee has already reported the transaction as international transaction which was referred by the AO to the TPO for determination of the ALP - HELD TH ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... u/ss.234A and 234B is mandatory and consequential. Therefore, no separate finding is required. - IT(TP)A No.1679/Bang/2012, IT(TP)A No.184/Bang/2013 - - - Dated:- 9-10-2015 - SHRI VIJAY PAL RAO, JUDICIAL MEMBER AND SHRI JASON P BOAZ, ACCOUNTANT MEMBER For The Appellant : Shri Rajan Vora, CA. For The Respondent : Shri Anurag Sahay, CIT(DR). ORDER Per VIJAY PAL RAO, JM: These two appeals filed by the assessee are directed against the assessment order dated 29/10/2012 passed under section 143(3) r.w.s. 144C of the IT Act,1961 ( the Act for short) in pursuance to the directions of the DRP dated 28/8/2012 for the assessment year 2008-09. 2. First we will take up IT(TP)A No.1679/Bang/2012. The assessee is engaged in the business of production and sale of nutritional and dietery supplements for weight management and personal care. The assessee has obtained relevant technology and know-how from its group companies. The assessee has also outsourced the manufacturing activity to third party manufacturer M/s.Litaka Pharma Ltd. During the year under consideration, the assessee has reported the following international transaction with its AE : ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee has raised the following grounds in Form No.36 which were subsequently modified vide letter dated 31/8/2015. The grounds raised by the assessee after modifications are as under: The grounds mentioned herein are without prejudice to one another. 1. That on the facts and in the circumstances of the case the order passed by the learned (Ld.) Assistant Commissioner of Income-tax, Circle 11(4) Bangalore('Assessing Officer' or 'AO')/the Deputy Commissioner of Income-tax (Transfer Pricing) - V, Bangalore ('Transfer Pricing Officer' or 'TPO') and the Ld. Dispute Resolution Panel, Bangalore ('the Panel') is perverse, erroneous on facts and bad in law. 2. (a) That on the facts and circumstances of the case and in law, the Ld. AO and the Ld. Panel erred in disallowing a sum of ₹ 47,64,201 being 25% of ₹ 1,90,56,804 representing turnover based royalty. (b) That without prejudice to the above, even assuming but not admitting that royalty of ₹ 47,64,201 is spent towards acquisition of capital asset, the Ld. AO and the Ld. Panel erred in not granting depreciation on the said amount as per the provisions of Section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8377; 7,96,230 respectively. 8. That the Appellant craves leave to add to and/or to alter, amend, rescind, modify the grounds herein above or produce further documents before or at the time of hearing of this appeal. 4. Ground No.1 is general in nature and does not require specific adjudication. 5. Ground No.2: Regarding 25% of the royalty disallowed by the AO and treating the same as capital expenditure. The assessee entered into a license and technical assistance agreement (royalty agreement) with its parent company Herbalife International Inc.(HII) on 10/11/1999 for licensing of the technical information including method of manufacture and improvements with respect to the products and technical services. The royalty agreement provides for payment of consideration to the parent company for using know-how and technical assistance services amounting to a sum of USD 2 million and the royalty of 5% of aggregate net retail sales during each calendar month. During the year under consideration, the assessee has paid aggregate royalty of ₹ 1,90,56,804/-. The AO has disallowed 25% of the royalty expenditure by holding that the same constitutes capital expenditure ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nternational Incorporate cannot be treated ascapital in nature to the extent of 25% as held by the Apex Court in 232 ITC 359? Thus it is clear that the issue involved is identical and while deciding the said substantial question of law, the Hon ble High Court has held in para.5 to 9 as under: 5. We have heard the learned counsel for the parties. 6. Clause 6.2 of the License and the Technical assistance agreement reads as under: 6.2: Ownership of Materials: Licensee expressly acknowledges and agrees that, except as specifically provided in this Agreement, at no time shall it acquire or retain, or appropriate for its own use, any right, title or interest in or to any Technical Information. All files, lists, records, documents, drawings and specifications which incorporate or refer to all or a portion of the Technical Information shall remain the sole property of Licensor. Such materials shall be promptly returned (a) upon Licensor's reasonable request, or (b) upon termination of this Agreement, whichever is earlier. 7. Similarly Clause 7.1, 7.2 and 7.3 reads as under: 7.1: Term and Renewal. The term of this Agreement shall commence on the effec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... documents, drawings, specifications and other technical information which was furnished to the assessee by the licensor. Under these circumstances, it cannot be said that the assessee got any enduring benefit in the said agreement which is a condition precedent for treating the payment as capital expenditure. Therefore, rightly the order passed by the Assessing Authority is setaside by the Appellate Authority and held the entire amount as revenue expenditure. 9. In that view of the matter, we do not see any merit in the appeal. Accordingly, substantial questions of law is answered in favour of the assessee and against the revenue. Accordingly, the appeal is dismissed. 8. It is pertinent to note that for the year under consideration, royalty paid by the assessee was under the same agreement as it was paid for the assessment year 2004-05. The Hon ble High Court has decided this issue after considering the relevant clauses of the agreement and therefore, the issue of payment of royalty is now covered by the decision of the Hon ble High Court in the assessee s own case. Respectfully following the decision of the Hon'ble jurisdictional High Court, we allow the claim of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble written off would be ₹ 1,34,000/-. Hence, the additional evidence filed by the assessee may be considered for adjudication of the issue. 9.2 On the other hand, learned DR has submitted that the assessee failed to produce the requisite details and supporting evidence before the AO. Even before the DRP, the assessee failed to produce any supporting evidence. Therefore, the AO was justified in disallowing the claim of the assessee. He has relied upon the orders of the authorities below. 9.3 We have considered the rival submissions as well as the relevant material on record. New facts have been brought before us by the assessee stating that the assessee has now restricted the claim after netting the amount payable to WMS to the balance of amount ₹ 1,34,000/- only which was to be written off on this account as against the original claim of ₹ 1,14,05,413/-. Further, the assessee has produced additional evidence which is required to be verified and examined. Accordingly, in the facts and circumstances and in the interest of justice, we set aside this issue to the record of the AO to adjudicate the same after considering the facts as well as the additional evide ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ayment of administrative service fee paid to AE is an international transaction and subjected to the examination under section 92CA of the Act and hence the same should not be evaluated under the provisions of sec.40A(2) of the Act. In support of his contention, he has relied upon the decision of the special bench of the Tribunal in the case of Aztex Software Technology Services Ltd. (294 ITR 32). 10.3 On the other hand, learned DR has relied upon the orders of the authorities below and submitted that the AO has made the additions only as an alternative measure apart from TP adjustment. 10.4 We have considered the rival submissions as well as the relevant material on record. This transaction of payment of administrative service fee has been declared by the assessee as international transaction and is also subjected to TP provisions of sec.92CA, however, the AO made an alternative addition by invoking the provisions of sec.40A(2) of the Act. The AO allowed only 2% of the turnover amounting to ₹ 1,02,62,530/- and the balance of ₹ 4,81,97,802/- has been disallowed under section 40A(2) of the Act. There is no dispute that the transaction has been reported by the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0A of the Act but has to determine the expenses which are excessive and unreasonable. The AO, in the case before us, has failed to point out any particular expenditure which according to him, is excessive or unreasonable but has made an ad hoc disallowance which is not sustainable. Further, as rightly pointed out by the learned counsel for the assessee, disallowance u/s 40A(2) can be made only if the alleged excessive and unreasonable payment is made to any person enumerated under clause (b) of sub-sec.(2) of sec.40A of the Act. In the case before us, the AO has not brought out anything on record to show that Cisco India Ltd., falls in any of the categories of persons enumerated under clause (b) of sub-section (2) of sec.40A of the Act. The recipient of the payment i.e. Cisco India, definitely does not fall under any of the categories of persons under clause (b) of sub-sec.(2) of sec.40A. The AO has not carried out any exercise to bring on record that Cisco India has got substantial interest in the business or profession of the assessee or that it falls in any of the categories of persons. In view of the same, we are of the opinion that the disallowance u/s 40A(2)(b) of the Act is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Hon ble Delhi High Court has held that the TPO has to work out the ALP of the international transaction by applying the method recognized under the Act. Further, TPO could not question the commercial expediency of the transaction and payment made by the assessee. The learned authorised representative of the assessee has also referred to the additional evidence in support of his claim of rendering of service by the AE. 11.3 On the other hand, learned DR has relied upon the orders of the authorities below and submitted that when the assessee has failed to prove that it has received services from the AE then the ALP determined at nil is justified. 11.4 We have considered the rival submissions as well as the relevant material on record. We find that the powers and jurisdiction of the AO and the TPO under the provisions of chapter X along with rule 10B has been examined by the Hon ble Delhi High Court in the case of Ekta Appliances Ltd. (supra) in paras.21 and 22 as under: 21. The position emerging from the above decisions is that it is not necessary for the assessee to show that any legitimate expenditure incurred by him was also incurred out of necessity. It is also not n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Hon ble Delhi High Court in the case of CIT v. EKL Appliances Ltd., ITA No.1068/2011 dated 29.03.2012. In the aforesaid decision, the assessee entered into an agreement pursuant to which it paid brand fee/ royalty to an associated enterprise. The TPO disallowed the payment on the ground that as the assessee was regularly incurring huge losses, the know-how/ brand had not benefited the assessee and so the payment was not justified. This was reversed by the CIT (A) Tribunal on the ground that as the payment was genuine, the TPO could not question commercial expediency. On appeal by the department, the Hon ble Delhi High Court held that the transfer pricing guidelines laid down by the OECD make it clear that barring exceptional cases, the tax administration cannot disregard the actual transaction or substitute other transactions for them and the examination of a controlled transaction should ordinarily be based on the transaction as it has been actually undertaken and structured by the associated enterprises. The guidelines discourage re-structuring of legitimate business transactions except where (i) the economic substance of a transaction differs from its form and (ii) the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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