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TMI Blog2018 (8) TMI 2029X X X X Extracts X X X X X X X X Extracts X X X X ..... fer of ownership right and that by virtue of the agreement the assessee will become the owner of such trademark/ patent/technical know-how. It is undisputed that the royalty expenditure is a recurring expenditure in the present appeals and is payable for every year the technical know-how/patent/trade-mark continues to be used. Thus held it to be revenue expenditure. Depreciation on UPS being computer peripherals at the rate of 15% instead of 60% - HELD THAT:- As decided in own case [ 2016 (7) TMI 1608 - ITAT DELHI ] as relying on CIT vs. BSES Yamuna Power Ltd. [ 2010 (8) TMI 58 - DELHI HIGH COURT ] while deleting the disallowance held that computer accessories and peripherals such as, printers, scanners and server etc. form an integral part of the computer system. In fact, the computer accessories and peripherals cannot be used without the computer. Consequently, as they are the part of the computer system, they are entitled to depreciation at the higher rate of 60%. - SHRI N.K. SAINI, ACCOUNTANT MEMBER AND SHRI KUL BHARAT, JUDICIAL MEMBER For the Assessee : Sh. Nageswar Rao, Adv. For the Department : S h . Sanjay I. Bara, CIT(DR) ORDER PER KUL BHARAT : JM This appeal by the Asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... method, the Hon ble DRP erred in not correcting the arithmetical inaccuracies in the computation of operating margins of the companies considered comparable by the learned TPO. 8. That the learned TPO/DRP failed to make appropriate adjustments for differences in the functions performed, risks undertaken and assets employed by the Appellant vis-a-vis the comparable companies. 9. That the learned TPO erred in placing reliance on the financial data which was not available in the public domain at the time when the economic analysis was undertaken and transfer pricing study was documented. 10. The learned TPO has erred in law in applying the amended Proviso to section 92C of the Act and has failed to allow the Appellant an option for the downward variation of 5 percent in determining the arm s length price. 11. That the learned AO/DRP erred on facts and in law in holding that the royalty payments amounting to ₹ 17,815,757 were made towards acquisition of intangible assets i.e. trademark and technical knowhow. 12. That the learned AO/DRP erred on facts and in law in treating the royalty payments as capital in nature and thus disallowing the said expenditure. 13. That the learned AO ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d to allow admissible depreciation on such a capital expenditure. Accordingly, he incorporated the same in the computation of income and assessed the income u/s. 143(3) of the Act on a total income of ₹ 21,24,60,970/-. Aggrieved with the aforesaid order of the Assessing Officer, the Assessee is in appeal before the Tribunal. 4. Ground nos. 1 3 are general in nature, hence, no need to adjudicate. 5. Apropos ground nos. 2, 4 to 10 are against adopting TNMM method to bench mark the international transactions and while doing so rejecting the comparable submitted by the Assessee. Ld. Counsel for the Assessee submitted that the authorities were not justified in adopting the TNMM method. However in the earlier years the RPM method adopted by the Assessee has been accepted by the authorities below. Ld. Counsel for the assessee reiterated the submissions as were made before the DRP. He has taken us through the order passed u/s. 92CA(3) of the Act passed by the TPO to support his argument that in Distribution Segment the assessee has been adopting the RPM method which had been duly accepted by the authorities below. He further submitted that if TNMM method was to be adopted then the co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h purchase of goods and providing services in case of tested party i.e. the assessee. He further submitted similarly components of cost base of comparable selected by the assessee are not disclosed or known and therefore the correctness gross margin which is basis of applying RPM is not verifiable or not known making it impossible to apply RPM correct. He further submitted that the resale price taken for computing the margin is the aggregate of sale value of products which were purchased both from AEs and Non AEs. Therefore the correct margin on the resale of goods purchased from AE cannot be computed. Hence, the AO has no option but to apply TNMM for benchmarking the international transactions for purchase of finished goods. In view of above, Ld. CIT(DR) submitted that RPM cannot be applied to benchmark the international transactions due to lack to critical information about the assessee in the audited financials and about the comparables in public database. However scrutiny of segmental results of distribution segment has revealed that the assessee has incurred huge net operating loss as compared to substantial net operating profit of manufacturing segment. 5.2 We have heard the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ccordingly, he requested to respectfully follow the Coordinate Bench decision referred above. 6.1 On the other hand, Ld. CIT(DR) supported the order of the AO/TPO. However, he has not cited any contrary decision on this issue. 6.2 We have heard the rival contentions and perused the records. We find that the Coordinate Bench of ITAT, Delhi in assessee s own case for the assessment years 2004-05, 2007-08 2008-09 vide order dated 21.07.2016 while deciding the Revenue s Appeals has held as under:- 10. We have heard the rival submissions and perused the material on record. We have also perused the License Agreement dated 27th October, 2003 specially clause 2 which specifically excludes the right of the licensee to grant sub licenses under Patent Rights, Trademark Rights and Software Copyright Rights to third parties unless so authorized by the Licensor. Clause 7 of the agreement safeguards the licensor s right to protect the patent rights, trademark rights and software copyright rights and know-how rights. Clause 9 provides that either party can terminate either the whole or part of the agreement upon service of 30 days prior notice to the other party and that the initial tenure of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nses claimed as revenue expenditure and that was being allowed by the Assessing Officer. Therefore, there was no reason as to why after a gap of almost 10 years, the Assessing Officer should suddenly change his mind and decide to treat the expenditure incurred by the assessee as a capital expenditure. The Tribunal added that even if the assessee had obtained a long term advantage of an enduring advantage, that, by itself, would not covert any expenditure incurred by it into a capital expenditure. In the instant case, the facts had been fully considered and a concurrent opinion had been expressed, both by the Commissioner (Appeals) as well as by the Tribunal that the expenditure was of a revenue nature and not of a capital nature. There was no reason to differ with the opinion on the facts of the instant case and it was quite dear that the ratio of the decisions of the Supreme Court in Jonas Woodhead Sons ((India) Ltd. v. OT [1997] 224 ITS 342/91 Taxman 1 and in Empire Jute Co.Ltd. v. CIT [1980] 124 iTR 1/3 Taxman 69 was fully applicable to the facts of the instant case and both the authorities were right in concluding that the payment made by the assessee towards licence fee to S&# ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the agreement because on a reading of the agreement as a whole, it appeared that what was transferred to the assessee was only a right to use the technical know-how of R and there was no sale of the technical know-how which the assessee could exploit. The assessee's rights were hedged in with all sorts of conditions, clearly making it a case of right to use the technology and not sale of the technical know-how. Therefore, the Tribunal was justified in holding that there was no sale of technical know-how by R to the assessee and, hence, the payment made by the assessee to R was a revenue expenditure. 12. In the case of CIT Vs. Sharda Motor Industrial Ltd. - [2009] 319 ITR 109 (Delhi), the facts were that the assessee had entered into two agreements with a Korean company under which the assessee was to pay a lump sum amount for transfer of technical know-how and running royalty at a specified rate per piece of production of different products. The assessee showed the lump sum payment against transfer of technical know-how provided by the Korean company as capital expenditure and claimed that the royalty was business expenditure. The Assessing Officer treated the royalty as capi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y producing exhaust systems and the technology agreement was not for setting up of the factory. (b) in the cited case the foreign company who gave the technology agreed not to manufacture similar products in India while there is no such regulation in our agreement. (c) in the cited case the technical knowledge obtained was held to give an advantage of enduring nature to the assesseecompany and as it had the right to continue to manufacture the product even after termination of the agreement. While in our case the design patent applies to the foreign company and we are only licensed to produce the goods for Hyundai Car and we cannot continue to produce the goods if the agreement is terminated. This itself is a major difference between the case cited by your honour and the facts of our case. On the facts and after applying the aforesaid principle, it becomes crystal dear that the expenditure is of revenue nature. 14. In the case of Climate Systems India Ltd. Vs. CIT - [2009] 319 ITR 113 (Delhi), the facts of the case were that the assessee company engaged in the manufacture and sale of heat exchangers (radiators) entered into technical collaboration agreement with a US company to man ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of S in Japan and also on designs and drawings charges payable to S. The assessee claimed the entire expenses as revenue expenditure. The Assessing Officer treated the expenses as capital expenditure which was confirmed by the CIT (A). The Tribunal held that the expenses were incurred for training the personnel of the assessee and for availing of drawings and designs to manufacture the shock absorbers but not for acquiring technology itself and, therefore, they could not be held to capital expenditure. On appeal, their Lordships of Jurisdictional High Court held as under:- Held, dismissing the appeals, that the know-how was granted by the foreign company solely for the purpose of manufacture, assembly and sale of products during the term of the contract and the license was to pay royalty to the licensor. The drawings and designs which were supplied by the licensor only enabled the assessee to manufacture the shock absorbers. The assessee was required to change the design of such shock absorbers from time to time for which new drawings and designs were required. For this purpose, the training of the personnel of the assessee was imperative. Under the agreement, the know-how acquire ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n ble High Court of Delhi has deleted the disallowance on similar issue. 7.1 However, the ld. CIT(DR) could not controvert the submissions of the Ld. Counsel for the assessee. 7.2 We have heard the rival contentions and perused the relevant records available with us. We find that the Coordinate Bench, ITAT, Delhi in assessee s own case in subsequent year i.e. AY 2007-08 in ITA No. 2798/Del/2012 vide order dated 21.7.2016 has followed the decision of the Hon ble Delhi High Court in the case of CIT vs. BSES Yamuna Power Ltd. in ITA no. 1267/2010 dated 31.8.2010 and decided the issue in assessee s favour by holding as under- We are in agreement with the view of the tribunal that computer accessories and peripherals such as, printers, scanners and server etc. form an integral part of the computer system. In fact, the computer accessories and peripherals cannot be used without the computer. Consequently, as they are the part of the computer system, they are entitled to depreciation at the higher rate of 60%. 7.3 Respectfully following the aforesaid ratio of the Hon ble Delhi High Court, we set aside the order of the Assessing Officer on this issue and allow the depreciation @ 60% on the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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