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TMI Blog2012 (12) TMI 1239X X X X Extracts X X X X X X X X Extracts X X X X ..... 4) Without prejudice to ground Nos. 1 and 2 above, the Assessing Officer erred in making an addition of Rs.59,81,648/- on account of unutilised Cenvat credit under Section 145A, when, in fact, he had correctly proposed a decrease of the said figure in his draft assessment order. 5) The Assessing Officer erred in disallowing Rs.4,30,05,713/- on the ground that royalty paid by the Appellant was in the nature of a capital expenditure. The Appellant submits the expenditure is of revenue nature, and that the disallowance be deleted. 6) The AO erred in disallowing provision for old and obsolete stores Rs.35,50,000/-. The Appellant submits that the disallowance is uncalled for, and requires to be deleted. 7) The Assessing Officer/Transfer Pricing Officer (AO/TPO) erred in making a transfer pricing adjustment in respect of royalty paid to the tune of Rs.1,99,13,521/-. Having regard to the facts and circumstances of the case, the Appellant submits that the Assessing Officer be directed to delete this erroneous transfer pricing adjustment. 8) Without prejudice to ground No. 6 above, the Appellant submits that the upward adjustment made is highly excessive and arbitrar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve method of accounting and not including Cenvat amount either in the inventory or purchase as well as in the sales; therefore, there is no point in making the addition to the closing stock. He has further submitted that the revenue has accepted the order of the Tribunal as no further appeal was filed. However, for the Assessment Year 2002-03, the revenue has challenged the order of the Tribunal before the Hon ble High Court, which has been dismissed vide order dated 16.10.2009. The ld AR has further submitted that for the subsequent assessment year upto the Assessment Year 2005-06, the department has accepted the order of the Commissioner of Income Tax(Appeals) deleting the addition made by the Assessing Officer u/s 145A. The ld AR has submitted that the assessee has field all the details and also comparative chart to show that even by following the inclusive method of account, the net effect will be nil. 4.1 On the other hand, the ld DR has submitted that as per the provisions of section 145A, inclusive method of accounting has to be applied at all the stages; therefore, the Assessing Officer has to give effect to the directions of the DRP by making adjustments at all the stag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for the same. Further, the assessee has contended that the assessee is following exclusive method of accounting and not including the amount taxed in the purchase as well as in sales. Since all these facts have not been examined and considered by the authorities below; therefore, this issue requires to be properly examined by considering all the relevant facts as claimed by the assessee. 5.3 As regards the addition deleted in the earlier assessment year, the effect of the same would be only to the extent that a corresponding adjustment is required to be made in the opening stock, purchase as well as sales apart from closing stock. 5.4 We find that a similar view has been taken by the Hon ble Jurisdictional High Court in the case of CIT vs. Mahalaxmi Glass Works P Ltd., 318 ITR 116 (Bom) and also the by the Hon ble Delhi High Court in the case of CIT vs. Maha veer Aluminium Ltd, 297 ITR 77. 5.5 Even in the case of CIT vs Nicholas Piramal India Ltd., the Hon ble Jurisdictional High Court in I T Appeal No. 8 of 2009 dated 24th March 2009 has held as under: On the other hand on behalf of the assessee,, the ld counsel submits that considering the accounting practices addit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . He further noted that this issue was a subject matter of proceedings u/s 263 for assessment year 2003-04 and the learned C.I.T. after examining all the relevant aspects did not consider it fit to withdraw the deduction allowed by the AO on account of royalty payment treating the same as revenue expenditure. Keeping in view the rule of consistency as well as the reasons given in paragraph No. 4.12 and 4.13 of his impugned order extracted above, the learned CIT(Appeals) held that royalty paid by the assessee to Cabot Corporation, USA was allowable as revenue expenditure and accordingly he deleted the disallowance made by the AO on this issue. 20. We have heard the arguments of both the sides and also perused the relevant material on record. The learned DR at the time of hearing before us has mainly relied on Article 2 of the Technology Agreement between assessee and Cabot Corporation, USA whereby plans, layouts, designs and technical data required for a carbon black reactor were to be supplied by the USA Company to the assessee company as part of technology package. She has pointed out that technical data, standard designs and plans for improving the processing and handling, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... improvement of the existing business and it was thus expenditure of revenue nature. In the case of Kirloskar Pneumatic Co. Ltd. v/s C.I.T (supra), the assessee was manufacturing air compressor. It entered into an agreement with G mainly to acquire technical know-how for manufacture and sale of certain products. G agreed to provide drawings and information and keep the assessee informed about research and development. The fees agreed to be paid was inclusive of lump-sum consideration for the drawings and royalty of 2% for the right to use patents in the name of G. In these facts and circumstances, it was held by the Hon ble Bombay High Court that while construing such agreement, they must be considered as a whole without putting emphasis on various clauses in isolation. It was held that the intention of the assessee was to acquire technical knowledge or know-how for certain period and the drawings acquired were part of technical knowledge. It was held that the assessee thus did not acquire any asset or benefit of enduring nature and the payments made under the agreement were allowable as revenue expenditure. 22. It may also be pertinent to note here that a similar payment of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of re-sale value of the discarded plant and machinery. Therefore, the Assessing Officer has took wrong amount which is resale value of plant and machinery which is a separate item not part of the provisions of old and obsolete stores. He has referred the explanations of the assessee to the Assessing Officer including the letter dated 14.12.2009 as well as dt 8.10.2010, which were submitted before the Assessing Officer after the directions of the DRP. 9.3 The ld AR has further submitted that the assessee has offered the income from sale of scrap of obsolete stores in the subsequent year; therefore, no adjustment can be made on this account as far as the provisions for the old and obsolete stores is concerned. In support of his contention, he has relied upon the decision of the Hon ble Madras High Court in the case of Commissioner of Income-tax v. South India Corporation (Agencies) Ltd., reported in 293 ITR 237. 9.4 On the other hand, the ld DR has submitted that the DRP has rightly directed the Assessing Officer to take into consideration the realisable value of the obsolete stores while allowing the claim of the assessee which is reasonable and justified. She has relied upon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the agreement governing the flow of technology/know-how etc. since 1990; accordingly, the increase of 3% in royalty was disallowed as the ALP of the royalty was determined at 2%. Consequently, an adjustment of ₹ 1,99,13,521/- was made on this account. 12 Before us the ld AR of the assessee has submitted that though this issue was considered and decided in the case of the assessee for the Assessment Year 2005-06 whereby the Tribunal has set aside the issue and restored the matter to the file of the Assessing Officer with the direction to do the exercise of determining ALP by applying most appropriate method; however, according to the ld AR this directions of the Tribunal for the Assessment Year 2005-06 should not be followed when neither the assessee nor the revenue has disputed the method adopted for the purpose of determining the ALP in respect of international transaction. The ld AR has submitted that both the assessee and the TPO applied Comparable Uncontrolled Price (CUP) method and therefore, the Tribunal has no jurisdiction to direct that other appropriate method should be applied. In support of his contention, the ld AR has relied upon the decision of the Hon ble ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lied in a transaction between person other than Associated Enterprise (AE) in an uncontrolled condition. The procedure for determination of ALP by adopting the most appropriate method has been provided under Rule 10B(1) and as per clause (a) of Rule 10B(1), the manner for determination of ALP by the comparable uncontrolled price method is provided as under: (a) comparable uncontrolled price method, by which, (i) the price charged or paid for property transferred or services provided in a comparable uncontrolled transaction, or a number of such transactions, is identified; (ii) such price is adjusted to account for differences, if any, between the international transaction and the comparable uncontrolled transactions or between the enterprises entering into such transactions, which could materially affect the price in the open market; (iii) the adjusted price arrived at under sub-clause (ii) is taken to be an arm's length price in respect of the property transferred or services provided in the international transaction; 12.5 Thus, it is pre-requisite essential condition for determination of ALP applying CUP method in relation to the international tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... one, therefore, is not relevant to decide the said issue. As a matter of fact, the royalty at the rate of 2% was paid by the assessee to its associate enterprise itself and the said transaction thus was a controlled transaction which cannot be taken as a bench mark for deciding as to whether the royalty paid by the assessee to M/s Cabot Corporation at the rate of 5% was at arm s length. This exercise of ascertaining whether the royalty so paid is at arm s length has to be done independently as per the procedure laid down in the relevant provisions of the Act as well as the rules prescribed. In this regard, it is observed that royalty paid at the rate of 5% was claimed to be an arm s length price by the assessee on the basis of CUP method. The AO, on the other hand, has not referred to any method specifically and made the addition on account of transfer pricing adjustment taking the rate of 2% at which royalty was paid by the assessee in the earlier years as a bench mark. As already observed by us, the said royalty at the rate of 2% was paid by the assessee company to its associate enterprise and the same, therefore, could not be taken as a comparable uncontrolled price. 9. At ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... taken into account namely (a) the nature and class of the international transaction; (b) the c/ass or c/asses of associated enterprises entering into the transaction and the functions performed by them taking into account assets employed or to be employed and risks assumed by such enterprise; (c) the availability, coverage and reliability of data necessary for application of the method; (d) the degree of comparability existing between the international transaction and the uncontrolled transaction and between the enterprises entering into such transactions; (e) the extent to which reliable and accurate adjustments can be made to account for differences, if any, between the international transaction, and the comparable uncontrolled transaction or between the enterprises entering into such transactions; (f) the nature, extent and reliability of assumptions required to be made in application of a method. 11. In our opinion, if the facts of the present case are considered in the light of the above factors, CUP method cannot be regarded as most appropriate method for determining arm s length price of the royalty paid by the assessee to M/s Cabot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any case, when the onus is on the assessee to provide all relevant data for the purpose of determination of ALP, then the assessee cannot escape from the responsibility by taking an excuse that the relevant data are not available and thereby computing ALP in a manner which is apparent on the face of it contrary to the basic concept and provisions of law. Hence, so far as the issue in principle is set aside to the record of the Assessing Officer by following the earlier order of this Tribunal. 13 The assessee has also filed additional evidence in the shape of two royalty agreements entered between the AE of the assessee and third party namely (i) Delaware USA (ii) Negroservia, SA wherein the royalty was paid by these third parties @ 5% on sale price and 4.5% on the sale price respectively. The ld AR has submitted that these agreements are relevant for considering the payment of royalty paid by the assessee to the AE being at ALP and therefore, pleaded that the additional evidence filed by the assessee may be admitted. 13.1 On the other hand, the ld DR has vehemently objected the proposed additional evidence filed by the assessee at this stage and submitted that these agreem ..... X X X X Extracts X X X X X X X X Extracts X X X X
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