Income Tax Appellate Tribunal - Ahmedabad
Fag Bearings India Limited, Baroda vs Assessee on 14 November, 2014
IN THE INCOME TAX APPELLATE TRIBUNAL
AHMEDABAD "D" BENCH AHMEDABAD
आयकर अपीलीय अिधकरण,
अिधकरण, अहमदाबाद Ûयायपीठ 'डȣ
डȣ'
डȣ
Before Shri Anil Chaturvedi, Accountant Member and
ौी अिनल चतुवद ȶ ȣ, लेखा सदःय एवं
Shri Kul Bharat, Judicial Member
ौी कुल भारत, Ûयाियक सदःय के सम¢ ।
ITA No. 793 & 817/Ahd/2006
Assessm ent Year :2002-03
FAG Bearings India Ltd., V/s. DCIT,
P.O. Maneja, Circle-1,
Baroda Baroda.
&
DCIT, FAG Bearings India Ltd.,
Circle-1, P.O. Maneja,
Baroda. Baroda
P AN No. AAACF3357Q
(Appellant) .. (Respondent)
राजःव कȧ ओर से / By Revenue Shri Vimalendu Verma, CIT D.R.,
Shri S. C. Tiwari, TPO
आवेदक कȧ ओर से / By Assessee Shri A. V. Sonde, Shri Milin Mehta
& Shri Bhavin Marfatia, A.R.
सुनवाई कȧ तारȣख/Date of Hearing 25.09.2014
घोषणा कȧ तारȣख/Date of Pronouncement 14.11.2014
ORDER
PER BENCH These two appeals filed by assessee and Revenue are against the order of CIT(A)-III, Baroda, dated 27.01.2006 for the assessment year 2002-
03.
2. The facts as culled out from the materials on record are as under:
3. The assessee is a Company stated to be engaged in the business of manufacturing of various types of ball and roller bearings. The assessee filed its return of income for A.Y. 2002-03 on 31.10.2002 declaring total income of I T A No s . 7 93 & 8 17 / A hd / 20 0 6 A . Y. 200 2- 03 ( FA G B ear i ngs I n dia L td . v s . D CI T) Page 2 Rs.4,27,30,600/-. The case was selected for scrutiny and thereafter the assessment was framed u/s.143(3) vide order dated 31.03.2005 and the total income was determined at Rs.25,95,51,168/-. Aggrieved by the order of A.O., assessee carried the matter before the CIT(A) who vide order dated 27.01.2006 granted partial relief to the assessee. Aggrieved by the aforesaid order of CIT(A), the assessee and Revenue are now in appeal before us.
4. We first take up assessee's appeal in ITA No. 793/Ahd/2006 and the grounds raised are as under:
1. The learned Commissioner of Income Tax (Appeals) erred in fact and in law in confirming the addition of Rs. 84.32 lacs on account of interest received by the appellant on Income Tax Refund despite the fact that the said interest had not become final during the year under consideration.
2. The learned Commissioner of Income Tax (Appeals) erred in fact and in law in confirming the action of the AO in treating repairing expenses to plant and machinery of Rs. 133.77 lacs as capital expenditure instead of revenue expenditure as claimed by the appellant.
3. The learned Commissioner of Income Tax (Appeals) erred in fact and in law in confirming the action of the AO in treating repairing expenses to plant & machinery of Rs. 120.16 lacs as capital expenditure instead of revenue expenditure as claimed by the appellant.
The learned Commissioner of Income Tax (Appeals) further erred in fact and in law in not allowing depreciation on the amount considered as capital expenditure on the ground that no evidence was furnished for proving that the subject asset was installed and put to use during the year.
4. The learned Commissioner of Income Tax (Appeals) erred in fact and in law in confirming the action of the AO in considering software expenses on account of SAP R3 charges of Rs. 104.99 lacs as capital expenditure.
5. The learned Commissioner of Income Tax (Appeals) erred in fact and in law in confirming the action of the AO in considering lump sum payment of Rs. 44.21 lacs on account of Knowhow Fees as capital expenditure.
I T A No s . 7 93 & 8 17 / A hd / 20 0 6 A . Y. 200 2- 03 ( FA G B ear i ngs I n dia L td . v s . D CI T) Page 3 The learned Commissioner of Income Tax (Appeals) also erred in fact and in law in enhancing the disallowance on account of Royalty by a sum of Rs. 8.81 lacs in respect of TDS paid on such amount of Knowhow fees as per the terms of agreement and treating the same as capital expenditure primarily on the ground that it is a capital expenditure.
6. The Ld. CIT (A) erred in fact and in law in partially confirming the adjustment proposed by the TPO / AO U/s. 92 C r.w.s. 92 (1) in respect of international transactions in as much as it pertained to part of the royalty paid amounting to Rs. 375.91 lacs and in respect of other international transactions amounting to Rs. 59.12 lacs and thus confirming the enhancement to the income of the Appellant aggregating to Rs. 435.03 lacs.
a. The Ld. CIT (A) also erred in fact and in law in holding that oniy Royalty and Fees for Technical Services paid @ 1.5 % of the sales value may be treated as arm's length price and balance was required to be adjusted under Chapter X of the Act and thus confirming the adjustment to the extent of Rs. 375.91 lacs.
b. The Ld. CIT (A) also erred in fact and in law in confirming the action of the TPO / AO in separating the profits of the Appellant Company in respect of Domestic Tariff Area Units and then comparing the same with composite profits of other cases, which included the export profits and thus confirming adjustment of Rs, 59.12 lacs on the alleged ground of lower comparable profits. » _
7. The Ld. CLT (A) erred in fact and in law in invoking the provisions of section 40 A (2) (b) for the first time for holding that the Royalty and Fees for Technical Services paid in excess of 1.5 % of the sales value is excessive and therefore deserved to be disallowed and thus confirming the disallowance of Rs. 375.91 lacs.
a. The Ld. C1T (A) also erred in fact and in law in holding that if for any reason the adjustment made U/s. 92 on the count of Royalty payment is deleted, then it may be confirmed on the ground of it being excessive by invoking the provisions of section 375.91 lacs.
8. The learned Commissioner of Income Tax (Appeals) erred in fact and in law in confirming the action of the AO in considering repairs to building amounting I T A No s . 7 93 & 8 17 / A hd / 20 0 6 A . Y. 200 2- 03 ( FA G B ear i ngs I n dia L td . v s . D CI T) Page 4 to Rs. 40.18 lacs as capital expenditure instead of revenue expenditure claimed by the appellant.
9. The learned Commissioner of Income Tax (Appeals) erred in fact and in law in confirming the action of the AO in considering software expenses of Rs. 14.91 lacs as capital expenditure.
10. The learned Commissioner of Income Tax (Appeals) erred in fact and in law in confirming disallowance of Rs. 0.93 lacs made by the AO invoking provisions of section 14A of the Income Tax Act, 1961.
11. The learned Commissioner of Income Tax (Appeals) erred in fact and in law in confirming disallowance of Rs. 65.35 lacs made by the AO on account of diminution in the value of investments.
12. The learned Commissioner of Income Tax (Appeals) erred in fact and in law in confirming disallowance of Rs. 8.05 lacs made by the AO on account of interest paid on Foreign Supply Credit on the ground that TDS u/s. 195 of the Income Tax Act, 1961 has not been deducted.
13. The learned Commissioner of Income Tax (Appeals) erred in fact and in law in confirming the action of the AO in charging interest u/s. 234B and section 234D of the Income Tax Act, 1961."
5. Ground no.1 is with respect to addition of Rs.84.32 lacs on account of interest received on Income Tax Refund.
6. During the course of assessment proceeding, A.O. noticed that assessee had received interest on Income Tax Refund amounting to Rs.84,32,309/- but the same was not considered by assessee as a part of taxable income, for the reason that according to assessee, the matter on which the refund has been received had not reached finality. The submission of the assessee was not found acceptable to the A.O. more so since the assessee had received the interest during the year under consideration. He, accordingly, added the amount as income of the assessee. Aggrieved by the order of A.O., assessee carried the matter before the CIT(A). CIT(A) I T A No s . 7 93 & 8 17 / A hd / 20 0 6 A . Y. 200 2- 03 ( FA G B ear i ngs I n dia L td . v s . D CI T) Page 5 following the order of his predecessor for A.Y. 2001-02 confirmed the order of A.O. and dismissed the grounds of assessee.
7. Aggrieved by the order of CIT(A), the assessee is now in appeal before us.
8. Before us, at the outset, ld. A.R. submitted that the issue in the present ground is covered against the assessee by the decision of Special Bench of Mumbai in the case of Avada Trading Company 100 ITD 131. He further submitted that the issue has also been decided against the assessee by the Tribunal while deciding the case for A.Y. 2001-02. He, therefore, fairly conceded that the issue has to be decided against the assessee. Ld. D.R. on the other hand supported the orders of A.O. and CIT(A).
9. We have heard the rival submissions and perused the material on record. We find that identical issue was before the Tribunal in assessee's own case in ITA Nos. 792 & 816/Ahd/2006, order dated 30.09.2011. The issue was decided by the co-ordinate Bench of Tribunal against the assessee by relying on the decision of Special Bench in case of Avada Trading Company (supra). Before us, no binding contrary decision in support of assessee has been placed on record. We, therefore, respectfully following the decision of Special Bench in case of Avada Trading Company (supra) and the decision of co-ordinate Bench in the case of assessee for preceding year, find no reason to interfere with the order of CIT(A) and thus, this ground of assessee is dismissed.
I T A No s . 7 93 & 8 17 / A hd / 20 0 6 A . Y. 200 2- 03 ( FA G B ear i ngs I n dia L td . v s . D CI T) Page 6
10. Ground no.2 & 3 are with respect to treating repairing expenses Rs.
133.77 lacs & Rs.120.16 lacs as capital expenses.
11. During the course of assessment proceeding, A.O. on perusing the details submitted by the assessee, noticed that it had claimed Rs.
1,33,77,052/- & Rs. 1,20,16,250/- respectively on account of modification of various machines as revenue expenses. A.O. also noticed that the amount of expenditure incurred was almost consistent with the quantum of the expenditure incurred in the immediately preceding year. A.O. was of the view that the expenses have resulted in quality improvement, technology up-
gradation and better fuel efficiency and has thus resulted into bringing into existence an asset or advantage of enduring nature. He, therefore, following the decision of Hon'ble Supreme Court in case of Ballimal Naval Kishore vs. CIT 224 ITR 414, held the expenditure as capital expenditure but however, allowed depreciation on the same.
12. Aggrieved by the order of A.O., the assessee carried the matter before the CIT(A) who upheld the order of A.O. by holding as under:
8.4 I have considered the facts of the case and the assessee's submissions.
As regards the expenditure on items II(1) to (19) above, the expenditure has not been incurred on current repairs but on rebuilding of assets/machines. The assessee itself did not debit this expenditure to P & L Account as part of repair but claimed it separately in the computation of income. This fact clearly demonstrates that the assessee itself did not treat the expenditure as current repair or part of day-to-day repairs and maintenance. No doubt, the entries in the books of account are not determinative of the true nature of income or expenditure. However, the assessee has not explained under what circumstances the expenditure was treated as capital expenditure in the books of accounts and claimed as revenue expenditure in the income-tax assessment.
I T A No s . 7 93 & 8 17 / A hd / 20 0 6 A . Y. 200 2- 03 ( FA G B ear i ngs I n dia L td . v s . D CI T) Page 7 The claim of expenditure is not a legal claim but a factual one and therefore, if the assessee is giving different treatment to the expenditure, there have to be justifiable reasons for the same. As discussed above, the expenditure is not on current repairs but on rebuilding of plant and rnachinery. The assessee has got advantage of enduring nature by incurring this expenditure and such advantage is in the capital field. It has been held by the Supreme Court in the case of Ballimal Naval Kishore v. CIT 224 ITR 414, that the current repairs connote an expenditure for the purpose of preserving or maintaining an already existing asset and not for renewal or modification and if the expenditure gives a new or different advantage, it is not repairs but a capital expenditure. The expenditure was, therefore, rightly treated as capital expenditure.
13. Aggrieved by the order of CIT(A), the assessee is now in appeal before us.
14. Before us, at the outset, ld. A.R. submitted that identical issue arose in the case of assessee for A.Y. 01-02 and the matter was restored back to the file of A.O. by Hon'ble ITAT. He, therefore, submitted that since the facts and circumstances of the case in the year under appeal are identical to that of earlier year, the matter in the year under consideration be also similarly, restored to the file of A.O. Ld. D.R. on the other hand submitted and pointed out to the findings of A.O. where A.O. has noted that assessee did not submit the required details called for by the A.O. He, therefore, submitted that in such circumstances, A.O. was fully justified in disallowing the claim of assessee. He, thus, supported the orders of A.O. and CIT(A).
15. We have heard the rival submissions and perused the material on record. Before us, it was submitted that in the assessee's own case identical issue was before the Tribunal for A.Y. 2001-02 and the matter was remitted I T A No s . 7 93 & 8 17 / A hd / 20 0 6 A . Y. 200 2- 03 ( FA G B ear i ngs I n dia L td . v s . D CI T) Page 8 back to the file of A.O. We find that the co-ordinate Bench of Tribunal in ITA Nos. 792 & 816/Ahd/2006 had held as under:
"12. Having heard the submissions of both the sides and on careful perusal of the compilation filed before us, one thing is evident that certain explanations were furnished before the AO but those were not supported by the requisite evidences. Even in the compilation from pages 211 to 289, the assessee has furnished certain details of the bills of repairs and details of replacement of furnace. The assessee was under strict obligation to furnish the proof and evidences in support of the repairs and replacement of furnace. A passing remark was made before us that the assessment order under consideration was passed on 30/03/2004 and might be because of the time barring assessment, procedure those Details were not scrutinized by the AO or the assessee might have prevented by inadequate opportunity to place those details. Therefore, we are of the view that the natural justice demands to provide an opportunity to this assessee to furnish full details along with bills and vouchers to demonstrate the nature of expenditure incurred; before the AO, so that after proper investigation about the nature of expenditure can be determined. With these observations, these two grounds of the assessee being restored back for de novo adjudication, hence may be treated as allowed but for statistical purposes."
Since, the aforesaid submission has not been controverted by Revenue, we are of the view that following the decision of Co-ordinate Bench in assessee's own case for A.Y. 2001-02, the matter in the year under consideration also needs to be remitted back to the file of A.O. We, therefore, with the similar directions given by co-ordinate Bench in A.Y. 01-02, remit the issue to the file of A.O. We also direct the assessee to co-operate with the A.O. by furnishing all the required details called for. The A.O. shall after considering the submission of the assessee decide the issue in accordance with law.
Needless to state that A.O. shall grant adequate opportunity of hearing to the assessee. Thus, this ground of assessee is allowed for statistical purpose.
I T A No s . 7 93 & 8 17 / A hd / 20 0 6 A . Y. 200 2- 03 ( FA G B ear i ngs I n dia L td . v s . D CI T) Page 9
16. Ground no.4 is with respect to treating software expenses of Rs.104.99 lacs as capital expenditure:-
17. During the course of assessment proceeding A.O. noticed that assessee had incurred expenses of Rs.1,89,23,999/- for ongoing implementation of the Information System which included amount paid for SAP-R3 licence user fees and reimbursement of SAP-R3 cost. Assessee submitted that the amount was paid towards additional development of software of SAP-R3 and the expenses incurred was for up-gradation of SAP-
R3 and its prototyping and its customization was of revenue in nature. The submission of assessee was not found acceptable to the A.O. as he was of the view that SAP application provides for a standard solution for many of the business processes and the payment was made as fees for having access to this software for business purpose. He was therefore of the view that assessee has acquired a new asset or new advantage of enduring nature. He accordingly considered the entire expenditure to be capital in nature for intangible assets but however, allowed depreciation on the same.
18. Aggrieved by the order of A.O., the assessee carried the matter before the CIT(A). CIT(A) decided the issue by holding as under:
"9.2 I have considered the submissions of the appellant. The appellant has filed the copy of agreement dated 1-1-2001 & copies of bills for expenditure. It is seen that during the year, the assessee has made two types of payments in connection with SAP software. The payment of Rs.84,24,564/- is towards monthly charges for operating and licence fee. This issue has been discussed by me while dealing with ground of appeal No. 8 for the Assessment year 2001-02 and it has been held by me that the expenditure is revenue in nature. For the reasons discussed in my appellate order for Assessment year 2001-02, in the I T A No s . 7 93 & 8 17 / A hd / 20 0 6 A . Y. 200 2- 03 ( FA G B ear i ngs I n dia L td . v s . D CI T) Page 10 current year also, the Assessing Officer is directed to allow the expenditure of Rs. 84,24, 564/-as revenue expenditure and withdraw depreciation.
9.2.1 The other payment of Rs.105.00 lakhs is towards assessee's share of cost for SAP R/3 Information system. This expenditure is towards development of additional/new functions and therefore, it amounts to obtaining additional software. The assessee has thus, obtained an advantage of enduring nature. By incurring the expenditure the appellant has obtained right to use the Software and has, thus, obtained advantage of enduring nature. For constituting expenditure as capital expenditure, it is not always necessary that the expenditure should necessarily result in absolute ownership of a capital asset. The license to use or right to use is also a capital asset. [A.R. Krishnamurthy & Others 176 ITR 417 (SC)]. In the case of Scientific Engineering House 157 ITR 66, the Hon'ble Supreme Court held that the right to use a technical know-how is a capital asset, in the nature of plant. In the case of the assessee, the assessee has obtained license to use additional software. This software is in the nature of capital asset.
9.2.1.1 Reliance is also placed on the decision of Hon'ble ITAT, Delhi in the case of Maruti Udyog Ltd. 92 ITD 119 wherein it was held that "Software is a capital asset and is an intangible asset. Hardware, commonly called as computer, is a tangible asset which by itself cannot function. The computer can function only with the help of software. Software is akin to know how. Admittedly; the assessee was not in the business of software. Hence, software was a capital asset as far as the assessee was concerned. The Income-tax Rules, as amended with effect from 1-4-2003 rather helped the revenue and not the assessee inasmuch as it provides for depreciation on software at the rate of 60 per cent. By providing higher depreciation, it could not be said that prior to 1- 4-2003, it was revenue expenditure. It was always a capital asset. Prior to 1-4-2003, the assessee was entitled to normal rate of depreciation which was enhanced to 60 per cent by the amendment considering the rapid wear and tear. Therefore, the expenditure was incurred on acquisition of capital assets and, thus, it was a capital expenditure. Resultantly, the same could be allowed as revenue expenditure." (from Head notes).
9.2.1.2 In view of the above, it is held that by incurring the expenditure of 105 lakhs, the assessee has obtained license for long term use of the software and thus obtained advantage of enduring nature. The expenditure has to be treated as capital expenditure. It is, therefore, held that the expenditure of Rs.105 lakhs was rightly treated as capital expenditure by the Assessing Officer. The ground of appeal No.5 is partly allowed."
I T A No s . 7 93 & 8 17 / A hd / 20 0 6 A . Y. 200 2- 03 ( FA G B ear i ngs I n dia L td . v s . D CI T) Page 11
19. Aggrieved by the order of CIT(A), the assessee is now in appeal before us.
20. Before us, ld. A.R. reiterated the submission made before A.O. and CIT(A) and further submitted that the issue in the present case is covered in favour of the assessee by the decisions Hon'ble Delhi High Court in case of CIT vs. Asahi India Safety Glass Ltd. in ITA Nos. 1110/2006 & 1111/2006, decision in the case of JCIT vs. Citicorp Overseas Software Ltd. 85 TTJ 87 (Mum), IBM India Ltd. vs. ACIT 105 ITD 1 (Bang.) and other decisions. Ld. D.R. on the other hand supported the order of A.O.
21. We have heard the rival submissions and perused the material on record. The fact of incurring of expenditure for SAP on account of user licencee fee and on account of reimbursement is not in dispute. We find that Hon'ble Delhi High Court in case of CIT vs. Asahi India Safety Glass Ltd.
(2011) 64 DTR (Del) 63 has concluded that the expenditure incurred by assessee on software is allowable as Revenue expenditure more so as the expenditure acquired by the assessee was an application software which enable it execute tasks in the field of accounting, purchases and inventory maintenance. In case of IBM India Ltd. vs. ACIT (2007) 108 TTJ (Bang) 531 the Co-ordinate Bench of Tribunal has held that expenditure on purchase of application software is allowable as revenue expenditure as it is an aid in manufacturing process rather than the tool and though there is an enduring benefit there is no acquisition of capital asset. In case of GE Capital Services India Ltd. 106 TTJ 65 (Del), the Co-ordinate Bench has held that software I T A No s . 7 93 & 8 17 / A hd / 20 0 6 A . Y. 200 2- 03 ( FA G B ear i ngs I n dia L td . v s . D CI T) Page 12 being the filed of vast change technology which needs update and upgradation regularly, expenditure on software is allowable as Revenue expenditure. Before us, Revenue has not brought on record any contrary binding decision in its support. We, therefore following the aforesaid decisions, are of the view that the expenditure incurred by the assessee has to be allowed as revenue expenditure. We direct accordingly. Thus, this ground of assessee is allowed.
22. Ground no.5 is with respect to considering lump sum payment of Rs.44.21 lacs on account of Knowhow Fees as capital expenditure.
23. A.O. noticed that assessee had paid Rs.44,21,653/- to FAG Automobiltechnik AG, Germany towards technical fees under the agreement dated 30.03.2000 and the same was claimed as revenue expenditure. It was also submitted that the amount became payable in three installments upon the fulfillment of the conditions stipulated in the agreement. However, A.O. was of the view that the nature of payment indicates that assessee has acquired an asset or advantage or enduring nature by incurring of this expenditure. He, following the decision of Hon'ble Apex Court in case of Scientific Engineering House P. Ltd. vs. CIT 157 ITR 86 held that assessee has acquired technical knowhow fees in the form of drawings/designs etc. which would assist the assessee in its manufacturing process and therefore the expenditure was covered by the provisions of Section 32. He accordingly considered the expenditure as capital expenditure but however, allowed depreciation.
I T A No s . 7 93 & 8 17 / A hd / 20 0 6 A . Y. 200 2- 03 ( FA G B ear i ngs I n dia L td . v s . D CI T) Page 13
24. Aggrieved by the order of A.O., the assessee carried the matter before the CIT(A). CIT(A) upheld the order of A.O.
25. Aggrieved by the order of CIT(A), the assessee is now in appeal before us.
26. Before us, at the outset, ld. A.R. submitted that the issue in the present case is directly covered in favour of the assessee by the decision of Tribunal in assessee's own case for A.Y. 2001-02. He further submitted that since the facts of the case in the year under appeal are identical to that of A.Y. 01-02, the issue of expenditure on knowhow fees be allowed in favour of the assessee. Ld. D.R. on the other hand supported the orders of A.O. and CIT(A).
27. We have heard the rival submissions and perused the material on record. We find that the issue of payment on knowhow fees by the assessee to FAG Automobiltechnik AG, Germany by the agreement dated 30.03.2000 was before Tribunal in ITA Nos. 792 & 816/Ahd/2006 for A.Y. 01-02. The issue was decided in favour of the assessee vide order dated 30.09.2011 by holding as under:
"6. We have heard the parties at some length. We have carefully perused the orders of the authorities below in the light of a voluminous compilation filed, before us containing almost 400 pages and the case laws cited. Before us, an agreement dated 30/03/2000 was referred which was executed between FAG AUTOMOBILTECHNIK AG on one part referred as "the Collaborator" and "FAG Bearings (India) Ltd." as other part mentioned as "the Indian Company". The said Collaborator is a subsidiary of FAG Kugelfischer George Schaefer AG incorporated under the laws of the Federal Republic of Germany. Clause -(c) on page No1l of the said agreement states that the "Indian Company" and the I T A No s . 7 93 & 8 17 / A hd / 20 0 6 A . Y. 200 2- 03 ( FA G B ear i ngs I n dia L td . v s . D CI T) Page 14 "Collaborator" have over the years entered into diverse agreements for supply of know-how and technical assistance in respect of diverse types of bearings. The present agreement was in respect of know-how and technical services in respect of the following products.
Clutch Release Bearings Alternator Bearings Wheel Bearings 1 lub units (All generations) Tensioner leer Assemblies From the side of the assessee by referring the types of the products, i.e., bearings, etc. the main argument was that there were no new product introduced but mainly the technical assistance was to improve the quality of the existing products.
6.1. Apart from the above specifications, it has also been brought to our notice that the know-how as such was not the property of the assessee. The know-how remained the property of the said "Collaborator" because the "Indian Company"
was not permitted to make use of know-how other than the purpose for which it had intended in terms of the said agreement. One of the clause, i.e. clausc-9 prescribes that the know-how should not be communicated to any person other than the responsible employees of the "Indian Company". Rather one of the clause prescribes that upon termination of the agreement the Indian Company had to return the Collaborators the said know-how. By referring these clauses and other connected clauses, the argument is that the said know-how in question had never been purchased by the Indian Company, i.e. the assessee. The said know-how had never become an asset of the assessee. The said know-how was to be used by the assessee for limited and specific purposes as prescribed in the agreement.
6.2. In respect of the observations made hereinabove, we have been asked to peruse a clarification issued by Central Board of Direct Taxes by Circular No.21 (F-No.7A/40/68-IT (A-II) dated 9th July, 1969. If a know-how is acquired under an agreement is merely a licence for the user, if it is for a limited period, if the know- how is without the right to use the patents and trade marks then if any payment made would no bring into existence an asset of enduring advantage to the Indian participants. This Circular therefore states that the payment should be regarded if expenditure incurred fop the purpose of running the business during the period of agreement. An another argument has also been extended that there were series I T A No s . 7 93 & 8 17 / A hd / 20 0 6 A . Y. 200 2- 03 ( FA G B ear i ngs I n dia L td . v s . D CI T) Page 15 of agreements, however, the know-how initially was acquired out of an agreement dated 30/08/1996. The changes in the provisions of section 32 were made subsequently from 1st day of April, 1998, therefore not applicable in the case of the assessee. It has been clarified that the agreements executed later on, had in fact, arose out of the original agreements which were in operation since inception of the company. In the light of the factual background, we have scrutinized the case laws cited before us. We have noted that in one of the case it was held that if the payment is made for exclusive acquisition of technical know-how, then the expenditure is capital in nature, but if the payment is for securing the use of know-how, then allowable as revenue expenditure.
6.3. In these decisions, it has been conveyed that the expenditure towards improvisation for the existing business is to be considered a revenue expenditure. In the present appeal, undisputedly the know-how related to the existing manufacturing operation of ball-bearings, i.e. stated to be same type of product. It cannot be ruled out that in a fast growing era of new technologies the outdated or obsolete technologies arc required to be replaced and that expenditure can be held a business requirement.
"6.4 It has also been noted while reading the clauses of the agreement that one of the clause is about the non-portability. Therefore, this clause has demonstrated that the know-how was not the property of the assessee. Rather, the said Collaborator has imposed a condition of confidentiality and secrecy which leads to an inference that the property belonged to the said Collaborator. Rather, we are inclined to draw an inference that the transfer of know-how in the present set of facts and circumstances was restricted for the use rather than its acquisition. In the light of the reasons assigned hereinabove and considering the totality of the evidence placed on record duly supported by the precedents cited, we hereby hold that the payment of Rs.43.10 lacs was in the nature of revenue expenditure."
Before us, Revenue has not produced any material to demonstrate that the facts in the year under appeal are different from that of A.Y. 01-02. Since the facts of the case in the year in appeal are identical to that of A.Y. 01-02, we respectfully following the decision of Co-ordinate Bench in assessee's own I T A No s . 7 93 & 8 17 / A hd / 20 0 6 A . Y. 200 2- 03 ( FA G B ear i ngs I n dia L td . v s . D CI T) Page 16 case and for similar reasons, decide the issue in favour of the assessee.
Thus, this ground is allowed.
28. Apropos to Ground Nos.6 & 7, the assessee and the Revenue have made elaborate arguments and have also filed written submissions. The written submissions of the Assessee as well as the Revenue are reproduced as under:-
28.1. Written submissions of the ld. counsel for the assessee are as under:
"Before the Hon'ble ITAT, Ahd "D" Bench In the matter of M/s. FAG Bearings India Ltd. ("the Appellant") AY 2002-03 ITA No. 793/A/2006 - Assessee's Appeal ITANo. 817/A/2006 - Department's Appeal Transfer Pricing Adjustment The present submissions are without prejudice to the oral arguments advanced during the course of hearing of appeal.
Brief Facts
1. The Appellant is in the business of manufacture of ball and roller bearings. The company is one of the largest manufactures of bearings in India. During year the Appellant had benchmarked its international transactions with associated enterprises (AEs) using Transaction Net Margin Method ("TNMM"). The economic analysis for the purpose of benchmarking the international transactions was carried out by segmental division of the activities of the company in the manufacturing segment and distribution segment. Following table gives the comparative figures as per the Transfer Pricing Study:
Segment Manufacturing Distribution
PLI - Appellant 9.55 % 15.08%
PLI - Comparables 9.79 % 2.19%
Upward Adjustment Accepted
made
I T A No s . 7 93 & 8 17 / A hd / 20 0 6 A . Y. 200 2- 03
( FA G B ear i ngs I n dia L td . v s . D CI T) Page 17
2. The Additional Commissioner of Income Tax, Transfer Pricing - I, Mumbai ("the TPO") has accepted TNMM as the most appropriate method for benchmarking the international transactions with AEs (refer para 5.3 on page 5 of the TPO's order). The TPO has also accepted the set of comparable companies selected by the Appellant and also the profit level indicator (PLI) being operating profit / sales. There is no dispute with respect to the method applied, the selection of comparables and also the PLI.
3. The TPO has accepted the ALP for all the transactions in the distribution segment.
Accordingly, no upward adjustment has been proposed for the distribution segment.
4. For the purpose of benchmarking the international transactions, the Appellant had bifurcated its activities into the manufacturing segment and the distribution segment. For the manufacturing segment the TPO has further bifurcated the activities of the Appellant into domestic unit ("DTA") and export oriented unit ("EOU"). The TPO thus artificially divided the manufacturing segment into two sub-segments i.e. for EOU (for Exports) and for DTA (for domestic sales). The TPO kept the set of comparable companies same for both EOU and DTA. The TPO concluded that though EOU and DTA present distinct and separate segments, their comparable companies are same.
Segment - Manufacturing EOU DTA
PLI - Appellant 42.74 % 2.78 %
PLI - Comparables 9.79 % 9.79 %
Accepted Upward
Adjustment
5. Attention is invited to the bifurcation of the International Transactions. Item- wise description of the International Transactions as contained on Page 3 of the TPO's order was given as under:
Sr. Particulars DTA EOU Amount Remarks
No. of International (Rs.)
Transaction
(i) Purchase of 90,738,976 Nil 90,738,976 Distribution
Bearings
(ii) Export of Bearings 7,403,728 395,303,94 402,707,671 DTA & EOU
3
(iii) Purchase Nil 27,303,089 27,303,089 Only EOU
of components
I T A No s . 7 93 & 8 17 / A hd / 20 0 6 A . Y. 200 2- 03
( FA G B ear i ngs I n dia L td . v s . D CI T) Page 18
(iv) Purchase of Stores 7,746,883 892,442 8,639,325 DTA & EOU
and Spares
(v) Purchase of 3,571,481 26,421,834 29,993,315 DTA & EOU
rollers, grinding
wheels and shield
(vi) Purchase of 4,291,279 Nil 4,291,279 Only DTA
Rubber Seals
(vii) Purchase of 3,037,495 10,983,860 14,021,355 DTA & EOU
Retainers
(viii) Purchase of 51,925,936 Nil 51,925,936 Capital
Capital Goods Goods
(ix) Export of Tools 1,467,658 Nil 1,467,658 Income
(x) Guarantee Nil 114,497 114,497 Only EOU
Commission
for foreign currency
loan
(xi) Charges for SAP / 15,732,397 3,191,000 18,923,397 DTA & EOU
R3 and connectivity
(xii) Advertisement 242,177 Nil 242,177 Only DTA
Materials
(xiii) Training & other 4,043,445 Nil 4,043,445 Only DTA
Costs
(xiv) Fees for use
of technology
(a) FAG Nil 8,194,643 8,194,643 Royalty
Kuglefischer Georg
Schaefer AG
(b)FAG 42,172,305 6,907,060 49,079,365 Royalty
Industrial Bearings
AG
(c)FAG 6,552,090 Nil 6,552,090 Royalty
Automobiletechnik
AG
Total 48,724,395 15,101,703 63,826,098
I T A No s . 7 93 & 8 17 / A hd / 20 0 6 A . Y. 200 2- 03
( FA G B ear i ngs I n dia L td . v s . D CI T) Page 19
(XV) Testing Charges 1,448,598 Nil 1,448,598 Only DTA
(xvi) Receipt 16,220,746 Nil 16,220,746 Distribution
of Consultancy
services fees
An analysis of the above International Transactions gives the following findings:
(a) Item No. (i) and Item No. (xvi) pertain to the distribution segment (though shown in this table in DTA) and since no adjustment is proposed in distribution segment, they are not relevant for the present appeal.
(b) Item No. (viii) is purchase of capital goods.
(c) Item No. (xiv) pertain to Royalty for which separate submissions are made
(d) Item No.s (iii) and (x) pertain only to EOU and since no adjustment is proposed in EOU, they are not relevant for the present appeal.
(e) Item No.s (ii), (iv), (v), (vii) and (xi) are common nature of expenses for DTA and EOU. For same expenditure the ALP in EOU is accepted. Same price lists and same transfer pricing policy is followed by the Company for supply to DTA and EOU.
(f) Only items listed at No.s (vi), (xii), (xiii) and (xv) are items of expenditure which is unique to DTA. Aggregate of such expenditure is Rs. 10,025,499 (i.e. Rs. 1.00 crore).
Further, the above international transactions are in the nature of revenue expense, royalty (fees for use of technology), revenue income or capital expenditure.
6. Nature-wise bifurcation of the international transaction is given on Page 41 of the CIT (A)'s order.
7. The Appellant further invites attention to Page 22 of the TPO's order. The TPO observed as under:
"As discussed in the order, the international trans action of the royalty is certainly not at Arm's length. In this order, the Arm's Length Price of the international transaction of the royalty is separately not determined because the company continues to argue that the Transactional Net Margin Method is the most appropriate method in its case and transactions cannot be benchmarked separately.
The assessee did not benchmark all the international transactions separately, that the activity of imports leads to manufacturing of goods, which in turn results into sale. The activity of import of raw material and export of goods are closely inter-linked and continuous and the same are not evaluated separately, I T A No s . 7 93 & 8 17 / A hd / 20 0 6 A . Y. 200 2- 03 ( FA G B ear i ngs I n dia L td . v s . D CI T) Page 20 by the assessee as well as this office. The ultimate result of the manufacturing activity of sale of finished products, reflect into the income earned by the entity. In the present case, as computed earlier, the operating profit requires to be adjusted upward by an amount of Rs. 13.84 crores. This adjustment, is not being allocated to various international transactions, as the assessee did not compute the Arm's Length Price of these transactions separately. In view of the fact that the transactions are inter-related and the pan of income generating activity, therefore, it will be appropriate to make the upward adjustment to the income of the assessee by the amount of Rs. 13.84 crores. Therefore, on account of bench marking the manufacturing activity of the DTA Unit of the company, an upward adjustment of Rs. 13.84 Crores is made. "
It was submitted that the TPO therefore concluded that the benchmarking of all the transactions should be done in a combined manner and not separately.
8. The Appellant submits that at no point in time during the course of TP proceedings, the TPO informed the Assessee that he proposes to bifurcate the profits of the manufacturing segment into DTA and EOU and carry out the comparison.
CIT (A)
9. The CIT(A) in her order vide para 10.7.14 to 10.7.18 has affirmed the view of the TPO that it is proper to bifurcate the manufacturing segment into DTA and EOU.
10. The CIT (A) observed that though TNMM is appropriate method for all the transactions, for Royalty CUP should be applied. The CIT (A) further observed that though no Uncontrolled Transactions were available for comparison, the CUP for the Royalty should be with reference to the Controlled Transactions being Royalty paid by SKF to its Parent Company and by Assessee himself to its related party for the earlier years. The CIT (A) accordingly observed that all the royalty paid (including lump sum payments and taxes) over and above, 1.5 % of the sales, will be adjusted. It may further be submitted that while the TPO had not proposed any adjustment to Royalty paid to EOU, the CIT (A) proposed that even in case of EOU, Royalty paid in excess of 1.5 % should be upwardly adjusted. The CIT (A) accordingly confirmed the adjustment aggregating to Rs. 375.91 lacs on account of Royalty. This Rs. 375.91 lacs of adjustment include the following:
(i) Royalty payable for Sales made by EOU of Rs. 102.99 lacs
(ii) Lump Sum Fees paid (not linked to % of sales) Rs. 43.36 lacs
(iii) Taxes paid Government of India on the Royalty Rs. 17.48 lacs
(iv) Royalty payable for DTA Unit Rs. 212.08 lacs.
11. It is most respectfully submitted that it was duly pointed out to the CIT (A), as reproduced by the CIT (A) on page 39 of the order (on 2nd Bullet Point) that aggregate of the international transaction done by the Assessee for revenue expenses debited to P & L amounted to only Rs. 8.88 crores. As against this the TPO made I T A No s . 7 93 & 8 17 / A hd / 20 0 6 A . Y. 200 2- 03 ( FA G B ear i ngs I n dia L td . v s . D CI T) Page 21 adjustment of Rs. 13.84 Crores. This meant that the AEs should not only have supplied material and services free of cost, but should have actually paid a sum of Rs. 4.96 crores to the Appellant, for having used the material and services supplied by the AEs. Attention is invited to Page 43 of the CIT (A)'s order, where the CIT (A) holds that such an addition is incorrect and unreasonable in the facts of the Appellant's case.
12. In case of other transactions of the manufacturing segment, the CIT (A) observed that the TNMM is appropriate method. However, the CIT (A) observed that the adjustment should be restricted to the International Transactions and not to all the transactions and accordingly applied the differential rate of 7.01 % in PLI to international transactions of DTA, other than Royalty, computed by her at Rs. 8,43,42,316. The CIT (A) accordingly confirmed adjustment of RS. 59.12 lacs on account of other transactions of DTA. It is separately submitted and demonstrated in these submissions that the said computation of the CIT (A) is erroneous on several counts.
Artificial Bifurcation of DTA and EOU is de hors the provisions of Law
13. The Appellant contents that based on "Functions, Assets and Risks" ("FAR") analysis the Appellant has already bifurcated the Manufacturing Segment and Distribution Segment. Further dividing the manufacturing segment into DTA and EOU is not permissible under law. Rule 10 B (2) providing for criteria on which the transactions are to be compared. These include the specific characteristics of the property transferred or services rendered, FAR analysis, contractual terms of the transactions and conditions prevailing in the market, etc. However, the person to whom the sales is made (i.e. Domestic and Exports), cannot be the ground on which the distinction should be made. Accordingly, such sub-segmentation is not in accordance with law.
14. The TPO has contended that the DTA and the EOU represent two distinct and separate segments with different risk profiles, different profiles completely separate and therefore, though they have common nature of transactions cannot be benchmarked jointly. However, while doing so, the TPO uses the same set of comparables for comparing the DTA segment and EOU segments. Therefore, the comparable set are comparable with both DTA and EOU, as per TPO, but DTA and EOU amongst themselves are not comparable. This is completely illogical. To put it differently, if A is equal to B and A is also equal to C, then B is equal to C. However, as per TPO A is equal to B and C, but B and C are not equal. It is submitted that the bifurcation is done by the TPO not on any logical ground but for the sake of enabling the adjustment. Since the TPO has used the same comparable set for comparing both the segments, he has accepted that FAR of both the segments are comparable and therefore there is no justification for segregating the results of both the segments for comparing it with comparable set of companies.
DTA Segment has no exports but comparable companies has exports I T A No s . 7 93 & 8 17 / A hd / 20 0 6 A . Y. 200 2- 03 ( FA G B ear i ngs I n dia L td . v s . D CI T) Page 22
15. Appellant invites attention to Page 589 of the Paper Book. It may be seen that average exports of the comparable companies is 15.25 %. The Appellant Company (DTA plus EOU Segments) also had exports of 16.39 % for this year. Therefore combined manufacturing segment is comparable. However, if EOU is treated separately, then the DTA has practically no exports. Since the same set of comparable companies is used, DTA with Nil exports is compared with comparable companies with average 15.25 % exports.
16. Therefore, if DTA segment is to be benchmarked separately, then from the comparable companies also the profits arising from their export transactions should be removed. Since no such information is available in public domain, there is no option but to consider the combined profitability of DTA and EOU in the Appellant's case also. Otherwise, it would amount to "Comparing Apples with Oranges".
Incorrect Computation by the CIT (A)
17. CITA (A) in Para 10.7.14 observed that the adjustment to the ALP should be restricted to the international transaction and cannot be made to the total sales including the transactions with unrelated parties. The CIT (A) has then worked out a figure of Rs.8,43,42,316 as the international transaction on which the adjustment should be made. While the said observation of the CIT (A), that the adjustment should be restricted to the international transaction, is correct, it is submitted, without prejudice, by the Appellant that the computation of the said sum of Rs.8,43,42,316 is completely baseless. Attention is invited to Page 3 of the TPO's order read with Page 41 of the CIT (A)'s order. It can be seen that the figure of Rs.8,43,42,316 is arrived at by the following method:
a. International Transactions in the nature of Revenue Expenses debited to the Profit and Loss Account (other than Royalty) of Rs. 4,01,14,355 (Rs. 8,88,38,750 minus 4,87,24,395 of Royalty);
b. Added to above, the Royalty of the DTA Segment of Rs. 4,87,24,395 giving aggregate of Rs. 8,88,38,750.
c. Added to above, the International Transaction in the nature of Revenue Expenditure CREDITED to the P & L Account of Rs. 74,03,728. d. Added to above, the International Transaction in the nature of Capital Goods, part of the Balance Sheet of Rs. 5,19,25,936, aggregating to Rs. 14,81,68,414. e. From the above, reduction of the Royalty of DTA and EOU Segment both) of Rs. 6,38,26,098. It may be noted that Royalty of EOU of Rs. 1,51,01,703 was not included in the above aggregate. Despite this fact, it was reduced from the aggregate.
18. It is most respectfully submitted that the computation made by the CIT (A) is without application of mind and makes addition of items in the nature of revenue expenditure, income, capital expenditure and reduces therefrom the item of expenditure which was not included at all.
I T A No s . 7 93 & 8 17 / A hd / 20 0 6 A . Y. 200 2- 03 ( FA G B ear i ngs I n dia L td . v s . D CI T) Page 23 Without Prejudice - If DTA segment is Separately considered
19. Without prejudice to the contention that artificial bifurcation of DTA and EOU cannot be made, the Appellant contends that even if DTA segment is to be benchmarked separately, then the following aspects needs to be considered:
a. As observed by the TPO, the profitability of the EOU is more than that of the comparable set of companies and therefore pricing of all the transactions of EOU are accepted to be ALP. Attention is invited to table on Page 3 of the TPO's order and Para 5 above. It may be seen that the except in case of 4 items of expense, in all other cases, the transactions are common between EOU and DTA. Since the transactions are accepted in EOU, there is absolutely no reason why the same transactions should also not be accepted in DTA. It is most' respectfully submitted that the aggregate of the transactions which are unique to the DTA segment are only Rs. 1.00 crore. Accordingly, if difference in margin of 7.01 % is applied to these transactions then maximum adjustment that is permissible is only Rs. 7.00 lacs and nothing more.
b. If after bifurcation into DTA and EOU, if the adjustment is still proposed, then it would amount to adjustment of Non-AE Transactions. As is rightly observed by the CIT (A) that the profit can be reduced by either increasing the prices of the purchases or reducing the price of the sales. As has been already shown above that the expenses and income with AEs are common for the EOU and the DTA. Since the transactions with the EOU are accepted, their ALP even for DTA has to be accepted. What is therefore left is purchases from Non- AES or Sales to Non-AEs. Therefore the adjustment made in the DTA segment is nothing but the adjustment of the purchase price or sales price of transactions with Non-AEs. This is not permissible under the Transfer Pricing Provisions.
20. We rely on Panasonic India Pvt. Ltd. v. ITO (Delhi) 6 ITR (Trib) 502 (Delhi). In this decision the business of the company was organized under three distinct segments, the consumer product division (CPD), the system product division (SPD) and the industrial sales division (ISD). The CPD and SPD divisions performed trading functions whereas the ISD performed commission agency functions. For the purpose of transfer pricing analysis the results of the CPD and SPD were aggregated and the results of the ISD were considered separately. The Arm's length margin was arrived at 2.48 per cent which being lower than net profit margin at 6.15 per cent; it was concluded in TP report that outcome of assessee's international transactions satisfied arm's length standard. In transfer price proceedings, TPO, however, observed that aggregation of results of two divisions, CPD and SPD, was not proper as they were not closely interlinked because of differences in nature of products, target consumer group and marketing strategy. According to TPO, it would be fair to analyse CPD (imports) separately keeping CPD (locals) apart and, therefore, he had I T A No s . 7 93 & 8 17 / A hd / 20 0 6 A . Y. 200 2- 03 ( FA G B ear i ngs I n dia L td . v s . D CI T) Page 24 segregated divisional accounts under trading function, into CPD (local), CPD (imports) and SPD. TPO, therefore, redrew accounts of CPD and SPD divisions and on that basis recommended two additions of Rs. 1.12 crores and Rs.1.15 crores as TP adjustments. Assessing Officer accepted recommendations of TPO and enhanced assessee's income to that extent.
Held, (i) that in the transfer pricing report filed by the assessee before the Assessing Officer, the comparables were chosen after extensive exercise and a net profit of 2.8 per cent, was adopted as the arm's length margin for benchmarking the trading activity of the assessee. The TPO had bifurcated the trading activity into two separate division of consumer product division and system product division but had assumed the consolidated profit margin of 2.48 per cent, of the comparables as the common net margin indicator. The TPO had also reworked the financial of the assessee without making any corresponding adjustment in the profit level indicator of the comparable cases. This approach of the TPO was not under the prescribed rule 10B. If the transactions of both the divisions having international transactions as found by the TPO in his report were consolidated as one trading activity, the operating profit margin of sales worked out at 3.95 per cent, which exceeded the arm's length maring of 2.48 per cent. Thus, the assessee's international transaction was at arm's length.
Without prejudice:
Margins to be applied only to International Transactions with AEs:
21. The CIT(A) vide para 10.7.2 to 10.7.4 has held that the differential margin of the DTA segment and comparables should be applied only to the international transactions with AEs and not on the entire turnover of the DTA unit. The CIT(A) has restricted the addition on account of lower margins of the DTA to Rs. 59,12,396 as against Rs. 13.84 crores made by the TPO.
22. In the following decisions it has been held that the transfer pricing adjustment is to be restricted to international transactions with AEs and not to total sales of company:
a. Phoenix Mecano (India) Ltd. v. DCIT (2012) 17 taxmann.com 119 (Mum) The dispute is regarding the addition on account of GP rate and TP adjustment made by the AO. In making TP adjustment, the AO has followed the TNMM method, about which there is no dispute. The dispute raised is only about not giving the benefit of 5% adjustment and making the adjustments in relation to the entire sales and not limiting to the transactions with the AE. The adjustments on account of transfer pricing are to be restricted only to the international transactions with the AE, and not to the entire turnover of the assessee as held by the Mumbai Bench of the Tribunal in case of Starlite (supra) and in several other cases, (emphasis supplied) I T A No s . 7 93 & 8 17 / A hd / 20 0 6 A . Y. 200 2- 03 ( FA G B ear i ngs I n dia L td . v s . D CI T) Page 25 b. M/s. Genisys Integrating Systems (India) Pvt. Ltd. v. DCIT [2013] 152 TTJ 215 (Bangalore) Section 92C of the Income-tax Act, 1961 - Transfer pricing - Computation of arm's length price - Assessment year 2006-07 - Whether while determining ALP, transfer pricing adjustments should be restricted to only international transactions between associated enterprises either or both of whom are non-
resident - Held, yes -
c. Pennzoil Quaker State India Ltd. [2012] 26 taxmann.com 124 (Mum.) In the given case the Assessing Officer has computed the transfer pricing adjustment with respect to gross sales of the assessee of Rs. 119.04 crores on the basis of arms-length-margin of 4.22 per cent. The case of the assessee is that total purchases by the assessee with associate enterprises in relation to which transfer pricing provisions have been applied was only to the tune of Rs.15.81 crores.
The limited dispute raised is regarding transfer pricing adjustment in relation to international transactions entered into by the assessee with associate enterprises. There is no dispute either regarding TNMM method followed by the Assessing Officer or about variables selected for computation of transfer pricing adjustment. The only dispute raised by the assessee is whether the transfer pricing adjustment should be computed with respect to gross turnover of the assessee or should be limited to volume of transaction entered into with the associate enterprises. Therefore, adjustment has to be made only with respect to purchases with associate enterprises. The Hon'ble Bench has held that the claim of the assessee is very reasonable as the adjustment has to be made only with respect to transactions with associate enterprises based on arm's length price and not with respect to total purchases/sales. The issue is restored to the file of Assessing Officer/TPO for fresh computation of transfer pricing adjustment after necessary examination in the light of the observations made above and after allowing opportunity of hearing to the assessee.
d. Lionbridge Technologies Pvt. Ltd. [2012] 137 ITD 197 (Mum.) It is axiomatic that the transfer pricing adjustment can be made only with reference to the international transactions with the AEs and not non-AEs. Special provisions relating to the computation of income from international transactions were introduced through sections 92 to 92F by the Finance Act, 2001 with a view to provide a statutory frame work which can lead to the computation of reasonable profits and taxes in India in case of international transactions between enterprises of a multi-national group. The object of these provisions is to ensure that the transactions between two AEs are not arranged in such a manner so as to reduce the incidence of tax due in India. Such object I T A No s . 7 93 & 8 17 / A hd / 20 0 6 A . Y. 200 2- 03 ( FA G B ear i ngs I n dia L td . v s . D CI T) Page 26 is achieved by determining ALP as per the relevant provisions of the Act, which is then compared with the price at which international transactions are actually entered into and recorded in the books of account. The difference between the ALP and the actual price, if leading to the lowering of income due in India, is added by way of transfer pricing adjustment. From the scheme of Chapter X, containing the sections as afore-referred, it is manifest that the addition on account of transfer pricing adjustment can be made only in respect of international transactions with the AEs and not the non-AEs. It is quite natural also because there can be no scope for arranging the transactions with non-AEs so as to reduce the due tax in India. That is the reason for which the transactions with non-AEs have been excluded from the ambit of Chapter X of the Act.
Royalty / Fees for Use of Technology
23. The TPO during the course of transfer pricing analysis had called for various details with respect to payment of royalty. The Appellant duly submitted the same. The TPO in para 5.8 at page 22 has held that the transaction of royalty is not at arm's length but has not made any upward adjustment on the count that under TNMM transactions cannot be benchmarked separately.
24. The CIT(A) while dealing with the additions on account of low margins in the DTA has held that the addition on account of differential operating margin should be restricted only to the international transactions with AEs. The CIT(A) restricted the addition to Rs. 59,12,396 instead of Rs. 13.84 crores made by the AO. However, while dealing with the said adjustment the CIT(A) held that the transaction of royalty should be benchmarked separately applying CUP method [para 10.7.10 page 59 of CIT(A) order].
25. The CIT(A) has rejected the contention of the Appellant that while applying TNMM since royalty payment was considered as part of cost the same cannot be benchmarked separately particularly when the margins of the EOU have been accepted to be at arm's length.
26. The Appellant has computed the ALP using TNMM. The TPO has accepted the fact that separate benchmarking of transactions is not possible (refer third para in para 5.8 at page 22 of the transfer pricing order). However, the CIT(A) has held that the entire royalty payment is to be benchmarked separately.
27. We most respectfully submit that the action of the CIT(A) in benchmarking the royalty payment on total basis suffers from inherent errors. It is an admitted fact that all transactions of EOU including that of purchase and sale of goods are at arm's length. There is no addition proposed by the TPO nor the CIT(A) with respect to the international transactions of EOU. Under the TNMM the profits of the EOU are accepted to be at arm's length. If the margins of the EOU are accepted to be at arm's I T A No s . 7 93 & 8 17 / A hd / 20 0 6 A . Y. 200 2- 03 ( FA G B ear i ngs I n dia L td . v s . D CI T) Page 27 length in that case the payment of royalty should also be accepted to be at arm's length.
28. Further, under the TNMM once the transaction is considered while computing margins the same cannot be segregated and benchmarked using different method. It is an admitted fact that while computing the margins of the EOU and DTA the Appellant has considered royalty as a part of cost. After considering royalty payments the margins of the EOU are accepted. In view of the same we submit that the transaction of royalty cannot be segregated and benchmarked separately.
29. We rely on Mainetti India Pvt. Ltd. v. ACIT [2012] 149 TTJ 767 (Chennai) for AY 2007-08 dated 16-3-2013. In this case it was held that while applying the transfer pricing method if a class of transactions is considered in that case the method is to be applied on that class and segregation is not possible.
a) Mainetti India Pvt. Ltd. v. ACIT [2012] 149 TTJ 767 (Chennai) In the given case, the assessee is in the business of manufacturing plastic garment hangers. The assessee was part of the global group of Mainetti, the assessee used to buy and sell the hangers. The assessee was also in the business of manufacturing of the same.
For determining the ALP the Assessing Officer had taken into account only those transactions where the sale price to Associate Enterprise (AE) was lower than the sale price to non-Associated Enterprise (non-AE) and ignoring the instances where the purchase-price from and sale price to AE exceeded the purchase-price from and the sale price to non-AE. While applying CUP method for determining the ALP, Transfer Pricing Officer (TPO) had considered only positive deviations and had ignored negative deviations. Further, the margin of plus or minus 5% as per Proviso to Section 92C(2) was also not considered.
On further appeal the Hon'ble Bench has held that this is not case where the assessee is only purchasing the products or only selling the products. The assessee was buying and selling the products to the AEs. It was the submission that when applying the CUP method as the transaction done by the assessee was continuous transaction with the AEs, the consolidated effect of all the transactions between the assessee and the AEs must be considered as a whole. As otherwise it would lead to a situation where the assessee would be making very high margins in some cases and very low margins in some cases and where the transactions show high margins, the same would stand accepted and in the transactions were low margins, the same would call for an adjustment, which would in effect be inflating the margins of the assessee to disproportionate levels. This was not contemplated under the provisions of Sec.92C of the Act. The Assessing Officer may be directed to take into consideration all the transactions as a whole when computing the ALP. These I T A No s . 7 93 & 8 17 / A hd / 20 0 6 A . Y. 200 2- 03 ( FA G B ear i ngs I n dia L td . v s . D CI T) Page 28 transactions clearly show that what is done by the assessee is one of purchase and sale. With this in mind reading of the provisions of section 92C shows that the word used is 'nature of transaction', 'nature of transaction' would be a particular set of transaction, which are to be seen together. When the assessee is buying from one place and selling at another that would be a 'class of transaction'. When the assessee is doing the business of trading, it would not be a right to hold that the purchase is one 'class of transaction' and the sales are another 'class of transaction'. The assessee dealing with the AEs is in a better position to negotiate better prices and, consequently, would be able to get a better bargain. Here, what is to be seen is whether the transaction of purchase and sale being the nature of transactions, when seen in consolidated from, generates profits which normally would be generated. For this both the purchase and sale transactions would have to be considered, (emphasis supplied)
30. The CIT(A) in her order has held that royalty @ 1.5% only represent reasonable royalty. This finding is given based on the appellate order for AY 2001-02. It has also been held that the benchmarking of royalty is to be done for EOU as well as DTA. Entire royalty payment has to be benchmarked irrespective of the fact whether the payment is for EOU or DTA. The CIT(A) has held that while dealing with the addition of royalty for AY 2001-02 u/s. 40A(2) it has been held that royalty @ 1.5% is reasonable. The CIT(A) has also relied on the royalty payments made by SKF for coming to the conclusion that royalty @ 1.5% represent ALP. It is the observation of the CIT(A) that the provisions of section 92 to 92F are similar to section 40A(2) similar adjustment is made in the current year also [refer para 10.7.5 of CIT(A) order].
It is submitted that for A.Y. 2001-02, the Appellant challenged the order of the CIT (A) before the Hon'ble ITAT. Before the Hon'ble ITAT it was contended by the Appellant that majority of the Royalty was paid to the Parties which are not covered by the provisions of Section 40 A (2) (b) of the Act. The ITAT for examining the said matter has set aside the order of the AO and has directed the AO to examine it further.
Use of Controlled Transactions as CUP
31. The CIT (A) erred in relying upon the rates of royalty for the controlled transaction of SKF. Your attention is invited to Page 545 of the Paper Book, which contains the Annual Report of SKF Bearings India Limited. On Page 576 of the said report, there is a listing of "Related Party Transactions". On Page 577 in Note (d) relating to Royalty Payment, it is clearly mentioned that the royalty is paid to the Parent of SKF Bearings India Ltd. The Fundamental principle of CUP is that the comparable transaction has to be "Uncontrolled Transaction" meaning that it has be a transaction between two parties who are not related to each other. SKF transaction is not eligible to be treated as CUP as it is with related party.
I T A No s . 7 93 & 8 17 / A hd / 20 0 6 A . Y. 200 2- 03 ( FA G B ear i ngs I n dia L td . v s . D CI T) Page 29
32. The TPO and the CIT (A) has further relied upon the rates of Royalty paid by the Assessee during the earlier years. It is most respectfully submitted that this transaction is also with related parties as it is given to a related party of the Assessee for the earlier period. It is difficult to understand as to how earlier transaction between the same related parties be treated as benchmark for the same transaction with the same related parties for subsequent period. It is submitted that there is absolutely no justification for using either of the two comparables.
33. It is further submitted that there is absolutely no evidence available on record that any enquiry of any nature has been carried out by any person including TPO to conclude that the transactions of SKF and for the earlier years for the Assessee were the correct ALP or were done in circumstances so as to be at the ALP. In view of the same, the CUP adopted by the TPO and the CIT (A) requires to be rejected. Since there is no CUP available, the only option available is to adopt TNMM as the method for determination of the ALP. Clause (c) of Rule 10 C of the Income Tax Rules, 1962 provide that "availability, coverage and reliability of data necessary for application of the method;" is one of the criteria for determining the "Most Appropriate Method". Since in the circumstances, no data is available for using the CUP, the only possible method is TNMM.
34. Since the TPO and the CIT (A) has concluded that TNMM is the MAM for all the transactions, it would be incorrect to adopt a different method for one item of expenditure (Royalty in this case), whereas for all other items of expenditure (like Purchase of store, spares, components, other expenses), etc TNMM is used as the MAM.
Approval by other Government Authorities
35. Further the CIT(A) has rejected the contention of the Appellant that the royalty rates were approved by SIA / RBI and therefore the same are to be taken to be at arm's length.
36. With respect to the approval of rates by SIA / RBI we submit that in case of Sona Okegawa Precision Forgins Ltd. v. Addl. [2012] 143 TTJ 516 (Delhi) it has been held that when royalty to related concern is approved by the RBI and DIPP also considers the same as reasonable at a certain percentage, the same can be taken as justified under the CUP method. In this case the assessee was engaged in the business of manufacturing of certain goods. It entered into eight international transactions with associated enterprises [AE]. It paid royalty to the AE at the rate of 3 per cent in respect of the goods sold to them and claimed deduction of the same. The royalty at the rate of 3 percent was paid on the basis of letter dated 30.04.1993 written by the Reserve Bank of India, Exchange Control Department, to Sona Steering Systems Ltd., in which payment of royalty @ 3% on domestic sales was allowed to be paid for a period of five years.
I T A No s . 7 93 & 8 17 / A hd / 20 0 6 A . Y. 200 2- 03 ( FA G B ear i ngs I n dia L td . v s . D CI T) Page 30 The Assessing Officer referred the matter to the TPO, who came to the conclusion that the royalty paid by the assessee to the AE was not allowable, because (i) the royalty paid did not stand justified under the comparable uncontrolled price method [CUP method], and (ii) the assessee was a contract manufacturer for the AE. The lower authorities, therefore, disallowed the royalty paid in respect of the goods sold to the AE.
On further appeal to the tribunal, the Hon'ble bench has held that the royalty was paid on the basis of approval letter issued by the RBI. The assessee has also placed on record a press note issued by the Government of India, Ministry of Commerce and Industries, Department of Industrial Policy & Promotion, issued in 2003, under which royalty payment @ 8% on export sales and 5% on domestic sales have been referred to be reasonable for the purpose of processing approval of payments. On the other hand, the AO failed to bring any material on record that payment of royalty @ 3% was not at arm's length. Therefore, the payment stands justified under the CUP method.
37. In the case of Cadbury India Ltd. v. Addl. CIT ITA No. 7408/Mum/2010 for AY 2002-03 dated 13-11-2013 it has been held that as the payment is made as per the approval given by the RBI and SIA, Government of India, there cannot be any scope of doubt that the royalty payment on technical know is not at arm's length. The Hon'ble Tribunal vide para no. 39 of the order held that, "39. On going through the records and the orders of the revenue authorities, we find that in so far as the payment of royalty on technical knowhow concerned, the assessee has been paying to its parent AE right from 1993, as, other group companies are paying across the globe. It has been accepted by the TPO that the payment does not affect the profitability of the assessee, if we are to examine the issue from that angle as well. In any case the payment of royalty on technical knowhow is at par with the similar payments from the group companies in other countries & region. Besides, this, the payment is made as per approval given by the RBI and SIA, Government of India. Hence there cannot be any scope of doubt that the royalty payment on technical knowhow is not at arm's length."
Use of Controlled Transaction for CUP
38. Regarding the use of date of SKF India Ltd. for benchmarking the royalty payment @ 1.5% we invite your kind attention to page 16 of the transfer pricing order. While dealing with comparability of SKF with that of the Appellant, the TPO has observed as below:
"(b) Regarding 2(iii), the company ..................................
I T A No s . 7 93 & 8 17 / A hd / 20 0 6 A . Y. 200 2- 03 ( FA G B ear i ngs I n dia L td . v s . D CI T) Page 31 This contention of the company, is duly considered. The transaction of Royalty payment by SKF India Ltd. is a controlled transaction and as a principle, the controlled transactions are not used for computing the Arm's Length Price. On the issue of use of controlled transaction, Para 1.70 of the 1995 OECD Report refers that evidence from enterprises engaged in controlled transactions with associated enterprise may be used in understanding the transaction under review or as a pointer to further investigation. The dealings between associated enterprises, for comparison, can also be used in the cases of last resort where:
(i) There is sufficient data available to demonstrate their reliability.
(ii) Related party comparable data provides the most reliable available data upon which to determine or estimate an Arm's Length outcome.
Therefore, the rate of royalty paid by SKF India Ltd. serves as a useful guide for determining the Arm's Length Rate of Royalty."
39. We most respectfully submit that there is no material on record to prove that the data extracted from SKF is sufficient to demonstrate its reliability. Except making such observations in the TP order no documentary evidence has been brought on record. Nor such data is shared with the Appellant before using for benchmarking the transactions. Further, no effort has been made to find out any comparable for the royalty transaction. The TPO has directly concluded that as a matter of last resort controlled transactions can be used before in fact even trying to find out a comparable transaction for royalty payments. No effort has been made by the TPO to search a comparable case. Further, the transaction of payment of royalty in case of SKF is a payment by associated enterprise and therefore does not satisfy the test of comparable uncontrolled price.
40. We rely on Tecnimont ICB (P) Ltd. v. Addl.CH 138 ITD 23 (Mumbai) (TM) wherein it has been held that net profit margin realized from a transaction with an AE cannot be taken as a comparable being internal comparable for computation of ALP of an international transaction with another AE even though said net margin from a transaction with AE is found and accepted at ALP.
41. Further, there is no data available on record which proves that payment of royalty @ 1.5% is at arm's length using CUP method. The CIT(A) has made comparison of the royalty paid by the Appellant in earlier years wherein it has been observed that the royalty rates have been increased from 1.5% to 3 %, 5% and 8%. The CIT(A) has held that since there is no data available evidencing the increase in rates, royalty @ 1.5% is comparable.
42. We respectfully submit that again the comparison is made with the internal rates and not uncontrolled transactions. For applying CUP the transaction should be uncontrolled transaction with high degree of comparability. No such criteria has been satisfied and brought on record. The facts in the case of CABOT India Ltd. v. DCIT I T A No s . 7 93 & 8 17 / A hd / 20 0 6 A . Y. 200 2- 03 ( FA G B ear i ngs I n dia L td . v s . D CI T) Page 32 2011 [2011] 12 taxmann.com 70 (Mum.) are similar. In this case also the TPO had noted that there was increase in the rate of royalty from 2 % to 5%. The ALP of royalty was determined at 2 %. It was held that payment of royalty @ 2% in earlier years represent CUP. The IT AT noted that the 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. The Tribunal in this case rejected the application of the CUP method as the product manufactured and the technology used for unique and had restored the matter to the TPO to work out the ALP using any other method.
43. In the case of the Appellant your kind office would appreciate that no data is available on record to prove that the CUP is the most appropriate method for benchmarking the transaction of royalty. No data is brought on record by the TPO nor by the CIT(A) for application of CUP. The transaction of SKF is a controlled transaction and this fact has been accepted by the TPO and also the CIT(A). In view of the same considering the decision of Tecnimont supra and Cabot supra the same cannot be used for benchmarking the transaction of royalty. Under the said circumstances we submit that the method applied by the Appellant (TNMM) is the correct method of computing the ALP of transaction of royalty more so when the margins of EOU have been accepted at arm's length. We therefore request your kind office to delete the adjustment made.
44. Regarding the rates of royalty we submit that the rates at which royalty is paid by the Appellant are generally accepted rates. In the case of SC Enviro Agro India Ltd. v. DCIT [2013] 143 ITD 195 (Mumbai - Trib.) dated 7-11-2012 the royalty paid @ 5 % was considered to be at arm's length. In this case the Assessee entered into an agreement for obtaining license to manufacture specified insecticides and pesticides and agreed to pay 5 per cent royalty on the value addition and RBI has approved the royalty at 5 per cent for a period of seven years. This issue for the first time was examined by the TPO on the basis of the TP report of assessee wherein assessee submitted that the arrangement is in the nature of contract manufacturers in the FAR analysis. The TPO without examining the nature of agreement or the manufacturing activity of assessee or any other incidental factor came to a conclusion that since assessee admitted to be a contract manufacturer, there is no need to pay any royalty. Accordingly, the TPO has calculated the arm's length price of the royalty at Nil on the ground that assessee was not making any sales to outside parties.
On further appeal the Hon'ble Tribunal held that the TPO has to examine whether the price paid or amount paid was at arm's length or not under the provisions of Transfer Pricing and its rules. The rule does not authorize the TPO to disallow any expenditure on the ground that it was not necessary or prudent for assessee to have incurred the same. On that principle alone, the order of the TPO cannot be approved as it not only considered the facts wrongly but also exceeded the jurisdiction available to the TPO in examining the arm's length price on a transaction, (emphasis supplied) I T A No s . 7 93 & 8 17 / A hd / 20 0 6 A . Y. 200 2- 03 ( FA G B ear i ngs I n dia L td . v s . D CI T) Page 33
45. In the case of Reebok India Co. v. Add.CIT ITA [2013] 35 taxmann.com 578 (Delhi -Trib) for AY 2008-09 dated 14-6-2013 it was held that payments of royalty @ 8 % on exports and 5 % on domestic sales under the automatic route is to be taken at arm's length.
46. In the case of Samsung India Electronics Private Limited v. ACIT [2013] 34 taxmann.com 299 (Delhi. Trib) for AY 2007-08 dated 21-6-2013 the payment of royalty @ 8 % was upheld and held that where the assessee company has paid royalty to its foreign parent company at same percentage of sales made to both AEs and non- AEs, no transfer pricing adjustment was required.
Alternative Argument without Prejudice
47. Without prejudice to our contention that no separate addition can be made for Royalty by benchmarking it separately, we submit that maximum addition on account of Benchmarking Royalty separately can be only Rs. 2.56 lacs, as contended herein. Attention is invited to Page 311 of the Paper Book. As it can be seen that for the running royalty paid for DTA exclusively is of only Rs. 3.67 lacs. In all other cases, the payment is either lump sum amount, for which no such addition can be made, or is paid at the same rates for EOU. As has been submitted earlier, that even after payment of this Royalty, the EOU has earned significantly higher margins as compared to the comparable companies. There is therefore no justification for making any adjustment of Royalty for the EOUs. Accordingly the rates applicable to the EOU have to be accepted. If the same rates are accepted for the same agreement for EOU then there is no reason why the same rate for the same agreement cannot be accepted for the DTA. This therefore leaves Royalty paid @ 5 % amounting to Rs. 3.67 lacs. If the said royalty is adjusted to 1.5 % then the adjustment will be of only Rs. 2.56 lacs. It is submitted that even if the matter is decided against the Appellant, the maximum adjustment for the Royalty should be restricted to Rs. 2.56 lacs and nothing more.
48. Should the Hon'ble Bench require any further information or explanation we shall be pleased to submit the same.
Sd/-
Milin Mehta Chartered Accountant Baroda 23rd September, 2014"
28.2. Written submissions of the ld.CIT-DR are as under:
"Before the Hon'ble D Bench. ITAT. Ahmedabad I T A No s . 7 93 & 8 17 / A hd / 20 0 6 A . Y. 200 2- 03 ( FA G B ear i ngs I n dia L td . v s . D CI T) Page 34 In the case of FAG Bearings India Limited Appeal No. 793/Ahd/2006 (A) and 817/Ahd/2006 (D) for AY 2002-03 Submission relating to transfer pricing issues..Assessee Ground No. 6
-CIT(A) erred in partly confirming adjustment proposed by TPO to the extent of Rs 375.91 lakh in respect of royalty and Rs 59.12 lakh in respect of other transactions. Erred in holding that only royalty and FTS to the extent of 1.5% of sales value be treated as at arm's length.
-CIT(A) erred in confirming action of TPO in separating the profits of DTA and then comparing the same to composite profits of other comparables, thus making an adjustment.Assessee Ground No. 7
-CIT(A) erred in invoking section 40(A)(2)(b) to restrain royalty allowance to 1.5% and also holding that if the addition u/s 92 is deleted, then it should be sustained on account of it being excessive.
Revenue Ground of Appeal:
-CIT(A) erred in reducing the addition of Rs 13.84 crore to Rs 4.35 crore.
1. CIT(A) - 10.7.7 to 10.7.14. Para 10.7.15 on comparables and their diversity. In the year 2001-02, the issue has been restored to the file of AO for re-determination (page 23 of para 10)
2. Transfer Pricing Study conducted by the assessee: Consolidated TNMM for manufacturing activity of both units - DTA and EOU with comparables. The assessee has selected 12 comparables with average Operating Margin of 9.79%. FAG's operating margin from manufacturing activity has been computed at 9.56%. Since it falls within the band of 5%, no adjustment has been made (para 5.1 of the order). In the distribution segment, the comparable margins have been computed at 2.19% as compared to margin of 15.08% in case of FAG. Hence, no adjustment has been made.
3. TNMM accepted by TPO. PLI Accepted by the TPO. The assessee has two distinct segments in the manufacturing division - Domestic Tariff Area and Export Oriented Unit. The AO has relied on para 1.42 of OECD 1995 guidelines to hold that the DTA and EOU operations are distinct and separate (para 5.4 of the TPO order).
4. The TPO has given his reasons for treating the EOU as a separate and totally independent Unit on page 9 of his order. In view of the fact that the EOU has been set up independently and admittedly, is being maintained as an independent unit, it is I T A No s . 7 93 & 8 17 / A hd / 20 0 6 A . Y. 200 2- 03 ( FA G B ear i ngs I n dia L td . v s . D CI T) Page 35 liable to be treated as a separate unit. The functional profile of the EOU is also different as it is catering to a separate captive market and its products are not being sold in the open market while in respect of DTA, the products are being sold in open market.
5. As regards comparable, the assessee itself has admitted before the TPO (discussion on page 16 of TPO order) that the comparable selected are similar and have similar functional profile. Para 5.8, page 22 of the order. The various international transactions in the DTA segment are seamless and continuous and hence TNMM at DTA level justified.
6. Reason for rejection of explanation relating to royalty is on page 20-21 of the TP order wherein it has been held that the payment of royalty is not at arm's length and that the increase in royalty rates to 5% has not been negotiated by the assessee. Further, no information has been furnished whether the parent is charging royalty at same rate from other AEs or from a third party.
7. The EOU also has related party transaction and has, therefore, been subject to TP Audit. The EOU has a profit margin of 42.74%. Since the operating margins of comparable are 9.79%, the transactions in EOU has been accepted at arm's length by the TPO. The DTA related issue has been discussed at para 5.6 of the order. The DTA operating margin has been computed at page 12 at 2.78% as against the comparable margin at 9.79%. The TPO has, suitably altered the margin and accordingly, the value of transaction. The total international transaction in DTA area are Rs 13.95 crore on expense side and Rs 2.51 crore on income side.
8. The OECD guidelines state that, " 1.42 Ideally, in order to arrive at the most precise approximation affair market value, the arm's length principle should be applied on a transaction-by- transaction basis. However, there are often situations where separate transactions are so closely linked or continuous that they cannot be evaluated adequately on a separate basis. Examples may include 1. some long-term contracts for the supply of commodities or services, 2. rights to use intangible property and 3. pricing a range of closely-linked products (e.g. in a product line) when it is impractical to determine pricing for each individual product or transaction. Another example would be the licensing of manufacturing know-
how and the supply of vital components to an associated manufacturer; it may be more reasonable to assess the arm's length term for the two items together rather than individually. Such transactions should be evaluated together using the most appropriate arm's length method or methods. A further example would be the routing of a transaction through another associated enterprise; it may be more appropriate to consider the transaction of which the routing is a part in its entirety rather than consider the individual transactions on a separate basis. "
I T A No s . 7 93 & 8 17 / A hd / 20 0 6 A . Y. 200 2- 03 ( FA G B ear i ngs I n dia L td . v s . D CI T) Page 36 Royalty payment: The royalty payment is found to be excessive and not at arm's length
1. Data on royalty charged from other AEs, or in respect of export of bearings, resale margin of the AE on exports made by the assessee, have not been furnished to the TPO. Hence, the arm's length price of the royalty payment as well as the margin of the AE on exports made could not be tested. Page 20 of the assessment order. The assessee has failed to given information on whether royalty has been charged on same products from other AEs or not.
2. The TPO has brought on record that the payment made for royalty is excessive and unreasonable as on the same technology, royalty was being paid at 1.5% in the last 15 to 20 years and hence there was no technology transfer subsequent to renewal of royalty payment agreement. In fact, the tax is borne by the assessee resulting in still higher charges for the assessee company, Absolutely no justification for increase has been provided by the assessee company.
3. However, since the adjustment has been made at TNMM level, no separate arm's length study for royalty has been done by TPO - para 5.8 Case Laws Relied upon:
1. Benetton India Pvt Ltd 17 taxmann.com 5(Delh)(2012): Whether since in assessee's case, there were different segmental activities, which were independent of each other, they were required to be analyzed on transaction to transaction basis and not by combining all , activities - Held, yes
2. Tecnimount 1CB Pvt Ltd : 7098/Murn/2010. The Bench has held that, "Now, coming to the main issue whether the segmental results are to be taken into consideration or profit margin at entity level is to be considered, we find that Chapter-X incorporates special provisions relating to avoiding of tax in regard to international transactions and income from international transactions has to be determined at arm's length price. Therefore, as per the provisions contained under sections 92 to 94, international transactions are to be taken into consideration. Therefore, segmental results are to be considered and not the profit at entity level. As regards the submissions of learned Department Representative that with reference to segmental results, each and every international transaction has to be considered separately because all the activities are separate and profit margin will be different. Learned Counsel objected to these submissions pointing out that it is not the appeal filed by the Revenue but by the assessee. He also submitted that the Tribunal has no power of enhancement that TPO has not at all considered the segmental results and, therefore, we refrain from making any observations with reference to the submissions made by the learned Departmental Representative and consider it I T A No s . 7 93 & 8 17 / A hd / 20 0 6 A . Y. 200 2- 03 ( FA G B ear i ngs I n dia L td . v s . D CI T) Page 37 appropriate to only observe that the Assessing Officer will consider the segmental results and determine the arm's length price in accordance with law.
Consequently, these grounds of appeal are allowed for statistical purposes in terms of our above observations.
3. Genome Biotech Pvt Ltd 21 Taxmann.com 315: Transfer pricing adjustments cannot be deleted on the grounds that (i) payment was made with RBI approval; (ii) expenses were audited and (iii) payments were made through banking channels.
4. ING Vysya Ltd 2886 of 2005 decision dated 6/6/2012: The question as to whether an asset is a trading asset or is an asset in the nature of a lasting asset investment held as part of investment made by the Banking Company to fulfill its obligations under the Regulatory Provisions of law or whether it is a part of trading asset, and therefore has become a part of stock-in-trade is a question which has to be answered in each case and not either based on the RBI Circular or Guidelines or even a Circular issued by the Board in general."
28.3. We have considered the rival contentions of the respective representative parties. We find force into the contention of the ld.counsel for the assessee that the Artificial Bifurcation of DTA and EOU is de hors the provisions of Law, DTA Segment has no exports but comparable companies has exports and incorrect computation by the ld.CIT(A). It is pointed out by the ld. counsel for the assessee that it can be seen that the figure of Rs.8,43,42,316/- is arrived at by the following method:-
a. International Transactions in the nature of Revenue Expenses debited to the Profit and Loss Account (other than Royalty) of Rs.4,01,14,355 (Rs.8,88,38,750 minus 4,87,24,395 of Royalty).
b. Added to above, the Royalty of the DTA Segment of Rs.4,87,24,395 giving aggregate of Rs.8,88,38,750.
c. Added to above, the International Transaction in the nature of Revenue Expenditure CREDITED to at the P&L Account of Rs.74,03,728. d. Added to above, the International Transaction in the nature of capital Goods, part of the Balance Sheet of Rs.5,19,25,936, aggregating to Rs.14,81,68,414.
e. From the above, reduction of the Royalty (of DTA and EOU Segment both) of Rs.6,38,26,098. It may be noted that Royalty of EOU of Rs.1,51,01,703 was not included in the above aggregate. Despite this fact, it was reduced from the aggregate.
I T A No s . 7 93 & 8 17 / A hd / 20 0 6 A . Y. 200 2- 03 ( FA G B ear i ngs I n dia L td . v s . D CI T) Page 38 The ld. counsel for the assessee submitted that for the purpose of benchmarking the international transactions the assessee had bifurcated its activities into manufacturing segment and distribution segment. However, the Transfer Pricing Officer (TPO) has further bifurcated the activities of the assessee into domestic unit (DTA) and export oriented unit (EOU). Thus, the TPO artificially divided the manufacturing segment into two sub-segments, i.e. for exports and for domestic sales, but however kept the set of comparable companies same for both EOU and DTA. The ld.counsel for the assessee invited our attention towards the bifurcation of the International Transactions.
Item-wise description of the International Transactions as contained on page-3 of the TPO's order. However, the ld.CIT(A) vide paras 10.7.2 to 10.7.4 in his order has held that the differential margin of the DTA segment and comparables should be applied only to the international transactions with AEs and not on the entire turnover of the DTA unit. Therefore, ld.CIT(A) has restricted the addition on account of lower margins of the DTA to Rs.59,12,396/- as against Rs.13.84 crores made by the TPO. This is duly supported by the decisions of the Coordinate Benches in the following cases:-
(i) Phoenix Mecano (India) Ltd. vs. DCIT (2012) 17 taxmann.com 119 (Mum)
(ii) M/s.Genisys Integrating Systems (India) Pvt.Ltd. vs. DCIT (2013) 152 TTJ 215 (Bangalore)
(iii) Pennzoil Quaker State India Ltd. (2012) 26 taxmann.com 124 (Mum.) I T A No s . 7 93 & 8 17 / A hd / 20 0 6 A . Y. 200 2- 03 ( FA G B ear i ngs I n dia L td . v s . D CI T) Page 39
(iv) Lionbridge Technologies Pvt.Ltd. (2012) 137 ITD 197 (Mum.) 28.4. There is no fault can be found from the order of the ld.CIT(A) so far as restricting the addition on account of differential operating margin to the international transactions is concerned. However, the figure of Rs.8,43,42,316/- as worked out by the ld.CIT(A) is not correct, therefore this issue is required to be restored to the file of ld.CIT(A) for recomputation of the international transactions. Needless to say that the ld.CIT(A) would give sufficient opportunity of being heard to both the parties. Thus, ground No.6 is allowed for statistical purposes.
29. Coming to ground No.7, we have heard the parties and gone through the written submissions. We find that the ld.CIT(A) in its order has held that royalty @ 1.5% only represent reasonable royalty. This finding is on the basis of the appellate order pertaining to AY 2001-02. It is also held that the benchmarking of royalty is to be done for EOU as well as DTA. The grievance of the assessee is that the ld.CIT(A) erred in relying upon the rates of royalty for the controlled transaction of SKF. The contention of the assessee is that the fundamental principle of CUP is that the comparable transaction has to be "uncontrolled Transaction", meaning thereby that it has to be a transaction between two parties who are not related to each other. SKF transaction is not eligible to be treated as CUP as it is with related party. The another contention of the assessee is that the TPO and ld.CIT(A) has relied upon the rates of royalty paid by the assessee during the earlier years. The contention is that this transaction is also with related parties as it is given to a related I T A No s . 7 93 & 8 17 / A hd / 20 0 6 A . Y. 200 2- 03 ( FA G B ear i ngs I n dia L td . v s . D CI T) Page 40 party of the assessee for the earlier period. It is also the contention of the assessee that no material is available on record that any enquiry of any nature has been carried out by any person including TPO to conclude that the transactions of SKF and for the earlier years for the assessee were the correct ALP or were done in circumstances so as to be at the ALP. The contention is that the only available option is to adopt TNMM as the method for determination of the ALP.
29.1. We have given our thoughtful consideration to the rival contentions. We find force into the contention of the ld.counsel for the assessee, therefore, we are of the considered view that the ld.CIT(A) and TPO were not justified in adopting the CUP method and, therefore, we direct the ld.CIT(A) to adopt the method of TNMM for determination of the ALP and recompute the ALP in respect of the royalty. Thus, this ground of assessee's appeal is also restored back to the file of ld.CIT(A) for recomputation of ALP after giving an opportunity of being heard to both the parties. Ground No.7 of assessee's appeal is allowed for statistical purposes.
30. Ground no.8 is with respect to expenditure incurred on repairs to building of Rs. 40.18 lacs.
31. A.O. noticed that assessee had incurred Rs. 14.34 lacs on account of office modernization and Rs. 25.84 lacs on account of repairs of building and the expenses were claimed as revenue expenses. A.O. also noticed that expenditure on account of office modernization was towards replacement of old false ceiling with new false ceiling and was therefore of the view that the I T A No s . 7 93 & 8 17 / A hd / 20 0 6 A . Y. 200 2- 03 ( FA G B ear i ngs I n dia L td . v s . D CI T) Page 41 expenditure was not of Revenue nature as it had resulted into new or different advantage to the assessee. He accordingly held the expenditure to be capital in nature but allowed depreciation on the same. As far as expenditure of Rs.
25.84 lacs is concerned, he noticed that the expenses were on account of trenches for DGBB Cell. The submission of the assessee that the existing trenches floors of DGBB Cell was removed due to technical problem and it was replaced with new floor and therefore, the expenditure was of Revenue in nature, was not found acceptable to the A.O. He was of the view that a new and different advantage of enduring nature has been achieved by assessee.
He, therefore, considered it to be capital expenditure and disallowed the expenditure but however, allowed the depreciation on the same.
32. Aggrieved by the order of A.O., the assessee carried the matter before the CIT(A). CIT(A) upheld the order of A.O. while holding as under:
"11. The ground of appeal No.8 relates to disallowance of office modernization expenses of Rs.14,34,358/-. The Assessing Officer noted that these expenses merely consisted of replacement of old False Ceiling with new False Ceiling. The Assessing Officer treated the expenditure as capital expenditure and allowed depreciation thereon.
11.1 Before me, the appellant submitted that the expense was incurred for replacement of Old False Ceiling with New False Ceiling. It was contended that in A.Y. 1998-99, the CIT(A) had allowed deduction for replacement of old ceiling with new ceiling as revenue expenditure. It was stated that since these expenses are comparable with the expenses for A.Y. 1998-99 deduction may be given to the appellant.
11.2 I have carefully considered the facts of the case and the appellant's submission. The assessee has incurred this expenditure on replacement of old false ceiling. The expenditure is not on preservation or maintenance of existing I T A No s . 7 93 & 8 17 / A hd / 20 0 6 A . Y. 200 2- 03 ( FA G B ear i ngs I n dia L td . v s . D CI T) Page 42 asset. By incurring the expenditure, the assessee has obtained an advantage of enduring nature. In the case of Assam Bengal Cement Co. 27 ITR 34, the Hon'ble Supreme Court laid down that if the expenditure is made for acquiring an asset or advantage of enduring nature, it is in the nature of capital expenditure. In the case of BaIlimaI Naval Kishore & Another v. CIT, 224 ITR 414, the Hon'ble Supreme observed that:
"Having regard to the context in which the expression 'current repairs' occurs in section 10(2)(v) of the Indian Income-tax Act, 1922, the expression "current repairs"
means expenditure on buildings, machinery, plant or furniture which is not for the purpose of renewal or restoration but which is only for the purpose of preserving or maintaining an already existing asset and which does not bring a new asset into existence or does not give to the assessee a new or different advantage (from head notes)."
11.2.1 Since in the present case, the expenditure on replacement of false ceiling is on renovating and replacing an asset, and not for preserving or maintaining an existing asset, it was rightly treated as capital expenditure by the Assessing Officer.
11.2.2 The ground of appeal No.8 is dismissed.
12. The ground of appeal No.9 relates to disallowance of expenses incurred on replacement of Flooring of DGBB Cell (Hall - I) amounting to Rs.25.84 lacs. The Assessing Officer treated the expenditure as capital expenditure on the ground that the assessee had acquired a new and deferent advantage of enduring nature. The Assessing Officer allowed depreciation at the applicable rate.
12.1 During appeal proceedings, it was submitted by the appellant that the contentions of the Assessing Officer are factually incorrect as the flooring was replaced because of some technical problem. There was an existing flooring and the said flooring was replaced and there is no new asset corning into existence.
12.2 I have considered the submissions of the assessee. For the reasons discussed in respect of ground No.8, it is held that by replacing the flooring, the assessee got advantage of enduring nature. The expenditure was rightly treated as capital expenditure. The ground of appeal No.9 is dismissed.
I T A No s . 7 93 & 8 17 / A hd / 20 0 6 A . Y. 200 2- 03 ( FA G B ear i ngs I n dia L td . v s . D CI T) Page 43
33. Aggrieved by the order of CIT(A), the assessee is now in appeal before us.
34. Before us, the ld. A.R. reiterated the submissions made before the A.O. and CIT(A). He further submitted that the issue is covered in favour of the assessee by the decision of Hon'ble Tribunal in assessee's own case for A.Y. 1998-99 & also the decision of Tribunal for A.Y. 01-02. He further submitted that replacement of flooring has been held to be Revenue expenditure in case of R B Bansilal Abirchand Spinning & Weaving Mills v. CIT 31 ITR 427 (Nag.).
He, therefore submitted that following the decision of Tribunal of earlier years, the ground of assessee be allowed. The ld. D.R. on the other hand supported the order of A.O.
35. We have heard the rival submissions and perused the material on record. We find that in A.Y. 1998-99 in ITA No. 1943/Ahd/2001 the issue before Tribunal in assessee's own case was about the expenditure incurred on construction of compound wall by replacing barbed wire fence. The issue was decided in favour of assessee by holding as under:
"22. The next dispute is with regard to disallowance of expenses of Rs.18,21,888/- on construction of compound wall by replacing barbed wire fence. The above expenditure was incurred on replacement of old assets and the same was claimed as revenue expenditure. He Assessing Officer noticed that the compound wall was not in existence earlier and a new asset of capital .nature has come into existence. He, accordingly, disallowed Rs. 18,21,888/-. He, however, allowed depreciation at the rate of 10%, The disallowance was upheld by the CIT(A) by holding that it is a capital expenditure.
23. We have heard the parties and considered their rival submissions. This issue is covered in favour of the assessee by the decision in the case of B.V.Ramachandrappa & Sons 191 ITR 34(Kar.) wherein it was held that Tribunal was right in holding that I T A No s . 7 93 & 8 17 / A hd / 20 0 6 A . Y. 200 2- 03 ( FA G B ear i ngs I n dia L td . v s . D CI T) Page 44 expenditure incurred on replacement of the barbed wire fence with compound wall was revenue expenditure Respectfully following the aforesaid decisions, we reverse the orders of authorities below and direct the Assessing Officer to allow the claim of the assessee.
In A.Y. 01-02, issue before the Tribunal was with respect to expenditure on replacing and fixing tiles, construction of shed, expenditure on expansion of tool room. The issue was decided in favour of the assessee by holding as under:
"16. We have heard both sides. As far as the assessee's appeal is concerned the amount contested before us is Rs.2,46,739/- towards construction of shed and Rs.12,55,771/- towards expenditure on tool-room, totaling to Rs.15,02,510/-. We have also examined the nature of repairs incurred by the assessee. Some of the expenditure was for replacement of old flooring, change of electrical wires, installation of partitions etc. There are series of decision, such as, Chowgule & Co. 214 ITR 523 (Bom) on this issue and placing reliance we hereby hold that sustenance of shed or building, etc. is definitely in the nature of "current repairs" as prescribed u/s. 31 of I.T. Act. Resultantly, following the law pronounced by the Hon'ble Court, we hereby direct to allow the claim. This ground is allowed."
Before us, Revenue has not brought any binding contrary decision on record in its support. We, therefore, following the decision of the Co-ordinate Bench of Tribunal in assessee's own case for earlier years decide the issue in favour of the assessee . Thus, this ground is allowed.
36. Ground no.9 is with respect to considering software expenses of Rs.14.91 lacs as capital expenditure.
37. During the course of assessment proceeding, A.O. noticed that assessee had paid fees for MS Office package amounting Rs. 14.91 lacs and was claimed as Revenue expenses. A.O. was of the view that by incurring the expenses assessee has acquired an asset or advantage of enduring nature.
I T A No s . 7 93 & 8 17 / A hd / 20 0 6 A . Y. 200 2- 03 ( FA G B ear i ngs I n dia L td . v s . D CI T) Page 45 He, therefore, considered the fees paid for obtaining the license as intangible asset and therefore, treated it as capital expenditure but however, allowed depreciation on same.
38. Aggrieved by the order of A.O., the assessee carried the matter before the CIT(A). CIT(A) following the order for A.Y. 01-02 upheld the disallowance made by A.O.
39. Aggrieved by the order of CIT(A), the assessee is now in appeal before us.
40. Before us, at the outset, ld. A.R. submitted that issue in the present case is covered in favour of the assessee by the decision of Tribunal in assessee's own case for A.Y. 01-02. He placed the copy of aforesaid decision on record. Ld. D.R. on the other hand supported the orders of A.O. and CIT(A).
41. We have heard the rival submissions and perused the material on record. We find that issue of payment of fees for use of MS Office was before the Tribunal in assessee's own case for A.Y. 01-02. The issue was decided in favour of the assessee in ITA Nos. 792 & 816/Ahd/2006 as under:
17.1. The assessee has incurred expenditure on computer software, details as under:-
(a) Fees paid for use of Microsoft office 9,45,005/-
(b) Expenses incurred for use of e-mail facility 2,72,500/-
(c) Cost of Auto card for bearing design 4,57,160/-
(d) Expenses incurred for upgradation of
Software/maintenance of computer 10,20,925/-
----------------------
Total 26,95,590/-
17.2. The authorities below have held that the expenditure constituted acquisition of assets and disallowed the same.
I T A No s . 7 93 & 8 17 / A hd / 20 0 6 A . Y. 200 2- 03 ( FA G B ear i ngs I n dia L td . v s . D CI T) Page 46 17.3. On the other hand, it was pleaded that number of licences of small amounts were purchased. Our attention was invited on page Nos.298 to 305 of the paper book to demonstrate the softwares acquired by the assessee. It has also been explained that due to technological changes the old softwares were required to be replaced year-after-year.
18. Having heard the submissions of both the sides, we have found that the identical issue now stood Covered in favour of the assessee vide CIT vs. Varinder Agro Chemicals Ltd. 309 ITR 272 (P&H) and Amway India Enterprises v. DCIT 111 ITD 112 (Del)[SB]. The issue being covered therefore this ground of the assessee is hereby allowed."
Before us, Revenue has not brought on record any contrary binding decision in its support nor could distinguish the facts with that of earlier years. We, therefore, following the decision of Co-ordinate Bench of the Tribunal in assessee's own case and for similar reasons, allow this ground of assessee.
Thus, this ground is allowed.
42. Ground no.10 is with respect to disallowance u/s.14A.
43. Ld. A.R. at the outset submitted that due to smallness of amount he would not like to press this ground. Thus, this ground is dismissed as not pressed.
44. Ground no11 is with respect to confirming disallowance of Rs. 65.35 lacs on account of diminution in value of investments. This ground was not pressed by ld. A.R. and therefore this ground is dismissed as not pressed.
45. Ground no.12 is with respect to disallowance of interest expenditure paid on foreign supply credit without deduction of TDS u/s. 195.
46. A.O. noticed that assessee had claimed Rs.8.05 lacs on account of interest on foreign supply credit. He also noticed that assessee had not deducted TDS as required u/s. 195. He, accordingly, disallowed the expenses u/s. 40(a) of the Act.
I T A No s . 7 93 & 8 17 / A hd / 20 0 6 A . Y. 200 2- 03 ( FA G B ear i ngs I n dia L td . v s . D CI T) Page 47
47. Aggrieved by the order of A.O., the assessee carried the matter before the CIT(A) who upheld the order of A.O. Aggrieved by the order of CIT(A), the assessee is now in appeal before us.
48. Before us, at the outset, ld. A.R. submitted that issue in the present case is covered against the assessee by the decision of the Tribunal in assessee's own case in ITA No. 3880/A/2003 for A.Y. 2000-01. He, therefore, fairly conceded that the ground be decided against assessee. Ld. D.R. supported the orders of A.O. and CIT(A).
49. We have heard the rival submissions and perused the material on record. We find that the identical issue was before the Tribunal in assessee's own case in ITA No. 3880/A/2003 for A.Y. 2000-01and the issue was decided against the assessee by holding as under:
"7. We have heard both the parties and gone through the facts of the case and the decision relied upon by the Id. AR. We find that Hon'ble Madras High Court in the case of India Pistons Ltd(supra) relied upon by the Id. AR found that the conditions for supply of goods by the non-resident to the assessee in that case were that the payment of purchase price in instalments was to be made with the condition that the assessee will compensate the supplier by means of interest on the unpaid instalments. Accordingly, the Hon'ble High Court held that the unpaid instalment was not the same as loan and therefore, interest paid could not be treated as paid on-the loan and hence, deduction of tax at source was not attracted. Since it is not the case of the Revenue that interest was paid with reference to loan so that the requirement of tax deduction at source would have been attracted; no disallowance under section 40(a)(i) can be made, Hon'ble High Court held. In the case under consideration, undisputedly, the interest as defined u/s 2(28A) of the Act was paid in foreign currency on foreign suppliers' credit. There is nothing to suggest that payment of purchase price has been made in installments nor it has been brought to our notice there was any such condition that the assessee will compensate the supplier by means of interest on the unpaid installments. There is no material before us I T A No s . 7 93 & 8 17 / A hd / 20 0 6 A . Y. 200 2- 03 ( FA G B ear i ngs I n dia L td . v s . D CI T) Page 48 suggesting that amount was paid to the bank nor any such findings has been recorded in the impugned orders. Rather, the Id. AR submitted that decision of the Id. CIT(A) for the AY 1999-2000 has not been contested further. In the absence of any material on record, we are of the opinion that the facts in the cited decision being altogether different, the said decision is not applicable in the case under consideration. .Since the Id. AR did not point out any infirmity in the impugned order of the Id. CIT(A) in following his own decision for the AY 1999-2000 while even the said decision of the Id. CIT(A) for the AY 1999-2000 has not .been placed before us , we find merit in the contentions of the Id. DR and therefore, have no recourse but to uphold the findings of the Id. CIT(A). Thus, ground no.1 in the appeal is dismissed."
In the present case, since the facts and circumstances are similar tro that of A.Y. 2000-01 as admitted by both the parties, we therefore respectfully following the decision of Co-ordinate Bench of Tribunal, find no reason to interfere with the order of CIT(A). Thus, this ground of assessee is dismissed.
50. Ground no.13 is with respect to charging of interest u/s.234B & 234D of the Act. Charging of interest u/s. 234B is consequential as not pressed. With respect to charging u/s. 234D, ld. A.R. submitted that in view of the explanation 2 being inserted by Finance Act, 2012 with retrospective effect from 01.06.2003. The issue is covered against the assessee. Since ld. A.R. has admitted that the issue of charging of interest u/s. 234D is covered against the assessee, the same is dismissed.
51. In the result, appeal of the assessee is partly allowed.
I T A No s . 7 93 & 8 17 / A hd / 20 0 6 A . Y. 200 2- 03 ( FA G B ear i ngs I n dia L td . v s . D CI T) Page 49 ITA No. 817/Ahd/2006 (Revenue's appeal)
52. The grounds raised by the Revenue are as under:-
"1. On the facts and in the circumstances of the case and in law, the learned CIT(A), Baroda has erred in I deleted the disallowance of claim of Rs.30,96,721/- being amount of lease rental paid to IDBI Ltd. and SBI Capital Markets Ltd. II reduced the addition of Rs.18923999/- to Rs. 1,05,00,000/- on account of payment of operating and licence fees for use of SAP R3 Software, allowing relief of Rs.84,24,564/-.
III deleted the disallowance of Rs.4,77,64,000/- on account of payment for transfer of Technical Know-how.
IV Reduced the addition of Rs.13,84,00,000/- to Rs.4,35,03,396/- on account of Transfer Pricing."
53. First ground is with respect to the disallowance of claim of Rs.30,96,721/-.
54. During the course of assessment proceeding, A.O. noticed that assessee had debited Rs.30,96,721/- as pre-paid rent paid to financial institutions. A.O. noticed that expenses pertained to subsequent period and was in the nature of advances and was therefore not incurred for the relevant financial year. He, therefore, disallowed the claim of assessee.
55. Aggrieved by the order of A.O., the assessee carried the matter before the CIT(A). CIT(A) following the decision in assessee's own case for A.Y. 01-
02 deleted the addition made by the A.O. I T A No s . 7 93 & 8 17 / A hd / 20 0 6 A . Y. 200 2- 03 ( FA G B ear i ngs I n dia L td . v s . D CI T) Page 50
56. Aggrieved by the order of CIT(A), the Revenue is now in appeal before us.
57. Before us, at the outset, ld. A.R. submitted that the issue is covered against the assessee by the decision of Special Bench in case of CIT vs. FAG Bearing (India) Ltd. 306 ITR 60 (Ahd) (AT). Ld. D.R. on the other hand supported the order of A.O.
58. We have heard the rival submissions and perused the material on record. We find that in the case of DCIT vs. FAG Bearing (India) Ltd. (supra) for A.Y. 1999-2000 & 2000-01, (2008) 155 ITD 53, the Special Bench of Tribunal concluded that assessee is not entitled to deduction of prepaid lease rent pertaining to next financial year as no liability can be said to have been incurred merely on the basis of advance payments irrespective for the terms of lease agreement requiring the assessee to make payment lease rent in the month of March preceding financial year in which the asset is to be used. It further held that lease rent being the prepaid is to be allowed only in the year to which such payment relates in view of theory of matching concept. In the present case, we, therefore, respectfully, following the decision of Spl. Bench of the Tribunal allow this ground of Revenue. Thus, this ground of Revenue is allowed.
59. Before us, both the parties submitted that the ground nos. II to IV raised in Revenue's appeal are identical to the grounds raised in assessee's appeal in ITA No. 793/Ahd/2006. We, therefore, for the similar reasons stated while I T A No s . 7 93 & 8 17 / A hd / 20 0 6 A . Y. 200 2- 03 ( FA G B ear i ngs I n dia L td . v s . D CI T) Page 51 deciding the assessee's appeal hereinabove dismiss the grounds of Revenue's appeal. Thus, the Revenue's appeal is partly allowed.
60. In the result, the assessee's appeal is partly allowed for statistical purpose and Revenue's appeal is partly allowed.
This Order pronounced in open Court on 14 /11/2014
Sd/- Sd/-
(Kul Bharat) (Anil Chaturvedi)
Judicial Member Accountant Member
S.K.Sinha
आदे श कȧ ूितिलǒप अमेǒषत / Copy of Order Forwarded to:-
1. अपीलाथȸ / Appellant
2. ू×यथȸ / Respondent
3. संबंिधत आयकर आयुƠ / Concerned CIT
4. आयकर आयुƠ- अपील / CIT (A)
5. ǒवभागीय ूितिनिध, आयकर अपीलीय अिधकरण, अहमदाबाद / DR, ITAT, Ahmedabad
6. गाड[ फाइल / Guard file.
By order/आदे श से, // True Copy // उप/सहायक पंजीकार आयकर अपीलीय अिधकरण, अहमदाबाद ।