Income Tax Appellate Tribunal - Ahmedabad
Khs Machinery Pvt.Ltd.,, Ahmedabad vs Assessee on 2 November, 2007
IN THE INCOME TAX APPELLATE TRIBUNAL AT
AHMEDABAD
AHMEDABAD "C"BENCH
Before Shri G.C.Gupta, Vice-President (AZ) and
Shri B.P. Jain, Accountant Member
IT A No.79/ Ahd/2008
Assessment Year:2004-05
KHS Machinery Pvt. Ltd., बनाम Incom e Tax
53, Madhuban, Nr. /V/s. Officer, W ard-
Madalpur, Under Bridge, 4(2), Ahmedabad
Ahm edabad -380 006
P AN No. AABCK2513Q
अपीलाथȸ/ Appellant .. ू×यथȸ/ Respondent
अपीलाथȸ कȧ ओर से / Appellant by Shri J.P. Shah SR-AR
ू×यथȸ कȧ ओर से /Respondent by Shri S.K. Gupta, CIT-DR
सुनवाई कȧ तारȣख / Date of Hearing 07-02-2012
घोषणा कȧ तारȣख / Date of Pronouncement 10-02-2012
आदे श/ORDER
PER B.P. Jain, Accountant Member:-
This appeal of the assessee arises from the order of Ld. Commissioner of Inc-tax (Appeals)-VIII, Ahmedabad dated 02-11-2007 for the assessment year 2004-05. The assessee has raised the following grounds of appeal:-
"1. Your appellant being aggrieved by the order passed by Learned C.I.T. (Appeals)-VIII, Ahmedabad, dated 2.11.2007, presents this appeal on following grounds.
2. The Learned C.I.T. (Appeals)-VIII, Ahmedabad has erred in not allowing deduction U/s. 80IB(3) of the I.T. Act, 1961 for Rs.1,87,34,518/- though fully explained. The addition made be deleted.
3. The Learned C.I.T. (Appeals)-VIII, Ahmedabad has erred in not allowing Royalty payment of Rs.74,63,975/- being computation of arms ITA No.79/Ahd/2008 A.Y. 2004-05 KHS Machinery Pvt. Ltd. v. ITO Wd-4(2) A'bd Page 2 length price in relation to international transactions though explained. The addition made be deleted.
4. The Learned C.I.T. (Appeals)-VIII, Ahmedabad has erred in not allowing Royalty payment of Rs.1,15,32,819/- being claimed as expenses U/s 40(a) for the year under consideration relates to A.Y. 2003-04 explained. The addition made be deleted.
5. The appellant craves, leave to add, amend, alter, edit, delete, modify or change all or any of the grounds of appeal at the time of or before hearing of this appeal."
2. Ground No. 1 and 5 of the assessee are general in nature and therefore do not require any adjudication.
3. As regards to ground No.2, the brief facts are that the assessee has claimed deduction u/s.80IB of the Act which is available as Small Scale Industry (SSI for short) unit as per clause (ii) of sub-section 3 of Section 80 of the Act. It was observed that total value of plant and machinery was of Rs.2,04,69,540/- whereas as per norms set by the government, a company with investment in plant and machinery of less than Rs.1 crore is considered to be small scale industries. Accordingly, the Assessing Officer issued a show- cause notice to the assessee asking it to justify how its unit can be considered as SSI unit for the purpose of deduction u/s.80IB of the Act. The AO also pointed out to the assessee that alternatively the income from sale of spares amount to Rs.4,13,17,344/-, service income of Rs.1,04,48,888/- and other income of Rs.1,44,58,821/- are to be excluded from the profit derived from industrial undertaking for the purpose of deduction u/s.80IB of the Act. The assessee submitted before the AO that its investment in plant and machinery would be less than Rs.1 crore if items of exclusion are considered as per Notification dated 10-12-1999 issued u/s 11B of IDR Act i.e. tools, jigs, dies, moulds, fixture, patterns and spare parts for maintenance and the cost of consumable stores are excluded and its net balance of plant and machinery comes to Rs.34,80,428/-. The assessee contention was not accepted. The AO did not allow deduction u/s.80IB of the Act on trading profit of Rs.27,43,073/-, ITA No.79/Ahd/2008 A.Y. 2004-05 KHS Machinery Pvt. Ltd. v. ITO Wd-4(2) A'bd Page 3 interest income of Rs.1,08,89,484/- and other income of Rs.35,69,336/- the total of these amounts was of Rs.1,72,01,893/- on which the AO disallowed deduction @ 30%. Further the AO observed that the assessee-company has 100% outsourced manufacturing model and it was doing the job of assembly and testing only and all the parts of large machines, racks, etc. were got manufactured from outside and they were being assembled and tested as per the specification of the clients, at the factory of the assessee. Therefore, the plants, machines and tools, by which the job of assembly and testing are accomplished, become the main equipments of the assessee-company. According to AO the assessee has itself categorized plant and machinery to the extent of Rs.9,15,797/- only as "tools & jigs" in the Annexure "B" forming part of form No. 3CD report. However, the assessee has tried to re-categorize a large number of components as tools, jigs, disc, moulds etc. out of plant and machinery, office equipments and factory equipments which is not correct and not admissible. The value of assets as per balance sheet as on 01-04-2002 is as under:-
i) plant & machinery Rs.1,97,64,860
ii) Computer hardware Rs. 85,47,749
iii) Computer software Rs. 12,67,590
iv) Furniture & fixture Rs. 19,11,461
v) vehicle Rs. 78,00,237
vi) office equipments Rs. 16,23,788
The Assessing Officer observed that tools, jigs, dies, moulds and spare pats which are re-categorized by the assessee in its submission are one of the most important tools and equipments used in the process of assembly and testing of its business. These are not for the purpose of its maintenance. The AO observed that such equipments can not be treated as peripheral or subsidiary tools and that these are the actual main tools. As for example, the AO observed that vernier calipers of very high cost are very necessary for correct joining and erection of different parts of big machinery and without ITA No.79/Ahd/2008 A.Y. 2004-05 KHS Machinery Pvt. Ltd. v. ITO Wd-4(2) A'bd Page 4 them, assembly can not take place and constitute the main assembly equipments. Under no circumstances, the same can be treated as tools for maintenance. Similarly equipments, like injection moulds can never be treated as maintenance equipments. The assessee has only considered cranes, air compressors, rectifiers and three other equipments only as plant and machinery and rest of the equipments, machineries as tools, jigs, moulds, etc., for the purpose of maintenance. According to the AO under no circumstances, the assessee can claim manufacturing and sale of heavy equipments to the extent of Rs.64 crores just by using cranes, compressors, rectifiers and a few other equipments and definitely a very large number of the plants and machinery are required which can never be categorized as being meant for the purpose of 'maintenance' or 'consumable items'. The AO also observed that the CIT(A)-VIII for assessment year 2003-04 has also confirmed the disallowance of claim u/s. 80IB of the Act made by the AO vide its order dated 09-10-2006 wherein the Ld. CIT(A) also added the vehicles as part of plant and machinery. Hence, considering these, the AO held that assessee's unit is not SSI unit and not eligible for deduction u/s 80IB(3)(ii) of the Act and disallowed the claim of Rs.1,87,34,518/-.
4. The Ld. CIT(A) confirmed the action of the Assessing Officer.
5. As per the argument made by Ld. CIT-DR the present issue is squarely covered by the decision of ITAT "C" bench Ahmedabad in ITA No.2289/Ahd/2006 dated 19-12-2008 for the assessment year 2003-04 in assessee's own case. The Ld. CIT-DR pointed out the relevant paras 9.3 to 10 of the said ITAT order in support of his arguments.
6. Ld. AR on the other hand also relied upon the order of ITAT in assessee's own case (supra) for the A.Y. 2003-04.
ITA No.79/Ahd/2008 A.Y. 2004-05KHS Machinery Pvt. Ltd. v. ITO Wd-4(2) A'bd Page 5
7. We have heard the rival contentions and perused the facts of the case. Both the parties before us have relied upon the decision in assessee's own case for A.Y. 2003-04 (supra) on the present issue. Therefore for the sake of clarity we reproduce the relevant paras of the said ITAT order for A.Y. 2003- 04 (supra) as under:-
"9.3 In the light of aforesaid provisions, we have to determine the status of taxpayer's industrial undertaking. In the case of under consideration, the book of industrial undertaking is that of manufacturing bottling plants. Therefore, it has to be seen, which are the plant and machinery and the ld. CIT(A) are of the opinion that the value of such plant and machinery exceeds Rs. One croes. The AO has included value of the entire plant and machinery, including vehicles, computer and computer software as also moulds, dies, jigs, consumables etc., while the ld. CIT(A) has recorded his findings only on inclusion of vehicles, computer and computer software. However, the arguments of both the sides with reference to these items items of plant and machinery are considered as under:-
(a) Moulds, dies, jigs, fixtures, patterns, tools, consumables, factory equipments being racks, tables, pallets. etc. 9.31 It is submitted by the learned counsel for the taxpayer that in calculating the value of plant and machinery cost of equipment such as tools jigs, dies, moulds, spare parts for maintenance and cost of consumable stores have to be excluded as per clause (i) of note (b) of the aforesaid notification No.857 dated 10.12.199. The AO in his order observed that the taxpayer had reflected net WDV of Rs.11,90,001 on account of tools and jigs in annexure B forming part of form 3CD while value of assts as on 1.4.202 reflects total value of plant and machinery at Rs.1,97,64,860 beside computes, furniture, vehicles and office equipment. In their submissions before the AO, the taxpayer adopted different value for moulds, dies, etc., The AO declined to exclude the actual cost of tools jigs, dies, moulds and spare parts on the ground that these are used in the process of assembly and testing in its business and these are not for maintenance Such equipments are main tools in the business of the taxpayer. The ld. CIT(A) has not adverted to the aspect of tools jigs, dies moulds and spare parts in his order and only concentrated on value of vehicles and computers and held that value of plant and machinery exceeded Rs.1 crore. Since clause (i) in note 2(b) specifically excludes cost of tools, jigs, dies, moulds and spare parts for maintenance and the cost of consumable is not justified in not excluding the same while determining the value of pm in our opinion, the word maintenance is suffixed to only spare parts and not to the other items such as tools, jigs, dies and moulds as also consumables. Accordingly, ITA No.79/Ahd/2008 A.Y. 2004-05 KHS Machinery Pvt. Ltd. v. ITO Wd-4(2) A'bd Page 6 the AO is directed to exclude the cost of equipments such as tools, jigs, dies, moulds and spare parts for maintenance and the cost of consumable stores while determining value of pm in order to ascertain the status of industrial undertaking of the taxpayer.
(e) Computer software 9.32 As regards computer hardware and software, the ld. AR on behalf of the taxpayer argued that computers are installed in office and therefore have to be excluded in terms of decision of the ITAT in the case of Samir Diamond Mfg. (P) Ld. 67 ITD 25 (Ahd). There is no finding in the order of either AO or ld. CIT(A) as to whether or not all the computers are installed in office ld. CIT(A) observed that since computers have not been excluded in the note 2(b) of aforesaid notification dated 10.12.1999, accordingly these have to be considered for determining the value of plant and machinery. Hon'ble jurisdictional High Court in the case of CIT Vs. Prabhudas Kishoresad Tobacco Products P Ld. 282 ITR 568 (Guj) held that for determining the value on plant and machinery for ascertaining the status of industrial undertaking SSI, the actual cost of plant and machinery which is installed in the industrial undertaking, and used for the purpose of business of the undertaking, has to be adopted. The provision does not stipulate taking the aggregate value of plant and machinery of the business as a whole, but limits the same to the plant and machinery relatable to the industrial undertaking. Since there is no finding either in the order of the AO or the ld. CIT(A) as whether or not all the computers, including software, valuing Rs.98.14 lacs are installed in the office or are used in the process of manufacturing bottling plants, in the light of aforesaid decision of Hon'ble jurisdictional High Court and in the interest of justice, we vacate the findings of the ld. CIT(A) on this aspect and restore the matter to the file of the AO with the directions to ascertain as to whether or not all the computers are installed in office or as to whether some of these are installed for the purpose of manufacturing bottling plants in the industrial undertaking and thereafter, determine the status of industrial undertaking as an SSI and consequently entitlement to deduction u/s.80IB of the Act, in accordance with law after allowing sufficient opportunity to the taxpayer.
(f) Vehicles 9.33 As regards vehicles, total value of plant and machinery includes vehicles of the value of Rs.78.15 lacs, the ld. CIT(A) observed that since vehicles have not been excluded in the note (2)(b) of the aforesaid notification dated 10.12.1999, accordingly these have to be considered for determining the value of plant and machinery. Hon'ble Andhra Pradesh High Court in the case of Hyderabad Deccan ITA No.79/Ahd/2008 A.Y. 2004-05 KHS Machinery Pvt. Ltd. v. ITO Wd-4(2) A'bd Page 7 Cigarettes Factory Vs. CIT 238 ITR 615 (AP) while adjudicating the issue of determining the status of industrial undertaking as an SSI in the content of provisions of sec. 32A of the Act held that 'since there is an independent definition in the context of defining a small-scale industrial undertaking, section 43(3) is not applicable to the definition of a small-scale industrial undertaking. If section 439(3) defining plant including vehicles is not applicable, the value of the vehicles cannot be added to the value of the plant and machinery installed excluding those items mentioned in the said Explanation' 9.331 In the case of DCIT Vs. Central Hatcheries (P) Ltd. 59 TTJ (Jab) 587, the ITAT held in the case of an assessee carrying on the business of hatcheries that truck has to be excluded while determining the value plant and machinery for determining the status of industrial undertaking as an SSI.
9.332 Similarly, in the case of DCIT Vs Samir Diamond Mftg. (P) Ltd. 67 ITD 25 (Ahd), ITAT held that vehicles not connected with the production industrial undertaking, have to be excluded while determining the value plant and machinery for determining the status of industrial undertaking as an SSI.
9.333. In the case under consideration in the context of provisions of section 80IB of the Act also, there is nothing to suggest that vehicles were used for the purpose of manufacturing bottling plants nor vehicles can be installed. Since there is an independent definition of a small- scale industrial undertaking in clause (g) of sec. 80IB(14), in the light of aforesaid decision of Hon'le AP High Court, we are of the opinion that vehicles have to be excluded while determining the value of plant and machinery for the purpose of determining the status of industrial undertaking as an SSI and consequently for entitlement of deduction u/s.80IB of the Act.
10. In the light of above discussion, the AO shall recompute the value of the plant and machinery installed in the industrial undertaking of the taxpayer for the purpose of the business of the undertaking as on the last day of the previous year. If the value so worked out is below Rs. One crore, the industrial undertaking should be treated as small scale industrial undertaking and the deduction under s. 80IB of the Act may be allowed in accordance with law to it."
8. Following the ITAT order in assessee's own case A.Y 2003-04 (supra) as regards moulds, dies, jigs, fixtures, patterns, tools, consumables, factory ITA No.79/Ahd/2008 A.Y. 2004-05 KHS Machinery Pvt. Ltd. v. ITO Wd-4(2) A'bd Page 8 equipments being racks, tables pallets etc. the Assessing Officer is directed to exclude the cost of equipments such as: tools, jigs, dies, moulds, spare parts for maintenance and cost of consumables sources while determining value of plant and machinery in order to ascertain the status of industrial undertaking of the assessee. As regards computers software, we restore the matter to the file of AO with the direction to ascertain as to whether or not all the computers are installed in office or as to whether some of these are installed for the purpose of manufacturing the bottling plants in the industrial undertaking and thereafter determining this status of industrial undertaking as an SSI and consequently entitlement to deduction u/s 80IB of the Act in accordance with law after allowing sufficient opportunity of being heard to the assessee. As regards vehicles the same have to be excluded while determining the value of plant and machinery for the purpose of determining the status of industrial undertaking as SSI and consequently for entitlement of deduction u/s. 80IB of the Act.
9. The Assessing Officer accordingly shall re-compute the value of the plant and machinery installed in the industrial undertaking of the assessee for the purpose of business of the undertaking as on the last day of the previous year. If the value so worked out is below Rs.1 crore, the industrial undertaking should be treated as SSI and the deduction u/s. 80IB of the Act may be allowed in accordance with law. Thus, ground No.2 of the assessee is allowed for statistical purpose.
10. As regards ground No.3, the brief facts are that the Assessing Officer disallowed the claim for royalty payment by the assessee to its associated enterprise (AE for short) holding that the Addl. CIT (Transfer Pricing-3), Mumbai has determined the Arms' Length Price of royalty paid at nil. Accordingly, the AO held that the royalty payment was not allowable and he disallowed the expenses claimed by the assessee in profit and loss account of Rs.74,63,975/-.
ITA No.79/Ahd/2008 A.Y. 2004-05KHS Machinery Pvt. Ltd. v. ITO Wd-4(2) A'bd Page 9
11. The Ld. CIT(A) confirmed the action of the Assessing Officer vide his observation in para-4.2 to 4.2.2, which are reproduced for the sake of clarity as under:-
"4.2 I have considered the arguments of the ld. A.R of the appellant carefully and also perused the assessment order and also the order of TPO. The TPO has categorically held vide para 5.2 of his order that the assessee has used Transactional Net Margin Method (TNMM) to justify the payment of royalty. According to the TPO, the payment of royalty is about Rs.64.90 lacs only whereas the assessee's total sales were more than Rs.56 cores. As such, Transactional Net Margin Method in the case of royalty would not give a fair comparability. The TPO observed that no royalty was charged from other group entities. The appellant replied that technology was received at no cost and that only for using the know-how they paid royalty to the joint venture company (AE) and if they had to pay the technology fees then that would have been more than the royalty. The question of no royalty payment by the wholly owned subsidiaries of the German parent company could not decide the issue of the appellant's transactions. They also contended that the TPO proposal would run counter to the guidelines of Government of India for DFDI in joint venture. The appellant also quoted the approval of SIA dated 01.08.1997.
4.2.1 The TPO, after considering the assessee's reply, held vide para 5.4 of the above order, that the assessee failed to provide details of cost of development n of technology by the AE and failed to provide the manner in which the cost and profit element in the development of know-how was proposed to be recovered by the AE from the other group entities who were using or benefiting from this know-how. On this basis, he held that at the Arms Length price for royalty charges could be inferred as Nil. The TPO also observed that the approval by FIPB and SIA cannot be deteminative of Arms Length Price of royalty payment as these regulatory bodies did not and could not have examined the assessee's international transactions with a transfer pricing perspective. Further, the provisions on Arms Length Price came on the Statute recent and in that perspective the assessee's contentions were held as not tenable on the facts as well as in the eye of law. Accordingly, the TPO held that the TNMM used by the assessee was not appropriate and rejected it. In the alternative the TDPO adopted the Cost Plus Method and cost being Nil as to the development of technical know-how transfer, the Arms Length Price of the transaction was determined at Nil vide para 5.9 of his order.
4.2.2 In view of the appellant's failure to furnish the complete and relevant details as to the development cost of the know-how, which was shared by the AE with the appellant company, the TPO has correctly ITA No.79/Ahd/2008 A.Y. 2004-05 KHS Machinery Pvt. Ltd. v. ITO Wd-4(2) A'bd Page 10 taken the Arms Length Price at Nil. It is also to be seen that even as penalty the written submissions, for the A.Y. 2002-03, the royalty was shown as waived by the German parent company that means there was no consistency as claimed by the appellant in that the royalty was payable only with reference to sales. The transactions being between two Associated Enterprises, the Assessing Officer and the TDPO were duty bound to examine the transactions and not to accept the claim at face value. In this regard, approval given by the SIA in August, 1997, when the provisions relating to Arms Length Price were not on Statute cannot have overriding effect. In any case, the said approval has not been ratified by the Finance Ministry in the light of the determination of Arms Length Price. Accordingly, I hold that the TNMM adopted by the appellant is not appropriate in that it does not give a true perspective of the transaction. In any case.,, the cost of development of know-how by the appellant having not been furnished to the TPO, his decision of determining the Arms Length Price at Nil using Cost Plus Method and rejection of TNMM adopted by the appellant is held as justifiable on the facts and circumstances of the case, especially in view of para 1.70 of OECD Guide lines on Transfer Pricing which was extracted in the order of TPO. In the light of the above discussion, the claim of the appellant for royalty payment disallowed by the AO as Nil is rejected and the action of the AO is upheld. I also find that similar finding had been given by my predecessor in appeal for the A.Y. 2003-04. Hence this ground is dismissed."
12. The Learned Counsel for the assessee at the outset pointed out the observation of the Addl. CIT (Transfer Pricing) Mumbai in his order dated 21- 09-2006, which has been reproduced in para-5 of A.O's order at page-17. However, at entity level, the payment of royalty at Rs.64.90 lakh in a total sale of about more than Rs.56 crores forms a very small fraction, the Ld AR argued that if by paying 5% as royalty, if the assessee can earn more than Rs.7 crores after depreciation and this 5% payment as royalty is Rs.64.90 lakh for a sale of Rs.56 crores then the said payment is a very reasonable amount and should be allowable. As regards other group entites are not paying any royalty for such manufacture know-how, it was argued that the said technical know- how is available to the assessee only and therefore no comparison with the other group entites can be made.
13. Ld. AR relying upon the arguments made before the Ld. CIT(A) argued that assessee had entered into an agreement for provision of technical know ITA No.79/Ahd/2008 A.Y. 2004-05 KHS Machinery Pvt. Ltd. v. ITO Wd-4(2) A'bd Page 11 with KHS Maschinen and Anlagenbau Ag, Germany (KHS Germany) in the year 1997. Under the agreement the said M/s. KHS Germany agreed to provide know-how technology, designs, information, training for variety of different machines required by the industries such as soft drinks, breweries, mineral water, pharmaceutical etc. The agreement was duly approved by SIA in the year 1997. The agreement also contemplates user of trade name 'KHS' as also use of trademark 'KHS' in relation to various products. This had provided significant benefits to the assessee as reflecting affiliation with the world leader. The know-how provided by M/s. KHS Germany is invaluable and said M/s KHS Germany appears to command a very sizable share of the bottling industry. The know-how has been provided in phases. It is on account of this know-how that the assessee has been ale to build up its turnover from Rs.5,06,248/- in the year 1997-98 to Rs.67,74,73,307/- in the current financial year i.e 2002-03. During the term of the agreement, there is a covenant on the part of the know-how provider to impart the improvements to the assessee. The machines are sophisticated and there is continuous up gradation in the technology front. As part of the obligation, KHS Germany has assisted the assessee in understanding the requirements of the customers and getting newer designs. Thus, it was ensured that the assessee has the benefit of operative industry trends. There was no lump sum or upfront or initial payment which was made by the assessee the know-how provider. The consideration payable in respect of the know-how comprised of royalty payment @ 5%. The calculation of the royalty fee is based on the net ex-factory selling price exclusive of statutory levies like sales tax, excise and excluding cost of standard bought out components. The agreement is of duration of 7 yeas from the date of commencement of manufacturing or ten years from the date of execution of the contract whichever is earlier. Royalty is payable during the duration of the agreement. The following royalty payments have been made during the years from 1998-99 till the current year 2002-03.
Assessment Year Royalty paid [Rs]
1999-00 77,176
ITA No.79/Ahd/2008 A.Y. 2004-05
KHS Machinery Pvt. Ltd. v. ITO Wd-4(2) A'bd Page 12
2000-01 39,68,468
2001-02 10,75,995
2002-03 Nil
2003-04 1,00,28,538
In the scrutiny assessment for the year 2001-02, the royalty expenditure has been allowed as deduction. In the current year, royalty provision of Rs.12,00,28,38/- was made. Since, withholding tax in respect thereof was paid in the subsequent year, the expenditure, if admissible as an eligible expenditure in the computation of income, is to be actually deducted in A.Y.2004-05. In the transfer pricing assessment for the current year, the TPO has apparently taken a view that the assessee need not have paid any royalty to the know-how provider at all during the current year. The AO is of the view that the know-how provided to the assessee had no value or had insignificant value and inferred that since the said M/s. KHS Germany had not charged any royalty from its wholly owned subsidiaries outside India. It is a strong indication of the know-how having nil or insignificant value. Further the AO also surmised that cost of development of know-how for the German company is nil and hence even under cost plus method, ALP is nil. The conclusion of TPO and AO are incorrect for following reasons:
1) It is apparent that a business enterprise has to abide by all its legal obligations which have been undertaken by it. The assessee has paid royalty under its agreement dated 21st Sept. 1997 which is its legal obligation. The agreement has been approved by SIA. It is unthinkable that SIA would have approved an agreement if it was for know-how of no relevance or no value or was eyewash.
2) It is wholly incorrect for one to even suggest that know-how possessed by a person who commands significant share in the industry at a global level and which has enabled the assessee to build up turnover of 67 crores in the current year and which has enabled the assessee's entry into majors like coca cola and pepsi did not have any value at all; as if, anyone has the capacity to build these machines.
3) The royalty expenditure has been admitted in scrutiny assessments in the past. There has been no change in the facts of the case. It is well settled that if there has been no change in the facts, it is incorrect for an assessing officer to depart from his earlier conclusion.ITA No.79/Ahd/2008 A.Y. 2004-05
KHS Machinery Pvt. Ltd. v. ITO Wd-4(2) A'bd Page 13
4) The TPO/AO fail to realize that compensation of know-how can be in one of the two or three accepted practices viz., upfront payment, recurring royalty, combination of the two. The recurring royalty payment that too, within the norms permitted by SIA, is one of the safer ways of paying compensation inasmuch as that the user does not have the risk of paying upfront amount without the taste of success. Considering this, in a hard case, it could be that even if a person has to make recurring payment for one time transfer of know-
how or IPR, it could still be a fair compensation. In fact, in the case of assessee, the fact are stronger inasmuch as that the assessee has live and continuous interaction with the know-how provider. It is also put forth that as the payments were allowed for royalty in earlier years on the principle of consistency, the same should be allowed for current year also.
The AR relied upon the decision of Hon'ble Delhi High Court in the case of CIT v. Oracle India (P) Ltd. (2011) 243 CTR 103 (Del), decision of ITAT "B" bench Delhi in ITA No.4878/Del/2009, 3895, 421 & 4333/Del/2010 dated 11- 02-2011 and decision of ITAT "L" Mumbai bench in the case of Cabot India Ltd. v. DCIT (20110) 46 SOT 402 (Mum) in support of his arguments.
14. The Ld. CIT-DR on the other hand, relied upon the orders of Assessing Officer and Ld. CIT(A). He further argued that technically the issue should be decided in favour of Revenue since the assessee did not deduct the Tax At Source during the assessment year 2003-04 and the assessee itself made the disallowance in the computation. In the preceding year, i.e. A.Y. 2003-04 the Transfer Pricing Officer made the disallowance, which action was confirmed by the Ld. CIT(A) and the ITAT vide para-2 had dismissed the grounds by observing as under:-
"2.At the outset, learned AR on behalf o the taxpayer did not press the aforesaid ground no.3 in respect of computation of arms length pricing relation to international transactions. Accordingly, the said ground is dismissed."
Moreover, the assessee could not provide the details in the preceding assessment year that is A.Y. 2003-04 in spite of show-cause notice to the assessee. Therefore, Ld. CIT-DR argued that technically the action of Ld. CIT(A) should be confirmed on merit.
ITA No.79/Ahd/2008 A.Y. 2004-05KHS Machinery Pvt. Ltd. v. ITO Wd-4(2) A'bd Page 14
15. Ld. CIT-DR argued that Transaction Net Margin Method (TNMM) is not correct method for computation of arms length price u/s92C(1) of the Act. Since the assessee has made the computation not with respect to individual transaction but the transactions have been grouped as a whole. The Ld. CIT- DR further argued that it is the assessee, who has to show the proper method for computation of arms length price and the assessee had failed to show such method. The method so adopted as mentioned hereinabove is not a correct method as has rightly been confirmed by the Ld. CIT(A). The Ld. CIT- DR relied upon the decisions of various courts of law in support of his arguments as under:-
i) UCB India (P) Ltd. v. ACIT (2009) 124 TTJ 289 (Mum) at Departmental paper book (DPB) page-29-35
ii) DCIT v. Starlite (2010) 113 TTJ 425 (Mum) (DPB) at pages 36-44 of (DPB)
iii) Aztec Software & Technology Services Ltd. v. ACIT (2007) 109 TTJ 892 (SB) (Bang) pages76-90(DPB)
iv) Coca Cola India Inc. v. ACIT & Ors. (2009) 221 CTR 225 (P& H) pages 91-96 (DPB)
v) Panasonic India (P) Ltd. v. ITO (2011) 135 TTJ 43 (Del) pages 120-
127 (DPB) Ld. CIT-DR also invited our attention to Circular of the Board available at DPB pages-16 in para-55.1 to 55.3
16. We have heard the rival contentions and perused the facts of the case. There is no dispute to the fact that assessee had entered into an agreement with KHS Germany in the year 1997 by which the said KHS Germany agreed to provide know-how, technology, design, information, training etc. to the assessee. The agreement was approved by SIA in the year 1997. As per the arrangement use of trade name KHS in relation to various products, which has provided significant benefits to the assessee. The said know-how has been provided in phases and the assessee had been able to build up its turnover ITA No.79/Ahd/2008 A.Y. 2004-05 KHS Machinery Pvt. Ltd. v. ITO Wd-4(2) A'bd Page 15 from Rs.5.06 lakh in the year 1997 to Rs.67.74 crores in the financial year 2002-03 relevant to A.Y 2003-04. As argued by the Ld. AR that as part of obligation, KHS Germany has assisted the assessee in understanding requirements of the customers and getting newer design. There was no lump sum or upfront or initial payment made to the know-how provider except the royalty payment @ 5% which is based on net ex-factory selling price exclusive of statutory levies and excluding cost of standard bought out components. It is also not disputed that the agreement was for a duration of seven years from the date of commencement of manufacturing or ten years from the date of execution of contract whichever is earlier. In scrutiny assessment for the A.Y. 2001-02 the royalty expenditure has been allowed as deduction.
17. On hearing the parties and perusing the materials available on record, we are of the view that for a transaction to come u/s 92 of the Act, it is necessary to establish that the course of business between resident and non- resident is so arranged that the business transacted between them provides to the resident either (i) no profits or (ii) less than ordinary profits which might be expected to arise in the business. In the present case, the assessee had declared income and therefore it is not case of "no profit". So as regards the adequacy of profits vis-à-vis ordinary profits which might be expected to arise in the business, the same can be found out only, when exercise is done to compare the income of the assessee with other comparable enterprises in India. In the present case, the TPO observed that no royalty was charged by other group entites and accordingly the Arms Length Price for royalty charges was inferred as nil. The AO accordingly disallowed the royalty payment. As argued by the Ld. AR that the technical know-how was provided to the assessee only and the same was not comparable with other entities of the group. The assessee had not made the one-time payment but making the continuous payment to the know-how provider which has been accepted by the Department in the past. The assessee has been charging 5% royalty on ITA No.79/Ahd/2008 A.Y. 2004-05 KHS Machinery Pvt. Ltd. v. ITO Wd-4(2) A'bd Page 16 each and every transaction and therefore the said payment cannot be said to have been paid on the aggregate amount, as argued by Ld. CIT-DR. The findings of the Assessing Officer in considering the royalty charges as nil as arms length price cannot be accepted since the AO in the present case has not brought on record, the ordinary profits which can be earned in such type of business. Therefore in our view the payment of royalty is not hit by the provisions of Section 92 of the Act and there is no reason to hold that the expenses should not be allowed u/s.37(1) of the Act, since the expenditure has been incurred by the assessee during the course of business and is having the nexus with the business of the assessee. Therefore the payment of royalty is a business expenditure which has been incurred wholly and exclusively for the purpose of business of the assessee and same is to be allowed in toto as a matter of commercial expediency. Therefore, the case laws relied upon by the Ld. CIT-DR are of no benefit to the Revenue. The reasonableness of expenditure in the present circumstances and facts of case, cannot be doubted and accordingly the Assessing Officer is directed to allow the claim of the assessee and the order of Ld. CIT(A) is reversed. Thus, ground No.3 of the assessee is allowed.
18. As regards ground No.4, the brief facts are that the Assessing Officer observed that in assessment year 2003-04 the assessee had debited royalty of Rs.1,15,32,819/- pertaining to that year and assessee replied before the AO vide letter dated 15-12-2006 saying that the TDS could not be deposited within the prescribed time-limit and assessee deposited the same during the year relevant to A.Y. 2004-05. The assessee claimed the same as expenses in this year u/s.40(a) of the Act. However, as the matter was decided against the assessee in A.Y. 2003-04 and the TPO-3 Mumbai had directed the AO to adjust upward the total income of the assessee at Rs.1,00,28,538/- on account of determination of arms length price of transaction relating to payment of royalty at nil. The Assessing Officer did not allow the expenses of ITA No.79/Ahd/2008 A.Y. 2004-05 KHS Machinery Pvt. Ltd. v. ITO Wd-4(2) A'bd Page 17 last year in the year under consideration and the same was added to the total income of the assessee.
19. The Ld. CIT(A) confirmed the action of the Assessing Officer.
20. There is no dispute to the fact that the assessee had not deducted the tax at source in the preceding year i.e. A.Y. 2003-04. The Ld. AR argued that same has been deducted during the impugned year and has been paid during the year. The Ld. DR has opposed the submissions of the assessee by referring the relevant para(s) of orders of Assessing Officer and Ld. CIT(A). He further submitted that the assessee has 'not pressed' this ground of appeal in its appeal for the A.Y. 2003-04 in respect of computation of arms length price in relation to International Transactions and accordingly the ground of the assessee was dismissed by ITAT Ahmedabad "C" Bench in its order in ITA No.2289/Ahd/2006 dated 19-12-2008..
21. We find that this issue has not been considered in the right perspective by the Assessing Officer and Ld. CIT(A). There is no finding in the relevant assessment year to what amount royalty payment pertains to which assessment year and whether TDS thereon was paid by the assessee during the relevant period i.e. A.Y. 2004-05. Accordingly, the issue is restored to file of AO with direction to decide the issue afresh in the light of decision hereinabove and to record the finding on the issue as directed above but by providing opportunity of being heard to assessee. Thus, ground No.4 of assessee is allowed for statistical purpose.
22. In the result, appeal of the assessee is partly allowed for statistical purposes.
इस आदे श कȧ घोषणा Ǒदनांकः 10/02/2012 को खुले Ûयायालय मɅ कȧ गई । This Order pronounced in Open Court on 10/02/2012.
Sd/- Sd/-
(G.C.Gupta) (B.P. Jain)
(Vice President) (Accountant Member)
Ǒदनांकः- 10/02/2012 अहमदाबाद ।
Dkp*
ITA No.79/Ahd/2008 A.Y. 2004-05
KHS Machinery Pvt. Ltd. v. ITO Wd-4(2) A'bd Page 18
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 ।