TaxTMI 
TaxTMI 
2011 (5) TMI 365
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.... The common issue raised in the remaining grounds of the assessee's appeal as well as ground No. 2 of the Revenue's appeal relates to the addition of Rs. 2,06,48,218 made by the Assessing Officer on account of transfer pricing adjustment which has been sustained by the learned CIT(Appeals) to the extent of Rs. 1,37,65,579. 4. The assessee in the present case is a company incorporated in India which is engaged in the business of manufacturing of carbon black. M/s Cabot Corporation, Boston, USA (the parent AE) is holding 60 per cent shares of the assessee company. During the year under consideration, the assessee company entered into international transactions with its various Associated Enterprises (AEs) including payment of royalty amounting to Rs. 5,62,67,879 made to Cabot Corporation, USA. The assessee company had entered into a foreign technology collaboration agreement with Cabot Corporation, USA dated December 19,1990 for modernization of Carbon black plant under energy conservation scheme. As per the said agreement, royalty was payable at the rate of 2 per cent on the domestic sales. The said agreement was renewed in April, 1998 whereby the rate of royalty payable by the a....
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.... and discussed by the TPO in respect of each and every material point raised by the assessee giving his finding thereon in paragraph No. 5-1.3 of his order as under : "(a) The assessee has entered into an agreement with the AR's for transfer of technology on an on-going basis. The collaboration agreement dated 7th August, 1990 was approved by the Reserve Bank of India. There is no change in the terms of the agreement governing the flow of technology/know-how etc., which the AE was to provide to the assessee. All the subsequent agreements entered between the assessee and the AE are by way of Supplementary agreement, wherein only the operating part in respect of the rate of royalty payable by the recipient of the technology to the provider of the technology is altered. There is no alteration in the scheme of services/benefits which are intended to be provided by the AE to the assessee. That the AE is a world leader in the manufacturing carbon black is not challenged here. It is because of the technological advantage enjoyed by the parent (AE) that the assessee is able to cater to the growing Indian market. The Indian company is almost fully held (97.54 per cent) by the paren....
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....ssee with regard to the higher recoveries that are warranted to be made by the parent from the subsidiaries world-wide in order to compensate for continued R & D activities. (d) The assessee has also submitted that it is likely to get benefited in future from the Research and Development undertaken by the AE. The contention taken by the assessee deserves to be rejected on the face of itself. The subjective assessment of the future benefit cannot be the arguments for enhanced rate of royalty that the assessee needs to pay, over and above what it is getting within the confines of the agreement already in existence. The future benefit, in any case, would have accrued to the assessee, had the rate of royalty be not revised from 2 per cent to 5 per cent. There is nothing on record that goes to suggest that the future benefits of the technology likely to be received from the AE would not have accrued to the assessee without the payment of higher rate of royalty. On the contrary, it is surprising that the payment of royalty at a higher rate is sought to be justified by the assessee when the profits of the assessee are declining. The operating profile of the assessee is wort....
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....rovided sufficient information in respect of the royalty charged by the AE from its subsidiaries located in the Asia Pacific region. As per the chart given, the rate of royalty obtainable in case of Malaysia is 3.5 per cent which is far less than being paid by the assessee at a rate of 5 per cent. Accordingly, the contention taken by the assessee is rejected on this count also. (f) The assessee has further submitted that the data culled from the website of SIA with regard to the approval given by the Govt. of India for payment of royalty in chemical industry justify the payment of royalty to the AE at the rate agreed for this year. The assessee has submitted that for this industry, the approved rate of royalty ranges from 3 per cent to 8 per cent of sales. As the royalty paid at a rate of 5 per cent very much falls within this range, therefore, as per CUP method the same should said through to be considered to be at arm's length. The fallacy in the argument of the assessee is quite bizarre: For, (i) The data picked up for comparison is not contemporaneous as all the figures are pertaining to the years 2000, 2001 & 2002. During these years, the rate of royalty paid b....
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....ssessee." In view of the above discussion, the explanation offered by the assessee justifying increase in the rate of royalty of carcass grade of products was not accepted by the TPO and adopting the rate of royalty at 2 per cent on the said product as arm's length price, he held that the royalty paid by the assessee in excess of 2 per cent was liable to be disallowed. On the basis of TPO's report, addition of Rs. 2,06,48,218 was made by the Assessing Officer to the total income of the assessee on account of transfer pricing adjustment in the assessment completed under section 143(3) vide an order dated 22-12-2008. 6. Against the order passed by the Assessing Officer under section 143(3), an appeal was filed by the assessee before the learned CIT (Appeals) challenging therein inter alia the addition made by the Assessing Officer on account of transfer pricing adjustment. During the course of appellate proceedings before the learned CIT (Appeals), the submissions made before the TPO justifying the increase in rate of royalty paid on carcass grade of products were reiterated on behalf of the assessee and after reproducing the same in his impugned order, the learned CIT (Appeals....
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....de by the Assessing Officer on account of transfer pricing adjustment to Rs. 1,37,65,579 allowing a relief of Rs. 68,82,639. Aggrieved by the order of the learned CIT(Appeals), the assessee and Revenue both have raised this issue in the present appeals filed before the Tribunal. 8. We have heard the arguments of both the sides and also perused the relevant material on record. Although the learned counsel for the assessee has made elaborate submissions with reference to the details and documents furnished in his paper book including the written submissions filed before the authorities below in an attempt to explain and justify the increase in the rate of royalty from 2 per cent to 5 per cent agreed to be paid by the assessee to Cabot Corporation, USA, we find that the issue involved in the present case is relating to the addition made on account of transfer pricing adjustment and for deciding the said issue, what is relevant to be seen is whether the rate at which royalty was paid by the assessee to its associate enterprise viz. Cabot Corporation, USA is at arm's length price or not. The justifiability of increase in rate of royalty from 2 per cent as paid in the earlier year to ....
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....nsaction, similarity of products or services will have the greatest effect on comparability under this method. Comparability under this method depends on close similarity with respect to various factors including especially the quality of product, the contractual terms etc. 10. It is observed that there is, however, no data available in the present case in respect of uncontrolled comparable transactions which have a similarity or at least a close similarity with the transactions of the assessee with its associate enterprise M/s Cabot Corporation, USA involving payment of royalty and in the absence of the same, we are of the considered view that CUP method adopted by the assessee for transfer pricing analysis cannot be considered as most appropriate method to determine the arm's length price. In our opinion, the arm's length price needs to be determined by the most appropriate method, determination of which would depend, inter alia, on the nature of transactions, functions performed by the associated enterprise etc. Rule 10C(2) of Income-tax Rules, 1962 prescribes the following factors which are relevant for determination of the most appropriate method : "(2) In selecting the ....
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....ital expenditure. 13. During the course of assessment proceedings, the claim of the assessee for deduction on account of royalty paid to M/s Cabot Corporation, USA was examined by the Assessing Officer from the foreign technology collaboration agreement between the assessee company and M/s Cabot Corporation, USA. On such examination, he was of the opinion that the royalty has been paid by the assessee for modernization of carbon black plant under energy conservation scheme in order to be competitive and to improve performance. He held that the assessee thus has acquired technology in terms of collaboration agreement and the quid pro quo for acquiring the technology was that the assessee was required to pay an annual royalty at percentage of sales. He held that the payment of royalty thus was in lieu of technical know-how received by the assessee from the foreign company and the same being in the nature of enduring advantage to the assessee company, the royalty was capital expenditure. For this conclusion, he relied on the decision of Hon'ble Supreme Court in the case of Southern Switch Gear Ltd. v. CIT [1998] 232 ITR 359 wherein it was held that grant of technical aid fees for s....
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....-license. (j) The appellant has ISO certification and has to constantly endeavour not only to maintain high technical standards for its own survival but also keep itself competitive in its line of business. (k) The Assessing Officer erred in ignoring the assessment record of the appellant, wherein this expenditure has been allowed as a revenue expenditure right from 1990. (l) The Assessing Officer also erred in ignoring the decision of the Commissioner of Income-tax under section 263 in assessment year 2003-04, when this matter was looked into, and thereafter the proceedings were dropped." 15. In support of the above submission, reliance was placed on behalf of the assessee on the following judicial pronouncements : (i) Alembic Chemical Works Co. Ltd. v. CIT [1989] 177 ITR 377/43 Taxman 312 (SC) (ii) CIT v. Telco [1979] 2 Taxman 149/123 ITR 538 (Bom.) (iii) Antifriction Bearings Corpn. Ltd. v. CIT [1978] 114 ITR 335 (Bom.) (iv) Kirloskar Pneumatic Co. Ltd. v. CIT [1981] 7 Taxman 85/[1982] 136 ITR 746 (Bom.) (v) Bajaj Tempo v. CIT [199....
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....ra) the learned CIT(Appeals) concluded the issue in favour of the assessee for the following reasons given in paras 4.12 and 4.13 of his impugned order : "4.12 Considering the above judgments, I hold the expenditure is only for the betterment and improvement of the very same line of business which the assessee is carrying on for more than 40 years. The business environment is changing so quickly that Indian companies need to respond proactively for sheer survival. After economic liberalization, keeping abreast of the latest developments, updating knowledge, using newer, better and improved techniques of production, and tools of management is a necessity for Indian companies to function in an environment where world class companies are permitted to enter. It has to be borne in mind that the assessee has only the right to use the relevant information and knowledge and the same cannot be transferred or disclosed to any third party. Further, being the holder of ISO certification, the assessee is required to adhere to international quality standard, and to maintain certification, a regular flow of information is necessary. Having regard to the cited decisions, it must be held that th....
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....e Assessing Officer on this issue. 20. We have heard the arguments of both the sides and also perused the relevant material on record. The learned DR at the time of hearing before us has mainly relied on Article 2 of the Technology Agreement between assessee and Cabot Corporation, USA whereby plans, layouts, designs and technical data required for a carbon black reactor were to be supplied by the USA Company to the assessee company as part of technology package. She has pointed out that technical data, standard designs and plans for improving the processing and handling, pelletizing and drying systems was also to be supplied by the USA Company to the assessee company. She contended that it was thus a clear case of transfer of technology by the USA company to the assessee company and the payment made for such transfer in the form of royalty was a capital expenditure as rightly held by the Assessing Officer. However, as pointed out by the learned counsel for the assessee, plans, layouts, designs and technical data as per Article 2 of the technology agreement were to be supplied by the USA company to the assessee company for reinforcing carbon black reactor capable of utilizing pre....
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....the Hon'ble Bombay High Court that while construing such agreement, they must be considered as a whole without putting emphasis on various clauses in isolation. It was held that the intention of the assessee was to acquire technical knowledge or know-how for certain period and the drawings acquired were part of technical knowledge. It was held that the assessee thus did not acquire any asset or benefit of enduring nature and the payments made under the agreement were allowable as revenue expenditure. 22. It may also be pertinent to note here that a similar payment of royalty under the same technology agreement was made by the assessee right from the year 1990 and the deduction claimed for the same as revenue expenditure was allowed consistently by the Department in the earlier years. As further noted by the learned CIT(Appeals) in his impugned order, this issue was the subject-matter of proceeding under section 263 for assessment year 2003-04 and the learned CIT after examining the same, did not find any error in the order of the Assessing Officer allowing the deduction claimed by the assessee on account of payment of royalty being expenditure of revenue nature. As such, conside....