TaxTMI 
TaxTMI 
2014 (10) TMI 696
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....re containing activities of the assessee company for explaining various technical activities of the assessee. ITA.No.1651/Hyd/2010 - A.Y. 2006-07 : 3. The assessee has raised 11 grounds in this appeal out of which, ground Nos.1 to 8 pertain to T.P. adjustments. Ground No.9 pertains to disallowance of an amount of Rs. 13,45,52,755/- under section 43B. Ground No.10 is on levy of interest under section 234B and 234D and ground No.11 is on initiation of penalty proceedings under section 271(1)(c). Ground No.10 is consequential in nature and Ground No.11 is premature in nature and therefore, they need not be adjudicated and accordingly, ground Nos. 10 and 11 are dismissed. 4. Ground Nos. 1 to 8 pertain to the disallowance of payment of royalty and technical service fee to M/s. Kirby Building Systems, Kuwait analysed under the provisions of transfer pricing. Briefly stated, assessee M/s. Kirby Building Systems India Ltd., is engaged in the business of manufacture of Pre-Engineered Steel Building System (PEB) Products. For the year under consideration, assessee filed return of income declaring total income of Rs. 6,82,39,910/-. A.O. noticed that it had international transactions ....
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.... payments will not exceed the potential outflow as agreed in the original TSA. Further, in respect of the lump sun technical fee, the sum of USD 2,000,000 which was agreed as per the original TSA, has not been revised but the payment terms have been amended to defer the payment over a certain number of years up to 2017." Taxpayer failed to furnish any FAR analysis in respect of royalty payment. It is pertinent to note that no royalty was paid by the taxpayer from year 2000 to 2004. Just because RBI fixed the limits of royalty rates, the same is taken as bench mark for payment of royalty. However, one has to understand that the RBI limits is nothing to do with determination of arms length price under the provision contained under section 92 of I.T. Act, 1961. RBI limits are meant to regulate foreign exchange as part of forexmanagement. The reason give for not paying royalty by the taxpayer between the years 2000 to 2004 is that there were no profits made during the said financial years. This is not correct. In fact, for F.Y. 2003-04, the taxpayer has earned a net profit margin of 6.67%. The claim of the taxpayer that there is a substantial expansion of the manufacturing facility ....
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....y in the year 2000. What brand value Kirby, Kuwait commands in a country like India where the usage of preengineered steel buildings are at a nascent stage. Only after year 2000, the infrastructure sector has opened up which started accepting these pre-engineered steel structures in industrial sector. PESBs are not consumer products which can be bought off the shelf from any store. Also it is important to note that brand value is developed from the contributions made by all the group entities of MNEs. Therefore, Kirby, India has developed its own brand value by spending huge amounts on marketing, development and advertisements as discussed in the earlier part of this order. Significant costs have been incurred by Kirby, India in marketing of its product in the country. Also, the PESBs are customized to the needs of the customers with reference to locations and functionality of the business. The PESBs which are prevalent in Kuwait cannot be simply replicated here in India. Kirby, India has spent huge amounts in marketing development and business promotion to familiarize their products. Developed in-house expertise and most of the works are also outsourced on job work basis. Therefor....
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....ve technical services, we are of the view is adequately compensated and hence further technical fee payment in this year is not necessary. The action of the TPO in taking technical fee payable for this year as "nil" is upheld. In respect of royalty, during the financial year under consideration the taxpayer was paying the royalty @7.5% on sales and debited an amount of Rs. 17.71 crores. As one could see, the AE is declaring 15% profit and the taxpayer has declared nearly 6% profit, whereas the royalty payment is @7.5% of the sales. Besides, this makes us to infer that there is a shifting of profit from India to its AE. We also tend to believe that since shifting of profits to its AE in countries non taxable, there would be a tendency to shift the profit from the taxpayer to its parent companies. Now the question is how to quantify them. During the FY 2004-05, the taxpayer has paid the royalty @ 3.5% on sales of Rs. 6,77,67,700/-. We are of the view that during this year also the royalty payment of 3.5% on sales would meet the requirement of ALP. To this extent, the TPO's report is modified i.e. ALP in respect of royalty payment is calculated as under : Price Received vis-a-v....
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.... to suit the assessee company in its working capital requirement. Accordingly, it was submitted that assessee paid US $1,00,000 as technical fee in the year under consideration. 9. With reference to royalty, it was submitted that in the original agreement dated 01.04.2000 royalty was payable on domestic sales at 2.5% in the first year and 5% from second year i.e., 2002 onwards up to 31.03.2007. However, assessee has not paid any royalty in the year 2000-2001 and vide agreement dated 07.09.2001, the terms were changed to pay royalty at 5% on domestic sales and 5% on export sales from the year 2002 to March, 2007. In spite of that, assessee did not pay any royalty in the years 2002 and 2003. Therefore, vide agreement dated 12.11.2002, this was changed to no royalty up to March 2003 and 7.5% on domestic sales and 8% on export sales for 3 years up to March, 2007. This was however, further modified vide agreement dated 17.12.2005 to nil royalty up to 2004 and 7.5% on domestic sales for 3 years and 8% of export sales for 3 years, that too up to March, 2007. All the agreements were approved by RBI as well as Industries Department, Government of India. It was submitted that assessee in ....
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....cal fee payable are on net basis. Therefore, assessee has grossed-up the amounts and to an extent of about 32% assessee has paid taxes including service tax, cess and other taxes. The Ld. Counsel referred to the detailed submissions made before the DRP on this issue. 13. It was further contended that assessee's agreements with AE were approved by RBI and also by the Department of Industries and therefore, the TPO/DRP has no role to deny the claim which was approved by other Government Authorities. Ld. Counsel on a clarification about the working of royalty clarified that even though the rate agreed/approved stood at 7.5% of domestic sales or 8% of export sales, as per the policy of the RBI there are various exclusions in considering the turnover. Therefore, the effective date of royalty was much less whereas, the DRP has approved the rate at 3.5% on the gross domestic sales. Therefore, there is a little variation in the amounts taken. 14. Summarising the arguments, Ld. Counsel submitted that DRP/TPO has no jurisdiction to restrict the amount to NIL. Ld. Counsel made various propositions as under and as supported by various decisions of the Coordinate Benches/High Court. i.....
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....tive rate of royalty is very much less. It was submitted that the assessee has paid cumulative royalty as percentage of cumulative sales at 3.75% up to A.Y. 2009-2010. It was submitted that the payment of technical knowhow and royalty should be allowed in full. 17. We have considered the rival contentions and examined the orders of the authorities, documents placed on record and relevant case law relied upon. Kirby Building Systems India P. Ltd., is a wholly owned subsidiary of Alghanim Industries, a Kuwait based Multi-Billion Conglomerate. It is one of the world's largest producers of Pre- Engineered Steel Buildings (in short "PEB") and has been operational for more than 38 years since 1976. To pioneer the PEB concept, it has set up a plant in India in the year 1999 with a manufacturing facility with a capacity of 60,000 MT per annum at Hyderabad. It was submitted that Kirby Kuwait has extremely talented pool of skilled structural engineers, designers and detailers conversant with Indian and Internationally acclaimed codes and engineering practices. All the buildings designed by Kirby are custom designed using latest domestic/international codes and standards such as IS, MBMA, ....
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.... same amount which was payble originally due to rescheduling in payment period. No extra amount was required to be paid. Moreover, on the entire turnover in the intervening years, assessee also would have paid royalty. However, due to business requirements, both the parties agreed to revise the royalties. TP provisions does not empower the TPO to decide about the commercial decisions and determining the ALP at NIL thereby, denying the entire claim instead of allowing the amount on the basis of ALP to be determined under the provisions. 20. The Hon'ble Delhi High Court in the case of CIT vs. EKL Appliances ITA.No.1068 of 2011 and 1070 of 2011 dated 29th March, 2012 considered similar issue whether the TPO has power to restrict in determining the ALP at NIL under the provisions of T.P. when he was supposed to have determined the arms length price of the international transaction. The Hon'ble Delhi High Court after examining the facts of the case held under : "19. There is no reason why the OECD guidelines should not be taken as a valid input in the present case in judging the action of the TPO. In fact, the CIT (Appeals) has referred to and applied them and his decision has bee....
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.... Section 57(iii) cannot be different. The deduction of the expenditure cannot, in the circumstances, be held to be conditional upon the making or earning of the income." It is noteworthy that the above observations were made in the context of Section 57(iii) of the Act where the language is somewhat narrower than the language employed in Section 37(1) of the Act. This fact is recognised in the judgment itself. The fact that the language employed in Section 37(1) of the Act is broader than Section 57(iii) of the Act makes the position stronger. 20. In the case of Sassoon J. David & Co. Pvt. Ltd. v. CIT, (1979) 118 ITR 261 (SC), the Supreme Court referred to the legislative history and noted that when the Income Tax Bill of 1961 was introduced, Section 37(1) required that the expenditure should have been incurred "wholly, necessarily and exclusively" for the purposes of business in order to merit deduction. Pursuant to public protest, the word "necessarily" was omitted from the section. 21. The position emerging from the above decisions is that it is not necessary for assessee to show that any legitimate expenditure incurred by him was also incurred out of necessity. It is a....
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..... Full justification supported by facts and figures have been given to demonstrate that the increase in the employees cost, finance charges, administrative expenses, depreciation cost and capacity increase have contributed to the continuous losses. The comparative position over a period of 5 years from 1998 to 2003 with relevant figures have been given before the CIT (Appeals) and they are referred to in a tabular form in his order in paragraph 5.5.1. In fact there are four tabular statements furnished by assessee before the CIT (Appeals) in support of the reasons for the continuous losses. There is no material brought by the revenue either before the CIT (Appeals) or before the Tribunal or even before us to show that these are incorrect figures or that even on merits the reasons for the losses are not genuine. 24. We are, therefore, unable to hold that the Tribunal committed any error in confirming the order of the CIT (Appeals) for both the years deleting the disallowance of the brand fee l royalty payment while determining the ALP. Accordingly, the substantial questions of law are answered in the affirmative and in favour of assessee and against the Revenue. The appeals are a....
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....sales basis. It was submitted that as percentage of sales, royalty payment in the impugned year was only 5.92%. Be that as it may, we are not in a position to approve the action of the A.O. / DRP in restricting the royalty and total denial of Technical services fee without any basis at NIL under the guise of T.P. provisions. In view of this, we are not in agreement with the action of the TPO / DRP. 20.4. In the course of arguments, Ld. Counsel made various propositions on payments of Royalty and technical services fee and cited the decisions of the Coordinate Benches of the Tribunal in the case of SC ENVIRO Agro India Ltd., Mumbai vs. DCIT 3(3), Mumbai ITA.No.2057 & 2058/Mum/2009 dated 07.11.2012, M/s. Thyssen Krupp Industries India P. Ltd., Mumbai vs. ACIT, CC 3(3),m Mumbai in ITA.No.7032/Mum/2011 dt. 27.11.2012, Air Liquid India P. Ltd., vs. DCIT, Circle 1(1), Hyderabad ITA.No.1159/Hyd/2011 etc., dt. 13.02.2014 and host of other decisions as stated in the submissions above to substantiate various propositions. Suffice to say that we have considered various legal principles on the issue. We are of the opinion that apart from legal position, even on merits the disallowance of en....
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....so not applicable. Assessee placed number of documents supporting the amount into a deferred loan but the DRP was of the view that the documents were not complete. Accordingly, it confirmed the order of the A.O. 23. Before us, Ld. Counsel contended that assessee has placed all the documents before the A.O. as well as before the DRP and referred to the order of the DRP in later year A.Y. 2007-08 wherein clear findings were given by DRP about this and allowed the objection raised by the assessee in that year. 24. After considering the rival contentions, we agree with assessee's objection with reference to disallowance of the amount. As seen from the order of the DRP in A.Y. 2007-08, the DRP on the basis of the evidences furnished before it, allowed the amount by stating as under: "10. Last ground of objection relates to the disallowance of sales tax under 43B of the Income Tax Act. The A.O. disallowed the claim of the assessee stating that it failed to produce a copy of the agreement with the Sales Tax department on conversion of deferment into interest free loan. The A.O. also cited the decision of the ITAT in the case of Krebs Bio-chemicals Industries Limited dated 29.01.2....