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2017 (11) TMI 1743

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....ower Pvt. Ltd., (formerly known as 'Gamesa Renewable Private Limited') ('Gamesa India' or 'the assessee') is an Indian company engaged in the business of manufacture of renewable energy equipments like Wind Energy Generation ('WEG', commonly known as 'windmills') and Solar Power Generators. The assessee provides turnkey solutions to its customers which includes the following activities: (a) Undertaking preliminary activities such as identifying land, obtaining approvals for developing wind farms (b) Manufacture and sale of WEGs (c) Erection and commissioning of WEGs (d) Operation & Maintenance of wind turbine generators 3.1 The facts of the issue as narrated in the assessment year 2012-13 are that the assessee maintained the documentation as required under the Rule 10D of the IT Rules, 1962 with respect to international transaction for the financial year 2011-12. The assessee is engaged in manufacturing and assembly of wind turbines, wind farm development, erection and commissioning and operations & maintenance of wind turbines. Based on the Functional Asset and Risk Analysis (FAR) and the economic analysis, the Transactional Net Mar....

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....at no technology is required for development of windfarm, erection and commissioning activities. 3.3 Further, the TPO questioned why imported bought out components should not be reduced from turnover and applied the rate of royalty on net turnover. In this regard, the TPO mentioned that under the provisions of the Foreign Exchange Management Act, 1999 (FEMA), no royalty can be paid on bought out components. With respect to adoption of CUP as alternate method, the TPO remarked that he is not inclined to accept the supplementary benchmarking done to prove the ALP of royalty on the ground that the database and copies of the agreements of comparables are not available for verification. In this regard, it is pertinent to note that the TPO has not disputed the said position in the preceding year and in the show-cause notice for the subject assessment year. The DRP has upheld the adjustment made by the TPO in this regard without appreciating the submissions of the assessee. Against this, the assessee is in appeal before us. 4. The ld. AR submitted that there is no transfer pricing adjustment in a scenario where the transactions are at Arm's Length in accordance with the method presc....

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.... v. Air Liquide Engg. India (P.) Ltd. [2014] 43 taxmann.com 299/[2015] 152 ITD 157 (Hyd.) 3. Daksh Business Process Services (P.) Ltd. v. Dy. CIT [2016] 72 taxmann.com 44 (Delhi - Trib.) 4. Asstt. CIT v. Sakata Inx (India) Ltd. [2015] 54 taxmann.com 106 (Jp. - Trib.) 4.2 The ld. AR submitted that the transactions entered into by the assessee with its AE are at arm's length under the methods prescribed under Rule 10B of the Rules and the TPO has no jurisdiction to identify any method which is not prescribed under the aforesaid Rules. To support his view, the ld. AR relied on the following decisions, wherein it has been held that the TPO has no jurisdiction to apply any method other than those prescribed under the Rules. 1. Dy. CIT v. Diebold Software Services (P.) Ltd. [2014] 151 ITD 463/48 taxmann.com 26 (Mum. - Trib.) 2. Merck Ltd. v. Dy. CIT [2014] 148 ITD 513/37 taxmann.com 433 (Delhi - Trib.) 4.3 Regarding the jurisdiction of the AO and the TPO to determine the commercial expediency of the assessee, it was submitted by the ld. AR that under the provisions of sec.92CA of the Act, the TPO is vested with the power to determine the ALP, which needs to be computed in a....

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....ermine the ALP of any transaction merely based on assumptions. The ld. AR submitted that the TPO does not extend to stepping into the shoes of the assessee and determining the necessity of incurrence of expenditure and the commercial expediency of a transaction has to be evaluated from the assessee's standpoint and not from Revenue's standpoint. Therefore, the ld. AR, submitted that the contention of the TPO that no technology is required for wind farm development and erection and commissioning activities is unwarranted. 4.5 Without prejudice to the above submissions, the ld. AR submitted that for the subject A.Ys. there is no such restriction on payment of royalty on bought out components under the provisions of FEMA on the reasons that as per erstwhile Foreign Exchange Management (Current Account Transactions) Rules, 2000, any remittance under technical collaboration agreement to the extent of 5% on local sales and 8% on exports was permitted without any prior approval of RBI. Further, it was submitted that the aforesaid ceiling on payment of royalty has been lifted with effect from 16th December, 2009 and for the subject A.Y., there was no restriction on payment of roya....

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....oceedings and transfer pricing regulations is to ensure that taxable profit earned by an entity India are not shifted to foreign tax jurisdiction without payment of legitimate share of tax due in India. Therefore, according to the ld. AR, the transfer pricing adjustment proposed by the TPO on the ground that the royalty payment is not within the limits prescribed under FEMA purposes is not tenable. 4.7 The ld. AR, further submitted that the TPO has no jurisdiction to interpret the provisions of FEMA. In other words, the issue on whether the assessee has remitted excess royalty or not is a prerogative of regulatory authorities and not tax authorities. In this regard, the ld. AR relied on the decision of the Tribunal, Pune Bench, in the case of Akzo Nobel Chemicals (India) Ltd. v. Dy. CIT [IT Appeal No. 1477 (Pune) of 2010] wherein it has held that the TPO has no jurisdiction to interpret the provisions of FEMA in order to compute net sales/turnover for 'the purpose of royalty, Applying the rationale, according to the ld. AR, in the instant case, the TPO has exceeded his jurisdiction by interpreting the provisions of FEMA in order to propose transfer pricing adjustments and sub....

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....al aspects - Ecological/architectural protection - Providing guidelines to use tools - Validation of foundation designs - Training to personnel of Gamesa India at the time of development of new prototypes Technical sustainability - Wind speed - Grid connection - Providing drawings and design - Supervisory control and Data acquisition (SCADA - for monitoring WTG throughout the year on remote basic Professional support - Conceptual design - Design verification - Process validation - Wind measurement and assessment   The ld. AR, further submitted that the TPO himself has agreed that such activities require technology support. The only contention raised by the TPO is that such activities do not require any technology, which is not available in India. According to the ld. AR, it is not the prerogative of the TPO to decide whether the assessee should have used the technology provided by its AE or not. The TPO ought to have appreciated the basic fact that the assessee developed wind farms, installed and commissioned WEGs on the basis of the inputs provided by its AE. The AE has substantial past experience in implementing similar projects across the globe and therefore....

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.... correct in stating that no method prescribed under the statute has been followed by the TPO. In a comparable situation involving an unrelated party, such payment would not have been made by that party without commensurate benefits accruing to it Even otherwise, the assessee did not demonstrate the need and benefit relating to such a payment. This has been elaborately dealt with by the TPO in his order u/s.92CA(3) of the Act dated 29.1.2015. Such comparison has been contemplated in the OECD Guidelines, 2010 which held the field at the relevant time of passing the order. The same is reproduced below: "7.6 Under the arm's length principle, the question whether an infra-group service has been rendered when an activity is performed for one or more group members by another group member should depend on whether the activity provides a respective group member with economic or social value too enhance its commercial position. This can be determined by considering whether an independent enterprise in comparable circumstances would have been willing to pay for the activity if performed for it by an independent enterprise or would have performed the activity in-house for itself." Accor....

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....ght out components as the cost for the technology already impeded into the price of the raw material (bought out components). The Id DR submitted that the RBI is an authority to regulate the foreign payments including royalty, put restriction on the royalty payments. However, the RBI has relaxed the ceiling for the payment of royalty does not mean that the assessee can pay entire profits to its AE as royalty. Though the ceilings for royalty relaxed by RBI, the method of calculation of royalty provided by the RBI can be taken as a reference as the same method followed by most of the companies for calculating the value of royalty. 5.4 The ld. DR submitted that the reason behind the reduction of the value of bought out components from the total sales while calculating the royalty is the cost of the technology already embedded in the price of the raw material and for better understanding, the royalty calculation of Mobius India Ltd. is provided below: ROYALTY TO MOBIUS KOREA FOR FY 2013-14 Year Months Sales Less:Trading & MDI sales Less Imports Net Sales Royalty 2013 April 3480790763.14 332329122 680868160 2477593481 74327804   May 3421868459.14 266548375 6936....

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....els respectively, the assessee agreed to pay royalty @ 4%/4.50% respectively on net amount of annual turnover on sale of Wind Energy Generators (WEG) to its customers including charges for development of land, substation, and erection & commissioning. The assessee aggregated the royalty payment which is being international transaction with AE and benchmarking it by using Net Present Cost (NPC) on Revenues as PLI with TNMM method as most appropriate method. The assessee's NPC on revenue was claimed to be at 1.49% with three year weighted margin on revenue of comparables of 0.07% and therefore, the AE transactions were claimed to be at arm's length. According to TPO, the assessee's approach of computation of Royalty and Managerial services by benchmarking them on an aggregation basis was not accepted by TPO/AO. According to TPO, no royalty payable on the standard bought out components and thereby reduced the cost of standard bought out components from the turnover of the assessee and applied the royalty rate on net turnover so as to determine the ALP. The plea of the assessee is that it has considered certain comparables, agreements and the arithmetic mean of the royalty ....

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....equired. Therefore, applying CUP method to the service not availed by the Assessee during the year is not justified. It would have been appropriate if the AO had applied CUP method to the payment made during the year by the Assessee for the three services and compared with similar payment for such services by an independent party. No efforts have been made by TPO/AO to determine the market value of services received by the Assessee during the year relating to SAP implementation and quality control to show that the Assessee had paid more compared to any independent party for the same services. The Assessee had submitted that in case the Assessee had paid to the AE at man hour rate for the technical services provided during the year in relation to SAP implementation, the fees payable would have been significantly higer There is nothing produced before ITAT to controvert the said claim. The Assessee has applied TNMM which shows that the margin shown by the Assessee was higher than the comparable companies. The case of the Assessee is also supported by the decision of Tribunal in case of Mc Can Erricson India Pvt. Ltd. (supra) in which the decision of TPO to take the value of certain s....

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....ent too." 6.3 Similar view was taken by co-ordinate Bench of Hyderabad Tribunal in the case of Air Liquid Engg. India (P.) Ltd. (supra) wherein held that:- '20. Furthermore, we are of the opinion that once TNMM has been applied to the assessee company's transaction, it covers under its ambit the Royalty transactions in question too and hence separate analysis and consequent deletion of the Royalty payments by the TPO in the instant case seems erroneous. We draw support from the Hon'ble Mumbai ITAT decision in Cadbury India Ltd. v. ACIT (ITA No. 7408/Mum/2010 and ITA No.7641/Mum/2010 dated 13-11-2013) wherein the Hon'ble ITAT upheld the use of TNMM for Royalty as well as relied on many of the above decisions to hold adjustment by TPO was erroneous: "33. The TPO has made the disallowance in question mainly on the basis of the benefit test. In this regard, it is seen that the payment of royalty cannot be examined divorced from the production and sales. Royalty is inextricably linked with these activities. In the absence of production and sale of products, there would be no question arising regarding payment of any royalty. Rule 10A(d) of the ITAT Rules defines '....

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.... payment of royalty is at the same percentage as that paid by other auto ancillaries in the automotive industry. Then, in 'Ekla Appliances' (supra) and in 'Ericsson India Pvt. Ltd. v. DCIT, 2012-TII-48-ITAT-Del-TP, it has been held that royalty payment cannot be disallowed on the basis of the so-called benefit test and the domain of the TPO is only to examine as to whether the payment based on the agreement adheres to the arm's length principle or not. That being so, the action of the TPO in the present case, to make the disallowance mainly on the ground of the benefit test, is unsustainable in law. 36. Keeping in view all the above factors, the disallowance made on account of royalty is found to be totally uncalled for and it is deleted as such....". 21. Hence, following the ratio of the Honb'le Delhi High Court in EKL Appliances (supra) and various other decisions as noted above and given the facts and circumstances of the instant case, we hold that the addition made by the TPO and upheld by the DRP is unsustainable and is to be deleted. Hence Ground No. 2 is held in favour of the assessee. Hence, the appeal of the Revenue ITA.No.1040/Hyd/2011 is dismissed a....

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....om time to time. 2. In terms of Rule 4 of the Foreign Exchange Management (Current Account Transactions) Rules 2000, prior approval of the Ministry of Commerce and Industry, Government of India, is required for drawing foreign exchange for remittances under technical collaboration agreements where payment of royalty exceeds 5% on local sales and 8% on exports and lump- sum payment exceeds USD 2 million [item 8 of Schedule ii to the Foreign Exchange Management (Current Account Transactions) Rules, 2000]. The Government of India has reviewed the extant policy with regard to liberalization of foreign technology agreement as it was decided to omit item number 8 of Schedule II to the Foreign Exchange Management (Current Account Transaction) Rules, 2000, and the entry relating thereto. 3. Accordingly, AD Category-I banks may permit drawal of foreign exchange by persons for payment of royalty and lump sum payment under technical collaboration agreements without the approval of Ministry of Commerce and Industry, Government of India. 4. The amendment to the Foreign Exchange Management (Current Account Transactions) Rules, 2000, in this regard has been notified by the Government of Ind....

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....d placing reliance on the provision of FEMA is incorrect. 6.7 Further, it is to be noted that there cannot be any restriction on payment of royalty on bought out components which were subject to further processing by the assessee and which was not sold on as is basis to end customers. This view of ours is fortified by the decision of the Tribunal in the case of Akzo Nobel Chemicals (India) Ltd. (supra) wherein held in para -23 that what is liable to be considered as standard bought out components are such material on which no further processing is required and are directly fitted into the final product; and, cost of such material only needs to be deducted from the sale price to compute the royalty payable. Applying the said clarification to the present situation, considering the manufacturing process explained, it cannot be construed that the so-called constituent material are merely fitted into the final product; on the contrary, it is a case where such material also undergoes a chemical reaction in the process of producing the final product and the same are irretrievable once the finished product is manufactured. For the said reason also, in our considered opinion, the so-called....

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.... of the OECD guidelines which have been exhaustively referred by the Hon'ble Delhi High Court in the case of EKL Appliances Ltd. (supra), the impugned situation does not fit into the two exceptions. Firstly, neither the Revenue has alleged and nor is there any material on record to suggest that the economic substance of the impugned transaction differs from its form. Secondly, there is no material on record to suggest that there is an arrangement between assessee and the AE made in relation to the impugned transaction which would differ from those which would have been adopted by independent enterprises behaving in a commercially rational manner. We say so for the reason that the entire gamut of royalty payment by the assessee to the AE is in terms of the Foreign Technology Collaboration agreement, which is duly approved by Govt. of India in terms of its Policy, which is applicable across the spectrum. Moreover, it is not the case of the TPO or even of the Revenue before us that the royalty remitted by the assessee to the AE has been found to be inconsistent or violative of the respective Government or RBI guidelines or any other authority in law. Further, in our considered opi....

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....and DRP in holding that no royalty is required on allied activities such as development of land, erection and commissioning etc. is not tenable on the first place. The ld. AR further submitted that the copy of sample reports provided by its AE in relation to wind farm development and sample mail correspondences evidencing the fact that the assessee has sought the inputs from its AE are also provided. 10. The ld. DR's submitted that the assessee had claimed royalty on substation development charges, development revenues and revenue on erection and commissioning of Wind Turbine Generators (WTGs). This issue has been discussed in paras 9.7 to 11.2 by the TPO, who has after a perusal of the agreements relating to the above activities, held that what was being done under these categories did not involve any technology transfer and that a third party would not have agreed to pay royalty on income arising out of common infrastructure activities which do not involve any element of transfer of technology. This has not been countered by the assessee. This issue has been dealt by the DRP also. 10.1 The ld. D.R, drew our attention to the relevant part of the order of DRP for AY 2012-13 w....

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.... agreement is filed with the Authorized Dealer in Foreign Exchange. Second 1/3rd on delivery of know-how documentation. Third and final l/3rd on commencement of commercial production, or four years after the proposal is approved by the Reserve Bank of India and agreement is filed with the Authorised Dealer in Foreign Exchange, whichever is earlier." 3.2 Thus the royalty was required to be calculated by the assessee on the basis of the net ex-factory sale price of the product, exclusive of excise duties, minus the cost of the standard bought out components and the landed cost of imported components, irrespective of the source of procurement, including ocean freight, insurance, custom duties, etc. However, the assessee has not done so. The assessee has claimed that the above conditions no longer apply after the issue of RBI circular RBI/2009-10/465 A.P (DIR Series) Circular No.52 dated 13th May 2010 liberalizing Royalty payment under technology collaboration agreements. However, this argument of the assessee does not have any merit. These conditions are still applicable. Further, such conditions also give a method regarding calculation of the amount of royalty to be paid to a f....

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....ear under consideration, the issues regarding royalty payment on bought out components, royalty on substation development charges, royalty on development revenue and royalty on erection & commission charges remain same as for the AY 2012-13. Since the facts remain the same, there is no reason to differ with the order on the same issues for AY 2012-13 and the DRP concurs with the reasoning given by the DRP for AY 2012-13 for rejecting the objections of the assessee. In addition to the reasoning of DRP for AY 2012-13, as regards the issue of Royalty payment on bought out components, the assessee was asked (order sheet entry 23.02.2017) by the Panel to explain as to whether any Royalty is paid by the various group companies to Gamesa Innovation & Tech (GIT), the owner of IPR, as such companies were using the technology owned by GIT in the process of manufacturing the component being supplied to the assessee. According to ld. DR, in the written submissions dated 15.03.2017, the assessee submitted that as per its Group Policy, the royalty is not required to be paid if sales are made to the group companies and same is charged only when the sales are made to the outside parties. To suppor....

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....re us, the assessee explained the activities, which involved high degree of expertise and cannot be undertaken directly by semi-skilled or unskilled workmen, which is as follows:- Wind farm development Erection & Commissioning Environmental sustainability - Visual aspects - Ecology/architectural protection - Providing guidelines to use tools - Validation of foundation designs - Training to personnel of Gamesa India at the time of development of new prototypes. - Supervisory control and Data acquisition (SCADA) - for monitoring WTG throughout the year on remote basis. Process explained in detail in pages 425 to 428 of paper book volume-2 Technical sustainability - Wind speed - Grid connection  - Providing drawings and design Professional support - Conceptual design - Design Verification - Process validation - Wind measurement and assessment   Nature of services rendered by Gamesa-Spain Erections: For erection WTC, all the technical support for crane capacity and erection procedure and safety procedures, validating the site conditions are provided. Tools For erection the guidelines to use erecting tools are provided and the necessary validation of suc....

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....ations that support the turbines. Based on the experience Gamesa-Spain provide know-how on, how to build the access roads, transport the wind turbine blades across remote places which more challenging. They also provide the technical feasibility to approach the site. After the turbine components arrive, crane operators set the first tower segment vertically on to the ground, where other workers secure it to the foundation. The remaining tower segments are then stacked atop one another and fastened together. When the tower has been erected, crane operators carefully lift the nacelle and the blades. The nacelle is placed on the top of the tower and the blades are attached to the turbine's hub. Construction labourers often work on wind farms as contractors and are responsible for preparing the site and building the surrounding infrastructure. Their work includes clearing tress and debris from the wind farm, cleaning machines, and helping to break-up the ground on which the turbine will rest. Construction workers employed by companies that specialize in developing wind farms are sometimes in supervisory roles. They might work under the project manager to direct local contractors....

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....n handling large, expensive cargo like wind turbine components. Most electricians learn their trade through apprenticeship programs that combine on-the-job training with related classroom instruction. Apprenticeship programs usually last 4 years, and, in them, electricians learn skills such as electrical theory, blueprint reading electrical code requirements, and soldering. Depending on the State, electricians might have to pass an examination that tests their knowledge of electrical theory, the National Electrical Code, and local and State electrical and building codes. For this connection Gamesa-Spain empowers the company to able to conduct training programs for their employees as well as contractors, so that skilled workforce is available to them. Project Managers It takes a large number of people to build a wind farm, and managing the project can be a difficult task. Project managers oversee the construction of the wind farm from site selection to the final installation of turbines. A project manager will oversee a diverse team, including engineers, construction workers, truck drivers, crane operators, and wind technicians. Project managers must have excellent attention to de....

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....of 133   The above guidelines are explaining how to proceed with the calculations of short-circuits currents and its connection with cable sizing and protective devices sizing documents. It is important to know the correct application of the various short-circuit ratings by the circuit designer, in order to avoid leaving a circuit or equipment with inadequate cable size or over-current protection device. This guideline analyses the calculation method described in the IEC 60909 standard and is compared with the procedures described in IEC 61363-1. This guide is directly linked with ETAP to let the designer a more practical view of the design. Gamesa Guideline Cable Sizing Guideline Code: GDE-TEC-002 Previous code: N/A Edition: 1 Date: 14/02/2012 Language: Security : Public Rating Page:1 of 57   The aim of this document is to write down a guideline for sizing the following cable types: Power medium voltage, power low voltage, and supply low voltage cables, considering the corresponding IEC and NEC Standards. Additionally, a detailed study about how to proceed with Cable Sizing in ETAP software is written down. The limitation of the software are explained as well ....

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....andard or criteria to judge an international transaction by. Each method is a package in itself, as it were, containing the necessary elements that are to be used as filters to judge the soundness of the international transaction in an ALP fixing exercise. If this were to be disturbed, the end result would be distorted and within one ALP determination for a year, two or even five methods can be adopted. This would spell chaos and be detrimental to the interests of both the assessee and the revenue. The second question is, therefore, answered in favour of the assessee; the TNMM had to be applied by the TPO/AO in respect of the technical fee payment too. 11.3 A similar view was taken by Co-ordinate Bench of Hyderabad in the case of Air Liquid Engg. India (P.) Ltd. (supra) wherein held that:- '20. Furthermore, we are of the opinion that once TNMM has been applied to the assessee company's transaction, it covers under its ambit the Royalty transactions in question too and hence separate analysis and consequent deletion of the Royalty payments by the TPO in the instant case seems erroneous. We draw support from the Hon'ble Mumbai ITAT decision, Cadbury India Ltd. v. ACIT ....

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....3% by the assessee is at arm's length. The Technical Collaboration Agreement stands approved by the Government of India. The royalty payment has been accepted by the department as having been made by the assessee wholly and exclusively for its business purposes. For Assessment Years 2004-05 and 2005-06, such payment of royalty has been allowed by the CIT (A). As per the FEMA Regulations, royalty can be paid on net sales @ 5% on domestic sales and @ 8% on export sales. The royalty payment by the assessee falls within these limits, it also falls within the limits of payment of royalty in the automobile sector, as per the market trend. This payment of royalty is at the same percentage as that paid by other auto ancillaries in the automotive industry. Then, in 'Ekla Appliances' (supra) and in 'Ericsson India Pvt. Ltd. v. DCIT', 2012-TII-48-ITAT-Del-TP, it has been held that royalty payment cannot be disallowed on the basis of the so-called benefit test and the domain of the TPO is only to examine as to whether the payment based on the agreement adheres to the arm's length principle or not. That being so, the action of the TPO in the present case, to make the dis....

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....n paras 9.7 to 11.2 of his order. He has after the perusal of Agreements relating to the above activities, held that what was being done under these categories did not involve any technology transfer and that a third party would not have agreed to pay royalty on income arising out of common infrastructure activities which do not involve any element of transfer of technology. This has not been countered by the assessee. This issue has been dealt with by the DRP in its order dt. 24.03.2017 in paras 4.1 & 4.2. Further, the assessee had claimed before the DRP that it was normal practice to have some products as ex-works at the end of the year and the royalty accrues only on the execution. The DRP has asked the assessee to furnish details of such ex-works products for the F.Y 2010-11 which were carried over and the assessee had admitted that there were no such carry over either in the F.Y 2010-11 or later years. In short, the assessee could not prove that such carryover were normal in its line of business. The assessee has not been able to explain as to why royalty was paid for prior period sales when the agreement itself had come into effect only from 01-04-2010. This has been recorded....

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....ee could not foresee the requirement of the tax authorities and DRP, therefore the assessee did not specifically submit the details of allocation of management fee:- Sl. No. Particulars 1 Statement showing allocation of management fees 2 List of invoices raised on group entities by Gamesa Corporation Technological SA Spain (Gamesa Spain) for the calendar year 2011 3 Sample copy   of invoices raised on Gamesa goup entities by Gamesa spain It was submitted by ld. A.R that only pursuant to the observations of the DRP in the order dated 26th November, 2016, the assessee understood the requirement of authorities and therefore, filed the above information before this Tribunal. It was also submitted that non-submission of the above details before the ld. Assessing Officer/TPO/DRP is neither intentional nor wanton. He drew our attention to the decision of Tribunal in the case of Abhay Kumar Shroff v. ITO [1997] 63 ITD 144 (Pat.) wherein held that if the documents sought to be admitted even at second appellate stage are of a nature and qualitatively such that they render assistance to Tribunal in passing orders or are required to be admitted for any 'other substantial ca....

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....not accepted. Even on merits, these additional evidences the assessee has not explained as to how the said document was relevant to its case, which relates to FY 2011-12, The TPO has not disputed that the assessee is carrying out the business of setting up of Wind Turbines. The TPO has only disputed the payment of royalty on certain sales/activities. These documents do not at all contradict the same. The Ld. DR submitted that in view of the above, the action of the TPO cannot be faulted with and the objections of the assessee are not accepted. 17.4 We have heard both the parties and perused the material on record. In view of the observation of the DRP, the basic evidence to support the claim of cost incurred at the AE's end are not available for verification. This is the very minimum that the TPO required to investigate and to establish whether the cost floated as per predetermined keys is reasonable/legitimate or not. No evidence from the books of the AE with regard to cost, both direct and indirect, and primary documents maintained by AE in support of this claim in its books, has been produced by the assessee either before TPO or DRP on this issue. Now, the assessee produced....

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.... 2012-13. 18. The facts of the issue are that the assessee has entered into a Service Agreement dated 1st April, 2010 with Gamesa Corporation Technologica SA ('GCT Spain') for availing the following services from GCT Spain: 1. General management services 2. Internal audit and risk services 3. Legal services 4. Commercial, marketing and promotion services 5. Financial management services 6. Operations management services 7. Business development services 8. Human capital management services 18.1 During the course of proceedings before the TPO and DRP, the assessee filed detailed submissions inter alia encompassing the following points: 1. The rationale for availing the services from the AE; 2. Copy of the management services agreement; 3. The documentary evidences/justifications to demonstrate that the assessee has indeed received the services in the form of e-mail exchanges between the assessee and the AE; 4. Summary of the benefits received by the assessee on account of receipt of services; 5. Details of department-wise management charge along with the basis of allocation of costs; 6. Detailed workings pertaining to derivation of allocation rat....

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....mann.com 755 (Bang. Trib.) b. Deolitte Consulting India (P.) Ltd. v. Dy. CIT [2012] 137 ITD 21/22 taxmann.com 107 (Mum. - Trib.) c. Knorr-Bremse India (P.) Ltd. v. Asstt. CIT [2013] 56 SOT 349/[2012] 27 taxmann.com 16 (Delhi - Trib.) 19. The ld. AR submitted that the adoption of CUP as most appropriate method for benchmarking management service fee by the TPO and determining the ALP to be Nil. Further, the ld. AR submitted that under the Agreement with AEs, the assessee availed various services in the nature of legal, administrative, human resources, finance, business development etc. The services are specifically rendered by the said entities which act as the global hub for rendering the corresponding services. The services would either be rendered directly by the AEs through its resources or it would employ third party consultants to render such services. The service fee has been charged on the basis of allocated cost to all group entities across the globe. It is pertinent to note that such similar services have not been availed by the assessee during the year from third party consultants and therefore, there is no price available to be regarded as 'internal CUP'. Fu....

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....agement fee satisfies the NEED-EVIDENCE-BENEFIT test, the ld. AR submitted that the action of the TPO in proposing transfer pricing adjustment is not tenable on account of the following submissions: * As elaborated above, in the transfer pricing study, the assessee considered TNMM as the most appropriate method. For the subject asst. year, the PLI of the assessee is higher as compared to the comparable companies. Further, the assessee considered CUP as the most appropriate method and contended that average rate of royalty as per comparable agreements is higher as compared to the subject royalty rates. Therefore, the assessee arrived at a conclusion that the royalty paid to its AE is at arm's length. * The assessee submitted that management service is a critical factor for undertaking its day-to-day operations and therefore it is inextricably linked to its business. Therefore, the determination of ALP of management fee on a stand-alone basis is unwarranted in the first place. The TPO has erred in not appreciating the basic fact that management service is inextricably linked to business of the assessee and, therefore, benchmarking the PLI at entity level is sufficient in orde....

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....ain to avail benefits in the form of global consistency in business, improvement in efficiency and access to common skill set and centralized portals etc. It is pertinent to note that the benefits arising out of the services are intangible in nature. The ld. AR submitted that the model of availing services from a centralized hub is a common phenomenon in all multinational corporations and it is critical for the assessee to avail such services in order to sustain in the market. Further, given that it is an ongoing activity carried on by the AE and considering the fact that the benefits availed by the assessee are intangible in nature which cannot be measured in monetary terms in all scenarios. Therefore, according to the ld. AR, the questioning of examining the benefits availed by the assessee out of such services would not arise in the first place. The ld. AR, further submitted that even in case of availing services from a third party service provider, the resulting benefit cannot be assured and the assessee pays for the expertise of the service provider which may or may not result in substantial benefits having monetary impact. To support his view, the ld. AR relied on the followi....

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.... that the services are peculiar and can be rendered only by the AEs by way of pooling the resources at group level, the contention of the TPO that it is merely in the nature of shareholder activity is baseless. Further, due to confidentiality issues, it is the general practice to undertake such services through group entities. Further, the assessee has substantiated that the services have actually been rendered by its AE and established the underlying benefit derived out of such services. Description of need, benefit on account of management service is captured. Therefore, the contention of the TPO and DRP that there is no requirement to avail management service from its AE is inappropriate. 19.5 In respect of benefits derived by the assessee on account of the management services, the ld. AR submitted that the subject year was the second year of commercial operations of Gamesa India. This year saw a huge increase in the assessee's turnover with increased activity due to new WTG Model G-58 in India coupled with new wind farm development in this year. To meet this increased activity, the assessee had to avail professional support services in the nature of management support (gen....

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....eld that where the PLI of the assessee under TNMM is at arm's length and it is not possible on the part of the department to identify a comparable rendering similar services, the question of considering CUP method would not arise at all. Interestingly, in the said decision, a portion of cost (50%) has been allocated on the proportion of net profits of the group entities. As a result, only companies having profits would suffer such cost whereas companies that have incurred loss would not remit the same. Even in a scenario where net profit is considered as allocation key, the co-ordinate Bench has held that no transfer pricing adjustment is required on management fee in a scenario where the PLI of the assessee company is at arm's length as compared to its comparables. Relevant extracts of the decision are captured. Applying the rationale, the ld. AR, submitted that the allegation of the TPO in holding that the mechanism adopted by the assessee is based on the principle of 'capacity to pay' is baseless. The TPO has no jurisdiction to question the allocation methodology adopted by the assessee. In other words, the TPO should have confined his jurisdiction only to the ex....

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.... assessee should not have taken some or any services, but the issue is the value of such services at arm's length and the quantum of services actually received by the assessee. The agreement between related parties and the invoices raised therefrom cannot be considered adequate and sufficient evidence of service performance Thus, it is observed that the basic evidence to support the claim of costs incurred at the AE's end are not available for verification. This is the very minimum that the TPO is required to investigate to establish whether the cost allocated as per predetermined keys is reasonable/legitimate or not. No evidence from the books of the AE with regard to its costs, both direct and indirect and the primary documents maintained by the AE in support of this claim in its books, has been produced by the assessee either before the TPO or before the Panel for verification of this important and key ingredient in the TP analysis. As discussed by the TPO in his order, the assessee has failed to substantiate its claim of having received any such services which were for its own business interest. The services rendered, if any, are in the nature of control and hold to be ....

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....efit to it. Only a cost-benefit analysis has been undertaken from the perspective of arm's length and the commercial expediency of entering into the agreement was never questioned. The DRP has analyzed the transaction in details and has come to the conclusion that the services which the AE is supported to render to the assessee are general and non-specific and the assessee also failed to furnish documents called for by the DRP. 20.3 The ld. DR, also submitted that in the analysis of services rendered by a group company to one or more group companies, it requires the economic value or commercial contribution and the benefit which can made a difference in the commercial position of the service receiver to be analyzed. This concept called benefit test, which takes place in the OECD guidelines and the importance of the test in questions emphasized in for justification of the performance of intra-group services. OECD guidelines state that a payment made by a group company does not constitute a sufficient evidence for the provision of the services in return for the payment Moreover, it is also stated that absence of payment or agreement between the parties regarding the services doe....

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....the documentation to substantiate to prove the receipt of service and need for such service. In the absence of evidences and the services received are in the nature of routine services from a shareholder the TPO determined the ALP as nil because the services are not be ones for which an independent enterprise ordinarily would be willing to pay. The ld. DR also submitted that the purpose of transfer pricing analysis is to ensure that the Indian tax jurisdiction gets its due share of taxes in the International transactions carried by the Indian companies with its AEs abroad. So the TPO should consider all the aspects which may affect due share of taxes to Indian tax jurisdiction. 20.5 We have heard both the parties and perused the material on record. In our considered opinion, transaction to transaction approach is not required if the Profit Level Indicator (PLI) of assessee at entity segment level is at arm's length where the assessee company has adopted TNMM for the purposes of benchmarking, its adoption of CUP solely for the purposes of evaluating technical assistance fee would lead to chaos and be detrimental to the interests of both revenue and the assessee. In other words,....

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....ese activities of an enterprise, being embedded therein. That being so, royalty cannot be considered and examined in isolation on a stand-alone basis. Royalty is to be calculated on a specified agreed basis, on determining the net sales which, in the present case, are required to be determined after excluding the amounts of standard bought out components, etc., since such net sales do not stand recorded by the assessee in its books of account. Therefore, it is our considered opinion that the assessee was correct in employing an overall TNMM for examining the royalty. The TPO worked out the difference in the PU of the outside party (the assessee) at 4.09% and the comparables at 7.05%. This has not been shown to fall outside the permissible range. 34. The decision of the Tribunal in 'Ekla Appliances', 2012- TH-01-HC Del-TP, has been sought to be distinguished by the TPO, observing that the facts in that case are not in pari materia with those of the assessee's case. However, therein also, the benefit test had been applied by the TPO, as in the present case. The matter was carried in appeal before the Hon'ble High Court. The Hon'ble Delhi High Court has held that....

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....rival contentions and perused the material available on record. In our considered view, there is no infirmity in the order of ld. CIT(A) inasmuch as: (i) ld. DR could not justify the application of CUP method to Arm's Length working. (ii) The products manufactured by the appellant were developed from technology support provided by the AE it would not have been possible so without the continuous AE support. The rights of access to the ongoing technical support and development of new products received by the appellant were clearly provided in the agreements entered into with the AE. (iii) The cost benefit test as worked out by the TPO was not based on proper appreciation of the facts and thus CUP method applied by the AO/TPO was not justifiable. (iv) The judicial citations relied on by ld. CIT(A) as well as further judgments relied on by the assessee including Hon'ble High Court in the case of Delhi EKL appliance Ltd. (supra) support the view taken by ld. CIT(A). In view of the foregoing we uphold the order of the CIT(Appeals) and dismiss the revenue's appeal." 20.6 In our considered opinion, ALP of management service cannot be said to be Nil in the absence of a....

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....view was supported by the decision of Co-ordinate Bench, Chennai in the case of Flakt India Ltd. (supra) vide order dated 9th June, 2016 for assessment year 2009-10 and in the case of Da Business Process Services (P.) Ltd. v. Dy. CIT ITAT in ITA No. 2166 of 2011. 20.8 In our considered opinion, Jurisdiction of the TPO is to determine the commercial expediency and necessity in the hands of the assessee. The learned TPO has remarked that the Assessee has not substantiated the necessity to incur such expenditure. In this regard, it is pertinent to note that the business transactions of the Assessees taken place in the ordinary course, which cannot be questioned by the TPO. Further, the learned TPO cannot conclude based on mere assumptions without examining the commercial expediency of the assessee. This view is fortified by the judgments/order of the various courts as below:- (i) Hive Communication (P.) Ltd. (supra) (ii) EKL Appliances Ltd. (supra) (iii) Computer Graphics Ltd. (supra) 20.9 In our considered opinion, benefit test is not a precondition for justifying arm's length price. Under Rule 10B of the Income-tax Rules, 1962 which deals with 'Determination of the a....

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....arm's length percentage of royalty at 2% either under CUP or TNMM method. On the contrary, observations made by TPO gives ample scope to conclude that adoption of royalty at 2% is neither on the basis of any approved method nor any reasonable basis. Rather it is on ad hoc or estimate basis, hence, not in accordance with statutory provisions. The approach of TPO in estimating royalty at 2% by applying the benefit test, in our view, is not only in complete violation of TP provisions but against the settled principles of law. ITAT, Mumbai Bench in case of Castrol India Ltd. v. Additional CITY, ITA No. 1292/Mum/2007 dated 20/12/2013 while examining identical issue of determination of ALP at 'Nil' by applying the benefit test held as under: "11. We have considered the rival submissions and perused the relevant material on record. It is observed that the impugned royalty was paid by the assessee company to its AE namely Castrol Ltd. UK at 3.5% of the net ex-factory sale price of products manufactured and sold in India as per the technical collaboration agreement. This international transaction involving payment of royalty to its AE was benchmarked by the assessee R.A.K Cera....

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....t and allow ground No. 3 of the assessee's appeal."' (ii) TNS India (P.) Ltd. (supra) '16. We have considered the issue. We are unable to accept the contention of the Assessing Officer/TPO with reference to the services provided by AEs. Assessee has provided the agreements which were entered not during the year but in earlier year and has been paying the service fee termed as management fee accordingly. This claim is not arising for the first time in this year but, is also there in earlier years and later years. Assessee is part of a worldwide group and they have placed some corporate centres for guidance of various units run by them across the globe. It was submitted that the costs being incurred by the centres are being shared by various units and assessee's share in this year has come to 5% of the receipts payable to NFO Worldwide Inc USA and at 4% to NFO Asia Pacific Ltd. Hongkong on the net revenues. These amounts are within the norms prescribed for payment of fees to various group companies of similar nature. There is no dispute with reference to services being provided by the group companies to assessee and assessee also paid various other amounts includi....

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....ither in the same year or in any of the subsequent years. The only condition is that the expenditure should have been incurred "wholly and exclusively" for the purpose of business and nothing more. It is this principle that inter alia Finds expression in the OECD guidelines, in the paragraphs which we have quoted above. 22. Even Rule 10B(l)(a) does not authorise disallowance of any expenditure on the ground that it was not necessary or prudent for assessee to have incurred the same or that in the view of the Revenue the expenditure was unremunerative or that in view of the continued losses suffered by assessee in his business, he could have fared better had he not incurred such expenditure. These are irrelevant considerations for the purpose of Rule 10B. Whether or not to enter into the transaction is for assessee to decide. The quantum of expenditure can no doubt be examined by the TPO as per law but in judging the allowability thereof as business expenditure, he has no authority to disallow the entire expenditure or a part thereof on the ground that assessee has suffered continuous losses. The financial health of assessee can never be a criterion to judge allowability of an exp....

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....lt for the Applicant to procure the services from third party service providers which are specific to the group and products. Given that the services are peculiar and can be rendered only by the AEs by way of pooling the resources at group level, the contention of the learned TPO that it is merely in the nature of shareholder activity is baseless. Further, due to confidentiality issues, it is the general practice to undertake such services through group entities. The Appellant has substantiated that the services have actually been rendered by its AE and established the underlying benefit derived out of such services. Description of need, benefit on account of management service is captured in Pages 660 to 680 of Paper book Volume 11. Therefore, the contention of the learned TPO and DRP that there is no requirement to avail management service from its AE is inappropriate. The Applicant has submitted the copies of invoice and elaborates the list of services rendered by the AE and basis of charging management fee. Further, the Assessee has submitted the copy of various mail correspondences which evidences rendition of management services by its AE. Sample mail correspondences and repo....

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....n earlier years and there was no addition on this count. The payment has been made originally, vide agreement dated 15.12.1986 and it was further extended up to 15.12.2014. Therefore, there is no question of raising invoices for each assessment year and the payment is made in terms of approved agreement. Further, in our opinion, the genuineness agreement cannot be questioned by the assessing authorities when it is duly approved by the Central Govt., Ministry of Commerce & Industry, Department of Industrial Policy and Promotion and by the Reserve Bank of India as well. It is brought on record that Ministry of Commerce & industry, Department of Industrial Policy and Promotion approved this payment vide their letter dated 25.4.2005. It is also brought on record that the payment made to Indian Offshore Inc was subjected to withholding taxes u/s. 195 of the Act and TDS was duly deducted and deposited in the Govt. Bank as seen from Form 16A placed on paper book at page 204. When the Department has given "No Objection Certificate" for remittance made to Indian Offshore Inc for earlier years which is placed on record at page Nos. 211-212 of the paper book. Further, it is brought on record ....

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.... intricacies of commercial expediencies involved in these arrangements. 6.5 In view of the above discussion, we are of the opinion that the payment is made in accordance with agreement entered into by the parties, which is evident from the record and it was subjected to TDS, disallowance is not justified Accordingly, we allow the ground raised by the assessee.'' 21. However, for the A.Y 2012-13, though the assessee was asked to explain as to how the cost of allocation for the management fee was done. The assessee had submitted vide letter dated 20-3-2017 a copy of application filed with Centre for Wind Energy Technology which was rejected by the DRP stating that no cognizance is required to be taken of these documents submitted after the hearing were completed. Regarding copy of correspondence with the AE for allocation of cost, it was observed by the DRP that no such document was furnished by the assessee. However, before us the assessee filed additional evidences for the A.Y 2012-13 as discussed in earlier para elsewhere in the order and we are in-principle agree with the contention of the assessee regarding the allowability of management fees and there is no requireme....

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....llowance of expenditure would arise only in a scenario where the assessee has earned exempt income during the year. To support his view, he relied on the fallowing judicial precedents: a. CIT v. Chettinad Logistics (P.) Ltd. [2017] 248 Taxman 55/80 taxmann.com 221 (Mad.) wherein held that:- b. Redington India Ltd. v. Addl. CIT [2017] 77 taxmann.com 257/392 ITR 633 (Mad.) wherein held that:- Similar view was fortified by the following case laws:- (i) Cheminvest Ltd. v. CIT [2015] 378 ITR 33/234 Taxman 761/61 taxmann.com 118 (Delhi) (ii) Asstt. CIT v. M. Baskaran[2014] 50 taxmann.com 138/152 ITD 844 (Chennai - Trib.) According to the ld. AR, the AO relied on Circular 5 of 2014, which has been annulled by the Jurisdictional High Court and the Tribunal in the above decisions. 24.1 The ld. AR argued that there is no disallowance u/s.14A of the Act, if the investment is on account commercial expediency or facilitates the business of the assessee. The ld. AR, submitted that the business carried on by the subsidiaries is integrated to the business of the assessee and therefore the investments have been made on account of commercial expediency and it indirectly facilitates the bu....

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....the addition made by the AO by relying upon section 14A of the Act, was completely contrary to the provisions of the said section. It was submitted that the Revenue could disallow the expenditure even in such a circumstance by taking recourse to Rule 8D. According to us, Rule 8D, only provides for a method to determine the amount of expenditure incurred in relation to income, which does not form part of the total income of the Assessee. Rule 8D, in our view, cannot go beyond what is provided in section 14A of the Act." (ii) Redington India Ltd. (supra) wherein held that:- '13. Reliance is also placed on a decision of the jurisdictional High Court in the case of Beach Minerals Company Pvt. Ltd. v. Assistant Commissioner of Income Tax in TCA No. 681 of 2013, dated 2-12-2013. In that case, payments of interest by the assessee were sought to be disallowed invoking the provisions of S.14A on the premise that the same related to borrowings that had been invested and would yield exempt returns. The assessee contested the disallowance u/s. 14A on multiple grounds. It was contended that there were sufficient reserves and surpluses available for the purpose of investments, and borrow....

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....al income' commences with the phrase. 'In computing the total income of a previous year, any income falling within any of the following clauses shall not be included. 15. The exemption extended to dividend income would relate only to the previous year when the income was earned and none other and consequently the expenditure incurred in connection therewith should also be dealt with in the same previous year. Thus, by application of the matching concept, in a year where there is no exempt income, there cannot be a disallowance of expenditure in relation to such assumed income. (Madras Industrial Investment Corporation Ltd. v. CIT (225 ITR 802). The language of S.14A(1) should be read in the context and such that it advances the scheme of the Act rather than distort it.' 25.1 Accordingly the above ground is decided in favour of the assessee and there cannot be any disallowance u/s.14A when there is no exempted income. This ground of appeal of the assessee for the A.Y 2012-13 is allowed. 26. The next ground for the asst. year 2012-13 is with regard to disallowance u/s.14A with Rule 8D while computing book profits u/s. 115JB of the Act. 26.1 The facts of the issue are....

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....a full and true disclosure of all material facts, it will be necessary to advert to the decision of the Supreme Court in Harshad Shantilal Mehta v. Custodian (1998) 231 ITR 871. The Supreme Court, in the course of its judgment observed that under the IT Act, 1961 the definition of tax under s. 2(43) does not include penalty or interest and that the concepts of tax, penalty and interest are different concepts under the Act. Justice Sujata Manohar speaking for a Bench of three learned Judges of the Supreme Court observed thus : We are concerned in the present case with penalty and interest under the IT Act. Tax, penalty and interest are different concepts under the IT Act. The definition of 'tax' under s. 2(43) does not include penalty or interest. Similarly, under s. 156, it. is provided that when any tax, interest, penalty, fine or any of other sum is payable in consequence of any order passed under this Act, the AO shall serve upon the assessee a notice of demand as prescribed. The provisions for imposition of penalty and interest are distinct from the provisions for imposition of tax." 10. The decision of the Supreme Court was delivered in an appeal which arose out of....

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....ired and installed plant and machinery during the preceding year in respect of which additional depreciation at the rate of 20% has been claimed. In respect of assets put into use for a period of less than 180 days during the preceding year, additional depreciation has been claimed at the rate of 10 per cent. Therefore, the remaining spill over of 10 per cent has been claimed during the subject AY, The AO held that additional depreciation would be allowable only in the year in which the asset is put into use and rejected the claim of the assessee. 33.1 The provisions of the Act are ambiguous and in case asset is put to use for less than 180 days in an year then additional depreciation u/s. 32(1)(iia) has to be reduced to half the specified rate. Further, there isn't any provision of carry forward of balance additional depreciation to the succeeding previous year. So there isn't any flaw in the order of the AO in this regard and the objection of the assessee is not accepted. This is important to note that realizing this aspect of loss to the assessee of balance depreciation, an amendment in the Act has already been carried out which allows this benefit of carry forward to t....