TaxTMI 
TaxTMI 
2017 (5) TMI 1639
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....Sample Design and Development charges receipt amounting to Rs. 96,13,655/- for the calculation of deduction u/s 80HHC ignoring that the assessee failed to file documentary evidence to justify its claim and as per provisions of explanation (baa) of section 80HHC, for computing "profits of business" 90% of sums referred to in clauses (iiia) to (iiie) of section 28 or any receipt by way of brokerage, commission, interest, rent, charges of any receipt of similar nature included in such profits have to be deducted from the profits and gains of business or profession. Reliance is also placed on the decision of Hon'ble ITAT in Beekay Engineering & Casting Ltd. v. JCIT A. No. 4961(Del) of 2002. 3. The Ld. CIT(A) has erred on facts and in law in directing the AO to allow the claim of the assessee on account of additional depreciation amounting to Rs. 20,61,050/- ignoring that documentary evidence in support of the asessee's claim for additional depreciation u/s 32(iia) of the I.T. Act is not available on record. Further, the assessee also failed to file the audit report even before the completion of the assessment. 4. The Ld. CIT(A) has erred on facts and in law in deletin....
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....ngly added entire face value of DEPB amounting to 1,27,73,524/-; whereas since co. has sold DEPB license at a loss therefore amount subject to non add back under third proviso to Section 80HHC(3) is NIL, on failure on the part of appellant to produce the evidence required by said proviso; Kindly note that the similar ground of appeal has been decided in the favour of appellant by CIT- A VI in AY 2002-03. Copy of CIT-A order for AY 02-03 adjudicating similar ground of appeal in the favour of appellant is enclosed for your reference (Attachment-2)". 6. The ld. CIT(A) after considering the submissions of the assessee decided the issue in favour of the assessee by stating that the similar issue was decided in assessee's favour for the assessment year 2002-03. 7. Now the department is in appeal. The ld. DR strongly supported the order of the AO and also filed the written submission which read as under: "The AO has held that since the assessee failed to furnish any evidence that the rate of Duty Drawback was higher than the rate of DEPB as per the amended provision (3rd proviso of Section 80HHC read with 28(iiid)) hence the amount of DEPB of Rs. 1,27,73,524/- shal....
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....book representing the excess of sale proceeds over the face value is liable to be considered u/s 28(iiid) at the time of sales. " 7.1 Undisputedly, ITAT Mumbai Bench (SB) in case of Topman Exports v. ITO (2009) 33 SOT 337 answered the aforesaid question in favour of the assessee by returning the following findings: "We, therefore, hold that in the scheme of section 80HHC, the face value of DEPB cannot be reduced from the purchase cost but is separate income under section 28(iiib), which accrues at the time of making application pursuant to exports. Only the profit element on the sale of DEPB, that is the amount in excess of sale proceeds over the face value, is covered under section 28(iiid). " 7.2 Then the matter went to Hon 'ble Apex Court in the case entitled Topman Exports v. CIT [2012] 18 taxmann.com 120 (SC) Hon'ble Apex Court upheld the order passed by Special Bench of the Tribunal (Mumbai) and the crux of the findings returned is as under for ready reference: "The aforesaid discussion would show that where an assessee has an export turnover exceeding Rs. 10 crores and has made profits on transfer of DEPB under. clause (iiid) of section 28....
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....rned the findings that since the assessee has failed to furnish any evidence that "rate of duty drawback was higher than the rate of DEPB", the amount of DEPB shall not be included in 90% of the amount to be added to the profits of business and thereby 90% of the DEPB amount i.e. Rs. 1,02,59,456/-0 was reduced from computation of profits of business for the purpose of calculating the deduction u/s 80HHC. Consequently, Assessing Officer reduced the deduction u/s 80HHC from Rs. 3,03,36,393/- to Rs. 2,31,60,167/-. 7.4 Undisputedly, in case, turnover of the assessee is up to Rs. 10 crores, the assessee will get deduction of 90% of the amount to be added to profits of business of export incentive and consequent deduction u/s 80HHC(3). It is also not disputed that the assessee has failed to furnish the requisite evidence to prove that he rate of duty drawback was higher than the rate of DEPB. 7.5 However, Ld. A.R. contended that the assessee has claimed the addition under 3rd proviso to Section 80HHC(3) at Rs. 6,61,653/- i.e. 90% of Rs. 7,35,170/-. Ld. A.R. further contended that 3rd and 4th proviso to section 80HHC(3)(c) operate only prospectively and relied upon the j....
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.... related to this issue in brief are that the AO during the course of assessment proceedings noticed that the assessee had shown receipts of Rs. 96,13,655/- on account of sample design and development charges. He asked the assessee to show cause as to why the same be not excluded from the computation of income. The AO held that such income are in principle acceptable to the existence of 90% out of profits of business in terms of explanation (baa) of Section 80HHC of the Act by observing in para 3.2.5 of the assessment order dated 28.03.2006 which read as under: "3.2.5. Sample Design & Development Charges Received - The assessee has shown receipts of Rs. 96,13,655/- on account of sample design and development charges. The assessee was asked to show cause as to why the same be not excluded from the computation of deduction. No reply has been filed in this regard, it may be pertinent to refer to the assessment and appellate proceedings in the case of the assessee for A.Y. 2001-02 in order to arrive at a conclusion regarding the treatment of these receipts. During the aforesaid proceedings it was stated by the assessee that the consideration on account of such sales did not hav....
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....evant portion of the said circular in paragraphs 32.10 and 32.11 read as follows: "32.10 The existing formula often gives a distorted figure of export profits when receipts like interest, commission, etc. which do not have element of turnover are included in the profit and loss account. 32.11 It has, therefore, been clarified that "profits of the business" for the purpose of section 80HHC will not include receipts by way of brokerage, commission, interest, rent, charges or any other receipt of a similar nature. As some expenditure might be incurred in earning these incomes, which in the generality of cases is part of common expenses, ad hoc 10 per cent deduction from such income is provided to account for these expenses." (emphasis supplied) Therefore it is amply clear from para 32.10 of the circular that the purpose of excluding receipts like interest, Commission, other receipt etc. from the ambit of the profits of the business is to exclude such receipts which do not have an element of turnover. Whereas in the case of appellant the development of sample designs is core business activity regularly carried on by the appellant; the proceeds from the export....
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....y, the word "Other Receipt" appearing in the company of those words also will not have any nexus with manufacturing or processing or core business activity of an assessee. The word "Other Receipt" appearing in the company of brokerage, commission, interest, rent etc. cannot be singled out and assigned a different meaning alleging a nexus with manufacturing or processing or core business activities. Therefore, the word "Other Receipt" appearing in clause (baa) of Explanation to section 80HHC should be read as receipts similar to receipts in the nature of brokerage, commission, interest, rent, etc." 14. The reliance was placed on the following case laws: * CIT v. Bangalore Clothing Co. [2003] 127 Taxman 637/260 ITR 371 (Bom.) * CIT v. Kiran Processors [2007] 158 Taxman 407/288 ITR 165 (Mad.) * ITO v. Su-raj Jewellery (India) Ltd. [2008] 21 SOT 79 (Mum.) * Asstt. CIT v. Herbal Isolates (P.) Ltd. [2002] 83 ITD 310 (Cochin) 15. The ld. CIT(A) after considering the submissions of the assessee held that the reimbursement of sample design and development charges constitute export turnover of the business and hence represent business income of the a....
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.... have contended that no element of profit is involved in the receipt but the contention was rejected for lack of evidence and the CIT (Appeals), relying on the definition of total turnover, upheld the Assessing Officer's action. We have carefully considered the matter. The receipt arose out of sale of samples exported out of India to the customers. The sale proceeds were received in foreign currency. The plea that the receipt was in the nature of reimbursement of expenses and did not include an element of profit has not been accepted by the CIT (Appeals) for lack of evidence and the position remains the same even before us. We are, therefore, of the view that no fault can be found with the income-tax authorities when they included the receipt of Rs. 10,66,725/- in the total turnover of the business. As regards the alternative claim for including the receipt as part of the export turnover, which is the numerator in the formula prescribed by the section, it cannot be said that the assessee exported samples, since sending samples is a means to procure export orders. The same goes for the design and sample charges. However, since the assessee has not been able to prove that there is no....
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....ation available on achieving substantial expansion by way of increase in installed capacity). One of the arguments put forward by AO for denial of additional depreciation is that perusal of Schedule 19 to the balance sheet containing significant accounting policies and notes to accounts shows that quantitative and other information regarding goods manufactured, licensed capacity and installed capacity are mentioned as N.A therefore the increase in installed capacity remained unsubstantiated. In this context kindly note that final products in appellant's industry are extremely diverse and dynamic and therefore it is not practicable to provide the details of licensed and installed capacity. Therefore AO has grossly erred in law in arbitrarily concluding that appellant is not eligible for additional depreciation without going into the facts of the case. It is therefore preyed to kindly admit Form 3AA as an additional evidence for claim of additional depreciation u/s 32(l)(iia) filed with your goodself vide letter dt. 26.10.2006." 23. Reliance was placed on the following case laws: * CIT v. Magnum Exports (P.) Ltd. [2003] 262 ITR 10/130 Taxman 702 (Cal.) ....
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.... the ld. CIT(A). 28. Vide Ground No. 4, the grievance of the department relates to the deletion of addition of Rs. 1,57,35,495/- made by the AO on account of Arm's Length Price u/s 90CA(3) of the Act. 29. The facts related to this issue in brief are that the AO during the course of assessment proceedings noticed that the assessee had made payment of royalty of Rs. 1,57,35,495/- to M/s Pike River Corporation which is a body corporate under the laws of state of Vermont United States of America and is an associated enterprises(A.E.) of the assessee company and was engaged in the business of designer's garments which included study of latest fashion trends in the market, developing styling the market and conceptualizing designs. M/s Pike Rive Corporation (PRC) is the owner of brand in the name of Apprel Cornell which is patent with office of United States. Since, the assessee had undertaken international transaction, the AO referred the matter to the TPO for determination of Arm's Length Price. 30. The TPO noticed that the assessee had undertaken following international transactions with its groups companies: S. No. Description of transaction Method Value (in Rs....
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....ng common control through Cornell Shareholder exercising full control over the affairs of the assessee. The TPO, therefore, inferred that the assessee company was a mere contract manufacturer of its overseas related party and the risk & reward matrix in respect of contract manufacturer was entirely different from an independent entrepreneur who may require technical know-how, logo, market access, designs and help of an expert whereas the contract manufacturer required none out of the above. He further observed that the contract manufacturer, did not carry the risk of marketing and therefore was not worried about the latest trends in the market, this risk was borne by the entity providing work to the contract manufacturer who necessarily carries the manufacturing risks like decline in production, maintenance of quality, timely delivery etc. and in the present case, when the assessee company was performing functions of the contract manufacturer, it was very difficult to understand why there were payments for intangibles like royalty and technical know- how in the nature of designs provided by the associated enterprises. The TPO also observed that the designs and its production techno....
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....s transacted and these arrangements are recognized by OECD in following terms: "6.17 The compensation for the use of intangible property may be included in the price charged for the sale of goods when, for example, one enterprise sells unfinished products to another and, at the same time, makes available its experience for further processing of these products. Whether it could be assumed that the transfer price for the goods includes a licence charge and that, consequently, any additional payment for royalties would ordinarily have to be disallowed by the country of the buyer, would depend very much upon the circumstances of each deal and there would appear to be no general principle which can be applied except that there should be no double deduction for the provision of technology. The transfer price may be a package price, i.e., for the goods and for the intangible property, in which case, depending on the facts and circumstances, an additional payment for royalties may not need to be paid by the purchaser for being supplied with technical expertise. This type of package pricing may need to be disaggregated to calculate a separate arm's length royalty in countries that ....
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.... 80HHC on this enhancement of income as per first proviso to section 92C (4)." 36. Being aggrieved the assessee carried the matter to the ld. CIT(A) and submitted as under: "A. Disallowance under wrong section The disallowance made by the AO has been made on the grounds that the payment of royalty is not wholly and exclusively for business purposes and has been made u/s 92C(4) read with section 92CA(4). A disallowance u/s 92C(4) read with section 92CA(4) is made only when the quantum of a international transaction is not as per the arms' length price. Whether a particular international transaction (i.e. payment of royalty in this case) between associated enterprises has been laid out wholly and exclusively for business purposes, is to be judged under section 37 of the IT Act and not under section 92. Hence the AO has erred in law in disallowing the above amount u/s 92. B. Royalty is wholly and exclusively for business purposes Without prejudice to the above, it is stated that irrespective of the section under which the AO has disallowed the royalty payment, the AO has erred on facts in concluding that the royalty payment is not wholly....
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....LP by applying a non specified method: Merely because royalty payments were relating to the product sold by the assessee to its associated enterprises cannot be the consideration before the TPO for determining 'ALP' of the Royalty payments as Nil. Specific methods have been prescribed in the Act and the I. T. Rules and the T.P.O. is bound to determine 'ALP' of any international transaction within the framework of the method prescribed by statute. Section 92C which deals with the specific methods is reproduced below for your ready reference: Computation of arm's length price. 92C. (1) The arm's length price in relation to an international transaction shall be determined by any of the following methods, being the most appropriate method, having regard to the nature of transaction or class of transaction or class of associated persons or junctions performed by such persons or such other relevant factors as the Board may prescribe, namely:- (a) comparable uncontrolled price method; (b) resale price method; (c) cost plus method; (d) profit split method; transactional net margin method; ....
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....e allowed in respect of the amount of income by which the total income of the assessee is enhanced after computation of income under this sub-section; Provided further that where the total income of an associated enterprise is computed under this sub-section on determination of the arm's length price paid to another associated enterprise from which tax has been deducted [or was deductible] under the provisions of Chapter XVIIB, the income of the other associated enterprise shall not be recomputed by reason of such determination of arm's length price in the case of the first mentioned enterprise. The manner in which the A.L.P is to be determined by any of the method prescribed in Sec. 92C in provided in Rule 10B of the I. T. Rules, 1962. After examining the parameters prescribed in Rule 10B, it can be seen that merely because royalty payments were made to one of the associated enterprises on sales made to the associated enterprises cannot be a factor to determine the arm's length price of Royalty. It is humbly submitted that the TPO has exceeded his limitation by following the method which is not authorised under the Act or rules and hence the ALP determined by the....
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....finished goods. It will be subject to the risks of selling the goods. It will need to invest in skilled labour and expensive plant and machinery. All the above characteristics are present in the case of the appellant and hence the appellant is a licensed manufacturer. 3. The appellant is registered with the Central Excise authorities as a full fledged manufacturer and is not treated as a contract manufacturer. A contract manufacturer as is evident from the definition given above, does not hold raw material inventory risk, however in this case the appellant holds the entire raw material on its own account. This is evident from the fact that the appellant is eligible for all the export benefits which are available on the purchase of raw materials like DEPB etc. 4. A contract manufacturer does not take the risk of bad debts. In fact this is one of the most important characteristics of a contract manufacturer. The appellant has taken the bad debt risks for all its sales as is evident from the FAR analysis mentioned in the TP Report. Also in the future years, the appellant has had bad debts and the same have been accounted for in its books of accounts as such and have ....
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....any guaranteed remuneration which is the hall mark of the relationship between a contract manufacturer and the principal. In this case the appellant has sold the finished goods to the associated enterprises at a price which is higher than what would have been available to the appellant from an independent buyer. This is evident from the fact that the gross margins and net margins earned by the appellant are higher than those of the industry, a fact acknowledged by the TPO himself. 6. The contract manufacturer as a rule does not recover the amount of payments made towards the IPR from the sale of goods since the goods are being manufactured for the principal However, in this case the entire amount paid as royalty has been recovered from the price of the goods sold to the associated enterprises. This is evident from the fact that the gross margins computed by the appellant have been computed after considering the royalty as an expense and these gross margins are greater that the average industry margins. E. Royalty Computed on Sates, Including Sates to Associated Enterprise Itself, Satisfies Arm's Length Standard When Taxpayer Is Not a Contract Manufacturer ....
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....eutral. F. Inter-Company Agreements for Royalty and Know-How Fees, Approved by Regulatory Agencies* Cannot Be Disregarded, in the Absence of a Showing that the Agreements Were Not Genuine The payments made by the appellant on account of royalty are well within the limits permitted by the Reserve Bank of India. Further, the appellant has made full compliance of the Service Tax regulations by making the appropriate Service Tax payments on these Royalty payments. Since the payments have been made under legally valid and genuine agreements the payments must be considered as being at ALP. The Delhi Tribunal held that legally binding inter- company agreements for the payment of royalty and technical know-how fees, that have been duly approved by regulatory agencies, cannot be disregarded by the Transfer Pricing Officer merely because of a finding that there was no commercial need for the arrangement. Abhishek Auto Industries Limited v. Deputy Commissioner of Income Tax [201O-TII-54-ITAT-DEL-TP] (12 November 2010, Assessment Year 2004-05). The tribunal noted that commercial expediency is the domain of the taxpayer and that it had not been alleged by the....
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....he taxpayer and because it had not been alleged by the tax authorities that the agreements were non-genuine or shams, they could not be rejected arbitrarily without assigning cogent reasons. CONCLUSION From the above it is evident that the TPO and the AO have erred in considering the ALP of the royalty as NIL and accordingly you are requested to delete the addition of Rs. 1,57,35,495/-". 37. The ld. CIT(A) after considering the submissions of the assessee observed that the royalty payment was included in the sale price of the garments so it was automatically benchmarked at arm's length. She further observed that the international transaction of export of garments was benchmarked at arm's length using Cost Plus Method and the royalty expenses had been reduced to arrive at gross profit for the purposes of benchmarking international transaction of export of garments, the gross profit margin earned by the assessee was 19% whereas comparables had earned gross margin between 12% - 16% which was acknowledged by the TPO vide para 2.1 of his order dated 09.03.2006. The ld. CIT(A) further observed that since the international transaction of royalty of export of garments ....
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....turer" and was manufacturing garments on the specifications, designs and instructions of the AEs for that purpose the assessee had been permitted to use the trademark know-how etc. only for sales made to the AEs, thus, CUP had been correctly computed at Nil and no independent party would have paid for the royalty under similar circumstances. The reliance was placed on the decision of the ITAT Delhi Bench in the case of GE Money Financial Services (P.) Ltd. v. Asstt. CIT [2016] 69 taxmann.com 420 and Judgment of the Hon'ble Delhi High Court in the case of CIT v. Cushman and Wakefield (India) (P.) Ltd. [2014] 46 taxmann.com 317/367 ITR 730. 39. In her rival submissions the ld. Counsel for the assessee supported the impugned order passed by the ld. CIT(A) and reiterated the submissions made before the authorities below. It was further submitted that the transaction of payment of royalty was revenue neutral because assessee charged royalty by embedding it in sale price from AEs to whom goods were sold and paid to other AE i.e. PRC, USA. A reference was made to page no. 206 of the assessee's paper book. It was further stated that the ld. CIT(A) observed that the royalty was included ....
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....ed that the TPO failed to understand that international transactions of assessee were with separate legal entities and the owner of technical know-how, designs, trade names, logos and trademarks, namely, PRC, UAS was to be compensated for services rendered. It was also submitted that the assessee could not have been the contract manufacture of its buyer AEs as none of them own intangibles or possess technical know-now as they were mere retailers or distributors and that the assessee could not be a contract manufacturer of PRC, USA as the assessee neither purchased anything from it nor sold anything to it. It was submitted that for the purpose of establishing the ALP of export garments (Rs.35.10 Crores), the assessee had compared itself with companies which were full fledged risk bearing manufacturers and the comparison had been accepted by the TPO. Therefore, the TPO had himself acknowledged that for the purposes of manufacture and export of garments, the assessee was full fledged manufacturer and not contract manufacturer. A reference was made to page no. 221 of the assessee's paper book. The reliance was placed on the decision of ITAT Delhi Bench in the case of Asstt. CIT v. Kehi....
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.... goods on its own account, valued inventory at cost or market price whichever was less, therefore, corresponding risk of inventory being out of market was taken by the assessee. A reference was made to page no. 73 of the assessee's paper book which is the copy of financial statements. It was pointed out that in the assessment year 2006-07, there had been loss of Rs. 2.4 crores on account of revaluation of inventory which were borne by the assessee. It was contended that the contract manufacturer as a rule does not recover the amount of payments made towards the IPR from the sale of goods since the goods are being manufactured for the principal. However, in this case the entire amount paid as royalty had been recovered from the price of the goods sold to the AEs, which was evident from the fact that gross margins were computed after considering the royalty as expense. It was further contended that the OECD guidelines quoted by the TPO were applicable where tested party was purchasing unfinished goods from AE as well as availing services for further processing of those unfinished goods from the AE. Thus, the guidelines seek to provide a guard lest there is duplication of payment by t....
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.... and trade name of Aplil Cornell. It was stated that even the TPO had not questioned the method of benchmarking and rate of royalty, in fact, in assessment year 2002-03 under the same agreement, rate of royalty at 5% was found to be at arm's length by the TPO. A reference was made to page nos. 146 & 147 of the assessee's paper book which is the copy of the TPO's order for the assessment year 2002-03. It was submitted that on the basis of principal of consistency, the TPO was not justified in considering the ALP at Nil, even when the Instruction No. 3 of 2003 dated 20.05.2003 issued by the CBDT clearly stated that in order to maintain uniformity of procedure and to ensure that work in this important area proceeds smoothly and effectively, the guidelines are issued. The reliance was also placed on the following case laws: * CIT v. EKL Appliances Ltd. [2012] 345 ITR 241 (Delhi) * LG Electronics India (P.) Ltd. v. Asstt. CIT [ 153 ITD 591 (Delhi - Trib.) * Kodak India (P.) Ltd. v. Addl. CIT [2013] 37 taxmann.com 233 (Mum.) * Sony Ericsson Mobile Communications India (P.) Ltd. v. CIT [2015] 374 ITR 118 (Delhi) * Cushman & Wakefield (India) (P....
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....ansferable, right and license within the TERRITORY: a. To manufacture and/or cause to be manufactured and to distribute and/or sell products reproduced from designs created by LICENSOR or prepared by LICENSEE and approved by LICENSOR under the terms and conditions hereinafter set forth (the "Products"); The LICENCEE shall not at any time, have the right to manufacture the Products reproduced from the designs created by the LICENSOR outside the territory either directly or indirectly, without the prior, written consent of the LICENSOR. b. To use LICENSOR's know-how and designs, in connection with the manufacture and sale of the Products; 2.2 The License herein granted shall only extend to the top quality products, designed, manufactured, promoted, advertised and sold according to the highest standards of the industry and in full compliance with the terms and conditions Hereof, so as to maintain, enhance and protect the image and prestige associated with the Name. 3.1 LICENSEE shall only use the Name, the Label and the Marks as authorized and, provided herein and in full compliance with the terms and conditions hereof and only for the d....
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....Jurisdictional High Court in the judgement in case of Goodyear India Ltd. (supra) held as under: "Section 37(1) of the Income-tax Act, 1961 - Business expenditure - Allowability of - Assessment year 1984-85 - Assessee-company manufacturing and selling automotive tyres and tubes paid certain amount to foreign company as consideration for agreeing to provide technical know-how for manufacture of extra large OTR tyres - Whether findings recorded by Tribunal that agreement was not made for manufacturing of an entirely new product, that consideration was paid for betterment of product and that assessee had only enlarged range of its existing products were pure findings of fact, and those facts having attained finality, expenditure incurred by assessee was revenue in nature - Held, yes 8.5 Ld. A.R. also relied upon the judgements cited as CIT v. IAEC (Pumps) Ltd. 232 ITR 316 (S.C.), CIT v. IAEC (Pumps) Ltd. 110 ITR 353 (Mad.), CIT v. Steel Plant (P) Ltd. 17 Taxman 301 (Bom.) and CIT Vs Southern Pressings (P) Ltd. 125 Taxman 714 (Mad.). By applying the ratio of judgements cited above relied upon by the Ld. A.R., to the facts and circumstances of the present case....