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2017 (2) TMI 1415
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.... in nature, these appeals are clubbed together and being disposed-of by this common order for the sake of convenience and brevity. The Assessee and the Revenue has taken following grounds of appeal in - T.P.A. No. 157/Ind/2015:A.Y. 2010-11 Transfer Pricing Grounds 1. The Learned Transfer Pricing Officer (Ld. TPO)/ Dispute Resolution Panel (DRP) erred on the facts and circumstances of the case and in law, by not accepting the economic analysis undertaken by the Appellant which was in accordance with provisions of the Act read with Rules for establishing arm`s length price of the international transactions. 2. Based on the facts and circumstances of the case, the Ld. TPO/ DRP has erred in law and in facts in making adjustment of Rs. 43,11,705/- to the transaction related to ''Contract revenue from projects'' In doing so, the Ld. TPO/DRP erred in a) In not considering the internal Cost Plus Method (CPM) analysis undertaken by the Appellant using combined transaction approach which was in accordance with the provisions of the Act read with Rules and internationally accepted principles. Applying on a project-by-project basis, despite agreeing to various ....
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....ors, which denied the relief the Appellant a relief on INR 11,13,016 in relation to international transaction of payment of technical services. Corporate Tax Grounds 5. Based on the facts and circumstances of the case, the Ld. Assessing Officer ( the Ld.AO) DRP had erred in law and fact by disallowing the payments of INR 10,699,464 made by the Appellant to its overseas parent company for the purchase of technical drawings and designs and alleging the same to be in the nature of royalty on which tax had to be withheld at the time of payment. In doing so, the Ld.AO further erred in not following the ruling of the Hon`ble ITAT in Appellant`s own case on this issue. Common Grounds 6. Based on the facts and circumstances of the case, the Ld.AO has erred in proposing to initiate penalty proceedings under section 271(1)(c) of the Act against The Appellant. 7. Erred in giving short credit of tax deducted at source of INR 26,920. The above grounds are independent and without prejudice, to each other unless mentioned specifically. T.P.A. No. 316/Ind/2016:A.Y. 2011-12 Transfer Pricing Grounds On the facts and circumstance....
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....nd not restricting the scope of assessment under section 92CA to determining the arm`s length price of international transactions by adopting one of the prescribed method only. e) Not appreciating that even if payment for technical services is held to be covered by Technical Collaboration Agreement (TCA) entered in to by the Appellant` with its AE's , the overall payments under TCA is within the limits of the rates agreed in TCAs. 4. Ld TPO/ DRP have erred in not allowing set-off of surplus revenue / profit exceeding the arm`s length price (ALP) earned from other transactions with Associated Enterprises (AE's)while computing the ALP under transaction-by-transactions analysis approach. Corporate Tax Grounds 5. Erred is disallowing the payments of INR 3,21,61,710 made by the Appellant to its overseas parent company for the purchase of technical drawings and designs and alleging the same to be in the nature of royalty on which tax had to be withheld at the time of payment. In doing so, the Ld.AO/ Hon`ble DRP further erred in not following the ruling of the Hon`ble ITAT in Appellant`s own case on this issue. 6. Erred in giving short credit o....
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....od with GP margin as the appropriate Profit Level Indicator (PLI). It carried out analysis for identification of comparable transactions for the export of finished goods under similar conditions with unrelated entities and such segments were separately identifiable; the assessee considered the two segments viz Projects with AEs and Projects with Non-AEs for CPM analysis. The GP mark- up earned by the assessee from sales to unrelated parties was computed and was added to the direct and indirect cost of production to arrive at the ALP of the products sold to AEs during the year. The assessee computed overall GP Margin from sale to AEs at 14.32% and GP Margin on sales to Non-AEs at 14.72%. Taking recourse to Proviso to section 92C(2), it was claimed by the assessee that the transaction is within tolerance band of +/-5% Margin. 2.2. The TPO made the comparison with the assessee margin reflected in respect of controlled transactions with its AEs for each projects separately. The TPO held that all the projects of the assessee with the AE were independent projects and, therefore, transfer pricing provision were to be applied on individual transaction basis. The assessee contended....
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....ferent profit margins. Consequently, the aggregation of such projects having different FAR incorrect and therefore, the aggregation carried out by the assessee is also held to be incorrect. Based on Rule 10A (d), and even the OECD guidelines, the only transaction, which are similar in nature or closely interlinked can be aggregated as one transaction and benchmarked, and only where considering it as separate transaction is impractical. Such is not the case here. Since all the AE projects of the assessee are independent and different projects, the benchmarking needs to be carried out separately on individual transaction basis. The application of gross profit margin on global basis will lead to lower than non-arm`s length price of one transaction being marked by high price of another in the same or another AEs case, which is not in accordance with provisions of law. The contention of aggregating as helping to reduce the impact of differences in terms and conditions as the accounting treatment given by the assessee is incorrect. If there are differences and such differences are material, then they must be explicitly recognized and provided for in the comparability analysis, but this d....
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....2% which has been compared with the average gross margin of transactions with AE's. The assessee recognizes revenue on Percentage of Completion Method (POCM) in accordance with Accounting Standard 7. While recognizing revenue of POCM basis, yearly gross margins from each transaction may vary as the project span for the periods over one year. Accordingly, unrelated party transactions cannot be reliably compared with related party transactions on individual transaction basis. Thus, to eliminate the impact of such differences, the arithmetic mean of gross margins earned by the assessee from all related party transactions should be compared with arithmetic mean of gross margins of all unrelated transactions which has been done by the assessee. 2.4.2. It was submitted that it is not possible to find a project with reference to its AE which is completely with similar functionalities to a project, and which has been undertaken by the assessee for Non AE enterprises as each project operates in a different life cycle. With projects operating in different life cycles with different level of completions, the margin needs to be compared on an aggregate basis as project wise one-on-one compa....
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....ansactions, the assessee performed additional functions since it is also responsible for the installation and commissioning of equipment supplied, the areas in case of related parties, the drawn of the assessee is restricted to only supply of equipment. Thus, given that additional functions performed, the assessee is anyways likely to earn higher gross margins in unrelated party transactions than related party transactions. 2.4.8. The learner TPO/DRP further grossly erred in not appreciating the fact that the assessee is a risk bearing entity. The assessee is full of risk bearing manufactures and supply of all power generation equipment's and as such the assessee is likely to earn low gross margins inserting transactions based on the quotient of risk involved. The same is also evident from the fact that the assessee has earned lower then mean gross margins in unrelated party transactions also. 2.4.9. The Ld. A.R. Further submitted that the TPO/DRP has grossly erred in ignoring the individual projects specific functional differences. As reiterated above, the overall profitability of the projects depends upon various factors such as nature of work, bidding process, location etc....
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....ansactions having been analyzed under TNMM were held to be at arm`s length. Therefore, relying on the decision in preceding years, the Ld. A.R. submitted that the addition made in current year deserve to be deleted. 2.5. The Ld. D.R. submitted that as per TP documents international transaction representing sales to AE has been benchmarked using TNNM method. It was noticed that the assessee was aggregating all transactions undertaken by both Units Mandieep and Prithla comparing the average gross margin of comparable transactions. As per Indian TP regulations, TNNM is to be applied on transaction basis. Since in this case, gross margin earned on the transaction is separately, there was no requirement of aggregating all of them and then calculating the average gross margin. The Ld. D.R. referred to para 1.42 of OECD Guidelines which suggest that ideally ALP should be applied on transaction-by-transaction basis, however, where separate transactions are closely linked or continuous that they cannot be evaluated adequately on a separate basis. Such transaction should be evaluated together using the most appropriate arm`s length method or methods. It can be seen from the aforesaid para....
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....cator (PLI). It carried out analysis for identification of comparable transactions for the export of finished goods under similar conditions with unrelated entities and such segments were separately identifiable; the assessee considered the two segments viz Projects with AEs and Projects with Non-AEs for CPM analysis. The assessee computed overall GP Margin from sale to AEs at 14.32% and GP Margin on sales to Non-AEs at 14.72%. Taking recourse to Proviso to section 92C (2), it was claimed that the transaction is within tolerance band of +/-5% Margin. 2.6.1. We find that there is no dispute between TPO and the assessee as regards the method, which is CPM and benchmarking based on internal comparable. The only dispute whether the assessee has justified for considering the aggregation of all the projects with AE (the AEs are different) and compared the mean CPM of the projects of related party transactions. In contrast, the TPO has rejected the aggregation of related party transactions and applied the benchmarking analysis on project-by-project transaction with AE. It is seen that that the gross margin earned by the assessee from transaction with unrelated parties range from (-) 48....
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....idelines which suggests that ideally ALP should be applied on transaction-by-transaction basis, however, where separate transactions are closely linked or continuous that they cannot be evaluated adequately on a separate basis. The para 1.42 of OECD Guidelines is reproduced as under: "ideally, in order to arrive at the most precise approximation of fair market value, the arm`s length principle should be applied on a transaction-by-transaction basis. However, there are often situations where separate transaction are so closely linked or continuous that they cannot be evaluated adequately on separate basis. Examples may include 1. Some long-term contracts for the supply of commodities or services, 2. Right to use intangible property, and 3. Pricing a range of closely-linked products ( e.g. in a product line) when it is impractical to determine pricing for each individual product or transaction. Another example would be the licensing of manufacturing know-how and the supply of vital components to an associated manufacture; it may be more reasonable to assess the arm`s length terms for the two items together rather than individually. Such transactions should be evaluated toget....
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....tion equipment's and as such the assessee is likely to earn low gross margins on international transactions based on the quotient of risk involved. The same is also evident from the fact that the assessee has earned lower than mean gross margins in unrelated party transactions also. 2.6.8. The individual projects have specific functional differences as each has various factors such as nature of work, bidding process, location etc. as different. Therefore, overall profitability in some projects may be lower margin earned; therefore, it would not be appropriate to hold that the assessee should earn more than the rest of the projects. For example, the margin of XE Kaman- Andritz India Projects is marginally found to be lower when compared individually with 2 other projects as risk is covered through the 3rd party consortium. The risk being mitigated, the margins are less as per the common business practices. Therefore, adjustment made on account of the difference in margins of XE, Kaman Projects is not justified. We also find that in the case of Ashlucreek projects, the reason for earning lower gross margin was on account of extraordinary cost of Rs. 87,28,333 incurred by the asses....
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....ervices rendered by the AE's. In respect of Prithla unit, agreement with German AE was for receipt of technical assistance for manufacturing of contract products while payment for technical services was in relation to other component of project. Therefore, the payments of technical royalty and technical services are different, hence, no disallowance should be made. However, the TPO reproduced some provisions of Technical Collaboration Agreement (TCA) dtd. 1st day of January 2006 and viewed that the licensor has provided know-how and available technical information and assistance for marketing, layout, basic design, manufacture, installation and servicing of contract products to the assessee. The term "technical information" means engineering and manufacturing information available with the licensor which inter-alia includes processes and products related to manufacture, testing, application, installation, of Rs. 1, 39, 79,990/- commissioning and servicing of contract products. It is clear that as per the royalty agreement, the associate's enterprise is required to provide all the information, which relates to marketing as well as installation and servicing of the contract products ....
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....e adjustment if that same were not found linked to contract products. Thus, payments of Rs. 15,94,092/- Rs. 2,70,70,489/- and Rs. 38,12,515 were deleted and balance amount of net adjustments of Rs. 1,17,23,967/- i.e. [Rs. 4,42,01,062- (15,94,092- 2,70,70,489- 38,12,515)] were upheld. 3.3. Being, aggrieved the assessee filed this appeal before the Tribunal. The learned Counsel for the assessee, submitted that the DRP has grossly erred in confirming addition of Rs. 1,17,23,967/- for A.Y. 2010-11 and Rs. 34,18,088/- for A.Y. 2011-12 on the following grounds "That the expenditure on account of technical services amounting to Rs. 1,17,23,967/- as confirmed by the DRP are not covered under the royalty agreements and as such no adjustment is warranted on the same. The receipts of technical service by the assessee is not in dispute. The amount paid for technical services for Mandideep Unit, the royalty is paid only for manufacturing and selling rights (Article 5) and does not cover other services such as Training of License Personal (Article 2), Deputation of licensor`s personal to licensee (Article 3) and transmission of Technical Information (Article 4) . The payments made th....
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.... was submitted that the TPO has applied CUP to determine ALP of the amounts paid for technical services without bringing any comparables on record, which is illegal. 3.3.3. The ld. A.R. Further submits that in the succeeding years i.e. A.Ys. 2012-13 and 2013-14, the TPO has accepted this factual position by not making any adjustment for amounts paid for services covered under Article 2, Article 3, and Article 4 of the agreement in case of Manideep Unit and Article 4.2 in respect of agreement in the case of Prithla Unit. The additions made in A.Y. 2012-13 amounting to Rs. 34,12,846/- pertained to sums, details of which were furnished by the assessee himself, which were covered under Royalty Agreements and that whose ALP was taken at Nil. Therefore, in the line of course of action taken by the TPO for A.Y. 2012-13, the Ld. A.R. furnished the details of adjustments vide Anx-A for A.Y. 2010-11 and Anx-B for A.Y. 2011-12 which are wrongly sustained by the DRP in connection with payments for technical services wrongly held to be already covered in Royalty agreement specifying the exact nature of the sum so paid along with the exclusion clauses relating to Royalty agreements to substan....
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....clause in 3.2 of the agreement relating to general technical assistance by active participation in establishing marketing, design, Production, assembly, quality control, testing, application, installation, commissioning and servicing. 6 ANDRITZ Hydro GmbH,Austria Mandideep Reimbursement of expenses incurred for training 293,460 Reimbursement of training costs on actual basis. Other similar Payment has been accepted at ALP(Please refer from 3CEB) 7 ANDRITZ Hydro GmbH,Austria Mandideep Site support, site visit travel Insurance 75,991 Amount Paid for need based onsite job-work support. Covered by Exclusion clause in 3.2 of the agreement relating to General technical assistance by active participation in establishing marking, design, Production, assembly, quality control, testing, application, installation, commissioning and servicing. 8 ANDRITZ Hydro GmbH, Austria Mandideep Quality Inspection- forging 192,433 Paid for engineering support for specific tasks. Covered by exclusion clause in 3.2 of the agreement relating to general technical assistance by active participation in establishing marketing, design, Production, assembly, qua....
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....of "Contract Products". Covered by exclusion Clause in 4.2 of the agreement relating to general technical assistance by active participation in establishing marketing, design, production, assembly, quality control, testing, applications, installation and servicing. 15 ANDRITZ Hydro GmbH, Germany Prithla Commissioning of engineer for inspection of nozzle spring (Hours + Expenses) 145,246 Covered by exclusion Clause in 4.2 of the agreement relating to general technical assistance by active participation in establishing marketing, design, production, assembly, quality control, testing, applications, installation and servicing. Further, it also Includes reimbursement of local costs such as hotel expenses, daily allowance, car, petrol, etc. for the expatriates working on erection commissioning site for Teesta 16 ANDRITZ Hydro GmbH, Germany Prithla Hydraulic layout and data schedule for bid Documentation 269,249 Paid for support in respect of bid documentation (hydraulic layout and data schedule) for a specific project (Singoli Batwari). Covered by exclusion under Article 4.2 of TCA dated 26 April 2006. Therefore, Separately Chargeable. 17 ANDRIT....
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....mation, which relates to marketing as well as installation and servicing of the contract products to the assessee, which are already covered under TCA and thus, it is duplicate in nature. The international transaction representing payment of technical services are class of transactions in itself and it cannot be clubbed with the other transaction of the assessee for benchmarking. The Ld. D.R. also submitted that it is not the claim of the assessee that the expenditure in relation to the payment of technical services is included in cost of goods sold calculated for the purpose of determining gross margins for using cost plus method in the determination of arm`s length price for the international transactions representing receipt of contract revenue. Therefore, the payment of technical services cannot be considered ALP based on TNNM analysis undertaken by the assessee. 3.5. We have heard the rival submissions of both the parties and have perused the material available on record. We find that the assessee has considered aggregation of transaction into its TPSR. When that international transaction pertaining to import of raw material, contract revenue from for Associates were closel....
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.... pay all such salaries, living allowances, travelling expenses and other remuneration and expenses to which its personnel deputed to THE LICNSOR may be entitled. The LICENSOR will not charge training costs if LICENSOR's Personnel impart training. 2.3. THE LICNSEE shall be responsible for and shall have sufficient knowledge in their respective lines and actively participate in their respective functions. They shall also have sufficient working knowledge of the English language THE LICENSEE shall endeavor that the personnel trained by THE LICENSOR will thereafter work at THE LICENSEE, S works where CONTRACT PRODUCTS are engineered and/or manufactured for at least three years from the date of completion of the training. 2.4. A man-month as used in this Article 2 is based upon the regular working time of five days per week with seven hours each, with no working on holidays. Article 3-Deputation of THE LICENSOR'S personnel 3.1 Subject to THE LICENSEE obtaining the approval of the concerned Indian Government authorities if any and upon mutual agreement of the parties, THE LICENSOR shall make available to THE LICENSEE for periods to be agreed upon by th....
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....greed upon by the parties hereto. Article 6-Consideration 6.1 In consideration of the rights granted to THE LICENSEE as set forth in Article 5 of this Agreement, THE LICENSEE shall, subject to the compliance of statutory regulations, Pay to THE LICENSOR following royalties. a) CONTRACT PRODUCTS manufactured 5% and/or sold by THE LICENSEE for The domestic market. b) CONTRACT PRODUCTS manufactured 8% And/or sold by the LICENSEE for The export market. The above percentages of royalties are application on "net sales" of CONTRACT PRODUCTS manufactured and/or sold by THE LICENSEE during the validity of this Agreement, The term "net sales" shall mean the net ex-factory sale price of the CONTRACT PRODUCT exclusive of cost of imported components irrespective of the source of procurement (including ocean freight, insurance custom duty etc.). Royalties are not applicable on CONTRACT PRODUCTS sold to the LICENSOR. 6.2 All Payments due based on this Agreement will be considered as effected only when they are at free disposal of THE LICENSOR. THE LICENSEE will pay any duty, taxes and similar charges payable....
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.... that clause 2.1 of Article 2 provides that Licensor shall receive the Licensee `s personnel for training in its plants in the Licensor country or elsewhere and as per clause 2.2 of Article 2 the Licensee shall be responsible to pay all such salaries and living allowances, travelling allowances and other remuneration and expenses to personnel deputed for training. This type of services under the head of training as given in scope of work as listed in Article 2 are not covered by Article 5 of TCA . Similarly payments related to deputation of personnel at the assessee`s factory at Mandideep Unit to train the licensee`s personnel for the services of nature mentioned in clause 3.1 of Article 3 of TCA are also not covered by the services mentioned under Article 5 of TCA. Such nature of payment has been reflected in Anx-A of the Table mentioned in para 7.3.15 of DRP`s order in the case of the assessee. The perusal of Article 4 of TCA shows that payments relating to delivery of documentation by Air carrier, custom duties and other levies under the head of Transmission of Technical Information are not covered by Royalty clause falling under Article 5 of TCA. We find that the consideration ....
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.... to THE LCNSE on the VA TECH HYDRO inter- company rates and for the periods to be mutually agreed upon." 3.5.4. Thus, perusal of Article 4 of TCA with Prithla Unit as above shows that the nature of services rendered through the above Article 4 is not covered by royalty clause of Articles 2, 3, 5 and 6 and consideration prescribed under Article 7 of TCA. It is the claim of the assessee that the personnel treated by the AO/TPO were made for the service rendered under Article 4 for deputation of personnel, which is not covered by royalty clauses consideration as mentioned under Article 7 of the TCA. Therefore, the consideration mentioned in the agreement for Prithla Unit does not cover payments made towards the Deputation of the licensor personal in Article 4 and as such payments made in pursuance of the same are distinct from the royalty consideration as specified in the Article 7 and as such is allowable as deduction. We find that the learned that TPO/DRP has failed to appreciate the fact that the payment of royalty and technical services serve two different purposes. We also find that the TPO has accepted the use of TNNM method in A.Y. 2008-09 as most appropriate method for the ....
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.... the Appellant of INR 11,13,016 in relation to international transaction of payment of technical services. 4.1. Brief facts are that the TPO has proposed the adjustment of Rs. 4,42,01,062/- towards payments for technical services to AE's. The assessee filed objection before the DRP , who allowed relief of Rs. 3,24,77,095/- and confirmed the balance amount of Rs. 1,17,23,967/- against which the assessee has preferred this appeal before us on Ground No. 3 above. However, without prejudice to above, the learned Counsel submitted that an amount of Rs. 11,13,016/- relating to Mandideep unit was held to be not covered by Royalty agreement and as such no addition was warranted on the same. The said relief due to some typographical error remained to be given to the appellant against which the appellant has preferred a rectification application and the same is pending. The learned Counsel therefore, prayed that the same may be granted in the interest of natural justice. 4.2. We have heard the rival submissions of both the parties and have perused the material available on record. We find that this amount is covered by ground no. 3 above. We also find that this amount is appearing at S....
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.... by non-resident Austrian Parent Company nor is the assessee keeping it as such. The drawings are more in the nature of secret formula. No outright sale of design has taken place and it is for limited use in manufacturing by the assessee and finally given to customers to whom generators designed based on drawing are sold. The designs purchased are not available off the shelf. The income arising to Parent Austrian Company on sale of generators by its 100% subsidiary being received in India, orders of which received in India and being manufactured in India as per design provided by the Parent Austrian Company. The Ld.AO also placed reliance in the case of CIT vs. Davy Ashmore India Ltd. and CIT vs. Neyveli Lignite Corporation Ltd. and AAR ruling in the case of Ishikawajima Harima Heavy Industries Company Ltd. 271 ITR 193 (SC) in support of his view. 6.1.2. The AO held that the assessee company has not obtained the design from anywhere else and it manufactures every generator on the design provided by the Parent Austrian Company with its 100% subsidiary company only. Thus the income accruing/in India is directly through the connection of Austrian Company in India, as envisaged in s....
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.... technical drawings and designs to manufacture the generators customized to the needs of its customers. Andritz Austria in turn prepares and sells the technical drawings and designs to the assessee on principal-to-principal basis without retaining any rights in the drawings. The copyright in the drawings is however, retained by Andritz Austria. The ownership of the design per se thus, is transferred to the assessee whereas ownership of copyright in drawings is retained by Andritz Austria. The assessee thus, has the right to use the product i.e. design so purchased "on as is basis" and is not authorized to modify, edit, reproduce the same. Even the technical know-how in relation to the drawings so made is retained by the Andritz Austria and is not transferred to the assessee. The transaction is thus if it transaction of purchase of drawings and not in the nature of royalty warranting deduction of tax at source. The designs so purchased are given to the customers of the assessee as part of the terms of contract between the assessee and its customers, which is specifically provided for consolidated consideration to be charged for the supply of generators as well as the technical drawi....
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....for A.Y. 2006-07 to 2009-10 has taken the same view and held that the transaction is in the nature of purchase not warranting deduction of tax at source. The finding of the DRP' is thus, not sustainable ii. The orders of the Hon`ble ITAT for A.Y. 1999-2000 to A.Y. 2002- 03 has been passed on 9.4. 2010 whereas the order for A.Y. 2001-01 to 2003-04 has been passed on 28. 12.2011. The Income Tax Act,1961 has been amended retrospectively by Finance Act 2010, w.e.f. 1. 6. 1976, whereby, under the Act, the scope of royalty on fees for technical services is been expanded which were not considered by the Hon`ble ITAT. iii. There were only 2 retrospective amendments made by Finance Act, 2010 which are referred by the DRP. First pertains to right to use a computer software and second is with reference to income deeming to accrue on arising India whether or not, the Non-resident has a residence or place of business or business connection in India or the Non-resident has rendered services in India. Both amendments are not applicable to the facts of the case. The observations of the DRP are thus misplaced and not sustainable. 6.3.3. The learned Counsel stated with reference to the cont....
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....e cannot be regarded as transfer for limited right to use and they are composite payment of royalty which is also covered by section 9(1)(vi) and section 9(1)(vii)of the Act as well as under India- Austria Tax Treaty on which TDS was not made hence, the AO has rightly disallowed the same under section 40(a)(ia) of the Act. 6.5. We have heard the rival submissions of both the parties and have perused the material available on record. We find that the supply of generators to its customers as per terms of contract which is specifically provided for consolidated consideration is to be charged consisting of generators as well as technical drawings and designs used in their manufacture. The supply of the design is imperative for the customers of the assessee to ensure maintenance and smooth running of generators. The assessee makes purchases of technical drawings and designs to manufacture generators as per needs of customers. Accordingly Australian Parent Company prepares and sales design to the assessee on the principal-to-principal basis with retaining the rights therein with him. Thus, the copyright in design is retained by Andritz Austria, thus, the assessee has right to use the ....
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....), the AO disallowed the payment was so made. 8.1 The fact as submitted by the assessee with regard to payment for designs & drawings as under: * The assessee company is a wholly owned subsidiary of nonresident company M/s Andritz Hydro GmbH, Austria ("Andritz Austria") and is engaged in the business of manufacturing generators and other heavy electrical equipment's for supply to Hydro Power Plants. * The assessee enters into contracts with its customers for supply of generators and equipment's as per their specifications of frequency, current, capacity, speed, efficiency etc. Such contracts include supply of 'technical drawing and design' to the customers along with the equipment's * The assessee does not possess the requisite skills and technical expertise for the designing of the generators and in this regard seeks assistance from its overseas parent entity. * For the above purpose, purchase orders are placed on Andritz Austria for the supply of technical drawings and designs to manufacture the generators customized to the needs of the customers. Copies of some of the sample Purchase Orders are attached as Exhibit 35 of the Paper book....
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....nditions of the transaction, which have not been challenged by the Ld. AO For AY 2003-04 and AY 2004-05, the Ld. CIT(A) has also held that the transaction is in the nature of purchase of designs and drawings not in the nature of royalty (vide orders dated 19 January 2007 and 23 November 2007). * Further, the CIT(A) order for A Y 2003-04 has also been upheld by the same bench of the Hon'ble ITAT vide order dated 28 December 2011 (ITA No 29/IND-2005 for AY 2000-01, ITA No 253 and 254/1ND- 2007 for AY 2001-02 and AY 2002-03, ITA No 255/IND- 2007 for AY 2003-04). * Further, no appeal has been filed by the tax authorities against the order of the Ld. CIT(A) for AY 2004-05. * The facts of the current appeals are same as those covered in the aforesaid orders. In this regard Appellant has relied on following key judicial precedents: * DCIT-3(1), Bhopal vs VA TECH Hydro India Private Limited (ITA No 255/IND-2007) * ACIT, 3(1), Bhopal vs VA TECH Hydro India Private Limited (ITA No 112 to 115/IND-2007) * Davy Ashmore India Ltd. vs CIT - 190 ITR 626 * Pro-Quip Corporation Vs CIT - 255 ITR 354 9. With regard to the paym....
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....attention to pages 2 to 5 and para 37 of page 13 of the assessment order. 2. We have considered the rival submissions and perused the material available on file. Since common grounds are involved, therefore, these can be disposed of by this common & consolidated order for the sake of brevity. Without going into much deliberation, we are reproducing hereunder the relevant portion of the order for assessment year 1999-00 to 2002-03 (ITA Nos.112 to 115/Ind/2007), order dated 30.4.2010: 2. The facts, in brief, are that the assessee company is a manufacturer of dydroelectric and turbo-generators for hydel and turbo projects and selling the same in India and abroad. The assessee is a 100% subsidiary of VA TECH HYDRO GmbH Austria from 1.4.2001. VA TECH Hydro is an established name in the world in the field of manufacturing and erection of Hydro and Turbo projects since last about 100 years. The Assessing Officer, on scrutiny of books of accounts of the assessee company and Form No. 27 for the assessment years, in question, found that though the assessee company has spent huge amounts as expenditure on technical drawings and designs on account of payments to parent compan....
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....to the assessee. Therefore, design of a generator cannot be equated with software package or any other copy righted articles whose unlimited number can be sold in market. 6.4. No outright sale of designs has taken place. It is only the limited use for manufacturing that the assessee company is holding authority to use design. Assessee company cannot purchase these design from any other third company as the trade name under which assessee company and non-resident Austrian Company are manufacturing and selling the generator is same and both the companies are known for their specific designs of generators. It has specifically been mentioned on the designs that it is the property of the parent Austrian Company. The assessee had right to use a particular design for single time. The assessee has been barred to sale the design as such to another manufacturer by the specific condition and warning printed on the design. When the design cannot be sold as above how it can be termed as outright purchase as claimed by the assessee. Thus, the assessee has only been given the right to use the design. 6.5. The designs are not purchased through open tender or bid because assessee ....
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....n 2 section 9(1)(vi); Explanation 2.- For the purpose of this clause "royalty" means .....(ii) the imparting of any information concerning the working of.....design, secret formula or process..." 6.11. The facts along with the case laws have been examined in para 4 and 5. After the detailed examination of facts and circumstances of the case it is held that VA TECH HYDRO India Pvt. Ltd. has failed to deduct tax on sums paid to the Parent Austrian company which was chargeable to tax within India by virtue of the IT Act, 1961 and as per the provisions of DTAA between India and Austria. 6.12. Assessee company is manufacturing Generator and its accessories i.e. only the electrical part of the complete Turn key Project for generation of electricity. Turbine is manufactured by the VATECH ESCHER VYAS Floval Ltd., Faridabad, which is again Austria 100% subsidiary company of Austria in India. International orders for supply of generators are received through its parent company in Austria for which the assessee company supplies generator and its accessories to its parent Austrian company. Turbine and erection infrastructure is supplied by the Austrian company in such project....
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....gn engineer is the input in the process and output is certain design and other parameters. These parameters are for the help of detailed design which is prepared in India by the assessee 'VA Tech India. The parent Austrian company has neither given the sophisticated computer programs nor the algorithms to VA Tech India. Only the output of the sophisticated computer programs and algorithms is provided to the assessee 'VA Tech India' which it calls as 'design'. Rights over these designs is with parent Austrian company. The assessee company further prepares detailed designs on the basis of the parameters and designs provided by its parent company. The rights over these detailed designs prepared by the assessee 'VA Tech India' with 'VA Tech India' itself. Thus it is clear that there are two sets of designs, one prepared by the Parent Austrian company for which assessee makes payment and another in house detailed design prepared by 'VA Tech India' based on the original design. 6.16. From the discussion, it is clear that with the design and other parameters supplied by the parent Austrian company, the assessee cannot create another output in Austria different case or even Austri....
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....O. is not justified in applying the provisions of section 9(1)(vi) of the IT Act. As regards the ownership is concerned, as rightly explained by the learned counsels that the transfer of ownership in the case of movable goods is governed by the Sales of Goods Act. The sale bill issued by the selling party contains the terms and condition on the basis of which the goods are being sold against the price. In the sale bills issued by the non-resident Austrian company, there is no mention that despite the sale of drawings and designs against the price, they have retained the ownership in the drawings and designs. The A.O. has failed to establish as to how the income arising to the non-resident company from the sale of the drawings and designs from outside country to the appellant company is chargeable to tax in India, when the non resident company is not having any permanent establishment in India, is taxable in India and, therefore, in the absence of any concrete finding that such payments are chargeable to tax in India, section 195 has no application. Having regard to the detailed and exhaustive submission and the case laws relied upon by the appellant, I hold that the payments made f....
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....ent is approved by the Central Government. Provided further that nothing contained in this clause shall apply in relation to so much of the income by way of royalty as consists of lump sum payment made by a person, who is a resident, for the transfer of all or any rights (including the granting of a licence) in respect of computer software supplied by a nonresident manufacturer along with a computer or compute-based equipment under any scheme approved under the Policy on Computer Software Export, Software Development and Trading, 1986 of the Government of India. Explanation 2.- For the purpose of this clause. "royalty" means consideration (including any lump sum consideration but excluding any consideration which would be the income of the recipient chargeable under the head "Capital gains") for - (i) the transfer of all or any rights (including the granting of a license) in respect of a paten, invention, model, design, secret formula or process or trade mark or similar property. (ii) the imparting of any information concerning the working of, or the use of a patent, invention, model, design, secret formula or process or trade mark or similar property. (iii) the use of any patent, ....
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....urce. The learned CIT DR thereafter also drew our attention to the observations of the Assessing Officer as regard to procurement of the same designs for the same contract, which also indicated that it was a case of royalty and not a case of out-right purchase thereof. The learned CIT DR placed heavy reliance on the conclusions drawn by the Assessing Officer which have already been reproduced hereinbefore. The learned CIT DR, thereafter, contended that the parent company was not selling the designs in the open market i.e. to any other party other than its subsidiaries. Hence, it was not a case of sale of copy righted articles. The learned CIT DR further emphasized on the fact that it was used by the assessee in manufacturing of the turbine/generator and was not sold as such in the open market like purchase and sale of a copy righted book or software, etc. The learned CIR DR further emphasized on the fact that if the view of the assessee was accepted then every transaction would become a case of sale and in that case, provisions relating to royalty would become redundant. At this stage, a question was posed to him that if the view of the revenue is accepted, then every transaction w....
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.... book in this regard. The learned counsel for the assessee also submitted that the action of the Assessing Officer was a case of change of opinion in respect of the same transaction which had been found to be of the nature of purchases, both in the course of proceedings under section 144A as well as under section 92CA of the Act. Hence, for this reason also, the action of the Assessing Officer was not justified. The learned counsel for the assessee thereafter contended that it was a settled law that the sale transaction did not result in royalty and in this regard again submitted that the transfer of such designs by the assessee to the buyers of generators in an unbridled manner established this fact. The learned counsel for the assessee further reiterated the submissions made before the learned Commissioner of Incometax (Appeals), particularly in respect of drawings being goods and the acquisition of drawings on out-right purchase basis could not be considered as a transaction of the nature of royalty. The learned counsel for the assessee further submitted that the provisions of DTAA were to supercede the provisions of the Income Tax Act and for this proposition the learned CIT DR....
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....e assessee had acquired hardware and software and the department bifurcated the transaction as one of supply of hardware and the other of the software, treating the software part as royalty, the Tribunal held that the assessee's transaction with the non-resident company was for the purchase of integrated equipment which consisted hardware as well as software and it was inseparable and having regard to the nature of agreement, what the assessee had purchased was a copy righted article and not copy right of the rights and similar was the position here, hence, this decision of the Tribunal also supported the claim of the assessee. The learned counsel for the assessee thereafter referred to the decision of the Tribunal in the case of Indian Hotels Co. Ltd. v. ITO in ITA No.553/Mum/00 (refer pages 163 to 167 of the paper book),wherein Indian Oil had obtained the services of a foreign company to prepare the interior design which had to be used by the Indian company for the purpose of re-designing or renovating the interiors of Taj Mahal Hotel at Mumbai and the design supplied by the foreign company became the property of Indian Hotel Company Limited (assessee) and in that background, the....
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....mited (supra) rather supported the case of the revenue. The CIT Departmental Representative further submitted that the basic design obtained by the assessee company was further modified and such modified design was given to the buyer of the turbine/generator and not basic design, as contended by the learned counsel for the assessed. 9. We have considered the submissions made by both the sides, material on record and the orders of the authorities below. It is noted that the assessee is engaged in manufacturing of turbine/generator as per the specifications/requirements of its customers. For this purpose, the assessee procures basic design from its parent company and accordingly manufactures such plant and machinery. It is also noted that such basic design is also given to the buyer of plant and machinery by the assessee company. The dispute before us is regarding the nature of payment made by the assessee company to its parent nonresident company for obtaining such designs. The conclusions of the Assessing Officer as well as the findings of the learned Commissioner of Incometax (Appeals) have already been reproduced which contain details of judicial decisions relied u....
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....n principal to principal basis and not a case of payment for transfer of right in the copy right of such designs. In this view of the matter, we confirm the findings of the learned Commissioner of Income tax (Appeals). 10. In the result, all the appeals of the revenue fail and are dismissed. Order pronounced in open Court on 30th April, 2010." 3. In the aforesaid order, an elaborate discussion has been made by the Tribunal. If the aforesaid facts are kept in juxtaposition with the facts of the appeal in hand, we find that the assessee purchases technical drawings and design for Rs. 4,14,18,313/- from its Austrian Joint Venture Company i.e. VA Space Tech Elin, Austria and the said expenditure was directly claimed to be manufacturing expenses and was claimed in its P & L account under the head 'manufacturing expenses' which were disallowed by the ld. Assessing Officer doubting the genuineness of the expenses. Admittedly, the audited accounts, Trading and P & L Account and details of technical drawings expenses were duly furnished by the assessee before the Assessing Officer as well as before the ld. CIT(A). The stand of the assessee before the Revenue authorities as....
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.... the assessee has purchased copyrighted items in form of technical drawings and designs only and the amount paid on account of supply of technical drawings and designs is not in the nature of royalty, hence, no TDS was required to be deducted under section 195 of the Act. Therefore, disallowance made under section 40(a)(ia) of the Act by The AO/TPO and sustained by the DRP is not justified hence, directed to be deleted. Thus, ground No. 5 of A.Ys. 2010-11 and 2011-12 of assessee`s appeal is allowed. 7. Ground No.6:for A.Y. 2010-11 and Ground No. 7 for A.Y. 2011-12 relates to initiation of penalty proceedings under section 271(1) (c) of the Income-tax Act 1961. 7.1. We find that the assessee is aggrieved with the initiation of penalty proceedings under section 271 (1) (c) of the Act. No appeal lies against mere initiation of penalty proceedings. These grounds of appeals, are therefore, premature and accordingly dismissed. 8. Ground No. 7 for A.Y. 10-11 and ground no. 6 for A.Y. 11-12 : relates to not giving credit of TDS of Rs. 26,920/-(A.Y. 10-11) and Rs. 1,81,109/- for A.Y. 11-12 . 8.1. We have considered the facts and are of the view that due credit of TDS paid is all....
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.... entered the contract with its customers for the sale of generators which required by Hydro Power Plant. The liability of warranty flows from the contract sale. Making a provision for all known liabilities is fundamental principle of mercantile system of accounting. The assessee has submitted project-wise details of the warranty expenses booked during the year and also explanation regarding the basis of claiming the same as business expenditure. It was submitted that once the warranty period specified under the contract lapses, the surplus balance lying in the warranty provision is transferred back to Profit & Loss Account. The assessee has also produced before the Ld. AO, orders of CIT(A) on similar issues of the assessee arising in AY 2003-04 and AY 2004- 05, wherein the CIT(A) has allowed the provision for warranty as deductible expense. Further, the CIT(A) order for A Y 2003-04 has also been upheld by the Indore Bench of the Income Tax Appellate Tribunal vide order dated 28 December 2011 in I.T.A. No. 255/Ind/2007 and vide order dated 03.07.2014 for A.Y. 2006-07,2007-08, 2008-09 and 2009-10 in lTA No. IT(TP)A.No.5/Ind/2011, IT(TPA)No.313/Ind/2011, IT(TP)A No.616/Ind/2012, & IT(....
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....allow- ability of warranty expenses and submitted that the deduction for the same cannot be allowed. 9.4. On the other hand, the learned Counsel for the assessee, submitted that the DRP has rightly deleted the addition as the similar additions were deleted by the Tribunal in earlier years in assessee`s own case. The activity of the assessee is being turnkey contracts, EPC contract, and supply of turbines/generators stipulate warranty obligations. The assessee has made warranty provisions approximately 1% of cost of goods sold (COGS) which has been held to be non- excessive considering data for A.Ys. 2006-07 to 2010-11. The learned Counsel placed reliance in the case of Rotork Control (P) India Ltd. 314 ITR 62(SC)/(2009-TIOL-64-SC). 9.5. We have heard the rival submissions of both the parties and have perused the material available on record. We find that the assessee has entered into contracts with its customers for the sale of generators and other equipments required by Hydro power plants. Such contracts contain the essential warranty clause, which serves as an assurance, or guarantee by a seller of goods about the character, quality or fitness of the product under sale for ....
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....n for the same should be allowed while computing the total income of the assessee for the relevant assessment years. 9.5.4. Further we find that the Indore Bench of the Income Tax Appellate Tribunal vide order dated 03.07.2014 in I T A No. IT(TP)A No.5/Ind/ 2011, IT(TP)A No.313/Ind/2011, IT(TP)A No.616/Ind/2012,& IT(TP)A No.120/Ind/2014 12 255/IND-2007 in para 6 to 8 of the order observed as under : "6. We have considered the rival contentions, carefully gone through the orders of the authorities below and found that assessee has made provision for warranty for each project separately taking into consideration all the factors with regard to the scope of work, terms of warranty agreed with the customers, estimated cost of warranty based on earlier years' experience. This method of warranty provisions was consistently followed over the years, which is also in accordance with the Accounting Standard u/s.145(2). Thus, we found that the basis of provision was not an ad-hoc or contingent as alleged by the AO. With regard to the reasonableness of the warranty provision, we had verified from the warranty provision reversed on yearly basis and the same was found to be reasonable....
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....duction u/s 37 of the Act. Incurring of liability is certainty whereas the quantification depends upon certain business exigency and at the same time, exact quantification may not be possible when such provision is estimated, which is to be discharged at a future date, therefore, it is lawfully deductible. Our view is supported by the ratio laid down in decisions from Hon'ble Apex Court in Bharat Earth Movers Ltd. vs. CIT (245 ITR 428) (SC), CIT vs. Vinitec Corporation Pvt. Ltd. (278 ITR 337) (Del) and CIT vs. Majestic Auto Ltd. (204 ITR (AT) 14) (Chd). Therefore, the stand of the ld. CIT(A) is affirmed." 6.3 As the facts and circumstances during the year under consideration are same, respectfully following the order of the Tribunal in assessee's own case, we delete the disallowance made by the AO in respect of provision of warranty. 7. It is pertinent to mention here that against the order of CIT(A) for the assessment year 2004-05, no appeal has been filed by the Revenue before the Tribunal, which further substantiates the fact that the department has accepted the assessee's claim of warranty as 'ascertained liability'. In the result, grounds taken by the assesse....