TaxTMI 
TaxTMI 
2017 (4) TMI 1437
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.... 30.4.2014 determining total income at Rs. 32,31,67,610/- pursuant to the letter dated 7.4.2014 filed by the assessee stating that they are not preferring to file objections before the Hon‟ble Dispute Resolution Panel (DRP) against the proposed additions / disallowances and that they would. only prefer regular appeal before the Ld. CITA. In the said assessment, a sum of Rs. 4,87,70,886/- was added as per the order of the ld. TPO suggesting an upward adjustment to Arm‟s Length Price (ALP) which admittedly included an addition towards adjustment to ALP for payment of Royalty in the sum of Rs. 82,88,935/-. During the pendency of appeal before the ld. CITA, the ld. Administrative Commissioner of Income Tax (CIT) sought to revise the assessment framed by the ld. AO on 30.4.2014 by holding the same as erroneous and prejudicial to the interests of the revenue in terms of section 263 of the Act. 4. The ld. CIT issued a show cause notice u/s 263 of the Act to the assessee on the ground that the Royalty Payment of Rs. 6,42,47,978/- to its Associated Enterprise (AE) (DIC Asia Pacific PTE Ltd of Singapore and DIC Corporation of Japan) as revenue expenditure for using technical kn....
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.... Therefore, he issued show cause notice as to why the same should. not be treated as capital expenditure and depreciation at 25% be granted to the assessee by treating the same as intangible asset of enduring nature and since this was not done by the ld. AO in his order, it makes the order of ld. AO erroneous in so far as it is prejudicial to the interest of the revenue. 5. The assessee submitted that During the year under consideration the assessee paid royalty of Rs. 6,33,74,362/- and Rs. 8,73,616/- to DIC Asia Pacific Pte Ltd. Singapore & DIC Corporation, Japan respectively. The assessee stated that the payments were made in the course and for the purposes of carrying on ordinary business of manufacture and sale of printing inks. It stated that it did not purchase and/or acquire any technology or knowhow pursuant to the royalty payments. No intangible asset was purchase by the company nor was these payments expected to give benefit of any enduring nature. The royalties were payable on a monthly/quarterly basis aligned to the sales effected and were in the nature of periodical payments. The quantum of royalty payment was commensurate with sales achieved in given quarters meanin....
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....ions of the license Agreement dated 01.07.2008 with DIC Asia Pacific Pte Ltd. it would be noted that the license was a non-transferable non-exclusive license granted to the assessee for limited use within the territory of India and that too for licensed period. It referred to the Clause 2.1 of the agreement wherein it is provided that the licensor has granted DIC India Limited a non-exclusive license to use the licensed information within the territory including improvements throughout the tenure of the agreement of 7 years. Clause10.2 of the agreement also provides that on termination of the Agreement, the assessee shall cease to use the License Information and shall deliver the Licensed Information, if any, in tangible form back to DIC Asia Pacific Pte Ltd. along with any copies thereof. The aforesaid terms of the Agreement therefore make it evidently clear that the licensed information was not acquired or purchased by the assessee outrightly. Instead the case is exactly opposite. The License Agreement provided only for the use of technical knowhow & information by the assessee which at all material times during the period of license & even thereafter is to be owned by DIC Asia P....
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....he License Agreement s it shall be observed that the assessee was required to pay royalty for use of technical information, knowhow and trade mark for certain period. The licensed information was not meant for setting up factory but contained technical knowhow & designs to assist the assessee in carrying on its existing business of manufacture of printing inks and poly-resin. It is stated in the impugned notice that by using the licensed information the assessee was able to set up its plant & machinery to manufacture printing inks or poly-resins and therefore derived an enduring benefit. The assessee submits that this particular observation in factually incorrect & it also not relevant to decide the nature of royalty payment. Technical knowhow & information licensed to the assessee merely assisted the assessee to manufacture printing inks & poly-resins. In the circumstances it was understandable that the licensed information contained technical knowhow concerning operations of plant & machineries to manufacture of the licensed products. The fact that by using the technical knowhow the assessee was able to use its plant & machinery more efficiently or profitably cannot make the an....
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.... case of CIT Vs Hindustan Motors Ltd (192 ITR 619), the ITAT allowed the assessee‟s appeal and deleted the disallowance of 25% out of royalty payments. The Department preferred appeal u/s 260A before the authorities had observed that the assessee did not derive any enduring benefit and the agreement was for no-transferable license to manufacture licensed products in India. In the circumstance the appeal of the Revenue on this issue was dismissed. The CIT, Kolkata-1 has not preferred further appeal before the Supreme Court and therefore the issue has attained finality. 5.3. In view of the decisions of Hon‟ble Supreme Court and Hon‟ble Jurisdictional High Court supra, it was submitted that the royalty of Rs. 6,42,47,978/- paid by the assessee was revenue in nature and hence it was rightly allowed deduction in respect of such payment from the profits of the business by the ld. AO. 5.4. The assessee further submitted that the royalty was paid to its foreign associated enterprises. The royalty payments made to these companies were reported in transfer pricing report furnished in Form 3CEB &, this was submitted along with the return of income. The Transfer Pricing A....
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....issible. 6. The ld. CIT ignored the submissions of the assessee and passed an order u/s 263 of the Act on 26.12.2016 by setting aside the order of the ld. AO terming it to be erroneous and prejudicial to the interest of the revenue, with a direction to examine and verify the above issue after giving sufficient opportunity of being heard to the assessee. Aggrieved, the assessee is in appeal before us on the following grounds:- 1) For that on the facts and in the circumstances of the case, the PCIT was unjustified in law and on facts in holding that the assessment order u/s 143(3) dated 30.04.2014 was erroneous in so far as prejudicial to the interest of the revenue even though on the facts and circumstances of the case the assessment order was neither erroneous nor prejudicial to the interest of the revenue. 2) For that on the facts and in the circumstances of the case, in spite of the fact that the company's representative had appeared before the PCIT in compliance to the show cause notice and made the written representation countering the reasons set out in show cause notice, the PCIT was grossly unjustified in passing the impugned order by ignoring the explanations pu....
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.... of the Hon‟ble Supreme Court in the case of Alembi Chemical Works Co. Ltd vs CIT reported in 177 ITR 377 (SC) . Actually even according to the version of the ld. CIT in his order, the said judgement indicated infinite variety of situational diversities in which the concept of what is capital expenditure and what is revenue arises, it is not possible to form any general rule even in the generality of cases, sufficiently accurate and reasonable comprehensive, to draw any clear line of demarcative, whether a particular outlay is capital or revenue. And therefore, once for all test as well as the test of "enduring benefit‟ may not be conclusive may also be applied to conclude the issue of royalty payment as an capital expenditure instead of revenue which was allowed to the assessee for past several years. He argued that the said judgement itself specified that as to whether a particular outlay is capital or revenue in nature had to be judged from the facts of each case and there cannot be any conclusive proof for the same. Having said so, without bringing any material on record , the ld. CIT had simply categorized the royalty payment as capital expenditure , without apprec....
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..... He in turn placed reliance on the decision of the Hon'ble Madras High Court in the case of CIT vs Southern Switchgear Ltd reported in (1984) 148 ITR 273 (Mad) in support of his contention. 9. We have heard the rival submissions and perused the materials available on record including the paper book filed by the assessee. We find Coates of India Limited was the erstwhile name of DIC India Limited (assessee herein) . We find from the technical collaboration agreement entered into between assessee and DIC Corporation, Japan on 5.12.2000 that assessee is engaged in the business of manufacturing of printing inks and allied products in India in its various factories located at Calcutta, Delhi, Mumbai, Chennai, Noida and Ahmedabad. The assessee was desirous of upgrading its overall technology and introduction of new technology for manufacturing printing inks and allied products of all types viz., manufacturing of flushed pigments, sheetfed offset inks, gravure inks, web offset inks, news inks, screen printing inks, varnishes of all types including flush varnish, adhesives including packaging adhesives on a continuous basis. The assessee had approached DIC Japan to make available to it ....
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....oup/ associate companies at such prices as may be mutually agreed upon but not less than the actual cost plus reasonable profit margin. Provided however COATES shall be under no obligations to accept such orders from DIC or its associates and DIC shall not be entitled to any royalty on such transactions. ....................................... 7. SECRECY 7.1. COATES agree to keep the Licensed Information provided hereunder by DIC as secret and confidential and agrees not to disclose it to any third party provided that the information of the following nature shall be excluded from these secrecy obligations: (a) Information that is in public domain. (b) Information that COATES has in its possession at the Effective date which is not subject to an Agreement of Confidentiality. (c ) Information which COATES has received rightfully from other sources before or after at the Effective Date. 7.2. The obligation under this article shall survive any termination of this Agreement for ten (10) years. 9. Period of Agreement 9.1. This Agreement will remain in force for 7 years from the Effective Date, provided that DIC, directly or indirectly, owns more than fifty (50) p....
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....hts (IPR) , but in the very same context , he had also stated that the business / commercial rights have been obtained for a period of seven years only. Admittedly the licensed information has been obtained for a period of seven years by the assessee and hence there cannot be any question of acquisition of such licensed information by the assessee. We have gone through the agreement entered into between the assessee and DIC Asia Pacific Pte Ltd, Singapore and DIC Corporation, Japan and we find that nowhere it was mentioned that the assessee had acquired the business/ commercial rights of IPR so as to fall within the ambit of an asset having enduring nature in the capital field.. On the contrary it is very clearly stated in both the agreements that DIC Asia Pacific Pte Ltd, Singapore and DIC Corporation, Japan has granted license to use technology, knowhow and other license information for a specified period and hence it cannot be said that the assessee had acquired any business / commercial rights thereon. We find that the ld. CIT had persuaded himself to incorrect assumption of facts that assessee by using the licensed information obtained from DIC Asia Pacific Pte Ltd, Singapore ....
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.... year. 9.2. Based on the aforesaid findings, it could. be safely concluded that the ld. AO had arrived at one possible conclusion in the given set of facts and circumstances and had taken one possible view. The ld. CIT is only trying to substitute his own view on the same set of facts and circumstances by invoking his revisionary powers u/s 263 of the Act which in our considered opinion is not permissible in law. 9.3. We find that similar issue was addressed by the co-ordinate bench of this tribunal in the case of DCIT vs Bata India Ltd in ITA Nos. 1826 to 1828/Kol/2012 dated 23.5.2013. In this case also, it had secrecy & confidentiality clause and termination clause similar to what is present in the technical collaboration agreement entered into by the assessee herein. The Tribunal after examining the relevant clauses of the agreement held. as below:- 16. The ld. AR drew our attention to the royalty agreement which was at pages 8 to 28 of the paper book. He drew our attention to para 2.5 of the agreement which specifically says that all the drawings and other documents comprising the technical knowhow and all notes and copies made there from by licensee shall be marked with....
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....portion of the said order is as below:- So far as question nos. (iv) and (v) are concerned we find from the order of the CIT(A) the assessee did not derive any enduring benefit for payment of lumpsum royalty as the agreement was for non-transferable license to manufacture licensed products in India. Out of several questions raised by the revenue before the Hon‟ble Calcutta High Court, only question no. (iv) was admitted by the Court and all other questions were either disposed of on merits or on the ground that they do not involve any substantial question of law. 9.4. We find that the assessee had filed chartered accountant‟s certificate in Form 3CEB for its international transactions which included payment of subject mentioned Royalty to its AE which was certified to be at Arm‟s Length by the Chartered Accountant. The assessee benchmarked its royalty transactions by following CUP method and by comparing the royalty percentage made by the comparable companies and arrived at the arithmetic mean of 8.55% on sales. Since assessee paid only 2% as royalty on sales, the assessee justified its royalty payment to be at Arm‟s Length. The Transfer Pricing Docum....
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.... and addition had been made thereon by the ld. TPO and ld. AO. Hence it amounts to application of mind by the ld. AO. We find that the international transactions carried out by the assessee would. be both on capital as well as on revenue account. The entire international transactions would have to be referred by the ld. AO to the ld. TPO u/s 92CA of the Act. As we had already stated that the scope of enquiry of the ld. TPO is merely restricted to determination of ALP of international transactions which would. be both on capital and on revenue account. Hence the order of ld. TPO on royalty payment and addition made thereon would. not come to the rescue of the assessee. 9.5. We also find that the issue of allowability of royalty as revenue expenditure was considered by the Hon'ble Calcutta High Court in the case of Timken India Ltd vs CIT reported in (2014) 51 taxmann.com 184 (Calcutta) dated 30.7.2014 which considered the decisions relied upon by the ld. AR [i.e CIT vs I.A.E.C. (Pumps) Ltd - 232 ITR 316 (SC) and ld. DR (i.e Alembic Chemical Works Co. Ltd vs CIT - 177 ITR 377 (SC) ]. The Hon‟ble Calcutta High Court held. as under:- 5. Mr. Majumdar, learned advocate appeari....
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....diture is capital in nature. She contended that the assessee may have already had an existing plant and machinery. It may also be true that the assessee was pursuing the same line of business, but it cannot be denied that by paying the sum of USD 200,000 the assessee acquired a new technology. There was as such accretion to the capital of the assessee in the sense that the company became better equipped to do its business with the help of technology. Therefore, the expenditure has to be treated as a capital expenditure. On the top of that, from the agreement entered into between the assessee and the non-resident it would. appear that the benefit of such payment is of an enduring nature which is to continue to benefit the assessee for a period of six years. It was, as such, a plain case of a capital expenditure on which the assessee was entitled to claim depreciation. The assessee has already been allowed depreciation at the rate of 25%. Accordingly, more than just treatment was given to the assessee and this court should. refrain from interfering with the order under challenge. 10. We have considered the rival submissions of the learned advocates for the parties. The submissions....
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....keep no copies thereof. Moreover, assessee in the instant case was given by its AE only a non-exclusive and non-transferable license to use Licensed Information for manufacture of products. Assessee was not granted any right to sublicense to any third parties or make available any licensed information to any third parties and is also directed to maintain the secrecy and confidentiality of the licensed information by not disclosing to any third party and such secrecy & confidentiality clause shall be binding even after termination of the agreement for ten years. Hence it is a restrictive usage privilege given to the assessee in the instant case and hence the facts before the Hon‟ble Madras High Court are squarely distinguishable. 9.6. We find that the ld. CIT considered the order of the ld. AO to be erroneous at the show cause notice stage by stating the royalty payment should be construed as capital expenditure and hence should. be disallowed, he later on in the order passed u/s 263 of the Act changed the track and considered the order to be erroneous for "lack of enquiry‟ on the part of the ld. AO. This finding of the ld. CIT recorded on altogether new footing withou....
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....te that the ld. CIT had mentioned about the existence of the royalty agreement in the show cause notice issued by him itself and had also scrutinized the said agreement before issuing the show cause notice. This goes to prove that the assessee had already filed the said agreements during the assessment proceedings on request from the ld. AO. The ld. CIT was trying to substitute his own view against the view taken by the ld. AO on the basis of the very same agreement when there being no change in the facts and circumstances of the case as compared to that of the earlier years. In this regard, we would. like to place reliance on the decision of the Hon'ble Bombay High Court in the case of CIT vs Nirav Modi reported in (2016) 71 taxmann.com 272 (Bombay) dated 16.6.2016 wherein it was held. as below:- 7. Firstly, the Revenue contends that the exercise of powers under Section 263 of the Act is justified as in this case, as no inquiry in respect of the gifts received during the subject years was done by the Assessing Officer for the Assessment orders for Assessment Years 2007-08 and 2008-09. This according to the Revenue is evident from the Assessment Orders dated 31st December, 2009 ....
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....her scrutiny is called for. If there is nothing on record to indicate that the evidence produced is not reliable and the Assessing Officer was satisfied with the same, then it is not open to the CIT to exercise his powers of Revision without the CIT recording how and why the order is erroneous due to not examining the donors. Thus, this objection to the impugned order by the Revenue is also not sustainable. 9. It was next submitted that no enquiry was done by the Assessing Officer to find out whether the donor Mr Deepak Modi (father) had received money from M/s. Chang Jiang as claimed. Nor any inquiry was done to find out whether the sister had in fact earned amounts on account of Foreign Exchange Transactions as claimed by her. We find that this enquiry of a source of source is not the requirement of law. Once the Assessing Officer is satisfied with the explanation offered on inquiry, it is not open to the CIT in exercise of his revisional powers direct that further enquiry has to be done. At the very highest, the case of the Revenue is that this is a case of inadequate inquiry and not of "no enquiry." It is well settled that the jurisdiction under Section 263 of the Act can be....
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....Assessment could. be completed on application of Section 68 of the Act. In this case, the order passed by the Assessing Officer is not per se erroneous and further the CIT has not given any reasons to conclude that the order is erroneous. In fact, he directs the Assessing Officer to find out whether the order is erroneous by making further enquiry. This the decision of the Delhi High Court in D.G. Housing Projects Ltd. (supra), clearly negates. In the above view, the decision of Delhi High Court in D.G. Housing Projects Ltd. (supra) would. not assist the Revenue in the present facts. 11. Further, reliance is placed upon by the Revenue upon the decision of the Apex Court in Amitabh Bachchan (supra) to impugn the order of the Tribunal. In the facts of the Supreme Court decision, the Respondent-Assessee had filed a revised return, claiming additional expenses. During the Assessment Proceedings, the Assessing Officer called upon the Assessee to furnish the details with regard to the expenses claimed to be incurred. The Assessee therein pointed out that the payments for expenses had come out of cash balance available with him. When the Assessing Officer commenced enquiry in respect o....