TaxTMI 
TaxTMI 
2019 (8) TMI 349
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....termination of the arm's length price (ALP). The TPO, during TP assessment proceedings, noted that the assessee has undertaken the following international transactions with its group companies:- S.No. Description of transaction Method Value (in Rs.) 1. Garments Home Furnishings CPM 37,20,22,974 2. Charge for samples provided for various styles TNMM 13,52,700 3. Payment of royalty CUP 1,67,07,324 4. Freight Charges recovered CPM 8,28,869 3. After considering the various submissions made by the assessee from time to time, the TPO proposed an upward adjustment of Rs. 1,67,07,324/- as the ALP of the international transaction relating to payment of royalty. The Assessing Officer in the body of the assessment order made this addition. Apart from the above, the Assessing Officer also made certain disallowances/additions on account of: payment of gratuity - Rs. 19,44,514/-; depreciation on computer peripherals - 2,17,032/-; income from other sources - Rs. 37,82,419, software expenses - Rs. 2,60,500/- and disallowance u/s 14A - Rs. 700. He also determined the deduction u/s 80HHC at nil. The Assessing Officer accordingly determin....
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....d by the AE. Hence, the assessee need not make a payment for the same. Ld. CIT(A) has erred in ignoring this fact. 4. The appellant craves leave for reserving the right to amend, modify, alter, add or forego any ground(s) of appeal at any time." 5. The assessee has raised the following grounds in the Cross Objection:- "1. DEPB Credit Ld AO has erred in interpreting the provisions of section 80HHC as amended retrospectively by the Taxation Laws Amendment Act 2005 and hence on non production of evidence required by third proviso to section 80HHC(3) ld AO has wrongly added entire sale receipts of DEPB amounting to Rs. 17,308,013/; whereas profit realized on transfer of DEPB is only Rs. 5,48,411/-, therefore amount subject to add back under third proviso to Section 80HHC(3) is Rs. 5,48,411/-. 2. Contribution to Group Gratuity Scheme of LIC Respondent has contributed Rs. 19,44,514/- to Group Gratuity Policy of LIC of India; Id AO has disallowed the same u/s 36(l)(v) on the ground that the trust to which contribution is made is not approved by the department. The expense since incurred wholly and exclusively for the purpose of busi....
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....ged in the business of designer's garments which include study of latest fashion trends in the market, developing styling the market and conceptualizing designs. It is the owner of brand in the name of 'Apprel Cornell' The trademark is patented with office of United States. PRC has entered into agreement with Cornell Overseas Pvt. Ltd. (the assessee) for permitting use of trademark and providing technical know-how. The details of royalty payment on various services are as under:- a) For use of trademark, trade name etc., an amount equal to 2% of all net sales of products made by the Indian company. b) For services to be rendered by PRC, for preparing designs and drawings and handling them over, an amount equal to 2% of all net sales of products made by the Indian company. c) For services to be rendered by PRC for sending a team of professional designers to India an amount of US $ 750/- per diem for the services of a senior designer and US $ 500/- per diem for the services of a junior designer. 10. On being confronted by the TPO, it was submitted by the assessee that the assessee has immensely benefited by entering into the agreement with PRC. The TPO n....
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....seas related parties. The risk and reward matrix in respect of a contract manufacturer is entirely different from an independent entrepreneur. According to him, an independent entrepreneur may require technical know-how, logo, market access, designs and help of an expert whereas the contract manufacturer requires none out of the above. Rejecting the various explanations given by the assessee and observing that the assessee company is making its total sales to its related parties and the benefit of producing quality garments is reaped by overseas entity, the payment of charges for royalty or technical know-how do not conform to arm's length principle. In view of the above, he proposed an upward adjustment of Rs. 1,67,07,324/-. 11. In appeal, the ld.CIT(A) deleted the addition so made by the A.O./TPO by observing as under:- "I have carefully considered the facts of the case and submissions filed by the appellant. The facts and the issue raised under this ground are similar to issue decided in the favour of appellant during A.Y. 2003-04. Appellant is not a contract manufacturer. The royalty payment is at arm's length; as Royalty is included in the sale price of the garment....
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....fic provision of the Income Tax Act. It has been held in plethora of decisions that each international transaction is needed to be benchmarked separately unless they are inextricably linked. Reference is made to the judgement of Hon'ble Punjab and Haryana High Court in case of Knorr-Bremse India (P.) Ltd. v. Assistant Commissioner of Income-tax [2015] 63 taxmann.com 186 (Punjab & Haryana). In this case, even the assessee has separately benchmarked the "Sales of Garments" and "Royalty Payments" in its TP Study Report and has even applied different methods - CPM for the "Sales of Garments" and CUP for the "Royalty Payments". The Ld. CIT(A) also relied on the judgement of Sona Okegawa Precision Forgings (ITA No. 4781/Del/2010). The above judgement is clearly not applicable in the present case as in that case it is clearly mentioned in the order itself that bulk of goods are sold to independent parties unlike the case of the assessee where 100% of the goods are sold to the AEs. Besides the above, it is evident that the assessee is a "Contract Manufacturer" and is manufacturing the Garments on the strict instructions and specifications given by the AEs. 100% of the sales are made to....
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....was at arm's length. Further, royalty paid to PRC, USA has been assessed in its hands in India and tax has been paid by PRC, USA thereon. He submitted that the transaction is revenue neutral as royalty expenses are embedded in the sale price. He submitted that the functions, assets and risk profile of the assessee remain the same in the current year as in the previous year, therefore, treating the assessee as a contract manufacturer in the current year despite same underlying facts amounts to taking inconsistent stand year on year. Relying on various decisions, he submitted that the TPO/A.O. were not justified in making the addition. He further submitted that the TPO referred to certain clauses of the agreement to drive home the point that the assessee is a contract manufacturer. However, these clauses were very much there in the earlier years too and the order of the TPO in 2004-05 is similarly worded as that of in the assessment year 2003-04. Since the Tribunal has already considered the identical issue in the assessment year 2002-03 and has given relief to the assessee, therefore, this being a covered matter in favour of the assessee the order of the CIT(A) should be upheld and ....
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....ear 2003-04, vide ITA No.2166/Del/2011, order dated 2nd May, 2017 has decided an identical issue and dismissed the appeal filed by the Revenue on this issue by observing as under:- "42. We have considered the submissions of both the parties and carefully gone through the material available on the record. In the present case, it is not in dispute that the assessee entered into an agreement with its AE i.e. Pike River Corporation (PRC), USA under "Technical Assistance, Trade-Mark and Royalty Garments" for use of technical know-how, designs, logos, trade names, and trade-marks. The royalty was paid @ 5% on net sale of products manufactured with the technical assistance of PRC, USA. The royalty agreement was effective from 02.04.2001 and for the assessment year 2002-03, the royalty payment was accepted by the TPO at arm's length. However, the AO considered that the royalty was a capital expenditure and not the revenue expenditure. Being aggrieved the assessee carried the matter to the ITAT in ITA No.4739/Del/2010 wherein vide order dated 30.03.2016 it has been held as under: "8. Ground No.2: The assessee has debited sum of Rs. 1,26,58,195/- on account of royalty payme....
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.... its agents and its employees shall keep any and all elements of LICENSOR's know-how strictly confidential and w111 refrain from using such ( know-how for any purpose other than the purpose of this Agreement. Upon termination thereof for any reason whatsoever, LICENSEE will return to LICENSOR any and all elements of LICENSOR's know-how fixed in a tangible medium of expression." 8.2 A perusal of the provisions of Agreement (supra) goes to prove that the assessee company has made the royalty payment to manufacture/sell products designed by licensor and also used its name, the label and the mark and has also availed technical assistance having limited right during subsistence of agreement for the aforesaid technical knowhow / use of name label and mark and technical assistance of the licensor. Assessee paid 5% of the net sales of the product during each year of the agreement. Now, the question arises for determination is, "as to whether payment of Rs. 1,26,58,195/- on account of royalty payment is to be capitalized or is revenue expenditure?" 8.3 A perusal of the terms and conditions of agreement (supra) goes to prove inter alia; that the same was made for a spec....
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....of the product for making use of the knowhow, label and mark and technical assistance and it has not a right to retain the knowhow, mark or label as absolute owner, such an expenditure cannot be capitalized and the same are revenue expenditure. Consequently, ground No.2 is determined against the revenue." 43. In the present case, it is not brought on record that the aforesaid decision of the ITAT has been reversed by the higher form, therefore, by keeping in view the principle of consistency, we are of the confirmed view that the ld. CIT(A) was fully justified in deleting the addition of Rs. 1,57,35,495/- made by the AO, particularly, when the benefit derived under the agreement dated 02.04.2001 was not doubted by the TPO and the assessee by using the technical know-how assistance and designs received under the said agreement was manufacturing the finished products which were sold to the AE as well as to the other parties. Therefore, the assessee derived benefit under the royalty agreement and it was accepted by the AO for the assessment year 2002-03. However, the only dispute raised by the AO in the said assessment year was as to whether the royalty payment was a capital ....
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....m para 3.5 of the order that the TPO has mentioned that 'the contract manufacturer does not carry the risk of marketing and, therefore, is not worried about the latest trends in the market, this risk is borne by the entity providing work to the contract manufacturer.' However, the assessee in its TP report has clearly mentioned that the assessee is undertaking market risk as it trades in open market condition and bears risk of excessive supply, presence of competitors, risk of advent of new business in markets, etc., which is evident from the TP study report and at page 119 of the paper book. The same reads under:- "c. Market Risk Since Cornell Trading buys from unrelated parties in India as well, all risks associated with market e.g. excessive supply, presence of competitors, new products etc., and low prices by unrelated enterprises are to be borne by COPL." 18. We further find the assessee during the impugned assessment year has exported to non-AEs as well as AEs and, therefore, it is factually incorrect on the part of the TPO that the sale of the entire finished product is to the AE. From the various submissions made by the assessee, we find that: ....
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....ggrieved with such order of the CIT(A), the Revenue is in appeal before the Tribunal and the assessee has raised the ground in the Cross Objection. 24. After hearing both the sides, we find the issue relating to depreciation on computer peripherals, namely, printers and UPS at 60% stands decided in favour of the assessee by the coordinate Benches of the Tribunal where it is being consistently held that printers and UPSs are integral part of the computer system and are entitled to depreciation @ 60%. We, therefore, uphold the order of the CIT(A) in allowing depreciation @ 60% on computer peripherals and reverse the order of the CIT(A) in allowing 25% depreciation on UPSs as against 60% claimed by the assessee. Thus, the ground raised by the Revenue on this issue is dismissed and the additional ground raised by the assessee in Cross Objections is allowed. 25. Ground of appeal No.1 by the Revenue and Ground No.1 of CO by the assessee as well as the additional Ground No.1by the assessee relate to the order of the CIT(A) in modifying the order of the Assessing Officer in allowing deduction u/s 80HHC of the IT Act. 26. Facts of the case, in brief, are that the Assessing Officer,....
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.... (baa) and, therefore, such income in principle is excludible to the extent of 90% out of profits of the business in terms of Explanation (baa). 27. In appeal, the ld.CIT(A) directed the Assessing Officer not to exclude the sample design and development charges receipts amounting to Rs. 13,52,700/- while calculating deduction u/s 80HHC. She further directed the Assessing Officer to exclude DEPB receipts amounting to Rs. 1,73,08,013/- for the calculation of deduction u/s 80HHC. She, however, upheld the action of the Assessing Officer in treating the interest income of Rs. 37,82,419/- earned on fixed deposits as 'Income from other sources' for the purpose of computation of deduction u/s 80HHC. 28. We have heard the rival arguments made by both the sides and perused the orders of the authorities below. So far as calculation of deduction u/s 80HHC on account of sample design and development charges of Rs. 13,52,700/- is concerned, we find an identical issue had come up before the Tribunal in the assessee's own case in the preceding assessment year. We find the Tribunal, in assessee's own case, vide ITA No.2166/Del/2011, order dated 2nd May, 2011 for assessment year 2003-04, follo....
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....ity of being heard to the assessee. We hold and direct accordingly. The issue relating to DEPB as per the first additional ground of the Cross Objections is allowed for statistical purposes. 29. So far as the issue relating to interest income of Rs. 37,82,419/- on fixed deposits for the computation of deduction u/s 80HHC is concerned, the ld. counsel for the assessee fairly conceded that this issue has been decided against the assessee by the Hon'ble High Court in the case of Ram Honda Power Equipment reported in 158 Taxman 474 (Del). In view of the above submission of the ld. counsel for the assessee, this issue is decided against the assessee. 30. Ground No.2 of the Cross Objections as well as additional grounds relate to the denial of deduction of Rs. 19,44,514/- being contribution to Group Gratuity Policy of LIC of India. 31. Facts of the case, in brief, are that the Assessing Officer, during the course of assessment proceedings, noted that the assessee has debited a sum of Rs. 19,44,514/- to the P&L Account on account of gratuity. It was submitted that the assessee has subscribed to a group gratuity policy with LIC of India and, accordingly, a sum of Rs. 19,44,514....
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....ce the payment made to LIC of India towards group gratuity scheme is not covered by section 36(1)(v), 40A(7)(b) & 40A(9) of the Act because the assessee has not satisfied the conditions. The argument of the assessee is that since the payments were made to LIC of India in Master policy scheme, the premiums contributed to the LIC of India is allowable deduction and relied on the decisions of coordinate bench of Hyderabad in the case of Capital IQ Information Systems (India) Pvt. Limited (supra). The Hon'ble ITAT Hyderabad Bench while deciding the issue on similar facts held as under: 8. We have heard the arguments of the parties, perused the material on record and have gone through the orders of the authorities below. We find that the issue is squarely covered by the decision of the ITAT, Hyderabad in the case of M/s. Sri Krishna Drugs Ltd. Vs. Department of Income-tax in ITA No.2126/Hyd/2011 for AY 2007.08 dated 11.4.2012, where the JM was one of the party. The Tribunal in the said case held as follows: 3. The second ground raised by the Revenue is as under: "The learned CIT(A) erred in holding that unrecognised gratuity fund is allowable u/s. 37(1),wh....
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....t has to be allowed. 5. We have carefully gone through the judgement of the jurisdictional High Court in the case of Warner Hindustan Ltd. (supra). In the case before the jurisdictional High Court, the Provident Fund was not approved by the CIT. The Andhra Pradesh High Court after referring to the judgement of the Bombay High Court in Tata Iron & Steel Co. Ltd. v. D. V. Bapat, ITO (1975) 101 ITR 292, and the judgement of the Supreme Court in Metal Box Company of India Ltd. vs. The Workmen (1969) 73 ITR 53, held that the amount paid towards an unapproved gratuity fund can be deducted under sec. 37 of the I.T. Act, though not under sec. 36(1)(v). In view of this judgment of the jurisdictional High Court, in our opinion, even if any payment is made to an unapproved gratuity fund, it has to be allowed under sec. 37. By respectfully following the binding judgement of Andhra Pradesh High Court in the case of warner Hindustan Ltd. (supra), we uphold the order of the CIT(A). In view of the above discussion, we dismiss the ground taken by the Revenue." 5. In view of the above decision of this Tribunal, the ground raised by the Revenue is dismissed." 9. Si....
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....se as said deduction was not being claimed on account of any provision and amount of gratuity was an allowable deduction - Held, yes". 5. Considering the above aspects, we do not find any infirmity in the order of the learned CIT(A) in deleting the addition. There is no merit in the departmental appeal. Same is accordingly dismissed." 10. In the case of Verizon Data Services India Pvt. Ltd. (supra) the coordinate bench of Madras held that payment made to gratuity fund maintained with LIC has no control over the irrevocable trust created exclusively for the benefit of employees and deduction shall be allowed. The coordinate bench of Madras while deciding the appeal relied on the decision of Hon'ble Madras High court in the case of Textool India Pvt. Limited (supra) (civil appeal No.447 of 2003). In the instant case the assessee has made the payments to the LIC towards group gratuity scheme directly in approved schemes. The assessee has also obtained the policy in favour of the bank. The assessee has no control over the funds contributed to LIC towards the gratuity. The assessee is receiving the gratuity payment directly from the LIC of India as per the scheme w....