TaxTMI 
TaxTMI 
2018 (8) TMI 2029
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....arned AO erred in law in not meeting the preconditions for making reference to the Additional Commissioner of Income Tax, Transfer Pricing-I (1) ("learned TPO") under section 92 CA (1) of the Act and in not providing an opportunity of being heard before referring the transfer pricing issues to the learned TPO. 3. That the learned TPO/DRP erred in understanding the actual facts of the case and business and economic conditions surrounding the Appellant's business and based their analysis on incorrect facts of the case leading to inaccurate analysis of arm's length nature of the international transactions pertaining to distribution division. 4. That the learned TPO/DRP erred on the facts and circumstances of the case and in law in using Transaction Net Margin Method ("TNMM") as most appropriate method for benchmarking the international transactions in the distribution segment as against the Resale Price Method (RPM) adopted by the Appellant in its Rule 10D documentation. 5. That the learned TPO/DRP erred on the facts and circumstances of the case and in law in attributing the entire losses incurred by the Appellant in its distribution division to the related....
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....llant prays for appropriate relief based on the said grounds of appeal and the facts and circumstances of the case. 3. Briefly stated, the facts of the case are that the return of income declaring income of Rs. 12,47,65,421/- was filed on 29.11.2006 and the same was processed u/s. 143(1) of the Act on 15.01.2008. The case was selected for scrutiny. Notice u/s 143(2) of the Act was issued on 28.9.2007 and was served on the assessee. Notices u/s 143(2) and 142(1) of the Act alongwith questionnaire were issued on 23.6.2009. Upon change of jurisdiction, fresh notice u/s. 143(2) of the Act dated 20.8.2009 was issued and served upon the assessee. In response to the notice, the A.R. of the Assessee attended the proceedings from time to time and filed the necessary details as called for by the Assessing Officer. 3.1 The assessee company, Baxter India (P) Ltd. is engaged in the business of manufacturing & Trading of Pharmaceutical products. During the year under consideration, there is no change in the paid up share capital and the same has been disclosed at Rs. 78,45,41,58/-. The assessee, during the year, has disclosed gross profit of Rs. 70.80 Crores on the total turnover of Rs. 20....
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....e very closely linked and incidental. Thus any segmental so prepared is only an artificial segmental and is not reflective of the economic reality of the business. Hence, he submitted that the RPM method should be adopted in the case of the assessee. To support his contention, he relied upon the decision of the Coordinate Bench, ITAT, Delhi in the case of DCIT vs. JDSU Indian Pvt. Ltd. & JDSU Indian Pvt. Ltd. vs. DCIT passed in ITA No. 1120/Del/2015 (AY 2010-11) & C.O. No. 217/Del/2016 wherein the Tribunal vide order dated 02.04.2018 has dealt the similar issue and decided the same in favour of the Assessee. He further relied upon the another decision of the Coordinate Bench, ITAT, Delhi in the case of DCIT vs. Delta Power Solution India P. Ltd. passed in ITA No. 3004/Del/2013 (AY 2008-09) wherein the Tribunal vide order dated 14.03.2016 has dealt the similar issue and observed that as in the subsequent year the TPO himself has accepted the RPM to the MAM for determining the ALP for the trading segment, on the similar facts and circumstances, as recorded by the Ld. CIT(A) and upheld the findings of the Ld. CIT(A) by dismissing the Revenue's appeal. He further filed the copy of the ....
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....s been examined and we are of the considered view that TNMM method adopted by the TPO/AO is most appropriate in the present facts and circumstances of the case. Further the assessee has all along been arguing to compare with the date of the year ending March, 2004, 2005 and 2006 to benchmark the transactions with the AE. The comparison can be made with the comparables. Hence, the TPO/AO has rightly compared with the date of year ending 2006, being the contemporaneous data. Averaging of data of three years is not as pr the provisions of I.T. Act, 1961. The contention of the assessee company that variation in margin is within 5%, stands negated in the order of the TPO himself and the DRP does not have reasons to interfere with the same. No directions, are hence made on the issue of adjustment u/s. 92CA." 5.2.1 After perusing the aforesaid findings of the Ld. DRP, it is clear that Ld. DRP has not applied its mind and there is no finding on the submissions of the Assessee. Under these facts and circumstances of the case, we deem it appropriate to restore this issue to the DRP to decide it afresh by giving its speaking finding. We hold and direct accordingly. 6. Apropos grou....
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....by virtue of the agreement the assessee will become the owner of such trademark/ patent/technical know-how. It is undisputed that the royalty expenditure is a recurring expenditure in the present appeals and is payable for every year the technical knowhow/ patent/trade-mark continues to be used. In the case of CIT vs. Lumax Industries Ltd. - 173 Taxman 390 (Delhi), the assessee company entered into an agreement with M/s Stanley Electric Co. Ltd. (SECL) on year to year basis for acquisition of technical knowledge. The assessee claimed the said payment as revenue expenditure. The Assessing Officer disallowed the claim holding that by virtue of the agreement, the assessee had derived an asset of enduring nature. On appeal, the CIT (A) allowed the assessee's claim holding that the expenditure incurred by the assessee was a recurring expenditure and not a capital expenditure. The Tribunal upheld the order of the CIT (A). On Revenue's appeal to the High Court, it was held as under:- "A perusal of the Circular No.21 of 1969, dated 9-7-1969 shows that if in terms of the agreement, only a license is required for user of technical knowledge from a foreign participant for a l....
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.... fixed amount and the payments would be made on the fulfillment of certain conditions. The agreement enabled the assessee to sub-license the technical knowhow to another Indian party subject to the prior written permission of 'R'. The validity of the agreement was for a period of five years, but it could be terminated before the expiry of that period in the event of any default by any of the parties. The agreement laid down that the right of the assessee to market any of the products manufactured under the agreement would cease upon its expiry or termination. Pursuant to the said agreement, the assessee paid certain amount to 'R' and claimed same as revenue expenditure. The lower authorities, relying on the word 'sold' in the agreement, held that it was a case of sale of technical know-how by 'R1 to the assessee and, therefore, payment in question could not be treated as revenue expenditure. However, the Tribunal held that there was no sale of technical knowhow by 'R' to the assessee and, therefore, the payment was revenue expenditure. It was held as under:- "There was, in fact, no absolute transfer of any right in the documentation given by 'R'....
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....ction in the relevant year was a finding of fact rightly arrived at." 13. In the above mentioned case of Sharda Motors (supra), their Lordships discussed the earlier decision of Hon'ble Jurisdictional High Court in the case of CIT Vs. J.K.Synthetics Limited - [2009] 309 ITR 371 (Delhi) wherein their Lordships have enumerated certain principles for determining whether the payment of royalty is a capital expenditure or revenue expenditure. The same is discussed at pages 111 & 112 of 319 ITR and is being reproduced herein below for ready reference:- "(v) expenditure incurred for grant of licence which accords 'access' to technical knowledge, as against, 'absolute' transfer of technical knowledge and information would ordinarily be treated as revenue expenditure. In order to sift, in a manner of speaking, the grain from the chaff, one would have to closely look at the attendant circumstances, such as : (a) the tenure of the licence, (b) the right, if any, in the licensee to create further rights in favour of Tribunal third parties, (c) the prohibition, if any, in parting with a confidential information received under the lice....
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....ment of US $ 1 million to the US company, which was capitalized in the assessee's books of account and a royalty of 3 per cent, of domestic sales and 5 per cent, of export sales to the US company for a period of 7 years for using the technology and for availing of technical services. During the previous year relevant to the assessment year 2002-03, the assessee paid to the foreign collaborators royalty calculated at 3 per cent, of domestic sales and at 5 per cent, of export sales and claimed deduction thereof as business expenditure. The Assessing Officer disallowed it as being of capital nature and this was confirmed by the Commissioner (Appeals) as did the ITAT on the grounds, inter alia, (a) that even after termination of the agreement the assessee could continue to use technical information in production of licensed products and hence the assessee obtained enduring benefit, and (b) that there was nothing to show that any technical service was to be provided on day-to-day or on regular basis at any specified interval and thus it was a case of outright transfer of technical know-how. On appeal, the Hon'ble Jurisdictional High Court held as under:- "Held, allowing....
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....se of manufacturing. This was basically in the realm of technical support." 16. In the assessee's case the Department has heavily relied upon the decisions of the Hon'ble Apex Court in the case of Jonas Woodhead and Sons (India) Ltd. (supra), for holding that the payment of royalty is capital expenditure but, the Assessing Officer has not fully applied that decision because in the case of Jonas Woodhead and Sons (India) Ltd. (supra) , only 25% of the royalty payment was held to be capital expenditure and 75% was allowed as revenue expenditure whereas in the present appeals the Assessing Officer has disallowed the entire payment as capital expenditure. We, therefore, respectfully following the above mentioned decisions of the Hon'ble Jurisdictional High Court hold that the annual payments of royalty were revenue expenditure. 17. Accordingly, ITA Nos. 4785/Del/2010 for AY 2004-05 and 5323/Del/2012 for AY 2008-09 filed by the Department are dismissed and Ground No. 1 in ITA No. 2798/Del/2012 (Department's Appeal) is also dismissed." 6.3 After perusing the aforesaid findings of the Coordinate Bench in assessee's own case in earlier year and subsequent years, we....