TaxTMI 
TaxTMI 
TaxTMI 
2023 (2) TMI 1419
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....ment year 2016-17, several international transactions took place between the Assessee and its AEs, including purchase of raw materials for the manufacturing segment, payment of royalty fee and provision of SWD services and in the course of assessment the Assessing Officer ("AO") made a reference to the TPO for examination of the arm's length price of the aforesaid transactions. On such reference, the TPO passed an order dated 28.10.2019 under Section 92CA of the Income-tax Act, 1961 ("the Act") determining a TP adjustment with respect to manufacturing segment, SWD services segment and payment of royalty totalling to Rs. 173,02,90,000/-. Initially, a draft assessment order dated 30.12.2019 came to be passed by the AO in which the aforesaid TP adjustment was incorporated, apart from the additions made to the income of the Assessee on account of disallowance of provision for warranty and royalty expenses claimed as revenue expenditure. 3. Aggrieved, the Assessee filed its objections before the DRP which, vide its directions dated 22.02.2021, rejected Assessee's objections insofar as the TP adjustments made by the TPO and the disallowance made in respect of provision for warranty....
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....roup has a Global Key Accounts Management (KAM) structure through which it maintains customers relationship with OEMs having global presence which helps the assessee to establish customer relationship with the Indian entities of global OEMs. The assessee sells goods both to independent third parties as well as to its AEs. For sales to third parties the price is driven by market conditions and for sales to AEs, it is based on agreed pricing policy. 6. In the manufacturing segment the assessee adopted the Transaction Net Margin Method (TNMM) as the most appropriate method for determination of Arm's Length Price (ALP). Under this method the comparison is made between the Assessee's the operating/ net margins with that of comparable companies to analyse if the related party transactions have been undertaken on an arm's length basis. Rule 10B(1)(e) of the Income Tax Rules, 1962 (Rules), explains transactional net margin method as a method by which,- (i) the net profit margin realized by the enterprise from an international transaction entered into with an associated enterprise is computed in relation to costs incurred or sales effected or assets employed or to be employed by the enterp....
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.... accordingly recomputed the margin of the assessee as under - Operating Income Rs. 786,29,70,000/- Operating Income Rs. 786,29,70,000/- Total Cost Rs. 842,40,50,000/- Operating loss (Op. Income - Op. Cost) (Rs. 56,10,80,000/-) Net mark-up (OP/OR) -7.14% 10. The assessee selected the following comparables in the TP study- Sl. No. Name of the company Average OP/Sales(in %) (weighted average) 1. Rane Engine Valve Ltd. 2.46 2. Hindustan Hardy Spicer Ltd. 1.19 3. JMT Auto Ltd. 7.09 4. Bharat Gears Ltd. 2.72 5. Munjal Showa Ltd. 5.49 Arithmetical Mean 3.79 11. Accordingly the assessee concluded that the margin on the international transaction in the manufacturing segment is within the arm's length price. 12. The TPO in addition to the comparables selected by the assessee conducted new search to filter fresh comparables. The final list of comparables as per TPO is as listed below - Sl. No. Name of the Company OP/Sales (in %) Comparable selected by the Assessee in its TP study, accepted by the TPO 1 Rane Engine Valve Ltd. 2.46 2 Hindustan Hardy Spicer Ltd. 1.19 3 Bharat Gears Ltd. 2.72 4 Munjal Showa Ltd. 5.49 5 JMT Auto Lt....
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....hat the lower authorities erred in not granting an adjustment towards exchange fluctuation.(Ground No. 13) (iv) That the lower authorities erred in not granting depreciation adjustment (Ground No. 14) (v) That the lower authorities erred in upholding the inclusion of Aditya Auto Products and Engg. (India) Pvt. Ltd., Aspee springs Ltd., Leewon Precision Pvt. Ltd., Maco Pvt. Ltd., TVS Upasana Ltd., and Varroc Engineering Ltd. as comparable to the Assessee(Ground No. 15). (vi) That the lower authorities erred in not including Gabriel India Ltd. and Vijayshree Autocom Ltd. as comparables to the Assessee. (Ground No. 16) (vii) That the TPO erred in not including the additional companies of the Assessee (Ground No. 17) (viii) Without prejudice, the lower authorities ought to have appreciated that adjustment if any, should be restricted to the proportion of cost of international transactions of the Assessee to total operating cost in the manufacturing segment. (Ground no. 18) Ground no. 11: Capacity utilisation 18. This ground is in relation to the action of the revenue authorities in not allowing adjustment to the operating costs of the Assessee by r....
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....sis of an international transaction with the uncontrolled transaction, reasonable and accurate adjustment is permitted to eliminate any difference which materially affects the price or costs or the profit arising from such transaction in the open market. Nowhere the rule suggest that such adjustment should be made only to the uncontrolled transaction, that is, comparable companies and not to the 'tested party' whose transaction is being compared. It is submitted that the adjustment can be made either in the case of the 'tested party' or the comparable companies so that the difference which could materially affect the amount of net profit margin is removed. More so, in practical situations there may be absence of reliable data in the case of the comparable companies for which such material difference is to be analysed or examined. In certain cases there may arise some difficulty when the reliable data for particular cost or profit may not be available, therefore, a reasonable accurate adjustment in the hands of the tested party may throw fruitful result. 21. It was submitted that in the case of Haworth India, this Hon'ble Tribunal had held that the adjustment, if an....
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....or custom duty 25. This ground is in relation to adjustment to the cost base of the Assessee on account of custom duty. The Assessee has incurred significant customs duty charges which are proportionately much greater than that of the comparable companies leading to a lower profitability for the Assessee. The comparable companies have not incurred any significant custom duty expense as they primarily manufacture using materials available indigenously within India. It is submitted that the Assessee is still in the process of localizing its manufacturing process. To meet the quality standards and to overcome technological challenges, the Assessee imports raw materials from its AEs. Therefore, it becomes necessary for the Assessee to import raw materials from its AEs which is not the case for the comparable companies, thus, putting the Assessee in a comparative disadvantage viz-a-viz the comparables. The TPO rejected the adjustment sought inter alia for the reason that the decision to import is a conscious decision taken by the Assessee and in the absence of any external factors, beyond the control of the Assessee necessitating imports, no adjustment can be made. The DRP affirmed th....
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....n applicable to the adjustments on account of the import cost mentioned in ground 4(b) too. The difference between the AL Margin before and after the said adjustments on account of 'import cost' works out to 0.57% (7.18%-6.61%). Revenue has not disputed the said working of the assessee. In these factual circumstances and in the light of the scope of adjustments discussed above, in our opinion and in principle, the assessee should win on this ground too. One such decision relied upon by the assessee's counsel supports our finding relates to the decision of this bench of the Tribunal in the case of SkodaAuto India p Ltd 122 TT.I 699 (Pune) dated March 2009 wherein, it is held (in para 19 of the order) that,- "No doubt, a higher import content of raw material by itself does not warrant an adjustment in operating margins, as was held in Sony India (P) Ltd.'s case (supra), but what is to be really seen is whether this high import content was necessitated by the extraordinary circumstances beyond assessee's control. As was observed by a Co-ordinate Bench of this Tribunal in the case of E-Gain Communication (P) Ltd. (supra) "the differences which are likely to materi....
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....rgument proceeded on the fallacy that an operating profit margin for higher import duty is permissible merely because the higher costs are incurred for the inputs. That argument has been rejected by a Co-ordinate Bench and we are in respectful agreement with the views of our esteemed colleagues. 17-25 additional argument was not available before authorities below and it will indeed be unfair for us to adjudicate on this factual aspect without allowing the TPO to examine all the related relevant facts. We, therefore, deem it fit and proper to remit this matter to the file of the TPO for fresh adjudication in the light of our above observations." 38. The perusal of the impugned orders shows that the above cited guidelines by way of decision of this bench of the Tribunal in the case of Skoda Auto India p Ltd (supra) were not available to the revenue authorities. Therefore, we are of the opinion, the issue should be set aside to the files of the TPO with direction to examine the claim of the assessee relating to the import cost factor and eliminate the difference if any. However, the TPO/AO/DRP see to it that the difference in question is 'likely to materially affect' the pri....
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..... The significant imports made by the Assessee are in Euro and USD. While accounting, the same is converted to INR based on the foreign exchange rates communicated by the Continental Group. During the relevant year, the INR depreciated considerably vis-à-vis most of the other major currencies and imports became costlier for the Assessee. Although there was no significant increase in the price of imports as compared to the previous year, the foreign exchange rate fluctuations has also contributed towards increased material costs. Therefore, an adjustment for the abnormal impact due to foreign currency fluctuation during the year, has to be considered on the value of import purchases made during the year. The ld. AR also submitted that this issue is covered in the Assessee's favour by the decision of this Hon'ble Tribunal in the Assessee's own case for the assessment year 2014-15 (supra). 33. We heard the rival submissions and perused the material on record. We notice that the coordinate bench in assessee's own case in ITA No. 129/Bang/2019 for AY 2014-15 vide order dated 29.03.2022 has considered the same issue and held that - 49. Both the parties agreed that identica....
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....d in relation to the plea of the Assessee for grant of depreciation adjustment in computing operating cost of the Assessee. It is submitted that the Assessee has invested huge capital in purchasing fixed assets which are an integral part of the manufacturing operations. The Assessee incurred high depreciation cost to sales of 8.70%. As it did not manufacture the products as estimated, the Assessee could not recover its fixed costs and incurred losses. The Assessee, without prejudice to the above arguments, has claimed adjustment to neutralize the difference between its depreciation cost and the significantly lower depreciation costs of the comparable companies. 36. The DRP in its directions held that depreciation adjustment is related to the capacity adjustment and can be granted only in the initial years and that such high investments are observed not only for the Assessee but in the entire industry. It was further held that since the average of comparable margins are taken and a margin of 3% is also allowed, the same would take care of adjustments that cannot be carried out. 37. The Assessee submits that the DRP directed grant of depreciation adjustment vis-à-vis differe....
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.... Rastriya Automotive Industries Pvt. Ltd. (at paras 56-58) Aspee Springs Ltd: (Aspee) Functionally dissimilar: It is submitted that this company is functionally dissimilar to the Assessee. Aspee is engaged in the business of manufacturing Washers, Circlips, Bushes, Retaining Rings, Clips and other similar automotive parts. These auto components are less complex and are mechanical in nature as compared to that of the Assessee which manufactures electrical components. Aspee can be characterized as a full-fledged manufacturer while the Assessee is only a licensed manufacturer assuming normal risks and not engaged in R&D activities. Also, Aspee performs research and development activities and therefore, this company is not functionally comparable to the Assessee. The company is also in possession of intangible assets generated during the course of its operations. Different business model: The company earns over 10% revenue from "job-work income: which suggests that the company operated in a different business model. Detailed submissions in this regard are placed in pages 227-231 of the paperbook. Moreover, the company was rejected by the TPO in the assessment year 2015-1....
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....business of manufacturing spokes and nipples for all the major OEM's in India. These auto components are less complex and are mechanical in nature as compared to the electric components manufactured by the Assessee. It is submitted that in the assessment year 2015-16, this company was rejected by the TPO as being functionally dissimilar (screenshot of the search matrix is placed at page 246 of the appeal set). In the absence of any change in facts, this company is liable to be rejected for the year under consideration. Reliance in this regard is placed on the findings of this Hon'ble Tribunal in the order passed in the Assessee's case for the assessment year 2014- 15(at paras 59-61). Detailed submissions in this regard are placed at pages 243-246 of the paperbook. Varroc Engineering Ltd. At the outset, it is submitted that the company was rejected by the TPO for the assessment year 2015-16 on the ground of functional dissimilarity (screenshot of the search matrix is placed at page 250 of the appeal set). In the absence of any change in facts, the company ought to be excluded in the year under consideration. Research and development: It is submitted that the company und....
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.... anti-lock braking system etc. for the automobile industry. It is the further plea of the Assessee that TVS is also engaged in manufacture of various products and operates in different segments. Moreover, raw material consumption ratio on sales of TVS and the Assessee are widely variant. The proportion of raw materials consumed by the Assessee (76%) exceeds 2 times that of TVS. Particulars TV Upasana Ltd Amt (in Rs) Assessee Amt (in Rs) Raw material cost 33,50,12,898 394,68,84,336 Sales 91,47,45,212 517,71,01,220 Raw material cost/Sales 37% 76% It was also pleaded that TVS fails the RPT filter of 15% consistently applied by the Tribunal. Therefore, the said company cannot be considered as a comparable and ought to be excluded from the final list of comparables. 60. The learned DR relied on the order of the DRP and the submissions were identical to the choice of comparable Rajsriya. 61. After giving a careful consideration to the rival contentions, we find that the reason that the Assessee was in electrical/electronic components manufacture and TVS is in manufacture of automotive/mechanical components in the automobile industry is a difference in the characteri....
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....om that of the Assessee and hence is functionally non-comparable. Therefore, the said company ought to be excluded from the final list of comparables. 63. The learned DR relied on the order of the DRP. 64. In so far as the contention regarding the dissimilarity in the characteristics of the property and presence of R & D activities the conclusions while dealing with Rajsriya will apply to this company also. As far as the difference in own consumption of raw material and different business model, we are of the view that the conclusions while dealing with the comparable TVS will equally apply to this comparable also. We hold and direct accordingly. 44. The ld. AR submitted that the above two comparables are excluded by the TPO himself in assessee's case for AY 2015-16. Respectfully following the decision of the coordinate bench we direct the TPO to exclude the above two comparables. 45. The ld. AR while praying for exclusion of Aditya Auto Products and Engg. (India) Pvt. Ltd., Leewon Precision Pvt. Ltd., Maco Pvt. Ltd., and Varroc Engineering Ltd submitted that the ratio laid down by the Tribunal in the above decision is that there is a difference in the specific characteristic....
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....nks, chassis reinforcements, stressed members and brackets, and is therefore comparable to the Assessee. In fact, in the previous assessment year 2014-15, the company was accepted by the TPO as a comparable (screenshot of the relevant extract is placed at page 260 of the appeal set). In the absence of any change in facts, the company ought to be included in the final list of comparables. The company passes all the filters applied by the TPO. The DRP's rejection on the ground that the company does not feature in the search matrix of the TPO is factually incorrect. 47. The ld. DR argued that the TPO / DRP including these companies as comparable in a different assessment year in assessee's case cannot be the criteria for inclusion in the year under consideration. 48. We heard the parties and perused the material on record. We notice that the TPO / DRP has included these comparables in AY 2014-15, AY 2015-16 and AY 2017-18. We further notice that the reason for not including these comparable as given by the TPO /DRP is that the company does not feature in the search matrix of the TPO. We are unable to appreciate this contention since these comparables have been included in assessee....
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....held as follows: "44. Section 92(1) of the Act provides as under:- "Any income arising from an international transaction shall be computed having regard to the arm's length price". 45. Section 92B defines the term "international transaction" to mean "a transaction between two or more associated enterprises ....." . 46. A conjoint reading of section 92 with section 92B clearly brings out that computation of income at ALP is permissible only in respect of international transaction, which, in turn, means a transaction between two or more associated enterprises. Similar position has been reiterated in the machinery provision contained in section 92C dealing with the manner of computation of ALP. Subsection (1) of section 92C stipulates that:- "The arm's length price in relation to an international transaction shall be determined by any of the following methods ............. ". 47. It is the plea of the assessee that addition by way of transfer pricing adjustment is mandated only in respect of transactions between two or more AEs. The profit from comparable transactions of the assessee with non-AEs is one of the subtle and most reliable modes for determining ALP of....
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....at page 170 of the paperbook. Therefore, we direct the AO to take only the international transactions of the assessee with its AE for the purpose of determining arm's length price. We direct accordingly." 6. The Tribunal has held that the figures are available with the Assessing Officer, the details of which has also been filed with the Tribunal at page 170 of the paperbook. It would be clear that the details of the international transaction are specifically made available and therefore the apprehension of the department as such is misplaced. ........ 6. Considering the provisions of Section 92 of the Income Tax Act, so also the reasoning adopted by the Tribunal suggesting that separate figures of international transaction are available, so also the order referred above. No substantial question of law arises for consideration. As such the appeal is dismissed with no costs." (Emphasis supplied) 51. The Hon'ble Mumbai Tribunal in the case of Thyssen Krupp Industries India Pvt. Ltd. [ITA No. 7032/Mum/2011] held that the ALP can only be determined on the value of international transaction alone and not on the entire turnover of the assessee at entity level. This decision....
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....y adopted 8.46% of the operating revenue and 8.46% of the Operating cost for purpose of the determination of ALP. However, this method is not the correct approach as the ALP determination should have been based on the entire operating revenue and entire operating cost. Since this change in method would have amounted to enhancement of the income of the Assessee, so opportunity of being heard was given to the Assessee vide order sheet entry dated 11.08.2017, as to why the proportionate reduction done by the TPO should not be disregarded. The Assessee sought time to file written submissions and the same was allowed. The Assessee filed written submissions vide letter dt 29.08.2017. The same have duly been considered and the issue is being decided as follows: 10.1 In the case under consideration, the Assessee is selling its product to AE as well as to non AEs, for the manufacture of which, part purchases are from AEs and remaining from the non AEs. The TPO has considered OP/OR for purpose of computation of the ALP as the quantum of sales to AE are lesser than the purchase from AE and thus lesser controlled. When a product is sold, only overall profit margin is recorded without any dat....
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....est for transactions with non-AE is neither correct on facts nor permissible in law. As rightly contended by the assessee, section 92 of the Act can be applied only in respect of international transactions i.e., transactions with AE. 53. In view of the above transfer pricing provisions and various judicial precedents, we hold that the transfer pricing adjustment should be restricted only to the AE related transactions of the assessee." 74. The facts and circumstances of the case in this appeal on this issue is identical to the case decided by the Tribunal in the case of IKA (supra). The reasoning of the CIT (A) in this case and the case of IKA (supra) are also identical. Therefore the decision rendered in the case of IKA (supra) squarely applies to the present case. Therefore, the adjustment on account of determination of ALP has to be restricted only to that part of the transaction with AE and not the entire value of the manufacturing segment as was done by the revenue authorities. 52. Respectfully following the above decision we direct the AO/TPO to restrict the adjustment on account of determination of ALP only to that part of the transaction with AE and not the entire valu....
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....P is the most appropriate method and accordingly upheld the TP adjustment made towards payment of royalty. 55. Before us the ld. AR submitted that - Basic R&D refers to the generic research and development performed for the use of all companies in the Continental Group. It may comprise of research into future concepts, or developments of devices for automotive purposes, which are still to be marketed with customers etc. The benefits made available include the following: - Development results such as designs, layouts, formulas, improvements, discoveries and software; - Technical drawings and specifications which can mean any oral or written information for instance, drawings, illustrative materials, cards, films specifications or any other technical description including quality and test specification and other know how data; - Trade secrets - Access to standard practices i.e. standard procedures, methodologies, best practices, knowledge updates, etc. relating to manufacturing process of a product, application of a technology, testing of a product/component(s), etc; - Validation of project matrices and feasibility analysis for various projects, by global team; - Access ....
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....s were necessary, actually received, and benefited the Assessee. The evidences produced are placed at pages 777-968 of the paper book and include the royalty agreement, technical drawings received, manual provided, documents showing the receipt of the IPs and usage thereof in the manufacturing process, emails, etc. It is submitted that the above details and documents furnished by the Assessee demonstrate the need for the services, the actual receipt and the benefits arising there from. It is submitted that the royalty being integral to the manufacturing process and being intrinsically linked to it, ought to be benchmarked in an aggregate manner. The TPO's action of treating the same as an independent international transaction is erroneous. Reliance in this regard is placed on the following decisions: A. Avery Dennison (India) (P.) Ltd. v. ACIT (reported in [2016] 65 taxmann.com 188 (Delhi - Trib.)), at para 30 which was affirmed by the Hon'ble High Court of Delhi in ITA No. 386/2016 vide order dated 28.07.2016, at para 3; and B. Cummins India Ltd. v. ACIT (reported in [2015] 53 taxmann.com 53 (Pune - Trib.) at paras 24-26. In view of the above, the action of the TPO in se....
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.... Vak Software and Exports Ltd. 9.01 2. Otco International Ltd. 15.00 3. RS Software (India) Ltd. 20.26 4. Sasken Communication Technologies Ltd. 5.97 5. TVS Infotech Ltd. 3.18 6. R Systems International Ltd. 25.51 7. Tata Elxsi Ltd. 11.17 8. Akshay Technologies Ltd. 0.00 9. Evoke Technologies Ltd. 5.49 10. Kals Information Systems Ltd. 7.05 11. Maveric Systems Ltd. -2.49 12. Isummation Technologies Pvt. Ltd. 3.16 13. Rheal Software Pvt. Ltd. 2.79 59. Accordingly the assessee concluded that the margins of the assessee in the SWD services segment is within arm's length. Out of the above, the TPO accepted only 3 comparables highlighted and rejected the rest of the 10 comparables. The TPO used revised filters to chose new comparables and the final list of comparables as per TPO is as given below - Sl. No. Name of the Company Weighted Average OP/OC % 1. Kals Information Systems Pvt. Ltd. 8.60% 2. Rheal Software Pvt. Ltd. 14.50% 3. Sybrant Technologies Pvt. Ltd. 14.74% 4. Harbinger Systems Pvt. Ltd. 15.06% 5. CG-VAK Software & Exports Ltd. 18.50% 6. R S Software (India) Ltd. 20.87% 7. Larsen & Toubro Infotech Ltd. 24.8....
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..... With regard to the exclusion of sought by the assessee through ground no.28, the ld. AR made the following submissions - Rheal Software Pvt. Ltd.: Functionally dissimilar: The Assessee submits that Rheal is engaged in custom software development and maintenance which is unlike the IT support operations of the Assessee. Though it is mentioned in the annual report that the company is earning its 100% revenue from software related services, such services are in the nature of custom application development, application development, mobile development, share point development, cloud migration, database optimization and legacy app migrations. It is observed that Rheal is engaged in the business of database solutions, custom application development, web enabling legacy applications which fall under the classification of KPO services, which are not comparable to the services of the Assessee. Submissions in this regard are placed at pages 310-316 of the appeal set. Inteq Software Pvt. Ltd. Functionally different: It is submitted that the company is engaged in outsourced product development for small, medium corporation and emerging technology businesses. The company unde....
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....incomparable to it. Peculiar economic circumstances: The company suffers from peculiar economic circumstance during the FYs 2013-14, 2014-15 and 2015-16. During the FY 2015-16, pursuant to the amalgamation of GDA Technologies Ltd., and Information Systems Resource Centre Pvt. Ltd. into the company, the entire business, assets, liabilities, duties and obligations stood vested in the company. During the FY 2014-15, the company had acquired Information Systems Resource Centre Pvt. Ltd., which was completed during the FY 2015-16. During the FY 2013-14, the company transferred its Product Engineering Services business to L&T Technology Services Ltd. and wound up its subsidiary GDA Technologies Inc. Detailed submissions are placed at pages 327-335 of the appeal set. Thus, the Assessee submits that L&T ought to be excluded from the final list of comparables. Nihilent Ltd. ('Nihilent') Functionally different: It is submitted that the company is engaged in diversified activities. Nihilent renders services in the nature of consulting, software development and product development, provision of business consulting in the area of the enterprise transformation, change and performa....
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....ssee. Further, it is submitted that the company undertakes significant R&D activities and has established 'Persistent Labs' to focus on R&D activities. Significant intangibles: The company also owns significant intangibles of 5.99%, 6.42% and 5.01% of net block of assets during the FYs 2013-14, 2014- 15 and 2015-16, respectively. Significant foreign currency expenses: The company has also incurred significant expenses in foreign currency, demonstrating that it renders significant onsite services, which business model is different from that of the Assessee's. The expenses incurred by the company as a percentage of its total sales is 13.41%, 15.03% and 18.40% for the Fys 2013-14, 2014- 15, and 2015-16, respectively. Significant related party transactions: The RPT sales of the company as a percentage of total sales stand at 19.48% for the FY 2014-15 and 17.29% for the FY 2015-16. Further the RPT expenses as a percentage of operating expenses stand at 15.46% for the FY 2014-15 and 19.07% for the FY 2015-16. Marketing expenses: The company has incurred significant amounts of marketing expenses in the nature of advertisement and sponsorship fees, as opposed to the ....
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....of providing integration platform services using its platforms in addition to software development services. It also provides services in the nature of product engineering, enterprise solutions, independent testing services, engineering services, infrastructure & application support services, business intelligence & analytics, etc and is also into IT infrastructure support services, and outsourced technology services. Significant intangible assets: It is submitted that Aspire owns non-routine intangible assets such as trademarks, customer contracts and goodwill which cannot be compared to the Assessee. The company also incurred significant expenses in relation to onsite services of approximately 20 percent of its total revenue. Significant related party transactions: Further, the company fails the RPT filter applied by the TPO. The computation of related party transactions is given below: Nature of the Transaction FY 2013-14 FY 2014-15 FY 2015-16 Rendering of services 223,417,070 298,621,389 544,052,341 Purchase of services 188,253,217 214,308,033 283,206,248 Expenses Reimbursed 9,650,786 26,519,375 25,773,664 Remuneration to KMP 61,447,016 83,854,419 ....
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.... the company is different from that of the Assessee's. Onsite expenses: The company has significant onsite revenue amounting to 51.10%, 50.40% and 52.70% of the total sales for the FYs 2013- 14, 2014-15, and 2015-16, respectively. Further, owing to the size, stature, reputation and IPs, Infosys earned abnormally high margins for the said years, as represented below: Particulars FY 2013-14 FY 2014-15 FY 2015-16 OP/ OC 36.28 41.30 38.22 Detailed submissions are placed at pages 369-383 of the appeal set. Therefore, it is submitted that the company ought to be excluded from the final list of comparables. Cybage Software Pvt. Ltd. ('Cybage') Functionally different: It is submitted that Cybage is engaged in the provision of diversified services which include product engineering, testing & quality assurance services, specialized services, support services, etc. Further from the website of Cybage, it is evident that it is engaged in product development and has developed a product called 'excelshore' apart from providing spectrum of services including ITeS and BPO services. The financials of Cybage do not provide for segmental information in respect of the diverse bus....
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....nce Systems (India) Pvt. Ltd. v. DCIT (order dated 03.10.2022 in IT(TP)A No. 261/Bang/2021) (iv) PCIT v. Saxo India P. Ltd. (2016) 74 taxmann.com 88 (v) ADP Pvt. Ltd. v. DCIT [Order dated 03.02.2022 in ITA Nos. 227&228/Hyd/2021] (vi) Red Hat India Pvt. Ltd. v. NFAC (order dated 25.02.2022 passed in ITA No. 1379/Mum/2021) (vii) PCIT v. Cashedge India Pvt. Ltd. (Order dated 04.05.2016 passed in ITA No. 279/2016) (viii) Infor (India) Pvt. Ltd. v. DCIT (order dated 06.10.2021 passed in IT(TP)A No. 198/HYD/2021). (ix) CIT v. Agnity India Technologies P. Ltd. (reported in (2013) 36 taxmann.com 289 (Delhi)) 66. The ld. AR submitted that Larsen & Toubro Infotech Ltd., Persistent Systems Ltd., have been excluded in assessee's own case for AY 2014-15 by the coordinate bench of the Tribunal. 67. The ld. DR relied on the order of the lower authorities. 68. We heard the rival submissions and perused the material on record. We notice that the Delhi Bench of the Tribunal in the case of Global Logic India Ltd (supra) has considered the exclusion of the above companies and held that - COMPARABLE COMPANIES SOUGHT TO BE EXCLUDED BY THE TAXPAYER LARSEN & TOUBRO INFOTECH LTD. (L&T) ....
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....3 of the paper book. 18. Coordinate Bench of the Tribunal rejected L&T in taxpayer's own case for AY 2014-15 (supra), available at pages 61 to 63 of the case law paper book, by returning following findings :- "6.6 The next objection of the assessee is regarding multiple segments. From segment reporting on page S-1258 of the Annual Report (page 129 of PB-2), we find that the assessee has reported three business segments. The first segment is service cluster which includes banking, financial services, insurance, media and entertainment, travel and logistics and healthcare. The second segment industry cluster which includes Hi Tech and consumer electronics, consumer, retail and Pharma, energy and process, auto Mobile and aerospace, plant equipment and industrial machinery, utilities and E &C. The third segment, is telecom segment which refers to product engineering services (PES) which has been discontinued in this year. Regarding the PES, in Director's report, (available on page S-1225 of the Annual Report or page 96 of PB2), it is reported as under : "TRANSFER OF PRODUCT ENGINEERING SERVICES (PES) BUSINESS TO L&T TECHNOLOGY SERVICES LIMITED (LTTSL) AND WINDING UP OF GD....
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....ning following findings:- "20. The Tribunal in assessee's own case in ITA No. 4740/Del/2018 relating to Assessment Year 2014-15 vide order dated 1-5-2020 has directed the exclusion of the said concern from the final list of comparables while benchmarking the ALP of the international transaction by the assessee with its AE. Before parting, we may also refer to an extraordinary event under which Larsen & Toubro Infotech Ltd. initiated and completed transfer of its Product Engineering Services Business (PES) Unit to L&T Technology Services Ltd. w.e.f. January 1, 2014 as part of the business restructuring undertaken within the Larsen & Toubro group. Though the initiation started from 1-1-2014 but the whole effect of the transaction was during the year under consideration. Further, Larsen & Toubro Infotech Ltd. during the year under consideration acquired Information Systems Resource Centre Private limited ("ISRC") thereby making it wholly owned subsidiary and because of such extraordinary event of acquisition, the said concern cannot be held to be a valid comparable and thus has to be excluded from the final set of comparable. Accordingly, we hold so." 20. In view of the facts ....
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....are services export from SEZ unit and revenue from subscription and training etc. and it is also into sale of licence and its segmental financials are not available. 43. Thirdware has been ordered to be excluded by the coordinate Bench of the Tribunal in case of Fiserve India (P.) Ltd. v. ITO [2015] 60 taxmann.com 48 (Delhi - Trib.) on ground of dissimilarity to routine software development service provider which has been affirmed by Hon'ble Delhi High Court in ITA 17/2016 order dated 6-1-2016. So, we order to exclude Thirdware from the final set of comparables. INFOBEANS TECHNOLOGIES LTD. (INFOBEANS) 44. The taxpayer sought exclusion of Infobeans as a comparable again on ground of functional dissimilarity, it also being into providing services viz. software engineering services primarily in Custom Application Development (CAD), Content Management Systems, Enterprise Mobility, Big Data Analytics, UX & UI, Automation Engineering Services, as is evident from its financials, available on page 123 of the annual report paper book. 45. The taxpayer also brought on record profile of the Infobeans at pages 58 to 60 of the appeal memo wherein it is claimed by the Infobeans that....
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....g ALP by observing as under: "27. As regards Persistent Systems Ltd, the objections of the assessee are as under: a) The Company is functionally not comparable. It is engaged in selling of the following: i. Software products (IP); ii. Platforms (Solutions & Integration); and iii. services (product engineering) b. There are no segmental details between software products and services. 28. In the case of Tata Elxsi, the assessee has taken the following objections: a) It is not functionally comparable to the assessee. In the financial statements of the company, the nature of business carried out by Tata Elxsi is given below: i) Corpoprate Information "Tata Elxsi Ltd was incorporated in 1989. The Company provides product design and engineering services to the consumer electronics, communications and transportation industries and systems integration and support services for enterprise customers. It also provides digital content creation for media and entertainment industry" 29. We find that in the case of Infor (India) (P) Ltd vs. ACIT in ITA No. 2307/Hyd/2018, the Coordinate Bench of the Tribunal has considered similar objections of the assessee therein and has held that thes....
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....eld that Infosys Ltd is not comparable to other software development company. Relevant paragraphs are reproduced hereunder: "8. It is a common case that Satyam Computer Services Ltd. should not be taken into consideration. The Tribunal for valid and good reasons has pointed out that Infosys Technologies Ltd. cannot be taken as a comparable in the present case. This leaves L&T Infotech Ltd. which gives us the figure of 11.11 %, which is less than the figure of 17% margin as declared by the respondent-assessee. This is the finding recorded by the Tribunal. The Tribunal in the impugned order has also observed that the assessee had furnished details of workables in respect of 23 companies and the mean of the comparables worked out to 10%, as against the margin of 17% shown by the assessee. Details of these companies are mentioned in para 5 of the impugned order". 26. Respectfully following the same, we direct the exclusion of this company from the final list of comparables." 9.4 On perusal of the entire financial statements, we observe that the company is functionally not comparable and selling and marketing expenses are 5% of revenue and there were extraordinary events also note....
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....Ltd We have perused the submissions of both sides in light of records placed before us. Primarily we note that this company is a product company and has diversified business segments. We note that this company is a full-fledged entrepreneur and assumes all the risks attributable to the various business segments for which details are not available. In our view, under such circumstances, this company cannot be held to be functionally comparable with that of assessee which is a captive service provider that caters only to its AE 72. The profile of the assessee as per the TP study (page 1459 of PB) is - 5.4 Software engineering and design services segment Services segment may include: * Product conceptualization; * Designing / development; and * know-how, customization, etc. Functional Analysis Continental India has entered into an agreement with its AEs for providing application / specific with regard to development and porting of software, creation of software specification Under the services segment, AEs perform the following functions and assumes the following sensibilities * Perform market research for the products. * The basic designs/technical drawings req....
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....d., Akshay Software Technologies Ltd., Sasken Communication Technologies Ltd., Ace Software Exports Ltd., Minvesta Infotech Ltd., Evoke Technologies Ltd., Agilysis IT Services India Pvt. Ltd., Sagarsoft India Ltd., Isummation Technologies Pvt. Ltd. DCIS Dot Com Solutions Pvt. Ltd., Batchmaster Software Pvt. Ltd. in the final list of comparables. 75. Maveric Systems Ltd - The ld. AR submitted that this company was selected by the Assessee and came to be rejected by the TPO and the DRP solely on the ground that the company did not feature in the search matrix of the TPO. The ld. AR further submitted that the company is functionally comparable and passes all the filters applied by the TPO. The company is engaged in computer programming, consultancy and related services, which are comparable to the services of the Assessee. It is submitted that a company which is comparable to the Assessee cannot be rejected on the only ground that it does not feature in the search matrix of the TPO. The ld. AR also submitted that this Hon'ble Tribunal in the Assessee's case for AY 2014-15, wherein this company was remanded to the TPO for fresh examination. Moreover, the DRP had remanded the company f....
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....t from the Assessee. The DRP upheld its rejection on the ground that the company did not feature in the search matrix of the TPO which is incorrect. 80. In this regard, the ld. AR submitted that a perusal of the functions of the company listed in its annual report shows that the company is functionally similar to the Assessee. The website of the company states that the company is engaged in rendering IT services, which are in the nature of SWD. Further, it is submitted that the income from SWD services is 96.5% of total sales and the income from sale of software licenses constitutes a meagre 3.4% of the total revenue and therefore the same would not have any impact on the profitability of the company. The ld. AR further submitted that the company passes all the filters applied by the TPO. Reliance in this regard is placed on the decision of this Hon'ble Tribunal in the Assessee's own case for the AY 2014-15, where in the company came to be remanded. 81. We heard the parties and perused the materials on record. We notice that the coordinate bench in assessee's own case for AY 2014- 15 has considered the inclusion of this company and held that - 90. As far as inclusion of Akshay ....
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....hould be examined afresh by the TPO as per the directions of the Tribunal in the order referred to above. We hold and direct accordingly. 82. Respectfully following the above decision of the coordinate bench we remit the issue of inclusion of Akshay back to the TPO for examination afresh after giving a reasonable opportunity of being heard to the assessee. 83. Sasken Communication Technologies Ltd. As regards Sasken, the company was rejected by the TPO and the DRP on the ground that the company did not feature in the search matrix of the TPO. 84. The ld. AR submitted that the Assessee has re-run the search (using same keywords applied by the learned TPO) and thereby identified Sasken as comparable company and submitted the Annual Report for the TPO's consideration. Further, it is submitted that the company is functionally comparable to the Assessee and passes all the filters applied by the TPO. Submissions in this regard are placed at pages 414-417 of the appeal set. It is further submitted that in the Assessee's own case for AY 2018-19, pursuant to a remand by the DRP, the TPO included the company in the final list of comparables. 85. We heard the ld. DR. We notice that the co....
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.... the coordinate bench we remit the issue of inclusion of Sasken back to the TPO for examination afresh after giving a reasonable opportunity of being heard to the assessee. 87. Ace Software Exports Ltd - This company was rejected by the TPO in the TP order on the ground that it fails the service revenue filter. The DRP upheld its rejection on the ground that it is functionally dissimilar. 88. In this regard, the ld. AR submitted that the company is engaged in computer programming, consultancy and related activities which are IT services comparable to the services of the Assessee. Therefore the DRP's findings are erroneous. Moreover, the company passes the service revenue filter applied by the TPO. Submissions in this regard are placed at pages 424-427 of the appeal set. It is further submissions that in the Assessee's own case for AY 2018-19, the DRP directed inclusion of this company at para no. 2.55. Hence, considering no change in facts in terms functional profile of Ace Software Exports Ltd from the current year to AY 2018-19, the said comparable company should be accepted. 89. We heard the rival submissions. We notice that for AY 2018-19, in assessee's own case the DRP has ....
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....rent, it would make no difference. If it is possible to determine the value of the transactions during the corresponding periods, the purpose of comparables would be served. The question in each case is whether despite the financial years of the assessee and of the other enterprise being different, the financials of the corresponding period of each of them are available. If they are, the TPO must refer to the corresponding period of both the entities in determining whether the two are comparable or not for the purpose of determining the ALP. 29. ***** 30. This view is not contrary to Rule 10(B)(4) which reads as under:- "10B(4) The data to be used in analysing the comparability of an uncontrolled transaction with an international transaction shall be the data relating to the financial year in which the international transaction has been entered into". 31. The Rule does not exclude from consideration the data of an entity merely because its financial year is different from the financial year of the assessee. What the Rule requires is that the data to be used in analyzing the financial results of an uncontrolled transaction with an international transaction shall be the data ....
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....e of inclusion of Evoke and held that - Ground No. 2.11: That the Ld. TPO erred in excluding Akshay Software Technologies Ltd, Sasken Communication Technologies Ltd. and Evoke Technologies Pvt. Ltd., even though the same are functionally comparable to the assessee. It is submitted that this company is engaged in providing software development services. It is submitted that these comparables were not considered by the Ld. TPO as they did not appear in the search matrix carried out by him, which has been upheld by the DRP. He placed reliance on the decisions of coordinate bench of this Hon'ble Tribunal in the case of Prism Networks Pvt. Ltd. reported in (2022) 141 taxmann.com 163. On the contrary, the Ld. DR relied on the orders passed by the authorities below. We have perused the submissions of both sides in light of records placed before us. We note that this Tribunal in case of Prism Networks Pvt. Ltd.(supra) observed and held as under: 18. We heard the rival submissions. It is clear from the order of the DRP that the DRP has not considered the plea of the Assessee in proper perspective. The fact that the TPO rejected the TP study of the Assessee cannot be the basis not ....
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....not been properly verified by the TPO. Further the DRP upheld the exclusion entirely for a different reason stating the company is not featuring in the search matrix of the TPO. We therefore remit this issue back to the AO/TPO to verify the facts pertaining to the comparable afresh and decide the inclusion accordingly after giving a reasonable opportunity of being heard to the assessee. 101. Sagarsoft India Ltd.: The company was rejected by the TPO on the ground that it fails 75% service revenue filter, and was upheld by the DRP on the ground that it did not feature in the search matrix of the TPO. 102. In this regard, it is submitted that the company is engaged in software development and consultancy services and 100% of its revenue is from rendering SWD services. Therefore the TPO's rejection on the ground that it fails the service revenue filter is grossly erroneous. It is submitted that the company passes all the filter applied by the TPO. Therefore, the DRP's rejection of the company on the sole ground that it did not feature in the TPO's search matrix is erroneous. It is submitted that in the Assessee's own case for the assessment years 2017-18 and 2018-19, the company was ....
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....ice that for AY 2018-19, in assessee's own case the DRP has given a direction to TPO (page 5173 & 5174) to include this company on the ground that the functions are similar to that of the assessee. We also notice that the TPO in the order giving effect has included the company as per DRP directions. The DRP has rejected the inclusion that the company did not feature in the search matrix of the TPO. We are therefore of the considered view that the comparability and inclusion of this company needs to be looked afresh for the year under consideration based on examination of facts and to see whether all the filters applied by the TPO is satisfied. Accordingly we remit the issue back to the AO/TPO for verification of facts afresh and decide accordingly. 108. DCIS Dot Com Solutions Pvt. Ltd. This company was rejected by the TPO on the ground that sufficient financial information was unavailable and was affirmed by the DRP on the ground that it did not feature in the search matrix of the TPO. 109. In this regard, it is submitted that DCIS is engaged in software development services as is evident from the annual report of the company and hence, functionally similar. The annual report of ....
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....passes all the filters (para no. 2.56). Pursuant to the same, the company came to be included by the TPO in the final list of comparables. 113. We heard the rival submissions. We notice that for AY 2018-19, in assessee's own case the DRP has given a direction to TPO (page 5226 & 5243) to include this company on the ground that the functions are similar to that of the assessee. We also notice that the TPO in the order giving effect has included the company as per DRP directions. The DRP has rejected the inclusion that the company did not feature in the search matrix of the TPO. We are therefore of the considered view that the comparability and inclusion of this company needs to be looked afresh for the year under consideration based on examination of facts and to see whether all the filters applied by the TPO is satisfied. Accordingly we remit the issue back to the AO/TPO for verification of facts afresh and decide accordingly. 114. Ground No. 30 is with regard to the lower authorities erred in computing the margin of Harbinger Systems Pvt. Ltd. Thirdware Solutions Ltd. and CG VAK Software and Exports Ltd. We remit this issue back to AO/TPO with a direction to examine afresh and c....
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....ansaction] shall be determined by any of the following methods, being the most appropriate method, in the following manner, namely :- (a)**** (e) transactional net margin method, by which - (i) the net profit margin realised by the enterprise from an international transaction [or a specified domestic transaction] entered into with an associated enterprise is computed in relation to costs incurred or sales effected or assets employed or to be employed by the enterprise or having regard to any other relevant base; (ii) the net profit margin realised by the enterprise or by an unrelated enterprise from a comparable uncontrolled transaction or a number of such transaction is computed having regard to the same base: (iii) the net profit margin referred to in sub-clause (ii) arising in comparable uncontrolled transactions is adjusted to take into account the differences, if any, between the international transaction [or the specified domestic transaction] and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect the amount of net profit margin in the open market; (iv) the net profit margin rea....
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....II of the DECO Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (hereafter the "TPG") contain extensive guidance on comparability analyses for transfer pricing purposes. Guidance on comparability adjustments is found in paragraphs 3.47-3.54 and in the Annex to Chapter III of the TPG. A revised version of this guidance was approved by the Council of the DECO on 22 July 2010. In paragraph 2 of these guidelines it has been explained as to what is comparability adjustment. The guideline explains that when applying the arm's length principle, the conditions of a controlled transaction (i.e. a transaction between a taxpayer and an associated enterprise) are generally compared to the conditions of comparable uncontrolled transactions. In this context, to be comparable means that: None of the differences (if any) between the situations being compared could materially effect the condition being examined in the methodology (e.g. price or margin), or Reasonably accurate adjustments can be made to eliminate the effect of any such differences. These are called "comparability adjustments. 13. In Paragraphs 13 to 16 of the aforesaid DECO guidelines, n....
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....nes. The guideline also expresses the difficulty in making working capital adjustment by concluding that the following factors have to he kept in mind (i) The point in time at which the Receivables, Inventory and Payables should be compared between the tested party and the comparables, whether it should be the figures of receivables, inventory and payable at the year end or beginning of the year or average of these figures, (ii) the selection of the appropriate interest rare (or rates) to use. The rate (or rates) should generally be determined by reference to the rate(s) of interest applicable to a commercial enterprise operating in the same market as the tested party. The guidelines conclude by observing that the purpose of working capital adjustments is to improve the reliability of the comparables. 15. In the present case the TPO allowed working capital adjustment accepting the calculation given by the Assessee. The CIT (A) in exercise of his powers of enhancement held that no adjustment should be made to the profit margins on account of working capital differences between the tested party and the comparable companies for the following reasons: (i) The daily working capita....
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....djustment, the Delhi Bench of ITAT in the case of ITO v E Value Servc.com [2016] 75 taxmann.com 195 (Delhi -Trib.}, has held that insisting on daily balances of working capital requirements to compute working capital adjustment is not proper as it will be impossible to carry out such exercise and that working capital adjustment has to be based on the opening and closing working capital deployed. The Bench has also observed that in Transfer Pricing Analysis there is always an element of estimation because it is not an exact science. One has to see that reasonable adjustment is being made so as to bring both comparable and test party on same footing. Therefore there is little merit in CIT(A)'s objection on working adjustment based on unavailable daily working capital requirements data. There is also no merit in the objection of the CIT (A) regarding absence of segmental details available of working capital requirements of comparable companies chosen and absence of details of trade and non-trade debtors of comparable companies as these details are beyond the power of the Assessee to obtain, unless these details are available in public domain. Regarding absence of cost of working c....
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....erefore in keeping with the OECD guidelines, endeavor should be made to bring in comparable companies for the purpose of broad comparison. Therefore the working capital adjustment as claimed by the Assessee should be allowed. We hold and direct accordingly. In view of the above, we remit the issue to the file of AO/TPO to compute the working capital adjustment after necessary examination in the light of the above observation and after allowing an opportunity of hearing to the assessee 118. Respectfully following the above decision of the Co-ordinate Bench we hold that the working capital adjustment is to be allowed as per actuals, after considering the decisions rendered in this order on the exclusion/inclusion of comparable companies out of/into the final set of comparables. The TPO/ AO are accordingly directed. 119. The other grounds raised in its appeal in relation to its international transaction of provision of SWD services are not pressed at this stage. However, the Assessee seeks liberty to urge the said grounds in any future proceeding, appellate or otherwise, and in these proceedings at a future point in time. The liberty prayed for is allowed. The TPO/AO is directed ....
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.... utilization (Rs. 9,04,03,141/-) during the year under consideration is more than the provision created (Rs. 8,46,53,034/-). As such the net impact on account of provision for warranty to the profit and loss results is negative. Accordingly, the ld. AR submitted that the utilization of the expense is on the higher side compared to the provision created, which itself indicates that the methodology followed by the Assessee is scientific. The ld. AR further submitted that an analysis of the warranty provision over a period of five years and the same is tabulated below: AY Opening balance Actual debit to P&L Actual expenditure Balance 2012-13 4,41,87,200 7,83,67,911 2,62,34,907 9,63,20,204 2013-14 9,63,20,204 1,66,55,739 5,88,40,832 5,41,35,111 2014-15 5,41,35,111 94,97,052 2,61,22,163 3,75,10,000 2015-16 3,75,12,432 4,10,30,636 3,84,30,238 4,01,12,830 2016-17 4,01,12,831 8,46,53,034 9,04,03,141 3,43,62,724 Total 23,02,04,372 24,00,31,281 123. It is contended by the ld. AR that it can observed from the above table that the utilization of the warranty provision exceeds the provision created over a five-year period which indicates that the meth....
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.... that it creates provision for warranty on a scientific basis. The ld. AR drew our attention to the decision of coordinate bench of this Hon'ble Tribunal in the Assessee's own case for the assessment year 2014-15, on identical facts, has held that the provision for warranty is to be allowed as a deduction as the provision created satisfied all the requirements for claiming the provision as a liability. The ld. AR further, submitted that this Hon'ble Tribunal in the Assessee's own case for the assessment year 2010-11 has rendered a finding that the Assessee is following scientific basis of creating the provision and had remanded the matter for verification of details by the Assessing Officer. Subsequently, the Assessing Officer passed an order giving effect to this Hon'ble Tribunal's order, accepting the claim made by the Assessee. 126. Notwithstanding and without prejudice to the above the ld. AR submitted that AO cannot disallow closing balance of the provision for warranty as the same is not debited to the profit and loss account. The AO ought to have appreciated that during the year the actual utilization is more than provision created and as such the net impact on account of p....
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....cense has been agreed to be paid by the Assessee as royalty computed as percentage of net sales of sensoric products per year. The AO disallowed the claim treating the same as R&D expenditure giving enduring benefit to the assessee and accordingly capital in nature. The AO held that the assessee has not produced proper evidence of the nature of expenditure. The DRP upheld the treatment of the impugned amount as capital expenditure but directed the AO to allow depreciation u/s. 32 on the same by placing reliance on the decision of the Supreme Court in the case of Honda Siel Cars India Limited (2019) 101 taxman 222(SC). Aggrieved by the final order passed by the AO pursuant to the directions of the DRP the assessee is in appeal before the Tribunal 131. The ld. AR submitted that that the royalty incurred by was for the use of technology of the Continental Group for manufacturing and sales of the products. Such expenditure should be allowed under section 37(1) of the Act based on following submission: i. Section 37 of the Act is a residual clause for claiming deduction for any expenditure incurred for the purposes of the business. ii. For the purpose of claiming deduction under se....
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....ions: * Hon'ble Karnataka High Court decision in the case of CIT v. Luwa India Ltd [2012] 18 taxmann.com 365 (Kar.) * Samsung India Electronics Private v. ACIT [I.T.A. No. 5316/Del/2011] * Kanpur Cigarettes (P.) Ltd. v. CIT 147 Taxman 428 (Allahabad High Court) * CIT v. Kirloskar Tractors Ltd [1998] 231 ITR 849 (Bombay HC) * Alembic Chemical Works Co. Ltd. v. CIT[1989] 43 Taxman 312 (SC) * J.K. Synthetics Ltd. v. CIT[2009] 176 Taxman 355 (Delhi High Court) * DCIT v. Honda SIEL Power Products Ltd I.T.A .No. 1579/DEL/2017 (A.Y 2012-13) & S. A No. 217/Del/2017 in ITA No. 1579/Del/2017 132. The ld. AR submitted that the ratio laid down by these judicial pronouncements is that that there are certain conditions to be satisfied for the payment to be treated as revenue expenditure and in this regard drew our attention to the various clauses of the agreement entered into by the assessee which is tabulated below - Factors under consideration Whether the conditions are satisfied? Clause reference in the Agreements A and B License period and termination Yes. All the licenses are granted for a limited period. The agreements can be terminated at the discretion of both par....
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....epending upon the sales made and export. The said finding is on the question of fact and cannot at all be said to be perverse or arbitrary. As the facts in this case is identical to the facts of the case in Ciba of India Ltd. case cited above and also the decision in I.A.E.C. (Pumps) Ltd. (supra) cited above. There is no merit in the contention of learned counsel appearing for the Assessee that since know-how and technology granted by the licence and the patents is of enduring nature, the same would constitute capital expenditure as the payment made is on the basis of sales and export made by the assessee. The mere fact that the said know-how and patent has been acquired even before commencement of production in this case would not in any way material itself having regard to the agreement and payment of royally as referred to above and therefore, finding of the ITAT that the expenditure made towards royalty in a sum of Rs. 28,07,950/- is revenue expenditure is justified and we answer the first substantial question of law against the revenue and in favour of the assessee. 135. The ratio laid down by the Hon'ble High Court is that the payment of royalty to make use of know-how and t....