M/s. Robert Bosch GmbH,, Bangalore v. ACIT (Intl. Taxn.), Bangalore

ITA 364/BANG/2007 | 2003-2004
Pronouncement Date: 23-07-2010 | Result: Allowed

Appeal Details

RSA Number 36421114 RSA 2007
Bench Bangalore
Appeal Number ITA 364/BANG/2007
Duration Of Justice 3 year(s) 3 month(s) 14 day(s)
Appellant M/s. Robert Bosch GmbH,, Bangalore
Respondent ACIT (Intl. Taxn.), Bangalore
Appeal Type Income Tax Appeal
Pronouncement Date 23-07-2010
Appeal Filed By Assessee
Order Result Allowed
Bench Allotted B
Tribunal Order Date 23-07-2010
Date Of Final Hearing 05-04-2010
Next Hearing Date 05-04-2010
Assessment Year 2003-2004
Appeal Filed On 09-04-2007
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH : BANGALORE BEFORE SHRI GEORGE GEORGE K. JUDICIAL MEMBER AND SHRI A. MOHAN ALANKAMONY ACCOUNTANT MEMBER ITA NO.364/BANG/2007 ASSESSMENT YEAR : 2003-04 ROBERT BOSCH GMBH POST FACH 106050 70049 STUTTGART GERMANY. : APPELLANT VS. THE ASSISTANT COMMISSIONER OF INCOME-TAX INTERNATIONAL TAXATION CIRCLE 19(1) BANGALORE. : RESPONDENT APPELLANT BY : SHRI S.E. DASTUR RESPONDENT BY : SMT. PREETHI GARG CIT-III(DR) O R D E R PER A. MOHAN ALANKAMONY ACCOUNTANT MEMBER THIS APPEAL OF THE ASSESSEE COMPANY IS DIRECTED AG AINST THE ORDER OF LD. CIT (A)-IV BANGALORE IN ITA NO:37/R-1 9/CIT(A)-IV/06-07 DATED: 8.1.2007 FOR THE ASSESSMENT YEAR 2003-04. 2. THE ASSESSEE A FOREIGN COMPANY (THE ASSESSEE IN SHORT) HAS RAISED 13 GROUNDS OUT OF WHICH SINCE GROUND N OS: 1 11 12 AND 13 WERE IN GENERAL AND NO SPECIFIC ISSUES INVOLVED TH EY HAVE BECOME NON- ITA NO.364/BANG/2007 PAGE 2 OF 20 CONSEQUENTIAL. THE GROUND NO.10 IS NOT MAINTAINABL E AS THE LEVY OF INTEREST U/S 234B OF THE ACT IS MANDATORY AND CONSEQUENTIAL IN NATURE. THUS IN THE REMAINING GROUNDS THE CRUX OF THE ISSUE IS CONFINE D TO - THE LD. CIT(A) ERRED: (1) IN UPHOLDING THE ACTION OF THE AO IN TAXING THE NO TIONAL INCOME OF RS.7 45 45 089/- THOUGH AGREED WITH THE ASSESSEE TH AT THE STAND OF THE AO WAS INCORRECT; - IN UPHOLDING THE ADDITION OF RS.7.45 CRORES WHICH C ANNOT FORM PART OF THE TOTAL INCOME AS PER S.5(2) R.W.S.9(1) ( IV) OF THE ACT DOUBLE TAXATION AVOIDANCE AGREEMENT [DTAA] BETWEEN INDIA AND GERMANY. 3. BRIEFLY STATED THE ASSESSEE A FOREIGN COMPANY BASED IN GERMANY FURNISHED ITS RETURN OF INCOME FOR THE ASSESSMENT Y EAR UNDER DISPUTE ADMITTING AN INCOME OF RS.50.22 CRORES WHICH WAS PR OCESSED U/S 143(1) OF THE ACT. SUBSEQUENTLY DURING THE COURSE OF SCRUTI NY PROCEEDINGS THE AO NOTICED THAT THE ASSESSEE HAS BEEN RECEIVING FEES F OR TECHNICAL SERVICES AND ROYALTY FROM MOTOR INDUSTRIES COMPANY LIMITED [ MICO]. ON A PERUSAL OF TECHNICAL COLLABORATION AGREEMENT BETWEEN THE TW O IT WAS NOTICED BY THE AO THAT NO ROYALTY WAS PAYABLE BY MICO TO THE ASSES SEE ON CONTRACT PRODUCTS EXPORTED TO ROBERT BOSCH GMBH PROVIDED THE SE PRODUCTS DO NOT INCLUDE ANY VALUE FOR ROYALTY ACCORDING TO THE CLA USE 5.1 OF THE SAID AGREEMENT CAME INTO EFFECT FROM 1.1.2001 IN RESPEC T OF ALL CONTRACT PRODUCTS EXPORTED TO THE ASSESSEE BY MICO NO ROYAL TY WAS INCLUDED IN THE INVOICES RAISED AGAINST THE ASSESSEE AND THEREFORE NO ROYALTY WAS PAYABLE BY MICO TO THE ASSESSEE. ITA NO.364/BANG/2007 PAGE 3 OF 20 3.1. AFTER ANALYZING THE SITUATION PRIOR TO 31.12. 2000 AND AFTER 1.1.2001 THE AO TOOK A STAND THAT THE AGREEMENTS H AVE BEEN DRAFTED IN SUCH A WAY THAT RECEIVABLES OF ROYALTY IN THE HANDS OF THE ASSESSEE HAVE BEEN ADJUSTED AGAINST THE PURCHASE CONSIDERATION PA YABLE TO MICO LED TO EVASION OF INCOME FROM TAXATION. ACCORDING TO THE AO THE MICO RAISED INVOICES AGAINST THE ASSESSEE ON CONTRACT PRODUCTS OF RS.175 86 89 110/- DURING THE FY UNDER DISPUTE AND AS PER THE AGREEMEN T CITED SUPRA THOSE INVOICES DID NOT INCLUDE VALUE FOR ROYALTY. THE AO S CONCLUSION WAS THAT IF THOSE PRODUCES WERE SOLD TO ANY OTHER PARTY THEY WOULD HAVE BEEN INVOICED AT RS.184 66 23 565/- INCLUDING THE VALUE FOR ROYALTY OF RS.8 79 34 455/- AT 5% AND THE SAME WOULD HAVE SUFF ERED TDS OF RS.87 93 446/-. SINCE THE INVOICES RAISED BY MICO ON THE ASSESSEE WERE ALREADY REDUCED BY THE VALUE FOR ROYALTY THE SAME WAS DEEMED TO HAVE BEEN PAID TO THE ASSESSEE BY MICO WITHOUT DEDUCTION OF TAX. THUS ACCORDING TO THE AO THE ASSESSEE UNDERSTATED ITS I NCOME BY RS.8 79 34 455/- WHICH HAS BEEN BROUGHT TO TAX. S UBSEQUENTLY THE AO VIDE HIS RECTIFICATION ORDER DATED 5.10.2006 THE A DDITION OF ROYALTY INCOME WAS DETERMINED AT RS.7 45 45 089/-. 4. AGGRIEVED THE ASSESSEE TOOK UP THE ISSUE WITH THE LD. CIT (A) FOR REMEDY. TO APPRECIATE THE FACTS OF THE ISS UE THE CIT(A) HAD INDEED ANALYZED THE PROS AND CONS OF THE AGREEMENT S ENTERED INTO BETWEEN THE ASSESSEE AND MICO FIRSTLY THE ASSESSEE HAD TO SUPPLY THE RIGHT TO USE THE TECHNOLOGY PATENT DESIGN ETC. TO MICO. BY VIRTUE OF THE RIGHT OF USE MICO MANUFACTURE THE CONTRACT ITEMS O R PRODUCTS WHILE SELLING THOSE ITEMS TO OTHER PARTIES THE PAYMENTS WILL ALS O INCLUDE PAYMENT OF ITA NO.364/BANG/2007 PAGE 4 OF 20 ROYALTY BY MICO TO THE ASSESSEE FOR USING THE TECHN ICAL KNOW-HOW ACCORDING TO WHICH AMONG OTHERS: - 5% ON ALL CONTRACT PRODUCTS AND PARTS THEREOF FOR THE PURPOSE OF EXPORTS I.E SALES TO CUSTOMERS OUTSIDE THE MANU FACTURING TERRITORY. HOWEVER NO ROYALTIES HAVE TO BE PAID F OR THE EXPORT OF CONTRACT PRODUCTS TO THE ASSESSEE PROVIDED THAT THE PRICES INVOICED BY MICO TO THE ASSESSEE FOR THESE CONTRAC T PRODUCTS DO NOT INCLUDE ANY VALUE FOR ROYALTIES. THIS WAS MODIFIED AS PER THE SUPPLEMENTARY DEED DAT ED: 8 TH /16 TH JANUARY 2001 CLAUSE 5.1 . FOR THE RIGHTS GRANTED ACCORDING TO THIS AGREEMENT MICO WILL PAY TO BOSCH AN AMOUNT EQUAL TO 3% (THREE PERCENT) OF THE NET EX-FACTORY SALES PRICES OF THE CONTRACT PRODUCTS MA NUFACTURED BY MICO ON SALES WITHIN AND/OR OUTSIDE THE MANUFACTURI NG TERRITORY IN CASE MICO OBTAINED THE WRITTEN CONSENT OF BOSCH FOR SUCH EXPORTS ACCORDING TO CLAUSE 2.2. EXCLUSIVE OF EXCI SE DUTIES MINUS THE COST OF THE STANDARD BOUGHT OUT COMPONENTS AND THE LANDED COST INCLUDING OCEAN FREIGHT INSURANCE CUSTOMS DU TIES ETC. OF THE IMPORTED COMPONENTS IRRESPECTIVE OF THE SOURCES I F ANY. HOWEVER NO ROYALTIES HAVE TO BE PAID FOR THE EXPOR T OF CONTRACT PRODUCTS TO BOSCH (ROBERT BOSCH GMBH) PROVIDED THA T THE PRICES INVOICED BY MICO TO BOSCH FOR THESE CONTRACT PRODUCTS DO NOT INCLUDE ANY VALUE FOR ROYALTIES AND ALSO THE APPROVAL OF THE AGREEMENT BY THE MINISTRY OF INDUSTRIES GOV ERNMENT OF INDIA. ITA NO.364/BANG/2007 PAGE 5 OF 20 4.1. AFTER DUE CONSIDERATION OF THESE FACTS WHICH HAVE BEEN ELABORATELY DISCUSSED IN THE IMPUGNED ORDER WHICH I S UNDER DISPUTE AND ALSO TAKING CUE FROM THE RULING OF THE HONBLE SUPR EME COURT IN THE CASE OF MCDOWELL AND COMPANY LIMITED V. CTO REPORTED IN 154 ITR 148 THE OBSERVATION OF THE LD. CIT (A) GOES THUS (PAGE 9: THUS WHAT IS APPROVED BY THE GOVERNMENT OF INDIA IS 5% OF ROYALTY ON EXPORT FOR THE PERIOD FROM 1/1/2001 T O 31/12/2005 AND NOT THE AMENDED PROVISION OF 0% OF ROYALTY AS CLAIM ED BY THE APPELLANT. THE APPELLANT AND MICO CANNOT CHANGE TH E TERMS ON THEIR OWN. APPROVAL OF THE MINISTRY OF INDUSTRY IS MANDA TORY TO ANY CHANGE IN TERMS OF CONTRACT. WITHOUT THE APPROVAL THE TE CHNICAL COLLABORATION BETWEEN THE PARTIES HAVE NO LEGS TO STAND. SO FAR AS THE APPROVAL IS CONCERNED IT HAS BEEN GIVEN TO PAYMENT OF ROYALTY @ 5% ON EXPORT SALES TO THE APPELLANT BY MICO. THUS ON FACTS THE AO IS JUSTIFIED IN TAXING 5% OF EXPORTED CONTRACT PRODUCTS EVEN IF HE HAD NO KNOWLEDGE THAT DURING THE RELEVANT PERIOD THE ROYALTY PAYMENT @ 5% WAS STILL IN VOGUE AND THE AMENDMENT WAS NOT EFFECTIVE. IN FACT IT SEEMS THE APPELLANT TRIED TO MISLEAD HIM BY CIRCUMVENTING A N EW CONTRACT. THUS FROM THE ANGLE OF LAW [MCDOWELLS CASE] AS WE LL AS ON POINTS OF FACTS [APPROVAL OF MINISTRY OF FINANCE MAKING THE C ONTRACT VALID] THE APPELLANT FAILS 5. AGGRIEVED THE ASSESSEE HAS COME UP WITH THE PR ESENT APPEAL. THE ARGUMENT OF THE ASSESSEE WAS CHIEFLY R EVOLVED THAT (I) THE CIT(A) ALTHOUGH ACCEPTED THE ASSESSEES ARGUMEN T THAT THE ACTION OF THE AO IN TAXING NOTIONAL INCOME OF RS. 7.45 CRORES WAS INCORRECT ULTIMATELY ERRED IN UPHOLDING THE ST AND OF THE AO; (II) THE CIT(A) ERRED IN UPHOLDING THE ACTION OF THE AO IN INCLUDING THE TOTAL INCOME OF THE ASSESSEE RS.7.45 CRORES WHI CH CANNOT FORM PART OF THE TOTAL INCOME OF THE ASSESSEE AS PER S.5 (2) R.W.S. 9(1) (IV) OF THE ACT AND DOUBLE TAXATION AVOIDANCE AGREE MENT [DTAA] BETWEEN INDIA AND GERMANY; - BY VIRTUE OF ARTICLE 12 OF DTAA IT WAS ONLY SUCH R OYALTY THAT WAS ACTUALLY RECEIVED WHICH COULD BE BROUGHT TO TAX AND IN AS MUCH AS THE ASSESSEE HAD NOT RECEIVED ANY PART OF T HE SAID SUM OF RS.7.45 CRORES THE ACTION OF THE AO WAS INVALID ; ITA NO.364/BANG/2007 PAGE 6 OF 20 - THE CIT(A) ERRED IN HOLDING THAT THE ASSESSEE HAD R ESORTED TO LEGAL AVOIDANCE OF TAX BASED ON THE RATIO OF SUPREM E COURTS FINDING IN MCDOWELLS CASE; (III) THE CIT(A) FAILED TO NOTE THE FACT THAT THE ASSESSE E HAD ENTERED INTO INTER ALIA TWO SEPARATE COLLABORATION AGREEM ENTS ONE FOR THE MANUFACTURE AND DIESEL FUEL INJECTION EQUIPMENT DT.14.2.2001 AND THE SECOND ONE FOR MANUFACTURE OF ALTERNATORS DYNAMOS STARTER MOTORS ETC. KNOWN AS AUTOMOTIVE EQUIPMENT P RODUCTS DT.15.10.1999 WHICH WAS REVISED VIDE SUPPLEMENTARY AGREEMENT DT.8/1/2001. AS A CONSEQUENCE THE OBSERVATION OF TH E CIT(A) THAT THUS IT MAY BE SEEN THAT THE SUPPLEMENTARY TERMS HA VE REDUCED THE ROYALTY ON EXPORT SALES FROM 5% TO NIL AND INCR EASED THE ROYALTY ON INLAND SALES FROM 1.5% TO 3% WAS FACTUALLY INCORRECT; & (IV) THE CIT(A) HAD FAILED TO NOTE THE FACT THAT THE ASS ESSEE RECEIVED ROYALTY AT 5% ON EXPORTS MADE BY MICO TO ALL PARTIE S EXCEPT TO THE ASSESSEE AND THE TAXES THEREON HAVE BEEN DULY P AID TO THE GOVERNMENT EXCHEQUER. 5.1. ON THE OTHER HAND THE STAND OF THE LD. D R WA S THAT THE CIT(A) DISMISSED THE ASSESSEES CLAIM AND SUSTAINED THE AO S ACTION ON THE GROUND THAT WHAT WAS APPROVED BY GOVERNMENT OF INDI A WAS ROYALTY @ 5% ON CONTRACT PRODUCTS EXPORTED DURING THE PERIOD 1.1 .01 TO 31.12.05 AND WITHOUT THE SAID APPROVAL WHICH WAS MANDATORY THE SUPPLEMENTARY AGREEMENT WAS NOT ENFORCEABLE. THE CIT(A) ACCORDING LY HELD THAT THE AO WAS JUSTIFIED IN BRINGING TO TAX ROYALTY @ 5% ON MI COS EXPORTS TO THE ASSESSEE AS THIS WAS THE RATE STILL IN VOGUE THE A MENDMENT HAVING BECOME INEFFECTIVE IN THE ABSENCE OF APPROVAL FROM GOVERNMENT OF INDIA. IT WAS VEHEMENTLY PRAYED THAT THE IMPUGNED ORDER OF TH E CIT(A) REQUIRES TO BE SUSTAINED. TO DRIVE HOME HER POINT THE LD. D R FURNISHED A PAPER BOOK CONTAINING 1 TO 23 PAGES WHICH CONSIST OF AMONG OTH ERS THE COPIES OF (I) APPROVAL OF GOVERNMENT TO THE EXTENSION OF THE TERM S AND CONDITIONS IN THE AGREEMENTS; (II) MICOS CORRESPONDENCE WITH THE MIN ISTRY ETC. ITA NO.364/BANG/2007 PAGE 7 OF 20 6. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSIO NS DILIGENTLY PERUSED THE RELEVANT RECORDS AND VARIOUS DOCUMENTS CASE LAWS ETC. FURNISHED BY EITHER PARTY DURING THE COURSE OF HEAR ING. 6.1. THE ASSESSEE BEING A FOREIGN COMPANY ITS INC OME INCLUDES ROYALTY FROM MICO AND THUS IT WAS LIABLE TO BE TAXED IN I NDIA ON ROYALTY U/S 5(2) READ WITH S. 9(1)(VI) OF THE ACT BESIDES THE PROVIS IONS OF DTAA. 6.2. AS COULD BE SEEN THE ASSESSEE HAD FROM TIME TO TIME ENTERED INTO TECHNICAL COLLABORATION AGREEMENTS WIT H MICO AND SUCH COLLABORATION AGREEMENTS RELEVANT TO THE PRESENT AP PEAL ARE: (I) DIESEL FUEL INJECTION EQUIPMENT SPARK PLUS DATED: 14.2.2001; & (II) AUTO ELECTRICAL ALTERNATORS & DYNAMOS STARTER MO TORS ETC. 6.3. DURING THE YEAR UNDER DISPUTE THE ASSESSEE RE CEIVED ROYALTY OF RS.15 77 19 773/- IN RESPECT OF THE ABOVE TWO AGREE MENTS AND OTHER COLLABORATION AGREEMENTS ENTERED INTO OUT OF WHICH THE MICO EFFECTED TDS TO THE EXTENT OF RS.1.57 CRORES. THE ASSESSEE OFFE RED THE SAID ROYALTY OF RS.15.77 CRORES FOR TAXATION AS STIPULATED U/S 5(2) RWS 9(1)(VI) OF THE ACT AS WELL AS DTAA. THE CONTENTION OF THE ASSESSEE WAS T HAT MICO HAD NOT PAID ROYALTY ON THE CONTRACT PRODUCTS MANUFACTURED AND E XPORTED TO THE ASSESSEE AT GERMANY IN CONSEQUENCE OF CLAUSE 5.1 OF COLLABORATION AGREEMENT DATED 14.2.2001 W.E.F. 1.1.2001. CL. 5.1 OF THE SAID AGREEMENT INTER ALIA READS: 5. PAYMENTS: 5.1. ITA NO.364/BANG/2007 PAGE 8 OF 20 - 5% ON ALL CONTRACT PRODUCTS AND PARTS THERE OF FOR THE PURPOSE OF EXPORTS I.E. SALES TO CUSTOMERS OUTSID E THE MANUFACTURING TERRITORY. HOWEVER NO ROYALTIES HAVE TO BE PAID FOR THE EXPORT OF CONTRACT PRODUCTS TO BOSCH PROVIDED THAT THE PRICES INVOICED BY MICO TO BOSCH FOR THESE CONTRACT PRODUCTS DO NOT INCLUDE ANY VALUE FOR ROYALTIES. 6.4. HOWEVER THE ASSESSEE HAD NOT DISPUTED AS FAR AS THE ACCESSIBILITY OF RS.15.77 CRORES WHICH REPRESENTED ROYALTY PAID BY MICO ON CONTRACT PRODUCTS MANUFACTURED AND SOLD BY MICO T O THE CUSTOMERS IN INDIA AND EXPORTED ABROAD OTHER THAN EXPORTED TO THE ASSESSEE. THE ASSESSEE OBJECTED TO THE TAXING OF RS.8 79 34 456/- WHICH REPRESENTED ROYALTY CALCULATED AT THE RATE OF 5% ON THE EXPORTS MADE BY MICO TO THE ASSESSEE EVEN THOUGH ACCORDING TO THE ASSESSEE I T HAD NO RIGHT TO RECEIVE SUCH AMOUNT AND IN FACT NOT RECEIVED SUCH R OYALTY. THE AMOUNT OF RS.8.79 CRORES OF COURSE HAS BEEN BROUGHT DOWN TO RS.7 45 45 089/- BY A RECTIFICATION ORDER DATED 5.10.2006. 6.5. THE CONTENTION OF THE ASSESSEE WAS THAT (I) THE AO HAD IGNORED THE FACTUAL AND LEGAL POSITION A ND BROUGHT TO TAX THE SAID AMOUNT ALLEGING EVASION OF THE SAME BY DRAWING CONCLUSION ; - FROM 1.1.2001 ONWARDS CLAUSE 5.1. OF THE AGREEMENT CAME INTO EFFECT IN RESPECT OF ALL CONTRACT PRODUCTS EXPORTED TO THE ASSESSEE AND AS PER THE SAID AGREEMENT NO ROYALTY WAS INCLUDED IN THE INVOICES RAISED AGAINST THE ASSESSE E AND THUS NO ROYALTY WAS PAYABLE BY THE MICO TO THE ASSESSEE; - THE AGREEMENTS HAVE BEEN SO DRAFTED THAT THE RECEIV ABLES OF ROYALTY IN THE HANDS OF THE ASSESSEE HAS BEEN ADJUS TED AGAINST THE PURCHASE CONSIDERATION PAYABLE TO MICO LEADING TO EVASION OF INCOME FROM TAXATION; - FROM THE RECORDS IT WAS FOUND THAT MICO RAISED INV OICES AGAINST THE ASSESSEE ON CONTRACT PRODUCTS TO THE EX TENT OF RS.175.86 CRORES DURING THE FINANCIAL YEAR 02-03. AS PER THE AGREEMENT THESE INVOICES DO NOT INCLUDE VALUE FOR ROYALTY. IF ITA NO.364/BANG/2007 PAGE 9 OF 20 THE SAME PRODUCTS WERE SOLD TO OTHER CUSTOMERS IT WOULD HAVE BEEN INVOICED AT RS.184.66 CRORES INCLUDING THE VAL UE OF RS.8.79 CRORES [RS.7.45 CRORES AS PER RECTIFICATION ORDER] AT 5% AND THIS ROYALTY WOULD BEEN SUFFERED TDS. SINCE THE INVOICES RAISED BY MICO ON THE ASSESSEE WERE ALREAD Y REDUCED BY THE VALUE OF ROYALTY ROYALTY WAS DEEMED TO HAVE BEEN PAID TO THE ASSESSEE BY MICO WITHOUT DEDUCTION OF TAX; (II) THE ASSESSEE BEING A NON-RESIDENT IN INDIA WAS LIAB LE FOR TAXATION ON ROYALTY INCOME AS PROVIDED IN S.5(2) R.W.S 9(1)( VI) OF THE ACT AND DTAA; - SINCE NO SUM OF RS.7.45 CRORES WAS RECEIVED BY THE ASSESSEE IN INDIA OR ACCRUED TO THE ASSESSEE IN INDIA AND COULD NOT BE DEEMED TO HAVE BEEN RECEIVED IN INDIA OR ACCRUED IN INDIA THE SAME WAS NOT LIABLE TO BE TAXED IN THE ASSESSEES H ANDS IN INDIA; (III) THE AO HAD NOT INVOKED ANY RELEVANT PROVISIONS OF T HE ACT IN SUPPORT OF HIS STAND TO TAX THE INCOME ALLEGED TO H AVE BEEN EVADED BY THE ASSESSEE; - THE ASSESSEE BEING A NON-RESIDENT THE SCOPE OF ITS TOTAL INCOME HAD TO BE DEFINED IN S.5(2) OF THE ACT AND DTAA; - BY VIRTUE OF THE PROVISIONS OF ARTICLE 12 OF DTAA THE ROYALTY WHICH WAS RECEIVED BY THE ASSESSEE WAS TO BE BROUGH T TO TAX; (IV) THE MOOT POINT IS THAT THE KNOW-HOW WHICH OWNED BY THE ASSESSEE WAS LICENCED TO MICO AND THE MICO PAID ROYALTY TO T HE ASSESSEE FOR THE USE OF KNOW-HOW FOR THE MANUFACTURE AND SAL E OF CONTRACT PRODUCTS TO PARTIES OTHER THAN THE ASSESSEE; - THE AO HAD FAILED TO SEE THE REASON THAT SINCE THE KNOW-HOW BELONGED TO THE ASSESSEE AND THE QUESTION OF MICO P AYING ROYALTY TO THE ASSESSEE FOR THE USE OF ITS KNOW-HOW IN THE MANUFACTURE OF THE CONTRACT PRODUCTS SOLD EXCLUSIVE LY TO THE ASSESSEE DID NOT ARISE; & - THE SUM OF RS.7.45 CRORES AS CALCULATED BY THE AO W AS A NOTIONAL INCOME AND NOT BEING AN ITEM FALLS WITHI N THE AMBIT OF S.5(2) R.W.S.9(1)(VI) OF THE ACT AND DTAA WHICH CANNOT BE BROUGHT TO TAX. 6.6. ON THE OTHER HAND THE SPIRITED ARGUMENT OF TH E LD. D R WAS THAT (I) CONTRARY TO THE ASSESSEES CLAIM THAT THE CIT(A ) HAD INITIALLY ACCEPTED THAT THE ACTION OF THE AO IN TAXING THE NOTIONAL IN COME WAS INCORRECT THE ITA NO.364/BANG/2007 PAGE 10 OF 20 CIT(A) HAD STATED THAT HIS DECISION AS TO WHETHER I T CONSTITUTES REAL INCOME OR OTHERWISE WAS MERELY KEPT IN ABEYANCE FOR THE TI ME BEING SUBJECT TO FURTHER ADJUDICATION ON THE ISSUE. THUS THE CIT(A )S DOESNT CONSTITUTE A CATEGORICAL FINDING; CLAUSE 5.1 . FOR THE RIGHTS GRANTED ACCORDING TO THIS AGREEMENT MICO WILL PAY TO BOSCH AN AMOUNT EQUAL TO 3% (THREE PERCENT) OF THE NET EX-FACTORY SALES PRICES OF THE CONTRACT PRODUCTS MANUFACTURED BY MIC O ON SALES WITHIN AND/OR OUTSIDE THE MANUFACTURING TERRITORY IN CASE MICO OBTAINED THE WRITTEN CONSENT OF BOSCH FOR SUCH EXPORTS ACCORDING TO CLAUSE 2.2. EXCLUSIVE OF EXCISE DUTIES MINUS THE COST OF THE S TANDARD BOUGHT OUT COMPONENTS AND THE LANDED COST INCLUDING OCEAN FREI GHT INSURANCE CUSTOMS DUTIES ETC. OF THE IMPORTED COMPONENTS IRRESPECTIV E OF THE SOURCES IF ANY. HOWEVER NO ROYALTIES HAVE TO BE PAID FOR THE EXPOR T OF CONTRACT PRODUCTS TO BOSCH (ROBERT BOSCH GMBH) PROVIDED THAT THE PRICES INVOICED BY MICO TO BOSCH FOR THESE CONTRACT PRODUCTS DO NOT IN CLUDE ANY VALUE FOR ROYALTIES (PAGE 9: THUS WHAT IS APPROVED BY THE GOVERNMENT OF INDIA IS 5% OF ROYALTY ON EXPORT FOR THE PERIOD FROM 1/1/2001 T O 31/12/2005 AND NOT THE AMENDED PROVISION OF 0% OF ROYALTY AS CLAIM ED BY THE APPELLANT. THE APPELLANT AND MICO CANNOT CHANGE TH E TERMS ON THEIR OWN. APPROVAL OF THE MINISTRY OF INDUSTRY IS MANDA TORY TO ANY CHANGE IN TERMS OF CONTRACT. WITHOUT THE APPROVAL THE TE CHNICAL COLLABORATION BETWEEN THE PARTIES HAVE NO LEGS TO STAND. SO FAR AS THE APPROVAL IS CONCERNED IT HAS BEEN GIVEN TO PAYMENT OF ROYALTY @ 5% ON EXPORT SALES TO THE APPELLANT BY MICO. THUS ON FACTS THE AO IS JUSTIFIED IN TAXING 5% OF EXPORTED CONTRACT PRODUCTS EVEN IF HE HAD NO KNOWLEDGE THAT DURING THE RELEVANT PERIOD THE ROYALTY PAYMENT @ 5% WAS STILL IN VOGUE AND THE AMENDMENT WAS NOT EFFECTIVE. IN FACT IT SEEMS THE APPELLANT TRIED TO MISLEAD HIM BY CIRCUMVENTING A N EW CONTRACT. THUS FROM THE ANGLE OF LAW [MCDOWELLS CASE] AS WE LL AS ON POINTS OF FACTS [APPROVAL OF MINISTRY OF FINANCE MAKING THE C ONTRACT VALID] THE APPELLANT FAILS (V) THE CIT(A) ALTHOUGH ACCEPTED THE ASSESSEES ARGUMEN T THAT THE ACTION OF THE AO IN TAXING NOTIONAL INCOME OF RS. 7.45 CRORES WAS INCORRECT ULTIMATELY ERRED IN UPHOLDING THE ST AND OF THE AO; (VI) THE CIT(A) ERRED IN UPHOLDING THE ACTION OF THE AO IN INCLUDING THE TOTAL INCOME OF THE ASSESSEE RS.7.45 CRORES WHI CH CANNOT FORM PART OF THE TOTAL INCOME OF THE ASSESSEE AS PER S.5 (2) R.W.S. 9(1) (IV) OF THE ACT AND DOUBLE TAXATION AVOIDANCE AGREE MENT [DTAA] BETWEEN INDIA AND GERMANY; ITA NO.364/BANG/2007 PAGE 11 OF 20 - BY VIRTUE OF ARTICLE 12 OF DTAA IT WAS ONLY SUCH R OYALTY THAT WAS ACTUALLY RECEIVED WHICH COULD BE BROUGHT TO TAX AND IN AS MUCH AS THE ASSESSEE HAD NOT RECEIVED ANY PART OF T HE SAID SUM OF RS.7.45 CRORES THE ACTION OF THE AO WAS INVALID ; - THE CIT(A) ERRED IN HOLDING THAT THE ASSESSEE HAD R ESORTED TO LEGAL AVOIDANCE OF TAX BASED ON THE RATIO OF SUPREM E COURTS FINDING IN MCDOWELLS CASE; (VII) THE CIT(A) FAILED TO NOTE THE FACT THAT THE ASSESSE E HAD ENTERED INTO INTER ALIA TWO SEPARATE COLLABORATION AGREEM ENTS ONE FOR THE MANUFACTURE AND DIESEL FUEL INJECTION EQUIPMENT DT.14.2.2001 AND THE SECOND ONE FOR MANUFACTURE OF ALTERNATORS DYNAMOS STARTER MOTORS ETC. KNOWN AS AUTOMOTIVE EQUIPMENT P RODUCTS DT.15.10.1999 WHICH WAS REVISED VIDE SUPPLEMENTARY AGREEMENT DT.8/1/2001. AS A CONSEQUENCE THE OBSERVATION OF TH E CIT(A) THAT THUS IT MAY BE SEEN THAT THE SUPPLEMENTARY TERMS HA VE REDUCED THE ROYALTY ON EXPORT SALES FROM 5% TO NIL AND INCR EASED THE ROYALTY ON INLAND SALES FROM 1.5% TO 3% WAS FACTUALLY INCORRECT; & (VIII) THE CIT(A) HAD FAILED TO NOTE THE FACT THAT THE ASS ESSEE RECEIVED ROYALTY AT 5% ON EXPORTS MADE BY MICO TO ALL PARTIE S EXCEPT TO THE ASSESSEE AND THE TAXES THEREON HAVE BEEN DULY P AID TO THE GOVERNMENT EXCHEQUER. (I) DIESEL FUEL INJECTION EQUIPMENT SPARK PLUS DATED: 14.2.2001; & (II) AUTO ELECTRICAL ALTERNATORS & DYNAMOS STARTER MOTORS ETC. 5. PAYMENTS: 5.1. - 5% ON ALL CONTRACT PRODUCTS AND PARTS THERE OF FOR THE PURPOSE OF EXPORTS I.E. SALES TO CUSTOMERS OUTSIDE THE MA NUFACTURING TERRITORY. HOWEVER NO ROYALTIES HAVE TO BE PAID FOR THE EXPORT OF CONTRACT PRODUCTS TO BOSCH PROVIDED THAT THE PRICES INVOICED BY MICO TO BOSCH FOR THESE CONTRACT PRODUCTS DO NOT INCLUDE ANY VALUE FOR ROYALTIES. (V) THE AO HAD IGNORED THE FACTUAL AND LEGAL POSITION A ND BROUGHT TO TAX THE SAID AMOUNT ALLEGING EVASION OF THE SAME BY DRAWING CONCLUSION ; - FROM 1.1.2001 ONWARDS CLAUSE 5.1. OF THE AGREEMENT CAME INTO EFFECT IN RESPECT OF ALL CONTRACT PRODUCTS EXPORTED TO THE ITA NO.364/BANG/2007 PAGE 12 OF 20 ASSESSEE AND AS PER THE SAID AGREEMENT NO ROYALTY WAS INCLUDED IN THE INVOICES RAISED AGAINST THE ASSESSE E AND THUS NO ROYALTY WAS PAYABLE BY THE MICO TO THE ASSESSEE; - THE AGREEMENTS HAVE BEEN SO DRAFTED THAT THE RECEIV ABLES OF ROYALTY IN THE HANDS OF THE ASSESSEE HAS BEEN ADJUS TED AGAINST THE PURCHASE CONSIDERATION PAYABLE TO MICO LEADING TO EVASION OF INCOME FROM TAXATION; - FROM THE RECORDS IT WAS FOUND THAT MICO RAISED INV OICES AGAINST THE ASSESSEE ON CONTRACT PRODUCTS TO THE EX TENT OF RS.175.86 CRORES DURING THE FINANCIAL YEAR 02-03. AS PER THE AGREEMENT THESE INVOICES DO NOT INCLUDE VALUE FOR ROYALTY. IF THE SAME PRODUCTS WERE SOLD TO OTHER CUSTOMERS IT WOULD HAVE BEEN INVOICED AT RS.184.66 CRORES INCLUDING THE VAL UE OF RS.8.79 CRORES [RS.7.45 CRORES AS PER RECTIFICATION ORDER] AT 5% AND THIS ROYALTY WOULD BEEN SUFFERED TDS. SINCE THE INVOICES RAISED BY MICO ON THE ASSESSEE WERE ALREAD Y REDUCED BY THE VALUE OF ROYALTY ROYALTY WAS DEEMED TO HAVE BEEN PAID TO THE ASSESSEE BY MICO WITHOUT DEDUCTION OF TAX; (VI) THE ASSESSEE BEING A NON-RESIDENT IN INDIA WAS LIAB LE FOR TAXATION ON ROYALTY INCOME AS PROVIDED IN S.5(2) R.W.S 9(1)( VI) OF THE ACT AND DTAA; - SINCE NO SUM OF RS.7.45 CRORES WAS RECEIVED BY THE ASSESSEE IN INDIA OR ACCRUED TO THE ASSESSEE IN INDIA AND COULD NOT BE DEEMED TO HAVE BEEN RECEIVED IN INDIA OR ACCRUED IN INDIA THE SAME WAS NOT LIABLE TO BE TAXED IN THE ASSESSEES H ANDS IN INDIA; (VII) THE AO HAD NOT INVOKED ANY RELEVANT PROVISIONS OF T HE ACT IN SUPPORT OF HIS STAND TO TAX THE INCOME ALLEGED TO H AVE BEEN EVADED BY THE ASSESSEE; - THE ASSESSEE BEING A NON-RESIDENT THE SCOPE OF ITS TOTAL INCOME HAD TO BE DEFINED IN S.5(2) OF THE ACT AND DTAA; - BY VIRTUE OF THE PROVISIONS OF ARTICLE 12 OF DTAA THE ROYALTY WHICH WAS RECEIVED BY THE ASSESSEE WAS TO BE BROUGH T TO TAX; (VIII) THE MOOT POINT IS THAT THE KNOW-HOW WHICH OWNED BY THE ASSESSEE WAS LICENCED TO MICO AND THE MICO PAID ROYALTY TO T HE ASSESSEE FOR THE USE OF KNOW-HOW FOR THE MANUFACTURE AND SAL E OF CONTRACT PRODUCTS TO PARTIES OTHER THAN THE ASSESSEE; ITA NO.364/BANG/2007 PAGE 13 OF 20 - THE AO HAD FAILED TO SEE THE REASON THAT SINCE THE KNOW-HOW BELONGED TO THE ASSESSEE AND THE QUESTION OF MICO P AYING ROYALTY TO THE ASSESSEE FOR THE USE OF ITS KNOW-HOW IN THE MANUFACTURE OF THE CONTRACT PRODUCTS SOLD EXCLUSIVE LY TO THE ASSESSEE DID NOT ARISE; & - THE SUM OF RS.7.45 CRORES AS CALCULATED BY THE AO W AS A NOTIONAL INCOME AND NOT BEING AN ITEM FALLS WITHI N THE AMBIT OF S.5(2) R.W.S.9(1)(VI) OF THE ACT AND DTAA WHICH CANNOT BE BROUGHT TO TAX. (I) CONTRARY TO THE ASSESSEES CLAIM THAT THE CIT(A ) HAD INITIALLY ACCEPTED THAT THE ACTION OF THE AO IN TAXING THE NOTIONAL IN COME WAS INCORRECT THE CIT(A) HAD STATED THAT HIS DECISION AS TO WHETHER I T CONSTITUTES REAL INCOME OR OTHERWISE WAS MERELY KEPT IN ABEYANCE FOR THE TI ME BEING SUBJECT TO FURTHER ADJUDICATION ON THE ISSUE. THUS (II) SINCE IT CONSTITUTES REAL INCOME AND NOT THE NOTIONAL INCOME OF THE ASSESSEE ROYALTY OF RS.7.45 CRORES WORKED OUT ON NET TURNOVER ASSESSED IN THE ASSESSEES HANDS DOES FORM PART OF ITS TOTAL I NCOME IN ACCORDANCE WITH THE PROVISIONS OF S.5(2) R.W.S 9(1)(VI) OF THE ACT R.W. ARTICLE 12 OF THE DTAA; - THE WORD RECEIVED INCLUDES RECEIVABLE AND THE PROVISIONS OF S.5(2) MAKE IT ABUNDANTLY CLEAR THAT THE TOTAL INCOME OF A NON- RESIDENT INCLUDES ALL INCOMES FROM WHATEVER SOURCE DERIVED WHICH ACCRUES OR ARISES OR IS DEEMED TO ACCRUE OR ARISE IN INDIA DURING SUCH YEAR R.W. EXPLANATION 2 TO S.9(I)(VI) CONTAINING THE DEFINITION OF ROYALTY. - WITH REGARD TO THE DISTINCT TECHNICAL COLLABORATI ON AGREEMENTS ONE FOR DIESEL FUEL INJECTION EQUIPMENT AND THE OTHER FOR A UTOMOTIVE EQUIPMENT PRODUCTS SUCH AS ALTERNATORS DYNAMOS STARTER MOTOR S ETC. AND THE SUPPLEMENTARY AGREEMENT DATED 8/16-1-01 ONLY A REVI SED AGREEMENT FOR MANUFACTURE OF AUTOMOTIVE EQUIPMENT PRODUCTS WAS OF NO CONSEQUENCE. WHAT WAS IMPORTANT WAS THAT THE MINISTRY OF COMMER CE AND INDUSTRY IN ITS APPROVAL LETTER DATED 30.1.2001 HAD ONLY GIVEN APPR OVAL TO EXTEND THE TERMS OF THE ORIGINAL AGREEMENT FOR ANOTHER FIVE YEARS ON THE EXISTING TERMS OF PAYMENT. NO DOCUMENT WAS PRODUCED BY THE ASSESSEE TO THE EFFECT THAT THE MINISTRYS APPROVAL FOR NON-PAYMENT OF ROYALTY FOR CONTRACT PRODUCTS. APPLICATIONS FOR EXTENSION OF THE TWO COLLABORATION AGREEMENTS APPROVALS WERE ACCORDED BY THE MINISTRY MERELY FOR EXTENSION OF THE COLLABORATION AGREEMENTS ON THE EXISTING TERMS OF PAYMENT AND IN EFFECT THE SUPPLEMENTARY AGREEMENT DID NOT RECEIVE THE STAMP O F APPROVAL OF THE MINISTRY; & ITA NO.364/BANG/2007 PAGE 14 OF 20 - TERMS OF THE CONTRACT AGREEMENT HAD NOT RECEIVED THE STAMP OF APPROVAL OF THE MINISTRY WHICH IS MANDATORY THE EXISTING TERMS OF ROYALTY PAYABLE AT 5% ON EXPORTS CONTINUE TO HOLD-GOOD AND THUS THE AO WAS RIGHT IN TAXING THE ROYALTY AND BY APPLYING THE SUPREME COURTS RULING IN MCDOWELL AND COMPANY LIMITED V. CTO 154 ITR 148 WHICH EMPOWERED THE AO TO LIFT THE CORPORATE VEIL TO SEE THE TRUE NATURE OF THE TRANSA CTION. 6.7. WE HAVE DULY CONSIDERED RIVAL ARGUMENTS AND AL SO THE VOLUMINOUS EVIDENCES PRODUCED AFTERMATH. WE HAVE ALSO CAREFUL LY GONE THROUGH THE RELEVANT RECORDS VARIOUS AGREEMENTS ENTERED INTO B Y THE ASSESSEE WITH MICO. THE DEPARTMENT OF INDUSTRIAL POLICY & PROMOTI ON SECRETARIAT FOR INDUSTRIAL APPROVALS HAD CONVEYED THE APPROVAL OF G OVERNMENT OF INDIA TO THE EXTENSION IN THE TERMS OF AGREEMENTS ENTERED IN TO BETWEEN THE ASSESSEE AND MICO FROM TIME TO TIME. 6.8. IN THE SUPPLEMENTARY AGREEMENT ENTERED INTO BE TWEEN THE ASSESSEE AND MICO ON 14.2.2001 WHICH CAME INTO EFFECT FROM 1 .1.2001 ACCORDING TO WHICH IN RESPECT OF PAYMENTS IN WAS MUTUALLY AGR EED UPON UNDER CLAUSE 5.1 THAT 5.1 - 5% ON ALL CONTRACT PRODUCTS AND PARTS THEREOF FOR THE PURPOSE OF EXPORTS I.E. SALES TO CUSTOMERS OUTSID E THE MANUFACTURING TERRITORY. HOWEVER NO ROYALTIES HAVE TO BE PAID FOR THE EXPORT OF CONTRACT PRODUCTS TO BOSCH (=ROBERT BOSCH GMBH) PROVIDED THAT THE PRICES INVOI CED BY MICO TO BOSCH FOR THESE CONTRACT PRODUCTS DO NOT INCLUDE AN Y VALUE FOR ROYALTIES. 6.9. THE MAIN CONTENTION OF THE REVENUE WAS THAT TH E TERMS OF CONTRACT HAD NOT RECEIVED THE SEAL OF APPROVAL OF THE MINIST RY OF COMMERCE & INDUSTRY WHICH IS MANDATORY AND THAT THE EXISTING T ERMS OF ROYALTY PAYABLE ITA NO.364/BANG/2007 PAGE 15 OF 20 @ 5% ON EXPORTS CONTINUE TO HOLD GOOD AND THEREFOR E THE AO WAS JUSTIFIED IN TAXING ROYALTY @ 5%. 6.10. HOWEVER THE SPECIFIC ARGUMENT OF THE LD. A R WAS REVOLVED AROUND THAT THE OBTAINING THE APPROVAL OF MINISTRY OF COMM ERCE AND INDUSTRY WITH REGARD TO THE AGREEMENTS ENTERED INTO BETWEEN THE A SSESSEE AND MICO HAS NO RELEVANCE TO AS FAR AS THE PROVISIONS OF THE INCOME-TAX ACT ARE CONCERNED. THE LD. A R FURTHER URGED THAT THE SUPP LEMENTARY AGREEMENT HAD MADE EXPLICITLY CLEAR THAT ROYALTY OF 5% ON ALL CONTRACT PRODUCTS AND PARTS THEREOF FOR THE PURPOSE OF EXPORTS I.E. SAL ES TO CUSTOMERS OUTSIDE THE MANUFACTURING TERRITORY WAS TO BE PAID AS AGREED UP ON IN THE ORIGINAL AGREEMENT AND SO FAR AS THE EXPORT OF CONTRACT PROD UCTS TO BOSCH THE ASSESSEE IS CONCERNED NO ROYALTIES HAVE TO BE PAID PROVIDED THAT THE PRICES INVOICED BY MICO TO THE ASSESSEE FOR THE SE CONTRACT PRODUCTS DO NOT INCLUDE ANY VALUE FOR ROYALTIES. THIS HAS BEEN AGREED UPON AMONG THE ASSESSEE AND MICO WHICH IT WAS VEHEMENTLY ARGUED B Y THE LD. A R DOES NOT MEAN THAT THE AGREEMENTS HAVE BEEN SO DRAFTED T HAT RECEIVABLES OF ROYALTY IN THE HANDS OF ROBERT BOSCH GMBH HAVE BEEN ADJUSTED AGAINST THE PURCHASE CONSIDERATION PAYABLE TO MIC LEAD TO E VASION OF INCOME FROM TAXATION AS ALLEGED BY THE REVENUE. THE LD. A R HA D FURTHER SUBMITTED THAT THERE WOULD BE NO BUYERS OF THE LD. CIT (A)S CONCEPT THAT WHAT IS APPROVED BY THE GOVERNMENT OF INDIA IS 5% OF ROYALT Y ON EXPORT FOR THE PERIOD FROM 1.1.2001 TO 31.12.2005 AND NOT THE AMEN DED PROVISION OF 0% ROYALTY AS CLAIMED BY THE APPELLANT. THE APPELLANT AND MICO CANNOT CHANGE THE TERMS ON THEIR OWN. APPROVAL OF THE MIN ISTRY OF INDUSTRY IS ITA NO.364/BANG/2007 PAGE 16 OF 20 MANDATORY TO ANY CHANGE IN TERMS OF CONTRACT. WITH OUT THE APPROVAL THE TECHNICAL COLLABORATION BETWEEN THE PARTIES HAS NO LEGS TO STAND. SO FAR AS THE APPROVAL IS CONCERNED IT HAS BEEN GIVEN TO PAY MENT OF ROYALTY @ 5% ON EXPORT SIDES TO THE APPELLANT BY MICO. IT WAS SUBMITTED THAT THE TERMS AND CONDITIONS IN TECHNICAL COLLABORATION AGREEMEN T(S) ENTERED INTO BY A NON-RESIDENT COMPANY WITH AN INDIAN COMPANY AND APP ROVAL OR OTHERWISE OF SUCH AGREEMENTS ARE WITHIN THE DOMAIN OF THE MIN ISTRY OF COMMERCE AND INDUSTRIES AND AS FAR AS THE INCOME-TAX DEPARTMENT IS CONCERNED ITS ROLE IS CONFINED TO WHETHER THE TAX AT SOURCE HAS BEEN EFFE CTED WITHIN THE RELEVANT PROVISIONS OF THE I.T. ACT WHILE MAKING ANY PAYMENT S. 6.11. IN ANALYZING THE RIVAL SUBMISSIONS WE ARE OF THE CONSIDERED VIEW THAT THERE IS A CONSIDERABLE FORCE IN THE SUBMISSIO N OF THE LD. A.R. ON A CAREFUL READING OF THE IMPUGNED ORDER WE FIND THAT THE AO HAD STATED THAT FROM THE RECORDS IT WAS FOUND THAT MICO RAISED INV OICES AGAINST ROBERT BOSCH GMBH ON CONTRACT PRODUCTS TO THE EXTENT OF RS .175 86 89 110/- DURING THE FINANCIAL YEAR 2002-03. AS PER THE AGRE EMENT THESE INVOICES DO NOT INCLUDE VALUE OF ROYALTY. IF THE SAME PRODUCTS WERE SOLD TO ANY OTHER PARTY IT WOULD HAVE BEEN INVOICED AT RS.184 66 23 565/- INCLUDING VALUE FOR ROYALTY OF RS.8 79 34 455/- AT 5% AND THIS ROYALTY WOULD HAVE SUFFERED TDS TO THE EXTENT OF RS.87 93 446/-. SINCE THE INVOICE S RAISED BY MICO ON ROBERT BOSCH GMBH ARE ALREADY REDUCED BY VALUE FOR ROYALTY ROYALTY IS DEEMED TO HAVE BEEN PAID TO ROBERT BOSCH GMBH BY MI CO WITHOUT DEDUCTION OF TAX.. BY CAREFUL ANALYSIS OF THE AOS VERSION ONE COULD COME TO A FAIR CONCLUSION THAT THE AOS FINDING W AS BASED ONLY ON ITA NO.364/BANG/2007 PAGE 17 OF 20 PRESUMPTION THAT ROYALTY WAS DEEMED TO HAVE BEEN PA ID TO THE ASSESSEE BY MICO WITHOUT DEDUCTION OF TAX. THE AO WHO HAD A CTUALLY MADE THE ASSESSMENT OF MICO HAD NOT ARRIVED AT SUCH A PRESU MPTION. IN A NUTSHELL THE AO HAD NOT BROUGHT ANY TANGIBLE PROOF ON RECORD TO EVEN REMOTELY SUGGEST THAT HE HAS BEEN ARMED WITH TO LIFT THE COR PORATE VEIL AND SEE THE REAL AND TRUE NATURE OF THE TRANSACTION. 6.12 IN A QUICK RUN OVER OF S.195 OF THE ACT WHI CH SAYS THAT 195. (1) ANY PERSON RESPONSIBLE FOR PAYING TO A NON-RESIDENT NOT BEING A COMPANY OR TO A FOREIGN COMPANY ANY INTEREST OR ANY OTHER SUM CHARGEABLE UNDER THE PROVISIONS OF THIS ACT (NOT BEING INCOME CHARGEABLE UNDER THE HEAD SALARIES) SHALL AT THE TIME OF CREDIT OF SUCH INCOME TO THE ACCOUNT OF THE PAYEE OR AT THE TIME O F PAYMENT THEREOF IN CASH OR BY THE ISSUE OF A CHEQUE OR DRAFT OR BY AN Y OTHER MODE WHICHEVER IS EARLIER DEDUCT INCOME-TAX THEREON AT THE RATES IN FORCE: THUS THE ASSESSING OFFICER WHO CONCLUDED THE ASSES SMENT IN THE CASE OF MICO COULD HAVE ANALYZED THE PROS AND CONS OF THE AGREEMENTS ENTERED INTO BETWEEN ROBERT BOSCH GMBH A ND MICO AND ALSO THE (INCOME) AMOUNT PAYABLE TO ROBERT BOSCH GM BH BY MICO AND THE TDS DEDUCTIBLE U/S 195 OF THE ACT BY MICO O R COULD HAVE TAKEN RECOURSE UNDER CHAPTER X SECTION 92 TO 94 OF THE ACT. NO REFERENCE HAS BEEN MADE BEFORE THIS BENCH BY EITHER PARTY DURING THE COURSE OF HEARING TO SUGGEST THAT THE AO WHO CONCLU DED THE ASSESSMENT IN THE CASE OF MICO FOR THE AY UNDER APP EAL DISPUTED THE AMOUNT PAYABLE TO ROBERT BOSCH GMBH BY MICO [AS WOR KED OUT BY MICO IN ITS COMPUTATION] TDS EFFECTED AND SO ON SO FORTH. ITA NO.364/BANG/2007 PAGE 18 OF 20 6.13. FURTHER FROM THE NATURE OF TRANSACTION IT IS CLEAR THAT DURING THE EARLIER PERIOD MICO WAS PAYING 5% ROYALTY ON AL L CONTRACT PRODUCTS TO THE ASSESSEE EVEN FOR THE SALE OF THE PRODUCTS EFFE CTED TO IT. THIS 5% ROYALTY PAID BY MICO TO THE ASSESSEE WAS RECOVERED FROM THE SALES INVOICE CHARGED TO THE ASSESSEE. IN OTHER WORDS THE PRODU CTS WERE SO PRICED BY MICO THAT THE 5% ROYALTY WAS ABSORBED IN THE SALES INVOICE. THE EFFECT OF THE TRANSACTION WAS THAT THE ROYALTY BECAME THE INC OME IN THE HANDS OF THE ASSESSEE WHICH WAS LIABLE TO BE TAXED IN INDIA. TD S WAS ALSO DEDUCTIBLE BY THE PAYEE MICO. ON THE OTHER HAND THIS INCOME ALSO BECAME THE PURCHASE COST OF THE ASSESSEE GIVING AN IMPACT ON I TS PROFIT & LOSS ACCOUNT ON WHICH THE ASSESSEE WAS TAXABLE IN ITS COUNTRY. IN A NUTSHELL THIS INCOME OF ROYALTY TO THE ASSESSEE SIMULTANEOUSLY BECAME IT S EXPENDITURE NEEDLESS TO MENTION THAT THE INCIDENCE OF TAX ON ROYALTY INC OME ARISED IN INDIA WHILE AS THE EFFECT OF EXPENDITURE ON THE PROFIT & LOSS A CCOUNT ON WHICH TAX WAS CHARGEABLE SHIFTED TO THE COUNTRY WHERE THE ASSESSE E BELONGED TO. THEREFORE IN ORDER TO AVOID THIS SITUATION THE ASS ESSEE HAD ARRANGED ITS AFFAIRS IN SUCH A WAY THAT THE RECEIPT OF ROYALTY I S ELIMINATED AND TO THAT EXTENT PAYMENT ON PURCHASES WAS REDUCED. THE ASSES SEE HAS RIGHTLY RELIED ON THE CASE UNION OF INDIA V. AZADI BACHAO ANDOLAN 263 ITR 706(SC) RENDERED BY THE HONBLE APEX COURT OF INDIA. 6.14 LD. DRS OBJECTION ON THE GROUND THAT THERE W AS NO APPROVAL FROM THE MINISTRY FOR NON-PAYMENT OF ROYALTY FOR CO NTRACT PRODUCTS IS NOT SUSTAINABLE. THE APPROVAL FROM THE MINISTRY IS REQ UIRED ONLY FOR FOREIGN EXCHANGE REMITTANCE. WHEN THERE IS NO FOREIGN EXCH ANGE REMITTANCE FURTHER SANCTION TO THAT EFFECT FROM THE MINISTRY D OES NOT ARISE. ITA NO.364/BANG/2007 PAGE 19 OF 20 6.15 ON PERUSING THE TRANSACTION WE DO NOT FIND IT APPROPRIATE FOR THE ASSESSEE TO EARN INCOME ON ONE HAND IN THE FORM OF ROYALTY WHICH INSTANTANEOUSLY CREEPS IN BACK TO THE ASSESSEE AS A TRADING/MANUFACTURING EXPENDITURE. MORE OVER THIS IS NOT A CASE OF THE R EVENUE THAT THE SALE PRICING FOR CONTRACT PRODUCTS SUPPLIED BY MICO TO T HE ASSESSEE IS SO ADJUSTED IN ORDER TO PAY ROYALTY TO THE ASSESSEE FO R THE SALE EFFECTED TO THE OTHER PARTIES. IT SHOULD BE KEPT IN MIND THAT THE KNOW-HOW BELONGS TO THE ASSESSEE IT IS ITS PREROGATIVE TO CHARGE MICO FOR THE USE OF ITS KNOW-HOW. CHARGING ROYALTY FROM MICO FOR THE PRODUCTS SUPPLIE D TO THE ASSESSEE AND THE SAME TO BE ADDED BACK TO THE INVOICE BY MICO T HE NET RESULT OF IT IS NULLITY. BOSCH THE ASSESSEE NEED NOT BE EXPECTED TO MAKE ROYALTY INCOME WITH REFERENCE TO THE SALE EFFECTED TO IT B Y MICO WHEN THE KNOW- HOW FOR MANUFACTURE OF THE SAME IS SUPPLIED BY THE ASSESSEE. 6.15 IN AN OVERALL CONSIDERATION OF THE FACTS AN D CIRCUMSTANCES OF THE ISSUE WE ARE OF THE FIRM VIEW THAT THE ASSESSE E HAS EVERY RIGHT TO ARRANGE ITSELF LEGALLY IN A POSITION IN ORDER TO RE DUCE ITS INCIDENCE OF TAX. THE AO IS NOT JUSTIFIED IN ARRIVING AT A CONCLUSION THAT THE ROYALTY RECEIVABLES IN THE HANDS OF THE ASSESSEE HAVING BEE N ADJUSTED AGAINST THE PURCHASE CONSIDERATION PAYABLE TO MICO LEADING TO E VASION OF INCOME FROM TAXATION. IT IS ORDERED ACCORDINGLY. 7. IN THE RESULT THE ASSESSEES APPEAL IS PARTLY ALLOWED . ITA NO.364/BANG/2007 PAGE 20 OF 20 PRONOUNCED IN THE OPEN COURT ON THIS 23 RD DAY OF JULY 2010. SD/- SD/- ( GEORGE GEORGE K. ) (A. MOHAN ALANKAMONY ) JUDICIAL MEMBER ACCOUNTANT MEMBER BANGALORE DATED THE 23 RD JULY 2010. DS/- COPY TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR ITAT BANGALORE. 6. GUARD FILE BY ORDER ASSISTANT REGISTRAR ITAT BANGALORE.