KHS Machinery Pvt.ltd.,, Ahmedabad v. The Income tax Officer,Ward-4(2),, Ahmedabad

ITA 79/AHD/2008 | 2004-2005
Pronouncement Date: 10-02-2012 | Result: Partly Allowed

Appeal Details

RSA Number 7920514 RSA 2008
Assessee PAN AABCK2513Q
Bench Ahmedabad
Appeal Number ITA 79/AHD/2008
Duration Of Justice 4 year(s) 1 month(s) 7 day(s)
Appellant KHS Machinery Pvt.ltd.,, Ahmedabad
Respondent The Income tax Officer,Ward-4(2),, Ahmedabad
Appeal Type Income Tax Appeal
Pronouncement Date 10-02-2012
Appeal Filed By Assessee
Order Result Partly Allowed
Bench Allotted C
Tribunal Order Date 10-02-2012
Date Of Final Hearing 07-02-2012
Next Hearing Date 07-02-2012
Assessment Year 2004-2005
Appeal Filed On 03-01-2008
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL AT AHMEDABAD AHMEDABAD C BENCH BEFORE SHRI G.C.GUPTA VICE-PRESIDENT (AZ) AND SHRI B.P. JAIN ACCOUNTANT MEMBER ITA NO.79/AHD/2008 ASSESSMENT YEAR:2004-05 KHS MACHINERY PVT. LTD. 53 MADHUBAN NR. MADALPUR UNDER BRIDGE AHMEDABAD -380 006 PAN NO.AABCK2513Q / V/S . INCOME TAX OFFICER WARD- 4(2) AHMEDABAD / APPELLANT .. / RESPONDENT / APPELLANT BY SHRI J.P. SHAH SR-AR /RESPONDENT BY SHRI S.K. GUPTA CIT-DR / DATE OF HEARING 07-02-2012 / DATE OF PRONOUNCEMENT 10-02-2012 !' !' !' !' / // / ORDER PER B.P. JAIN ACCOUNTANT MEMBER:- THIS APPEAL OF THE ASSESSEE ARISES FROM THE ORDER OF LD. COMMISSIONER OF INC-TAX (APPEALS)-VIII AHMEDABAD DATED 02-11-20 07 FOR THE ASSESSMENT YEAR 2004-05. THE ASSESSEE HAS RAISED THE FOLLOWIN G GROUNDS OF APPEAL:- 1. YOUR APPELLANT BEING AGGRIEVED BY THE ORDER PAS SED BY LEARNED C.I.T. (APPEALS)-VIII AHMEDABAD DATED 2.11.2007 PRESENTS THIS APPEAL ON FOLLOWING GROUNDS. 2. THE LEARNED C.I.T. (APPEALS)-VIII AHMEDABAD HAS ERRED IN NOT ALLOWING DEDUCTION U/S. 80IB(3) OF THE I.T. ACT 19 61 FOR RS.1 87 34 518/- THOUGH FULLY EXPLAINED. THE ADDITI ON MADE BE DELETED. 3. THE LEARNED C.I.T. (APPEALS)-VIII AHMEDABAD HAS ERRED IN NOT ALLOWING ROYALTY PAYMENT OF RS.74 63 975/- BEING CO MPUTATION OF ARMS ITA NO.79/AHD/2008 A.Y. 2004-05 KHS MACHINERY PVT. LTD. V. ITO WD-4(2) ABD PAGE 2 LENGTH PRICE IN RELATION TO INTERNATIONAL TRANSACTI ONS THOUGH EXPLAINED. THE ADDITION MADE BE DELETED. 4. THE LEARNED C.I.T. (APPEALS)-VIII AHMEDABAD HAS ERRED IN NOT ALLOWING ROYALTY PAYMENT OF RS.1 15 32 819/- BEING CLAIMED AS EXPENSES U/S 40(A) FOR THE YEAR UNDER CONSIDERATION RELATES TO A.Y. 2003-04 EXPLAINED. THE ADDITION MADE BE DELETED. 5. THE APPELLANT CRAVES LEAVE TO ADD AMEND ALTER EDIT DELETE MODIFY OR CHANGE ALL OR ANY OF THE GROUNDS OF APPEAL AT TH E TIME OF OR BEFORE HEARING OF THIS APPEAL. 2. GROUND NO. 1 AND 5 OF THE ASSESSEE ARE GENERAL I N NATURE AND THEREFORE DO NOT REQUIRE ANY ADJUDICATION. 3. AS REGARDS TO GROUND NO.2 THE BRIEF FACTS ARE T HAT THE ASSESSEE HAS CLAIMED DEDUCTION U/S.80IB OF THE ACT WHICH IS AVAI LABLE AS SMALL SCALE INDUSTRY (SSI FOR SHORT) UNIT AS PER CLAUSE (II) OF SUB-SECTION 3 OF SECTION 80 OF THE ACT. IT WAS OBSERVED THAT TOTAL VALUE OF PLANT AND MACHINERY WAS OF RS.2 04 69 540/- WHEREAS AS PER NORMS SET BY THE GO VERNMENT A COMPANY WITH INVESTMENT IN PLANT AND MACHINERY OF LESS THAN RS.1 CRORE IS CONSIDERED TO BE SMALL SCALE INDUSTRIES. ACCORDINGLY THE ASSE SSING OFFICER ISSUED A SHOW- CAUSE NOTICE TO THE ASSESSEE ASKING IT TO JUSTIFY H OW ITS UNIT CAN BE CONSIDERED AS SSI UNIT FOR THE PURPOSE OF DEDUCTION U/S.80IB O F THE ACT. THE AO ALSO POINTED OUT TO THE ASSESSEE THAT ALTERNATIVELY THE INCOME FROM SALE OF SPARES AMOUNT TO RS.4 13 17 344/- SERVICE INCOME OF RS.1 04 48 888/- AND OTHER INCOME OF RS.1 44 58 821/- ARE TO BE EXCLUDED FROM THE PROFIT DERIVED FROM INDUSTRIAL UNDERTAKING FOR THE PURPOSE OF DEDUCTION U/S.80IB OF THE ACT. THE ASSESSEE SUBMITTED BEFORE THE AO THAT ITS INVESTMEN T IN PLANT AND MACHINERY WOULD BE LESS THAN RS.1 CRORE IF ITEMS OF EXCLUSION ARE CONSIDERED AS PER NOTIFICATION DATED 10-12-1999 ISSUED U/S 11B OF IDR ACT I.E. TOOLS JIGS DIES MOULDS FIXTURE PATTERNS AND SPARE PARTS FOR MAINT ENANCE AND THE COST OF CONSUMABLE STORES ARE EXCLUDED AND ITS NET BALANCE OF PLANT AND MACHINERY COMES TO RS.34 80 428/-. THE ASSESSEE CONTENTION WA S NOT ACCEPTED. THE AO DID NOT ALLOW DEDUCTION U/S.80IB OF THE ACT ON TRAD ING PROFIT OF RS.27 43 073/- ITA NO.79/AHD/2008 A.Y. 2004-05 KHS MACHINERY PVT. LTD. V. ITO WD-4(2) ABD PAGE 3 INTEREST INCOME OF RS.1 08 89 484/- AND OTHER INCOM E OF RS.35 69 336/- THE TOTAL OF THESE AMOUNTS WAS OF RS.1 72 01 893/- ON W HICH THE AO DISALLOWED DEDUCTION @ 30%. FURTHER THE AO OBSERVED THAT THE A SSESSEE-COMPANY HAS 100% OUTSOURCED MANUFACTURING MODEL AND IT WAS DOIN G THE JOB OF ASSEMBLY AND TESTING ONLY AND ALL THE PARTS OF LARGE MACHINE S RACKS ETC. WERE GOT MANUFACTURED FROM OUTSIDE AND THEY WERE BEING ASSEM BLED AND TESTED AS PER THE SPECIFICATION OF THE CLIENTS AT THE FACTORY OF THE ASSESSEE. THEREFORE THE PLANTS MACHINES AND TOOLS BY WHICH THE JOB OF ASS EMBLY AND TESTING ARE ACCOMPLISHED BECOME THE MAIN EQUIPMENTS OF THE ASS ESSEE-COMPANY. ACCORDING TO AO THE ASSESSEE HAS ITSELF CATEGORIZED PLANT AND MACHINERY TO THE EXTENT OF RS.9 15 797/- ONLY AS TOOLS & JIGS IN THE ANNEXURE B FORMING PART OF FORM NO. 3CD REPORT. HOWEVER THE ASSESSEE HAS TRIED TO RE-CATEGORIZE A LARGE NUMBER OF COMPONENTS AS TOOLS JIGS DISC MOULDS ETC. OUT OF PLANT AND MACHINERY OFFICE EQUIPMENTS AND FACTORY EQUIPMENTS WHICH IS NOT CORRECT AND NOT ADMISSIBLE. THE VALUE OF ASSETS AS PER BALANCE SHEET AS ON 01-04-2002 IS AS UNDER:- I) PLANT & MACHINERY RS.1 97 64 860 II) COMPUTER HARDWARE RS. 85 47 749 III) COMPUTER SOFTWARE RS. 12 67 590 IV) FURNITURE & FIXTURE RS. 19 11 461 V) VEHICLE RS. 78 00 237 VI) OFFICE EQUIPMENTS RS. 16 23 788 THE ASSESSING OFFICER OBSERVED THAT TOOLS JIGS DI ES MOULDS AND SPARE PATS WHICH ARE RE-CATEGORIZED BY THE ASSESSEE IN ITS SUB MISSION ARE ONE OF THE MOST IMPORTANT TOOLS AND EQUIPMENTS USED IN THE PRO CESS OF ASSEMBLY AND TESTING OF ITS BUSINESS. THESE ARE NOT FOR THE PURP OSE OF ITS MAINTENANCE. THE AO OBSERVED THAT SUCH EQUIPMENTS CAN NOT BE TREATED AS PERIPHERAL OR SUBSIDIARY TOOLS AND THAT THESE ARE THE ACTUAL MAIN TOOLS. AS FOR EXAMPLE THE AO OBSERVED THAT VERNIER CALIPERS OF VERY HIGH COST ARE VERY NECESSARY FOR CORRECT JOINING AND ERECTION OF DIFFERENT PARTS OF BIG MACHINERY AND WITHOUT ITA NO.79/AHD/2008 A.Y. 2004-05 KHS MACHINERY PVT. LTD. V. ITO WD-4(2) ABD PAGE 4 THEM ASSEMBLY CAN NOT TAKE PLACE AND CONSTITUTE TH E MAIN ASSEMBLY EQUIPMENTS. UNDER NO CIRCUMSTANCES THE SAME CAN BE TREATED AS TOOLS FOR MAINTENANCE. SIMILARLY EQUIPMENTS LIKE INJECTION M OULDS CAN NEVER BE TREATED AS MAINTENANCE EQUIPMENTS. THE ASSESSEE HAS ONLY CO NSIDERED CRANES AIR COMPRESSORS RECTIFIERS AND THREE OTHER EQUIPMENTS ONLY AS PLANT AND MACHINERY AND REST OF THE EQUIPMENTS MACHINERIES A S TOOLS JIGS MOULDS ETC. FOR THE PURPOSE OF MAINTENANCE. ACCORDING TO THE AO UNDER NO CIRCUMSTANCES THE ASSESSEE CAN CLAIM MANUFACTURING AND SALE OF HE AVY EQUIPMENTS TO THE EXTENT OF RS.64 CRORES JUST BY USING CRANES COMPRE SSORS RECTIFIERS AND A FEW OTHER EQUIPMENTS AND DEFINITELY A VERY LARGE NUMBER OF THE PLANTS AND MACHINERY ARE REQUIRED WHICH CAN NEVER BE CATEGORIZ ED AS BEING MEANT FOR THE PURPOSE OF MAINTENANCE OR CONSUMABLE ITEMS. THE AO ALSO OBSERVED THAT THE CIT(A)-VIII FOR ASSESSMENT YEAR 2003-04 HA S ALSO CONFIRMED THE DISALLOWANCE OF CLAIM U/S. 80IB OF THE ACT MADE BY THE AO VIDE ITS ORDER DATED 09-10-2006 WHEREIN THE LD. CIT(A) ALSO ADDED THE VE HICLES AS PART OF PLANT AND MACHINERY. HENCE CONSIDERING THESE THE AO HEL D THAT ASSESSEES UNIT IS NOT SSI UNIT AND NOT ELIGIBLE FOR DEDUCTION U/S 80I B(3)(II) OF THE ACT AND DISALLOWED THE CLAIM OF RS.1 87 34 518/-. 4. THE LD. CIT(A) CONFIRMED THE ACTION OF THE ASSES SING OFFICER. 5. AS PER THE ARGUMENT MADE BY LD. CIT-DR THE PRESE NT ISSUE IS SQUARELY COVERED BY THE DECISION OF ITAT C BENCH AHMEDABAD IN ITA NO.2289/AHD/2006 DATED 19-12-2008 FOR THE ASSESSMENT YEAR 2003-04 I N ASSESSEES OWN CASE. THE LD. CIT-DR POINTED OUT THE RELEVANT PARAS 9.3 TO 10 OF THE SAID ITAT ORDER IN SUPPORT OF HIS ARGUMEN TS. 6. LD. AR ON THE OTHER HAND ALSO RELIED UPON THE OR DER OF ITAT IN ASSESSEES OWN CASE (SUPRA) FOR THE A.Y. 2003-04. ITA NO.79/AHD/2008 A.Y. 2004-05 KHS MACHINERY PVT. LTD. V. ITO WD-4(2) ABD PAGE 5 7. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE FACTS OF THE CASE. BOTH THE PARTIES BEFORE US HAVE RELIED UPON THE DEC ISION IN ASSESSEES OWN CASE FOR A.Y. 2003-04 (SUPRA) ON THE PRESENT ISSUE. THEREFORE FOR THE SAKE OF CLARITY WE REPRODUCE THE RELEVANT PARAS OF THE SAID ITAT ORDER FOR A.Y. 2003- 04 (SUPRA) AS UNDER:- 9.3 IN THE LIGHT OF AFORESAID PROVISIONS WE HAVE TO DETERMINE THE STATUS OF TAXPAYERS INDUSTRIAL UNDERTAKING. IN THE CASE O F UNDER CONSIDERATION THE BOOK OF INDUSTRIAL UNDERTAKING IS THAT OF MANUF ACTURING BOTTLING PLANTS. THEREFORE IT HAS TO BE SEEN WHICH ARE THE PLANT AND MACHINERY AND THE LD. CIT(A) ARE OF THE OPINION THAT THE VALU E OF SUCH PLANT AND MACHINERY EXCEEDS RS. ONE CROES. THE AO HAS INCLUDE D VALUE OF THE ENTIRE PLANT AND MACHINERY INCLUDING VEHICLES COM PUTER AND COMPUTER SOFTWARE AS ALSO MOULDS DIES JIGS CONSUMABLES ET C. WHILE THE LD. CIT(A) HAS RECORDED HIS FINDINGS ONLY ON INCLUSION OF VEHICLES COMPUTER AND COMPUTER SOFTWARE. HOWEVER THE ARGUMENTS OF BO TH THE SIDES WITH REFERENCE TO THESE ITEMS ITEMS OF PLANT AND MACHINE RY ARE CONSIDERED AS UNDER:- (A) MOULDS DIES JIGS FIXTURES PATTERNS TOOLS CONSUMABLES FACTORY EQUIPMENTS BEING RACKS TABLES PALLETS. ETC. 9.31 IT IS SUBMITTED BY THE LEARNED COUNSEL FOR THE TAXPAYER THAT IN CALCULATING THE VALUE OF PLANT AND MACHINERY COST O F EQUIPMENT SUCH AS TOOLS JIGS DIES MOULDS SPARE PARTS FOR MAINTENAN CE AND COST OF CONSUMABLE STORES HAVE TO BE EXCLUDED AS PER CLAUSE (I) OF NOTE (B) OF THE AFORESAID NOTIFICATION NO.857 DATED 10.12.199. THE AO IN HIS ORDER OBSERVED THAT THE TAXPAYER HAD REFLECTED NET WDV OF RS.11 90 001 ON ACCOUNT OF TOOLS AND JIGS IN ANNEXURE B FORMING PAR T OF FORM 3CD WHILE VALUE OF ASSTS AS ON 1.4.202 REFLECTS TOTAL VALUE O F PLANT AND MACHINERY AT RS.1 97 64 860 BESIDE COMPUTES FURNITURE VEHIC LES AND OFFICE EQUIPMENT. IN THEIR SUBMISSIONS BEFORE THE AO THE TAXPAYER ADOPTED DIFFERENT VALUE FOR MOULDS DIES ETC. THE AO DECL INED TO EXCLUDE THE ACTUAL COST OF TOOLS JIGS DIES MOULDS AND SPARE P ARTS ON THE GROUND THAT THESE ARE USED IN THE PROCESS OF ASSEMBLY AND TESTI NG IN ITS BUSINESS AND THESE ARE NOT FOR MAINTENANCE SUCH EQUIPMENTS A RE MAIN TOOLS IN THE BUSINESS OF THE TAXPAYER. THE LD. CIT(A) HAS NO T ADVERTED TO THE ASPECT OF TOOLS JIGS DIES MOULDS AND SPARE PARTS I N HIS ORDER AND ONLY CONCENTRATED ON VALUE OF VEHICLES AND COMPUTERS AND HELD THAT VALUE OF PLANT AND MACHINERY EXCEEDED RS.1 CRORE. SINCE CLAU SE (I) IN NOTE 2(B) SPECIFICALLY EXCLUDES COST OF TOOLS JIGS DIES MO ULDS AND SPARE PARTS FOR MAINTENANCE AND THE COST OF CONSUMABLE IS NOT JUSTI FIED IN NOT EXCLUDING THE SAME WHILE DETERMINING THE VALUE OF PM IN OUR O PINION THE WORD MAINTENANCE IS SUFFIXED TO ONLY SPARE PARTS AND NOT TO THE OTHER ITEMS SUCH AS TOOLS JIGS DIES AND MOULDS AS ALSO CONSUM ABLES. ACCORDINGLY ITA NO.79/AHD/2008 A.Y. 2004-05 KHS MACHINERY PVT. LTD. V. ITO WD-4(2) ABD PAGE 6 THE AO IS DIRECTED TO EXCLUDE THE COST OF EQUIPMENT S SUCH AS TOOLS JIGS DIES MOULDS AND SPARE PARTS FOR MAINTENANCE AND TH E COST OF CONSUMABLE STORES WHILE DETERMINING VALUE OF PM IN ORDER TO ASCERTAIN THE STATUS OF INDUSTRIAL UNDERTAKING OF THE TAXPAYE R. (E) COMPUTER SOFTWARE 9.32 AS REGARDS COMPUTER HARDWARE AND SOFTWARE THE LD. AR ON BEHALF OF THE TAXPAYER ARGUED THAT COMPUTERS ARE INSTALLED IN OFFICE AND THEREFORE HAVE TO BE EXCLUDED IN TERMS OF DECISION OF THE ITAT IN THE CASE OF SAMIR DIAMOND MFG. (P) LD. 67 ITD 25 (AHD). THERE IS NO FINDING IN THE ORDER OF EITHER AO OR LD. CIT(A) AS TO WHETHER OR NOT ALL THE COMPUTERS ARE INSTALLED IN OFFICE LD. CIT(A) OBSERV ED THAT SINCE COMPUTERS HAVE NOT BEEN EXCLUDED IN THE NOTE 2(B) O F AFORESAID NOTIFICATION DATED 10.12.1999 ACCORDINGLY THESE HA VE TO BE CONSIDERED FOR DETERMINING THE VALUE OF PLANT AND MACHINERY. H ONBLE JURISDICTIONAL HIGH COURT IN THE CASE OF CIT VS. PRABHUDAS KISHORESAD TOBACCO PRODUCTS P LD. 282 ITR 568 (GUJ) HELD THAT FOR DETERMINING THE VA LUE ON PLANT AND MACHINERY FOR ASCERTAINING THE STATUS OF INDUSTRIAL UNDERTAKING SSI THE ACTUAL COST OF PLANT AND MACHINERY WHICH I S INSTALLED IN THE INDUSTRIAL UNDERTAKING AND USED FOR THE PURPOSE OF BUSINESS OF THE UNDERTAKING HAS TO BE ADOPTED. THE PROVISION DOES NOT STIPULATE TAKING THE AGGREGATE VALUE OF PLANT AND MACHINERY OF THE B USINESS AS A WHOLE BUT LIMITS THE SAME TO THE PLANT AND MACHINERY RELA TABLE TO THE INDUSTRIAL UNDERTAKING. SINCE THERE IS NO FINDING EITHER IN TH E ORDER OF THE AO OR THE LD. CIT(A) AS WHETHER OR NOT ALL THE COMPUTERS INC LUDING SOFTWARE VALUING RS.98.14 LACS ARE INSTALLED IN THE OFFICE O R ARE USED IN THE PROCESS OF MANUFACTURING BOTTLING PLANTS IN THE LI GHT OF AFORESAID DECISION OF HONBLE JURISDICTIONAL HIGH COURT AND I N THE INTEREST OF JUSTICE WE VACATE THE FINDINGS OF THE LD. CIT(A) O N THIS ASPECT AND RESTORE THE MATTER TO THE FILE OF THE AO WITH THE D IRECTIONS TO ASCERTAIN AS TO WHETHER OR NOT ALL THE COMPUTERS ARE INSTALLED I N OFFICE OR AS TO WHETHER SOME OF THESE ARE INSTALLED FOR THE PURPOSE OF MANUFACTURING BOTTLING PLANTS IN THE INDUSTRIAL UNDERTAKING AND T HEREAFTER DETERMINE THE STATUS OF INDUSTRIAL UNDERTAKING AS AN SSI AND CONS EQUENTLY ENTITLEMENT TO DEDUCTION U/S.80IB OF THE ACT IN ACCORDANCE WIT H LAW AFTER ALLOWING SUFFICIENT OPPORTUNITY TO THE TAXPAYER. (F) VEHICLES 9.33 AS REGARDS VEHICLES TOTAL VALUE OF PLANT AND MACHINERY INCLUDES VEHICLES OF THE VALUE OF RS.78.15 LACS THE LD. CIT (A) OBSERVED THAT SINCE VEHICLES HAVE NOT BEEN EXCLUDED IN THE NOTE ( 2)(B) OF THE AFORESAID NOTIFICATION DATED 10.12.1999 ACCORDINGL Y THESE HAVE TO BE CONSIDERED FOR DETERMINING THE VALUE OF PLANT AND M ACHINERY. HONBLE ANDHRA PRADESH HIGH COURT IN THE CASE OF HYDERABAD DECCAN ITA NO.79/AHD/2008 A.Y. 2004-05 KHS MACHINERY PVT. LTD. V. ITO WD-4(2) ABD PAGE 7 CIGARETTES FACTORY VS. CIT 238 ITR 615 (AP) WHILE ADJUDICATING THE ISSUE OF DETERMINING THE STATUS OF INDUSTRIAL UNDER TAKING AS AN SSI IN THE CONTENT OF PROVISIONS OF SEC. 32A OF THE ACT HELD T HAT SINCE THERE IS AN INDEPENDENT DEFINITION IN THE CO NTEXT OF DEFINING A SMALL-SCALE INDUSTRIAL UNDERTAKING SECTION 43(3) IS NOT APPLICABLE TO THE DEFINITION OF A SMALL-SCALE INDU STRIAL UNDERTAKING. IF SECTION 439(3) DEFINING PLANT INCLUDING VEHICLES IS NOT APPLICABLE THE VALUE OF THE VEHICLES CANNOT BE ADD ED TO THE VALUE OF THE PLANT AND MACHINERY INSTALLED EXCLUDING THOS E ITEMS MENTIONED IN THE SAID EXPLANATION 9.331 IN THE CASE OF DCIT VS. CENTRAL HATCHERIES (P ) LTD. 59 TTJ (JAB) 587 THE ITAT HELD IN THE CASE OF AN ASSESSEE CARRY ING ON THE BUSINESS OF HATCHERIES THAT TRUCK HAS TO BE EXCLUDED WHILE D ETERMINING THE VALUE PLANT AND MACHINERY FOR DETERMINING THE STATUS OF I NDUSTRIAL UNDERTAKING AS AN SSI. 9.332 SIMILARLY IN THE CASE OF DCIT VS SAMIR DIAM OND MFTG. (P) LTD. 67 ITD 25 (AHD) ITAT HELD THAT VEHICLES NOT CONNEC TED WITH THE PRODUCTION INDUSTRIAL UNDERTAKING HAVE TO BE EXCLU DED WHILE DETERMINING THE VALUE PLANT AND MACHINERY FOR DETER MINING THE STATUS OF INDUSTRIAL UNDERTAKING AS AN SSI. 9.333. IN THE CASE UNDER CONSIDERATION IN THE CONTE XT OF PROVISIONS OF SECTION 80IB OF THE ACT ALSO THERE IS NOTHING TO S UGGEST THAT VEHICLES WERE USED FOR THE PURPOSE OF MANUFACTURING BOTTLING PLANTS NOR VEHICLES CAN BE INSTALLED. SINCE THERE IS AN INDEPENDENT DEF INITION OF A SMALL- SCALE INDUSTRIAL UNDERTAKING IN CLAUSE (G) OF SEC. 80IB(14) IN THE LIGHT OF AFORESAID DECISION OF HONLE AP HIGH COURT WE ARE OF THE OPINION THAT VEHICLES HAVE TO BE EXCLUDED WHILE DETERMINING THE VALUE OF PLANT AND MACHINERY FOR THE PURPOSE OF DETERMINING THE STATUS OF INDUSTRIAL UNDERTAKING AS AN SSI AND CONSEQUENTLY FOR ENTITLEM ENT OF DEDUCTION U/S.80IB OF THE ACT. 10. IN THE LIGHT OF ABOVE DISCUSSION THE AO SHALL RECOMPUTE THE VALUE OF THE PLANT AND MACHINERY INSTALLED IN THE INDUSTRIAL UNDERTAKING OF THE TAXPAYER FOR THE PURPOSE OF THE BUSINESS OF THE UND ERTAKING AS ON THE LAST DAY OF THE PREVIOUS YEAR. IF THE VALUE SO WORK ED OUT IS BELOW RS. ONE CRORE THE INDUSTRIAL UNDERTAKING SHOULD BE TRE ATED AS SMALL SCALE INDUSTRIAL UNDERTAKING AND THE DEDUCTION UNDER S. 8 0IB OF THE ACT MAY BE ALLOWED IN ACCORDANCE WITH LAW TO IT. 8. FOLLOWING THE ITAT ORDER IN ASSESSEES OWN CASE A.Y 2003-04 (SUPRA) AS REGARDS MOULDS DIES JIGS FIXTURES PATTERNS TOOLS CONSUMABLES FACTORY ITA NO.79/AHD/2008 A.Y. 2004-05 KHS MACHINERY PVT. LTD. V. ITO WD-4(2) ABD PAGE 8 EQUIPMENTS BEING RACKS TABLES PALLETS ETC. THE ASS ESSING OFFICER IS DIRECTED TO EXCLUDE THE COST OF EQUIPMENTS SUCH AS: TOOLS JIGS DIES MOULDS SPARE PARTS FOR MAINTENANCE AND COST OF CONSUMABLES SOURCES WHI LE DETERMINING VALUE OF PLANT AND MACHINERY IN ORDER TO ASCERTAIN THE STATU S OF INDUSTRIAL UNDERTAKING OF THE ASSESSEE. AS REGARDS COMPUTERS SOFTWARE WE RESTORE THE MATTER TO THE FILE OF AO WITH THE DIRECTION TO ASCERTAIN AS TO WH ETHER OR NOT ALL THE COMPUTERS ARE INSTALLED IN OFFICE OR AS TO WHETHER SOME OF TH ESE ARE INSTALLED FOR THE PURPOSE OF MANUFACTURING THE BOTTLING PLANTS IN THE INDUSTRIAL UNDERTAKING AND THEREAFTER DETERMINING THIS STATUS OF INDUSTRIAL UN DERTAKING AS AN SSI AND CONSEQUENTLY ENTITLEMENT TO DEDUCTION U/S 80IB OF T HE ACT IN ACCORDANCE WITH LAW AFTER ALLOWING SUFFICIENT OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. AS REGARDS VEHICLES THE SAME HAVE TO BE EXCLUDED WHILE DETERMINING THE VALUE OF PLANT AND MACHINERY FOR THE PURPOSE OF DETERMINING THE STATUS OF INDUSTRIAL UNDERTAKING AS SSI AND CONSEQUENTLY FOR ENTITLEMENT OF DEDUCTION U/S. 80IB OF THE ACT. 9. THE ASSESSING OFFICER ACCORDINGLY SHALL RE-COMPU TE THE VALUE OF THE PLANT AND MACHINERY INSTALLED IN THE INDUSTRIAL UND ERTAKING OF THE ASSESSEE FOR THE PURPOSE OF BUSINESS OF THE UNDERTAKING AS ON TH E LAST DAY OF THE PREVIOUS YEAR. IF THE VALUE SO WORKED OUT IS BELOW RS.1 CROR E THE INDUSTRIAL UNDERTAKING SHOULD BE TREATED AS SSI AND THE DEDUCTION U/S. 80I B OF THE ACT MAY BE ALLOWED IN ACCORDANCE WITH LAW. THUS GROUND NO.2 O F THE ASSESSEE IS ALLOWED FOR STATISTICAL PURPOSE. 10. AS REGARDS GROUND NO.3 THE BRIEF FACTS ARE THA T THE ASSESSING OFFICER DISALLOWED THE CLAIM FOR ROYALTY PAYMENT BY THE ASS ESSEE TO ITS ASSOCIATED ENTERPRISE (AE FOR SHORT) HOLDING THAT THE ADDL. CI T (TRANSFER PRICING-3) MUMBAI HAS DETERMINED THE ARMS LENGTH PRICE OF ROY ALTY PAID AT NIL. ACCORDINGLY THE AO HELD THAT THE ROYALTY PAYMENT W AS NOT ALLOWABLE AND HE DISALLOWED THE EXPENSES CLAIMED BY THE ASSESSEE IN PROFIT AND LOSS ACCOUNT OF RS.74 63 975/-. ITA NO.79/AHD/2008 A.Y. 2004-05 KHS MACHINERY PVT. LTD. V. ITO WD-4(2) ABD PAGE 9 11. THE LD. CIT(A) CONFIRMED THE ACTION OF THE ASSE SSING OFFICER VIDE HIS OBSERVATION IN PARA-4.2 TO 4.2.2 WHICH ARE REPRODU CED FOR THE SAKE OF CLARITY AS UNDER:- 4.2 I HAVE CONSIDERED THE ARGUMENTS OF THE LD. A.R OF THE APPELLANT CAREFULLY AND ALSO PERUSED THE ASSESSMENT ORDER AND ALSO THE ORDER OF TPO. THE TPO HAS CATEGORICALLY HELD VIDE PARA 5.2 O F HIS ORDER THAT THE ASSESSEE HAS USED TRANSACTIONAL NET MARGIN METHOD ( TNMM) TO JUSTIFY THE PAYMENT OF ROYALTY. ACCORDING TO THE TPO THE P AYMENT OF ROYALTY IS ABOUT RS.64.90 LACS ONLY WHEREAS THE ASSESSEES TOT AL SALES WERE MORE THAN RS.56 CORES. AS SUCH TRANSACTIONAL NET MARGIN METHOD IN THE CASE OF ROYALTY WOULD NOT GIVE A FAIR COMPARABILITY . THE TPO OBSERVED THAT NO ROYALTY WAS CHARGED FROM OTHER GROUP ENTITI ES. THE APPELLANT REPLIED THAT TECHNOLOGY WAS RECEIVED AT NO COST AND THAT ONLY FOR USING THE KNOW-HOW THEY PAID ROYALTY TO THE JOINT VENTURE COMPANY (AE) AND IF THEY HAD TO PAY THE TECHNOLOGY FEES THEN THAT WOULD HAVE BEEN MORE THAN THE ROYALTY. THE QUESTION OF NO ROYALTY PAYMEN T BY THE WHOLLY OWNED SUBSIDIARIES OF THE GERMAN PARENT COMPANY COU LD NOT DECIDE THE ISSUE OF THE APPELLANTS TRANSACTIONS. THEY ALSO CO NTENDED THAT THE TPO PROPOSAL WOULD RUN COUNTER TO THE GUIDELINES OF GOV ERNMENT OF INDIA FOR DFDI IN JOINT VENTURE. THE APPELLANT ALSO QUOTED TH E APPROVAL OF SIA DATED 01.08.1997. 4.2.1 THE TPO AFTER CONSIDERING THE ASSESSEES REP LY HELD VIDE PARA 5.4 OF THE ABOVE ORDER THAT THE ASSESSEE FAILED TO PROVIDE DETAILS OF COST OF DEVELOPMENT N OF TECHNOLOGY BY THE AE AND FAILED TO PROVIDE THE MANNER IN WHICH THE COST AND PROFIT ELEMENT IN THE DEVELOPMENT OF KNOW-HOW WAS PROPOSED TO BE RECOVERED BY THE AE FRO M THE OTHER GROUP ENTITIES WHO WERE USING OR BENEFITING FROM TH IS KNOW-HOW. ON THIS BASIS HE HELD THAT AT THE ARMS LENGTH PRICE FOR RO YALTY CHARGES COULD BE INFERRED AS NIL. THE TPO ALSO OBSERVED THAT THE APP ROVAL BY FIPB AND SIA CANNOT BE DETEMINATIVE OF ARMS LENGTH PRICE OF ROYALTY PAYMENT AS THESE REGULATORY BODIES DID NOT AND COULD NOT HAVE EXAMINED THE ASSESSEES INTERNATIONAL TRANSACTIONS WITH A TRANSF ER PRICING PERSPECTIVE. FURTHER THE PROVISIONS ON ARMS LENGTH PRICE CAME O N THE STATUTE RECENT AND IN THAT PERSPECTIVE THE ASSESSEES CONTE NTIONS WERE HELD AS NOT TENABLE ON THE FACTS AS WELL AS IN THE EYE OF L AW. ACCORDINGLY THE TPO HELD THAT THE TNMM USED BY THE ASSESSEE WAS NOT APPROPRIATE AND REJECTED IT. IN THE ALTERNATIVE THE TDPO ADOPTE D THE COST PLUS METHOD AND COST BEING NIL AS TO THE DEVELOPMENT OF TECHNICAL KNOW-HOW TRANSFER THE ARMS LENGTH PRICE OF THE TRANSACTION WAS DETERMINED AT NIL VIDE PARA 5.9 OF HIS ORDER. 4.2.2 IN VIEW OF THE APPELLANTS FAILURE TO FURNISH THE COMPLETE AND RELEVANT DETAILS AS TO THE DEVELOPMENT COST OF THE KNOW-HOW WHICH WAS SHARED BY THE AE WITH THE APPELLANT COMPANY THE TP O HAS CORRECTLY ITA NO.79/AHD/2008 A.Y. 2004-05 KHS MACHINERY PVT. LTD. V. ITO WD-4(2) ABD PAGE 10 TAKEN THE ARMS LENGTH PRICE AT NIL. IT IS ALSO TO B E SEEN THAT EVEN AS PENALTY THE WRITTEN SUBMISSIONS FOR THE A.Y. 2002- 03 THE ROYALTY WAS SHOWN AS WAIVED BY THE GERMAN PARENT COMPANY THAT M EANS THERE WAS NO CONSISTENCY AS CLAIMED BY THE APPELLANT IN THAT THE ROYALTY WAS PAYABLE ONLY WITH REFERENCE TO SALES. THE TRANSACTI ONS BEING BETWEEN TWO ASSOCIATED ENTERPRISES THE ASSESSING OFFICER A ND THE TDPO WERE DUTY BOUND TO EXAMINE THE TRANSACTIONS AND NOT TO A CCEPT THE CLAIM AT FACE VALUE. IN THIS REGARD APPROVAL GIVEN BY THE S IA IN AUGUST 1997 WHEN THE PROVISIONS RELATING TO ARMS LENGTH PRICE W ERE NOT ON STATUTE CANNOT HAVE OVERRIDING EFFECT. IN ANY CASE THE SAI D APPROVAL HAS NOT BEEN RATIFIED BY THE FINANCE MINISTRY IN THE LIGHT OF THE DETERMINATION OF ARMS LENGTH PRICE. ACCORDINGLY I HOLD THAT THE TNM M ADOPTED BY THE APPELLANT IS NOT APPROPRIATE IN THAT IT DOES NOT GI VE A TRUE PERSPECTIVE OF THE TRANSACTION. IN ANY CASE. THE COST OF DEVELOP MENT OF KNOW-HOW BY THE APPELLANT HAVING NOT BEEN FURNISHED TO THE TPO HIS DECISION OF DETERMINING THE ARMS LENGTH PRICE AT NIL USING COST PLUS METHOD AND REJECTION OF TNMM ADOPTED BY THE APPELLANT IS HELD AS JUSTIFIABLE ON THE FACTS AND CIRCUMSTANCES OF THE CASE ESPECIALLY IN VIEW OF PARA 1.70 OF OECD GUIDE LINES ON TRANSFER PRICING WHICH WAS EXTR ACTED IN THE ORDER OF TPO. IN THE LIGHT OF THE ABOVE DISCUSSION THE C LAIM OF THE APPELLANT FOR ROYALTY PAYMENT DISALLOWED BY THE AO AS NIL IS REJECTED AND THE ACTION OF THE AO IS UPHELD. I ALSO FIND THAT SIMILA R FINDING HAD BEEN GIVEN BY MY PREDECESSOR IN APPEAL FOR THE A.Y. 2003-04. H ENCE THIS GROUND IS DISMISSED. 12. THE LEARNED COUNSEL FOR THE ASSESSEE AT THE OUT SET POINTED OUT THE OBSERVATION OF THE ADDL. CIT (TRANSFER PRICING) MUM BAI IN HIS ORDER DATED 21- 09-2006 WHICH HAS BEEN REPRODUCED IN PARA-5 OF A.O S ORDER AT PAGE-17. HOWEVER AT ENTITY LEVEL THE PAYMENT OF ROYALTY AT RS.64.90 LAKH IN A TOTAL SALE OF ABOUT MORE THAN RS.56 CRORES FORMS A VERY SMALL FRACTION THE LD AR ARGUED THAT IF BY PAYING 5% AS ROYALTY IF THE ASSESSEE CA N EARN MORE THAN RS.7 CRORES AFTER DEPRECIATION AND THIS 5% PAYMENT AS RO YALTY IS RS.64.90 LAKH FOR A SALE OF RS.56 CRORES THEN THE SAID PAYMENT IS A VER Y REASONABLE AMOUNT AND SHOULD BE ALLOWABLE. AS REGARDS OTHER GROUP ENTITES ARE NOT PAYING ANY ROYALTY FOR SUCH MANUFACTURE KNOW-HOW IT WAS ARGUED THAT T HE SAID TECHNICAL KNOW- HOW IS AVAILABLE TO THE ASSESSEE ONLY AND THEREFORE NO COMPARISON WITH THE OTHER GROUP ENTITES CAN BE MADE. 13. LD. AR RELYING UPON THE ARGUMENTS MADE BEFORE T HE LD. CIT(A) ARGUED THAT ASSESSEE HAD ENTERED INTO AN AGREEMENT FOR PRO VISION OF TECHNICAL KNOW ITA NO.79/AHD/2008 A.Y. 2004-05 KHS MACHINERY PVT. LTD. V. ITO WD-4(2) ABD PAGE 11 WITH KHS MASCHINEN AND ANLAGENBAU AG GERMANY (KHS GERMANY) IN THE YEAR 1997. UNDER THE AGREEMENT THE SAID M/S. KHS GE RMANY AGREED TO PROVIDE KNOW-HOW TECHNOLOGY DESIGNS INFORMATION TRAINING FOR VARIETY OF DIFFERENT MACHINES REQUIRED BY THE INDUSTRIES SUCH AS SOFT DRINKS BREWERIES MINERAL WATER PHARMACEUTICAL ETC. THE AGREEMENT WA S DULY APPROVED BY SIA IN THE YEAR 1997. THE AGREEMENT ALSO CONTEMPLATES U SER OF TRADE NAME KHS AS ALSO USE OF TRADEMARK KHS IN RELATION TO VARIO US PRODUCTS. THIS HAD PROVIDED SIGNIFICANT BENEFITS TO THE ASSESSEE AS RE FLECTING AFFILIATION WITH THE WORLD LEADER. THE KNOW-HOW PROVIDED BY M/S. KHS GER MANY IS INVALUABLE AND SAID M/S KHS GERMANY APPEARS TO COMMAND A VERY SIZA BLE SHARE OF THE BOTTLING INDUSTRY. THE KNOW-HOW HAS BEEN PROVIDED I N PHASES. IT IS ON ACCOUNT OF THIS KNOW-HOW THAT THE ASSESSEE HAS BEEN ALE TO BUILD UP ITS TURNOVER FROM RS.5 06 248/- IN THE YEAR 1997-98 TO RS.67 74 73 30 7/- IN THE CURRENT FINANCIAL YEAR I.E 2002-03. DURING THE TERM OF THE AGREEMENT THERE IS A COVENANT ON THE PART OF THE KNOW-HOW PROVIDER TO IMPART THE IMPROVE MENTS TO THE ASSESSEE. THE MACHINES ARE SOPHISTICATED AND THERE IS CONTINU OUS UP GRADATION IN THE TECHNOLOGY FRONT. AS PART OF THE OBLIGATION KHS GE RMANY HAS ASSISTED THE ASSESSEE IN UNDERSTANDING THE REQUIREMENTS OF THE C USTOMERS AND GETTING NEWER DESIGNS. THUS IT WAS ENSURED THAT THE ASSESS EE HAS THE BENEFIT OF OPERATIVE INDUSTRY TRENDS. THERE WAS NO LUMP SUM OR UPFRONT OR INITIAL PAYMENT WHICH WAS MADE BY THE ASSESSEE THE KNOW-HOW PROVIDE R. THE CONSIDERATION PAYABLE IN RESPECT OF THE KNOW-HOW COMPRISED OF ROY ALTY PAYMENT @ 5%. THE CALCULATION OF THE ROYALTY FEE IS BASED ON THE NET EX-FACTORY SELLING PRICE EXCLUSIVE OF STATUTORY LEVIES LIKE SALES TAX EXCIS E AND EXCLUDING COST OF STANDARD BOUGHT OUT COMPONENTS. THE AGREEMENT IS OF DURATION OF 7 YEAS FROM THE DATE OF COMMENCEMENT OF MANUFACTURING OR TEN YE ARS FROM THE DATE OF EXECUTION OF THE CONTRACT WHICHEVER IS EARLIER. ROY ALTY IS PAYABLE DURING THE DURATION OF THE AGREEMENT. THE FOLLOWING ROYALTY PA YMENTS HAVE BEEN MADE DURING THE YEARS FROM 1998-99 TILL THE CURRENT YEAR 2002-03. ASSESSMENT YEAR ROYALTY PAID [RS] 1999-00 77 176 ITA NO.79/AHD/2008 A.Y. 2004-05 KHS MACHINERY PVT. LTD. V. ITO WD-4(2) ABD PAGE 12 2000-01 39 68 468 2001-02 10 75 995 2002-03 NIL 2003-04 1 00 28 538 IN THE SCRUTINY ASSESSMENT FOR THE YEAR 2001-02 TH E ROYALTY EXPENDITURE HAS BEEN ALLOWED AS DEDUCTION. IN THE CURRENT YEAR ROY ALTY PROVISION OF RS.12 00 28 38/- WAS MADE. SINCE WITHHOLDING TAX I N RESPECT THEREOF WAS PAID IN THE SUBSEQUENT YEAR THE EXPENDITURE IF ADMISSI BLE AS AN ELIGIBLE EXPENDITURE IN THE COMPUTATION OF INCOME IS TO BE ACTUALLY DEDUCTED IN A.Y.2004-05. IN THE TRANSFER PRICING ASSESSMENT FOR THE CURRENT YEAR THE TPO HAS APPARENTLY TAKEN A VIEW THAT THE ASSESSEE NEED NOT HAVE PAID ANY ROYALTY TO THE KNOW-HOW PROVIDER AT ALL DURING THE CURRENT YEAR. THE AO IS OF THE VIEW THAT THE KNOW-HOW PROVIDED TO THE ASSESSEE HAD NO V ALUE OR HAD INSIGNIFICANT VALUE AND INFERRED THAT SINCE THE SAID M/S. KHS GER MANY HAD NOT CHARGED ANY ROYALTY FROM ITS WHOLLY OWNED SUBSIDIARIES OUTSIDE INDIA. IT IS A STRONG INDICATION OF THE KNOW-HOW HAVING NIL OR INSIGNIFIC ANT VALUE. FURTHER THE AO ALSO SURMISED THAT COST OF DEVELOPMENT OF KNOW-HOW FOR THE GERMAN COMPANY IS NIL AND HENCE EVEN UNDER COST PLUS METHOD ALP I S NIL. THE CONCLUSION OF TPO AND AO ARE INCORRECT FOR FOLLOWING REASONS: 1) IT IS APPARENT THAT A BUSINESS ENTERPRISE HAS TO ABIDE BY ALL ITS LEGAL OBLIGATIONS WHICH HAVE BEEN UNDERTAKEN BY IT. THE A SSESSEE HAS PAID ROYALTY UNDER ITS AGREEMENT DATED 21 ST SEPT. 1997 WHICH IS ITS LEGAL OBLIGATION. THE AGREEMENT HAS BEEN APPROVED B Y SIA. IT IS UNTHINKABLE THAT SIA WOULD HAVE APPROVED AN AGREEME NT IF IT WAS FOR KNOW-HOW OF NO RELEVANCE OR NO VALUE OR WAS EYEWASH . 2) IT IS WHOLLY INCORRECT FOR ONE TO EVEN SUGGEST T HAT KNOW-HOW POSSESSED BY A PERSON WHO COMMANDS SIGNIFICANT SHAR E IN THE INDUSTRY AT A GLOBAL LEVEL AND WHICH HAS ENABLED TH E ASSESSEE TO BUILD UP TURNOVER OF 67 CRORES IN THE CURRENT YEAR AND WHICH HAS ENABLED THE ASSESSEES ENTRY INTO MAJORS LIKE COCA COLA AND PEPSI DID NOT HAVE ANY VALUE AT ALL; AS IF ANYONE HAS TH E CAPACITY TO BUILD THESE MACHINES. 3) THE ROYALTY EXPENDITURE HAS BEEN ADMITTED IN SCR UTINY ASSESSMENTS IN THE PAST. THERE HAS BEEN NO CHANGE IN THE FACTS OF THE CASE. IT IS WELL SETTLED THAT IF THERE HAS BEEN NO CHANGE IN TH E FACTS IT IS INCORRECT FOR AN ASSESSING OFFICER TO DEPART FROM H IS EARLIER CONCLUSION. ITA NO.79/AHD/2008 A.Y. 2004-05 KHS MACHINERY PVT. LTD. V. ITO WD-4(2) ABD PAGE 13 4) THE TPO/AO FAIL TO REALIZE THAT COMPENSATION OF KNOW-HOW CAN BE IN ONE OF THE TWO OR THREE ACCEPTED PRACTICES VIZ. UP FRONT PAYMENT RECURRING ROYALTY COMBINATION OF THE TWO. THE RECU RRING ROYALTY PAYMENT THAT TOO WITHIN THE NORMS PERMITTED BY SIA IS ONE OF THE SAFER WAYS OF PAYING COMPENSATION INASMUCH AS THAT THE USER DOES NOT HAVE THE RISK OF PAYING UPFRONT AMOUNT WITHOUT THE TASTE OF SUCCESS. CONSIDERING THIS IN A HARD CASE IT COULD BE THAT EVEN IF A PERSON HAS TO MAKE RECURRING PAYMENT FOR ONE TIME T RANSFER OF KNOW- HOW OR IPR IT COULD STILL BE A FAIR COMPENSATION. IN FACT IN THE CASE OF ASSESSEE THE FACT ARE STRONGER INASMUCH AS THAT TH E ASSESSEE HAS LIVE AND CONTINUOUS INTERACTION WITH THE KNOW-HOW P ROVIDER. IT IS ALSO PUT FORTH THAT AS THE PAYMENTS WERE ALLOWED FOR ROY ALTY IN EARLIER YEARS ON THE PRINCIPLE OF CONSISTENCY THE SAME SHO ULD BE ALLOWED FOR CURRENT YEAR ALSO. THE AR RELIED UPON THE DECISION OF HONBLE DELHI HI GH COURT IN THE CASE OF CIT V. ORACLE INDIA (P) LTD. (2011) 243 CTR 103 (DEL) DECISION OF ITAT B BENCH DELHI IN ITA NO.4878/DEL/2009 3895 421 & 4333/DEL/2010 DATED 11- 02-2011 AND DECISION OF ITAT L MUMBAI BENCH IN TH E CASE OF CABOT INDIA LTD. V. DCIT (20110) 46 SOT 402 (MUM) IN SUPPORT OF HIS ARGUME NTS. 14. THE LD. CIT-DR ON THE OTHER HAND RELIED UPON T HE ORDERS OF ASSESSING OFFICER AND LD. CIT(A). HE FURTHER ARGUED THAT TECH NICALLY THE ISSUE SHOULD BE DECIDED IN FAVOUR OF REVENUE SINCE THE ASSESSEE DID NOT DEDUCT THE TAX AT SOURCE DURING THE ASSESSMENT YEAR 2003-04 AND THE A SSESSEE ITSELF MADE THE DISALLOWANCE IN THE COMPUTATION. IN THE PRECEDING Y EAR I.E. A.Y. 2003-04 THE TRANSFER PRICING OFFICER MADE THE DISALLOWANCE WHI CH ACTION WAS CONFIRMED BY THE LD. CIT(A) AND THE ITAT VIDE PARA-2 HAD DISM ISSED THE GROUNDS BY OBSERVING AS UNDER:- 2.AT THE OUTSET LEARNED AR ON BEHALF O THE TAXPAY ER DID NOT PRESS THE AFORESAID GROUND NO.3 IN RESPECT OF COMPUTATION OF ARMS LENGTH PRICING RELATION TO INTERNATIONAL TRANSACTIONS. ACCORDINGLY THE SAID GROUND IS DISMISSED. MOREOVER THE ASSESSEE COULD NOT PROVIDE THE DETAIL S IN THE PRECEDING ASSESSMENT YEAR THAT IS A.Y. 2003-04 IN SPITE OF SH OW-CAUSE NOTICE TO THE ASSESSEE. THEREFORE LD. CIT-DR ARGUED THAT TECHNIC ALLY THE ACTION OF LD. CIT(A) SHOULD BE CONFIRMED ON MERIT. ITA NO.79/AHD/2008 A.Y. 2004-05 KHS MACHINERY PVT. LTD. V. ITO WD-4(2) ABD PAGE 14 15. LD. CIT-DR ARGUED THAT TRANSACTION NET MARGIN M ETHOD (TNMM) IS NOT CORRECT METHOD FOR COMPUTATION OF ARMS LENGTH PRICE U/S92C(1) OF THE ACT. SINCE THE ASSESSEE HAS MADE THE COMPUTATION NOT WIT H RESPECT TO INDIVIDUAL TRANSACTION BUT THE TRANSACTIONS HAVE BEEN GROUPED AS A WHOLE. THE LD. CIT- DR FURTHER ARGUED THAT IT IS THE ASSESSEE WHO HAS TO SHOW THE PROPER METHOD FOR COMPUTATION OF ARMS LENGTH PRICE AND THE ASSESS EE HAD FAILED TO SHOW SUCH METHOD. THE METHOD SO ADOPTED AS MENTIONED HER EINABOVE IS NOT A CORRECT METHOD AS HAS RIGHTLY BEEN CONFIRMED BY THE LD. CIT(A). THE LD. CIT- DR RELIED UPON THE DECISIONS OF VARIOUS COURTS OF L AW IN SUPPORT OF HIS ARGUMENTS AS UNDER:- I) UCB INDIA (P) LTD. V. ACIT (2009) 124 TTJ 289 (M UM) AT DEPARTMENTAL PAPER BOOK (DPB) PAGE-29-35 II) DCIT V. STARLITE (2010) 113 TTJ 425 (MUM) (DPB) AT PAGES 36-44 OF (DPB) III) AZTEC SOFTWARE & TECHNOLOGY SERVICES LTD. V. A CIT (2007) 109 TTJ 892 (SB) (BANG) PAGES76-90(DPB) IV) COCA COLA INDIA INC. V. ACIT & ORS. (2009) 221 CTR 225 (P& H) PAGES 91-96 (DPB) V) PANASONIC INDIA (P) LTD. V. ITO (2011) 135 TTJ 4 3 (DEL) PAGES 120- 127 (DPB) LD. CIT-DR ALSO INVITED OUR ATTENTION TO CIRCULAR O F THE BOARD AVAILABLE AT DPB PAGES-16 IN PARA-55.1 TO 55.3 16. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE FACTS OF THE CASE. THERE IS NO DISPUTE TO THE FACT THAT ASSESSEE HAD E NTERED INTO AN AGREEMENT WITH KHS GERMANY IN THE YEAR 1997 BY WHICH THE SAID KHS GERMANY AGREED TO PROVIDE KNOW-HOW TECHNOLOGY DESIGN INFORMATIO N TRAINING ETC. TO THE ASSESSEE. THE AGREEMENT WAS APPROVED BY SIA IN THE YEAR 1997. AS PER THE ARRANGEMENT USE OF TRADE NAME KHS IN RELATION TO VA RIOUS PRODUCTS WHICH HAS PROVIDED SIGNIFICANT BENEFITS TO THE ASSESSEE. THE SAID KNOW-HOW HAS BEEN PROVIDED IN PHASES AND THE ASSESSEE HAD BEEN ABLE T O BUILD UP ITS TURNOVER ITA NO.79/AHD/2008 A.Y. 2004-05 KHS MACHINERY PVT. LTD. V. ITO WD-4(2) ABD PAGE 15 FROM RS.5.06 LAKH IN THE YEAR 1997 TO RS.67.74 CROR ES IN THE FINANCIAL YEAR 2002-03 RELEVANT TO A.Y 2003-04. AS ARGUED BY THE L D. AR THAT AS PART OF OBLIGATION KHS GERMANY HAS ASSISTED THE ASSESSEE I N UNDERSTANDING REQUIREMENTS OF THE CUSTOMERS AND GETTING NEWER DES IGN. THERE WAS NO LUMP SUM OR UPFRONT OR INITIAL PAYMENT MADE TO THE KNOW- HOW PROVIDER EXCEPT THE ROYALTY PAYMENT @ 5% WHICH IS BASED ON NET EX-FACTO RY SELLING PRICE EXCLUSIVE OF STATUTORY LEVIES AND EXCLUDING COST OF STANDARD BOUGHT OUT COMPONENTS. IT IS ALSO NOT DISPUTED THAT THE AGREEMENT WAS FOR A DURA TION OF SEVEN YEARS FROM THE DATE OF COMMENCEMENT OF MANUFACTURING OR TEN YE ARS FROM THE DATE OF EXECUTION OF CONTRACT WHICHEVER IS EARLIER. IN SCRU TINY ASSESSMENT FOR THE A.Y. 2001-02 THE ROYALTY EXPENDITURE HAS BEEN ALLOWED AS DEDUCTION. 17. ON HEARING THE PARTIES AND PERUSING THE MATERIA LS AVAILABLE ON RECORD WE ARE OF THE VIEW THAT FOR A TRANSACTION TO COME U /S 92 OF THE ACT IT IS NECESSARY TO ESTABLISH THAT THE COURSE OF BUSINESS BETWEEN RESIDENT AND NON- RESIDENT IS SO ARRANGED THAT THE BUSINESS TRANSACTE D BETWEEN THEM PROVIDES TO THE RESIDENT EITHER (I) NO PROFITS OR (II) LESS THA N ORDINARY PROFITS WHICH MIGHT BE EXPECTED TO ARISE IN THE BUSINESS. IN THE PRESENT C ASE THE ASSESSEE HAD DECLARED INCOME AND THEREFORE IT IS NOT CASE OF NO PROFIT . SO AS REGARDS THE ADEQUACY OF PROFITS VIS--VIS ORDINARY PROFITS WHIC H MIGHT BE EXPECTED TO ARISE IN THE BUSINESS THE SAME CAN BE FOUND OUT ONLY WH EN EXERCISE IS DONE TO COMPARE THE INCOME OF THE ASSESSEE WITH OTHER COMPA RABLE ENTERPRISES IN INDIA. IN THE PRESENT CASE THE TPO OBSERVED THAT N O ROYALTY WAS CHARGED BY OTHER GROUP ENTITES AND ACCORDINGLY THE ARMS LENGTH PRICE FOR ROYALTY CHARGES WAS INFERRED AS NIL. THE AO ACCORDINGLY DISALLOWED THE ROYALTY PAYMENT. AS ARGUED BY THE LD. AR THAT THE TECHNICAL KNOW-HOW WA S PROVIDED TO THE ASSESSEE ONLY AND THE SAME WAS NOT COMPARABLE WITH OTHER ENTITIES OF THE GROUP. THE ASSESSEE HAD NOT MADE THE ONE-TIME PAYME NT BUT MAKING THE CONTINUOUS PAYMENT TO THE KNOW-HOW PROVIDER WHICH H AS BEEN ACCEPTED BY THE DEPARTMENT IN THE PAST. THE ASSESSEE HAS BEEN C HARGING 5% ROYALTY ON ITA NO.79/AHD/2008 A.Y. 2004-05 KHS MACHINERY PVT. LTD. V. ITO WD-4(2) ABD PAGE 16 EACH AND EVERY TRANSACTION AND THEREFORE THE SAID P AYMENT CANNOT BE SAID TO HAVE BEEN PAID ON THE AGGREGATE AMOUNT AS ARGUED B Y LD. CIT-DR. THE FINDINGS OF THE ASSESSING OFFICER IN CONSIDERING TH E ROYALTY CHARGES AS NIL AS ARMS LENGTH PRICE CANNOT BE ACCEPTED SINCE THE AO I N THE PRESENT CASE HAS NOT BROUGHT ON RECORD THE ORDINARY PROFITS WHICH C AN BE EARNED IN SUCH TYPE OF BUSINESS. THEREFORE IN OUR VIEW THE PAYMENT OF ROYA LTY IS NOT HIT BY THE PROVISIONS OF SECTION 92 OF THE ACT AND THERE IS NO REASON TO HOLD THAT THE EXPENSES SHOULD NOT BE ALLOWED U/S.37(1) OF THE ACT SINCE THE EXPENDITURE HAS BEEN INCURRED BY THE ASSESSEE DURING THE COURSE OF BUSINESS AND IS HAVING THE NEXUS WITH THE BUSINESS OF THE ASSESSEE. THEREFORE THE PAYMENT OF ROYALTY IS A BUSINESS EXPENDITURE WHICH HAS BEEN IN CURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS OF THE ASSE SSEE AND SAME IS TO BE ALLOWED IN TOTO AS A MATTER OF COMMERCIAL EXPEDIENC Y. THEREFORE THE CASE LAWS RELIED UPON BY THE LD. CIT-DR ARE OF NO BENEFI T TO THE REVENUE. THE REASONABLENESS OF EXPENDITURE IN THE PRESENT CIRCUM STANCES AND FACTS OF CASE CANNOT BE DOUBTED AND ACCORDINGLY THE ASSESSI NG OFFICER IS DIRECTED TO ALLOW THE CLAIM OF THE ASSESSEE AND THE ORDER OF LD . CIT(A) IS REVERSED. THUS GROUND NO.3 OF THE ASSESSEE IS ALLOWED. 18. AS REGARDS GROUND NO.4 THE BRIEF FACTS ARE THA T THE ASSESSING OFFICER OBSERVED THAT IN ASSESSMENT YEAR 2003-04 THE ASSESS EE HAD DEBITED ROYALTY OF RS.1 15 32 819/- PERTAINING TO THAT YEAR AND ASS ESSEE REPLIED BEFORE THE AO VIDE LETTER DATED 15-12-2006 SAYING THAT THE TDS CO ULD NOT BE DEPOSITED WITHIN THE PRESCRIBED TIME-LIMIT AND ASSESSEE DEPOS ITED THE SAME DURING THE YEAR RELEVANT TO A.Y. 2004-05. THE ASSESSEE CLAIMED THE SAME AS EXPENSES IN THIS YEAR U/S.40(A) OF THE ACT. HOWEVER AS THE MATTER WAS DECIDED AGAINST THE ASSESSEE IN A.Y. 2003-04 AND THE TPO-3 MUMBAI H AD DIRECTED THE AO TO ADJUST UPWARD THE TOTAL INCOME OF THE ASSESSEE AT R S.1 00 28 538/- ON ACCOUNT OF DETERMINATION OF ARMS LENGTH PRICE OF TR ANSACTION RELATING TO PAYMENT OF ROYALTY AT NIL. THE ASSESSING OFFICER DI D NOT ALLOW THE EXPENSES OF ITA NO.79/AHD/2008 A.Y. 2004-05 KHS MACHINERY PVT. LTD. V. ITO WD-4(2) ABD PAGE 17 LAST YEAR IN THE YEAR UNDER CONSIDERATION AND THE S AME WAS ADDED TO THE TOTAL INCOME OF THE ASSESSEE. 19. THE LD. CIT(A) CONFIRMED THE ACTION OF THE ASSE SSING OFFICER. 20. THERE IS NO DISPUTE TO THE FACT THAT THE ASSESS EE HAD NOT DEDUCTED THE TAX AT SOURCE IN THE PRECEDING YEAR I.E. A.Y. 2003- 04. THE LD. AR ARGUED THAT SAME HAS BEEN DEDUCTED DURING THE IMPUGNED YEAR AND HAS BEEN PAID DURING THE YEAR. THE LD. DR HAS OPPOSED THE SUBMISSIONS OF THE ASSESSEE BY REFERRING THE RELEVANT PARA(S) OF ORDERS OF ASSESSI NG OFFICER AND LD. CIT(A). HE FURTHER SUBMITTED THAT THE ASSESSEE HAS NOT PRE SSED THIS GROUND OF APPEAL IN ITS APPEAL FOR THE A.Y. 2003-04 IN RESPECT OF CO MPUTATION OF ARMS LENGTH PRICE IN RELATION TO INTERNATIONAL TRANSACTIONS AND ACCORDINGLY THE GROUND OF THE ASSESSEE WAS DISMISSED BY ITAT AHMEDABAD C BE NCH IN ITS ORDER IN ITA NO.2289/AHD/2006 DATED 19-12-2008.. 21. WE FIND THAT THIS ISSUE HAS NOT BEEN CONSIDERED IN THE RIGHT PERSPECTIVE BY THE ASSESSING OFFICER AND LD. CIT(A). THERE IS N O FINDING IN THE RELEVANT ASSESSMENT YEAR TO WHAT AMOUNT ROYALTY PAYMENT PERT AINS TO WHICH ASSESSMENT YEAR AND WHETHER TDS THEREON WAS PAID BY THE ASSESSEE DURING THE RELEVANT PERIOD I.E. A.Y. 2004-05. ACCORDINGLY THE ISSUE IS RESTORED TO FILE OF AO WITH DIRECTION TO DECIDE THE ISSUE AFRESH IN THE LIGHT OF DECISION HEREINABOVE AND TO RECORD THE FINDING ON THE ISSUE AS DIRECTED ABOVE BUT BY PROVIDING OPPORTUNITY OF BEING HEARD TO ASSESSEE. T HUS GROUND NO.4 OF ASSESSEE IS ALLOWED FOR STATISTICAL PURPOSE. 22. IN THE RESULT APPEAL OF THE ASSESSEE IS PARTLY ALL OWED FOR STATISTICAL PURPOSES. # !' $!%& 10 / 02 /201 2 * + - THIS ORDER PRONOUNCED IN OPEN COURT ON 10/02/ 201 2. SD/- SD/- ( G.C.GUPTA ) ( B.P. JAIN ) (VICE PRESIDENT) (ACCOUNTANT MEMBER) $!%&- 10/02/2012 /!! - DKP* ITA NO.79/AHD/2008 A.Y. 2004-05 KHS MACHINERY PVT. LTD. V. ITO WD-4(2) ABD PAGE 18 !' !' !' !' 001 001 001 001 21 21 21 21 / COPY OF ORDER FORWARDED TO:- 1. / APPELLANT 2. / RESPONDENT 3. %%05 6 / CONCERNED CIT 4. 6- / CIT (A) 5. 19 0005 05 /!! / DR ITAT AHMEDABAD 6. <= ># / GUARD FILE. BY ORDER/ !' /TRUE COPY/ ?// %@ 05 /!! -