The ACIT, Circle-1(2),, Baroda v. FAG BEARINGS INDIA LIMITED, Baroda

ITA 817/AHD/2006 | 2002-2003
Pronouncement Date: 14-11-2014 | Result: Partly Allowed

Appeal Details

RSA Number 81720514 RSA 2006
Assessee PAN AAACF3357Q
Bench Ahmedabad
Appeal Number ITA 817/AHD/2006
Duration Of Justice 8 year(s) 7 month(s) 11 day(s)
Appellant The ACIT, Circle-1(2),, Baroda
Respondent FAG BEARINGS INDIA LIMITED, Baroda
Appeal Type Income Tax Appeal
Pronouncement Date 14-11-2014
Appeal Filed By Department
Order Result Partly Allowed
Bench Allotted D
Tribunal Order Date 14-11-2014
Date Of Final Hearing 23-09-2014
Next Hearing Date 23-09-2014
Assessment Year 2002-2003
Appeal Filed On 03-04-2006
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD D BENCH AHMEDABAD BEFORE SHRI ANIL CHATURVEDI ACCOUNTANT MEMBER AND ! '# '# '# '# SHRI KUL BHARAT JUDICIAL MEMBER $ ! % & % & % & % & ITA NO. 793 & 817/AHD/2006 ASSESSMENT YEAR :2002-03 FAG BEARINGS INDIA LTD. P.O. MANEJA BARODA DCIT CIRCLE-1 BARODA. V/S . & DCIT CIRCLE-1 BARODA. FAG BEARINGS INDIA LTD. P.O. MANEJA BARODA PAN NO. A A A CF 3357Q (APPELLANT) .. (RESPONDENT) '! ( ) / BY REVENUE SHRI VIMALENDU VERMA CIT D.R. SHRI S. C. TIWARI TPO ( ) / BY ASSESSEE SHRI A. V. SONDE SHRI MILIN MEHTA & SHRI BHAVIN MARFATIA A.R. * ( /DATE OF HEARING 25.09.2014 + - ( /DATE OF PRONOUNCEMENT 14.11.2014 O R D E R PER BENCH THESE TWO APPEALS FILED BY ASSESSEE AND REVENUE ARE AGAINST THE ORDER OF CIT(A)-III BARODA DATED 27.01.2006 FOR T HE ASSESSMENT YEAR 2002- 03. 2. THE FACTS AS CULLED OUT FROM THE MATERIALS ON RE CORD ARE AS UNDER: 3. THE ASSESSEE IS A COMPANY STATED TO BE ENGAGED I N THE BUSINESS OF MANUFACTURING OF VARIOUS TYPES OF BALL AND ROLLER B EARINGS. THE ASSESSEE FILED ITS RETURN OF INCOME FOR A.Y. 2002-03 ON 31.10.2002 DECLARING TOTAL INCOME OF ITA NOS. 793 & 817/AHD/2006 A.Y. 2002-03 (FAG BEARINGS INDIA LTD. VS. DCIT) PAGE 2 RS.4 27 30 600/-. THE CASE WAS SELECTED FOR SCRUTI NY AND THEREAFTER THE ASSESSMENT WAS FRAMED U/S.143(3) VIDE ORDER DATED 3 1.03.2005 AND THE TOTAL INCOME WAS DETERMINED AT RS.25 95 51 168/-. AGGRIE VED BY THE ORDER OF A.O. ASSESSEE CARRIED THE MATTER BEFORE THE CIT(A) WHO V IDE ORDER DATED 27.01.2006 GRANTED PARTIAL RELIEF TO THE ASSESSEE. AGGRIEVED BY THE AFORESAID ORDER OF CIT(A) THE ASSESSEE AND REVENUE ARE NOW I N APPEAL BEFORE US. 4. WE FIRST TAKE UP ASSESSEES APPEAL IN ITA NO. 79 3/AHD/2006 AND THE GROUNDS RAISED ARE AS UNDER: 1. THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) ERRED IN FACT AND IN LAW IN CONFIRMING THE ADDITION OF RS. 84.32 LACS ON ACC OUNT OF INTEREST RECEIVED BY THE APPELLANT ON INCOME TAX REFUND DESPITE THE FACT THAT THE SAID INTEREST HAD NOT BECOME FINAL DURING THE YEAR UNDER CONSIDERATIO N. 2. THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) ERRED IN FACT AND IN LAW IN CONFIRMING THE ACTION OF THE AO IN TREATING REPA IRING EXPENSES TO PLANT AND MACHINERY OF RS. 133.77 LACS AS CAPITAL EXPENDITURE INSTEAD OF REVENUE EXPENDITURE AS CLAIMED BY THE APPELLANT. 3. THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) ERRED IN FACT AND IN LAW IN CONFIRMING THE ACTION OF THE AO IN TREATING REPA IRING EXPENSES TO PLANT & MACHINERY OF RS. 120.16 LACS AS CAPITAL EXPENDITURE INSTEAD OF REVENUE EXPENDITURE AS CLAIMED BY THE APPELLANT. THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) F URTHER ERRED IN FACT AND IN LAW IN NOT ALLOWING DEPRECIATION ON THE AMOUNT C ONSIDERED AS CAPITAL EXPENDITURE ON THE GROUND THAT NO EVIDENCE WAS FURN ISHED FOR PROVING THAT THE SUBJECT ASSET WAS INSTALLED AND PUT TO USE DURING T HE YEAR. 4. THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) ERRED IN FACT AND IN LAW IN CONFIRMING THE ACTION OF THE AO IN CONSIDERING S OFTWARE EXPENSES ON ACCOUNT OF SAP R3 CHARGES OF RS. 104.99 LACS AS CAP ITAL EXPENDITURE. 5. THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) ERRED IN FACT AND IN LAW IN CONFIRMING THE ACTION OF THE AO IN CONSIDERING L UMP SUM PAYMENT OF RS. 44.21 LACS ON ACCOUNT OF KNOWHOW FEES AS CAPITAL EX PENDITURE. ITA NOS. 793 & 817/AHD/2006 A.Y. 2002-03 (FAG BEARINGS INDIA LTD. VS. DCIT) PAGE 3 THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) A LSO ERRED IN FACT AND IN LAW IN ENHANCING THE DISALLOWANCE ON ACCOUNT OF ROY ALTY BY A SUM OF RS. 8.81 LACS IN RESPECT OF TDS PAID ON SUCH AMOUNT OF KNOWH OW FEES AS PER THE TERMS OF AGREEMENT AND TREATING THE SAME AS CAPITAL EXPENDITURE PRIMARILY ON THE GROUND THAT IT IS A CAPITAL EXPENDITURE. 6. THE LD. CIT (A) ERRED IN FACT AND IN LAW IN PART IALLY CONFIRMING THE ADJUSTMENT PROPOSED BY THE TPO / AO U/S. 92 C R.W.S. 92 (1) IN RESPECT OF INTERNATIONAL TRANSACTIONS IN AS MUCH AS IT PERTAINED TO PART OF THE ROYALTY PAID AMOUNTING TO RS. 375.91 LACS AND IN RESPECT OF OTHER INTERNATION AL TRANSACTIONS AMOUNTING TO RS. 59.12 LACS AND THUS CONFIRMING THE ENHANCEME NT TO THE INCOME OF THE APPELLANT AGGREGATING TO RS. 435.03 LACS. A. THE LD. CIT (A) ALSO ERRED IN FACT AND IN LAW IN HOLDING THAT ONIY ROYALTY AND FEES FOR TECHNICAL SERVICES PAID @ 1.5 % OF THE SALES VALUE MAY BE TREATED AS ARM'S LENGTH PRIC E AND BALANCE WAS REQUIRED TO BE ADJUSTED UNDER CHAPTER X OF THE ACT AND THUS CONFIRMING THE ADJUSTMENT TO THE EXTEN T OF RS. 375.91 LACS. B. THE LD. CIT (A) ALSO ERRED IN FACT AND IN LAW IN CONFIRMING THE ACTION OF THE TPO / AO IN SEPARATING THE PROFITS OF THE APPELLANT COMPANY IN RESPECT OF DOMESTIC TARIFF ARE A UNITS AND THEN COMPARING THE SAME WITH COMPOSITE PROFITS OF OTHER CASES WHICH INCLUDED THE EXPORT PROFITS AND THUS C ONFIRMING ADJUSTMENT OF RS 59.12 LACS ON THE ALLEGED GROUND OF LOWER COMPARABLE PROFITS. _ 7. THE LD. CLT (A) ERRED IN FACT AND IN LAW IN INVO KING THE PROVISIONS OF SECTION 40 A (2) (B) FOR THE FIRST TIME FOR HOLDING THAT TH E ROYALTY AND FEES FOR TECHNICAL SERVICES PAID IN EXCESS OF 1.5 % OF THE S ALES VALUE IS EXCESSIVE AND THEREFORE DESERVED TO BE DISALLOWED AND THUS CO NFIRMING THE DISALLOWANCE OF RS. 375.91 LACS. A. THE LD. C1T (A) ALSO ERRED IN FACT AND IN LAW IN HOLDING THAT IF FOR ANY REASON THE ADJUSTMENT MADE U/S. 92 ON THE C OUNT OF ROYALTY PAYMENT IS DELETED THEN IT MAY BE CONFIRME D ON THE GROUND OF IT BEING EXCESSIVE BY INVOKING THE PROVIS IONS OF SECTION 375.91 LACS. 8. THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) ERRED IN FACT AND IN LAW IN CONFIRMING THE ACTION OF THE AO IN CONSIDERING R EPAIRS TO BUILDING AMOUNTING ITA NOS. 793 & 817/AHD/2006 A.Y. 2002-03 (FAG BEARINGS INDIA LTD. VS. DCIT) PAGE 4 TO RS. 40.18 LACS AS CAPITAL EXPENDITURE INSTEAD OF REVENUE EXPENDITURE CLAIMED BY THE APPELLANT. 9. THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) ERRED IN FACT AND IN LAW IN CONFIRMING THE ACTION OF THE AO IN CONSIDERING S OFTWARE EXPENSES OF RS. 14.91 LACS AS CAPITAL EXPENDITURE. 10. THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS ) ERRED IN FACT AND IN LAW IN CONFIRMING DISALLOWANCE OF RS. 0.93 LACS MADE BY THE AO INVOKING PROVISIONS OF SECTION 14A OF THE INCOME TAX ACT 19 61. 11. THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS ) ERRED IN FACT AND IN LAW IN CONFIRMING DISALLOWANCE OF RS. 65.35 LACS MADE B Y THE AO ON ACCOUNT OF DIMINUTION IN THE VALUE OF INVESTMENTS. 12. THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS ) ERRED IN FACT AND IN LAW IN CONFIRMING DISALLOWANCE OF RS. 8.05 LACS MADE BY THE AO ON ACCOUNT OF INTEREST PAID ON FOREIGN SUPPLY CREDIT ON THE GROUN D THAT TDS U/S. 195 OF THE INCOME TAX ACT 1961 HAS NOT BEEN DEDUCTED. 13. THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS ) ERRED IN FACT AND IN LAW IN CONFIRMING THE ACTION OF THE AO IN CHARGING INTE REST U/S. 234B AND SECTION 234D OF THE INCOME TAX ACT 1961. 5. GROUND NO.1 IS WITH RESPECT TO ADDITION OF RS.84 .32 LACS ON ACCOUNT OF INTEREST RECEIVED ON INCOME TAX REFUND. 6. DURING THE COURSE OF ASSESSMENT PROCEEDING A.O. NOTICED THAT ASSESSEE HAD RECEIVED INTEREST ON INCOME TAX REFUND AMOUNTING TO RS.84 32 309/- BUT THE SAME WAS NOT CONSIDERED BY A SSESSEE AS A PART OF TAXABLE INCOME FOR THE REASON THAT ACCORDING TO AS SESSEE THE MATTER ON WHICH THE REFUND HAS BEEN RECEIVED HAD NOT REACHED FINALITY. THE SUBMISSION OF THE ASSESSEE WAS NOT FOUND ACCEPTABLE TO THE A.O . MORE SO SINCE THE ASSESSEE HAD RECEIVED THE INTEREST DURING THE YEAR UNDER CONSIDERATION. HE ACCORDINGLY ADDED THE AMOUNT AS INCOME OF THE ASSE SSEE. AGGRIEVED BY THE ORDER OF A.O. ASSESSEE CARRIED THE MATTER BEFO RE THE CIT(A). CIT(A) ITA NOS. 793 & 817/AHD/2006 A.Y. 2002-03 (FAG BEARINGS INDIA LTD. VS. DCIT) PAGE 5 FOLLOWING THE ORDER OF HIS PREDECESSOR FOR A.Y. 200 1-02 CONFIRMED THE ORDER OF A.O. AND DISMISSED THE GROUNDS OF ASSESSEE. 7. AGGRIEVED BY THE ORDER OF CIT(A) THE ASSESSEE I S NOW IN APPEAL BEFORE US. 8. BEFORE US AT THE OUTSET LD. A.R. SUBMITTED THA T THE ISSUE IN THE PRESENT GROUND IS COVERED AGAINST THE ASSESSEE BY THE DECIS ION OF SPECIAL BENCH OF MUMBAI IN THE CASE OF AVADA TRADING COMPANY 100 ITD 131. HE FURTHER SUBMITTED THAT THE ISSUE HAS ALSO BEEN DECIDED AGAI NST THE ASSESSEE BY THE TRIBUNAL WHILE DECIDING THE CASE FOR A.Y. 2001-02. HE THEREFORE FAIRLY CONCEDED THAT THE ISSUE HAS TO BE DECIDED AGAINST T HE ASSESSEE. LD. D.R. ON THE OTHER HAND SUPPORTED THE ORDERS OF A.O. AND CIT (A). 9. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL ON RECORD. WE FIND THAT IDENTICAL ISSUE WAS BEFORE TH E TRIBUNAL IN ASSESSEES OWN CASE IN ITA NOS. 792 & 816/AHD/2006 ORDER DATED 30 .09.2011. THE ISSUE WAS DECIDED BY THE CO-ORDINATE BENCH OF TRIBUNAL AG AINST THE ASSESSEE BY RELYING ON THE DECISION OF SPECIAL BENCH IN CASE OF AVADA TRADING COMPANY (SUPRA). BEFORE US NO BINDING CONTRARY DECISION IN SUPPORT OF ASSESSEE HAS BEEN PLACED ON RECORD. WE THEREFORE RESPECTFULLY FOLLOWING THE DECISION OF SPECIAL BENCH IN CASE OF AVADA TRADING COMPANY (SU PRA) AND THE DECISION OF CO-ORDINATE BENCH IN THE CASE OF ASSESSEE FOR PRECE DING YEAR FIND NO REASON TO INTERFERE WITH THE ORDER OF CIT(A) AND THUS THI S GROUND OF ASSESSEE IS DISMISSED. ITA NOS. 793 & 817/AHD/2006 A.Y. 2002-03 (FAG BEARINGS INDIA LTD. VS. DCIT) PAGE 6 10. GROUND NO.2 & 3 ARE WITH RESPECT TO TREATING RE PAIRING EXPENSES RS. 133.77 LACS & RS.120.16 LACS AS CAPITAL EXPENSES. 11. DURING THE COURSE OF ASSESSMENT PROCEEDING A.O . ON PERUSING THE DETAILS SUBMITTED BY THE ASSESSEE NOTICED THAT IT HAD CLAIMED RS. 1 33 77 052/- & RS. 1 20 16 250/- RESPECTIVELY ON A CCOUNT OF MODIFICATION OF VARIOUS MACHINES AS REVENUE EXPENSES. A.O. ALSO NO TICED THAT THE AMOUNT OF EXPENDITURE INCURRED WAS ALMOST CONSISTENT WITH THE QUANTUM OF THE EXPENDITURE INCURRED IN THE IMMEDIATELY PRECEDING Y EAR. A.O. WAS OF THE VIEW THAT THE EXPENSES HAVE RESULTED IN QUALITY IMPROVEM ENT TECHNOLOGY UP- GRADATION AND BETTER FUEL EFFICIENCY AND HAS THUS R ESULTED INTO BRINGING INTO EXISTENCE AN ASSET OR ADVANTAGE OF ENDURING NATURE. HE THEREFORE FOLLOWING THE DECISION OF HONBLE SUPREME COURT IN CASE OF BALLIMAL NAVAL KISHORE VS. CIT 224 ITR 414 HELD THE EXPENDITURE AS CAPITAL EXPENDITURE BUT HOW EVER ALLOWED DEPRECIATION ON THE SAME. 12. AGGRIEVED BY THE ORDER OF A.O. THE ASSESSEE CA RRIED THE MATTER BEFORE THE CIT(A) WHO UPHELD THE ORDER OF A.O. BY HOLDING AS UNDER: 8.4 I HAVE CONSIDERED THE FACTS OF THE CASE AND THE ASSESSEE'S SUBMISSIONS. AS REGARDS THE EXPENDITURE ON ITEMS II(1) TO (19) ABOVE THE EXPENDITURE HAS NOT BEEN INCURRED ON CURRENT REPAIRS BUT ON REBUILDING OF ASSETS/MACHINES. THE ASSESSEE ITSELF DID NOT DEBIT THIS EXPENDITURE TO P & L ACCOUNT AS PART OF REPAIR BUT CLAIMED IT SEPARATELY IN THE COMPUTATION OF INC OME. THIS FACT CLEARLY DEMONSTRATES THAT THE ASSESSEE ITSELF DID NOT TREAT THE EXPENDITURE AS CURRENT REPAIR OR PART OF DAY-TO-DAY REPAIRS AND MAINTENANC E. NO DOUBT THE ENTRIES IN THE BOOKS OF ACCOUNT ARE NOT DETERMINATIVE OF THE TRUE NATURE OF INCOME OR EXPENDITURE. HOWEVER THE ASSESSEE HAS NOT EXPLAINE D UNDER WHAT CIRCUMSTANCES THE EXPENDITURE WAS TREATED AS CAPITA L EXPENDITURE IN THE BOOKS OF ACCOUNTS AND CLAIMED AS REVENUE EXPENDITURE IN THE INCOME-TAX ASSESSMENT. ITA NOS. 793 & 817/AHD/2006 A.Y. 2002-03 (FAG BEARINGS INDIA LTD. VS. DCIT) PAGE 7 THE CLAIM OF EXPENDITURE IS NOT A LEGAL CLAIM BUT A FACTUAL ONE AND THEREFORE IF THE ASSESSEE IS GIVING DIFFERENT TREATMENT TO THE E XPENDITURE THERE HAVE TO BE JUSTIFIABLE REASONS FOR THE SAME. AS DISCUSSED AB OVE THE EXPENDITURE IS NOT ON CURRENT REPAIRS BUT ON REBUILDING OF PLANT AND RNAC HINERY. THE ASSESSEE HAS GOT ADVANTAGE OF ENDURING NATURE BY INCURRING THIS EXPE NDITURE AND SUCH ADVANTAGE IS IN THE CAPITAL FIELD. IT HAS BEEN HELD BY THE SU PREME COURT IN THE CASE OF BALLIMAL NAVAL KISHORE V. CIT 224 ITR 414 THAT THE CURRENT REPAIRS CONNOTE AN EXPENDITURE FOR THE PURPOSE OF PRESERVING OR MAINTA INING AN ALREADY EXISTING ASSET AND NOT FOR RENEWAL OR MODIFICATION AND IF TH E EXPENDITURE GIVES A NEW OR DIFFERENT ADVANTAGE IT IS NOT REPAIRS BUT A CAPITA L EXPENDITURE. THE EXPENDITURE WAS THEREFORE RIGHTLY TREATED AS CAPITAL EXPENDIT URE. 13. AGGRIEVED BY THE ORDER OF CIT(A) THE ASSESSEE IS NOW IN APPEAL BEFORE US. 14. BEFORE US AT THE OUTSET LD. A.R. SUBMITTED TH AT IDENTICAL ISSUE AROSE IN THE CASE OF ASSESSEE FOR A.Y. 01-02 AND THE MATTER WAS RESTORED BACK TO THE FILE OF A.O. BY HONBLE ITAT. HE THEREFORE SUBMI TTED THAT SINCE THE FACTS AND CIRCUMSTANCES OF THE CASE IN THE YEAR UNDER APPEAL ARE IDENTICAL TO THAT OF EARLIER YEAR THE MATTER IN THE YEAR UNDER CONSIDER ATION BE ALSO SIMILARLY RESTORED TO THE FILE OF A.O. LD. D.R. ON THE OTHER HAND SUBMITTED AND POINTED OUT TO THE FINDINGS OF A.O. WHERE A.O. HAS NOTED TH AT ASSESSEE DID NOT SUBMIT THE REQUIRED DETAILS CALLED FOR BY THE A.O. HE TH EREFORE SUBMITTED THAT IN SUCH CIRCUMSTANCES A.O. WAS FULLY JUSTIFIED IN DIS ALLOWING THE CLAIM OF ASSESSEE. HE THUS SUPPORTED THE ORDERS OF A.O. A ND CIT(A). 15. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL ON RECORD. BEFORE US IT WAS SUBMITTED THAT IN THE AS SESSEES OWN CASE IDENTICAL ISSUE WAS BEFORE THE TRIBUNAL FOR A.Y. 2001-02 AND THE MATTER WAS REMITTED ITA NOS. 793 & 817/AHD/2006 A.Y. 2002-03 (FAG BEARINGS INDIA LTD. VS. DCIT) PAGE 8 BACK TO THE FILE OF A.O. WE FIND THAT THE CO-ORDIN ATE BENCH OF TRIBUNAL IN ITA NOS. 792 & 816/AHD/2006 HAD HELD AS UNDER: 12. HAVING HEARD THE SUBMISSIONS OF BOTH THE SIDES AND ON CAREFUL PERUSAL OF THE COMPILATION FILED BEFORE US ONE THING IS EVIDE NT THAT CERTAIN EXPLANATIONS WERE FURNISHED BEFORE THE AO BUT THOSE WERE NOT SUP PORTED BY THE REQUISITE EVIDENCES. EVEN IN THE COMPILATION FROM PAGES 211 T O 289 THE ASSESSEE HAS FURNISHED CERTAIN DETAILS OF THE BILLS OF REPAIRS A ND DETAILS OF REPLACEMENT OF FURNACE. THE ASSESSEE WAS UNDER STRICT OBLIGATION T O FURNISH THE PROOF AND EVIDENCES IN SUPPORT OF THE REPAIRS AND REPLACEMENT OF FURNACE. A PASSING REMARK WAS MADE BEFORE US THAT THE ASSESSMENT ORDER UNDER CONSIDERATION WAS PASSED ON 30/03/2004 AND MIGHT BE BECAUSE OF THE TIME BARRING ASSESSMENT PROCEDURE THOSE DETAILS WERE NOT SCRUTINIZED BY THE AO OR THE ASSESSEE MIGHT HAVE PREVENTED BY INADEQUATE OPPORTUNITY TO PLACE T HOSE DETAILS. THEREFORE WE ARE OF THE VIEW THAT THE NATURAL JUSTICE DEMANDS TO PROVIDE AN OPPORTUNITY TO THIS ASSESSEE TO FURNISH FULL DETAILS ALONG WITH BILLS A ND VOUCHERS TO DEMONSTRATE THE NATURE OF EXPENDITURE INCURRED; BEFORE THE AO SO T HAT AFTER PROPER INVESTIGATION ABOUT THE NATURE OF EXPENDITURE CAN BE DETERMINED. WITH THESE OBSERVATIONS THESE TWO GROUNDS OF THE ASSESSEE BEING RESTORED BA CK FOR DE NOVO ADJUDICATION HENCE MAY BE TREATED AS ALLOWED BUT FOR STATISTICAL PURPOSES. SINCE THE AFORESAID SUBMISSION HAS NOT BEEN CONTRO VERTED BY REVENUE WE ARE OF THE VIEW THAT FOLLOWING THE DECISION OF CO-O RDINATE BENCH IN ASSESSEES OWN CASE FOR A.Y. 2001-02 THE MATTER IN THE YEAR U NDER CONSIDERATION ALSO NEEDS TO BE REMITTED BACK TO THE FILE OF A.O. WE THEREFORE WITH THE SIMILAR DIRECTIONS GIVEN BY CO-ORDINATE BENCH IN A.Y. 01-02 REMIT THE ISSUE TO THE FILE OF A.O. WE ALSO DIRECT THE ASSESSEE TO CO-OPERATE WITH THE A.O. BY FURNISHING ALL THE REQUIRED DETAILS CALLED FOR. THE A.O. SHAL L AFTER CONSIDERING THE SUBMISSION OF THE ASSESSEE DECIDE THE ISSUE IN ACCO RDANCE WITH LAW. NEEDLESS TO STATE THAT A.O. SHALL GRANT ADEQUATE OP PORTUNITY OF HEARING TO THE ASSESSEE. THUS THIS GROUND OF ASSESSEE IS ALLOWED FOR STATISTICAL PURPOSE. ITA NOS. 793 & 817/AHD/2006 A.Y. 2002-03 (FAG BEARINGS INDIA LTD. VS. DCIT) PAGE 9 16. GROUND NO.4 IS WITH RESPECT TO TREATING SOFTWAR E EXPENSES OF RS.104.99 LACS AS CAPITAL EXPENDITURE:- 17. DURING THE COURSE OF ASSESSMENT PROCEEDING A.O. NOTICED THAT ASSESSEE HAD INCURRED EXPENSES OF RS.1 89 23 999/- FOR ONGOING IMPLEMENTATION OF THE INFORMATION SYSTEM WHICH INC LUDED AMOUNT PAID FOR SAP-R3 LICENCE USER FEES AND REIMBURSEMENT OF SAP-R 3 COST. ASSESSEE SUBMITTED THAT THE AMOUNT WAS PAID TOWARDS ADDITION AL DEVELOPMENT OF SOFTWARE OF SAP-R3 AND THE EXPENSES INCURRED WAS FO R UP-GRADATION OF SAP- R3 AND ITS PROTOTYPING AND ITS CUSTOMIZATION WAS OF REVENUE IN NATURE. THE SUBMISSION OF ASSESSEE WAS NOT FOUND ACCEPTABLE TO THE A.O. AS HE WAS OF THE VIEW THAT SAP APPLICATION PROVIDES FOR A STANDA RD SOLUTION FOR MANY OF THE BUSINESS PROCESSES AND THE PAYMENT WAS MADE AS FEES FOR HAVING ACCESS TO THIS SOFTWARE FOR BUSINESS PURPOSE. HE WAS THEREFO RE OF THE VIEW THAT ASSESSEE HAS ACQUIRED A NEW ASSET OR NEW ADVANTAGE OF ENDURING NATURE. HE ACCORDINGLY CONSIDERED THE ENTIRE EXPENDITURE TO BE CAPITAL IN NATURE FOR INTANGIBLE ASSETS BUT HOWEVER ALLOWED DEPRECIATION ON THE SAME. 18. AGGRIEVED BY THE ORDER OF A.O. THE ASSESSEE CA RRIED THE MATTER BEFORE THE CIT(A). CIT(A) DECIDED THE ISSUE BY HOLDING AS UNDER: 9.2 I HAVE CONSIDERED THE SUBMISSIONS OF THE APPE LLANT. THE APPELLANT HAS FILED THE COPY OF AGREEMENT DATED 1-1-2001 & COPIES OF BILLS FOR EXPENDITURE. IT IS SEEN THAT DURING THE YEAR THE ASSESSEE HAS MADE TW O TYPES OF PAYMENTS IN CONNECTION WITH SAP SOFTWARE. THE PAYMENT OF RS.84 24 564/- IS TOWARDS MONTHLY CHARGES FOR OPERATING AND LICENCE FEE. THIS ISSUE HAS BEEN DISCUSSED BY ME WHILE DEALING WITH GROUND OF APPEAL NO. 8 FOR TH E ASSESSMENT YEAR 2001-02 AND IT HAS BEEN HELD BY ME THAT THE EXPENDITURE IS REVENUE IN NATURE. FOR THE REASONS DISCUSSED IN MY APPELLATE ORDER FOR ASSESSM ENT YEAR 2001-02 IN THE ITA NOS. 793 & 817/AHD/2006 A.Y. 2002-03 (FAG BEARINGS INDIA LTD. VS. DCIT) PAGE 10 CURRENT YEAR ALSO THE ASSESSING OFFICER IS DIRECTED TO ALLOW THE EXPE NDITURE OF RS. 84 24 564/-AS REVENUE EXPENDITURE AND WITHD RAW DEPRECIATION. 9.2.1 THE OTHER PAYMENT OF RS.105.00 LAKHS IS TOWAR DS ASSESSEE'S SHARE OF COST FOR SAP R/3 INFORMATION SYSTEM. THIS EXPENDITU RE IS TOWARDS DEVELOPMENT OF ADDITIONAL/NEW FUNCTIONS AND THEREFORE IT AMOUNTS TO OBTAINING ADDITIONAL SOFTWARE. THE ASSESSEE HAS THUS OBTAINED AN ADVANT AGE OF ENDURING NATURE. BY INCURRING THE EXPENDITURE THE APPELLANT HAS OBTAINE D RIGHT TO USE THE SOFTWARE AND HAS THUS OBTAINED ADVANTAGE OF ENDURING NATUR E. FOR CONSTITUTING EXPENDITURE AS CAPITAL EXPENDITURE IT IS NOT ALWAY S NECESSARY THAT THE EXPENDITURE SHOULD NECESSARILY RESULT IN ABSOLUTE O WNERSHIP OF A CAPITAL ASSET. THE LICENSE TO USE OR RIGHT TO USE IS ALSO A CAPITA L ASSET. [A.R. KRISHNAMURTHY & OTHERS 176 ITR 417 (SC) ]. IN THE CASE OF SCIENTIFIC ENGINEERING HOUSE 157 ITR 66 THE HON'BLE SUPREME COURT HELD THAT THE RIGHT T O USE A TECHNICAL KNOW-HOW IS A CAPITAL ASSET IN THE NATURE OF PLANT. IN THE CAS E OF THE ASSESSEE THE ASSESSEE HAS OBTAINED LICENSE TO USE ADDITIONAL SOFTWARE. TH IS SOFTWARE IS IN THE NATURE OF CAPITAL ASSET. 9.2.1.1 RELIANCE IS ALSO PLACED ON THE DECISION O F HON'BLE ITAT DELHI IN THE CASE OF MARUTI UDYOG LTD. 92 ITD 119 WHEREIN IT WAS HELD THAT 'SOFTWARE IS A CAPITAL ASSET AND IS AN INTANGIBLE ASSET. HARDWARE COMMONLY CALLED AS COMPUTER IS A TANGIBLE ASSET WHICH B Y ITSELF CANNOT FUNCTION. THE COMPUTER CAN FUNCTION ONLY WITH THE HELP OF SOFTWARE. SOFTWARE IS AKIN TO KNOW HOW. ADMITTEDLY; THE ASSESSEE WAS NOT IN THE BUSINESS OF SOFTWARE. HENCE SOFTWARE WAS A CAPITAL ASSET A S FAR AS THE ASSESSEE WAS CONCERNED. THE INCOME-TAX RULES AS AMENDE D WITH EFFECT FROM 1-4-2003 RATHER HELPED THE REVENUE AND NO T THE ASSESSEE INASMUCH AS IT PROVIDES FOR DEPRECIATION ON SOFTWARE AT THE RATE OF 60 PER CENT. BY PROVIDING HIGHER DEPRECIATION IT COULD NOT BE SAID THAT PRIOR TO 1- 4-2003 IT WAS REVENUE EXPENDITURE. IT WAS ALWAYS A CA PITAL ASSET. PRIOR TO 1-4-2003 THE ASSESSEE WAS ENTITLED TO NORMAL RATE OF DEPRECIATION WHICH WAS ENHANCED TO 60 PER CENT BY THE AMENDMENT CON SIDERING THE RAPID WEAR AND TEAR. THEREFORE THE EXPENDITURE WAS I NCURRED ON ACQUISITION OF CAPITAL ASSETS AND THUS IT WAS A CAPITA L EXPENDITURE. RESULTANTLY THE SAME COULD BE ALLOWED AS REVENUE EXPE NDITURE.' (FROM HEAD NOTES). 9.2.1.2 IN VIEW OF THE ABOVE IT IS HELD THAT BY I NCURRING THE EXPENDITURE OF 105 LAKHS THE ASSESSEE HAS OBTAINED LICENSE FOR LO NG TERM USE OF THE SOFTWARE AND THUS OBTAINED ADVANTAGE OF ENDURING NATURE. THE EXPENDITURE HAS TO BE TREATED AS CAPITAL EXPENDITURE. IT IS THEREFORE H ELD THAT THE EXPENDITURE OF RS.105 LAKHS WAS RIGHTLY TREATED AS CAPITAL EXPENDITURE BY THE ASSESSING OFFICER. THE GROUND OF APPEAL NO.5 IS PARTLY ALLOWED. ITA NOS. 793 & 817/AHD/2006 A.Y. 2002-03 (FAG BEARINGS INDIA LTD. VS. DCIT) PAGE 11 19. AGGRIEVED BY THE ORDER OF CIT(A) THE ASSESSEE IS NOW IN APPEAL BEFORE US. 20. BEFORE US LD. A.R. REITERATED THE SUBMISSION M ADE BEFORE A.O. AND CIT(A) AND FURTHER SUBMITTED THAT THE ISSUE IN THE PRESENT CASE IS COVERED IN FAVOUR OF THE ASSESSEE BY THE DECISIONS HONBLE DEL HI HIGH COURT IN CASE OF CIT VS. ASAHI INDIA SAFETY GLASS LTD. IN ITA NOS. 1 110/2006 & 1111/2006 DECISION IN THE CASE OF JCIT VS. CITICORP OVERSEAS SOFTWARE LTD. 85 TTJ 87 (MUM) IBM INDIA LTD. VS. ACIT 105 ITD 1 (BANG.) AND OTHER DECISIONS. LD. D.R. ON THE OTHER HAND SUPPORTED THE ORDER OF A.O. 21. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL ON RECORD. THE FACT OF INCURRING OF EXPENDITURE FOR S AP ON ACCOUNT OF USER LICENCEE FEE AND ON ACCOUNT OF REIMBURSEMENT IS NOT IN DISPUTE. WE FIND THAT HONBLE DELHI HIGH COURT IN CASE OF CIT VS. ASAHI INDIA SAFETY GLASS LTD. (2011) 64 DTR (DEL) 63 HAS CONCLUDED THAT THE EXPENDITURE INCURRED BY ASSESSEE ON SOFTWARE IS ALLOWABLE AS REVENUE EXPEND ITURE MORE SO AS THE EXPENDITURE ACQUIRED BY THE ASSESSEE WAS AN APPLICA TION SOFTWARE WHICH ENABLE IT EXECUTE TASKS IN THE FIELD OF ACCOUNTING PURCHASES AND INVENTORY MAINTENANCE. IN CASE OF IBM INDIA LTD. VS. ACIT (2007) 108 TTJ (BANG) 531 THE CO-ORDINATE BENCH OF TRIBUNAL HAS HELD THAT EXP ENDITURE ON PURCHASE OF APPLICATION SOFTWARE IS ALLOWABLE AS REVENUE EXPEND ITURE AS IT IS AN AID IN MANUFACTURING PROCESS RATHER THAN THE TOOL AND THOU GH THERE IS AN ENDURING BENEFIT THERE IS NO ACQUISITION OF CAPITAL ASSET. IN CASE OF GE CAPITAL SERVICES INDIA LTD. 106 TTJ 65 (DEL) THE CO-ORDINATE BENCH HAS HELD THAT SOFTWARE ITA NOS. 793 & 817/AHD/2006 A.Y. 2002-03 (FAG BEARINGS INDIA LTD. VS. DCIT) PAGE 12 BEING THE FILED OF VAST CHANGE TECHNOLOGY WHICH NEE DS UPDATE AND UPGRADATION REGULARLY EXPENDITURE ON SOFTWARE IS A LLOWABLE AS REVENUE EXPENDITURE. BEFORE US REVENUE HAS NOT BROUGHT ON RECORD ANY CONTRARY BINDING DECISION IN ITS SUPPORT. WE THEREFORE FOL LOWING THE AFORESAID DECISIONS ARE OF THE VIEW THAT THE EXPENDITURE INC URRED BY THE ASSESSEE HAS TO BE ALLOWED AS REVENUE EXPENDITURE. WE DIRECT AC CORDINGLY. THUS THIS GROUND OF ASSESSEE IS ALLOWED. 22. GROUND NO.5 IS WITH RESPECT TO CONSIDERING LUMP SUM PAYMENT OF RS.44.21 LACS ON ACCOUNT OF KNOWHOW FEES AS CAPITAL EXPENDITURE. 23. A.O. NOTICED THAT ASSESSEE HAD PAID RS.44 21 65 3/- TO FAG AUTOMOBILTECHNIK AG GERMANY TOWARDS TECHNICAL FEES UNDER THE AGREEMENT DATED 30.03.2000 AND THE SAME WAS CLAIMED AS REVENU E EXPENDITURE. IT WAS ALSO SUBMITTED THAT THE AMOUNT BECAME PAYABLE IN TH REE INSTALLMENTS UPON THE FULFILLMENT OF THE CONDITIONS STIPULATED IN THE AGR EEMENT. HOWEVER A.O. WAS OF THE VIEW THAT THE NATURE OF PAYMENT INDICATES THAT ASSESSEE HAS ACQUIRED AN ASSET OR ADVANTAGE OR ENDURING NATURE BY INCURRING OF THIS EXPENDITURE. HE FOLLOWING THE DECISION OF HONBLE APEX COURT IN CAS E OF SCIENTIFIC ENGINEERING HOUSE P. LTD. VS. CIT 157 ITR 86 HELD THAT ASSESSEE HAS ACQUIRED TECHNICAL KNOWHOW FEES IN THE FORM OF DRAWINGS/DESIGNS ETC. W HICH WOULD ASSIST THE ASSESSEE IN ITS MANUFACTURING PROCESS AND THEREFORE THE EXPENDITURE WAS COVERED BY THE PROVISIONS OF SECTION 32. HE ACCORD INGLY CONSIDERED THE EXPENDITURE AS CAPITAL EXPENDITURE BUT HOWEVER ALL OWED DEPRECIATION. ITA NOS. 793 & 817/AHD/2006 A.Y. 2002-03 (FAG BEARINGS INDIA LTD. VS. DCIT) PAGE 13 24. AGGRIEVED BY THE ORDER OF A.O. THE ASSESSEE CA RRIED THE MATTER BEFORE THE CIT(A). CIT(A) UPHELD THE ORDER OF A.O. 25. AGGRIEVED BY THE ORDER OF CIT(A) THE ASSESSEE IS NOW IN APPEAL BEFORE US. 26. BEFORE US AT THE OUTSET LD. A.R. SUBMITTED TH AT THE ISSUE IN THE PRESENT CASE IS DIRECTLY COVERED IN FAVOUR OF THE ASSESSEE BY THE DECISION OF TRIBUNAL IN ASSESSEES OWN CASE FOR A.Y. 2001-02. HE FURTHE R SUBMITTED THAT SINCE THE FACTS OF THE CASE IN THE YEAR UNDER APPEAL ARE IDEN TICAL TO THAT OF A.Y. 01-02 THE ISSUE OF EXPENDITURE ON KNOWHOW FEES BE ALLOWED IN FAVOUR OF THE ASSESSEE. LD. D.R. ON THE OTHER HAND SUPPORTED THE ORDERS OF A.O. AND CIT(A). 27. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL ON RECORD. WE FIND THAT THE ISSUE OF PAYMENT ON KNOWH OW FEES BY THE ASSESSEE TO FAG AUTOMOBILTECHNIK AG GERMANY BY THE AGREEMEN T DATED 30.03.2000 WAS BEFORE TRIBUNAL IN ITA NOS. 792 & 816/AHD/2006 FOR A.Y. 01-02. THE ISSUE WAS DECIDED IN FAVOUR OF THE ASSESSEE VIDE O RDER DATED 30.09.2011 BY HOLDING AS UNDER: 6. WE HAVE HEARD THE PARTIES AT SOME LENGTH. WE HAVE CAREFULLY PERUSED THE ORDERS OF THE AUTHORITIES BELOW IN THE LIGHT OF A VOLUMINOUS COMPILATION FILED BEFORE US CONTAINING ALMOST 400 PAGES AND THE CASE LAWS CITED. BEFORE US AN AGREEMENT DATED 30/03/2000 WAS REFERRED WHICH WAS E XECUTED BETWEEN FAG AUTOMOBILTECHNIK AG ON ONE PART REFERRED AS 'THE CO LLABORATOR' AND 'FAG BEARINGS (INDIA) LTD. AS OTHER PART MENTIONED AS ' THE INDIAN COMPANY'. THE SAID COLLABORATOR IS A SUBSIDIARY OF FAG KUGELFISCH ER GEORGE SCHAEFER AG INCORPORATED UNDER THE LAWS OF THE FEDERAL REPUBLIC OF GERMANY. CLAUSE -(C) ON PAGE NO1L OF THE SAID AGREEMENT STATES THAT THE 'IN DIAN COMPANY' AND THE ITA NOS. 793 & 817/AHD/2006 A.Y. 2002-03 (FAG BEARINGS INDIA LTD. VS. DCIT) PAGE 14 'COLLABORATOR' HAVE OVER THE YEARS ENTERED INTO DIV ERSE AGREEMENTS FOR SUPPLY OF KNOW-HOW AND TECHNICAL ASSISTANCE IN RESPECT OF DIV ERSE TYPES OF BEARINGS. THE PRESENT AGREEMENT WAS IN RESPECT OF KNOW-HOW AND TE CHNICAL SERVICES IN RESPECT OF THE FOLLOWING PRODUCTS. CLUTCH RELEASE BEARINGS ALTERNATOR BEARINGS WHEEL BEARINGS 1 LUB UNITS (ALL GENERATIONS) TENSIONER LEER ASSEMBLIES FROM THE SIDE OF THE ASSESSEE BY REFERRING THE TYPE S OF THE PRODUCTS I.E. BEARINGS ETC. THE MAIN ARGUMENT WAS THAT THERE WER E NO NEW PRODUCT INTRODUCED BUT MAINLY THE TECHNICAL ASSISTANCE WAS TO IMPROVE THE QUALITY OF THE EXISTING PRODUCTS. 6.1. APART FROM THE ABOVE SPECIFICATIONS IT HAS ALSO BEEN BROUGHT TO OUR NOTICE THAT THE KNOW-HOW AS SUCH WAS NOT THE PROPERTY OF T HE ASSESSEE. THE KNOW-HOW REMAINED THE PROPERTY OF THE SAID 'COLLABORATOR' BE CAUSE THE 'INDIAN COMPANY' WAS NOT PERMITTED TO MAKE USE OF KNOW-HOW OTHER THA N THE PURPOSE FOR WHICH IT HAD INTENDED IN TERMS OF THE SAID AGREEMENT. ONE O F THE CLAUSE I.E. CLAUSC-9 PRESCRIBES THAT THE KNOW-HOW SHOULD NOT BE COMMUNIC ATED TO ANY PERSON OTHER THAN THE RESPONSIBLE EMPLOYEES OF THE 'INDIAN COMPA NY'. RATHER ONE OF THE CLAUSE PRESCRIBES THAT UPON TERMINATION OF THE AGRE EMENT THE INDIAN COMPANY HAD TO RETURN THE COLLABORATORS THE SAID KNOW-HOW. BY REFERRING THESE CLAUSES AND OTHER CONNECTED CLAUSES THE ARGUMENT IS THAT T HE SAID KNOW-HOW IN QUESTION HAD NEVER BEEN PURCHASED BY THE INDIAN COM PANY I.E. THE ASSESSEE. THE SAID KNOW-HOW HAD NEVER BECOME AN ASSET OF THE ASSESSEE. THE SAID KNOW-HOW WAS TO BE USED BY THE ASSESSEE FOR LIMITED AND SPECIFIC PURPOSES AS PRESCRIBED IN THE AGREEMENT. 6.2. IN RESPECT OF THE OBSERVATIONS MADE HEREINAB OVE WE HAVE BEEN ASKED TO PERUSE A CLARIFICATION ISSUED BY CENTRAL BOARD OF D IRECT TAXES BY CIRCULAR NO.21 (F-NO.7A/40/68-IT (A-II) DATED 9 TH JULY 1969. IF A KNOW-HOW IS ACQUIRED UNDER AN AGREEMENT IS MERELY A LICENCE FOR THE USER IF IT I S FOR A LIMITED PERIOD IF THE KNOW- HOW IS WITHOUT THE RIGHT TO USE THE PATENTS AND TRA DE MARKS THEN IF ANY PAYMENT MADE WOULD NO BRING INTO EXISTENCE AN ASSET OF ENDU RING ADVANTAGE TO THE INDIAN PARTICIPANTS. THIS CIRCULAR THEREFORE STATES THAT T HE PAYMENT SHOULD BE REGARDED IF EXPENDITURE INCURRED FOP THE PURPOSE OF RUNNING THE BUSINESS DURING THE PERIOD OF AGREEMENT. AN ANOTHER ARGUMENT HAS ALSO BEEN EXTEND ED THAT THERE WERE SERIES ITA NOS. 793 & 817/AHD/2006 A.Y. 2002-03 (FAG BEARINGS INDIA LTD. VS. DCIT) PAGE 15 OF AGREEMENTS HOWEVER THE KNOW-HOW INITIALLY WAS ACQUIRED OUT OF AN AGREEMENT DATED 30/08/1996. THE CHANGES IN THE PROV ISIONS OF SECTION 32 WERE MADE SUBSEQUENTLY FROM 1 ST DAY OF APRIL 1998 THEREFORE NOT APPLICABLE IN TH E CASE OF THE ASSESSEE. IT HAS BEEN CLARIFIED THAT TH E AGREEMENTS EXECUTED LATER ON HAD IN FACT AROSE OUT OF THE ORIGINAL AGREEMEN TS WHICH WERE IN OPERATION SINCE INCEPTION OF THE COMPANY. IN THE LIGHT OF TH E FACTUAL BACKGROUND WE HAVE SCRUTINIZED THE CASE LAWS CITED BEFORE US. WE HAVE NOTED THAT IN ONE OF THE CASE IT WAS HELD THAT IF THE PAYMENT IS MADE FOR EXCLUSI VE ACQUISITION OF TECHNICAL KNOW-HOW THEN THE EXPENDITURE IS CAPITAL IN NATURE BUT IF THE PAYMENT IS FOR SECURING THE USE OF KNOW-HOW THEN ALLOWABLE AS REV ENUE EXPENDITURE. 6.3. IN THESE DECISIONS IT HAS BEEN CONVEYED TH AT THE EXPENDITURE TOWARDS IMPROVISATION FOR THE EXISTING BUSINESS IS TO BE CO NSIDERED A REVENUE EXPENDITURE. IN THE PRESENT APPEAL UNDISPUTEDLY THE KNOW-HOW RELATED TO THE EXISTING MANUFACTURING OPERATION OF BALL-BEARINGS I.E. STATED TO BE SAME TYPE OF PRODUCT. IT CANNOT BE RULED OUT THAT IN A FAST GR OWING ERA OF NEW TECHNOLOGIES THE OUTDATED OR OBSOLETE TECHNOLOGIES ARC REQUIRED TO BE REPLACED AND THAT EXPENDITURE CAN BE HELD A BUSINESS REQUIREMENT. 6.4 IT HAS ALSO BEEN NOTED WHILE READING THE CLAUS ES OF THE AGREEMENT THAT ONE OF THE CLAUSE IS ABOUT THE NON-PORTABILITY. TH EREFORE THIS CLAUSE HAS DEMONSTRATED THAT THE KNOW-HOW WAS NOT THE PROPERTY OF THE ASSESSEE. RATHER THE SAID COLLABORATOR HAS IMPOSED A CONDITION OF CO NFIDENTIALITY AND SECRECY WHICH LEADS TO AN INFERENCE THAT THE PROPERTY BELON GED TO THE SAID COLLABORATOR. RATHER WE ARE INCLINED TO DRAW AN INFERENCE THAT T HE TRANSFER OF KNOW-HOW IN THE PRESENT SET OF FACTS AND CIRCUMSTANCES WAS RESTRICT ED FOR THE USE RATHER THAN ITS ACQUISITION. IN THE LIGHT OF THE REASONS ASSIGNED HEREINABOVE AND CONSIDERING THE TOTALITY OF THE EVIDENCE PLACED ON RECORD DULY SUPP ORTED BY THE PRECEDENTS CITED WE HEREBY HOLD THAT THE PAYMENT OF RS.43.10 LACS WA S IN THE NATURE OF REVENUE EXPENDITURE. BEFORE US REVENUE HAS NOT PRODUCED ANY MATERIAL TO DEMONSTRATE THAT THE FACTS IN THE YEAR UNDER APPEAL ARE DIFFERENT FROM T HAT OF A.Y. 01-02. SINCE THE FACTS OF THE CASE IN THE YEAR IN APPEAL ARE IDENTIC AL TO THAT OF A.Y. 01-02 WE RESPECTFULLY FOLLOWING THE DECISION OF CO-ORDINATE BENCH IN ASSESSEES OWN ITA NOS. 793 & 817/AHD/2006 A.Y. 2002-03 (FAG BEARINGS INDIA LTD. VS. DCIT) PAGE 16 CASE AND FOR SIMILAR REASONS DECIDE THE ISSUE IN F AVOUR OF THE ASSESSEE. THUS THIS GROUND IS ALLOWED. 28. APROPOS TO GROUND NOS.6 & 7 THE ASSESSEE AN D THE REVENUE HAVE MADE ELABORATE ARGUMENTS AND HAVE ALSO FILED WRITTE N SUBMISSIONS. THE WRITTEN SUBMISSIONS OF THE ASSESSEE AS WELL AS THE REVENUE ARE REPRODUCED AS UNDER:- 28.1. WRITTEN SUBMISSIONS OF THE LD. COUNSEL FOR THE ASSESSEE ARE AS UNDER: BEFORE THE HON'BLE ITAT AHD 'D' BENCH IN THE MATTER OF M/S. FAG BEARINGS INDIA LTD. ('THE APPELLANT') AY 2002-03 ITA NO. 793/A/2006 - ASSESSEE'S APPEAL ITANO. 817/A/2006 - DEPARTMENT'S APPEAL TRANSFER PRICING ADJUSTMENT THE PRESENT SUBMISSIONS ARE WITHOUT PREJUDICE TO TH E ORAL ARGUMENTS ADVANCED DURING THE COURSE OF HEARING OF APPEAL. BRIEF FACTS 1. THE APPELLANT IS IN THE BUSINESS OF MANUFACTURE OF BALL AND ROLLER BEARINGS. THE COMPANY IS ONE OF THE LARGEST MANUFACTURES OF BEARI NGS IN INDIA. DURING YEAR THE APPELLANT HAD BENCHMARKED ITS INTERNATIONAL TRANSAC TIONS WITH ASSOCIATED ENTERPRISES (AES) USING TRANSACTION NET MARGIN METHOD ('TNMM'). THE ECONOMIC ANALYSIS FOR THE PURPOSE OF BENCHMARKING THE INTERNATIONAL TRANS ACTIONS WAS CARRIED OUT BY SEGMENTAL DIVISION OF THE ACTIVITIES OF THE COMPANY IN THE MANUFACTURING SEGMENT AND DISTRIBUTION SEGMENT. FOLLOWING TABLE GIVES THE COM PARATIVE FIGURES AS PER THE TRANSFER PRICING STUDY: SEGMENT MANUFACTURING DISTRIBUTION PLI - APPELLANT 9.55 % 15.08% PLI - COMPARABLES 9.79 % 2.19% UPWARD ADJUSTMENT MADE ACCEPTED ITA NOS. 793 & 817/AHD/2006 A.Y. 2002-03 (FAG BEARINGS INDIA LTD. VS. DCIT) PAGE 17 2. THE ADDITIONAL COMMISSIONER OF INCOME TAX TRANS FER PRICING - I MUMBAI ('THE TPO') HAS ACCEPTED TNMM AS THE MOST APPROPRIATE MET HOD FOR BENCHMARKING THE INTERNATIONAL TRANSACTIONS WITH AES (REFER PARA 5.3 ON PAGE 5 OF THE TPO'S ORDER). THE TPO HAS ALSO ACCEPTED THE SET OF COMPARABLE COMPANI ES SELECTED BY THE APPELLANT AND ALSO THE PROFIT LEVEL INDICATOR (PLI) BEING OPERATI NG PROFIT / SALES. THERE IS NO DISPUTE WITH RESPECT TO THE METHOD APPLIED THE SELECTION O F COMPARABLES AND ALSO THE PLI. 3. THE TPO HAS ACCEPTED THE ALP FOR ALL THE TRANSAC TIONS IN THE DISTRIBUTION SEGMENT. ACCORDINGLY NO UPWARD ADJUSTMENT HAS BEEN PROPOSED FOR THE DISTRIBUTION SEGMENT. 4. FOR THE PURPOSE OF BENCHMARKING THE INTERNATIONA L TRANSACTIONS THE APPELLANT HAD BIFURCATED ITS ACTIVITIES INTO THE MANUFACTURING SE GMENT AND THE DISTRIBUTION SEGMENT. FOR THE MANUFACTURING SEGMENT THE TPO HAS FURTHER B IFURCATED THE ACTIVITIES OF THE APPELLANT INTO DOMESTIC UNIT ('DTA') AND EXPORT ORI ENTED UNIT ('EOU'). THE TPO THUS ARTIFICIALLY DIVIDED THE MANUFACTURING SEGMENT INTO TWO SUB-SEGMENTS I.E. FOR EOU (FOR EXPORTS) AND FOR DTA (FOR DOMESTIC SALES). THE TPO KEPT THE SET OF COMPARABLE COMPANIES SAME FOR BOTH EOU AND DTA. THE TPO CONCLUDED THAT THOUGH EOU AND DTA PRESENT DISTINCT AND SEPARATE SEGMENTS THEIR COMPARABLE COMPANIES ARE SAME. SEGMENT - MANUFACTURING EOU DTA PLI - APPELLANT 42.74 % 2.78 % PLI - COMPARABLES 9.79 % 9.79 % ACCEPTED UPWARD ADJUSTMENT 5. ATTENTION IS INVITED TO THE BIFURCATION O F THE INTERNATIONAL TRANSACTIONS. ITEM- WISE DESCRIPTION OF THE INTERNATIONAL TRANSACTIONS AS CONTAINED ON PAGE 3 OF THE TPO'S ORDER WAS GIVEN AS UNDER: SR. NO. PARTICULARS OF INTERNATIONAL TRANSACTION DTA EOU AMOUNT (RS.) REMARKS (I) PURCHASE OF BEARINGS 90 738 976 NIL 90 738 976 DISTRIBUTION (II) EXPORT OF BEARINGS 7 403 728 395 303 94 3 402 707 671 DTA & EOU (III) PURCHASE OF COMPONENTS NIL 27 303 089 27 303 089 ONLY EOU ITA NOS. 793 & 817/AHD/2006 A.Y. 2002-03 (FAG BEARINGS INDIA LTD. VS. DCIT) PAGE 18 (IV) PURCHASE OF STORES AND SPARES 7 746 883 892 442 8 639 325 DTA & EOU (V) PURCHASE OF ROLLERS GRINDING WHEELS AND SHIELD 3 571 481 26 421 834 29 993 315 DTA & EOU (VI) PURCHASE OF RUBBER SEALS 4 291 279 NIL 4 291 279 ONLY DTA (VII) PURCHASE OF RETAINERS 3 037 495 10 983 860 14 021 355 DTA & EOU (VIII) PURCHASE OF CAPITAL GOODS 51 925 936 NIL 51 925 936 CAPITAL GOODS (IX) EXPORT OF TOOLS 1 467 658 NIL 1 467 658 INCOME (X) GUARANTEE COMMISSION FOR FOREIGN CURRENCY LOAN NIL 114 497 114 497 ONLY EOU (XI) CHARGES FOR SAP / R3 AND CONNECTIVITY 15 732 397 3 191 000 18 923 397 DTA & EOU (XII) ADVERTISEMENT MATERIALS 242 177 NIL 242 177 ONLY DTA (XIII) TRAINING & OTHER COSTS 4 043 445 NIL 4 043 445 ONLY DTA (XIV) FEES FOR USE OF TECHNOLOGY (A) FAG KUGLEFISCHER GEORG SCHAEFER AG NIL 8 194 643 8 194 643 ROYALTY (B)FAG INDUSTRIAL BEARINGS AG 42 172 305 6 907 060 49 079 365 ROYALTY (C)FAG AUTOMOBILETECHNIK AG 6 552 090 NIL 6 552 090 ROYALTY TOTAL 48 724 395 15 101 703 63 826 098 ITA NOS. 793 & 817/AHD/2006 A.Y. 2002-03 (FAG BEARINGS INDIA LTD. VS. DCIT) PAGE 19 (XV) TESTING CHARGES 1 448 598 NIL 1 448 598 ONLY DTA (XVI) RECEIPT OF CONSULTANCY SERVICES FEES 16 220 746 NIL 16 220 746 DISTRIBUTION AN ANALYSIS OF THE ABOVE INTERNATIONAL TRANSACTIONS GIVES THE FOLLOWING FINDINGS: (A) ITEM NO. (I) AND ITEM NO. (XVI) PERTAIN TO THE DISTRIBUTION SEGMENT (THOUGH SHOWN IN THIS TABLE IN DTA) AND SINCE NO ADJUSTMENT IS PR OPOSED IN DISTRIBUTION SEGMENT THEY ARE NOT RELEVANT FOR THE PRESENT APPEAL. (B) ITEM NO. (VIII) IS PURCHASE OF CAPITAL GOODS. (C) ITEM NO. (XIV) PERTAIN TO ROYALTY FOR WHICH SEP ARATE SUBMISSIONS ARE MADE (D) ITEM NO.S (III) AND (X) PERTAIN ONLY TO EOU AND SINCE NO ADJUSTMENT IS PROPOSED IN EOU THEY ARE NOT RELEVANT FOR THE PRESENT APPEAL. (E) ITEM NO.S (II) (IV) (V) (VII) AND (XI) ARE C OMMON NATURE OF EXPENSES FOR DTA AND EOU. FOR SAME EXPENDITURE THE ALP IN EOU IS ACCEPTE D. SAME PRICE LISTS AND SAME TRANSFER PRICING POLICY IS FOLLOWED BY THE COMPANY FOR SUPPLY TO DTA AND EOU. (F) ONLY ITEMS LISTED AT NO.S (VI) (XII) (XIII) A ND (XV) ARE ITEMS OF EXPENDITURE WHICH IS UNIQUE TO DTA. AGGREGATE OF SUCH EXPENDITURE IS RS. 10 025 499 (I.E. RS. 1.00 CRORE). FURTHER THE ABOVE INTERNATIONAL TRANSACTIONS ARE I N THE NATURE OF REVENUE EXPENSE ROYALTY (FEES FOR USE OF TECHNOLOGY) REVENUE INCOM E OR CAPITAL EXPENDITURE. 6. NATURE-WISE BIFURCATION OF THE INTERNATIO NAL TRANSACTION IS GIVEN ON PAGE 41 OF THE CIT (A)'S ORDER. 7. THE APPELLANT FURTHER INVITES ATTENTION T O PAGE 22 OF THE TPO'S ORDER. THE TPO OBSERVED AS UNDER: AS DISCUSSED IN THE ORDER THE INTERNATIONAL TRANS ACTION OF THE ROYALTY IS CERTAINLY NOT AT ARM'S LENGTH. IN THIS ORDER THE A RM'S LENGTH PRICE OF THE INTERNATIONAL TRANSACTION OF THE ROYALTY IS SEPARAT ELY NOT DETERMINED BECAUSE THE COMPANY CONTINUES TO ARGUE THAT THE TRANSACTION AL NET MARGIN METHOD IS THE MOST APPROPRIATE METHOD IN ITS CASE AND TRANSAC TIONS CANNOT BE BENCHMARKED SEPARATELY. THE ASSESSEE DID NOT BENCHMARK ALL THE INTERNATIONA L TRANSACTIONS SEPARATELY THAT THE ACTIVITY OF IMPORTS LEADS TO MANUFACTURING OF GOODS WHICH IN TURN RESULTS INTO SALE. THE ACTIVITY OF IMPORT OF RAW MA TERIAL AND EXPORT OF GOODS ARE CLOSELY INTER-LINKED AND CONTINUOUS AND THE SAME AR E NOT EVALUATED SEPARATELY ITA NOS. 793 & 817/AHD/2006 A.Y. 2002-03 (FAG BEARINGS INDIA LTD. VS. DCIT) PAGE 20 BY THE ASSESSEE AS WELL AS THIS OFFICE. THE ULTIMAT E RESULT OF THE MANUFACTURING ACTIVITY OF SALE OF FINISHED PRODUCTS REFLECT INTO THE INCOME EARNED BY THE ENTITY. IN THE PRESENT CASE AS COMPUTED EARLIER THE OPERA TING PROFIT REQUIRES TO BE ADJUSTED UPWARD BY AN AMOUNT OF RS. 13.84 CRORES. T HIS ADJUSTMENT IS NOT BEING ALLOCATED TO VARIOUS INTERNATIONAL TRANSACTIO NS AS THE ASSESSEE DID NOT COMPUTE THE ARM'S LENGTH PRICE OF THESE TRANSACTION S SEPARATELY. IN VIEW OF THE FACT THAT THE TRANSACTIONS ARE INTER-RELATED AND TH E PAN OF INCOME GENERATING ACTIVITY THEREFORE IT WILL BE APPROPRIATE TO MAKE THE UPWARD ADJUSTMENT TO THE INCOME OF THE ASSESSEE BY THE AMOUNT OF RS. 13.84 C RORES. THEREFORE ON ACCOUNT OF BENCH MARKING THE MANUFACTURING ACTIVITY OF THE DTA UNIT OF THE COMPANY AN UPWARD ADJUSTMENT OF RS. 13.84 CRORES IS MADE. ' IT WAS SUBMITTED THAT THE TPO THEREFORE CONCLUDED T HAT THE BENCHMARKING OF ALL THE TRANSACTIONS SHOULD BE DONE IN A COMBINED MANNER AN D NOT SEPARATELY. 8. THE APPELLANT SUBMITS THAT AT NO POINT IN TIME DURING THE COURSE OF TP PROCEEDINGS THE TPO INFORMED THE ASSESSEE THAT HE PROPOSES TO BIFURCATE THE PROFITS OF THE MANUFACTURING SEGMENT INTO DTA AND EOU AND C ARRY OUT THE COMPARISON. CIT (A) 9. THE CIT(A) IN HER ORDER VIDE PARA 10.7.14 TO 10.7.18 HAS AFFIRMED THE VIEW OF THE TPO THAT IT IS PROPER TO BIFURCATE THE MANUFACT URING SEGMENT INTO DTA AND EOU. 10. THE CIT (A) OBSERVED THAT THOUGH TNMM IS A PPROPRIATE METHOD FOR ALL THE TRANSACTIONS FOR ROYALTY CUP SHOULD BE APPLIED. TH E CIT (A) FURTHER OBSERVED THAT THOUGH NO UNCONTROLLED TRANSACTIONS WERE AVAILABLE FOR COMPARISON THE CUP FOR THE ROYALTY SHOULD BE WITH REFERENCE TO THE CONTROLLED TRANSACTIONS BEING ROYALTY PAID BY SKF TO ITS PARENT COMPANY AND BY ASSESSEE HIMSELF T O ITS RELATED PARTY FOR THE EARLIER YEARS. THE CIT (A) ACCORDINGLY OBSERVED THAT ALL TH E ROYALTY PAID (INCLUDING LUMP SUM PAYMENTS AND TAXES) OVER AND ABOVE 1.5 % OF THE SA LES WILL BE ADJUSTED. IT MAY FURTHER BE SUBMITTED THAT WHILE THE TPO HAD NOT PRO POSED ANY ADJUSTMENT TO ROYALTY PAID TO EOU THE CIT (A) PROPOSED THAT EVEN IN CASE OF EOU ROYALTY PAID IN EXCESS OF 1.5 % SHOULD BE UPWARDLY ADJUSTED. THE CIT (A) A CCORDINGLY CONFIRMED THE ADJUSTMENT AGGREGATING TO RS. 375.91 LACS ON ACCOUN T OF ROYALTY. THIS RS. 375.91 LACS OF ADJUSTMENT INCLUDE THE FOLLOWING: (I) ROYALTY PAYABLE FOR SALES MADE BY EOU OF RS. 102.99 LACS (II) LUMP SUM FEES PAID (NOT LINKED TO % OF SALES) RS. 4 3.36 LACS (III) TAXES PAID GOVERNMENT OF INDIA ON THE ROYALTY RS. 1 7.48 LACS (IV) ROYALTY PAYABLE FOR DTA UNIT RS. 212.08 LACS. 11. IT IS MOST RESPECTFULLY SUBMITTED THAT IT WAS DULY POINTED OUT TO THE CIT (A) AS REPRODUCED BY THE CIT (A) ON PAGE 39 OF THE ORDER ( ON 2 ND BULLET POINT) THAT AGGREGATE OF THE INTERNATIONAL TRANSACTION DONE BY THE ASSESSEE FOR REVENUE EXPENSES DEBITED TO P & L AMOUNTED TO ONLY RS. 8.88 CRORES. AS AGAINST THIS THE TPO MADE ITA NOS. 793 & 817/AHD/2006 A.Y. 2002-03 (FAG BEARINGS INDIA LTD. VS. DCIT) PAGE 21 ADJUSTMENT OF RS. 13.84 CRORES. THIS MEANT THAT THE AES SHOULD NOT ONLY HAVE SUPPLIED MATERIAL AND SERVICES FREE OF COST BUT SHOULD HAVE ACTUALLY PAID A SUM OF RS. 4.96 CRORES TO THE APPELLANT FOR HAVING USED THE MATERI AL AND SERVICES SUPPLIED BY THE AES. ATTENTION IS INVITED TO PAGE 43 OF THE CIT (A)'S OR DER WHERE THE CIT (A) HOLDS THAT SUCH AN ADDITION IS INCORRECT AND UNREASONABLE IN T HE FACTS OF THE APPELLANT'S CASE. 12. IN CASE OF OTHER TRANSACTIONS OF THE MANUF ACTURING SEGMENT THE CIT (A) OBSERVED THAT THE TNMM IS APPROPRIATE METHOD. HOWEV ER THE CIT (A) OBSERVED THAT THE ADJUSTMENT SHOULD BE RESTRICTED TO THE INTERNAT IONAL TRANSACTIONS AND NOT TO ALL THE TRANSACTIONS AND ACCORDINGLY APPLIED THE DIFFERENTI AL RATE OF 7.01 % IN PLI TO INTERNATIONAL TRANSACTIONS OF DTA OTHER THAN ROYAL TY COMPUTED BY HER AT RS. 8 43 42 316. THE CIT (A) ACCORDINGLY CONFIRMED ADJU STMENT OF RS. 59.12 LACS ON ACCOUNT OF OTHER TRANSACTIONS OF DTA. IT IS SEPARAT ELY SUBMITTED AND DEMONSTRATED IN THESE SUBMISSIONS THAT THE SAID COMPUTATION OF THE CIT (A) IS ERRONEOUS ON SEVERAL COUNTS. ARTIFICIAL BIFURCATION OF DTA AND EOU IS DE HORS TH E PROVISIONS OF LAW 13. THE APPELLANT CONTENTS THAT BASED ON 'FUNC TIONS ASSETS AND RISKS' ('FAR') ANALYSIS THE APPELLANT HAS ALREADY BIFURCATED THE M ANUFACTURING SEGMENT AND DISTRIBUTION SEGMENT. FURTHER DIVIDING THE MANUFACT URING SEGMENT INTO DTA AND EOU IS NOT PERMISSIBLE UNDER LAW. RULE 10 B (2) PRO VIDING FOR CRITERIA ON WHICH THE TRANSACTIONS ARE TO BE COMPARED. THESE INCLUDE THE SPECIFIC CHARACTERISTICS OF THE PROPERTY TRANSFERRED OR SERVICES RENDERED FAR ANAL YSIS CONTRACTUAL TERMS OF THE TRANSACTIONS AND CONDITIONS PREVAILING IN THE MARKE T ETC. HOWEVER THE PERSON TO WHOM THE SALES IS MADE (I.E. DOMESTIC AND EXPORTS) CANNOT BE THE GROUND ON WHICH THE DISTINCTION SHOULD BE MADE. ACCORDINGLY SUCH S UB-SEGMENTATION IS NOT IN ACCORDANCE WITH LAW. 14. THE TPO HAS CONTENDED THAT THE DTA AND THE EOU REPRESENT TWO DISTINCT AND SEPARATE SEGMENTS WITH DIFFERENT RISK PROFILES DIF FERENT PROFILES COMPLETELY SEPARATE AND THEREFORE THOUGH THEY HAVE COMMON NATURE OF TR ANSACTIONS CANNOT BE BENCHMARKED JOINTLY. HOWEVER WHILE DOING SO THE T PO USES THE SAME SET OF COMPARABLES FOR COMPARING THE DTA SEGMENT AND EOU S EGMENTS. THEREFORE THE COMPARABLE SET ARE COMPARABLE WITH BOTH DTA AND EOU AS PER TPO BUT DTA AND EOU AMONGST THEMSELVES ARE NOT COMPARABLE. THIS IS COMPLETELY ILLOGICAL. TO PUT IT DIFFERENTLY IF A IS EQUAL TO B AND A IS ALSO EQUAL TO C THEN B IS EQUAL TO C. HOWEVER AS PER TPO A IS EQUAL TO B AND C BUT B AND C ARE N OT EQUAL. IT IS SUBMITTED THAT THE BIFURCATION IS DONE BY THE TPO NOT ON ANY LOGICAL G ROUND BUT FOR THE SAKE OF ENABLING THE ADJUSTMENT. SINCE THE TPO HAS USED THE SAME COM PARABLE SET FOR COMPARING BOTH THE SEGMENTS HE HAS ACCEPTED THAT FAR OF BOTH THE SEGMENTS ARE COMPARABLE AND THEREFORE THERE IS NO JUSTIFICATION FOR SEGREGATING THE RESULTS OF BOTH THE SEGMENTS FOR COMPARING IT WITH COMPARABLE SET OF COMPANIES. DTA SEGMENT HAS NO EXPORTS BUT COMPARABLE COMPANIES HAS EXPORTS ITA NOS. 793 & 817/AHD/2006 A.Y. 2002-03 (FAG BEARINGS INDIA LTD. VS. DCIT) PAGE 22 15. APPELLANT INVITES ATTENTION TO PAGE 589 OF THE PAPER BOOK. IT MAY BE SEEN THAT AVERAGE EXPORTS OF THE COMPARABLE COMPANIES IS 15.2 5 %. THE APPELLANT COMPANY (DTA PLUS EOU SEGMENTS) ALSO HAD EXPORTS OF 16.39 % FOR THIS YEAR. THEREFORE COMBINED MANUFACTURING SEGMENT IS COMPARABLE. HOWEV ER IF EOU IS TREATED SEPARATELY THEN THE DTA HAS PRACTICALLY NO EXPORTS . SINCE THE SAME SET OF COMPARABLE COMPANIES IS USED DTA WITH NIL EXPORTS IS COMPARED WITH COMPARABLE COMPANIES WITH AVERAGE 15.25 % EXPORTS. 16. THEREFORE IF DTA SEGMENT IS TO BE BENCHMA RKED SEPARATELY THEN FROM THE COMPARABLE COMPANIES ALSO THE PROFITS ARISING FROM THEIR EXPORT TRANSACTIONS SHOULD BE REMOVED. SINCE NO SUCH INFORMATION IS AVAILABLE IN PUBLIC DOMAIN THERE IS NO OPTION BUT TO CONSIDER THE COMBINED PROFITABILITY O F DTA AND EOU IN THE APPELLANT'S CASE ALSO. OTHERWISE IT WOULD AMOUNT TO 'COMPARING APPLES WITH ORANGES'. INCORRECT COMPUTATION BY THE CIT (A) 17. CITA (A) IN PARA 10.7.14 OBSERVED THAT THE ADJUSTMENT TO THE ALP SHOULD BE RESTRICTED TO THE INTERNATIONAL TRANSACTION AND CAN NOT BE MADE TO THE TOTAL SALES INCLUDING THE TRANSACTIONS WITH UNRELATED PARTIES. THE CIT (A) HAS THEN WORKED OUT A FIGURE OF RS.8 43 42 316 AS THE INTERNATIONAL TRANS ACTION ON WHICH THE ADJUSTMENT SHOULD BE MADE. WHILE THE SAID OBSERVATION OF THE C IT (A) THAT THE ADJUSTMENT SHOULD BE RESTRICTED TO THE INTERNATIONAL TRANSACTION IS CORRECT IT IS SUBMITTED WITHOUT PREJUDICE BY THE APPELLANT THAT THE COMPUTATION OF THE SAID SUM OF RS.8 43 42 316 IS COMPLETELY BASELESS. ATTENTION IS INVITED TO PAGE 3 OF THE TPO'S ORDER READ WITH PAGE 41 OF THE CIT (A)'S ORDER. IT CAN BE SEEN THAT THE FIGURE OF RS.8 43 42 316 IS ARRIVED AT BY THE FOLLOWING METHOD: A. INTERNATIONAL TRANSACTIONS IN THE NATURE OF RE VENUE EXPENSES DEBITED TO THE PROFIT AND LOSS ACCOUNT (OTHER THAN ROYALTY) OF RS. 4 01 14 355 (RS. 8 88 38 750 MINUS 4 87 24 395 OF ROYALTY); B. ADDED TO ABOVE THE ROYALTY OF THE DTA SEGMENT OF RS. 4 87 24 395 GIVING AGGREGATE OF RS. 8 88 38 750. C. ADDED TO ABOVE THE INTERNATIONAL TRANSACTION IN THE NATURE OF REVENUE EXPENDITURE CREDITED TO THE P & L ACCOUNT OF RS. 74 03 728. D. ADDED TO ABOVE THE INTERNATIONAL TRANSACTION I N THE NATURE OF CAPITAL GOODS PART OF THE BALANCE SHEET OF RS. 5 19 25 936 AGGREGATIN G TO RS. 14 81 68 414. E. FROM THE ABOVE REDUCTION OF THE ROYALTY OF DT A AND EOU SEGMENT BOTH) OF RS. 6 38 26 098. IT MAY BE NOTED THAT ROYALTY OF EOU OF RS. 1 51 01 703 WAS NOT INCLUDED IN THE ABOVE AGGREGATE. DESPITE THIS FACT IT WAS R EDUCED FROM THE AGGREGATE. 18. IT IS MOST RESPECTFULLY SUBMITTED THAT THE COMPUTATION MADE BY THE CIT (A) IS WITHOUT APPLICATION OF MIND AND MAKES ADDITION OF I TEMS IN THE NATURE OF REVENUE EXPENDITURE INCOME CAPITAL EXPENDITURE AND REDUCE S THEREFROM THE ITEM OF EXPENDITURE WHICH WAS NOT INCLUDED AT ALL. ITA NOS. 793 & 817/AHD/2006 A.Y. 2002-03 (FAG BEARINGS INDIA LTD. VS. DCIT) PAGE 23 WITHOUT PREJUDICE - IF DTA SEGMENT IS SEPARATELY CO NSIDERED 19. WITHOUT PREJUDICE TO THE CONTENTION THAT A RTIFICIAL BIFURCATION OF DTA AND EOU CANNOT BE MADE THE APPELLANT CONTENDS THAT EVEN IF DTA SEGMENT IS TO BE BENCHMARKED SEPARATELY THEN THE FOLLOWING ASPECTS NEEDS TO BE CONSIDERED: A. AS OBSERVED BY THE TPO THE PROFITABILITY OF T HE EOU IS MORE THAN THAT OF THE COMPARABLE SET OF COMPANIES AND THEREFORE PRICI NG OF ALL THE TRANSACTIONS OF EOU ARE ACCEPTED TO BE ALP. ATTENTION IS INVITED TO TABLE ON PAGE 3 OF THE TPO'S ORDER AND PARA 5 ABOVE. IT MAY BE SEEN THAT T HE EXCEPT IN CASE OF 4 ITEMS OF EXPENSE IN ALL OTHER CASES THE TRANSACTIONS AR E COMMON BETWEEN EOU AND DTA. SINCE THE TRANSACTIONS ARE ACCEPTED IN EOU TH ERE IS ABSOLUTELY NO REASON WHY THE SAME TRANSACTIONS SHOULD ALSO NOT BE ACCEPTED IN DTA. IT IS MOST' RESPECTFULLY SUBMITTED THAT THE AGGREGATE OF THE TRANSACTIONS WHICH ARE UNIQUE TO THE DTA SEGMENT ARE ONLY RS. 1.00 CRORE. ACCORDINGLY IF DIFFERENCE IN MARGIN OF 7.01 % IS APPLIED TO THESE TRANSACTION S THEN MAXIMUM ADJUSTMENT THAT IS PERMISSIBLE IS ONLY RS. 7.00 LACS AND NOTHI NG MORE. B. IF AFTER BIFURCATION INTO DTA AND EOU IF THE ADJUSTMENT IS STILL PROPOSED THEN IT WOULD AMOUNT TO ADJUSTMENT OF NON-AE TRANSA CTIONS. AS IS RIGHTLY OBSERVED BY THE CIT (A) THAT THE PROFIT CAN BE REDU CED BY EITHER INCREASING THE PRICES OF THE PURCHASES OR REDUCING THE PRICE OF TH E SALES. AS HAS BEEN ALREADY SHOWN ABOVE THAT THE EXPENSES AND INCOME WITH AES A RE COMMON FOR THE EOU AND THE DTA. SINCE THE TRANSACTIONS WITH THE EOU AR E ACCEPTED THEIR ALP EVEN FOR DTA HAS TO BE ACCEPTED. WHAT IS THEREFORE LEFT IS PURCHASES FROM NON- AES OR SALES TO NON-AES. THEREFORE THE ADJUSTMENT M ADE IN THE DTA SEGMENT IS NOTHING BUT THE ADJUSTMENT OF THE PURCHASE PRICE OR SALES PRICE OF TRANSACTIONS WITH NON-AES. THIS IS NOT PERMISSIBLE UNDER THE TRANSFER PRICING PROVISIONS. 20. WE RELY ON PANASONIC INDIA PVT. LTD. V. IT O (DELHI) 6 ITR (TRIB) 502 (DELHI). IN THIS DECISION THE BUSINESS OF THE COMPANY WAS OR GANIZED UNDER THREE DISTINCT SEGMENTS THE CONSUMER PRODUCT DIVISION (CPD) THE SYSTEM PRODUCT DIVISION (SPD) AND THE INDUSTRIAL SALES DIVISION (ISD). THE CPD AN D SPD DIVISIONS PERFORMED TRADING FUNCTIONS WHEREAS THE ISD PERFORMED COMMISS ION AGENCY FUNCTIONS. FOR THE PURPOSE OF TRANSFER PRICING ANALYSIS THE RESULTS OF THE CPD AND SPD WERE AGGREGATED AND THE RESULTS OF THE ISD WERE CONSIDERED SEPARATE LY. THE ARM'S LENGTH MARGIN WAS ARRIVED AT 2.48 PER CENT WHICH BEING LOWER THAN NET PROFIT MARGIN AT 6.15 PER CENT; IT WAS CONCLUDED IN TP REPORT THAT OUTCOME OF ASSESSEE 'S INTERNATIONAL TRANSACTIONS SATISFIED ARM'S LENGTH STANDARD. IN TRANSFER PRICE PROCEEDINGS TPO HOWEVER OBSERVED THAT AGGREGATION OF RESULTS OF TWO DIVISIO NS CPD AND SPD WAS NOT PROPER AS THEY WERE NOT CLOSELY INTERLINKED BECAUSE OF DIF FERENCES IN NATURE OF PRODUCTS TARGET CONSUMER GROUP AND MARKETING STRATEGY. ACCOR DING TO TPO IT WOULD BE FAIR TO ANALYSE CPD (IMPORTS) SEPARATELY KEEPING CPD (LOCAL S) APART AND THEREFORE HE HAD ITA NOS. 793 & 817/AHD/2006 A.Y. 2002-03 (FAG BEARINGS INDIA LTD. VS. DCIT) PAGE 24 SEGREGATED DIVISIONAL ACCOUNTS UNDER TRADING FUNCTI ON INTO CPD (LOCAL) CPD (IMPORTS) AND SPD. TPO THEREFORE REDREW ACCOUNTS OF CPD AND SPD DIVISIONS AND ON THAT BASIS RECOMMENDED TWO ADDITIONS OF RS. 1.12 CRORES AND RS.1.15 CRORES AS TP ADJUSTMENTS. ASSESSING OFFICER ACCEPTED RECOMMENDAT IONS OF TPO AND ENHANCED ASSESSEE'S INCOME TO THAT EXTENT. HELD (I) THAT IN THE TRANSFER PRICING REPORT FILED BY THE ASSESSEE BEFORE THE ASSESSING OFFICER THE COMPARABLES WERE CHOSEN AFTER EXTENSIV E EXERCISE AND A NET PROFIT OF 2.8 PER CENT WAS ADOPTED AS THE ARM'S LENGTH MARGIN FO R BENCHMARKING THE TRADING ACTIVITY OF THE ASSESSEE. THE TPO HAD BIFURCATED TH E TRADING ACTIVITY INTO TWO SEPARATE DIVISION OF CONSUMER PRODUCT DIVISION AND SYSTEM PR ODUCT DIVISION BUT HAD ASSUMED THE CONSOLIDATED PROFIT MARGIN OF 2.48 PER CENT OF THE COMPARABLES AS THE COMMON NET MARGIN INDICATOR. THE TPO HAD ALSO REWORKED THE FIN ANCIAL OF THE ASSESSEE WITHOUT MAKING ANY CORRESPONDING ADJUSTMENT IN THE PROFIT L EVEL INDICATOR OF THE COMPARABLE CASES. THIS APPROACH OF THE TPO WAS NOT UNDER THE P RESCRIBED RULE 10B. IF THE TRANSACTIONS OF BOTH THE DIVISIONS HAVING INTERNATI ONAL TRANSACTIONS AS FOUND BY THE TPO IN HIS REPORT WERE CONSOLIDATED AS ONE TRADING ACTIVITY THE OPERATING PROFIT MARGIN OF SALES WORKED OUT AT 3.95 PER CENT WHICH EXCEEDED THE ARM'S LENGTH MARING OF 2.48 PER CENT. THUS THE ASSESSEE'S INTERNATIONA L TRANSACTION WAS AT ARM'S LENGTH. WITHOUT PREJUDICE: MARGINS TO BE APPLIED ONLY TO INTERNATIONAL TRANSAC TIONS WITH AES: 21. THE CIT(A) VIDE PARA 10.7.2 TO 10.7.4 HAS HELD THAT THE DIFFERENTIAL MARGIN OF THE DTA SEGMENT AND COMPARABLES SHOULD BE APPLIED ONLY TO THE INTERNATIONAL TRANSACTIONS WITH AES AND NOT ON THE ENTIRE TURNOVE R OF THE DTA UNIT. THE CIT(A) HAS RESTRICTED THE ADDITION ON ACCOUNT OF LOWER MARGINS OF THE DTA TO RS. 59 12 396 AS AGAINST RS. 13.84 CRORES MADE BY THE TPO. 22. IN THE FOLLOWING DECISIONS IT HAS BEEN HEL D THAT THE TRANSFER PRICING ADJUSTMENT IS TO BE RESTRICTED TO INTERNATIONAL TRANSACTIONS W ITH AES AND NOT TO TOTAL SALES OF COMPANY: A. PHOENIX MECANO (INDIA) LTD. V. DCIT (2012) 17 TAXMANN.COM 119 (MUM) THE DISPUTE IS REGARDING THE ADDITION ON ACCOUNT OF GP RATE AND TP ADJUSTMENT MADE BY THE AO. IN MAKING TP ADJUSTMENT THE AO HAS FOLLOWED THE TNMM METHOD ABOUT WHICH THERE IS NO DISPUTE. THE DISPUT E RAISED IS ONLY ABOUT NOT GIVING THE BENEFIT OF 5% ADJUSTMENT AND MAKING THE ADJUSTMENTS IN RELATION TO THE ENTIRE SALES AND NOT LIMITING TO THE TRANSACTIO NS WITH THE AE. THE ADJUSTMENTS ON ACCOUNT OF TRANSFER PRICING ARE TO B E RESTRICTED ONLY TO THE INTERNATIONAL TRANSACTIONS WITH THE AE AND NOT TO THE ENTIRE TURNOVER OF THE ASSESSEE AS HELD BY THE MUMBAI BENCH OF THE TRIBUNAL IN CASE OF STARLITE (SUPRA) AND IN SEVERAL OTHER CASES (EMPHASIS SUPPLIED) ITA NOS. 793 & 817/AHD/2006 A.Y. 2002-03 (FAG BEARINGS INDIA LTD. VS. DCIT) PAGE 25 B. M/S. GENISYS INTEGRATING SYSTEMS (INDIA) PVT. LTD. V. DCIT [2013] 152 TTJ 215 (BANGALORE) SECTION 92C OF THE INCOME-TAX ACT 1961 - TRANSFER PRICING - COMPUTATION OF ARM'S LENGTH PRICE - ASSESSMENT YEAR 2006-07 - WHETHER WHILE DETERMINING ALP TRANSFER PRICING ADJUSTMENTS SHOULD BE RESTRIC TED TO ONLY INTERNATIONAL TRANSACTIONS BETWEEN ASSOCIATED ENTERPRISES EITHER OR BOTH OF WHOM ARE NON- RESIDENT - HELD YES - C. PENNZOIL QUAKER STATE INDIA LTD. [2012] 26 TAX MANN.COM 124 (MUM.) IN THE GIVEN CASE THE ASSESSING OFFICER HAS COMPUTE D THE TRANSFER PRICING ADJUSTMENT WITH RESPECT TO GROSS SALES OF THE ASSES SEE OF RS. 119.04 CRORES ON THE BASIS OF ARMS-LENGTH-MARGIN OF 4.22 PER CENT. T HE CASE OF THE ASSESSEE IS THAT TOTAL PURCHASES BY THE ASSESSEE WITH ASSOCIATE ENTERPRISES IN RELATION TO WHICH TRANSFER PRICING PROVISIONS HAVE BEEN APPLIED WAS ONLY TO THE TUNE OF RS.15.81 CRORES. THE LIMITED DISPUTE RAISED IS REGARDING TRANSFER PR ICING ADJUSTMENT IN RELATION TO INTERNATIONAL TRANSACTIONS ENTERED INTO BY THE A SSESSEE WITH ASSOCIATE ENTERPRISES. THERE IS NO DISPUTE EITHER REGARDING T NMM METHOD FOLLOWED BY THE ASSESSING OFFICER OR ABOUT VARIABLES SELECTED F OR COMPUTATION OF TRANSFER PRICING ADJUSTMENT. THE ONLY DISPUTE RAISED BY THE ASSESSEE IS WHETHER THE TRANSFER PRICING ADJUSTMENT SHOULD BE COMPUTED WITH RESPECT TO GROSS TURNOVER OF THE ASSESSEE OR SHOULD BE LIMITED TO VOLUME OF T RANSACTION ENTERED INTO WITH THE ASSOCIATE ENTERPRISES. THEREFORE ADJUSTMENT HA S TO BE MADE ONLY WITH RESPECT TO PURCHASES WITH ASSOCIATE ENTERPRISES. TH E HON'BLE BENCH HAS HELD THAT THE CLAIM OF THE ASSESSEE IS VERY REASONABLE A S THE ADJUSTMENT HAS TO BE MADE ONLY WITH RESPECT TO TRANSACTIONS WITH ASSOCIA TE ENTERPRISES BASED ON ARM'S LENGTH PRICE AND NOT WITH RESPECT TO TOTAL PU RCHASES/SALES. THE ISSUE IS RESTORED TO THE FILE OF ASSESSING OFFICER/TPO FOR F RESH COMPUTATION OF TRANSFER PRICING ADJUSTMENT AFTER NECESSARY EXAMINATION IN T HE LIGHT OF THE OBSERVATIONS MADE ABOVE AND AFTER ALLOWING OPPORTUNITY OF HEARIN G TO THE ASSESSEE. D. LIONBRIDGE TECHNOLOGIES PVT. LTD. [2012] 137 I TD 197 (MUM.) IT IS AXIOMATIC THAT THE TRANSFER PRICING ADJUSTMEN T CAN BE MADE ONLY WITH REFERENCE TO THE INTERNATIONAL TRANSACTIONS WITH TH E AES AND NOT NON-AES. SPECIAL PROVISIONS RELATING TO THE COMPUTATION OF I NCOME FROM INTERNATIONAL TRANSACTIONS WERE INTRODUCED THROUGH SECTIONS 92 TO 92F BY THE FINANCE ACT 2001 WITH A VIEW TO PROVIDE A STATUTORY FRAME WORK WHICH CAN LEAD TO THE COMPUTATION OF REASONABLE PROFITS AND TAXES IN INDI A IN CASE OF INTERNATIONAL TRANSACTIONS BETWEEN ENTERPRISES OF A MULTI-NATIONA L GROUP. THE OBJECT OF THESE PROVISIONS IS TO ENSURE THAT THE TRANSACTIONS BETWE EN TWO AES ARE NOT ARRANGED IN SUCH A MANNER SO AS TO REDUCE THE INCIDENCE OF T AX DUE IN INDIA. SUCH OBJECT ITA NOS. 793 & 817/AHD/2006 A.Y. 2002-03 (FAG BEARINGS INDIA LTD. VS. DCIT) PAGE 26 IS ACHIEVED BY DETERMINING ALP AS PER THE RELEVANT PROVISIONS OF THE ACT WHICH IS THEN COMPARED WITH THE PRICE AT WHICH INTERNATIO NAL TRANSACTIONS ARE ACTUALLY ENTERED INTO AND RECORDED IN THE BOOKS OF ACCOUNT. THE DIFFERENCE BETWEEN THE ALP AND THE ACTUAL PRICE IF LEADING TO THE LOWERING OF INCOME DUE IN INDIA IS ADDED BY WAY OF TRANSFER PRICING ADJUS TMENT. FROM THE SCHEME OF CHAPTER X CONTAINING THE SECTIONS AS AFORE-REFERRE D IT IS MANIFEST THAT THE ADDITION ON ACCOUNT OF TRANSFER PRICING ADJUSTMENT CAN BE MADE ONLY IN RESPECT OF INTERNATIONAL TRANSACTIONS WITH THE AES AND NOT THE NON-AES. IT IS QUITE NATURAL ALSO BECAUSE THERE CAN BE NO SCOPE FOR ARRA NGING THE TRANSACTIONS WITH NON-AES SO AS TO REDUCE THE DUE TAX IN INDIA. THAT IS THE REASON FOR WHICH THE TRANSACTIONS WITH NON-AES HAVE BEEN EXCLUDED FROM T HE AMBIT OF CHAPTER X OF THE ACT. ROYALTY / FEES FOR USE OF TECHNOLOGY 23. THE TPO DURING THE COURSE OF TRANSFER PRIC ING ANALYSIS HAD CALLED FOR VARIOUS DETAILS WITH RESPECT TO PAYMENT OF ROYALTY. THE APP ELLANT DULY SUBMITTED THE SAME. THE TPO IN PARA 5.8 AT PAGE 22 HAS HELD THAT THE TRANSA CTION OF ROYALTY IS NOT AT ARM'S LENGTH BUT HAS NOT MADE ANY UPWARD ADJUSTMENT ON TH E COUNT THAT UNDER TNMM TRANSACTIONS CANNOT BE BENCHMARKED SEPARATELY. 24. THE CIT(A) WHILE DEALING WITH THE ADDITION S ON ACCOUNT OF LOW MARGINS IN THE DTA HAS HELD THAT THE ADDITION ON ACCOUNT OF DIFFER ENTIAL OPERATING MARGIN SHOULD BE RESTRICTED ONLY TO THE INTERNATIONAL TRANSACTIONS W ITH AES. THE CIT(A) RESTRICTED THE ADDITION TO RS. 59 12 396 INSTEAD OF RS. 13.84 CROR ES MADE BY THE AO. HOWEVER WHILE DEALING WITH THE SAID ADJUSTMENT THE CIT(A) HELD TH AT THE TRANSACTION OF ROYALTY SHOULD BE BENCHMARKED SEPARATELY APPLYING CUP METHOD [PARA 10.7.10 PAGE 59 OF CIT(A) ORDER]. 25. THE CIT(A) HAS REJECTED THE CONTENTION OF THE APPELLANT THAT WHILE APPLYING TNMM SINCE ROYALTY PAYMENT WAS CONSIDERED AS PART O F COST THE SAME CANNOT BE BENCHMARKED SEPARATELY PARTICULARLY WHEN THE MARGIN S OF THE EOU HAVE BEEN ACCEPTED TO BE AT ARM'S LENGTH. 26. THE APPELLANT HAS COMPUTED THE ALP USING T NMM. THE TPO HAS ACCEPTED THE FACT THAT SEPARATE BENCHMARKING OF TRANSACTIONS IS NOT POSSIBLE (REFER THIRD PARA IN PARA 5.8 AT PAGE 22 OF THE TRANSFER PRICING ORDER). HOWEVER THE CIT(A) HAS HELD THAT THE ENTIRE ROYALTY PAYMENT IS TO BE BENCHMARKED SEP ARATELY. 27. WE MOST RESPECTFULLY SUBMIT THAT THE ACTIO N OF THE CIT(A) IN BENCHMARKING THE ROYALTY PAYMENT ON TOTAL BASIS SUFFERS FROM INHEREN T ERRORS. IT IS AN ADMITTED FACT THAT ALL TRANSACTIONS OF EOU INCLUDING THAT OF PURCHASE AND SALE OF GOODS ARE AT ARM'S LENGTH. THERE IS NO ADDITION PROPOSED BY THE TPO NO R THE CIT(A) WITH RESPECT TO THE INTERNATIONAL TRANSACTIONS OF EOU. UNDER THE TNMM T HE PROFITS OF THE EOU ARE ACCEPTED TO BE AT ARM'S LENGTH. IF THE MARGINS OF T HE EOU ARE ACCEPTED TO BE AT ARM'S ITA NOS. 793 & 817/AHD/2006 A.Y. 2002-03 (FAG BEARINGS INDIA LTD. VS. DCIT) PAGE 27 LENGTH IN THAT CASE THE PAYMENT OF ROYALTY SHOULD A LSO BE ACCEPTED TO BE AT ARM'S LENGTH. 28. FURTHER UNDER THE TNMM ONCE THE TRANSACTI ON IS CONSIDERED WHILE COMPUTING MARGINS THE SAME CANNOT BE SEGREGATED AND BENCHMARK ED USING DIFFERENT METHOD. IT IS AN ADMITTED FACT THAT WHILE COMPUTING THE MARGINS O F THE EOU AND DTA THE APPELLANT HAS CONSIDERED ROYALTY AS A PART OF COST. AFTER CON SIDERING ROYALTY PAYMENTS THE MARGINS OF THE EOU ARE ACCEPTED. IN VIEW OF THE SAM E WE SUBMIT THAT THE TRANSACTION OF ROYALTY CANNOT BE SEGREGATED AND BENCHMARKED SEP ARATELY. 29. WE RELY ON MAINETTI INDIA PVT. LTD. V. ACI T [2012] 149 TTJ 767 (CHENNAI) FOR AY 2007-08 DATED 16-3-2013. IN THIS CASE IT WAS HEL D THAT WHILE APPLYING THE TRANSFER PRICING METHOD IF A CLASS OF TRANSACTIONS IS CONSID ERED IN THAT CASE THE METHOD IS TO BE APPLIED ON THAT CLASS AND SEGREGATION IS NOT POSSIB LE. A) MAINETTI INDIA PVT. LTD. V. ACIT [2012] 149 TTJ 767 (CHENNAI) IN THE GIVEN CASE THE ASSESSEE IS IN THE BUSINESS OF MANUFACTURING PLASTIC GARMENT HANGERS. THE ASSESSEE WAS PART OF THE GLOBA L GROUP OF MAINETTI THE ASSESSEE USED TO BUY AND SELL THE HANGERS. THE ASSE SSEE WAS ALSO IN THE BUSINESS OF MANUFACTURING OF THE SAME. FOR DETERMINING THE ALP THE ASSESSING OFFICER HAD T AKEN INTO ACCOUNT ONLY THOSE TRANSACTIONS WHERE THE SALE PRICE TO ASSOCIAT E ENTERPRISE (AE) WAS LOWER THAN THE SALE PRICE TO NON-ASSOCIATED ENTERPRISE (N ON-AE) AND IGNORING THE INSTANCES WHERE THE PURCHASE-PRICE FROM AND SALE PR ICE TO AE EXCEEDED THE PURCHASE-PRICE FROM AND THE SALE PRICE TO NON-AE. W HILE APPLYING CUP METHOD FOR DETERMINING THE ALP TRANSFER PRICING OFFICER ( TPO) HAD CONSIDERED ONLY POSITIVE DEVIATIONS AND HAD IGNORED NEGATIVE DEVIAT IONS. FURTHER THE MARGIN OF PLUS OR MINUS 5% AS PER PROVISO TO SECTION 92C(2) W AS ALSO NOT CONSIDERED. ON FURTHER APPEAL THE HON'BLE BENCH HAS HELD THAT T HIS IS NOT CASE WHERE THE ASSESSEE IS ONLY PURCHASING THE PRODUCTS OR ONLY SE LLING THE PRODUCTS. THE ASSESSEE WAS BUYING AND SELLING THE PRODUCTS TO THE AES. IT WAS THE SUBMISSION THAT WHEN APPLYING THE CUP METHOD AS THE TRANSACTIO N DONE BY THE ASSESSEE WAS CONTINUOUS TRANSACTION WITH THE AES THE CONSOL IDATED EFFECT OF ALL THE TRANSACTIONS BETWEEN THE ASSESSEE AND THE AES MUST BE CONSIDERED AS A WHOLE. AS OTHERWISE IT WOULD LEAD TO A SITUATION WHERE THE ASSESSEE WOULD BE MAKING VERY HIGH MARGINS IN SOME CASES AND VERY LOW MARGIN S IN SOME CASES AND WHERE THE TRANSACTIONS SHOW HIGH MARGINS THE SAME WOULD STAND ACCEPTED AND IN THE TRANSACTIONS WERE LOW MARGINS THE SAME WOUL D CALL FOR AN ADJUSTMENT WHICH WOULD IN EFFECT BE INFLATING THE MARGINS OF T HE ASSESSEE TO DISPROPORTIONATE LEVELS. THIS WAS NOT CONTEMPLATED UNDER THE PROVISIONS OF SEC.92C OF THE ACT. THE ASSESSING OFFICER MAY BE DIRECTED TO TAKE INTO CONSIDERATION ALL THE TRANSACTIONS AS A WHOLE WHEN COMPUTING THE ALP. THESE ITA NOS. 793 & 817/AHD/2006 A.Y. 2002-03 (FAG BEARINGS INDIA LTD. VS. DCIT) PAGE 28 TRANSACTIONS CLEARLY SHOW THAT WHAT IS DONE BY THE ASSESSEE IS ONE OF PURCHASE AND SALE. WITH THIS IN MIND READING OF THE PROVISIONS OF SECTION 92C SHOWS THAT THE WORD USED IS 'NATURE OF TRANSACTION' 'NATURE O F TRANSACTION' WOULD BE A PARTICULAR SET OF TRANSACTION WHICH ARE TO BE SEEN TOGETHER. WHEN THE ASSESSEE IS BUYING FROM ONE PLACE AND SELLING AT ANOTHER THA T WOULD BE A 'CLASS OF TRANSACTION'. WHEN THE ASSESSEE IS DOING THE BUSINESS OF TRADING IT WOULD NOT BE A RIGHT TO HOLD THAT THE PURCHASE IS O NE 'CLASS OF TRANSACTION' AND THE SALES ARE ANOTHER 'CLASS OF TRANSACTION'. THE ASSESSEE DEALING WITH THE AES IS IN A BETTER POSITION TO NEGOTIATE BETTER PRI CES AND CONSEQUENTLY WOULD BE ABLE TO GET A BETTER BARGAIN. HERE WHAT IS TO BE SEEN IS WHETHER THE TRANSACTION OF PURCHASE AND SALE BEING THE NATURE O F TRANSACTIONS WHEN SEEN IN CONSOLIDATED FROM GENERATES PROFITS WHICH NORMA LLY WOULD BE GENERATED. FOR THIS BOTH THE PURCHASE AND SALE TRANSACTIONS WO ULD HAVE TO BE CONSIDERED (EMPHASIS SUPPLIED) 30. THE CIT(A) IN HER ORDER HAS HELD THAT ROYALT Y @ 1.5% ONLY REPRESENT REASONABLE ROYALTY. THIS FINDING IS GIVEN BASED ON THE APPELLATE ORDER FOR AY 2001-02. IT HAS ALSO BEEN HELD THAT THE BENCHMARKING OF ROYA LTY IS TO BE DONE FOR EOU AS WELL AS DTA. ENTIRE ROYALTY PAYMENT HAS TO BE BENCHMARKE D IRRESPECTIVE OF THE FACT WHETHER THE PAYMENT IS FOR EOU OR DTA. THE CIT(A) H AS HELD THAT WHILE DEALING WITH THE ADDITION OF ROYALTY FOR AY 2001-02 U/S. 40A(2) IT HAS BEEN HELD THAT ROYALTY @ 1.5% IS REASONABLE. THE CIT(A) HAS ALSO RELIED ON T HE ROYALTY PAYMENTS MADE BY SKF FOR COMING TO THE CONCLUSION THAT ROYALTY @ 1.5% RE PRESENT ALP. IT IS THE OBSERVATION OF THE CIT(A) THAT THE PROVISIONS OF SECTION 92 TO 92F ARE SIMILAR TO SECTION 40A(2) SIMILAR ADJUSTMENT IS MADE IN THE CURRENT YEAR ALSO [REFER PARA 10.7.5 OF CIT(A) ORDER]. IT IS SUBMITTED THAT FOR A.Y. 2001-02 THE APPELLAN T CHALLENGED THE ORDER OF THE CIT (A) BEFORE THE HON'BLE ITAT. BEFORE THE HON'BLE ITAT IT WAS CONTENDED BY THE APPELLANT THAT MAJORITY OF THE ROYALTY WAS PAID TO THE PARTIE S WHICH ARE NOT COVERED BY THE PROVISIONS OF SECTION 40 A (2) (B) OF THE ACT. THE ITAT FOR EXAMINING THE SAID MATTER HAS SET ASIDE THE ORDER OF THE AO AND HAS DIRECTED THE AO TO EXAMINE IT FURTHER. USE OF CONTROLLED TRANSACTIONS AS CUP 31. THE CIT (A) ERRED IN RELYING UPON THE RATE S OF ROYALTY FOR THE CONTROLLED TRANSACTION OF SKF. YOUR ATTENTION IS INVITED TO PA GE 545 OF THE PAPER BOOK WHICH CONTAINS THE ANNUAL REPORT OF SKF BEARINGS INDIA LI MITED. ON PAGE 576 OF THE SAID REPORT THERE IS A LISTING OF 'RELATED PARTY TRANSA CTIONS'. ON PAGE 577 IN NOTE (D) RELATING TO ROYALTY PAYMENT IT IS CLEARLY MENTIONE D THAT THE ROYALTY IS PAID TO THE PARENT OF SKF BEARINGS INDIA LTD. THE FUNDAMENTAL P RINCIPLE OF CUP IS THAT THE COMPARABLE TRANSACTION HAS TO BE 'UNCONTROLLED TRAN SACTION' MEANING THAT IT HAS BE A TRANSACTION BETWEEN TWO PARTIES WHO ARE NOT RELAT ED TO EACH OTHER. SKF TRANSACTION IS NOT ELIGIBLE TO BE TREATED AS CUP AS IT IS WITH RELATED PARTY. ITA NOS. 793 & 817/AHD/2006 A.Y. 2002-03 (FAG BEARINGS INDIA LTD. VS. DCIT) PAGE 29 32. THE TPO AND THE CIT (A) HAS FURTHER RELIED UPON THE RATES OF ROYALTY PAID BY THE ASSESSEE DURING THE EARLIER YEARS. IT IS MOST R ESPECTFULLY SUBMITTED THAT THIS TRANSACTION IS ALSO WITH RELATED PARTIES AS IT IS G IVEN TO A RELATED PARTY OF THE ASSESSEE FOR THE EARLIER PERIOD. IT IS DIFFICULT TO UNDERSTA ND AS TO HOW EARLIER TRANSACTION BETWEEN THE SAME RELATED PARTIES BE TREATED AS BENC HMARK FOR THE SAME TRANSACTION WITH THE SAME RELATED PARTIES FOR SUBSEQUENT PERIOD . IT IS SUBMITTED THAT THERE IS ABSOLUTELY NO JUSTIFICATION FOR USING EITHER OF THE TWO COMPARABLES. 33. IT IS FURTHER SUBMITTED THAT THERE IS ABSO LUTELY NO EVIDENCE AVAILABLE ON RECORD THAT ANY ENQUIRY OF ANY NATURE HAS BEEN CARRIED OUT BY ANY PERSON INCLUDING TPO TO CONCLUDE THAT THE TRANSACTIONS OF SKF AND FOR THE E ARLIER YEARS FOR THE ASSESSEE WERE THE CORRECT ALP OR WERE DONE IN CIRCUMSTANCES SO AS TO BE AT THE ALP. IN VIEW OF THE SAME THE CUP ADOPTED BY THE TPO AND THE CIT (A) RE QUIRES TO BE REJECTED. SINCE THERE IS NO CUP AVAILABLE THE ONLY OPTION AVAILABL E IS TO ADOPT TNMM AS THE METHOD FOR DETERMINATION OF THE ALP. CLAUSE (C) OF RULE 10 C OF THE INCOME TAX RULES 1962 PROVIDE THAT 'AVAILABILITY COVERAGE AND RELIABILIT Y OF DATA NECESSARY FOR APPLICATION OF THE METHOD;' IS ONE OF THE CRITERIA FOR DETERMINING THE 'MOST APPROPRIATE METHOD'. SINCE IN THE CIRCUMSTANCES NO DATA IS AVAILABLE FO R USING THE CUP THE ONLY POSSIBLE METHOD IS TNMM. 34. SINCE THE TPO AND THE CIT (A) HAS CONCLUDE D THAT TNMM IS THE MAM FOR ALL THE TRANSACTIONS IT WOULD BE INCORRECT TO ADOPT A DIFFERENT METHOD FOR ONE ITEM OF EXPENDITURE (ROYALTY IN THIS CASE) WHEREAS FOR ALL OTHER ITEMS OF EXPENDITURE (LIKE PURCHASE OF STORE SPARES COMPONENTS OTHER EXPENS ES) ETC TNMM IS USED AS THE MAM. APPROVAL BY OTHER GOVERNMENT AUTHORITIES 35. FURTHER THE CIT(A) HAS REJECTED THE CONTEN TION OF THE APPELLANT THAT THE ROYALTY RATES WERE APPROVED BY SIA / RBI AND THEREFORE THE SAME ARE TO BE TAKEN TO BE AT ARM'S LENGTH. 36. WITH RESPECT TO THE APPROVAL OF RATES BY S IA / RBI WE SUBMIT THAT IN CASE OF SONA OKEGAWA PRECISION FORGINS LTD. V. ADDL. [2012] 143 TTJ 516 (DELHI) IT HAS BEEN HELD THAT WHEN ROYALTY TO RELATED CONCERN IS A PPROVED BY THE RBI AND DIPP ALSO CONSIDERS THE SAME AS REASONABLE AT A CERTAIN PERCE NTAGE THE SAME CAN BE TAKEN AS JUSTIFIED UNDER THE CUP METHOD. IN THIS CASE THE AS SESSEE WAS ENGAGED IN THE BUSINESS OF MANUFACTURING OF CERTAIN GOODS. IT ENTERED INTO EIGHT INTERNATIONAL TRANSACTIONS WITH ASSOCIATED ENTERPRISES [AE]. IT PAID ROYALTY TO THE AE AT THE RATE OF 3 PER CENT IN RESPECT OF THE GOODS SOLD TO THEM AND CLAIMED DEDUC TION OF THE SAME. THE ROYALTY AT THE RATE OF 3 PERCENT WAS PAID ON THE BASIS OF LETT ER DATED 30.04.1993 WRITTEN BY THE RESERVE BANK OF INDIA EXCHANGE CONTROL DEPARTMENT TO SONA STEERING SYSTEMS LTD. IN WHICH PAYMENT OF ROYALTY @ 3% ON DOMESTIC SALES WAS ALLOWED TO BE PAID FOR A PERIOD OF FIVE YEARS. ITA NOS. 793 & 817/AHD/2006 A.Y. 2002-03 (FAG BEARINGS INDIA LTD. VS. DCIT) PAGE 30 THE ASSESSING OFFICER REFERRED THE MATTER TO THE TP O WHO CAME TO THE CONCLUSION THAT THE ROYALTY PAID BY THE ASSESSEE TO THE AE WAS NOT ALLOWABLE BECAUSE (I) THE ROYALTY PAID DID NOT STAND JUSTIFIED UNDER THE COMPARABLE U NCONTROLLED PRICE METHOD [CUP METHOD] AND (II) THE ASSESSEE WAS A CONTRACT MANUF ACTURER FOR THE AE. THE LOWER AUTHORITIES THEREFORE DISALLOWED THE ROYALTY PAID IN RESPECT OF THE GOODS SOLD TO THE AE. ON FURTHER APPEAL TO THE TRIBUNAL THE HON'BLE BENC H HAS HELD THAT THE ROYALTY WAS PAID ON THE BASIS OF APPROVAL LETTER ISSUED BY THE RBI. THE ASSESSEE HAS ALSO PLACED ON RECORD A PRESS NOTE ISSUED BY THE GOVERNMENT OF IND IA MINISTRY OF COMMERCE AND INDUSTRIES DEPARTMENT OF INDUSTRIAL POLICY & PROMO TION ISSUED IN 2003 UNDER WHICH ROYALTY PAYMENT @ 8% ON EXPORT SALES AND 5% ON DOME STIC SALES HAVE BEEN REFERRED TO BE REASONABLE FOR THE PURPOSE OF PROCESSING APPR OVAL OF PAYMENTS. ON THE OTHER HAND THE AO FAILED TO BRING ANY MATERIAL ON RECORD THAT PAYMENT OF ROYALTY @ 3% WAS NOT AT ARM'S LENGTH. THEREFORE THE PAYMENT STA NDS JUSTIFIED UNDER THE CUP METHOD. 37. IN THE CASE OF CADBURY INDIA LTD. V. ADDL. CIT ITA NO. 7408/MUM/2010 FOR AY 2002-03 DATED 13-11-2013 IT HAS BEEN HELD THAT AS T HE PAYMENT IS MADE AS PER THE APPROVAL GIVEN BY THE RBI AND SIA GOVERNMENT OF IN DIA THERE CANNOT BE ANY SCOPE OF DOUBT THAT THE ROYALTY PAYMENT ON TECHNICAL KNOW IS NOT AT ARM'S LENGTH. THE HON'BLE TRIBUNAL VIDE PARA NO. 39 OF THE ORDER HELD THAT '39. ON GOING THROUGH THE RECORDS AND THE ORDERS OF THE REVENUE AUTHORITIES WE FIND THAT IN SO FAR AS THE PAYMENT OF ROYALTY ON TECHNICAL KNOWHOW CONCERNED THE ASSESSEE HAS BEEN PAYING TO ITS PARE NT AE RIGHT FROM 1993 AS OTHER GROUP COMPANIES ARE PAYING ACROSS THE GLOBE. IT HAS BEEN ACCEPTED BY THE TPO THAT THE PAYMENT DOES NOT AFFECT THE PROFIT ABILITY OF THE ASSESSEE IF WE ARE TO EXAMINE THE ISSUE FROM THAT ANGLE AS WELL. I N ANY CASE THE PAYMENT OF ROYALTY ON TECHNICAL KNOWHOW IS AT PAR WITH THE SIM ILAR PAYMENTS FROM THE GROUP COMPANIES IN OTHER COUNTRIES & REGION. BESIDE S THIS THE PAYMENT IS MADE AS PER APPROVAL GIVEN BY THE RBI AND SIA GOVE RNMENT OF INDIA. HENCE THERE CANNOT BE ANY SCOPE OF DOUBT THAT THE ROYALTY PAYMENT ON TECHNICAL KNOWHOW IS NOT AT ARM'S LENGTH.' USE OF CONTROLLED TRANSACTION FOR CUP 38. REGARDING THE USE OF DATE OF SKF INDIA LTD . FOR BENCHMARKING THE ROYALTY PAYMENT @ 1.5% WE INVITE YOUR KIND ATTENTION TO PAG E 16 OF THE TRANSFER PRICING ORDER. WHILE DEALING WITH COMPARABILITY OF SKF WITH THAT OF THE APPELLANT THE TPO HAS OBSERVED AS BELOW: '(B) REGARDING 2(III) THE COMPANY ................ .................. ITA NOS. 793 & 817/AHD/2006 A.Y. 2002-03 (FAG BEARINGS INDIA LTD. VS. DCIT) PAGE 31 THIS CONTENTION OF THE COMPANY IS DULY CONSIDERED. THE TRANSACTION OF ROYALTY PAYMENT BY SKF INDIA LTD. IS A CONTROLLED TRANSACTI ON AND AS A PRINCIPLE THE CONTROLLED TRANSACTIONS ARE NOT USED FOR COMPUTING THE ARM'S LENGTH PRICE. ON THE ISSUE OF USE OF CONTROLLED TRANSACTION PARA 1. 70 OF THE 1995 OECD REPORT REFERS THAT EVIDENCE FROM ENTERPRISES ENGAGED IN CO NTROLLED TRANSACTIONS WITH ASSOCIATED ENTERPRISE MAY BE USED IN UNDERSTANDING THE TRANSACTION UNDER REVIEW OR AS A POINTER TO FURTHER INVESTIGATION. TH E DEALINGS BETWEEN ASSOCIATED ENTERPRISES FOR COMPARISON CAN ALSO BE USED IN TH E CASES OF LAST RESORT WHERE: (I) THERE IS SUFFICIENT DATA AVAILABLE TO DEM ONSTRATE THEIR RELIABILITY. (II) RELATED PARTY COMPARABLE DATA PROVIDES THE MO ST RELIABLE AVAILABLE DATA UPON WHICH TO DETERMINE OR ESTIMATE AN ARM'S LENGTH OUTCOME. THEREFORE THE RATE OF ROYALTY PAID BY SKF INDIA LT D. SERVES AS A USEFUL GUIDE FOR DETERMINING THE ARM'S LENGTH RATE OF ROYALTY.' 39. WE MOST RESPECTFULLY SUBMIT THAT THERE IS NO MATERIAL ON RECORD TO PROVE THAT THE DATA EXTRACTED FROM SKF IS SUFFICIENT TO DEMONS TRATE ITS RELIABILITY. EXCEPT MAKING SUCH OBSERVATIONS IN THE TP ORDER NO DOCUMENTARY EV IDENCE HAS BEEN BROUGHT ON RECORD. NOR SUCH DATA IS SHARED WITH THE APPELLANT BEFORE USING FOR BENCHMARKING THE TRANSACTIONS. FURTHER NO EFFORT HAS BEEN MADE TO F IND OUT ANY COMPARABLE FOR THE ROYALTY TRANSACTION. THE TPO HAS DIRECTLY CONCLUDED THAT AS A MATTER OF LAST RESORT CONTROLLED TRANSACTIONS CAN BE USED BEFORE IN FACT EVEN TRYING TO FIND OUT A COMPARABLE TRANSACTION FOR ROYALTY PAYMENTS. NO EFFORT HAS BEE N MADE BY THE TPO TO SEARCH A COMPARABLE CASE. FURTHER THE TRANSACTION OF PAYMEN T OF ROYALTY IN CASE OF SKF IS A PAYMENT BY ASSOCIATED ENTERPRISE AND THEREFORE DOES NOT SATISFY THE TEST OF COMPARABLE UNCONTROLLED PRICE. 40. WE RELY ON TECNIMONT ICB (P) LTD. V. ADDL. CH 138 ITD 23 (MUMBAI) (TM) WHEREIN IT HAS BEEN HELD THAT NET PROFIT MARGIN REA LIZED FROM A TRANSACTION WITH AN AE CANNOT BE TAKEN AS A COMPARABLE BEING INTERNAL COMP ARABLE FOR COMPUTATION OF ALP OF AN INTERNATIONAL TRANSACTION WITH ANOTHER AE EVE N THOUGH SAID NET MARGIN FROM A TRANSACTION WITH AE IS FOUND AND ACCEPTED AT ALP. 41. FURTHER THERE IS NO DATA AVAILABLE ON REC ORD WHICH PROVES THAT PAYMENT OF ROYALTY @ 1.5% IS AT ARM'S LENGTH USING CUP METHOD. THE CIT(A) HAS MADE COMPARISON OF THE ROYALTY PAID BY THE APPELLANT IN EARLIER YEARS WHEREIN IT HAS BEEN OBSERVED THAT THE ROYALTY RATES HAVE BEEN INCREASED FROM 1.5% TO 3 % 5% AND 8%. THE CIT(A) HAS HELD THAT SINCE THERE IS NO DATA AVA ILABLE EVIDENCING THE INCREASE IN RATES ROYALTY @ 1.5% IS COMPARABLE. 42. WE RESPECTFULLY SUBMIT THAT AGAIN THE COMP ARISON IS MADE WITH THE INTERNAL RATES AND NOT UNCONTROLLED TRANSACTIONS. FOR APPLYI NG CUP THE TRANSACTION SHOULD BE UNCONTROLLED TRANSACTION WITH HIGH DEGREE OF COMPAR ABILITY. NO SUCH CRITERIA HAS BEEN SATISFIED AND BROUGHT ON RECORD. THE FACTS IN THE C ASE OF CABOT INDIA LTD. V. DCIT ITA NOS. 793 & 817/AHD/2006 A.Y. 2002-03 (FAG BEARINGS INDIA LTD. VS. DCIT) PAGE 32 2011 [2011] 12 TAXMANN.COM 70 (MUM.) ARE SIMILAR. I N THIS CASE ALSO THE TPO HAD NOTED THAT THERE WAS INCREASE IN THE RATE OF ROYALT Y FROM 2 % TO 5%. THE ALP OF ROYALTY WAS DETERMINED AT 2 %. IT WAS HELD THAT PAY MENT OF ROYALTY @ 2% IN EARLIER YEARS REPRESENT CUP. THE IT AT NOTED THAT THE ROYAL TY AT THE RATE OF 2% WAS PAID BY THE ASSESSEE COMPANY TO ITS ASSOCIATE ENTERPRISE AN D THE SAME THEREFORE COULD NOT BE TAKEN AS A COMPARABLE UNCONTROLLED PRICE. THE TRIBU NAL IN THIS CASE REJECTED THE APPLICATION OF THE CUP METHOD AS THE PRODUCT MANUFA CTURED AND THE TECHNOLOGY USED FOR UNIQUE AND HAD RESTORED THE MATTER TO THE TPO T O WORK OUT THE ALP USING ANY OTHER METHOD. 43. IN THE CASE OF THE APPELLANT YOUR KIND OFF ICE WOULD APPRECIATE THAT NO DATA IS AVAILABLE ON RECORD TO PROVE THAT THE CUP IS THE MO ST APPROPRIATE METHOD FOR BENCHMARKING THE TRANSACTION OF ROYALTY. NO DATA IS BROUGHT ON RECORD BY THE TPO NOR BY THE CIT(A) FOR APPLICATION OF CUP. THE TRANS ACTION OF SKF IS A CONTROLLED TRANSACTION AND THIS FACT HAS BEEN ACCEPTED BY THE TPO AND ALSO THE CIT(A). IN VIEW OF THE SAME CONSIDERING THE DECISION OF TECNIMONT S UPRA AND CABOT SUPRA THE SAME CANNOT BE USED FOR BENCHMARKING THE TRANSACTION OF ROYALTY. UNDER THE SAID CIRCUMSTANCES WE SUBMIT THAT THE METHOD APPLIED BY THE APPELLANT (TNMM) IS THE CORRECT METHOD OF COMPUTING THE ALP OF TRANSACTION OF ROYALTY MORE SO WHEN THE MARGINS OF EOU HAVE BEEN ACCEPTED AT ARM'S LENGTH. WE THEREFORE REQUEST YOUR KIND OFFICE TO DELETE THE ADJUSTMENT MADE. 44. REGARDING THE RATES OF ROYALTY WE SUBMIT T HAT THE RATES AT WHICH ROYALTY IS PAID BY THE APPELLANT ARE GENERALLY ACCEPTED RATES. IN T HE CASE OF SC ENVIRO AGRO INDIA LTD. V. DCIT [2013] 143 ITD 195 (MUMBAI - TRIB.) DA TED 7-11-2012 THE ROYALTY PAID @ 5 % WAS CONSIDERED TO BE AT ARM'S LENGTH. IN THIS CASE THE ASSESSEE ENTERED INTO AN AGREEMENT FOR OBTAINING LICENSE TO MANUFACTURE SPEC IFIED INSECTICIDES AND PESTICIDES AND AGREED TO PAY 5 PER CENT ROYALTY ON THE VALUE A DDITION AND RBI HAS APPROVED THE ROYALTY AT 5 PER CENT FOR A PERIOD OF SEVEN YEARS. THIS ISSUE FOR THE FIRST TIME WAS EXAMINED BY THE TPO ON THE BASIS OF THE TP REPORT O F ASSESSEE WHEREIN ASSESSEE SUBMITTED THAT THE ARRANGEMENT IS IN THE NATURE OF CONTRACT MANUFACTURERS IN THE FAR ANALYSIS. THE TPO WITHOUT EXAMINING THE NATURE OF A GREEMENT OR THE MANUFACTURING ACTIVITY OF ASSESSEE OR ANY OTHER INCIDENTAL FACTOR CAME TO A CONCLUSION THAT SINCE ASSESSEE ADMITTED TO BE A CONTRACT MANUFACTURER TH ERE IS NO NEED TO PAY ANY ROYALTY. ACCORDINGLY THE TPO HAS CALCULATED THE ARM'S LENGT H PRICE OF THE ROYALTY AT NIL ON THE GROUND THAT ASSESSEE WAS NOT MAKING ANY SALES TO OU TSIDE PARTIES. ON FURTHER APPEAL THE HON'BLE TRIBUNAL HELD THAT TH E TPO HAS TO EXAMINE WHETHER THE PRICE PAID OR AMOUNT PAID WAS AT ARM'S LENGTH OR NO T UNDER THE PROVISIONS OF TRANSFER PRICING AND ITS RULES. THE RULE DOES NOT AUTHORIZE THE TPO TO DISALLOW ANY EXPENDITURE ON THE GROUND THAT IT WAS NOT NECESSARY OR PRUDENT FOR ASSESSEE TO HAVE INCURRED THE SAME. ON THAT PRINCIPLE ALONE THE ORD ER OF THE TPO CANNOT BE APPROVED AS IT NOT ONLY CONSIDERED THE FACTS WRONGL Y BUT ALSO EXCEEDED THE JURISDICTION AVAILABLE TO THE TPO IN EXAMINING THE ARM'S LENGTH PRICE ON A TRANSACTION (EMPHASIS SUPPLIED) ITA NOS. 793 & 817/AHD/2006 A.Y. 2002-03 (FAG BEARINGS INDIA LTD. VS. DCIT) PAGE 33 45. IN THE CASE OF REEBOK INDIA CO. V. ADD.CIT ITA [2013] 35 TAXMANN.COM 578 (DELHI -TRIB) FOR AY 2008-09 DATED 14-6-2013 IT WAS HELD THAT PAYMENTS OF ROYALTY @ 8 % ON EXPORTS AND 5 % ON DOMESTIC SALES UNDER THE AUTOMATIC ROUTE IS TO BE TAKEN AT ARM'S LENGTH. 46. IN THE CASE OF SAMSUNG INDIA ELECTRONICS P RIVATE LIMITED V. ACIT [2013] 34 TAXMANN.COM 299 (DELHI. TRIB) FOR AY 2007-08 DATED 21-6-2013 THE PAYMENT OF ROYALTY @ 8 % WAS UPHELD AND HELD THAT WHERE THE AS SESSEE COMPANY HAS PAID ROYALTY TO ITS FOREIGN PARENT COMPANY AT SAME PERCENTAGE OF SALES MADE TO BOTH AES AND NON- AES NO TRANSFER PRICING ADJUSTMENT WAS REQUIRED. ALTERNATIVE ARGUMENT WITHOUT PREJUDICE 47. WITHOUT PREJUDICE TO OUR CONTENTION THAT N O SEPARATE ADDITION CAN BE MADE FOR ROYALTY BY BENCHMARKING IT SEPARATELY WE SUBMIT TH AT MAXIMUM ADDITION ON ACCOUNT OF BENCHMARKING ROYALTY SEPARATELY CAN BE ONLY RS. 2.56 LACS AS CONTENDED HEREIN. ATTENTION IS INVITED TO PAGE 311 OF THE PAPER BOOK. AS IT CAN BE SEEN THAT FOR THE RUNNING ROYALTY PAID FOR DTA EXCLUSIVELY IS OF ONLY RS. 3.67 LACS. IN ALL OTHER CASES THE PAYMENT IS EITHER LUMP SUM AMOUNT FOR WHICH NO SUCH ADDITION CAN BE MADE OR IS PAID AT THE SAME RATES FOR EOU. AS HAS BEEN SUBMITT ED EARLIER THAT EVEN AFTER PAYMENT OF THIS ROYALTY THE EOU HAS EARNED SIGNIFI CANTLY HIGHER MARGINS AS COMPARED TO THE COMPARABLE COMPANIES. THERE IS THER EFORE NO JUSTIFICATION FOR MAKING ANY ADJUSTMENT OF ROYALTY FOR THE EOUS. ACCORDINGLY THE RATES APPLICABLE TO THE EOU HAVE TO BE ACCEPTED. IF THE SAME RATES ARE ACCEPTED FOR THE SAME AGREEMENT FOR EOU THEN THERE IS NO REASON WHY THE SAME RATE FOR THE S AME AGREEMENT CANNOT BE ACCEPTED FOR THE DTA. THIS THEREFORE LEAVES ROYALTY PAID @ 5 % AMOUNTING TO RS. 3.67 LACS. IF THE SAID ROYALTY IS ADJUSTED TO 1.5 % THEN THE ADJU STMENT WILL BE OF ONLY RS. 2.56 LACS. IT IS SUBMITTED THAT EVEN IF THE MATTER IS DECIDED AGAINST THE APPELLANT THE MAXIMUM ADJUSTMENT FOR THE ROYALTY SHOULD BE RESTRICTED TO RS. 2.56 LACS AND NOTHING MORE. 48. SHOULD THE HONBLE BENCH REQUIRE ANY FURTHER I NFORMATION OR EXPLANATION WE SHALL BE PLEASED TO SUBMIT THE SAME. SD/- MILIN MEHTA CHARTERED ACCOUNTANT BARODA 23 RD SEPTEMBER 2014 28.2. WRITTEN SUBMISSIONS OF THE LD.CIT-DR ARE AS UNDER: BEFORE THE HON'BLE D BENCH. ITAT. AHMEDABAD ITA NOS. 793 & 817/AHD/2006 A.Y. 2002-03 (FAG BEARINGS INDIA LTD. VS. DCIT) PAGE 34 IN THE CASE OF FAG BEARINGS INDIA LIMITED APPEAL NO. 793/AHD/2006 (A) AND 817/AHD/2006 (D) FOR AY 2002-03 SUBMISSION RELATING TO TRANSFER PRICING ISSUES.. ASSESSEE GROUND NO. 6 -CIT(A) ERRED IN PARTLY CONFIRMING ADJUSTMENT PROPO SED BY TPO TO THE EXTENT OF RS 375.91 LAKH IN RESPECT OF ROYALTY AND RS 59.1 2 LAKH IN RESPECT OF OTHER TRANSACTIONS. ERRED IN HOLDING THAT ONLY ROYALTY AN D FTS TO THE EXTENT OF 1.5% OF SALES VALUE BE TREATED AS AT ARM'S LENGTH. -CIT(A) ERRED IN CONFIRMING ACTION OF TPO IN SEPARA TING THE PROFITS OF DTA AND THEN COMPARING THE SAME TO COMPOSITE PROFITS OF OTHER COMPARABLES THUS MAKING AN ADJUSTMENT. ASSESSEE GROUND NO. 7 -CIT(A) ERRED IN INVOKING SECTION 40(A)(2)(B) TO RE STRAIN ROYALTY ALLOWANCE TO 1.5% AND ALSO HOLDING THAT IF THE ADDITION U/S 92 I S DELETED THEN IT SHOULD BE SUSTAINED ON ACCOUNT OF IT BEING EXCESSIVE. REVENUE GROUND OF APPEAL: -CIT(A) ERRED IN REDUCING THE ADDITION OF RS 13.84 CRORE TO RS 4.35 CRORE. 1. CIT(A) - 10.7.7 TO 10.7.14. PARA 10.7.15 ON CO MPARABLES AND THEIR DIVERSITY. IN THE YEAR 2001-02 THE ISSUE HAS BEEN RESTORED TO TH E FILE OF AO FOR RE-DETERMINATION (PAGE 23 OF PARA 10) 2. TRANSFER PRICING STUDY CONDUCTED BY THE ASSESS EE: CONSOLIDATED TNMM FOR MANUFACTURING ACTIVITY OF BOTH UNITS - DTA AND EOU WITH COMPARABLES. THE ASSESSEE HAS SELECTED 12 COMPARABLES WITH AVERAGE OPERATING MARGIN OF 9.79%. FAG'S OPERATING MARGIN FROM MANUFACTURING ACTIVITY HAS BE EN COMPUTED AT 9.56%. SINCE IT FALLS WITHIN THE BAND OF 5% NO ADJUSTMENT HAS BEEN MADE (PARA 5.1 OF THE ORDER). IN THE DISTRIBUTION SEGMENT THE COMPARABLE MARGINS HA VE BEEN COMPUTED AT 2.19% AS COMPARED TO MARGIN OF 15.08% IN CASE OF FAG. HENCE NO ADJUSTMENT HAS BEEN MADE. 3. TNMM ACCEPTED BY TPO. PLI ACCEPTED BY THE TPO. THE ASSESSEE HAS TWO DISTINCT SEGMENTS IN THE MANUFACTURING DIVISION - DOMESTIC T ARIFF AREA AND EXPORT ORIENTED UNIT. THE AO HAS RELIED ON PARA 1.42 OF OECD 1995 G UIDELINES TO HOLD THAT THE DTA AND EOU OPERATIONS ARE DISTINCT AND SEPARATE (PARA 5.4 OF THE TPO ORDER). 4. THE TPO HAS GIVEN HIS REASONS FOR TREATING THE EOU AS A SEPARATE AND TOTALLY INDEPENDENT UNIT ON PAGE 9 OF HIS ORDER. IN VIEW OF THE FACT THAT THE EOU HAS BEEN SET UP INDEPENDENTLY AND ADMITTEDLY IS BEING MAINTAIN ED AS AN INDEPENDENT UNIT IT IS ITA NOS. 793 & 817/AHD/2006 A.Y. 2002-03 (FAG BEARINGS INDIA LTD. VS. DCIT) PAGE 35 LIABLE TO BE TREATED AS A SEPARATE UNIT. THE FUNCT IONAL PROFILE OF THE EOU IS ALSO DIFFERENT AS IT IS CATERING TO A SEPARATE CAPTIVE M ARKET AND ITS PRODUCTS ARE NOT BEING SOLD IN THE OPEN MARKET WHILE IN RESPECT OF DTA TH E PRODUCTS ARE BEING SOLD IN OPEN MARKET. 5. AS REGARDS COMPARABLE THE ASSESSEE ITSELF HAS ADMITTED BEFORE THE TPO (DISCUSSION ON PAGE 16 OF TPO ORDER) THAT THE COMPA RABLE SELECTED ARE SIMILAR AND HAVE SIMILAR FUNCTIONAL PROFILE. PARA 5.8 PAGE 22 OF THE ORDER. THE VARIOUS INTERNATIONAL TRANSACTIONS IN THE DTA SEGMENT ARE S EAMLESS AND CONTINUOUS AND HENCE TNMM AT DTA LEVEL JUSTIFIED. 6. REASON FOR REJECTION OF EXPLANATION RELATING T O ROYALTY IS ON PAGE 20-21 OF THE TP ORDER WHEREIN IT HAS BEEN HELD THAT THE PAYMENT OF ROYALTY IS NOT AT ARM'S LENGTH AND THAT THE INCREASE IN ROYALTY RATES TO 5% HAS NOT BE EN NEGOTIATED BY THE ASSESSEE. FURTHER NO INFORMATION HAS BEEN FURNISHED WHETHER THE PARENT IS CHARGING ROYALTY AT SAME RATE FROM OTHER AES OR FROM A THIRD PARTY. 7. THE EOU ALSO HAS RELATED PARTY TRANSACTION AND HAS THEREFORE BEEN SUBJECT TO TP AUDIT. THE EOU HAS A PROFIT MARGIN OF 42.74%. SINCE THE OPERATING MARGINS OF COMPARABLE ARE 9.79% THE TRANSACTIONS IN EOU HAS B EEN ACCEPTED AT ARM'S LENGTH BY THE TPO. THE DTA RELATED ISSUE HAS BEEN DISCUSSED A T PARA 5.6 OF THE ORDER. THE DTA OPERATING MARGIN HAS BEEN COMPUTED AT PAGE 12 AT 2. 78% AS AGAINST THE COMPARABLE MARGIN AT 9.79%. THE TPO HAS SUITABLY ALTERED THE MARGIN AND ACCORDINGLY THE VALUE OF TRANSACTION. THE TOTAL INTERNATIONAL TRANS ACTION IN DTA AREA ARE RS 13.95 CRORE ON EXPENSE SIDE AND RS 2.51 CRORE ON INCOME S IDE. 8. THE OECD GUIDELINES STATE THAT ' 1.42 IDEALLY IN ORDER TO ARRIVE AT THE MOST PREC ISE APPROXIMATION AFFAIR MARKET VALUE THE ARM'S LENGTH PRINCIPLE SHOULD BE APPLIED ON A TRANSACTION-BY- TRANSACTION BASIS. HOWEVER THERE ARE OFTEN SITUATI ONS WHERE SEPARATE TRANSACTIONS ARE SO CLOSELY LINKED OR CONTINUOUS TH AT THEY CANNOT BE EVALUATED ADEQUATELY ON A SEPARATE BASIS. EXAMPLES MAY INCLUD E 1. SOME LONG-TERM CONTRACTS FOR THE SUPPLY OF COMMODITIES OR SERVICES 2. RIGHTS TO USE INTANGIBLE PROPERTY AND 3. PRICING A RANGE OF CLOSELY-LINKED P RODUCTS (E.G. IN A PRODUCT LINE) WHEN IT IS IMPRACTICAL TO DETERMINE PRICING F OR EACH INDIVIDUAL PRODUCT OR TRANSACTION. ANOTHER EXAMPLE WOULD BE THE LICENSING OF MANUFACTURING KNOW- HOW AND THE SUPPLY OF VITAL COMPONENTS TO AN ASSOCI ATED MANUFACTURER; IT MAY BE MORE REASONABLE TO ASSESS THE ARM'S LENGTH TERM FOR THE TWO ITEMS TOGETHER RATHER THAN INDIVIDUALLY. SUCH TRANSACTIONS SHOULD BE EVALUATED TOGETHER USING THE MOST APPROPRIATE ARM'S LENGTH METHOD OR METHODS . A FURTHER EXAMPLE WOULD BE THE ROUTING OF A TRANSACTION THROUGH ANOTHER ASS OCIATED ENTERPRISE; IT MAY BE MORE APPROPRIATE TO CONSIDER THE TRANSACTION OF WHICH THE ROUTING IS A PART IN ITS ENTIRETY RATHER THAN CONSIDER THE INDIVIDUAL TRANSACTIONS ON A SEPARATE BASIS. ' ITA NOS. 793 & 817/AHD/2006 A.Y. 2002-03 (FAG BEARINGS INDIA LTD. VS. DCIT) PAGE 36 ROYALTY PAYMENT: THE ROYALTY PAYMENT IS FOUND TO BE EXCESSIVE AND NOT AT ARM'S LENGTH 1. DATA ON ROYALTY CHARGED FROM OTHER AES OR IN RESPECT OF EXPORT OF BEARINGS RESALE MARGIN OF THE AE ON EXPORTS MADE B Y THE ASSESSEE HAVE NOT BEEN FURNISHED TO THE TPO. HENCE THE ARM'S LENGTH PRICE OF THE ROYALTY PAYMENT AS WELL AS THE MARGIN OF THE AE ON EXPORTS MADE COULD NOT BE TESTED. PAGE 20 OF THE ASSESSMENT ORDER. THE ASSESSEE HAS F AILED TO GIVEN INFORMATION ON WHETHER ROYALTY HAS BEEN CHARGED ON SAME PRODUCT S FROM OTHER AES OR NOT. 2. THE TPO HAS BROUGHT ON RECORD THAT THE PAYMENT MADE FOR ROYALTY IS EXCESSIVE AND UNREASONABLE AS ON THE SAME TECHNOLOG Y ROYALTY WAS BEING PAID AT 1.5% IN THE LAST 15 TO 20 YEARS AND HENCE THERE WAS NO TECHNOLOGY TRANSFER SUBSEQUENT TO RENEWAL OF ROYALTY PAYMENT AGREEMENT. IN FACT THE TAX IS BORNE BY THE ASSESSEE RESULTING IN STILL HIGHER CHARGES F OR THE ASSESSEE COMPANY ABSOLUTELY NO JUSTIFICATION FOR INCREASE HAS BEEN P ROVIDED BY THE ASSESSEE COMPANY. 3. HOWEVER SINCE THE ADJUSTMENT HAS BEEN MADE AT TNMM LEVEL NO SEPARATE ARM'S LENGTH STUDY FOR ROYALTY HAS BEEN DONE BY TPO - PARA 5.8 CASE LAWS RELIED UPON: 1. BENETTON INDIA PVT LTD 17 TAXMANN.COM 5(DELH)( 2012): WHETHER SINCE IN ASSESSEE'S CASE THERE WERE DIFFERENT SEGMENTAL ACT IVITIES WHICH WERE INDEPENDENT OF EACH OTHER THEY WERE REQUIRED TO BE ANALYZED ON TRANSACTION TO TRANSACTION BASIS AND NOT BY COMBINING ALL ACTIVI TIES - HELD YES 2. TECNIMOUNT 1CB PVT LTD : 7098/MURN/2010. THE B ENCH HAS HELD THAT 'NOW COMING TO THE MAIN ISSUE WHETHER THE SEGMENTA L RESULTS ARE TO BE TAKEN INTO CONSIDERATION OR PROFIT MARGIN AT ENTITY LEVEL IS TO BE CONSIDERED WE FIND THAT CHAPTER-X INCORPORATES SPECIAL PROVISIONS RELA TING TO AVOIDING OF TAX IN REGARD TO INTERNATIONAL TRANSACTIONS AND INCOME FRO M INTERNATIONAL TRANSACTIONS HAS TO BE DETERMINED AT ARM'S LENGTH P RICE. THEREFORE AS PER THE PROVISIONS CONTAINED UNDER SECTIONS 92 TO 94 INTER NATIONAL TRANSACTIONS ARE TO BE TAKEN INTO CONSIDERATION. THEREFORE SEGMENTAL R ESULTS ARE TO BE CONSIDERED AND NOT THE PROFIT AT ENTITY LEVEL. AS REGARDS THE SUBMISSIONS OF LEARNED DEPARTMENT REPRESENTATIVE THAT WITH REFERENCE TO SE GMENTAL RESULTS EACH AND EVERY INTERNATIONAL TRANSACTION HAS TO BE CONSIDERE D SEPARATELY BECAUSE ALL THE ACTIVITIES ARE SEPARATE AND PROFIT MARGIN WILL BE D IFFERENT. LEARNED COUNSEL OBJECTED TO THESE SUBMISSIONS POINTING OUT THAT IT IS NOT THE APPEAL FILED BY THE REVENUE BUT BY THE ASSESSEE. HE ALSO SUBMITTED THAT THE TRIBUNAL HAS NO POWER OF ENHANCEMENT THAT TPO HAS NOT AT ALL CONSIDERED T HE SEGMENTAL RESULTS AND THEREFORE WE REFRAIN FROM MAKING ANY OBSERVATIONS WITH REFERENCE TO THE SUBMISSIONS MADE BY THE LEARNED DEPARTMENTAL REPRES ENTATIVE AND CONSIDER IT ITA NOS. 793 & 817/AHD/2006 A.Y. 2002-03 (FAG BEARINGS INDIA LTD. VS. DCIT) PAGE 37 APPROPRIATE TO ONLY OBSERVE THAT THE ASSESSING OFFI CER WILL CONSIDER THE SEGMENTAL RESULTS AND DETERMINE THE ARM'S LENGTH PR ICE IN ACCORDANCE WITH LAW. CONSEQUENTLY THESE GROUNDS OF APPEAL ARE ALLOWED F OR STATISTICAL PURPOSES IN TERMS OF OUR ABOVE OBSERVATIONS. 3. GENOME BIOTECH PVT LTD 21 TAXMANN.COM 315: TRA NSFER PRICING ADJUSTMENTS CANNOT BE DELETED ON THE GROUNDS THAT (I) PAYMENT W AS MADE WITH RBI APPROVAL; (II) EXPENSES WERE AUDITED AND (III) PAYMENTS WERE MADE THROUGH BANKING CHANNELS. 4. ING VYSYA LTD 2886 OF 2005 DECISION DATED 6/6/ 2012: THE QUESTION AS TO WHETHER AN ASSET IS A TRADING ASSET OR IS AN ASSET IN THE N ATURE OF A LASTING ASSET INVESTMENT HELD AS PART OF INVESTMENT MADE BY THE BANKING COMP ANY TO FULFILL ITS OBLIGATIONS UNDER THE REGULATORY PROVISIONS OF LAW OR WHETHER I T IS A PART OF TRADING ASSET AND THEREFORE HAS BECOME A PART OF STOCK-IN-TRADE IS A QUESTION WHICH HAS TO BE ANSWERED IN EACH CASE AND NOT EITHER BASED ON THE RBI CIRCUL AR OR GUIDELINES OR EVEN A CIRCULAR ISSUED BY THE BOARD IN GENERAL. 28.3. WE HAVE CONSIDERED THE RIVAL CONTENTIONS OF THE RES PECTIVE REPRESENTATIVE PARTIES. WE FIND FORCE INTO THE CON TENTION OF THE LD.COUNSEL FOR THE ASSESSEE THAT THE ARTIFICIAL BIFURCATION OF DTA AND EOU IS DE HORS THE PROVISIONS OF LAW DTA SEGMENT HAS NO EXPORTS BUT C OMPARABLE COMPANIES HAS EXPORTS AND INCORRECT COMPUTATION BY THE LD.CIT (A). IT IS POINTED OUT BY THE LD. COUNSEL FOR THE ASSESSEE THAT IT CAN BE SEE N THAT THE FIGURE OF RS.8 43 42 316/- IS ARRIVED AT BY THE FOLLOWING MET HOD:- A. INTERNATIONAL TRANSACTIONS IN THE NATURE OF REV ENUE EXPENSES DEBITED TO THE PROFIT AND LOSS ACCOUNT (OTHER THAN ROYALTY) OF RS.4 01 14 355 (RS.8 88 38 750 MINUS 4 87 24 395 OF ROYALTY). B. ADDED TO ABOVE THE ROYALTY OF THE DTA SEGMENT O F RS.4 87 24 395 GIVING AGGREGATE OF RS.8 88 38 750. C. ADDED TO ABOVE THE INTERNATIONAL TRANSACTION IN THE NATURE OF REVENUE EXPENDITURE CREDITED TO AT THE P&L ACCOUNT OF RS.74 03 728. D. ADDED TO ABOVE THE INTERNATIONAL TRANSACTION IN THE NATURE OF CAPITAL GOODS PART OF THE BALANCE SHEET OF RS.5 19 25 936 AGGREGATING TO RS.14 81 68 414. E. FROM THE ABOVE REDUCTION OF THE ROYALTY (OF DTA AND EOU SEGMENT BOTH) OF RS.6 38 26 098. IT MAY BE NOTED THAT ROYA LTY OF EOU OF RS.1 51 01 703 WAS NOT INCLUDED IN THE ABOVE AGGREG ATE. DESPITE THIS FACT IT WAS REDUCED FROM THE AGGREGATE. ITA NOS. 793 & 817/AHD/2006 A.Y. 2002-03 (FAG BEARINGS INDIA LTD. VS. DCIT) PAGE 38 THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT FOR THE PURPOSE OF BENCHMARKING THE INTERNATIONAL TRANSACTIONS THE ASS ESSEE HAD BIFURCATED ITS ACTIVITIES INTO MANUFACTURING SEGMENT AND DISTRIBUT ION SEGMENT. HOWEVER THE TRANSFER PRICING OFFICER (TPO) HAS FURTHER BIFURCAT ED THE ACTIVITIES OF THE ASSESSEE INTO DOMESTIC UNIT (DTA) AND EXPORT ORIENT ED UNIT (EOU). THUS THE TPO ARTIFICIALLY DIVIDED THE MANUFACTURING SEGMENT INTO TWO SUB-SEGMENTS I.E. FOR EXPORTS AND FOR DOMESTIC SALES BUT HOWEVER KEP T THE SET OF COMPARABLE COMPANIES SAME FOR BOTH EOU AND DTA. THE LD.COUNSE L FOR THE ASSESSEE INVITED OUR ATTENTION TOWARDS THE BIFURCATION OF TH E INTERNATIONAL TRANSACTIONS. ITEM-WISE DESCRIPTION OF THE INTERNATIONAL TRANSACT IONS AS CONTAINED ON PAGE-3 OF THE TPOS ORDER. HOWEVER THE LD.CIT(A) VIDE PA RAS 10.7.2 TO 10.7.4 IN HIS ORDER HAS HELD THAT THE DIFFERENTIAL MARGIN OF THE DTA SEGMENT AND COMPARABLES SHOULD BE APPLIED ONLY TO THE INTERNATI ONAL TRANSACTIONS WITH AES AND NOT ON THE ENTIRE TURNOVER OF THE DTA UNIT. T HEREFORE LD.CIT(A) HAS RESTRICTED THE ADDITION ON ACCOUNT OF LOWER MARGINS OF THE DTA TO RS.59 12 396/- AS AGAINST RS.13.84 CRORES MADE BY T HE TPO. THIS IS DULY SUPPORTED BY THE DECISIONS OF THE COORDINATE BENCHE S IN THE FOLLOWING CASES:- (I) PHOENIX MECANO (INDIA) LTD. VS. DCIT (2012) 17 TAXMANN.COM 119 (MUM) (II) M/S.GENISYS INTEGRATING SYSTEMS (INDIA) PVT.L TD. VS. DCIT (2013) 152 TTJ 215 (BANGALORE) (III) PENNZOIL QUAKER STATE INDIA LTD. (2012) 26 TA XMANN.COM 124 (MUM.) ITA NOS. 793 & 817/AHD/2006 A.Y. 2002-03 (FAG BEARINGS INDIA LTD. VS. DCIT) PAGE 39 (IV) LIONBRIDGE TECHNOLOGIES PVT.LTD. (2012) 137 I TD 197 (MUM.) 28.4. THERE IS NO FAULT CAN BE FOUND FROM THE ORDER OF THE LD.CIT(A) SO FAR AS RESTRICTING THE ADDITION ON ACCOUNT OF DIFFERENTIAL OPERATING MARGIN TO THE INTERNATIONAL TRANSACTIONS IS CONCERNED. HOWEVER THE FIGURE OF RS.8 43 42 316/- AS WORKED OUT BY THE LD.CIT(A) IS NOT CORRECT THEREFORE THIS ISSUE IS REQUIRED TO BE RESTORED TO THE FILE OF LD. CIT(A) FOR RECOMPUTATION OF THE INTERNATIONAL TRANSACTIONS. NEEDLESS TO SAY THAT T HE LD.CIT(A) WOULD GIVE SUFFICIENT OPPORTUNITY OF BEING HEARD TO BOTH THE PARTIES. THUS GROUND NO.6 IS ALLOWED FOR STATISTICAL PURPOSES. 29. COMING TO GROUND NO.7 WE HAVE HEARD THE PARTI ES AND GONE THROUGH THE WRITTEN SUBMISSIONS. WE FIND THAT THE LD.CIT( A) IN ITS ORDER HAS HELD THAT ROYALTY @ 1.5% ONLY REPRESENT REASONABLE ROYALTY. THIS FINDING IS ON THE BASIS OF THE APPELLATE ORDER PERTAINING TO AY 2001-02. I T IS ALSO HELD THAT THE BENCHMARKING OF ROYALTY IS TO BE DONE FOR EOU AS WE LL AS DTA. THE GRIEVANCE OF THE ASSESSEE IS THAT THE LD.CIT(A) ERRED IN RELY ING UPON THE RATES OF ROYALTY FOR THE CONTROLLED TRANSACTION OF SKF. THE CONTENT ION OF THE ASSESSEE IS THAT THE FUNDAMENTAL PRINCIPLE OF CUP IS THAT THE COMPAR ABLE TRANSACTION HAS TO BE UNCONTROLLED TRANSACTION MEANING THEREBY THAT IT HAS TO BE A TRANSACTION BETWEEN TWO PARTIES WHO ARE NOT RELATED TO EACH OTH ER. SKF TRANSACTION IS NOT ELIGIBLE TO BE TREATED AS CUP AS IT IS WITH RELATED PARTY. THE ANOTHER CONTENTION OF THE ASSESSEE IS THAT THE TPO AND LD.C IT(A) HAS RELIED UPON THE RATES OF ROYALTY PAID BY THE ASSESSEE DURING THE EA RLIER YEARS. THE CONTENTION IS THAT THIS TRANSACTION IS ALSO WITH RELATED PARTI ES AS IT IS GIVEN TO A RELATED ITA NOS. 793 & 817/AHD/2006 A.Y. 2002-03 (FAG BEARINGS INDIA LTD. VS. DCIT) PAGE 40 PARTY OF THE ASSESSEE FOR THE EARLIER PERIOD. IT I S ALSO THE CONTENTION OF THE ASSESSEE THAT NO MATERIAL IS AVAILABLE ON RECORD TH AT ANY ENQUIRY OF ANY NATURE HAS BEEN CARRIED OUT BY ANY PERSON INCLUDING TPO TO CONCLUDE THAT THE TRANSACTIONS OF SKF AND FOR THE EARLIER YEARS FOR T HE ASSESSEE WERE THE CORRECT ALP OR WERE DONE IN CIRCUMSTANCES SO AS TO BE AT TH E ALP. THE CONTENTION IS THAT THE ONLY AVAILABLE OPTION IS TO ADOPT TNMM AS THE METHOD FOR DETERMINATION OF THE ALP. 29.1. WE HAVE GIVEN OUR THOUGHTFUL CONSIDERATION TO THE RIVAL CONTENTIONS. WE FIND FORCE INTO THE CONTENTION OF THE LD.COUNSEL FO R THE ASSESSEE THEREFORE WE ARE OF THE CONSIDERED VIEW THAT THE LD.CIT(A) AND T PO WERE NOT JUSTIFIED IN ADOPTING THE CUP METHOD AND THEREFORE WE DIRECT T HE LD.CIT(A) TO ADOPT THE METHOD OF TNMM FOR DETERMINATION OF THE ALP AND REC OMPUTE THE ALP IN RESPECT OF THE ROYALTY. THUS THIS GROUND OF ASSES SEES APPEAL IS ALSO RESTORED BACK TO THE FILE OF LD.CIT(A) FOR RECOMPUTATION OF ALP AFTER GIVING AN OPPORTUNITY OF BEING HEARD TO BOTH THE PARTIES. GR OUND NO.7 OF ASSESSEES APPEAL IS ALLOWED FOR STATISTICAL PURPOSES. 30. GROUND NO.8 IS WITH RESPECT TO EXPENDITURE INCU RRED ON REPAIRS TO BUILDING OF RS. 40.18 LACS. 31. A.O. NOTICED THAT ASSESSEE HAD INCURRED RS. 14. 34 LACS ON ACCOUNT OF OFFICE MODERNIZATION AND RS. 25.84 LACS ON ACCOUNT OF REPAIRS OF BUILDING AND THE EXPENSES WERE CLAIMED AS REVENUE EXPENSES. A.O . ALSO NOTICED THAT EXPENDITURE ON ACCOUNT OF OFFICE MODERNIZATION WAS TOWARDS REPLACEMENT OF OLD FALSE CEILING WITH NEW FALSE CEILING AND WAS TH EREFORE OF THE VIEW THAT THE ITA NOS. 793 & 817/AHD/2006 A.Y. 2002-03 (FAG BEARINGS INDIA LTD. VS. DCIT) PAGE 41 EXPENDITURE WAS NOT OF REVENUE NATURE AS IT HAD RES ULTED INTO NEW OR DIFFERENT ADVANTAGE TO THE ASSESSEE. HE ACCORDINGLY HELD THE EXPENDITURE TO BE CAPITAL IN NATURE BUT ALLOWED DEPRECIATION ON THE SAME. AS FAR AS EXPENDITURE OF RS. 25.84 LACS IS CONCERNED HE NOTICED THAT THE EXPENS ES WERE ON ACCOUNT OF TRENCHES FOR DGBB CELL. THE SUBMISSION OF THE ASSE SSEE THAT THE EXISTING TRENCHES FLOORS OF DGBB CELL WAS REMOVED DUE TO TEC HNICAL PROBLEM AND IT WAS REPLACED WITH NEW FLOOR AND THEREFORE THE EXPE NDITURE WAS OF REVENUE IN NATURE WAS NOT FOUND ACCEPTABLE TO THE A.O. HE WA S OF THE VIEW THAT A NEW AND DIFFERENT ADVANTAGE OF ENDURING NATURE HAS BEEN ACHIEVED BY ASSESSEE. HE THEREFORE CONSIDERED IT TO BE CAPITAL EXPENDIT URE AND DISALLOWED THE EXPENDITURE BUT HOWEVER ALLOWED THE DEPRECIATION O N THE SAME. 32. AGGRIEVED BY THE ORDER OF A.O. THE ASSESSEE CA RRIED THE MATTER BEFORE THE CIT(A). CIT(A) UPHELD THE ORDER OF A.O. WHILE HOLDING AS UNDER: 11. THE GROUND OF APPEAL NO.8 RELATES TO DISALLOWANCE O F OFFICE MODERNIZATION EXPENSES OF RS.14 34 358/-. THE ASSESSING OFFICER NOTED THAT THESE EXPENSES MERELY CONSISTED OF REPLACEMENT OF O LD FALSE CEILING WITH NEW FALSE CEILING. THE ASSESSING OFFICER TREATED THE E XPENDITURE AS CAPITAL EXPENDITURE AND ALLOWED DEPRECIATION THEREON. 11.1 BEFORE ME THE APPELLANT SUBMITTED THAT THE EX PENSE WAS INCURRED FOR REPLACEMENT OF OLD FALSE CEILING WITH NEW FALSE CEI LING. IT WAS CONTENDED THAT IN A.Y. 1998-99 THE CIT(A) HAD ALLOWED DEDUCTION F OR REPLACEMENT OF OLD CEILING WITH NEW CEILING AS REVENUE EXPENDITURE. IT WAS ST ATED THAT SINCE THESE EXPENSES ARE COMPARABLE WITH THE EXPENSES FOR A.Y. 1998-99 DEDUCTION MAY BE GIVEN TO THE APPELLANT. 11.2 I HAVE CAREFULLY CONSIDERED THE FACTS OF THE C ASE AND THE APPELLANT'S SUBMISSION. THE ASSESSEE HAS INCURRED THIS EXPENDIT URE ON REPLACEMENT OF OLD FALSE CEILING. THE EXPENDITURE IS NOT ON PRESERVATI ON OR MAINTENANCE OF EXISTING ITA NOS. 793 & 817/AHD/2006 A.Y. 2002-03 (FAG BEARINGS INDIA LTD. VS. DCIT) PAGE 42 ASSET. BY INCURRING THE EXPENDITURE THE ASSESSEE H AS OBTAINED AN ADVANTAGE OF ENDURING NATURE. IN THE CASE OF ASSAM BENGAL CEMENT CO. 27 ITR 34 THE HON'BLE SUPREME COURT LAID DOWN THAT IF THE EXPENDI TURE IS MADE FOR ACQUIRING AN ASSET OR ADVANTAGE OF ENDURING NATURE IT IS IN THE NATURE OF CAPITAL EXPENDITURE. IN THE CASE OF BAILIMAI NAVAL KISHORE & ANOTHER V. CIT 224 ITR 41 4 THE HON'BLE SUPREME OBSERVED THAT: 'HAVING REGARD TO THE CONTEXT IN WHICH THE EXPR ESSION 'CURRENT REPAIRS' OCCURS IN SECTION 10(2)(V) OF THE INDIAN INCOME-TAX ACT 1922 THE EXPRESSION 'CURRENT REPAIRS' MEANS EXPENDITURE ON BUILDINGS MACHINERY PLANT OR FUR NITURE WHICH IS NOT FOR THE PURPOSE OF RENEWAL OR RESTORATION BUT WHICH IS ONLY FOR THE PURPOSE OF PRESERVING OR MAINTAINING AN ALREADY EXISTING ASSET AND WHICH DOES NOT BRING A NEW ASSET INTO EXISTENCE OR DOES NOT GIVE TO THE ASSESSEE A NEW OR DIFFE RENT ADVANTAGE (FROM HEAD NOTES).' 11.2.1 SINCE IN THE PRESENT CASE THE EXPENDITURE ON R EPLACEMENT OF FALSE CEILING IS ON RENOVATING AND REPLACING AN ASSET AND NOT FOR PRESERVIN G OR MAINTAINING AN EXISTING ASSET IT WAS RIGHTLY TREATED AS CAPITAL EXPENDITURE BY TH E ASSESSING OFFICER. 11.2.2 THE GROUND OF APPEAL NO.8 IS DISMISSED. 12. THE GROUND OF APPEAL NO.9 RELATES TO DISALLOWA NCE OF EXPENSES INCURRED ON REPLACEMENT OF FLOORING OF DGBB CELL (H ALL - I) AMOUNTING TO RS.25.84 LACS. THE ASSESSING OFFICER TREATED THE EXPENDITURE AS CAPITAL EXPENDITURE ON THE GROUND THAT THE ASSESSEE HAD ACQ UIRED A NEW AND DEFERENT ADVANTAGE OF ENDURING NATURE. THE ASSESSING OFFICER ALLOWED DEPRECIATION AT THE APPLICABLE RATE. 12.1 DURING APPEAL PROCEEDINGS IT WAS SUBMITTED BY THE APPELLANT THAT THE CONTENTIONS OF THE ASSESSING OFFICER ARE FACTUALLY INCORRECT AS THE FLOORING WAS REPLACED BECAUSE OF SOME TECHNICAL PROBLEM. THERE W AS AN EXISTING FLOORING AND THE SAID FLOORING WAS REPLACED AND THERE IS NO NEW ASSET CORNING INTO EXISTENCE. 12.2 I HAVE CONSIDERED THE SUBMISSIONS OF THE ASSES SEE. FOR THE REASONS DISCUSSED IN RESPECT OF GROUND NO.8 IT IS HELD THA T BY REPLACING THE FLOORING THE ASSESSEE GOT ADVANTAGE OF ENDURING NATURE. THE EXPE NDITURE WAS RIGHTLY TREATED AS CAPITAL EXPENDITURE. THE GROUND OF APPEAL NO.9 IS DISMISSED. ITA NOS. 793 & 817/AHD/2006 A.Y. 2002-03 (FAG BEARINGS INDIA LTD. VS. DCIT) PAGE 43 33. AGGRIEVED BY THE ORDER OF CIT(A) THE ASSESSEE IS NOW IN APPEAL BEFORE US. 34. BEFORE US THE LD. A.R. REITERATED THE SUBMISSI ONS MADE BEFORE THE A.O. AND CIT(A). HE FURTHER SUBMITTED THAT THE ISSUE IS COVERED IN FAVOUR OF THE ASSESSEE BY THE DECISION OF HONBLE TRIBUNAL IN ASS ESSEES OWN CASE FOR A.Y. 1998-99 & ALSO THE DECISION OF TRIBUNAL FOR A.Y. 01 -02. HE FURTHER SUBMITTED THAT REPLACEMENT OF FLOORING HAS BEEN HELD TO BE RE VENUE EXPENDITURE IN CASE OF R B BANSILAL ABIRCHAND SPINNING & WEAVING MILLS V. CIT 31 ITR 427 (NAG.). HE THEREFORE SUBMITTED THAT FOLLOWING THE DECISION OF TRIBUNAL OF EARLIER YEARS THE GROUND OF ASSESSEE BE ALLOWED. THE LD. D.R. ON THE OTHER HAND SUPPORTED THE ORDER OF A.O. 35. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL ON RECORD. WE FIND THAT IN A.Y. 1998-99 IN ITA NO. 19 43/AHD/2001 THE ISSUE BEFORE TRIBUNAL IN ASSESSEES OWN CASE WAS ABOUT TH E EXPENDITURE INCURRED ON CONSTRUCTION OF COMPOUND WALL BY REPLACING BARBE D WIRE FENCE. THE ISSUE WAS DECIDED IN FAVOUR OF ASSESSEE BY HOLDING AS UND ER: 22. THE NEXT DISPUTE IS WITH REGARD TO DISALLOWANC E OF EXPENSES OF RS.18 21 888/- ON CONSTRUCTION OF COMPOUND WALL BY REPLACING BARBED WIRE FENCE. THE ABOVE EXPENDITURE WAS INCURRED ON REPLACEMENT OF OLD ASSE TS AND THE SAME WAS CLAIMED AS REVENUE EXPENDITURE. HE ASSESSING OFFICER NOTICED THAT THE COMPOUND WALL WAS NOT IN EXISTENCE EARLIER AND A NEW ASSET OF CAPITAL .NATUR E HAS COME INTO EXISTENCE. HE ACCORDINGLY DISALLOWED RS. 18 21 888/-. HE HOWEV ER ALLOWED DEPRECIATION AT THE RATE OF 10% THE DISALLOWANCE WAS UPHELD BY THE CIT(A) BY H OLDING THAT IT IS A CAPITAL EXPENDITURE. 23. WE HAVE HEARD THE PARTIES AND CONSIDERED THEIR RIVAL SUBMISSIONS. THIS ISSUE IS COVERED IN FAVOUR OF THE ASSESSEE BY THE DECISION I N THE CASE OF B.V.RAMACHANDRAPPA & SONS 191 ITR 34(KAR.) WHEREIN IT WAS HELD THAT TRIB UNAL WAS RIGHT IN HOLDING THAT ITA NOS. 793 & 817/AHD/2006 A.Y. 2002-03 (FAG BEARINGS INDIA LTD. VS. DCIT) PAGE 44 EXPENDITURE INCURRED ON REPLACEMENT OF THE BARBED W IRE FENCE WITH COMPOUND WALL WAS REVENUE EXPENDITURE RESPECTFULLY FOLLOWING THE AFOR ESAID DECISIONS WE REVERSE THE ORDERS OF AUTHORITIES BELOW AND DIRECT THE ASSESSIN G OFFICER TO ALLOW THE CLAIM OF THE ASSESSEE. IN A.Y. 01-02 ISSUE BEFORE THE TRIBUNAL WAS WITH R ESPECT TO EXPENDITURE ON REPLACING AND FIXING TILES CONSTRUCTION OF SHED E XPENDITURE ON EXPANSION OF TOOL ROOM. THE ISSUE WAS DECIDED IN FAVOUR OF THE ASSESSEE BY HOLDING AS UNDER: 16. WE HAVE HEARD BOTH SIDES. AS FAR AS THE ASSES SEES APPEAL IS CONCERNED THE AMOUNT CONTESTED BEFORE US IS RS.2 46 739/- TOWARDS CONSTRUCTION OF SHED AND RS.12 55 771/- TOWARDS EXPENDITURE ON TOOL-ROOM TO TALING TO RS.15 02 510/-. WE HAVE ALSO EXAMINED THE NATURE OF REPAIRS INCURRED B Y THE ASSESSEE. SOME OF THE EXPENDITURE WAS FOR REPLACEMENT OF OLD FLOORING CH ANGE OF ELECTRICAL WIRES INSTALLATION OF PARTITIONS ETC. THERE ARE SERIES O F DECISION SUCH AS CHOWGULE & CO. 214 ITR 523 (BOM) ON THIS ISSUE AND PLACING RELIANC E WE HEREBY HOLD THAT SUSTENANCE OF SHED OR BUILDING ETC. IS DEFINITELY IN THE NATURE OF CURRENT REPAIRS AS PRESCRIBED U/S. 31 OF I.T. ACT. RESULTANTLY FOLLO WING THE LAW PRONOUNCED BY THE HONBLE COURT WE HEREBY DIRECT TO ALLOW THE CLAIM. THIS GROUND IS ALLOWED. BEFORE US REVENUE HAS NOT BROUGHT ANY BINDING CONT RARY DECISION ON RECORD IN ITS SUPPORT. WE THEREFORE FOLLOWING THE DECIS ION OF THE CO-ORDINATE BENCH OF TRIBUNAL IN ASSESSEES OWN CASE FOR EARLIER YEAR S DECIDE THE ISSUE IN FAVOUR OF THE ASSESSEE . THUS THIS GROUND IS ALLOWED. 36. GROUND NO.9 IS WITH RESPECT TO CONSIDERING SOFT WARE EXPENSES OF RS.14.91 LACS AS CAPITAL EXPENDITURE. 37. DURING THE COURSE OF ASSESSMENT PROCEEDING A.O . NOTICED THAT ASSESSEE HAD PAID FEES FOR MS OFFICE PACKAGE AMOUNT ING RS. 14.91 LACS AND WAS CLAIMED AS REVENUE EXPENSES. A.O. WAS OF THE V IEW THAT BY INCURRING THE EXPENSES ASSESSEE HAS ACQUIRED AN ASSET OR ADVANTAG E OF ENDURING NATURE. ITA NOS. 793 & 817/AHD/2006 A.Y. 2002-03 (FAG BEARINGS INDIA LTD. VS. DCIT) PAGE 45 HE THEREFORE CONSIDERED THE FEES PAID FOR OBTAINI NG THE LICENSE AS INTANGIBLE ASSET AND THEREFORE TREATED IT AS CAPITAL EXPENDIT URE BUT HOWEVER ALLOWED DEPRECIATION ON SAME. 38. AGGRIEVED BY THE ORDER OF A.O. THE ASSESSEE CA RRIED THE MATTER BEFORE THE CIT(A). CIT(A) FOLLOWING THE ORDER FOR A.Y. 01 -02 UPHELD THE DISALLOWANCE MADE BY A.O. 39. AGGRIEVED BY THE ORDER OF CIT(A) THE ASSESSEE IS NOW IN APPEAL BEFORE US. 40. BEFORE US AT THE OUTSET LD. A.R. SUBMITTED TH AT ISSUE IN THE PRESENT CASE IS COVERED IN FAVOUR OF THE ASSESSEE BY THE DE CISION OF TRIBUNAL IN ASSESSEES OWN CASE FOR A.Y. 01-02. HE PLACED THE COPY OF AFORESAID DECISION ON RECORD. LD. D.R. ON THE OTHER HAND SUP PORTED THE ORDERS OF A.O. AND CIT(A). 41. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL ON RECORD. WE FIND THAT ISSUE OF PAYMENT OF FEES FOR USE OF MS OFFICE WAS BEFORE THE TRIBUNAL IN ASSESSEES OWN CASE FOR A.Y. 01-02. THE ISSUE WAS DECIDED IN FAVOUR OF THE ASSESSEE IN ITA NOS. 792 & 816/AHD/20 06 AS UNDER: 17.1. THE ASSESSEE HAS INCURRED EXPENDITURE ON COMPUTER SOFTWARE DETAILS AS UNDER:- (A) FEES PAID FOR USE OF MICROSOFT OFFICE 9 45 00 5/- (B) EXPENSES INCURRED FOR USE OF E-MAIL FACILITY 2 72 500/- (C) COST OF AUTO CARD FOR BEARING DESIGN 4 57 160 /- (D) EXPENSES INCURRED FOR UPGRADATION OF SOFTWARE/MAINTENANCE OF COMPUTER 10 20 9 25/- ---------------------- TOTAL 26 95 590/- 17.2. THE AUTHORITIES BELOW HAVE HELD THAT THE EXPE NDITURE CONSTITUTED ACQUISITION OF ASSETS AND DISALLOWED THE SAME. ITA NOS. 793 & 817/AHD/2006 A.Y. 2002-03 (FAG BEARINGS INDIA LTD. VS. DCIT) PAGE 46 17.3. ON THE OTHER HAND IT WAS PLEADED THAT NUMBER OF LICENCES OF SMALL AMOUNTS WERE PURCHASED. OUR ATTENTION WAS INVITED ON PAGE NOS.298 TO 305 OF THE PAPER BOOK TO DEMONSTRATE THE SOFTWARES ACQUIRED BY THE A SSESSEE. IT HAS ALSO BEEN EXPLAINED THAT DUE TO TECHNOLOGICAL CHANGES THE OLD SOFTWARES WERE REQUIRED TO BE REPLACED YEAR-AFTER-YEAR. 18. HAVING HEARD THE SUBMISSIONS OF BOTH THE SID ES WE HAVE FOUND THAT THE IDENTICAL ISSUE NOW STOOD COVERED IN FAVOUR OF THE ASSESSEE VIDE CIT VS. VARINDER AGRO CHEMICALS LTD. 309 ITR 272 (P&H) AND AMWAY IND IA ENTERPRISES V. DCIT 111 ITD 112 (DEL)[SB]. THE ISSUE BEING COVERED THEREF ORE THIS GROUND OF THE ASSESSEE IS HEREBY ALLOWED. BEFORE US REVENUE HAS NOT BROUGHT ON RECORD ANY CO NTRARY BINDING DECISION IN ITS SUPPORT NOR COULD DISTINGUISH THE FACTS WITH THAT OF EARLIER YEARS. WE THEREFORE FOLLOWING THE DECISION OF CO-ORDINATE BE NCH OF THE TRIBUNAL IN ASSESSEES OWN CASE AND FOR SIMILAR REASONS ALLOW THIS GROUND OF ASSESSEE. THUS THIS GROUND IS ALLOWED. 42. GROUND NO.10 IS WITH RESPECT TO DISALLOWANCE U/ S.14A. 43. LD. A.R. AT THE OUTSET SUBMITTED THAT DUE TO SM ALLNESS OF AMOUNT HE WOULD NOT LIKE TO PRESS THIS GROUND. THUS THIS GR OUND IS DISMISSED AS NOT PRESSED. 44. GROUND NO11 IS WITH RESPECT TO CONFIRMING DISAL LOWANCE OF RS. 65.35 LACS ON ACCOUNT OF DIMINUTION IN VALUE OF INVESTMEN TS. THIS GROUND WAS NOT PRESSED BY LD. A.R. AND THEREFORE THIS GROUND IS DI SMISSED AS NOT PRESSED. 45. GROUND NO.12 IS WITH RESPECT TO DISALLOWANCE OF INTEREST EXPENDITURE PAID ON FOREIGN SUPPLY CREDIT WITHOUT DEDUCTION OF TDS U/S. 195. 46. A.O. NOTICED THAT ASSESSEE HAD CLAIMED RS.8.05 LACS ON ACCOUNT OF INTEREST ON FOREIGN SUPPLY CREDIT. HE ALSO NOTICED THAT ASSESSEE HAD NOT DEDUCTED TDS AS REQUIRED U/S. 195. HE ACCORDINGLY DISALLOWED THE EXPENSES U/S. 40(A) OF THE ACT. ITA NOS. 793 & 817/AHD/2006 A.Y. 2002-03 (FAG BEARINGS INDIA LTD. VS. DCIT) PAGE 47 47. AGGRIEVED BY THE ORDER OF A.O. THE ASSESSEE CA RRIED THE MATTER BEFORE THE CIT(A) WHO UPHELD THE ORDER OF A.O. AGGRIEVED BY THE ORDER OF CIT(A) THE ASSESSEE IS NOW IN APPEAL BEFORE US. 48. BEFORE US AT THE OUTSET LD. A.R. SUBMITTED TH AT ISSUE IN THE PRESENT CASE IS COVERED AGAINST THE ASSESSEE BY THE DECISIO N OF THE TRIBUNAL IN ASSESSEES OWN CASE IN ITA NO. 3880/A/2003 FOR A.Y. 2000-01. HE THEREFORE FAIRLY CONCEDED THAT THE GROUND BE DECIDED AGAINST ASSESSEE. LD. D.R. SUPPORTED THE ORDERS OF A.O. AND CIT(A). 49. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL ON RECORD. WE FIND THAT THE IDENTICAL ISSUE WAS BEFOR E THE TRIBUNAL IN ASSESSEES OWN CASE IN ITA NO. 3880/A/2003 FOR A.Y. 2000-01AND THE ISSUE WAS DECIDED AGAINST THE ASSESSEE BY HOLDING AS UNDER: 7. WE HAVE HEARD BOTH THE PARTIES AND GONE THROUGH THE FACTS OF THE CASE AND THE DECISION RELIED UPON BY THE ID. AR. WE FIND THA T HON'BLE MADRAS HIGH COURT IN THE CASE OF INDIA PISTONS LTD(SUPRA) RELIED UPON BY THE ID. AR FOUND THAT THE CONDITIONS FOR SUPPLY OF GOODS BY THE NON-RESIDENT TO THE ASSE SSEE IN THAT CASE WERE THAT THE PAYMENT OF PURCHASE PRICE IN INSTALMENTS WAS TO BE MADE WITH THE CONDITION THAT THE ASSESSEE WILL COMPENSATE THE SUPPLIER BY MEANS OF I NTEREST ON THE UNPAID INSTALMENTS. ACCORDINGLY THE HON'BLE HIGH COURT HE LD THAT THE UNPAID INSTALMENT WAS NOT THE SAME AS LOAN AND THEREFORE INTEREST PAID C OULD NOT BE TREATED AS PAID ON-THE LOAN AND HENCE DEDUCTION OF TAX AT SOURCE WAS NOT ATTRACTED. SINCE IT IS NOT THE CASE OF THE REVENUE THAT INTEREST WAS PAID WITH REFERE NCE TO LOAN SO THAT THE REQUIREMENT OF TAX DEDUCTION AT SOURCE WOULD HAVE B EEN ATTRACTED; NO DISALLOWANCE UNDER SECTION 40(A)(I) CAN BE MADE HON'BLE HIGH CO URT HELD. IN THE CASE UNDER CONSIDERATION UNDISPUTEDLY THE INTEREST AS DEFINE D U/S 2(28A) OF THE ACT WAS PAID IN FOREIGN CURRENCY ON FOREIGN SUPPLIERS' CREDIT. THER E IS NOTHING TO SUGGEST THAT PAYMENT OF PURCHASE PRICE HAS BEEN MADE IN INSTALLMENTS NOR IT HAS BEEN BROUGHT TO OUR NOTICE THERE WAS ANY SUCH CONDITION THAT THE ASSESS EE WILL COMPENSATE THE SUPPLIER BY MEANS OF INTEREST ON THE UNPAID INSTALLMENTS. TH ERE IS NO MATERIAL BEFORE US ITA NOS. 793 & 817/AHD/2006 A.Y. 2002-03 (FAG BEARINGS INDIA LTD. VS. DCIT) PAGE 48 SUGGESTING THAT AMOUNT WAS PAID TO THE BANK NOR ANY SUCH FINDINGS HAS BEEN RECORDED IN THE IMPUGNED ORDERS. RATHER THE ID. AR SUBMITTED THAT DECISION OF THE ID. CIT(A) FOR THE AY 1999-2000 HAS NOT BEEN CONTESTED FURTHER. IN THE ABSENCE OF ANY MATERIAL ON RECORD WE ARE OF THE OPINION THAT THE FACTS IN THE CITED DECISION BEING ALTOGETHER DIFFERENT THE SAID DECISION IS NOT APPL ICABLE IN THE CASE UNDER CONSIDERATION. .SINCE THE ID. AR DID NOT POINT OUT ANY INFIRMITY IN THE IMPUGNED ORDER OF THE ID. CIT(A) IN FOLLOWING HIS OWN DECISION FOR THE AY 1999-2000 WHILE EVEN THE SAID DECISION OF THE ID. CIT(A) FOR THE AY 1999-200 0 HAS NOT .BEEN PLACED BEFORE US WE FIND MERIT IN THE CONTENTIONS OF THE ID. DR AND THEREFORE HAVE NO RECOURSE BUT TO UPHOLD THE FINDINGS OF THE ID. CIT(A). THUS GROUND NO.1 IN THE APPEAL IS DISMISSED. IN THE PRESENT CASE SINCE THE FACTS AND CIRCUMSTAN CES ARE SIMILAR TRO THAT OF A.Y. 2000-01 AS ADMITTED BY BOTH THE PARTIES WE TH EREFORE RESPECTFULLY FOLLOWING THE DECISION OF CO-ORDINATE BENCH OF TRIB UNAL FIND NO REASON TO INTERFERE WITH THE ORDER OF CIT(A). THUS THIS GRO UND OF ASSESSEE IS DISMISSED. 50. GROUND NO.13 IS WITH RESPECT TO CHARGING OF INT EREST U/S.234B & 234D OF THE ACT. CHARGING OF INTEREST U/S. 234B IS CONSEQU ENTIAL AS NOT PRESSED. WITH RESPECT TO CHARGING U/S. 234D LD. A.R. SUBMITTED T HAT IN VIEW OF THE EXPLANATION 2 BEING INSERTED BY FINANCE ACT 2012 W ITH RETROSPECTIVE EFFECT FROM 01.06.2003. THE ISSUE IS COVERED AGAINST THE ASSESSEE. SINCE LD. A.R. HAS ADMITTED THAT THE ISSUE OF CHARGING OF INTEREST U/S. 234D IS COVERED AGAINST THE ASSESSEE THE SAME IS DISMISSED. 51. IN THE RESULT APPEAL OF THE ASSESSEE IS PARTLY ALLOWED. ITA NOS. 793 & 817/AHD/2006 A.Y. 2002-03 (FAG BEARINGS INDIA LTD. VS. DCIT) PAGE 49 ITA NO. 817/AHD/2006 (REVENUES APPEAL) 52. THE GROUNDS RAISED BY THE REVENUE ARE AS UNDER: - 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE AND IN LAW THE LEARNED CIT(A) BARODA HAS ERRED IN I DELETED THE DISALLOWANCE OF CLAIM OF RS.30 96 721 /- BEING AMOUNT OF LEASE RENTAL PAID TO IDBI LTD. AND SBI CAPITAL M ARKETS LTD. II REDUCED THE ADDITION OF RS.18923999/- TO RS. 1 0 5 00 000/- ON ACCOUNT OF PAYMENT OF OPERATING AND LICENCE FEES FO R USE OF SAP R3 SOFTWARE ALLOWING RELIEF OF RS.84 24 564/-. III DELETED THE DISALLOWANCE OF RS.4 77 64 000/- ON ACCOUNT OF PAYMENT FOR TRANSFER OF TECHNICAL KNOW-HOW. IV REDUCED THE ADDITION OF RS.13 84 00 000/- TO RS. 4 35 03 396/- ON ACCOUNT OF TRANSFER PRICING. 53. FIRST GROUND IS WITH RESPECT TO THE DISALLOWANC E OF CLAIM OF RS.30 96 721/-. 54. DURING THE COURSE OF ASSESSMENT PROCEEDING A.O . NOTICED THAT ASSESSEE HAD DEBITED RS.30 96 721/- AS PRE-PAID REN T PAID TO FINANCIAL INSTITUTIONS. A.O. NOTICED THAT EXPENSES PERTAINED TO SUBSEQUENT PERIOD AND WAS IN THE NATURE OF ADVANCES AND WAS THEREFORE NOT INCURRED FOR THE RELEVANT FINANCIAL YEAR. HE THEREFORE DISALLOWED THE CLAI M OF ASSESSEE. 55. AGGRIEVED BY THE ORDER OF A.O. THE ASSESSEE CA RRIED THE MATTER BEFORE THE CIT(A). CIT(A) FOLLOWING THE DECISION IN ASSES SEES OWN CASE FOR A.Y. 01- 02 DELETED THE ADDITION MADE BY THE A.O. ITA NOS. 793 & 817/AHD/2006 A.Y. 2002-03 (FAG BEARINGS INDIA LTD. VS. DCIT) PAGE 50 56. AGGRIEVED BY THE ORDER OF CIT(A) THE REVENUE I S NOW IN APPEAL BEFORE US. 57. BEFORE US AT THE OUTSET LD. A.R. SUBMITTED TH AT THE ISSUE IS COVERED AGAINST THE ASSESSEE BY THE DECISION OF SPECIAL BEN CH IN CASE OF CIT VS. FAG BEARING (INDIA) LTD. 306 ITR 60 (AHD) (AT). LD. D.R. ON THE OTHER HAND SUPPORTED THE ORDER OF A.O. 58. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL ON RECORD. WE FIND THAT IN THE CASE OF D CIT VS. FAG BEARING (INDIA) LTD. (SUPRA) FOR A.Y. 1999-2000 & 2000-01 (2008) 155 ITD 53 TH E SPECIAL BENCH OF TRIBUNAL CONCLUDED THAT ASSESSEE IS NOT ENTITLED TO DEDUCTION OF PREPAID LEASE RENT PERTAINING TO NEXT FINANCIAL YEAR AS NO LIABIL ITY CAN BE SAID TO HAVE BEEN INCURRED MERELY ON THE BASIS OF ADVANCE PAYMENTS IR RESPECTIVE FOR THE TERMS OF LEASE AGREEMENT REQUIRING THE ASSESSEE TO MAKE P AYMENT LEASE RENT IN THE MONTH OF MARCH PRECEDING FINANCIAL YEAR IN WHICH TH E ASSET IS TO BE USED. IT FURTHER HELD THAT LEASE RENT BEING THE PREPAID IS T O BE ALLOWED ONLY IN THE YEAR TO WHICH SUCH PAYMENT RELATES IN VIEW OF THEORY OF MATCHING CONCEPT. IN THE PRESENT CASE WE THEREFORE RESPECTFULLY FOLLOWIN G THE DECISION OF SPL. BENCH OF THE TRIBUNAL ALLOW THIS GROUND OF REVENUE. THUS THIS GROUND OF REVENUE IS ALLOWED. 59. BEFORE US BOTH THE PARTIES SUBMITTED THAT THE GROUND NOS. II TO IV RAISED IN REVENUES APPEAL ARE IDENTICAL TO THE GROUNDS RAISE D IN ASSESSEES APPEAL IN ITA NO. 793/AHD/2006. WE THEREFORE FOR THE SIMIL AR REASONS STATED WHILE ITA NOS. 793 & 817/AHD/2006 A.Y. 2002-03 (FAG BEARINGS INDIA LTD. VS. DCIT) PAGE 51 DECIDING THE ASSESSEES APPEAL HEREINABOVE DISMISS THE GROUNDS OF REVENUES APPEAL. THUS THE REVENUES APPEAL IS P ARTLY ALLOWED. 60. IN THE RESULT THE ASSESSEES APPEAL IS PARTLY ALLOWED FOR STATISTICAL PURPOSE AND REVENUES APPEAL IS PARTLY ALLOWED. THIS ORDER PRONOUNCED IN OPEN COURT ON 14 /1 1 /2014 SD/- SD/- (KUL BHARAT) (ANIL CHATURVE DI) JUDICIAL MEMBER ACCOUNTANT MEMBER S.K.SINHA . . . . ( (( ( /0 /0 /0 /0 10- 10- 10- 10- / COPY OF ORDER FORWARDED TO:- 1. 45 / APPELLANT 2. /745 / RESPONDENT 3. ## 9 / CONCERNED CIT 4. 9- / CIT (A) 5. 0$= / / DR ITAT AHMEDABAD 6. =? @A / GUARD FILE. BY ORDER/ . // TRUE COPY // B/ #' &