M/S CONTITECH INDIA PVT. LTD.,NEW DELHI vs. ACIT, NEW DELHI

The relevant facts as culled from the material on records are as under:

Assessee is a company which is stated to be engaged in the business of Manufacturing and Sale of Wrapped & Raw Edge V Belts, Hoses and its Trading. Assessee filed its return of income for A.Y. 2006-07 on 21.11.2006 declaring total income at Rs.5,65,68,372/-. The case was selected for scrutiny and thereafter assessment was framed u/s 143(3) r.w.s 144C of the I.T. Act vide order dated 29.09.2010 and the total income was determined at Rs.9,07,46,710/-. Aggrieved with the order of AO, assessee is now before us and has raised the following grounds: “Ground No.1 The Assessing Officer had erred both on the law as well as on the facts in holding that the royalty payment made by the Appellant Company amounted to Rs.23,215,000/- as capital expenditure by ignoring the facts that no asset of enduring nature was acquired by the appellant company. Further in assessment order at Page No.7 – para 4, the AO mentioned that only 25% will be treated as capital expenditure i.e. Rs.5,803,750/- after following the Hon’ble SC decision of Southern Switch Gear Ltd. vs CIT 232 ITR 359. However, while calculating total additions at page No.14 of the order, total royalty amount of Rs.23,215,000/- was disallowed.

As far as A.Y. 2007-08 is concerned, assessee filed its return of income on 31.10.2007 declaring total income at Rs.6,58,58,618/-. The case was selected for scrutiny and thereafter assessment was framed u/s 143(3) r.w.s 144C of the Act and the total income was determined at Rs.7,42,06,840/-. Aggrieved by the aforesaid order, assessee is now before us and has raised the following grounds: “Ground No.1 The Assessing Officer/ Transfer pricing officer has erred in law and on the facts of the case by making addition of Rs.8,090,359/- pertaining to royalty payment while determining the arm’s length price in respect of International Transaction without appreciating that the appellant has entered the international transaction at arm’s length principle and the margins earned by the appellant are comparable with the Industry’s margin. Ground No.2 The Assessing Officer had erred both on the law as well as on the facts while making disallowance of Rs.257,860/- under Section 14A of the Act on the basis of certain expenditure by ignoring the fact that the no expenditure directly incurred by the appellant company during the year under consideration for earning the dividend income. Further the AO has ignored the fact that as per notification no. 45/2008 dated 24.03.2008 that the Rule 8D is not applicable to the relevant assessment year under consideration. Ground No.3

AO noticed that assessee had paid royalty of Rs.23,215,000/- to Roulunds Fabriker, Denmark (RFDK) and the entire amount was debited to the Profit and Loss account and claimed as expenditure. The assessee was asked to explain as to why the amount should not be treated as capital expenditure to which assessee made the submissions and also relied upon certain case laws to support its contentions. The submissions of the assessee was not found acceptable to AO. AO after considering the submissions of the assessee and the agreement pursuant to which the payment was made, came to the conclusion that the know-how was provided before the commencement of commercial production in April, 1993 and therefore the disclosure of the know-how and other rights granted were ‘in part’ capital in nature and it provided enduring advantage to the assessee which could produce Industrial Agricultural and Automotive wrapped and raw Edge V belts of international standards. He therefore held 25% of the payment

Before us, Learned AR reiterated the submissions made before the lower authorities and further submitted that AO had followed the order of his predecessor for the immediately preceding years and DRP while noting the findings of AO has also noted that similar disallowance was made in the preceding years and the appeal was pending before the appellate authorities. The DRP therefore following the order of earlier years directed the disallowance be made in the year under consideration. He submitted that for A.Y. 2001-02 & 2002-03, Hon’ble Tribunal vide order dated 22.04.2009 and order dated 31.08.2010 for A.Y. 2005-06 has held that payment was not for acquiring any asset of enduring nature nor any asset has been acquired by the assessee by making this payment. He further submitted that the Hon’ble Tribunal has further held that assessee had only right and exclusive license to use the know-how to sell product in India and outside India which cannot be a ground for holding that it was an 7 expenditure on capital account. He submitted that the orders of Tribunal was challenged by the Revenue before the Hon’ble High Court and the Hon’ble High Court has dismissed the appeals of the Revenue. He further submitted that for A.Y.2007-08 disallowance proposed to be made by the AO was deleted by the DRP and from A.Y. 2008-09 onwards, the AO has accepted the royalty expense claimed by the assessee and has not made any disallowance. He pointed to the copy of order placed in the paper book at Page 83 to 85 and the order of High Court upholding the order of Tribunal at Page 85A of the paper book. He therefore submitted that expenditure by way of license fee incurred by the assessee was allowable revenue deduction. He therefore submitted that the disallowance made by the AO is liable to be deleted.

We further find that in A.Y. 2005-06, identical issue arose before the Co-ordinate Bench of Tribunal and the Co-ordinate Bench of Tribunal in order dated

Before us, Revenue has not placed any material on record to demonstrate that the orders of Tribunal in assessee’s own case in earlier years has been set aside/overruled or stayed by higher judicial forum. In such a situation, we are of the view that the AO was not justified in disallowing the payment of license fees on ad hoc basis by holding it to be capital expenditure. We therefore direct the deletion of the addition made by AO. Thus the ground No.1 in A.Y. 2006-07 & 2007-08 of the assessee are allowed.

Ground No.2 is with respect to the disallowance u/s 14A of the Act.

AO noted that assessee had claimed dividend of Rs.40,91,269/- to be exempt income. The assessee was therefore asked to show-cause as to why disallowance u/s 14A not be made as per Rule 8D to which the assessee made the submissions which were not found acceptable to AO. AO thereafter by following the procedure prescribed under Rule 8D of the I. T. Rules worked out the disallowance u/s 14A at Rs.7,57,345/- and made its addition. When the matter was carried before the DRP by the assessee, DRP following the decision of ITAT Special Bench, Mumbai in the case of ITO vs.

Before us, Learned AR reiterated the submissions made before the AO and DRP and further submitted that majority of the dividend yielding investments had been brought forward from earlier years and no fresh investments which yielded dividend was made in the year under consideration. He further submitted that investment made in Mutual Funds in the preceding years and during the relevant previous year were made out of own surplus fund. He further submitted that assessee had sufficient own funds in the form of Share Capital and Reserves & Surplus and therefore in such a situation no disallowance of interest is called for.

As far as the income from Mutual Funds is concerned, he submitted that Mutual Funds charges fund management charges, as permitted by SEBI under the scheme and out of the income earned by the Fund, fund management charges are deducted and net income is available for distribution to unit holders and only the net income of Rs.40,91,269/- was received by the assessee. He further submitted that the provision of Rule 8D are not applicable to the year under consideration as it has been held that provision of Section 14A r.w. Rule 8D are applicable from for 12 A.Y. 2008-09 onwards. He therefore submitted that the addition made by the AO be deleted.

Learned DR on the other hand supported the order of AO.

We have heard the rival submissions and perused the material on record. The issue in the present ground is with respect to the disallowance u/s 14A. It is an undisputed fact that year under consideration is 2006-07 and the AO has proceeded to disallow the expenses by following the methodology prescribed under Rule 8D of the I.T. Rules. We find that provision of Rule 8D for invoking the disallowance under Rule 14A could not be applied to the year under consideration in view of the decision of Hon’ble Bombay High Court in the case of Godrej & Boyce Mfg Co. Ltd vs. DCIT (2010) 328 ITR 81 (Bom) wherein the Hon’ble High Court has held that since Rule 8D were notified on 24th March 2008, it would apply from A.Y. 2008-09. Following the aforesaid decision of Hon’ble Bombay High Court, we are of the view that no addition is called for in the present case. We therefore set aside the addition made by the AO thus the ground of the assessee is allowed.

Ground No.3 & 4 are interconnected and it is with respect to the addition of Rs.92,37,617/- pertaining to royalty payment in respect of international transaction.

Before us, Learned AR reiterated the submissions made before the lower authorities and further submitted that identical issue arose in A.Y. 2009-10 & the Hon’ble Tribunal while deciding the issue in remitted the matter back to the AO for the reason that while making the transfer pricing adjustment, the TPO have acted in contradiction to the ratio laid down in Cushman & Wakefield 367 ITR 730. He submitted that the matter was remitted to the file of AO to decide the issue

Learned DR on the other hand did not controvert the submissions of Learned AR but however supported the order of lower authorities.

We have heard the rival submissions and perused the material available on record. The issue in the present ground is with respect to the action of TPO in treating the payment of royalty at nil. We find that identical issue arose in assessee’s own case in A.Y. 2009-10 and the Co-ordinate Bench of Tribunal while deciding the issue in held as under: “8. We have heard the rival submissions and perused the relevant material on record. It is observed that the TPO has computed ALP of the international transaction of `Payment of Royalty’ at Nil by holding that the assessee did not avail any benefit and the services provided by the foreign AEs were unwarranted. In doing 16 so, he rejected the assessee’s adoption of TNMM as the most appropriate method and followed the CUP method. That is how, he computed ALP of this international transaction at Nil. The AO in his order has simply incorporated the conclusion of the TPO in determining the ALP of this international transaction at Nil without carrying out any independent analysis or evaluation as to whether or not such use of technical know-how was required/availed by the assessee in terms of section 37(1) of the Act. The ld. AR fairly admitted that there is no independent discussion in the assessment order about the disallowance of royalty payment, except for reproduction of the relevant parts from the order of the TPO.

The Hon'ble Delhi High Court in CIT v. Cushman & Wakefield (India) (P.) Ltd. (2014) 367 ITR 730(Del) has held that the authority of the TPO is limited to conducting transfer pricing analysis for determining the ALP of an international transaction and not to decide if such services exist or benefits did accrue to the assessee. Such later aspects have been held to be falling in the exclusive domain of the AO. In that case, it was observed that the E-mails considered by tribunal from Mr. Braganza and Mr. Choudhary dealt with specific interaction and related to benefits obtained by assessee, providing a sufficient basis to hold that benefit accrued to assessee. Since the details of specific activities for which cost was incurred by both AEs (for activities of Mr. Braganza and Mr. Choudhary), and attendant benefits to assessee were not considered, the Hon'ble High Court remanded the matter to file of concerned AO for an ALP assessment by TPO, followed by AO's assessment order in accordance with law considering the deductibility or otherwise as per section 37(1) of the Act.

When we advert to the facts of the instant case, it turns out that the TPO proposed the transfer pricing adjustment with Nil ALP of the international transaction of `Payment of royalty’ on the ground that no such payment was warranted and further no cost benefit analysis on this count was brought to his notice and as such the payment of royalty was not required. The AO in his final assessment order dated 26.12.2013 has taken the ALP at Nil on the basis of recommendation of the TPO without carrying out any independent investigation in terms of the deductibility or otherwise of such payment in terms of section 37(1) of the Act. As per the ratio decidendi of Cushman & Wakefield India (P.) Ltd. (supra), the TPO was required to simply determine the ALP of this transaction unconcerned with the fact, if any benefit accrued to the assessee 17 and thereafter, it was for the AO to decide the deductibility of this amount u/s 37(1) of the Act.

Since the authorities below have acted in contradiction to the ratio laid down in Cushman & Wakefield (supra), we set aside the impugned order on this score and remit the matter to the file of AO/TPO for deciding it in conformity with the law laid down by the Hon'ble jurisdictional High Court in the case of Cushman & Wakefield (India) (P.) Ltd. (supra).

Before parting with this issue, we want to clarify that we have desisted from examining the correctness of any aspect of this international transaction, be it the calculation of the amount paid as royalty or determination of ALP of this international transaction, such as, the most appropriate method and comparables etc. because the matter is being sent to the AO/TPO for redoing in accordance with the judgment in the case of Cushman & Wakefield (India) (P.) Ltd. (supra). It is further seen that the TPO has also recommended the transfer pricing adjustment of the full amount of royalty payment, without checking the veracity of the calculation of royalty payment in terms of rate(s) as given in the Agreements with both the AEs. Now the ball is in the court of the lower authorities to independently do the needful.”

We further find that the Co-ordinate Bench of Tribunal while deciding the appeal for A.Y. 2010-11 (ITA No.370/Del/2015 order dated 17.10.2016) following the ITAT order for A.Y. 2009-10, had remitted the issue to AO/TPO. We further find that Tribunal while deciding the issue in 2011-12 & 2013-14 had also remitted the matter to the AO to decide the issue afresh by following the ITAT order for A.Y. 2009-10. We further find that TPO pursuant to the directions of ITAT had deleted the addition in order giving effect to appeal. Since facts in the year under consideration are identical to that of 2009-10, 2010-11 & 2011-12, we are of the view that no addition is called for in the year under consideration, we therefore direct its deletion. Thus the ground of assessee is allowed.

Ground No.5 is with respect to the ad hoc disallowance of Rs.1,00,000/-.

AO noted that assessee had made purchase of plant & machinery amounting to Rs.7.78 crores (rounded off). The assessee was asked to show cause as to why the transport charges/ freight paid for transportation of machinery which is claimed as expenditure not be disallowed. Assessee inter alia submitted that to the extent the transporation was with respect to the purchase of machinery, the same was capitalized and was not claimed as Revenue expenses. The submissions made by the assessee were not found acceptable to AO. AO thereafter considered Rs.10 lacs to have been incurred for freight/ transportation of machinery & accordingly treated it as capital expenditure. He however allowed depreciation @ 15% on the same and thereby made a net disallowance of Rs.8,50,000/-. Aggrieved by the order of AO, assessee carried the matter before DRP. DRP directed the AO to verify the factual position and thereafter pass the order. Pursuant to the directions of DRP, AO following his observations in the draft order, made addition of Rs.8,50,000/-. Aggrieved by the order of AO pursuant to the direction of DRP, assessee is now before us.

Before us, Learned AR reiterated the submissions made before the lower authorities and further submitted that whenever the expenditure pertained to the transporation of machinery, the 19 same was capitalized and that there is no expenditure which relates to the transporation of machinery which has been capitalized. He further submitted that the addition has been made on adhoc basis and therefore it be deleted. Learned DR on the other hand supported the order of lower authorities.

We have heard the rival submissions and perused the material on record. The issue in the present ground is with respect to the disallowed of Rs.8,50,000/-. We find that the disallowance of transportation is made for the reason that the transporation was for the transportation of machinery and therefore required capitalization.

We find that the disallowance has been made by AO on adhoc basis without bringing any material on record to support his views. In such a situation, we are of the view that the addition made by AO was not justified. We therefore direct its deletion. Thus the ground of assessee is allowed.

Ground No.6 is with respect to denying the claim of depreciation of printers @ 60%.

AO noted that during the year under consideration, assessee had made purchase of “computer accessories and peripherals” amounting to Rs. 3,15,259/- and had claimed depreciation of the same @ 60%. The assessee was asked to show-cause as to why

Before us, Learned AR reiterated the submissions made before lower authorities and further submitted that for A.Y. 2007- 08 similar disallowance was proposed by AO but was deleted by DRP and further from A.Y. 2008-09 onwards the AO has accepted the claim of Assessee and no disallowance has been made. He further submitted that Hon’ble Delhi High Court in the case of CIT vs. BSES Yamuna Power Ltd. (2013) 358 ITR 47 (Del) has held that assessee is entitled to 60% depreciation of computer accessories and peripherals. He therefore submitted that the addition by AO be deleted. Learned DR on the other hand supported the order of lower authorities.

We have heard the rival submissions and perused the materials available on record. The issue in the present ground is 21 with respect to the correct rate of depreciation on computer accessories and peripherals. It is the claim of assessee that it being an integral part of computer system, depreciation @60% is allowable. On the other hand, it is the case of Revenue that it is eligible for depreciation @ 15% being the rate applicable to general plant and machinery. We find that Hon’ble Delhi High Court in the case of CIT vs. BSES Yamuna Powers Ltd. (supra) has held that computer accessories and peripherals such as printers, scanners and servers form an integral part of the computer system and they cannot be used without the computer and therefore they are part of computer system and therefore eligible for depreciation @ 60%.

Before us, Revenue has not placed any contrary binding decision in its support. We therefore following the aforesaid decision rendered by Hon’ble Delhi High Court in the case of BSES Yamuna (supra) hold that AO was not justified in restricting the depreciation @ 15%. We therefore set aside the order of AO on this issue. Thus the ground of assessee is allowed.

As far as the appeal for A.Y. 2007-08 is concerned. Before us, Learned AR submitted that the issues raised in the year are identical to that of A.Y. 2006-07. The aforesaid contention of Learned AR was not controverted by Assessee.

Thus the appeal of the assessee is allowed.

In the combined result, both the appeals of assessee are allowed.