OWENS CORNING INDUSTRIES (INDIA) P. LTD. MAHABUBNAGAR (PREVIOUSLY KNOWN AS SAINT GOBAIN VETROTEX INDIA LTD),MAHABUBNAGAR DIST vs. DCIT, CIRCLE-3(1), HYDERABAD, HYDERABAD

IN THE INCOME TAX APPELLATE TRIBUNAL Hyderabad ‘ A ‘ Bench, Hyderabad (Through Video Conferencing) Before Shri A. Mohan Alankamony, Accountant Member AND Shri S.S. Godara, Judicial Member ITA No.256/Hyd/2016 Assessment Year: 2004-05 Owens Corning Industries Vs. The Deputy Commissioner (India) Private Limited of Income Tax, (Previously known as Saint Circle 3(1), Gobain Vetrotex India Hyderabad. Limited), Hyderabad. PAN : AAACV9858N. (Appellant) (Respondent) Assessee by: Shri S. Rama Rao. Revenue by: Shri T. Sunil Goutam. Date of hearing: 17.02.2022 Date of pronouncement: 22.02.2022 O R D E R Per S. S. Godara, J.M. This assessee’s appeal for A.Y. 2004-05 arises from the Commissioner of Income Tax (Appeals) – 4, Hyderabad’s order dated 21.12.2015 in case No.0217/DCIT, Cir.3(1)/2014-15/ CIT(A)-4/Hyd/2015-16 involving proceedings u/s 143(3) of the Income Tax Act, 1961 [in short, ‘the Act’].

Heard both the parties. Case file perused.

ITA No.256/Hyd/2016

“3. Ground no. 2 is regarding restricting the deduction of royalty expenses by the CIT(A) to 4% instead of 5% of net sales claimed and paid by the assessee. The assessee company formerly known as Vetrotex Industries India (P) Ltd., is wholly on subsidiary of Saint Gobain Vetrotex International, France. In the year 1998, the assessee acquired fiber glass reinforcements business of FGP Ltd., as going concern. Saint Gobain Vetrotex International, France renders technical assistance to all Vetrotex plants of Saint Gobain Group worldwide. The assessee and Saint Gobain Vetrotex International, France entered into an agreement dated 16th August, 2001 for modernization and expansion of assessee’s project which includes providing technical assistance from design to project management and implementation. Under the said agreement, the assessee was to pay 5% Royalty on the total sales domestic as well as exports. This agreement was for the period of seven years. The assessee filed its return of income for the year under consideration on 31st October, 2002 declaring loss of Rs. 31.03 Crores. The Assessing Officer noted that the assessee has paid an amount of Rs. 2,43,33,761/- to its parent company Saint Gobain Vetrotex International, France as Royalty. The Assessing Officer disallowed 90% of the Royalty amount treating the same as capital in nature amounting to Rs. 2,19,00,385/-. The assessee challenged the action of the Assessing Officer before the CIT(A) and claimed that the Royalty payment is an allowable deduction as the same is paid on the basis of the annual sales and therefore, the same cannot be treated as capital in nature. The CIT(A) allowed the claim of Royalty payment to the extent of 4% by following the decision of this Tribunal in assessee’s own case for the assessment year 2009-10. 4. Before the Tribunal, the learned AR of the assessee has submitted that the payment of Royalty is an expenditure based on the total sales of the assessee and therefore, this is an allowable Revenue expenditure. The assessee has been paying the Royalty to Saint Gobain Vetrotex International, France under the agreement whereby the parent company has provided technical knowhow and technical information etc., to the assessee which is a time tested technicality in manufacturing glass products. The assessee received the benefit of ongoing process technology and product improvement, technical engineering information and methods

ITA No.256/Hyd/2016

of manufacture, processing, design engineering etc. All these services and technologies provided by the parent company is elaborated in the Annexure to the Royalty agreement. The payment of Royalty is made after the approval of the RBI for remittance of the Royalty @ 5% of the sales. Therefore, the assessee has discharged Research and Development Cess @ 5% of the value of the Royalty to the Ministry of Science & Development as provided in the Research & Development Cess Act, 1960. He has pointed out that for the assessment year 2009-10 this Tribunal has decided this issue of Royalty payment in favour of the assessee vide order dated 3.10.2014. He has further submitted that since there was a new Royalty agreement due to change of ownership whereby the royalty payment was agreed upon @ 4% of net sales. The Tribunal has allowed the claim of payment of Royalty paid by the assessee as per the new agreement. Hence, the learned AR has submitted that this issue is covered by the decision in assessee’s own case. 5. On the other hand, the learned DR has relied upon the order of the CIT(A) and submitted that the CIT(A) has followed the decision of this Tribunal for the assessment year 2009-10 whereby the claim of Royalty payment was allowed @ 4% of net sales. 6. We have considered the rival submissions as well as relevant material on record. There is no dispute that the Royalty payment for the year under consideration to the parent company is based on the Royalty agreement between the parties wherein the parties have agreed for a Royalty of 5% of net sales. Subsequently, there was a change in the ownership of the parent group and a new Royalty agreement was entered into between the parties whereby they agreed for payment of 4% Royalty payment of net sales vide agreement dated 1.7.2008. This Tribunal in assessee’s own case for the assessment year 2009-10, vide order dated 13.10.2014 in ITA Nos. 549 & 595/201 has considered this issue in para 13 to 17 as under:- “13. We have heard both the parties. From the facts and circumstances of the case before us, it is clear that the assessee was being rendered technical assistance through the royalty agreement entered into with Owens Corning Invest Co-operative U.A., Netherlands and the royalty agreement has been in application from 1.7.2008. We are of the opinion that the TPO was incorrect in going into the business expediency of payment of royalty and arriving at the conclusion of the quantum of the royalty. We find support for this proposition in the decision of Hon'ble Delhi High Court in CIT vs. EKL Appliances (345 ITR 241. (Del) wherein the Hon'ble Delhi High Court had occasion to consider the disallowance of royalty by TPO and held that if the expenditure has been incurred or laid out for the purposes of business it is no concern of the TPO to disallow the same on any extraneous reasons. In the case of Ericsson India Pvt. Ltd. vs. DCIT (ITA No. 5141/Del/ 2011) the Delhi High Court decision in CIT vs. EKL Appliances (supra) was followed wherein it was held that "it would be wrong to hold that the expenditure should be disallowed only on the ground that these expenses were not required to be incurred by the assessee".

ITA No.256/Hyd/2016

ITA No.256/Hyd/2016

technology transfer sanctioned by RBI was incorporated in the original agreement (refer page 6 & 7 of TPO order dt. 13.12.12). Finally it is seen that Saint Gobain Vetrotex France S.A. is now known as Owens Coming Invest Cooperative, Netherlands with which subsequent agreement dt. 1.7.2008 was made and under whom the payments were made in the impugned assessment year 2009-10. In short, the assessee has claimed that the royalty payments were based on agreement which was approved by RBI and hence the TPO cannot question the same. 17. We find merit in this claim that once the RBI approval of royalty rate was obtained the payment was considered to be held at arm's-length. It is also noted that various Tribunals such as Air Liquide Engg. India (P) Ltd, Hyderabad (ITA No.1159, l040/Hyd/2011 & ITA No.1408/ Hyd/ 2010), DCIT vs. Sona Okegawa Precision Forgins Limited (ITA No. 5386/DeI/2010), Hero Motocorp Limited vs. Addl. CIT (ITA No. 5130/Del/2010), ThyssenKrup Industries India Ltd vs Addl. CIT (ITA No. 6460/Mum/2012), Abhishek Auto Industries Ltd. vs. CIT (ITA No. 1433/Del/2009) have taken a view that RBI approval of the Royalty rates itself implies that the payments are at Arm's Length and hence no further adjustment needs to be made viewed from this angle too.” 7. The entire finding of the Tribunal is based on the reasoning that once the Royalty is paid as per the agreement and the remittance was approved by the RBI @ 5% to the net sales itself implies that the payment is at arm’s length and no further adjustment needs to be made. Therefore, it is clear that the payment of Royalty for the assessment year 2009-10 was subjected to transfer pricing analysis and found to be at arm’s length. Following the earlier order of this Tribunal in assessee’s own case, we modify the impugned order of the CIT(A) and allow the claim of Royalty payment @ 5% instead of 4% allowed by the CIT(A).”

ITA No.256/Hyd/2016

“13. We have considered the rival contentions as well as relevant material available on record. As it is emerged from the record that the assessee is using component called bushing made of precious metal (platinum & radium) in the manufacturing process of glass. Due to the extreme heat in the process of glass manufacturing this component which is made of precious metals needs to be replaced regularly. The assessee is sending old components to its parent company and getting a new component which is passing through a fabrication / manufacturing process. As per the invoice issued by the parent company, it raised the bills for the extra precious metals used in manufacturing / fabrication process apart from the fabrication process charges. The old and used bushing is being used by the parent company as raw material and therefore, to the extent of the metal which is taken from the old bushing is taken as part of the cost of the new bushing. The assessee has claimed the fabrication charges as Revenue expenditure and additional metal used in the fabrication process is capitalized. Though, the Assessing Officer has treated these charges as fee for technical service (FTS) however, the CIT(A) while passing the impugned order has held the entire expenditure as capital in nature in para 5.3 to 5.5 as under:- “5.3 I have carefully considered the facts of the case, assessment order and the submissions of the appellant. The assessing officer made an addition of Rs. 97,31,760/- as ”fees for technical services.” The Assessing Officer in his assessment order after detailed discussion conclude that the amount paid towards bushing re-fabrication charges of Rs. 80,99,759/- and additional metal charges of Rs. 1,01,33,118/- paid to Saint Gobain Vetrotex International, France, constitute “fees for technical services within the meaning as per Section 9(1)(vii) and hence taxable in India, Since the appellant has failed to deduct TDS, the same cannot be allowed as deduction u/s 40)a)(a) of the Act. Hence, the bushing charges of Rs. 80,99,675/- claimed as revenue expenditure is disallowed an added back to the total Income. An amount of Rs. 1,02,33,118/- towards additional metal charges which is capitalized by the appellant and claimed depreciation on the same is not allowable expenditure. Thereby the depreciation of 25% of Rs. 16,32,001/- also disallowed. Thereby the total disallowance made by the Assessing Officer was Rs. 97,31,760/-. 5.4. In this regard, the appellant submissions are verified. As per the P&L account, the appellant has debited Rs, 2,23,53,266/- under the head “repairs and maintenance to plant and machinery”. This amount of Rs. 2,23,53,266/- includes bushing charges of Rs. 80,99,759/- and remaining balance includes repairs to alloyroom expenses, annual maintenance contracts and other repairs to Plant and machinery. As per the details of addition of platinum/Rhodium, during this year the bills were raised by the Saint Gobain Vetrotex international, SA, for a metal cost and as bushing as a whole. As per the details submitted by the appellant for the entire year, there is metal custom including customs duty was capitalized to Rs. 1,08,09,160/- and added to the plant and machinery and remaining amount shown as fabrication charges of Rs. 80,99,759/- which was added by the Assessing officer as bushing expenses and not allowed,. Other amounts like transportation, other

ITA No.256/Hyd/2016

expenses, etc. were also debited to P&L account and claimed in respective heads. Therefore, form this it is clear that the Saint Gobain Vetrotex, International, France raising bills for bushing and cost of Platinum and Rhodium. But the appellant company is capitalizing the original cost of platinum and rhodium and taking to plant and machinery and balance sheet and the bushing and refabrication was debited under the head ‘reprimand maintenance; in the P&L account. The Assessing officer has disallowed the depreciation on this ‘capitalized amount and added back to the bushing expenses as not allowed due to the reason that appellant has not deducted TDS and so the provisions of section 40(a)(ia) are applicable. Against this the submissions of the appellant that this payment was made to their parent company and even though the explanation to Section 9(1)(vii) are applicable but as per DTAAA India and France, there is no need of deducting TS. Even though the TDS was deducted for Royalty, keeping in view of this nature of the payment as bushing/refabribation which does not fall under royalty or fees for technical services, therefore, the TS not to be deducted. On the above issue, the appellant has relied on the Hon’ble ITAT, ‘A’ Bench, Hyderabad, decision in the case of BHEL-GE-Gas Turbine Servicing Pvt. Ltd. Hyderabad. 5.5 After considering the above submissions of the appellant, I am in agreement with the submissions of the appellant and case laws relied upon, therefore, the TDS is not deductible. But after verification of all the details and also keeping in view that the parent company Saint Gobain Vetrotes, International, France, SA issue a single bill for cost of metal and also for the bushing expenses, I conclude that the nature of this expenses was bushing/refabrication debited it to the P&L account pertains to the metal Platinum/Rhodium which is capital in nature. Therefore, the bushing expenses should not fall under revenue expenses and it should be capitalized by the appellant. Hence, keeping in view of all the discussion, the Assessing Officer is directed that the cost of Plant and Machinery to be treated as Rs. 1,08,09,160/- and Rs. 80,99,759/- totaling to Rs. 1,89,08,919/- and depreciation to be allowed @25% of the total amount. Hence, the grounds of appeal are allowed.” 14. Thus, the limited issue in this ground of appeal of the assessee is whether the expenditure on account of a fabrication charges is an allowable Revenue expenditure being repair and maintenance or is a capital expenditure. So far as the claim of repair and maintenance expenditure is concerned, since it is not an expenditure incurred on current repairs of machinery but the expenditure is incurred for replacement of the machinery / component therefore, this expenditure does not fall in the ambit of current repairs as provided under section 30 and 31 of the Income Tax Act. Section 30 and 31 contemplates the expenditure on account of current repairs due to day to day wearing and tearing but it does not include the replacement of a machinery. Once the expenditure does not fall under the current repairs then the allowability of the expenditure is required to be tested under section 37 of the Income Tax Act which is a residual provision and an expenditure laid out wholly and exclusively for the business of the assessee is an allowable expenditure subject to the condition that it is not in capital field. The test

ITA No.256/Hyd/2016

of the expenditure being Revenue or capital is whether such an expenditure brings into an existence of a new asset or a benefit of enduring nature. Undisputedly, the assessee is replacing the bushings used for manufacturing of glass as it get damaged due to extreme heat conditions therefore, this process of getting the old bushings fabricated into a new bushings does not fall under the ambit of repairs of plant and machinery but it brings into existence of a new asset. Merely because the old bushing is used as raw material for manufacturing of new would not change the character of the expenditure for bringing into an existence of a new asset. The assessee has not disputed the fact of bringing the new asset into an existence and part of the expenditure was capitalized by the assessee itself and only the fabrication charges were claimed as Revenue expenditure. It is pertinent to note that the fabrication charges are directly related to the manufacturing process of the bushing and therefore, the same cannot be given a separate classification that of bushing itself. Accordingly, in view of the above fact and circumstances, we do not find any reason to interfere with the impugned order of the CIT(A).” 5. We thus go by the following detailed discussion for the impugned assessment year as well to confirm the impugned disallowance made in both the lower proceedings.

No other ground has been pressed before us.

Order pronounced in the Open Court on 22nd February, 2022.

Sd/- Sd/- (A. MOHAN ALANKAMONY) (S.S. GODARA) ACCOUNTANT MEMBER JUDICIAL MEMBER

Hyderabad, dated 22nd February, 2022. TYNM/sps

ITA No.256/Hyd/2016

Copy to: S.No Addresses 1 Owens Corning Industries (India) Private Limited (Previously known as Saint Gobain Vetrotex India Limited), Hyderabad - Bangalore Highway, Thimmapur – 509325, Kothu Mandal, Mahaboobnagar District, Telangana State, India. 2 The Deputy Commissioner of Income Tax, Circle 3(1), Hyderabad. 3 CIT(Appeals) – 4, Hyderabad. 4 PCIT-4, Hyderabad. 5 DR, ITAT Hyderabad Benches 6 Guard File By Order