M/S FILTREX TECHNOLOGIES PRIVATE LIMITED ,BANGALORE vs. ASSISTANT COMMISSIONER OF INCOME TAX CIRCLE-3(1)(1), BANGALORE

The assessee is engaged in the business of manufacture of carbon block cartridges, which are used for removal of harmful contaminants from drinking water. The associated enterprises (AE) of the assessee are Filtrex Holding Pte Ltd (FHPL) and Filtred International Pet Ltd (FIPL). Both these companies are Singapore based companies. It was stated that both the above said AEs are pioneers in water purification industry.

We shall first take up appeal filed for AY 2013-14. The first issue contested by the assessee in AY 2013-14 relates to the T.P adjustment made by the TPO and confirmed by Ld CIT(A). The facts relating thereto are stated in brief. The assessee had paid a sum of Rs.1358.75 lakhs to FHPL as “Fee for technical Services”. Similarly, it paid a sum of Rs.190.22 lakhs as Management Consultancy charges to FITL. The assessee claimed to have benchmarked the Transfer Pricing transactions under TNMM. Though the assessee had furnished prescribed certificate for T.P study, the TPO noticed that the assessee has not furnished T.P documentation.

Before the TPO, the assessee submitted that the above said payments have been made to both FHPL and FIPL in pursuance of agreements entered with them. It was submitted that the assessee paid royalty of USD 0.50 for each product manufactured by it during the previous year to FHPL, but subject to a maximum amount of USD 25,00,000/- p.a. It was also submitted that the management fee was paid to FIPL for obtaining administrative, financial, marketing, quality control, R & D, Human Resources and IT(TP)A No.2162/Bang/2017 & IT(TP)A No.3330/Bang/2018 Page 3 of 16 other support services. For all these services, the assessee has paid lump sum fee subject to a maximum of USD 3,50,000/- p.a. Thus, the assessee primarily relied upon the agreement entered by it with FHPL and FIPL to substantiate ALP of transactions.

The TPO expressed the view that the ALP of the intra group services received by one of the AEs can be ascertained by examining following points:- (a) Whether the AE has received intra group services? (b) What are the economic and commercial benefits derived by the recipient of intra group services? (c) In order to identify the charges relating to services, there should be a mechanism in place which can identify (i) the cost incurred by the AE in providing the intra group services and (ii) the basis of allocation of cost to various AEs. (d) Whether a comparable independent enterprise would have paid for the services in comparable circumstances? The TPO noted that the assessee has not furnished any evidence to substantiate the nature of services received by it or did it show that the services were actually received by it. The TPO further observed that the assessee has failed to show that it derived any benefit out of such services; it did not furnish the details of cost incurred by the AE in providing the services and the basis of allocation.

It is pertinent to note that the revenue had collected certain information about the assessee’s group from Inland Revenue Authority of Singapore in pursuance to the reference made under DTAA through the letter dated 06-01-2014 made by Director, FT &

It was informed by Shri Bommi Govind to Inland Revenue Authority that FHPL holds several patterns in the field of making and use of Carbon blocks. It also held trademarks and copyrights including the brand “FX”. It was submitted that FHPL provides intellectual property which include patent, trademarks and processing knowhow. It was submitted that Shri Bommi Govind is a water scientist with 15 years of experience in water purification industry and has invented various technologies used in purification of drinking waters. Accordingly, the TPO took the view that Shri Bommi Govind is the only person who can provide knowhow, patent and trademark. It was also noticed that majority of assistance was provided to the assessee herein by Shri Bommi Govind only through meetings, phone calls and video conferencing. Accordingly, the TPO took the view that the alleged services were actually provided by Shri Bommi Govind to the assessee and not by FHPL or FIPL as claimed.

The TPO examined the financial statements of FHPL and FIPL for financial years 2006-07 to 2011-12. He noticed that both the IT(TP)A No.2162/Bang/2017 & IT(TP)A No.3330/Bang/2018 Page 5 of 16 companies did not have any business income other than the amounts paid by the assessee herein to them by way of royalty and management fee. Both these companies have, in turn, paid remuneration to Shri Bommi Govind.

The TPO also noticed that, as per the agreement entered between the assessee and the above said two companies, the amount payable to both these companies are determined on the basis of direct and indirect expenses incurred by them. On the contrary, the payments have been made by the assessee on the basis of production, which was not in accordance with the terms of agreement. Accordingly, the TPO took the view that the payments made to these two companies should not have exceeded the expenses incurred by them. The TPO noticed that the major expense incurred by these two companies was found to be the remuneration paid to Shri Bommi Govind. Apart from this, other expenses incurred by them were nominal only. The TPO also noticed that the assessee did not furnish any evidence to substantiate the claim of receipt of services. Accordingly, the TPO took the view that the payments made to FHPL and FIPL are not incurred for the purposes of business and they have been paid only to shift the profits to its AEs assessed in Singapore at lower rate of tax. The TPO also took support of the decision rendered by Hon’ble Kerala High Court in the case of MIL Controls Ltd vs. CIT (340 ITR 190) in support of his view that it is imperative for the assessee to prove the ALP of the payments made to AEs. Accordingly, he took the view that payments made to both the AEs are not justified and accordingly determined the ALP as NIL.

The Ld CIT(A) also confirmed the same and hence the assessee is challenging the decision of Ld CIT(A).

We heard the parties on this issue and perused the record. The Ld A.R submitted that the co-ordinate bench of Tribunal has considered an identical issue in the assessee’s own case in IT(TP)A No.469/Bang/2017 dated 11.4.2018 relating to AY 2012-13 and the matter was restored to the file of AO/TPO for examining the same afresh. He submitted that the co-ordinate bench has specifically held that the TPO shall not dispute that services were rendered by AE. He also submitted that the co-ordinate bench has also observed that the assessee should be permitted to file TP Study, if the TNMM method adopted by the assessee is disputed by the TPO.

On the contrary, the Ld DR submitted that the assessee has not furnished any details that were required to substantiate the payments made to these two companies. Further the payments made were also not in accordance with the terms of payments specified in the agreement entered by them.

We notice that an identical issue was considered by the co- ordinate bench in the assesee’s own case in AY 2012-13 (supra) and the matter has been restored to the file of AO/TPO. Since there is no change in facts, consistent with the view taken by the co- ordinate bench, we restore this issue to the file of the AO with the similar directions as given by the co-ordinate bench in AY 2012-13.

The next issue contested by the assessee in AY 2013-14 relates to the disallowance of depreciation claimed by the assessee on Factory Shed. The facts relating thereto are that there was a fire in the business premises of the assessee and consequently, the assessee constructed a new factory. The block of assets was reduced by the WDV of old building and increased by the cost of new factory shed. The assessee claimed to have completed the factory shed in March, 2013 and accordingly claimed depreciation thereon. The AO asked the assessee to prove the claim that the new factory shed was put to use before 31.3.2013. The assessee furnished a copy of Stability certificate dated 25.03.2013 issued by a Chartered Engineer under Karnataka Factory Rules, 1969. However, the AO noticed that the assessee has submitted application to the Karnataka Boilers and Factory Department only on 03-04-2013, i.e., after the end of financial year. The AO was of the view that the assessee could not have used the factory before obtaining permission from the above said department. Accordingly, the AO took the view that the Factory shed was not put to use during the year under consideration and accordingly disallowed the depreciation claimed on the factory shed.

Before Ld CIT(A), the assessee took an alternative contention that the factory was ready for use before 31.3.2013, which constitutes “passive use” of assets and such passive use also satisfies the condition of “put to use” specified in sec.32 of the Act. The Ld CIT(A) did not agree with the said contentions of the assessee. He took the view that the assessee could not have used

We heard the parties on this issue and perused the record. The Ld A.R relied upon the submissions made by the assessee before Ld CIT(A). The Ld A.R submitted that the factory shed was ready in all respects by February, 2013 and the commercial production has started in the new factory shed on 25.03.2013 itself. He submitted that the Stability certificate was obtained by the assessee accordingly from a Chartered Engineer on 25.03.2013 itself. e submitted that the application before the State Government was made subsequently, but the same cannot militate against the fact that the factory was put to use before 31.3.2013. The Ld A.R also took alternative plea that the factory was ready to use and the said fact alone would satisfy the requirement of “put to use” specified in sec.32 of the Act. In this regard, he placed his reliance on the decision rendered by Hon’ble Punjab & Haryana High Court in the case of CIT vs. O.P.Khanna & Sons (1982)(101 taxman 243).

On the contrary, the Ld D.R placed his reliance on the decision rendered by Hon’ble Karnataka High Court in the case of DCIT vs. Yellamma Dasappa hospital (290 ITR 353) to contend that the asset has to be actually used for claiming depreciation u/s 32 of the Act and hence “asset was ready to use” theory is not available to IT(TP)A No.2162/Bang/2017 & IT(TP)A No.3330/Bang/2018 Page 9 of 16 the assessee. The Ld D.R further placed his reliance on the order of Ld CIT(A) and submitted the assessee could not have used the factory shed without approval from the State Government. Accordingly, he submitted that the Ld CIT(A) was justified in confirming the disallowance.

We notice that the contentions of the assessee are two fold. First contention of the assessee was that the factory was actually put to use on 25.3.2013 itself and the production has started therefrom, i.e., the factory shed was actually put to use. In the alternative, it has contended that the factory shed was “ready to use” in all aspects and hence the same constitutes “passive use” of the asset. Admittedly, the alternative contention of the assessee would become infructuous, if the assessee is able to show that the factory was actually put to use.

The assessee has given chronology of events in the chart placed in page 412 of the paper book. According to the Chart, the commercial production in the new factory shed has been started on 25.03.2013 itself by moving the Plant and machinery into the new shed. If the assessee is able to prove this fact, then we are of the view that the assessee should be eligible to claim depreciation on the factory shed. The application furnished to the Karnataka Boilers and Factory department in the succeeding year should not come into the way of the assessee, if it is able to prove that the factory was actually put to use. The case of the Ld CIT(A) was that the assessee did not furnish any material to prove its case that the factory was actually put to use.

In case, if the assessee fails to prove above said fact, then the alternative contention of the assessee becomes relevant. The Ld D.R has placed his reliance on the decision rendered by Hon’ble Karnataka High Court in the case of Yellamma Dasappa hospital (supra), wherein the theory of “ready to use” or “passive use” has been rejected by the Hon’ble jurisdictional High Court. Since the main issue is restored to the file of the AO, we restore this alternative contention also to the file of the assessing officer for his examination.

The next issue contested by the assessee in AY 2013-14 relates to the disallowance of Rs.2,89,747/- made u/s 40(a)(ia) of the Act. The AO noticed that the assessee has paid testing charges to Water Quality Association, USA and M/s Paragon Water Systems Inc, USA without deducting tax at source. Hence he disallowed the same u/s 40(a)(i) of the Act. Before Ld CIT(A), the assessee submitted that these services were rendered outside India and hence there was no requirement to deduct tax at source from these payments. The assessee also submitted that these services do not satisfy the condition of “make available” under India-USA DTAA and on this count also, these payments are not liable for tax deduction. However, the Ld CIT(A) confirmed the disallowance by holding that the services were made available to the assessee.

We heard the parties on this issue and perused the record. The Ld A.R submitted that the provisions of India-USA DTAA will apply to the impugned payments. He submitted that the Ld

We heard Ld D.R, who supported the order passed by Ld CIT(A). Having heard rival submissions, we are of the view that there is merit in the contentions of the assessee. The assessee has submitted the details of expenses before Ld CIT(A) and a perusal of the same would show that the payments were made for Annual listing charges, sponsorship charges, testing charges, reimbursement of expenses. Thus we notice that the payments have been made towards expenses and not for acquiring any technical knowhow falling within the meaning of India-USA DTAA. These payments do not make available any technical knowledge to the assessee which would enable it to apply independently. There is no dispute with regard to the fact that these services were rendered outside India and hence these payments cannot be brought to tax in India in the hands of the recipients. Hence we agree with the contentions of the assessee that the provisions of sec.195 of the Act do not apply to these payments and hence there is no requirement to deduct tax at source from these payments. Accordingly we set aside the order passed by Ld CIT(A) on this issue and direct the AO to delete the disallowance made u/s 40(a)(i) of the Act.

We shall now take up the appeal filed by the assessee for AY 2014-15. The first issue relates to the Transfer pricing adjustment made in respect of payment made towards Royalty and Management fee. We have restored an identical issue to the file of the AO/TPO in AY 2013-14 for the reasons stated in the preceding paragraphs. Consistent with the view taken therein, we restore this issue to the file of AO/TPO in this year also with similar directions.

The AO had made the addition of Transfer Pricing adjustment on protective basis u/s 37 of the Act. Since the main issue is restored to the file of AO/TPO, we restore this issue also to his file.

The next issue contested by the assessee in AY 2014-15 relates to the disallowance of Export commission paid to foreign agents. The assessee claimed to have paid to Sales commission to foreign agents named M/s Eco Fil Marketing Pte Ltd and M/s Premium Carbon Pte Ltd, both being Singapore based companies. The AO noticed that both these companies are having low capital and further they have been wound up in the year 2016. Both these companies were having common director named Shri Faridah Ehsan. The AO also noticed that the assessee did not prove that these two companies have rendered services to the assessee company. Hence the AO disallowed the expenses including the expenses relating to foreign exchange fluctuation relating thereto.

Before Ld DRP, the assessee furnished certain additional evidences. However, the Ld DRP took the view that the additional evidences do not answer the query raised by the AO, i.e., the IT(TP)A No.2162/Bang/2017 & IT(TP)A No.3330/Bang/2018 Page 13 of 16 assessee has not proved the bonafide of the transactions. Accordingly it rejected the contentions of the assessee. Accordingly the AO sustained the disallowance of commission expenses.

The Ld A.R submitted that the foreign agents are not related parties and the additional evidences furnished before the Ld DRP has been rejected without consideration. He submitted that the assessee has furnished comprehensive details and hence they should not have been rejected by Ld DRP. On the contrary, the Ld D.R submitted that the case of the AO is that the assessee has not proved that these agents have really rendered services to the assessee. He submitted that the promoter of the assessee company is a Singapore resident and hence the responsibility to prove that these agents have rendered services is heavy on the assessee. He submitted that it may be the case of routing the sales through these agents in order to divert the profits to foreign country. Accordingly, the Ld D.R submitted that there is no reason to interfere with the order passed by the AO on this issue.

We heard the parties on this issue and perused the record. We notice that the assessee has furnished additional evidences before Ld DRP, but the same have not been critically examined by the it. In our view, these additional evidences require proper examination and without examining them, it may not be proper to reject the contentions of the assessee. Accordingly we set aside the order passed by the AO on this issue and restore the same to his file for examining it afresh by duly considering the additional evidences furnished by the assessee.

The next issue relates to the disallowance of higher rate of depreciation claimed by the assessee. The AO noticed that the assessee has claimed depreciation on computer software @ 60%. He restricted the same to 25%. The Ld DRP noticed that the assessee has acquired licence fee and hence the same is eligible for depreciation @ 25% only.

Before us, the assessee submitted that the AO had made similar disallowance in AY 2013-14, but higher depreciation has been allowed by Ld CIT(A). He submitted that the revenue has not challenged the decision of Ld CIT(A). On the contrary, the Ld DR supported the order passed by the AO.

We heard the parties and perused the record. There is no dispute with regard to the fact that higher depreciation is allowed under depreciation table (Note 7 below the table) to “Computer including computer software”. We notice that the AO has taken the view that the term “computer software” should interpreted to mean those software which have been embedded with the computer at the time of purchase. We notice that the above said interpretation is against the view expressed in the following case law:- (a) Amway India Enterprises vs. DCIT (111 ITD 112(SB)(Delhi) (b) CIT vs. Amway India Enterprises (346 ITR 341)(Delhi) (c) Ushodaya Enteprises Ltd (2015)(60 taxmann.com 85)(Hyd- Trib) (d) Zydus Infrastructure P Ltd (72 taxmann.com 199)(Ahd. Trib)

The assessee has raised certain legal grounds in both the years. However no argument was advanced on them and hence they are dismissed as not contested.

Other grounds urged on charging of interest are consequential in nature.

In the result, both the appeals of the assessee are treated as allowed for statistical purposes.