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Income Tax Appellate Tribunal, ‘D’ BENCH, CHENNAI
Before: SHRI N.R.S. GANESAN & SHRI A. MOHAN ALANKAMONY
PER N.R.S. GANESAN, JUDICIAL MEMBER:
The Revenue has filed appeals for assessment years 2002- 03 and 2007-08 and the assessee has filed appeal for assessment year 2009-10. Therefore, we heard all these appeals together and disposing of the same by this common order.
Shri G. Ravi Kumar, the Ld.counsel for the assessee, submitted that the assessee-company is a joint venture company of M/s JBM-Sung woo Private Limited. The assessee is engaged itself in the business of manufacturing and sale of sheet metal components, assemblies and sub-assemblies and supplying them to Hyundai Motors India Ltd. The assessee has paid 4% as service charges for the service rendered by the parent company. The parent company offered services in management and administration, right from the high level strategic planning, including the products to be ventured, type of customers to be targeted, etc. and also day-to-day operation of the assessee-company. The payment made by the assessee-company was disallowed by the Assessing Officer on the ground that there was no evidence to suggest that the parent company has offered services to the has adopted Transaction Net Margin Method as most appropriate method for determining arm's length price for the purpose of transfer pricing study. In fact, the tested party paid 5.23% as against the comparable standalone average margin of 4.63%. Therefore, the assessee claimed before the Assessing Officer that the international transaction made by the assessee was at arm’s length.
Referring to the copy of service agreement, more particularly Article 2, the Ld.counsel for the assessee submitted that the parent company has provided all the services referred in Article 2 of the agreement. On a query from the Bench, how the parent company was able to provide services in carrying out day-to-day activities of a company which is India? The Ld.counsel could not clarify how the parent company was able to carry on the business of the Indian company. Referring to legal and taxation services said to be offered by the parent company, the Ld.counsel clarified that the parent company offered advice on how to deal with legal and taxation matters in India. Therefore, the Dispute Resolution Panel, according to the Ld. counsel, is not justified in confirming the order of the Transfer Pricing Officer.
Representative also. According to the Ld. D.R., the assessee has not received any service from the parent company. Referring to the order of the Dispute Resolution Panel, the Ld. D.R. clarified that no evidence was filed before the Transfer Pricing Officer as well as DRP with regard to the services said to be rendered by the parent company. Referring to the directions of the DRP, the Ld. D.R. submitted that it appears that the parent company has done liaison work with Chinese authorities. If this is true, then the Indian company is not expected to make any payment for the liaison work done by the parent company with Chinese authorities. Therefore, the Ld. D.R. submitted that it is a clear case of diverting profit outside the jurisdiction of the country so as to reduce the profit in India. In the absence of evidence of any services rendered by the parent company, the so-called payment of administrative charges cannot be allowed. Therefore, the TPO has rightly rejected the claim of the assessee.
We have considered the rival submissions on either side and perused the relevant material available on record. The assessee claims that it paid administrative charges to the parent company for the so-called services rendered as per the agreement dated agreement for providing services described in Article 2 of the agreement. The Assessing Officer as well as the DRP found that the assessee has not received any service from the parent company. In fact, the Chief Financial Officer of the parent company was summoned under Section 131 of the Income-tax Act, 1961 (in short 'the Act'). He admitted before the Assessing Officer that it is not possible to provide the details of the administrative services provided to the Indian company. Considering the functions performed by the joint venture partners as shareholders of the Indian company, the DRP found that the services rendered by the shareholders does not require any compensation from the assessee-company even as per the OECD guidelines. The DRP further found that the contribution said to be made by the joint venture partners to the sales of the existing business of the assessee-company was not available on record. In the absence of any material to indicate that services were rendered by the joint venture company, this Tribunal is of the considered opinion that the DRP has rightly confirmed the order of the Transfer Pricing Officer.
Therefore, this Tribunal do not find any reason to interfere with the order of the lower authority and accordingly the same is confirmed.
Now coming to Revenue’s appeals for the assessment years 2002-03 and 2007-08 in & 1693/Mds/2014, the only ground is with regard to disallowance of payment of royalty.
Shri Duraipandian, the Ld. Departmental Representative, submitted that the assessee claims the payment of royalty as revenue expenditure for use of technical knowhow as per the agreement. The Assessing Officer, after considering the agreement entered into with M/s Sungwoo Hightech Company Limited, found that the so-called payment of royalty is a capital expenditure since there was enduring benefit acquired by the assessee. However, the CIT(Appeals) allowed the claim of the assessee on the ground that the payment of royalty is revenue in nature. Referring to the order of the Assessing Officer, the Ld. D.R. submitted that by placing reliance on the observation made by the Dispute Resolution Panel in the assessee's own case for assessment year 2009-10, the CIT(Appeals) allowed the claim without examining the same independently. On a query from the Bench, whether any appeal was filed by the Revenue challenging directions of the DRP for assessment year 2009-10 in the assessee's own case? The Ld. DRP for the assessment year 2009-10.
On the contrary, Shri G. Ravi Kumar, the Ld.counsel for the assessee, submitted that the assessee admittedly paid royalty and the same was claimed as revenue expenditure. According to the Ld. counsel, M/s Sungwoo Hitech Company Limited, Korea is the legitimate owner of technical knowhow and the assessee was given the right to use the technical knowhow. According to the Ld. counsel, the assessee has not acquired the intellectual property.
The Ld.counsel further clarified that the right to use the technology and the information was for a prescribed period and it is not for perpetual. The Ld.counsel further submitted that the right to use technology for manufacturing a product does not result in enduring benefit to the assessee. The right to use the technology would not make the assessee-company the owner of the technology, therefore, according to the Ld. counsel, the royalty paid by the assessee is a business expenditure for the purpose of carrying out the business. Hence, according to the Ld. counsel, it has to be allowed as revenue expenditure.
2009-10, the Ld.counsel for the assessee submitted that this issue was considered by the DRP and found that it is a recurring payment, therefore, it cannot be presumed that the payment was made for acquiring a new technology. The DRP categorically found that the payment was revenue in nature, therefore, the Assessing Officer has to allow the same as revenue expenditure. The Ld.counsel further submitted that the Revenue has not filed any appeal against this direction of the DRP for assessment year 2009-
10. Therefore, according to the Ld. counsel, the same cannot be disputed by the Revenue for the assessment years 2002-03 and 2007-08.
We have considered the rival submissions on either side and perused the relevant material available on record. The nature of payment was examined by the DRP for the assessment year 2009-
10. The DRP found that the payment was made by the assessee for right to use the technology and technical information for a prescribed period and it is not perpetual. The DRP has also found that the assessee does not obtain any enduring benefit. The payment is also recurring in nature. Therefore, the DRP for the assessment year 2009-10 found the payment as revenue
9 & 1693/Mds/14 I.T.A. No.954/Mds/14 expenditure. Admittedly, this direction of the DRP was not challenged by the Revenue further. Therefore, it attained finality. Since the nature of payment was examined by DRP and it was found as revenue expenditure and the direction of the DRP attained finality, this Tribunal is of the considered opinion that the CIT(Appeals) has rightly found that the payment was revenue in nature. Therefore, this Tribunal do not find any reason to interfere with the order of the lower authority and accordingly the same is confirmed.
In the result, appeals of the Revenue and the assessee are dismissed.