M/s. VA TECH HYDRO INDIA PRIVATE LIMITED ( NOW KNOWN AS ANDRITZ HYDRO PRIVATE LIMITED), Mandideep V. The DCIT 1(1), Bhopal

ITA 120/IND/2014

• Counselvise Citation: 12022714 RSA 2014
• Duration Of Justice: 4 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 03-07-2014
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: DB
• Assessment Year: 2009-2010
• Appeal Filed On: 10-02-2014
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: MRIDULA BAJPAYEE
• Assessee Lawyers: AJIT TOLANI
• Keywords: Related party transaction; Capital asset; Business income; Depreciation; Transfer pricing; Business expenditure; Double taxation relief; Principle of natural justice; International transaction; Permanent establishment; Advance ruling; Cost of acquisition; Wholly owned subsidiary; Difference of opinion; Change of opinion
• Section: 92C; 143(3); 201(1); 37; 92

Judgement Text

, A IN THE INCOME TAX APPELLATE TRIBUNAL INDORE BE NCH INDORE , . ., BEFORE : SHRI JOGINDER SINGH, JM & SHRI R.C.SHARMA, AM !' ./ IT(TP)A NO.5/IND/2011 ( #$% & /ASSESSMENT YEAR : 2006-07) M/S ANDRITZ HYDRO PRIVATE LIMITED (FORMERLY VA TECH HYDRO INDIA P VT. LTD.), D- 17, INDUSTRIAL AREA, MANDIDEEP- 462 046, NEAR BHOPAL (M.P.), INDI A VS. ADCIT-3(1), BHOPAL. ' ./ ( ./PAN/GIR NO. : AABCV 2466 R ( !' ') /APPELLANT ) .. ( *+') / RESPONDENT ) AND !' ./ IT(TP)A NO.313/IND/2011 ( #$% & /ASSESSMENT YEAR : 2007-08) M/S ANDRITZ HYDRO PRIVATE LIMITED (F ORMERLY VA TECH HYDRO INDIA PVT. LTD.), D- 17, INDUSTRIAL AREA, MANDIDEEP- 462 046, NEAR BHOPAL (M.P.), INDIA VS. ADCIT-3(1), BHOPAL. ' ./ ( ./PAN/GIR NO. : AABCV 2466 R ( !' ') /APPELLANT ) .. ( *+') / RESPONDENT ) AND !' ./ IT(TP)A NO.616/IND/2012 ( #$% & /ASSESSMENT YEAR : 2008-09) VA TECH HYDRO INDIA PVT. LTD.( NOW M/S ANDRITZ HYDRO PRIVATE LIMITED) , D-17, INDUSTRIAL AREA, MANDIDEEP- 462 046, NEAR BHOPAL (M.P.), INDIA VS. DY.CIT-1(1), BHOPAL. ' ./ ( ./PAN/GIR NO. : AABCV 2466 R ( !' ') /APPELLANT ) .. ( *+') / RESPONDENT ) AND !' ./ IT(TP)A NO.120/IND/2014 ( #$% & /ASSESSMENT YEAR : 2009-10) VA TECH HYDRO INDIA PVT. LTD. (NOW M/S ANDRITZ HYDRO PRIVATE LIMITED), D-17, INDUSTRIAL AREA, MANDIDEEP- 462 046, NEAR BHOPAL (M.P.), INDIA VS. DY.CIT-1(1), BHOPAL. ' ./ ( ./PAN/GIR NO. : AABCV 2466 R ( !' ') /APPELLANT ) .. ( *+') / RESPONDENT ) IT(TP)A NO.5/IND/2011, IT(TP)A NO.313/IND/2011, IT(TP)A NO.616/IND/2012,& IT(TP)A NO.120/IND/2014 2 #$,- /ASSESSEE BY : SHRI AJIT TOLANI /REVENUE BY : SMT. MRIDULA BAJPAYEE . # / -0 / DATE OF HEARING : 30 TH APRIL, 2014 1&% / -0 /DATE OF PRONOUNCEMENT : 03.07. 2014 / O R D E R PER R.C.SHARMA (A.M.) : THESE APPEALS ARE FILED BY THE ASSESSEE AGAINST THE ORDER PASSED UNDER SECTION 143(3) R.W.S.144C(13) OF I.T.A CT, FOR THE ASSESSMENT YEAR 2006-07, 2007-08, 2008-09 & 2009-10 , RESPECTIVELY. 2. AS MOST OF THE GROUNDS ARE COMMON IN ALL THE YEARS UNDER CONSIDERATION, THEREFORE, ALL THE APPEALS HEARD TOG ETHER AND DECIDED BY THIS CONSOLIDATED ORDER FOR THE SAKE OF CONVENIENCE AND BREVITY. 3. GROUNDS RAISED BY THE ASSESSEE FOR ASSESSMENT YEAR 2006-07 ARE AS UNDER :- GROUNDS ON JUDICIAL DISCIPLINE AND NATURAL JUSTICE 1. THAT ON FACTS AND IN LAW, THE ORDER/DIRECTIONS P ASSED BY THE LEARNED ASSESSING OFFICER (LD.AO)/LEARNED TRANSFE R PRICING OFFICER (LD.TPO)/HONBLE DISPUTE RESOLUTION PANEL (DRP) ARE BAD IN LAW AND VOID AB-INITIO. 2. THE HONBLE DRP/LD AO AND LD. TPO HAVE ERRED IN FACTS AND IN LAW IN COMPUTING THE TOTAL INCOME AT RS.4,30,68,482 /- AS AGAINST THE NIL RETURNED INCOME IN THE PRESENT CASE. 3. THAT THE ORDER PASSED BY THE LD. AO/HONBLE DRP IS BAD IN LAW TO THE EXTENT IT HAS VITIATED JUDICIAL DISCIPLINE BY N OT FOLLOWING THE DECISION OF HONBLE INCOME-TAX APPELLATE TRIBUNAL( ITAT) ON SIMILAR FACTS, IN APPELLANTS OWN CASE FOR EARLIER YEARS. GROUNDS ON TRANSFER PRICING ISSUES . 4. ARMS LENGTH PRICE OF PURCHASE MADE BY APPELLANT FROM ITS ASSOCIATED ENTERPRISES (AES) ARE ON COST-TO-COST BASIS AND HENCE SHOULD BE CONSIDERED TO BE AT ARMS LENGTH. 4.1 THE HONBLE DRP/LD.TPO HAVE ERRED IN LAW AND IN FACTS, IN IGNORING THAT PURCHASES MADE BY APPELLANT FROM ITS AES ARE ON COST-TO-COST BASIS AND THAT AES HAVE NOT CHARGED AN Y MARK-UP ON SAME. FURTHER, THE HONBLE DRP/LD.TPO HAVE NOT APPR ECIATED THAT SAME TRANSACTION OF APPELLANT HAS BEEN ACCEPTED TO BE AT ARMS LENGTH IN PRECEDING YEARS. 4.2 FURTHER, THE LD. TPO HAS ERRONEOUSLY PROCEEDED TO EVALUATE THE APPELLANTS TRANSACTION USING TRANSACTIONAL NET MAR GIN METHOD (TNMM) AND HAD FAILED TO APPRECIATE THAT TNMM ANA LYSIS WAS FURTHER UNDERTAKEN ONLY AS A SECONDARY ANALYSIS TO SUPPORT THAT THE IT(TP)A NO.5/IND/2011, IT(TP)A NO.313/IND/2011, IT(TP)A NO.616/IND/2012,& IT(TP)A NO.120/IND/2014 3 PURCHASES FROM AES ARE AT ARMS LENGTH. 5. REJECTION OF BHARAT HEAVY ELECTRICAL LIMITED (B HEL) AS A COMPARABLE. 5.1 WITHOUT PREJUDICE TO THE GROUND NO. 4, BASED ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE HON'BLE DRP/ LD. TPO HAVE FURTHER ERRED IN LAW AND IN FACTS IN NOT ACCEPTING THE DETA ILED AND ROBUST SET OF COMPARABLE COMPANIES SUBMITTED BY THE APPELL ANT, WHILE UNDERTAKING THE ANALYSIS USING TNMM AS MOST APPROPR IATE METHOD. 5.2 THE HON'BLE DRP / LD. TPO HAD FAILED TO APPRECI ATE APPELLANT'S CONTENTION OF NOT ACCEPTING BHEL AS A COMPARABLE ON ACCOUNT OF EXTRA-ORDINARY SIZE OF OPERATIONS OF BHEL AS COMPAR ED TO APPELLANT HAVING REGARD TO THE FUNCTIONS PERFORMED, ASSETS EMPLOYED AND RISK ASSUMED. 6. ERRONEOUS COMPUTATION OF OPERATING MARGINS OF AP PELLANT AND COMPARABLE COMPANIES 6.1 WITHOUT PREJUDICE TO ABOVE, BASED ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE HON'BLE DRP/ LD. TPO HAVE ERRED IN FACT IN NOT ACCEPTING THE COMPUTATION OF COMPARABLE COMPANIES S UBMITTED BY THE APPELLANT WHILE APPLYING TNMM. 6.2 THE HON'BLE DRP/ LD. TPO HAVE ERRED IN LAW AND IN FACT, IN RESORTING TO USE OF FINANCIAL INFORMATION OF COMPAR ABLE COMPANIES AS DERIVED FROM PROWESS DATABASE AND DISREGARDING T HE USE OF AUDITED FINANCIAL INFORMATION OF COMPARABLE COMPANI ES AS USED BY THE APPELLANT WHILE COMPUTING OPERATING MARGINS OF COMPARABLE COMPANIES. 6.3 FURTHER, THE HON'BLE DRP / LD. TPO HAVE ERRED I N DISREGARDING USE OF RELEVANT SEGMENTAL INFORMATION (WHERE AVAILA BLE) OF COMPARABLE COMPANIES AND INSTEAD USING COMPANY WIDE MARGINS EXTRACTED FROM THE PROWESS DATABASE WHILE APPLYING TNMM. 7. USE OF SINGLE YEAR DATA OF COMPARABLE COMPANIES WITHOUT PREJUDICE TO THE AFORESAID GROUNDS OF OBJE CTION, BASED ON FACT AND CIRCUMSTANCES OF THE CASE, THE HON'BLE DRP / LD. TPO HAVE ERRED IN LAW AND IN FACT, BY ADOPTING A FLAWED APPROACH BY USING SINGLE YEAR DATA AS AGAINST THE MULTIPLE YEAR DATA USED BY THE APPELLANT TO COMPUTE THE ARM'S LENGTH PRICE OF THE INTERNATIONAL TRANSACTION USING TNMM. 8. WORKING CAPITAL ADJUSTMENT BASED ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE HON'BLE DRP/ LD. TPO HAVE ERRED IN LAW AND IN FACT, IN FAIL ING TO MAKE APPROPRIATE ADJUSTMENTS TO ACCOUNT FOR DIFFERENCES IN WORKING CAPITAL EMPLOYED BY THE APPELLANT VIS-A-VIS THE COM PARABLES AND IN THE PROCESS ALSO IGNORED INDIAN TRANSFER PRICING RE GULATIONS AND JUDICIAL PRECEDENCE. 9. PRINCIPLE OF RES-JUDICATA BASED ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE HON'BLE DRP/ LD. TPO HAVE ERRED IN LAW AND IN FACT, BY NOT TAKING COGNIZANCE OF THE FACT THAT IMPUGNED INTERNATIONAL TRANSACTION OF APPELLANT HAS BEEN ACCEPTED BY REVENUE AUTHORITIES TO BE AT ARM'S LENGTH IN PREVIOUS YEARS. 10. TRANSFER PRICING ADJUSTMENT TO BE MADE WITH REF ERENCE TO VALUE OF INTERNATIONAL TRANSACTION ONLY IT(TP)A NO.5/IND/2011, IT(TP)A NO.313/IND/2011, IT(TP)A NO.616/IND/2012,& IT(TP)A NO.120/IND/2014 4 10.1 BASED ON THE FACTS AND CIRCUMSTANCES OF THE CA SE, THE HON'BLE DRP/ LD. TPO HAVE COMPLETELY IGNORED THE FUNCTIONAL AND BUSINESS PROFILE OF THE APPELLANT AND HAVE FAILED T O APPRECIATE THAT APPELLANT IS A RISK BEARING ENTITY. CONSEQUENTLY, I T WOULD BE INCORRECT ON LD. TPO'S ACCOUNT TO CONTEND THAT THE ALLEGED DIFFERENCE IN OPERATING MARGINS OF APPELLANT VIS-A- VIS COMPARABLE COMPANIES ARE SOLELY ON ACCOUNT OF HIGHER PRICE PAI D BY APPELLANT FOR PURCHASES 10.2 FURTHER, THE HON'BLE DRP/ LD. TPO HAVE FAILED TO APPRECIATE THAT BY MAKING A TRANSFER PRICING ADJUSTMENT BASED SIMPL Y ON DIFFERENCE IN OPERATING MARGINS OF THE APPELLANT AN D COMPARABLE COMPANIES, THE LD. TPO HAD IGNORED THAT ADJUSTMENT HAS TO BE MADE IN RELATION TO THE VALUE OF IMPUGNED INTERNATI ONAL TRANSACTION WITH AES ONLY (WHICH CONSTITUTE LESS THAN 5% OF THE TOTAL OPERATING COST OF THE APPELLANT) AND NOT WITH REFERENCE TO TO TAL VALUE OF ALL THE TRANSACTIONS UNDERTAKEN BY THE APPELLANT. 10.3 THAT BASED ON THE FACTS AND IN LAW, THE HON'BL E DRP / LD. TPO HAVE ERRED IN IGNORING THE JUDICIAL PRONOUNCEMENTS UPHOLDING THE APPELLANT'S CONTENTION OF TRANSFER PRICING ADJUSTME NT TO BE MADE WITH REFERENCE TO VALUE OF INTERNATIONAL TRANSACTIO N ONLY. 11. AGGREGATION OF TRANSACTIONS WHILE APPLYING COST -PLUS METHOD BASED ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE HON'BLE DRP/ LD. TPO HAVE ERRED IN LAW AND IN FACT, IN NOT CONSIDERING THE INTERNAL COST PLUS METHOD ('CPM') ANALYSIS UNDERTAK EN BY THE APPELLANT BY WAY OF AGGREGATION OF TRANSACTIONS IN ACCORDANCE WITH THE PROVISIONS OF THE ACT READ WITH THE INCOME TAX RULES, 1962 FOR DETERMINATION OF THE ARM'S LENGTH PRICE OF INTERNAT IONAL TRANSACTION ON ACCOUNT OF SALE OF GENERATORS AND GENERATOR PART S TO AES. 12. PROVISO TO SECTION 92C(2) THAT ON FACTS AND IN LAW, THE HON'BLE DRP / LD. TP O HAVE ERRED IN LAW IN NOT APPLYING THE PROVISO TO SECTION 92C OF T HE ACT AND HAVE FAILED TO ALLOW THE APPELLANT AN OPTION FOR FIXING THE ARM'S LENGTH PRICE AT A VARIANCE OF 5 PERCENT IN DETERMINING THE ARM'S LENGTH PRICE AND HENCE ERRONEOUSLY ADJUSTING THE INCOME OF THE APPELLANT TO ARITHMETIC MEAN. GROUNDS ON CORPORATE TAX ISSUES 13. DISALLOWANCE OFF DEPRECIATION ON CAPITAL ASSET BASED ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE HON'BLE DRP/ LD. AO HAVE ERRED IN LAW AND IN FACT, IN DISAL LOWING THE DEPRECIATION CLAIMED ON CAPITAL ASSET PURCHASED FRO M AE DURING AY 2005-06, THE VALUE OF WHICH HAD BEEN DETERMINED BY THE THEN LD. TPO AS NIL ON ACCOUNT OF INDIAN TRANSFER PRICIN G PROVISIONS. 14. DISALLOWANCE OF TECHNICAL DRAWING AND DESIGN EX PENDITURE PAID TO ITS AUSTRIAN PARENT COMPANY 14.1 BASED ON THE FACTS AND CIRCUMSTANCES OF THE CA SE, THE HON'BLE DRP/ LD. AO HAVE ERRED IN LAW AND ON FACT BY DISALL OWING THE PAYMENTS MADE BY THE APPELLANT TO ITS OVERSEAS PARE NT COMPANY DURING AY 2006-07 FOR THE PURCHASE OF TECHNICAL DRA WINGS AND DESIGNS AND ALLEGING THE SAME TO BE IN THE NATURE O F ROYALTY ON WHICH TAX HAD TO BE WITHHELD AT THE TIME OF PAYMENT . 14.2 THAT THE ORDER PASSED BY THE HON'BLE DRP / LD. AO IS BAD IN LAW TO THE EXTENT IT HAS VITIATED JUDICIAL DISCIPLINE B Y NOT FOLLOWING THE IT(TP)A NO.5/IND/2011, IT(TP)A NO.313/IND/2011, IT(TP)A NO.616/IND/2012,& IT(TP)A NO.120/IND/2014 5 DECISION OF HON'BLE INCOME-TAX APPELLATE TRIBUNAL ( 'ITA T') ON SIMILAR FACTS, IN APPELLANT'S OWN CASE FOR EARLIER YEARS. 15. DISALLOWANCE OF PROVISION FOR WARRANTY FOR AY 2 006-07 15.1 BASED ON THE FACTS AND CIRCUMSTANCES OF THE CA SE, THE HON'BLE DRP/ LD. AO HAVE ERRED IN LAW AND IN FACT IN ALLEGI NG THAT THE PROVISION FOR WARRANTY HAS BEEN CREATED BY THE APPE LLANT ON AN ARBITRARY BASIS AND ACCORDINGLY IS NOT A DEDUCTIBLE EXPENDITURE WHILE COMPUTING THE INCOME TAX PAYABLE BY THE APPEL LANT. 15.2 FURTHER THE HON'BLE DRP / LD. AO HAVE COMPLETE LY ERRED IN FACTS AND IN LAW, IN IGNORING THE ORDER PASSED BY HON'BLE COMMISSIONER OF INCOME TAX (APPEALS) IN APPELLANT'S OWN CASE IN RELATION TO AY 2004-05 ON SIMILAR ISSUE, WHEREBY THE MATTER HAS BE EN DECIDED IN FAVOUR OF THE APPELLANT. 15.3 THAT ON THE FACTS OF THE CASE AND IN LAW, THE HON'BLE DRP / LD. AO'S CONTENTION THAT WARRANTY IS MERELY A CONTINGEN T LIABILITY MADE ON AN ESTIMATE BASIS, IS GROSSLY ERRONEOUS AND SHOU LD BE REJECTED. PENALTY FOR CONCEALMENT OF INCOME 16. THAT ON FACTS AND IN LAWS, THE HON'BLE DRP/ LD. AO HAVE ERRED IN HOLDING THAT APPELLANT HAS FURNISHED INACCURATE PAR TICULARS OF INCOME IN RESPECT OF EACH ITEM OF DISALLOWANCE/ ADD ITIONS AND IN INITIATING PENALTY PROCEEDINGS UNDER SECTION 271 (1 )(C) OF THE ACT. 3.1 GROUNDS RAISED BY THE ASSESSEE IN ASSESSMENT YEAR 2 007-08 ARE AS UNDER :- BASED ON THE FACTS AND CIRCUMSTANCES OF THE CASE, ANDRITZ HYDRO PRIVATE LIMITED (HERE-IN-AFTER REFERRED TO AS THE 'APPELLANT') RESPECTFULLY CRAVES LEAVE TO PREFER AN APPEAL UNDER SECTION 253 OF THE I NCOME-TAX ACT, 1961 ('ACT') AG AINST THE ASSESSMENT ORDER ISSUED UNDER SECTION 143(3) READ W ITH SECTION 144C(13) OF THE ACT BY ASSISTANT COMMISSIONER OF IN COME-TAX - 3(1), BHOPAL (HERE-IN-AFTER REFERRED TO AS 'LEARNED AO') IN PURSUANCE OF THE DIRECTIONS ISSUED BY DISPUTE RESOL UTION PANEL- 1 MUMBAI (HERE-IN-AFTER REFERRED TO AS 'DRP'),. THE APPEAL IS PREFERRED ON THE FOLLOWING GROUNDS. THE FOLLOWING G ROUNDS OF APPEAL ARE MUTUALLY EXCLUSIVE OF AND WITHOUT PREJUD ICE TO EACH ANOTHER. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED AO BASED ON DIRECTIONS OF DRP: GROUNDS ON JUDICIAL DISCIPLINE AND NATURAL JUSTICE 1. ERRED IN NOT PROVIDING SUFFICIENT OPPORTUNITY AN D ORDER PASSED IN VIOLATION OF PRINCIPLES NATURAL JUSTICE AND IS OTHE RWISE ARBITRARY AND IS THUS BAD IN LAW AND IS VOID AB-INITIO 2. ERRED ON THE FACTS AND IN LAW IN ASSESSING THE I NCOME OF THE APPELLANT AT RS 34,862,441 (BEFORE SETTING OFF CARR Y FORWARD LOSS) AS AGAINST THE TOTAL INCOME OF NIL COMPUTED BY THE APPELLANT. GROUNDS ON TRANSFER PRICING ISSUES 3. ERRED ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW IN MAKING ADJUSTMENT OF RS.19,729,478 TO THE TOTAL INC OME OF THE APPELLANT UNDER SECTION 92CA (3) OF THE INCOME TAX ACT, 1961 ('THE ACT') ON ACCOUNT OF ADJUSTMENT IN ARM'S LENGT H PRICE OF THE FOLLOWING INTERNATIONAL TRANSACTION: IT(TP)A NO.5/IND/2011, IT(TP)A NO.313/IND/2011, IT(TP)A NO.616/IND/2012,& IT(TP)A NO.120/IND/2014 6 SALE OF GENERATOR & GENERATOR PARTS TO AES; PURCHASE OF RAW MATERIALS; SELECTION OF MOST APPROPRIATE METHOD FOR PURCHASE O F RAW MATERIAL 4. ERRED IN LAW AND IN FACTS, IN IGNORING THAT PURC HASES MADE BY APPELLANT FROM ITS AES ARE ON COST-TO-COST BASIS AN D THAT AES HAVE NOT CHARGED ANY MARK-UP ON SAME. FURTHER, THE HON'BLE DRP/ LD. TPO HAVE NOT APPRECIATED THAT SAME TRANSAC TION OF APPELLANT HAS BEEN ACCEPTED TO BE AT ARM'S LENGTH I N PRECEDING YEARS RATHER PROCEEDED TO EVALUATE THE APPELLANT'S TRANSACTION USING TRANSACTIONAL NET MARGIN METHOD ('TNMM'). COMPARABLE COMPANIES FOR THE PURPOSE OF APPLYING TH E TNMM 5. WITHOUT PREJUDICE TO THE ABOVE GROUNDS , ERRED IN LAW AND IN FACTS IN NOT ACCEPTING THE APPELLANT'S CONTENTION OF NOT ACC EPTING BHEL AS A COMPARABLE ON ACCOUNT OF EXTRA-ORDINARY SIZE O F OPERATIONS OF BHEL AS COMPARED TO APPELLANT HAVING REGARD TO T HE FUNCTIONS PERFORMED, ASSETS EMPLOYED AND RISK ASSUMED. SCOPE OF TRANSFER PRICING ADJUSTMENT 6. WITHOUT PREJUDICE TO THE ABOVE GROUNDS , ERRED IN MAKING TRANSFER PRICING ADJUSTMENT ON ACCOUNT OF PURCHASES MADE FRO M AE BY IGNORING THAT ADJUSTMENT HAS TO BE MADE IN RELATION TO THE VALUE OF IMPUGNED INTERNATIONAL TRANSACTION WITH AES ONLY (WHICH CONSTITUTE LESS THAN 8% OF THE TOTAL OPERATING COST OF THE APPELLANT) AND NOT WITH REFERENCE TO TOTAL VALUE OF ALL THE TRANSACTIONS UNDERTAKEN BY THE APPELLANT. 7. WITHOUT PREJUDICE TO THE ABOVE GROUNDS, ERRED IN MAKING TRANSFER PRICING ADJUSTMENT ON ACCOUNT OF PURCHASES MADE FRO M AE BASED ON THE TNMM AND ALSO MAKING ADJUSTMENT ON THE TRANSACTION ON SALE OF GENERATOR AND GENERATOR PART S RESULTING INTO DOUBLE TAXATION OF THE APPELLANT'S INCOME. USE OF SINGLE YEAR DATA OF COMPARABLE COMPANIES 8. WITHOUT PREJUDICE TO THE ABOVE GROUNDS, BASED ON FACT AND CIRCUMSTANCES OF THE CASE, THE HON'BLE DRP / LD. TP O HAVE ERRED IN LAW AND IN FACT, BY ADOPTING A FLAWED APPR OACH BY USING SINGLE YEAR DATA AS AGAINST THE MULTIPLE YEAR DATA USED BY THE APPELLANT TO COMPUTE THE ARM'S LENGTH PRICE OF THE INTERNATIONAL TRANSACTION USING TNMM. AGGREGATION OF TRANSACTIONS WHILE APPLYING COST-PLU S METHOD 9. ERRED IN LAW AND IN FACT, IN NOT CONSIDERING THE INTERNAL COST PLUS METHOD ('CPM') ANALYSIS UNDERTAKEN BY THE APPELLANT BY WAY OF AGGREGATION OF TRANSACTIONS IN ACCORDANCE WITH THE PROVISIONS OF THE ACT READ WITH THE INCOME TAX RULES, 1962 FOR DE TERMINATION OF THE ARM'S LENGTH PRICE OF INTERNATIONAL TRANSACT ION ON ACCOUNT OF SALE OF GENERATORS AND GENERATOR PARTS TO AES. 10. ERRED BY IGNORING THE FUNCTIONAL AND BUSINESS P ROFILE OF THE APPELLANT AND VARIOUS BUSINESS EXIGENCIES WHICH MAY LEAD TO VARYING LEVEL OF GROSS MARGINS IN VARIOUS CONTROLLE D TRANSACTIONS. FURTHER ERRED IN IGNORING THE FACT THAT THE APPELLA NT IS A RISK BEARING ENTITY AND IT CANNOT BE EXPECTED TO RECOVER UNIFORM MARGIN FROM EACH TRANSACTION. BENEFIT OF +-5% 11. WITHOUT PREJUDICE TO ABOVE GROUNDS, ERRED IN NO T PROVIDINQ THE IT(TP)A NO.5/IND/2011, IT(TP)A NO.313/IND/2011, IT(TP)A NO.616/IND/2012,& IT(TP)A NO.120/IND/2014 7 BENEFIT OF +-5% UNDER PROVISO TO SECTION 92C OF ACT FOR PURPOSES OF COMPUTING TILE ARM'S LENGTH PRICE IN RESPECT OF INTERNATIONAL TRANSACTION AND HENCE ERRONEOUSLY ADJUSTING THE INC OME OF THE APPELLANT TO ARITHMETIC MEAN. GROUNDS ON CORPORATE TAX ISSUES 12. ERRED ON THE FACTS AND CIRCUMSTANCES OF THE CAS E AND IN LAW IN MAKING ADJUSTMENT OF RS.15,132,963 TO THE TOTAL INC OME OF THE APPELLANT ON ACCOUNT OF ADJUSTMENT RELATED TO THE F OLLOWING: DEPRECIATION ON INSULATING TAPING MACHINE; PAYMENT FOR TECHNICAL DRAWINGS/ DESIGNS; AND WARRANTY EXPENSES. DISALLOWANCE OFF DEPRECIATION ON CAPITAL ASSET 13. ERRED IN LAW AND IN FACT, IN DISALLOWING THE DE PRECIATION CLAIMED ON CAPITAL ASSET PURCHASED FROM AE DURING AY 2005-06, THE VALUE OF WHICH HAD BEEN DETERMINED BY THE THEN LD. TPO AS NI L ON ACCOUNT OF INDIAN TRANSFER PRICING PROVISIONS. DISALLOWANCE OF TECHNICAL DRAWING AND DESIGN EXPEND ITURE 14. ERRED IN LAW AND ON FACT BY DISALLOWING THE PAY MENTS MADE BY THE APPELLANT TO ITS ASSOCIATED ENTERPRISES DURING AY 2 007-08 FOR THE PURCHASE OF TECHNICAL DRAWINGS AND DESIGNS AND ALLE GING THE SAME TO BE IN THE NATURE OF ROYALTY ON WHICH TAX HA D TO BE WITHHELD AT THE TIME OF PAYMENT. 15. THE HON'BLE DRP / LD. AO IS BAD IN LAW TO THE E XTENT IT HAS VITIATED JUDICIAL DISCIPLINE BY NOT FOLLOWING THE D ECISION OF HON'BLE INCOME-TAX APPELLATE TRIBUNAL ('ITA T') ON SIMILAR FACTS, IN APPELLANT'S OWN CASE FOR EARLIER YEARS. DISALLOWANCE OF PROVISION FOR WARRANTY 16. ERRED IN LAW AND IN FACT IN ALLEGING THAT THE P ROVISION FOR WARRANTY HAS BEEN CREATED BY THE APPELLANT ON AN ARBITRARY B ASIS AND ACCORDINGLY IS NOT A DEDUCTIBLE EXPENDITURE WHILE C OMPUTING THE INCOME TAX PAYABLE BY THE APPELLANT. 17. ERRED IN FACTS AND IN LAW, IN IGNORING THE ORDE R PASSED BY HON'BLE COMMISSIONER OF INCOME TAX (APPEALS) IN APPELLANT'S OWN CASE IN RELATION TO AY 2004-05 ON SIMILAR ISSUE, WHEREBY THE MATTER HAS BEEN DECIDED IN FAVOUR OF THE APPELLANT. PENALTY FOR CONCEALMENT OF INCOME 18. ERRED IN HOLDING THAT APPELLANT HAS FURNISHED I NACCURATE PARTICULARS OF INCOME IN RESPECT OF EACH ITEM OF DI SALLOWANCE/ ADDITIONS AND IN INITIATING PENALTY PROCEEDINGS UND ER SECTION 271(1)(C) OF THE ACT. 3.2 GROUNDS RAISED BY THE ASSESSEE IN ASSESSMENT YEAR 2 008-09 ARE AS UNDER :- BASED ON THE FACTS AND CIRCUMSTANCES OF THE CASE, VA TECH HYDRO INDIA PRIVATE LIMITED (HERE-IN-AFTER REFERRED TO AS THE' APPELLANT') RESPECTFULLY CRAVES LEAVE TO PREFER AN APPEAL UNDER SECTION 253 OF THE INCOME-TAX ACT, 1961 (' ACT') AG AINST THE ASSESSMENT ORDER ISSUED UNDER SECTION 143(3) OF THE ACT BY DEPUTY COMMISSIONER OF INCOME TAX - 1(1), BHOPAL (, HERE-IN-AFTER REFERRED TO AS 'LEARNED AO') IN PURSUANCE OF THE DI RECTIONS ISSUED IT(TP)A NO.5/IND/2011, IT(TP)A NO.313/IND/2011, IT(TP)A NO.616/IND/2012,& IT(TP)A NO.120/IND/2014 8 BY DISPUTE RESOLUTION PANEL - II, MUMBAI (HERE-IN-A FTER REFERRED TO AS 'DRP'). THE APPEAL IS PREFERRED ON THE FOLLOWING GROUNDS. : ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN L AW, THE LEARNED AO BASED ON DIRECTIONS OF DRP: DISALLOWANCE OF TECHNICAL DRAWING AND DESIGNS EXPEN DITURE 1. ERRED IN LAW AND ON FACT BY DISALLOWING THE PAYM ENTS MADE BY THE APPELLANT TO ITS ASSOCIATED ENTERPRISES DURING A Y 2008-09 FOR THE PURCHASE OF TECHNICAL DRAWINGS AND DESIGNS AND ALLE GING THE SAME TO BE IN THE NATURE OF ROYALTY ON WHICH TAX HAD TO BE WITHHELD AT THE TIME OF PAYMENT. 2. THE HON'BLE DRP/ LEARNED AO IS BAD IN LAW TO THE EXTENT IT HAS VITIATED JUDICIAL DISCIPLINE BY NOT FOLLOWING THE D ECISION OF HON'BLE INCOME-TAX APPELLATE TRIBUNAL ('IT AT') ON SIMILAR FACTS IN APPELLANT'S OWN CASE FOR EARLIER YEARS. DISALLOWANCE OF PROVISION OF WARRANTY 3. ERRED IN LAW AND IN FACT IN ALLEGING THAT THE PR OVISION FOR WARRANTY HAS BEEN CREATED BY THE APPELLANT ON AN ARBITRARY B ASIS AND ACCORDINGLY IS NOT A DEDUCTIBLE EXPENDITURE WHILE C OMPUTING THE INCOME TAX PAYABLE BY THE APPELLANT. 4. ERRED IN FACTS AND IN LAW, IN IGNORING THE ORDER PASSED BY HON'BLE COMMISSIONER OF INCOME TAX (APPEALS) IN APPELLANT'S OWN CASE IN RELATION TO A Y 2004-05 ON SIMILAR ISSUE, WHEREBY' MATTER HAS BEEN DECIDED IN FAVOUR OF THE APPELLANT. PENALTY FOR CONCEALMENT OF INCOME 5. ERRED IN HOLDING THAT THE APPELLANT HAS FURNISHE D INACCURATE PARTICULARS OF INCOME IN RESPECT OF EACH ITEM OF DISALLOWANCE/ADDITION AND IN INITIATING PENALTY PRO CEEDINGS UNDER SECTION 271(1)(C) OF THE ACT. 3.3 GROUNDS RAISED BY THE ASSESSEE IN ASSESSMENT YEAR 2009-10 ARE AS UNDER :- GROUNDS OF APPEAL BASED ON THE FACTS AND CIRCUMSTANCES OF THE CASE, V A TECH HYDRO INDIA PRIVATE LIMITED (HERE-IN-AFTER REFERRED TO AS THE APPELLANT) RESPECTFULLY CRAVES LEAVE TO PREFER AN APPEAL UNDER SECTION 253 OF THE INCOME TAX ACT, 1961 (ACT) AGAINST THE ASSESS MENT ORDER ISSUED UNDER SECTION 143(3) OF THE ACT BY DEPUTY CO MMISSIONER OF INCOME-TAX-1(1), BHOPAL (HERE-IN-AFTER REFERRED TO AS LEARNED AO) IN PURSUANCE OF THE DIRECTIONS ISSUED BY DISPUTE RE SOLUTION PANEL- I, MUMBAI (HERE-IN-AFTER REFERRED TO AS DRP). THE APPEAL IS PREFERRED ON THE FOLLOWING GROUNDS : ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN L AW, THE LEARNED AO BASED ON DIRECTIONS OF DRP: TRANSFER PRICING GROUNDS: 1. ERRED ON THE FACTS AND CIRCUMSTANCES OF THE CAS E AND IN LAW, BY NOT ACCEPTING ECONOMIC ANALYSIS UNDERTAKEN BY THE ASSES SEE WHICH WAS IN ACCORDANCE WITH THE PROVISIONS OF THE ACT RE AD WITH THE RULES FOR ESTABLISHING THE ARMS LENGTH PRICE OF TH E INTERNATIONAL TRANSACTIONS. 2. ERRED IN LAW AND IN FACT, IN NOT CONSIDERING THE INTERNAL CPM IT(TP)A NO.5/IND/2011, IT(TP)A NO.313/IND/2011, IT(TP)A NO.616/IND/2012,& IT(TP)A NO.120/IND/2014 9 ANALYSIS UNDERTAKEN BY THE ASSESSEE BY WAY OF AGGRE GATION OF TRANSACTIONS IN ACCORDANCE WITH THE PROVISIONS OF T HE ACT READ WITH THE RULES, FOR DETERMINATION OF THE ARMS LENGTH PR ICE OF INTERNATIONAL TRANSACTION ON ACCOUNT OF CONTRACT RE VENUE FROM PROJECTS. 3. ERRED ON THE FACTS AND CIRCUMSTANCES OF THE CASE BY NOT CONSIDERING THE FUNCTIONAL END RISK DIFFERENCES BET WEEN INDIVIDUAL CONTROLLED TRANSACTIONS AND AGGREGATE UNCONTROLLED TRANSACTIONS. 4. ERRED IN LAW AND IN FACT, BY NOT TAKING COGNIZAN CE OF THE FACT THAT SAME INTERNATIONAL TRANSACTION OF ASSESSEE HAS BEEN ACCEPTED BY REVENUE AUTHORITIES TO BE AT ARMS LENGTH IN PREVIO US YEAR. 5. ERRED IN LAW IN NOT APPLYING THE PROVISO TO SECT ION 92C(2) OF THE ACT AND HAS FAILED TO ALLOW THE APPELLANT THE BENEFIT O F UPWARD VARIATION OF 5 PERCENT IN DETERMINING THE ALP. CORPORATE TAX GROUNDS DISALLOWANCE OF TECHNICAL DRAWING AND DESIGNS EXPEN DITURE 6. ERRED IN LAW AND ON FACT BY DISALLOWING THE PAYM ENTS MADE BY THE APPELLANT TO ITS ASSOCIATED ENTERPRISES DURING AY 2 009-10 FOR THE PURCHASE OF TECHNICAL DRAWINGS AND DESIGNS AND ALLE GING THE SAME TO BE IN THE NATURE OF ROYALTY ON WHICH TAX HAD TO BE WITHHELD AT THE TIME OF PAYMENT. 7. ERRED IN LAW TO THE EXTENT IT HAS VITIATED JUDIC IAL DISCIPLINE BY NOT FOLLOWING THE DECISION OF HONBLE INCOME-TAX APPELL ATE TRIBUNAL (HONBLE ITAT) ON SIMILAR FACTS, IN APPELLANTS O WN CASE FOR EARLIER YEARS. DISALLOWANCE OF PROVISIONS OF WARRANTY 8. ERRED IN LAW AND IN FACT IN ALLEGING THAT THE PR OVISION FOR WARRANTY HAS BEEN CREATED BY THE ASSESSEE ON AN ARBITRARY BA SIS AND ACCORDINGLY IS NOT A DEDUCTIBLE EXPENDITURE WHILE C OMPUTING THE INCOME TAX PAYABLE BY THE ASSESSEE. 9. ERRED IN LAW TO THE EXTENT IT HAS VITIATED JUDIC IAL DISCIPLINE BY NOT FOLLOWING THE DECISION OF HONBLE ITAT ON SIMILAR F ACTS, IN APPELLANTS OWN CASE FOR EARLIER YEARS. PENALTY FOR CONCEALMENT OF INCOME 10. ERRED IN HOLDING THAT THE APPELLANT HAS FURNISH ED INACCURATE PARTICULARS OF INCOME IN RESPECT OF EACH ITEM OF DISALLOWANCE/ADDITION AND IN INITIATING PENALTY PRO CEEDINGS UNDER SECTION 271(1)(C) OF THE ACT. 4 . RIVAL CONTENTIONS HAVE BEEN HEARD AND RECORD PERUSE D. FACTS IN BRIEF ARE THAT THE ASSESSEE COMPANY IS MANUFACTURIN G GENERATORS AND ITS EQUIPMENTS BESIDES PROVIDING INSTALLATION AND E RECTION SERVICES. ASSESSEE IS A 100% SUBSIDIARY OF NON-RESIDENT COMPA NY M/S ANDRITZ HYDRO GMBH, AUSTRIA. THE FOLLOWING ADDITIONS/ ADJUS TMENTS HAVE BEEN MADE BY THE TRANSFER PRICING OFFICER (LD. TPO)/ A SSESSING OFFICER (LD. AO), WHICH ARE BEING CONTESTED IN THE AFORES AID APPEALS: S. DETAILS OF AMOUNT (IN INR) IT(TP)A NO.5/IND/2011, IT(TP)A NO.313/IND/2011, IT(TP)A NO.616/IND/2012,& IT(TP)A NO.120/IND/2014 10 NO ADDITIONS AY 2006- 07 AY 2007- 08 AY 2008- 09 AY 2009- 10 CORPORATE TAX ADDITION: 1 DISALLOWANCE OF PROVISION FOR WARRANTY EXPENSES 6,810,422 6,572,822 6,890,631 21,103,474 2 DISALLOWANCE OF PAYMENT FOR PURCHASE OF TECHNICAL DRAWINGS/ DESIGNSU/S 40(A)(I) 6,690,516 6,275,164 14,710,186 27,046,898 3 DISALLOWANCE OF DEPRECIATION ON CAPITAL ASSET PURCHASED FROM AE IN AY 2005-06 4,480,347 2,284,977 - - TRANSFER PRICING ADJUSTMENT: 4 TRANSFER PRICING ADJUSTMENT TO THE INTERNATIONAL TRANSACTION RELATED TO PURCHASE OF RAW MATERIAL FROM AES 24,189,935 13,996,551 - - 5 TRANSFER PRICING ADJUSTMENT TO THE INTERNATIONAL TRANSACTION RELATED TO SALES TO AES 897,262 5,732,927 - 10,915,735 TOTAL ADDITION 43,068,482 34,862,441 21,600,817 59,066,107 5 . THE AO ALSO DISALLOWED PROVISION OF WARRANTY EXPENS ES ON THE PLEA THAT WARRANTY PROVISION IS A CONTINGENT LIABI LITY. THE FACT AS SUBMITTED BY THE ASSESSEE IN THE COURSE OF ASSESSME NT PROCEEDINGS ARE AS UNDER: THE ASSESSEE ENTERS INTO CONTRACTS WITH ITS CUSTOM ERS FOR THE SALE OF GENERATORS AND OTHER EQUIPMENTS REQUIRED BY HYDRO POWER PLANTS. SUCH CONTRACTS CONTAIN THE ESSENTIAL WARRANTY CLAUSE WHICH SERVES AS AN ASSURANCE OR GUARANTEE BY A SELLER IT(TP)A NO.5/IND/2011, IT(TP)A NO.313/IND/2011, IT(TP)A NO.616/IND/2012,& IT(TP)A NO.120/IND/2014 11 OF GOODS ABOUT THE CHARACTER, QUALITY OR FITNESS OF THE PRODUCT UNDER SALE FOR THE AGREED PERIOD. THE OBLIGATION OF WARRANTY FLOWS FROM THE CONTRACT OF SALE. DURING THE WARRANT Y PERIOD, THE ASSESSEE IS COMMITTED TO REMEDIAL ACTION AT HIS COS T SHOULD THERE BE FAILURE IN QUALITY OR PERFORMANCE OF ITS P RODUCTS (I.E. GENERATORS AND EQUIPMENTS) SOLD. MAKING A PROVISION FOR ALL KNOWN LIABILITIES IS A FUNDAMENTAL PRINCIPLE OF THE MERCANTILE SYSTEM OF ACCOUNTING AN D THE ASSESSEE BY PROVISIONING FOR THE LIABILITY ARISING FROM WARRANTY CLAUSES OF THE LONG TERM CONTRACTS HAS ABIDED BY SU CH ACCOUNTING PRINCIPLES. THE ASSESSEE DEBITS THE RELEVANT EXPENSES TO THE W ARRANTY PROVISION ACCOUNT. FOR THIS PURPOSE, THE ASSESSEE H AS FURNISHED PROJECT WISE DETAILS OF THE WARRANTY EXPE NSES BOOKED DURING THE YEAR AND ALSO EXPLANATION REGARDING THE BASIS OF CLAIMING THE SAME AS BUSINESS EXPENDITURE. IT WAS ALSO SUBMITTED TO THE LD. AO THAT ONCE THE W ARRANTY PERIOD SPECIFIED UNDER THE CONTRACT LAPSES, THE SUR PLUS BALANCE LYING IN THE WARRANTY PROVISION ACCOUNT IS TRANSFER RED BACK TO THE PROFIT AND LOSS ACCOUNT. THE ASSESSEE HAS ALSO PRODUCED BEFORE THE LD. AO, O RDERS OF CIT(A) ON SIMILAR ISSUES OF THE ASSESSEE ARISING IN AY 200 3-04 AND AY 2004- 05, WHEREIN THE HONBLE CIT(A) HAS ALLOWED THE PROV ISION FOR WARRANTY AS DEDUCTIBLE EXPENSE. IN THIS REGARD, CONTENTIONS OF THE ASSESSEE WERE AS UNDER: WARRANTY IS CONTRACTUAL LIABILITY OF THE APPELLANT IN RESPECT OF ITS CONTRACT WITH CUSTOMERS THE PROVISION FOR WARRANTY IS MADE AT FOR EACH PROJ ECT SEPARATELY, TAKING INTO CONSIDERATION VARIOUS FACTORS SUCH AS T HE COMPLEXITY OF THE SCOPE OF WORK, WARRANTY TERMS AGREED WITH THE CUSTO MERS, ESTIMATED COST OF WARRANTY BASED ON PAST EXPERIENCES. THIS ME THODOLOGY FOR WARRANTY PROVISION HAS BEEN CONSISTENTLY FOLLOWED O VER THE YEARS AND IS ALSO CONSISTENT WITH THE ACCOUNTING STANDARDS U/ S 145(2) OF THE INCOME TAX ACT. HENCE THE BASIS OF PROVISION IS NOT AD-HOC AS CLAIMED BY THE LD. AO. FURTHER, THE REASONABLENESS OF THE W ARRANTY PROVISION CAN ALSO BE CHECKED FROM THE WARRANTY PROVISION REV ERSED ON A YEARLY BASIS. FOR A Y 2003-04 AND A Y 2004-05, THE PROVISION FOR WARRANTY HAS BEEN HELD TO BE IN THE NATURE OF ASCERTAINED LIABIL ITY AND NOT A CONTINGENT LIABILITY BY THE COMMISSIONER OF INCOME TAX (APPEALS) ('LD. CIT(A)') (VIDE ORDERS DATED 19 JANUARY 2007 AND 23 NOVEMBER 2007). FURTHER, THE CIT(A) ORDER FOR A Y 2003-04 HAS ALS O BEEN UPHELD BY THE SAME BENCH OF THE HON'BLE INDORE BENCH OF THE I NCOME TAX APPELLATE TRIBUNAL VIDE ORDER DATED 28 DECEMBER 201 1 IN LTA NO. IT(TP)A NO.5/IND/2011, IT(TP)A NO.313/IND/2011, IT(TP)A NO.616/IND/2012,& IT(TP)A NO.120/IND/2014 12 255/IND-2007. FURTHER, NO APPEAL HAS BEEN FILED BY THE TAX AUTH ORITIES AGAINST THE ORDER OF THE LD. CIT(A) FOR AY 2004-05. THE FACTS OF THE CURRENT APPEALS ARE SAME AS THOSE COVERED IN THE AFORESAID ORDERS. THE CONTENTIONS OF THE ASSESSEE ARE SUPPORTED BY TH E FOLLOWING KEY JUDICIAL PRECEDENTS: DCIT-3(1), BHOPAL VS VA TECH HYDRO INDIA PRIVATE LIMITED (ITA NO 255/IND- 2007) . ROTORK CONTROLS INDIA (P) LTD - 2009-TIOL-64-SCIT BHARAT EARTH MOVERS V CIT - 245 ITR 428 (2000) (S C) CIT V VINITEC CORPORATION PVT LTD - 278 ITR 337 ( 2005) (DEL) CIT VS. MAJESTIC AUTO LTD. (204 ITR (AT) 14) (CHD ) HENCE, BASED ON THE ABOVE, IT CAN BE CONCLUDED THAT THE PROVISION FOR WARRANTY IS IN THE NATURE OF AN ASCERTAINED LIABILI TY (WITH A REASONABLE ESTIMATE OF THE QUANTUM) AND NOT A CONTINGENT LIAB ILITY, HENCE, A DEDUCTION FOR THE SAME SHOULD BE ALLOWED WHILE COMP UTING THE TOTAL INCOME OF THE ASSESSEE FOR THE RELEVANT ASSESSMENT YEARS. 6 . WE HAVE CONSIDERED THE RIVAL CONTENTIONS, CAREFULLY GONE THROUGH THE ORDERS OF THE AUTHORITIES BELOW AND FOU ND THAT ASSESSEE HAS MADE PROVISION FOR WARRANTY FOR EACH PROJECT SE PARATELY TAKING INTO CONSIDERATION ALL THE FACTORS WITH REGARD TO THE SC OPE OF WORK, TERMS OF WARRANTY AGREED WITH THE CUSTOMERS, ESTIMATED COST OF WARRANTY BASED ON EARLIER YEARS EXPERIENCE. THIS METHOD OF WARRAN TY PROVISIONS WAS CONSISTENTLY FOLLOWED OVER THE YEARS, WHICH IS ALS O IN ACCORDANCE WITH THE ACCOUNTING STANDARD U/S.145(2). THUS, WE FOUND THAT THE BASIS OF PROVISION WAS NOT AN AD-HOC OR CONTINGENT AS ALLEG ED BY THE AO. WITH REGARD TO THE REASONABLENESS OF THE WARRANTY PROVIS ION, WE HAD VERIFIED FROM THE WARRANTY PROVISION REVERSED ON YEARLY BASI S AND THE SAME WAS FOUND TO BE REASONABLE. EXACTLY SIMILAR ISSUE W AS DEALT BY THE TRIBUNAL IN ASSESSEES OWN CASE FOR THE ASSESSMENT YEAR 2003-04 VIDE ORDER DATED 28-12-2011 IN ITA NO.255/IND/2007, WHE REIN IT WAS HELD THAT THE PROVISION OF WARRANTY WAS NOT A CONTINGEN T LIABILITY. THE PRECISE OBSERVATION OF TRIBUNAL WERE AS UNDER:- IT(TP)A NO.5/IND/2011, IT(TP)A NO.313/IND/2011, IT(TP)A NO.616/IND/2012,& IT(TP)A NO.120/IND/2014 13 15. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND P ERUSED THE MATERIAL AVAILABLE ON FILE. WE FIND THAT THE FOLLOWING PROVI SION WAS MADE OF THE WARRANTY CLAIM IN THE ACCOUNTS OF THE ASSESSEE: PROJECT NAME TOTAL COST INCURRED (IN RS.) PROVISION @1% (IN RS.) WARRANTY PERIOD BHANDARDHARA 53230000 532300 18 MONTHS FROM TEST RU N TRIVENI SUGARS 12000000 120000 2 CRUSHING SEASONS VAJRA 6550000 65500 18 MONTHS FROM SUPPLY CHASKAMAN 7550000 75500 18 MONTHS FROM SUPPLY RANA SUGARS 5190000 51900 2 CRUSHING SEASONS TRIVENI TURBO 4915000 49150 24 MONTHS FROM SUPPLY HPCL 6600000 66000 24 MONTHS FROM SUPPLY RENUKA SUGARS 9150000 91500 2 CRUSHING SEASONS NA LOI 25450000 254500 24 MONTHS/8 HRS. OF OPERATIO N PAN AFRICA 9028000 90280 18 MONTHS FROM COMMISSIONING SHRI RAM 5315000 53150 18 MONTHS FROM COMMISSIONING KORADI 1630000 16300 12 MONTHS FROM COMMISSIONING WEST COAST 12200000 122000 24 MONTHS FROM OPERATION TOTAL 15,88,080 THE DETAILS OF WARRANTY PROVISION AND ITS REVERSALS ARE REPRODUCED HEREUNDER: S.NO. ASSESSMENT YEAR WARRANTY PROVISION CREATED DURING THE PERIOD (IN RS.) WARRANTY PROVISION OF EARLIER YEARS REVERSED DURING THE PERIOD (IN RS.) 1 2003-04 1588080 - 2 2004-05 3024128 680100 3 2005-06 6954871 529718 4 2006-07 6810422 487755 5 2007-08 6572822 2872949 TOTAL: 24950323 45701522 IF THE TOTALITY OF THE FACTS ARE ANALYSED, WARRANTY CLAIMED IS INBUILT IN THE SALE MECHANISM AND THE WARRANT PROVISION WAS MADE DUE TO CONTRACTUAL LIABILITY WHICH CAN BE BASED UPON ESTIMATED LIABILITY WHICH I S OTHERWISE ELIGIBLE FOR DEDUCTION U/S 37 OF THE ACT. INCURRING OF LIABILITY IS CERTAINTY WHEREAS THE QUANTIFICATION DEPENDS UPON CERTAIN BUSINESS EXIGEN CY AND AT THE SAME TIME, EXACT QUANTIFICATION MAY NOT BE POSSIBLE WHEN SUCH PROVISION IS ESTIMATED, WHICH IS TO BE DISCHARGED AT A FUTURE DA TE, THEREFORE, IT IS LAWFULLY DEDUCTIBLE. OUR VIEW IS SUPPORTED BY THE RATIO LAID DOWN IN DECISIONS FROM HONBLE APEX COURT IN BHARAT EARTH MOVERS LTD. VS. CIT (245 ITR 428) (SC), CIT VS. VINITEC CORPORATION PVT. LTD. (278 ITR 337) (DEL) AND CIT VS. MAJESTIC AUTO LTD. (204 ITR (AT) 14) (CHD). THEREFORE, THE S TAND OF THE LD. CIT(A) IS AFFIRMED. IT(TP)A NO.5/IND/2011, IT(TP)A NO.313/IND/2011, IT(TP)A NO.616/IND/2012,& IT(TP)A NO.120/IND/2014 14 6.3 AS THE FACTS AND CIRCUMSTANCES DURING THE YEAR UND ER CONSIDERATION ARE SAME, RESPECTFULLY FOLLOWING THE ORDER OF THE TRIBUNAL IN ASSESSEES OWN CASE, WE DELETE THE DISALLOWANCE MADE BY THE AO IN RESPECT OF PROVISION OF WARRANTY. 7 . IT IS PERTINENT TO MENTION HERE THAT AGAINST THE OR DER OF CIT(A) FOR THE ASSESSMENT YEAR 2004-05, NO APPEAL HAS BEEN FIL ED BY THE REVENUE BEFORE THE TRIBUNAL, WHICH FURTHER SUBSTANT IATES THE FACT THAT THE DEPARTMENT HAS ACCEPTED THE ASSESSEES CLAIM OF WARRANTY AS ASCERTAINED LIABILITY. IN THE RESULT, GROUNDS TAK EN BY THE ASSESSEE IN ALL THE YEARS WITH RESPECT TO PROVISION OF WARRANTY ARE ALLOWED. 8 . THE ASSESSEE COMPANY HAS DEBITED RS.66,90,516/- IN THE A.Y. 2006-07 ON ACCOUNT OF TECHNICAL DRAWING EXPENSES UN DER THE HEAD COST OF RAW MATERIALS AND COMPONENTS. THE AO TREA TED THE SAME AS EXPENDITURE IN THE NATURE OF ROYALTY WITHIN THE MEA NING OF ARTICLE 12 OF DTAA WITH AUSTRIA. AS NO TDS WAS DEDUCTED THEREON B Y INVOKING PROVISIONS OF SECTION 40(A)(IA), THE AO DISALLOWED THE PAYMENT WAS SO MADE. 8.1 THE FACT AS SUBMITTED BY THE ASSESSEE WITH REGARD T O PAYMENT FOR DESIGNS & DRAWINGS AS UNDER: THE ASSESSEE COMPANY IS A WHOLLY OWNED SUBSIDIARY OF NON- RESIDENT COMPANY M/S ANDRITZ HYDRO GMBH, AUSTRIA ( ANDRITZ AUSTRIA) AND IS ENGAGED IN THE BUSINESS OF MANUFAC TURING GENERATORS AND OTHER HEAVY ELECTRICAL EQUIPMENTS FO R SUPPLY TO HYDRO POWER PLANTS. THE ASSESSEE ENTERS INTO CONTRACTS WITH ITS CUSTOM ERS FOR SUPPLY OF GENERATORS AND EQUIPMENTS AS PER THEIR SP ECIFICATIONS OF FREQUENCY, CURRENT, CAPACITY, SPEED, EFFICIENCY ETC. SUCH CONTRACTS INCLUDE SUPPLY OF TECHNICAL DRAWING AND DESIGN TO THE CUSTOMERS ALONG WITH THE EQUIPMENTS. THE ASSESSEE DOES NOT POSSESS THE REQUISITE SKILLS AND TECHNICAL EXPERTISE FOR THE DESIGNING OF THE GENERA TORS AND IN THIS REGARD SEEKS ASSISTANCE FROM ITS OVERSEAS PARE NT ENTITY. FOR THE ABOVE PURPOSE, PURCHASE ORDERS ARE PLACED ON ANDRITZ AUSTRIA FOR THE SUPPLY OF TECHNICAL DRAWINGS AND DE SIGNS TO MANUFACTURE THE GENERATORS CUSTOMIZED TO THE NEEDS OF THE CUSTOMERS. COPIES OF SOME OF THE SAMPLE PURCHASE OR DERS ARE ATTACHED AS EXHIBIT 35 OF THE PAPERBOOK ) TO SUBSTANTIATE THE IT(TP)A NO.5/IND/2011, IT(TP)A NO.313/IND/2011, IT(TP)A NO.616/IND/2012,& IT(TP)A NO.120/IND/2014 15 FACT THAT ORDERS ARE PLACE BY THE ASSESSEE FOR PURC HASE OF THE DESIGNS AND NOT OBTAINING A LIMITED RIGHT TO USE TH EM. IT HAS BEEN SUBMITTED TO THE AO THAT ANDRITZ AUSTR IA SELLS THE TECHNICAL DRAWINGS AND DESIGNS TO THE ASSESSEE ON A PRINCIPAL TO PRINCIPAL BASIS AND DOES NOT RETAIN ANY RIGHT IN SUCH DRAWINGS AND DESIGNS. THE DRAWINGS PROCURED FROM ANDRITZ AUS TRIA ARE USED IN THE MANUFACTURE OF GENERATORS AND SUPPLIED ALONG WITH THE GENERATORS TO THE CUSTOMERS. THE TERMS OF THE CONTRACT BETWEEN THE ASSESSEE AND ITS CUSTOMERS SPECIFICALLY PROVIDE FOR A CONSOLIDATED C ONSIDERATION TO BE CHARGED FOR THE SUPPLY OF GENERATORS AS WELL AS THE TECHNICAL DRAWINGS AND DESIGNS USED IN THEIR MANUFA CTURE. (COPY OF RELEVANT EXTRACTS OF CONTRACT AGREEMENTS A S ENCLOSED AS EXHIBIT 36 OF THE PAPERBOOK ). THE HARD COPIES OF TECHNICAL DRAWINGS AND DESIGN O BTAINED FROM ANDRITZ AUSTRIA ARE ACCOMPANIED BY A BILL OF E NTRY AND SUBJECT TO PAYMENT OF CUSTOM DUTY WHILE BEING IMPOR TED IN INDIA. FURTHER, PAYMENT IS MADE TO ANDRITZ AUSTRIA TOWARDS OUTRIGHT PURCHASE OF TECHNICAL DRAWINGS AND IN THIS REGARD HAS BEEN CLAIMED AS EXPENDITURE BY THE ASSESSEE IN ITS BOOKS AS, COST OF RAW MATERIALS AND COMPONENTS. THE ASSESSEE HAS ALSO SUBMITTED COPIES OF ORDERS PA SSED BY HIGHER APPELLATE AUTHORITY I.E. COMMISSIONER OF INCOME TAX (APPEALS) (CIT(A)) IN FAVOUR OF ASSESSEE IN SIMILAR MATTERS IN PAST ASSESSMENT YEARS HOLDING THAT ANDRITZ AUSTRIA HAD SOLD TECHNIC AL DRAWING AND DESIGN TO THE ASSESSEE. IN THIS REGARD, THE SAID EX PENDITURE WOULD BE REGARDED AS A BUSINESS EXPENDITURE AND NOT ROYALTY AS CONTENDED BY THE LD. AO. 8.2 THE CONTENTION OF THE ASSESSEE WITH REGARD TO THE D ISALLOWANCE OF PAYMENT U/S.40(A)(I) WAS AS UNDER :- THE DESIGNS AND DRAWINGS ARE PURCHASED ON A PRINCI PLE-TO-PRINCIPLE BASIS AND IS IN THE NATURE OF PURCHASE OF GOODS THE TRANSACTION IS IN THE NATURE OF PURCHASE OF 'CO PYRIGHTED ARTICLE' AND NOT OF A PURCHASE OF 'COPYRIGHT' ITSELF IN THE DRAWINGS. HENCE, THE SAME IS IN THE NATURE OF THE 'BUSINESS INCOME' AND NOT IN THE NATURE OF 'ROYALTY'. TO SUBSTANTIATE THE NATURE OF TRANSACTION AS A PURC HASE OF GOODS, THE APPELLANT HAS PROVIDED VARIOUS SUPPORTING DOCUMENTS SUCH AS COPIES OF BILL OF ENTRY, COPY OF PHYSICAL DRAWINGS RECEIVE D, COPIES OF INVOICES AND DETAILS REGARDING THE TERMS AND CONDITIONS OF T HE TRANSACTION, WHICH HAVE NOT BEEN CHALLENGED BY THE LD. AO FOR AY 2003-04 AND AY 2004-05, THE LD. CIT(A) HAS A LSO HELD THAT THE TRANSACTION IS IN THE NATURE OF PURCHASE OF DES IGNS AND DRAWINGS NOT IN THE NATURE OF ROYALTY (VIDE ORDERS DATED 19 JANUARY 2007 AND 23 NOVEMBER 2007). FURTHER, THE CIT(A) ORDER FOR A Y 2003-04 HAS ALS O BEEN UPHELD BY IT(TP)A NO.5/IND/2011, IT(TP)A NO.313/IND/2011, IT(TP)A NO.616/IND/2012,& IT(TP)A NO.120/IND/2014 16 THE SAME BENCH OF THE HON'BLE ITAT VIDE ORDER DATED 28 DECEMBER 2011 (ITA NO 29/IND-2005 FOR AY 2000-01, ITA NO 253 AND 254/1ND- 2007 FOR AY 2001-02 AND AY 2002-03, ITA NO 255/IND- 2007 FOR AY 2003-04). FURTHER, NO APPEAL HAS BEEN FILED BY THE TAX AUTH ORITIES AGAINST THE ORDER OF THE LD. CIT(A) FOR AY 2004-05. THE FACTS OF THE CURRENT APPEALS ARE SAME AS THOS E COVERED IN THE AFORESAID ORDERS. IN THIS REGARD APPELLANT HAS RELIED ON FOLLOWING KE Y JUDICIAL PRECEDENTS: DCIT-3(1), BHOPAL VS VA TECH HYDRO INDIA PRIVATE LIMITED (ITA NO 255/IND-2007) ACIT, 3(1), BHOPAL VS VA TECH HYDRO INDIA PRIVATE LIMITED (ITA NO 112 TO 115/IND-2007) DAVY ASHMORE INDIA LTD. VS CIT - 190 ITR 626 PRO-QUIP CORPORATION VS CIT - 255 ITR 354 9 . WITH REGARD TO THE PAYMENT MADE FOR DESIGN AND DR AWING IMPORTED BY IT FROM ITS GROUP COMPANIES IN AUSTRIA, THE AO HELD THAT SUCH IMPORT OF DESIGN IS NOT IN NATURE OF PURCHASE OF RAW MATERIALS, HOWEVER, THE AO TREATED THE SAME AS PAYMENT OF ROYA LTY AS PER SECTION 91(VII). WHILE REACHING TO THIS CONCLUSION THE AO HAS RELIED UPON THE ORDER PASSED U/S.201(1). AS NO TAX WAS DED UCTED ON THESE PAYMENTS, THE AO DISALLOWED THE SAME BY INVOKING PR OVISIONS OF SECTION 40(A)(I) AND WHICH WAS CONFIRMED BY CIT(A). WE DO NOT FIND ANY MERIT IN THE CONCLUSION OF THE LOWER AUTHORITIE S INSOFAR AS THE DESIGN AND DRAWINGS WAS PURCHASED ON A PRINCIPLE TO PRINCIPLE BASIS AND SAME WAS IN THE NATURE OF PURCHASE OF GOODS. PR ECISELY THE DRAWING IS IN THE NATURE OF PURCHASE OF COPYRIGHT ARTICLES AND NOT OF PURCHASE OF COPYRIGHT ITSELF IN THE DRAWINGS. HEN CE, THE SAME IS IN THE NATURE OF BUSINESS EXPENDITURE AND NOT IN THE NATUR E OF ROYALTY. THE PAYMENTS OF TECHNICAL DRAWINGS AND DESIGN HAVE BEEN INCURRED TO PROCURE SUCH DRAWINGS AND DESIGNS ALONG WITH ALL TH E RIGHTS ATTACHED TO THEM AS THE ENTIRE SET WAS REQUIRED TO BE PROVIDED TO THE CUSTOMERS AS PER THE TERMS OF THE CONTRACT. WITHOUT ACQUIRING AL L THE RIGHTS ATTACHED TO SUCH DRAWINGS AND DESIGNS, THE ASSESSEE WOULD NO T HAVE BEEN IN THE POSITION TO MEET ITS CONTRACTUAL OBLIGATION. WE HAD VERIFIED THE COPIES OF BILLS OF ENTRY, COPY OF PHYSICAL DRAWINGS RECEIPT, COPIES OF INVOICES AND DETAILS REGARDING TERMS AND CONDITION OF THE TRANSACTION IT(TP)A NO.5/IND/2011, IT(TP)A NO.313/IND/2011, IT(TP)A NO.616/IND/2012,& IT(TP)A NO.120/IND/2014 17 AND FOUND THAT THE DRAWING WAS IN THE NATURE OF PUR CHASE OF GOODS. EXACTLY SIMILAR ISSUE HAS BEEN CONSIDERED BY THE TR IBUNAL IN ASSESSEES OWN CASE FOR THE A.Y. 2003-04 VIDE ORDER DATED 28-12- 2011 IN ITA NO.29/IND/2005. THE PRECISE OBSERVATION OF THE TRIBUNAL WERE AS UNDER :- FIRST, WE SHALL TAKE UP THE APPEAL OF THE REVENUE FOR ASSESSMENT YEAR 2000-01 (ITA NO.29/IND/2005) WHEREIN FIRST GRO UND PERTAINS TO GRANTING RELIEF OF RS.4,14,18,313/- REPRESENTING DI SALLOWANCE OF EXPENDITURE UNDER THE HEAD TECHNICAL DESIGN & DRAW INGS. THE CRUX OF ARGUMENTS ON BEHALF OF THE REVENUE IS IN SUPPORT TO THE ASSESSMENT ORDER WHEREAS THE LEARNED COUNSEL FOR TH E ASSESSEE CONTENDED THAT THE IMPUGNED ISSUE HAS ALREADY BEEN DECIDED IN FAVOUR OF THE ASSESSEE BY THE TRIBUNAL. IN REPLY, T HE LD. CIT/DR SHRI ANADI VARMA INVITED OUR ATTENTION TO PAGES 2 TO 5 A ND PARA 37 OF PAGE 13 OF THE ASSESSMENT ORDER. 2. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND PER USED THE MATERIAL AVAILABLE ON FILE. SINCE COMMON GROUNDS AR E INVOLVED, THEREFORE, THESE CAN BE DISPOSED OF BY THIS COMMON & CONSOLIDATED ORDER FOR THE SAKE OF BREVITY. WITHOUT GOING INTO M UCH DELIBERATION, WE ARE REPRODUCING HEREUNDER THE RELEVANT PORTION OF T HE ORDER FOR ASSESSMENT YEAR 1999-00 TO 2002-03 (ITA NOS.112 TO 115/IND/2007), ORDER DATED 30.4.2010: 2. THE FACTS, IN BRIEF, ARE THAT THE ASSESSEE COMPA NY IS A MANUFACTURER OF DYDROELECTRIC AND TURBO-GENERATORS FOR HYDEL AND TURBO PROJECTS AND SELLING THE SAME IN INDIA AND AB ROAD. THE ASSESSEE IS A 100% SUBSIDIARY OF VA TECH HYDRO GMBH AUSTRIA FROM 1.4.2001. VA TECH HYDRO IS AN ESTABLI SHED NAME IN THE WORLD IN THE FIELD OF MANUFACTURING AND ERECTIO N OF HYDRO AND TURBO PROJECTS SINCE LAST ABOUT 100 YEARS. THE ASSE SSING OFFICER, ON SCRUTINY OF BOOKS OF ACCOUNTS OF THE ASSESSEE CO MPANY AND FORM NO. 27 FOR THE ASSESSMENT YEARS, IN QUESTION, FOUND THAT THOUGH THE ASSESSEE COMPANY HAS SPENT HUGE AMOUNTS AS EXPENDITURE ON TECHNICAL DRAWINGS AND DESIGNS ON AC COUNT OF PAYMENTS TO PARENT COMPANY, NEITHER THE TAX WAS DED UCTED AT SOURCE, NOR THE ASSESSEE COMPANY OBTAINED NO DEDUCT ION CERTIFICATE FROM THE ASSESSING OFFICER. THE ASSESS ING OFFICER, CALLED FOR THE EXPLANATIONS OF THE ASSESSEE AND AFT ER CONSIDERING THE SAME, MADE THE FOLLOWING OBSERVATIONS :- 6.1 ARGUMENTS OF THE ASSESSEE ARE HOVERING AROUND INCORRECT REASONING THAT A) IT HAS PURCHASED THE DESIGN ON OU T RIGHT BASIS AS COMMODITY AND B) ON THE DICTIONARY MEANING OF ROYAL TY. 6.2. ROYALTY HAS BEEN GIVEN WIDER MEANING BOTH IN T HE INCOME TAX ACT AND DTAA, WHICH INCLUDES PAYMENT FOR DESIGN /DRAWING. ASSESSEE HAS RELIED ON JUDGMENT IN THE CASE OF CIT V/S DAVY ASHMORE INDIA LTD. 190 ITR, CIT VS. NEYVELI LIGNITE CORPORATION LTD. 243 ITR 459,ETC. HOWEVER, THESE CA SES ARE DISTINGUISHABLE ON FACTS WHICH ARE DIFFERENT AND NO T OF ANY SUPPORT TO THE ASSESSEE. THE DESIGN PURCHASED BY THE ASSES SEE ARE NOT IN RESPECT OF COMMISSIONING OF PLANT BUT THESE ARE IN RESPECT OF A IT(TP)A NO.5/IND/2011, IT(TP)A NO.313/IND/2011, IT(TP)A NO.616/IND/2012,& IT(TP)A NO.120/IND/2014 18 PARTICULAR GENERATOR WHICH IS BEING MANUFACTURED AN D SOLD TO THE CUSTOMERS. SUCH DESIGNS ARE PURCHASED SEPARATELY FO R EVERY GENERATOR THE ASSESSEE HAS MANUFACTURED SO FAR. IN THESE CASE LAWS THERE WAS AN OUTRIGHT PURCHASE OF PLANT ALONG WITH DESIGN THROUGH A BID PROCESS. WHERE AN ASSESSEE IS GETTIN G THE DESIGN PREPARED FOR EVERY GENERATOR FROM THE PARENT AUSTRI AN COMPANY. ASSESSEES ARGUMENTS AREBASELESS AND DENYING THE BA SIC DEFINITION OF ROYALTY AS MENTIONED IN ARTICLE 12 OF DTAA AND EXPLANATION 2 TO SECTION 9(VI) OF THE I.T. ACT, ACC ORDING TO WHICH PAYMENTS IN THE HEAD OF DESIGN IN REFERENCE TO ASSE SSEES CASE IS WITHIN THE AMBIT OF THE DEFINITION OF ROYALTY AS PR OVIDED THEREIN. IN FACT THE CASE ISHIKAWAJIMA HARIMA HEAVY INDUSTRIES COMPANY LTD. IN RE (AAR) 271 ITR 193 MAKES THE POSITION OF TAXABILITY CLEAR. 6.3. THE NON-RESIDENT AUSTRIAN PARENT COMPANY IS NO T MARKETING DESIGN AS GOODS FOR SALE TO ALL. AND ALSO THE ASS ESSEE COMPANY V A TECH INDIA IS NOT KEEPING, NOR HAS ANY INTENT ION TO KEEP, THE DESIGN AS GOODS. IT IS IN FACT MORE LIKE A SECRET FORMULA. THE WEB SITE OF THE ASSESSEE COMPANY GIVES THE DETAILS ABOU T THE ALGORITHMS AND THE DESIGN PROCESS (ENCLOSED AS ANNE XURE A). THAT DESIGN IS BEING USED BY IT TO MANUFACTURE THE END PRODUCT (GENERATOR) WHICH IS MEANT FOR SALE AFTER THAT IT I S OF NO USE TO THE ASSESSEE. THEREFORE, DESIGN OF A GENERATOR CANNOT BE EQUATED WITH SOFTWARE PACKAGE OR ANY OTHER COPY RIGHTED ART ICLES WHOSE UNLIMITED NUMBER CAN BE SOLD IN MARKET. 6.4. NO OUTRIGHT SALE OF DESIGNS HAS TAKEN PLACE. I T IS ONLY THE LIMITED USE FOR MANUFACTURING THAT THE ASSESSEE COM PANY IS HOLDING AUTHORITY TO USE DESIGN. ASSESSEE COMPANY CANNOT PURCHASE THESE DESIGN FROM ANY OTHER THIRD COMPANY AS THE TRADE NAME UNDER WHICH ASSESSEE COMPANY AND NON-RESIDENT AUSTRIAN COMPANY ARE MANUFACTURING AND SELLING THE GENERATOR IS SAME AND BOTH THE COMPANIES ARE KNOWN FOR THEIR SPECIFIC DESIGNS OF GENERATORS. IT HAS SPECIFICALLY BEEN MENTIONED ON THE DESIGNS THAT IT IS THE PROPERTY OF THE PARENT AUSTRIAN COMP ANY. THE ASSESSEE HAD RIGHT TO USE A PARTICULAR DESIGN FOR S INGLE TIME. THE ASSESSEE HAS BEEN BARRED TO SALE THE DESIGN AS SUCH TO ANOTHER MANUFACTURER BY THE SPECIFIC CONDITION AND WARNING PRINTED ON THE DESIGN. WHEN THE DESIGN CANNOT BE SOLD AS ABOVE HO W IT CAN BE TERMED AS OUTRIGHT PURCHASE AS CLAIMED BY THE ASSES SEE. THUS, THE ASSESSEE HAS ONLY BEEN GIVEN THE RIGHT TO USE T HE DESIGN. 6.5. THE DESIGNS ARE NOT PURCHASED THROUGH OPEN TEN DER OR BID BECAUSE ASSESSEE IS MANUFACTURING GENERATORS WITH A UNIQUE TECHNOLOGY WHICH IS POSSESSED BY THE PARENT AUSTRIA N COMPANY ONLY HENCE THE DESIGNS ARE SPECIFIC TO THE PARENT C OMPANY. BECAUSE OF THIS SPECIAL RELATIONSHIP ASSESSEE IS BO UND TO PURCHASE THE DESIGN FROM ITS PARENT AUSTRIAN COMPAN Y ONLY. THE DESIGN IS FIRST RECEIVED THROUGH INTERNET AND ITS H ARD COPY ALONG WITH BILL IS RECEIVED THROUGH CUSTOMS TO JUSTIFY TH E PAYMENTS MADE TO THE PARENT COMPANY FROM THE ANGLE OF ALLOWABILIT Y OF EXPENDITURE. 6.6. THERE IS NO AGREEMENT/TERMS AND CONDITIONS IN PURCHASE OF THE DESIGNS FROM THE PARENT AUSTRIAN COMPANY. ASSE SSEE IS JUST PLACING THE ORDERS FOR SUPPLY OF THE DESIGNS TO ITS PARENT COMPANY IT(TP)A NO.5/IND/2011, IT(TP)A NO.313/IND/2011, IT(TP)A NO.616/IND/2012,& IT(TP)A NO.120/IND/2014 19 AND IN EACH CASE THE COST OF THE DESIGN IS ALSO DET ERMINED BY THE AUSTRIAN COMPANY ON ITS OWN PARAMETERS. 6.7. THE DESIGN PURCHASED BY THE COMPANY ARE NOT AV AILABLE OFF THE SHELF. THESE DESIGNS ARE PREPARED AND SUPPLIED EXCLUSIVELY AS PER THE SPECIFICATION AND REQUIREMENTS OF THE CUSTO MERS WHICH IS PROVIDED TO AUSTRIAN COMPANY BY THE ASSESSEE. AS I NFORMED BY THE ASSESSEE THESE DESIGNS ARE DIFFERENT FOR EACH G ENERATOR ASSESSEE HAS MANUFACTURED. 6.8. INCOME IS ARISING TO THE PARENT AUSTRIAN COMPA NY ON SALE OF GENERATORS BY ITS 100% SUBSIDIARY COMPANY IN INDIA, ORDERS FOR WHICH ARE RECEIVED IN INDIA AND BEING MANUFACTURED IN INDIA AS PER DESIGNS PROVIDED BY THE PARENT AUSTRIAN COMPANY . ASSESSEE COMPANY HAS NOT OBTAINED THE DESIGN FROM ANYWHERE E LSE AND IT MANUFACTURES EVERY GENERATOR ON THE DESIGN PROVIDED BY THE PARENT AUSTRIAN COMPANY ONLY. THUS THE INCOME IS ACCRUING/ARISING IN INDIA DIRECTLY THROUGH BUSINESS CONNECTION OF AUSTRIAN COMPANY WITH ITS 100% SUBSIDIARY COMPANY I N INDIA AS ENVISAGED IN SECTION 9(1)(VI) OF THE INCOME TAX ACT , 1961 AND ARTICLE 12(2) OF THE DTAA. 6.9. THE LEGAL PROVISIONS HAVE BEEN EXAMINED IN PAR A 2 SUPRA AND THE DTAA IN PARA 3. THE PAYMENT MADE BY ASSESSE E COMPANY IS COVERED IN DEFINITION OF ROYALTY AS PER DTAA, WHICH DEFINES ROYALTY AS CONSIDERATION FOR THE USE OF OR THE RIGHT TO USE DESIGN OR MODEL, PLAN, SECRET FORMULA OR PROCE SS INFORMATION CONCERNING INDUSTRIAL, COMMERCIAL OR SC IENTIFIC EXPERIENCE. 6.10. THE PAYMENT MADE BY ASSESSEE COMPANY IS ALSO COVERED IN DEFINITION OF ROYALTY AS PER IT ACT, 19 61 EXPLANATION 2 SECTION 9(1)(VI); EXPLANATION 2.- FOR THE PURPOSE O F THIS CLAUSE ROYALTY MEANS ..(II) THE IMPARTING OF ANY INFORMATION CONCERNING THE WORKING OF..DESIGN, SECRET FORMULA OR PROCESS 6.11. THE FACTS ALONG WITH THE CASE LAWS HAVE BEEN EXAMINED IN PARA 4 AND 5. AFTER THE DETAILED EXAMI NATION OF FACTS AND CIRCUMSTANCES OF THE CASE IT IS HELD THAT VA TE CH HYDRO INDIA PVT. LTD. HAS FAILED TO DEDUCT TAX ON SUMS PAID TO THE PAREN T AUSTRIAN COMPANY WHICH WAS CHARGEABLE TO TAX WITHIN INDIA BY VIRTUE OF THE IT ACT, 1961 AND AS PER THE PROVISION S OF DTAA BETWEEN INDIA AND AUSTRIA. 6.12. ASSESSEE COMPANY IS MANUFACTURING GENERATOR A ND ITS ACCESSORIES I.E. ONLY THE ELECTRICAL PART OF TH E COMPLETE TURN KEY PROJECT FOR GENERATION OF ELECTRICITY. TURBINE IS MANUFACTURED BY THE VATECH ESCHER VYAS FLOVAL LTD., FARIDABAD, W HICH IS AGAIN AUSTRIA 100% SUBSIDIARY COMPANY OF AUSTRIA IN INDIA. INTERNATIONAL ORDERS FOR SUPPLY OF GENERATORS ARE R ECEIVED THROUGH ITS PARENT COMPANY IN AUSTRIA FOR WHICH THE ASSESSE E COMPANY SUPPLIES GENERATOR AND ITS ACCESSORIES TO ITS PAREN T AUSTRIAN COMPANY. TURBINE AND ERECTION INFRASTRUCTURE IS SU PPLIED BY THE AUSTRIAN COMPANY IN SUCH PROJECTS. PROJECTS IN IND IA ARE COMPLETED BY THE ASSESSEE COMPANY WITH THE TURBINE SUPPLIED BY THE ANOTHER 100% SUBSIDIARY COMPANY I.E. VATECH ESC HER IT(TP)A NO.5/IND/2011, IT(TP)A NO.313/IND/2011, IT(TP)A NO.616/IND/2012,& IT(TP)A NO.120/IND/2014 20 VYAS FLOVAL LTD., FARIDABAD. IN ALL THE CASES DESI GN OF GENERATOR IS SUPPLIED BY THE PARENT AUSTRIA COMPANY ONLY. 6.13. THE V AUSTRIA TECH INDIA HAS STATED THAT IT S PARENT AUSTRIAN COMPANY DOES NOT HAVE AUSTRIA PERMANENT ESTABLISHMENT. IN FACT, THERE IS NO NEED FOR THE A USTRIAN COMPANY TO HAVE ANOTHER PERMANENT ESTABLISHMENT IN INDIA, A S THEY HAVE THEIR 100% SUBSIDIARY COMPANY IN INDIA (VA TECH IN DIA) WHICH IS ACTING ON THEIR BEHALF FOR PROCURING ORDER S ETC. FURTHER THE VA TECH INDIA IS MANUFACTURING EVERY GENERATO R ON THE BASIS OF DESIGN PROVIDED BY THE AUSTRIAN COMPANY. THUS THE ASSESSEE COMPANY VA TECH INDIA IS MEANS FOR ACCR UAL OF INCOME TO THE AUSTRIAN COMPANY ON ACCOUNT OF ITS BU SINESS ACTIVITIES IN INDIA.MOREOVER, FOR TAXABILITY OF ROY ALTY, PERMANENT ESTABLISHMENT IS NOT AN ESSENTIAL CRITERION. (ALSO HELD IN LEONHARDT ANDRA UND PARTNER, GMBH V. COMMISSIONER O F INCOME TAX; 249 ITR 418 (CAL) . IN VIEW OF THE ABOVE IT IS HELD IN THE CASE OF VA TECH INDIA THAT THE PAYMENT MADE BY TH E ASSESSEE IS IN THE NATURE OF ROYALTY. HOWEVER, EVEN IF THE CLAI M OF THE ASSESSEE IS TAKEN UP FOR ARGUMENTS SAKE AS PAYMENT FOR TECHNICAL SERVICES STILL THE PAYMENT SHALL BE TAXAB LE @ 10% IN INDIA IN VIEW OF THE EARLIER DISCUSSION IN THIS ORD ER. 6.14. GENERATOR IS DESIGNED AS PER THE REQUIREMENT OF THE CUSTOMER THEREFORE ITS DESIGN IS AN INTEGRAL PART O F IT, ON THE BASIS OF WHICH IT IS MANUFACTURED AND FOR THAT GENERATOR THE CUSTOMER MAKING PAYMENTS. THEREFORE, PROVIDING OF THE DESIG N TO THE CUSTOMER CANNOT BE TERMED AS AUSTRIA SEPARATE SALE AS CLAIMED BY THE ASSESSEE. WITHOUT DESIGN GENERATOR CANNOT BE MANUFACTURED. HENCE THE PRICE OF GENERATOR OR ANY PLANT WILL ALWAYS BE INCLUSIVE OF DESIGN WITHOUT WHICH IT IS O F NO USE. THE DESIGN OF PARTICULAR GENERATOR IS SPECIFIC TO THAT ONLY AND IS OF NO USE IN CASE OF ANY OTHER GENERATOR. HENCE THE ARGUM ENTS OF THE ASSESSEE THAT THEY ARE SELLING THE DESIGN ALONG WIT H GENERATOR IS SIMPLY MISLEADING AND NOT RELEVANT TO THE ISSUE OF TAXABILITY. 6.15. AS DISCUSSED EARLIER IN PARA 1.9 THE DRAWINGS AND DESIGNS ARE MADE WITH THE HELP OF SOPHISTICATED COM PUTER PROGRAMS AND ALGORITHMS. (PLEASE SEE ANNEXURE AUSTR IA). THE COMPUTER PROGRAM ALONG WITH THE BRAIN OF THE DESIGN ENGINEER IS THE INPUT IN THE PROCESS AND OUTPUT IS CERTAIN DES IGN AND OTHER PARAMETERS. THESE PARAMETERS ARE FOR THE HELP OF DETAILED DESIGN WHICH IS PREPARED IN INDIA BY THE ASSESSEE VA TECH INDIA. THE PARENT AUSTRIAN COMPANY HAS NEITHER GIV EN THE SOPHISTICATED COMPUTER PROGRAMS NOR THE ALGORITHMS TO VA TECH INDIA. ONLY THE OUTPUT OF THE SOPHISTICATED COMPUTE R PROGRAMS AND ALGORITHMS IS PROVIDED TO THE ASSESSEE VA TECH I NDIA WHICH IT CALLS AS DESIGN. RIGHTS OVER THESE DESIGNS IS WI TH PARENT AUSTRIAN COMPANY. THE ASSESSEE COMPANY FURTHER PREP ARES DETAILED DESIGNS ON THE BASIS OF THE PARAMETERS AN D DESIGNS PROVIDED BY ITS PARENT COMPANY. THE RIGHTS OVER TH ESE DETAILED DESIGNS PREPARED BY THE ASSESSEE VA TECH INDIA W ITH VA TECH INDIA ITSELF. THUS IT IS CLEAR THAT THERE ARE TWO SETS OF DESIGNS, ONE PREPARED BY THE PARENT AUSTRIAN COMPANY FOR WHICH A SSESSEE MAKES PAYMENT AND ANOTHER IN HOUSE DETAILED DESIGN PREPARED BY VA TECH INDIA BASED ON THE ORIGINAL DESIGN. 6.16. FROM THE DISCUSSION, IT IS CLEAR THAT WITH TH E DESIGN IT(TP)A NO.5/IND/2011, IT(TP)A NO.313/IND/2011, IT(TP)A NO.616/IND/2012,& IT(TP)A NO.120/IND/2014 21 AND OTHER PARAMETERS SUPPLIED BY THE PARENT AUSTRIA N COMPANY, THE ASSESSEE CANNOT CREATE ANOTHER OUTPUT IN AUSTRI A DIFFERENT CASE OR EVEN AUSTRIA SIMILAR CASE. FROM ALL THE DI SCUSSION AND CASE LAWS CITED ABOVE, IT IS BEYOND DOUBT THAT THE PAYMENTS MADE BY THE ASSESSEE VA TECH INDIA ARE IN THE NATURE O F ROYALTY AND ARE SQUARELY COVERED BY THE DECISION OF ROYALTY BOT H IN THE DTAA AND IT ACT, 1961. I HOLD THAT THE PAYMENTS MADE BY THE ASSESSEE VA TECH INDIA ARE IN THE NATURE OF ROYALTY AND TH AT THE ASSESSEE VA TECH INDIA HAVING FAILED TO DEDUCT TAX HAS COM MITTED DEFAULT WITHIN THE MEANING OF SEC.195(1) READ WITH DTAA BET WEEN AUSTRIA AND INDIA AND READ WITH SEC.9(1)(VI) OF THE INCOME TAX ACT, 1961. THE ASSESSING OFFICER, FOR THE REASONS MENTIONED AB OVE, FINALISED THE PROCEEDINGS INITIATED EARLIER CULMINATING IN TH E ORDER UNDER SECTION 195(1) READ WITH SECTION 9(1)(VI) AND 201(1 )/ 201(1A), BY HOLDING THAT THE PAYMENTS MADE BY THE ASSESSEE COMP ANY TO ITS PARENT AUSTRIAN COMPANY VA TECH HYDRO GMBH AUSTRIA, FOR THE PURCHASE OF DESIGN, DURING THE F.Y.2002-03, 2001-02 , 2000-01 AND 1999-2000, ARE TREATED AS ROYALTY WITHIN THE MEANING OF EXPLANATION 2 TO SECTION 9(1)(VI) AND ARTICLE 12 OF THE DTA AGREEMENT, ON WHICH THE ASSESSEE HAS FAILED TO DEDU CT TAX AT THE RATE OF 10% UNDER SECTION 195 OF THE INCOME TAX ACT , 1961. THE CALCULATION MADE BY THE ASSESSING OFFICER IN THIS B EHALF IS AS UNDER :- DEFAULT UNDER SECTION 201(1) RS. 1,16,28,072 INTEREST UNDER SECTION 201(1A) RS. 71,28,172 TOTAL DEMAND PAYABLE RS.1,87,56,244 . 4. FELT AGGRIEVED, THE ASSESSEE PREFERRED AN APPEAL BEFORE THE LEARNED COMMISSIONER OF INCOMETAX (APPEALS) WHEREIN DETAILED SUBMISSIONS WERE MADE. THE LEARNED CIT(AUSTRIA), AF TER CONSIDERING THE SUBMISSIONS AND THE LEGAL POSITION EXPLAINED BY THE ASSESSEE, MADE THE FOLLOWING OBSERVATIONS :- THE ENTIRE TRANSACTION BETWEEN THE APPELLANT AND T HE NON- RESIDENT COMPANY IS OF SALE AND PURCHASE OF GOODS O N PRINCIPAL TO PRINCIPAL BASIS. THE MEANING OF ROYALTY HAS BEEN DEFINED IN THE DTAA. THE APEX COURT IN THE CASE OF UNION OF INDI A VS AZADI BACHO ANDOLAN AND ANOTHER REPORTED IN 263 ITR 706 ( SC) HELD THAT IN CASE OF DIFFERENCE BETWEEN THE PROVISIONS O F THE ACT AND THE AGREEMENT, THE PROVISIONS OF THE AGREEMENT WOUL D PREVAIL OVER THE PROVISIONS OF THE ACT, THEREFORE, THE DEFI NITION OF ROYALTY IS UNDER THE DOMESTIC LAW IS NOT APPLICABLE FOR THE PURPOSE OF UNDERSTANDING THE CONCEPT OF ROYALTY UNDER THE DOUB LE TAXATION AVOIDANCE AGREEMENT BETWEEN INDIA AND AUSTRIA AND, THEREFORE, THE A.O. IS NOT JUSTIFIED IN APPLYING THE PROVISION S OF SECTION 9(1)(VI) OF THE IT ACT. AS REGARDS THE OWNERSHIP I S CONCERNED, AS RIGHTLY EXPLAINED BY THE LEARNED COUNSELS THAT THE TRANSFER OF OWNERSHIP IN THE CASE OF MOVABLE GOODS IS GOVERNED BY THE SALES OF GOODS ACT. THE S ALE BILL ISSUED BY THE SELLING PARTY CONTAINS THE TERMS AND CONDITION ON THE BASIS OF WHICH THE GOODS ARE BEING SOLD AGAINST THE PRICE. IN THE SALE BILLS ISSUED BY THE NON-RESIDENT AUSTRIAN COMP ANY, THERE IS NO MENTION THAT DESPITE THE SALE OF DRAWINGS AND DE SIGNS AGAINST THE PRICE, THEY HAVE RETAINED THE OWNERSHIP IN THE DRAWINGS AND DESIGNS. THE A.O. HAS FAILED TO ESTABLISH AS TO HO W THE INCOME ARISING TO THE NON-RESIDENT COMPANY FROM THE SALE O F THE DRAWINGS IT(TP)A NO.5/IND/2011, IT(TP)A NO.313/IND/2011, IT(TP)A NO.616/IND/2012,& IT(TP)A NO.120/IND/2014 22 AND DESIGNS FROM OUTSIDE COUNTRY TO THE APPELLANT C OMPANY IS CHARGEABLE TO TAX IN INDIA, WHEN THE NON RESIDENT C OMPANY IS NOT HAVING ANY PERMANENT ESTABLISHMENT IN INDIA, IS TAX ABLE IN INDIA AND, THEREFORE, IN THE ABSENCE OF ANY CONCRETE FIND ING THAT SUCH PAYMENTS ARE CHARGEABLE TO TAX IN INDIA, SECTION 19 5 HAS NO APPLICATION. HAVING REGARD TO THE DETAILED AND EXH AUSTIVE SUBMISSION AND THE CASE LAWS RELIED UPON BY THE APPELLANT, I HOLD THAT THE PAYME NTS MADE FOR THE PURCHASE OF DRAWINGS AND DESIGNS DO NOT GIVE RI SE TO ANY INCOME IN INDIA AND NO TAX NEEDS TO BE DEDUCTED U/S 295 OF THE IT ACT. THE SAID PAYMENTS ARE ALSO NOT IN THE NATURE O F ROYALTY AS DEFINED IN THE DTAA ENTERED INTO BETWEEN INDIA AND AUSTRIA. IN ANY CASE, IT IS NOT A CASE OF THE A.O. THAT THERE I S A TRANSFER OF COPYRIGHT BY THE AUSTRIAN COMPANY IN FAVOUR OF THE APPELLANT COMPANY BUT ITS IS A CASE OF SALE OF COPYRIGHTED AR TICLES AND THEREFORE ALSO THE PAYMENTS MADE BY THE INDIAN COMP ANY TO NON RESIDENT COMPANY ARE NOT IN THE NATURE OF ROYALTY. HENCE THE DEMANDS RAISED U/S 201(1A) FOR INTEREST PAYABLE FRO M THE DATE OF DEFAULT IN NOT DEDUCTING THE TAX AT SOURCE TILL PAS SING OF THE ORDER BY THE A.O. IN FINANCIAL YEARS 1999-2000, 2000-01, 2001-02 & 2002-03 ARE CANCELLED. 5. NOW, THE REVENUE IS IN APPEAL BEFORE US. 6. THE LEARNED CIT DR SUBMITTED THAT ON THE HARD CO PY OF DRAWINGS AND DESIGNS SUPPLIED BY THE FOREIGN COMPAN Y, IT WAS SPECIFICALLY MENTIONED THAT SUCH DRAWING WAS THE PR OPERTY OF THAT COMPANY AND IT COULD NEITHER BE KEPT, NOR COULD BE USED IN ANY OTHER MANNER, WITHOUT THE WRITTEN CONSENT OF THE FO REIGN CONCERN. THE LEARNED CIT DR FURTHER SUBMITTED THAT IT COULD NEITHER BE HANDED OVER, NOR IN ANY OTHER WAY COULD BE COMMUNIC ATED TO A THIRD PARTY, HENCE, THE ASSESSING OFFICER LOGICALLY INFERRED THAT THE ASSESSEE COMPANY COULD NOT BE CONSIDERED AS OWNER O F SUCH DESIGNS. THE ASSESSING OFFICER, ACCORDING TO THE L EARNED CIT DR, IN THE ABSENCE OF ANY MATERIAL BROUGHT ON RECORD BY THE ASSESSEE COMPANY, RIGHTLY HELD THAT THE PARENT NON-RESIDENT COMPANY HAD PROPRIETARY RIGHTS IN SUCH DRAWINGS. THE LEARNED C IT DR THEREAFTER REFERRED TO THE PROVISIONS OF SECTION 9( 1)(VI) AND EXPLANATION 2 THERETO AND ALSO TO THE PROVISIONS OF ARTICLE 12 OF DTAA WITH AUSTRIA WHICH ARE REPRODUCED AS UNDER FOR THE SAKE OF CONVENIENCE :- PROVIDED THAT NOTHING CONTAINING CONTAINED IN THI S CLAUSE SHALL APPLY IN RELATION TO SO MUCH OF THE INCOME BY WAY OF ROY ALTY AS CONSISTS OF LUMP SUM CONSIDERATION FOR THE TRANSFER OUTSIDE INDIA OF, OR THE IMPARTING OF INFORMATION OUTSIDE INDIA I N RESPECT OF ANY DATA, DOCUMENTATION, DRAWING OR SPECIFICATION RELA TING TO ANY PATENT, INVENTION, MODEL, DESIGN, SECRET FORMULA OR PROCESS OR TRADE MARK OR SIMILAR PROPERTY, IF SUCH INCOME IS P AYABLE IN PURSUANCE OF AN AGREEMENT MADE BEFORE THE IST DAY OF APRIL, 1976, AND THE AGREEMENT IS APPROVED BY THE CENTRAL GOVERNMENT. PROVIDED FURTHER THAT NOTHING CONTAINED IN THIS CL AUSE SHALL APPLY IN RELATION TO SO MUCH OF THE INCOME BY WAY O F ROYALTY AS CONSISTS OF LUMP SUM PAYMENT MADE BY A PERSON, WHO IS A RESIDENT, FOR THE TRANSFER OF ALL OR ANY RIGHTS (IN CLUDING THE GRANTING OF A LICENCE) IN RESPECT OF COMPUTER SOFTWARE SUPPL IED BY A NON- RESIDENT MANUFACTURER ALONG WITH A COMPUTER OR COMP UTE-BASED EQUIPMENT UNDER ANY SCHEME APPROVED UNDER THE POLIC Y ON IT(TP)A NO.5/IND/2011, IT(TP)A NO.313/IND/2011, IT(TP)A NO.616/IND/2012,& IT(TP)A NO.120/IND/2014 23 COMPUTER SOFTWARE EXPORT, SOFTWARE DEVELOPMENT AND TRADING, 1986 OF THE GOVERNMENT OF INDIA. EXPLANATION 2.- FOR THE PURPOSE OF THIS CLAUSE. R OYALTY MEANS CONSIDERATION (INCLUDING ANY LUMP SUM CONSIDE RATION BUT EXCLUDING ANY CONSIDERATION WHICH WOULD BE THE INCO ME OF THE RECIPIENT CHARGEABLE UNDER THE HEAD CAPITAL GAINS ) FOR (I) THE TRANSFER OF ALL OR ANY RIGHTS (INCLUDING T HE GRANTING OF A LICENSE) IN RESPECT OF A PATEN, INVENTION, MODEL, D ESIGN, SECRET FORMULA OR PROCESS OR TRADE MARK OR SIMILAR PROPERTY . (II) THE IMPARTING OF ANY INFORMATION CONCERNING T HE WORKING OF, OR THE USE OF A PATENT, INVENTION, MODE L, DESIGN, SECRET FORMULA OR PROCESS OR TRADE MARK OR SIMILAR PROPERTY . (III) THE USE OF ANY PATENT, INVENTION, MODEL, DES IGN, SECRET FORMULA OR PROCESS OR TRADE MARK OR SIMILAR PROPERT Y; (IV) THE IMPARTING OF ANY INFORMATION CONCERNING T ECHNICAL, INDUSTRIAL, COMMERCIAL OR SCIENTIFIC KNOWLEDGE, EXP ERIENCE OR SKILL; (IVA) THE USE OR RIGHT TO USE ANY INDUSTRIAL, COMM ERCIAL OR SCIENTIFIC EQUIPMENTS BUT NOT INCLUDING THE AMOUNT REFERRED T O IN SECTION 44AB (V) THE TRANSFER OF ALL OR ANY RIGHTS (INCLUDING T HE GRANTING OF A LICENSE) IN RESPECT OF ANY COPYRIGHT, LITERARY, ARTISTIC OR SCIENTIFIC WORK INCLUDING FILMS OR VIDEO TAPES FOR USE IN CONNECTION WITH TELEVISION OR TAPES FOR USE IN CONNECTION WITH RADI O BROADCASTING, BUT NOT INCLUDING CONSIDERATION FOR THE SALE, DISTRIBUTION OR EXHIBITION OF CINEMATOGRAPHIC FILMS; OR (VI) THE RENDERING OF ANY SERVICES IN CONNECTION W ITH THE ACTIVITIES REFERRED TO IN SUB-CLAUSES (I) TO (IV), (IVA) AND (V) THE TERM ROYALTIES AND FEES FOR TECHNICAL SERVICES HAS BEEN DEFINED IN ARTICLE 12 OF DTAA WITH AUSTRIA WHICH RE ADS AS UNDER :- ARTICLE 12 : ROYALTIES AND FEES FOR TECHNICAL SER VICES (1) ROYALTIES AND FEES FOR TECHNICAL SERVICES ARI SING IN A CONTRACTING STATE AND PAID TO A RESIDENT OF TH E OTHER CONTRACTING STATE MAY BE TAXED IN THAT OTHER STATE. (2) HOWEVER, SUCH ROYALTIES AND FEES FOR TECHNICA L SERVICES MAY ALSO BE TAXED IN THE CONTRACTING STATE IN WHICH THEY ARISE AND ACCORDING TO THE LAWS OF THAT STATE, BUT IF THE BENEFICIAL OWNER OF THE ROYALTIES AND FEES FOR TECHNICAL SERVI CES IS A RESIDENT OF THE OTHER CONTRACTING STATE, THE TAX SO CHARGED SHALL NOT EXCEED 10% OF THE GROSS AMOUNT OF THE ROYALTIES AND FEES FOR TECHNICAL SERVICES. (3) THE TERM ROYALTIES AS USED IN THIS ARTICLE, MEANS PAYMENTS OF ANY KIND RECEIVED AS A CONSIDERAT ION FOR THE USE OF, OR THE RIGHT TO USE, ANY COPYRIGHT OF LITER ARY, ARTISTIC OR SCIENTIFIC WORK INCLUDING CINEMATOGRAPHY FILMS OR F ILMS OR TAPES USED FOR RADIO OR TELEVISION BROADCASTING, ANY PATE NT, TRADE MARK, DESIGN OR MODEL, PLAN, SECRET FORMULA OR PROCESS, O R FOR THE USE OF, OR THE RIGHT TO USE, INDUSTRIAL, COMMERCIAL OR SCIE NTIFIC EQUIPMENT, OR FOR INFORMATION CONCERNING INDUSTRIAL, COMMERCIA L OR SCIENTIFIC EXPERIENCE. THE LEARNED CIT DR CONTENDED THAT AS PER THE MEANIN G OF THE TERM ROYALTY, AS PER BOTH THESE PROVISIONS, THE T RANSACTION BETWEEN THE ASSESSEE COMPANY AND ITS PARENT NON-RES IDENT COMPANY, FELL WITHIN THE REALM THEREOF, HENCE, THE ASSESSEE SHOULD HAVE DEDUCTED THE TAX AT SOURCE. THE LEARNE D CIT DR THEREAFTER ALSO DREW OUR ATTENTION TO THE OBSERVATI ONS OF THE IT(TP)A NO.5/IND/2011, IT(TP)A NO.313/IND/2011, IT(TP)A NO.616/IND/2012,& IT(TP)A NO.120/IND/2014 24 ASSESSING OFFICER AS REGARD TO PROCUREMENT OF THE S AME DESIGNS FOR THE SAME CONTRACT, WHICH ALSO INDICATED THAT IT WAS A CASE OF ROYALTY AND NOT A CASE OF OUT-RIGHT PURCHASE THEREO F. THE LEARNED CIT DR PLACED HEAVY RELIANCE ON THE CONCLUSIONS DRA WN BY THE ASSESSING OFFICER WHICH HAVE ALREADY BEEN REPRODUCE D HEREINBEFORE. THE LEARNED CIT DR, THEREAFTER, CONTE NDED THAT THE PARENT COMPANY WAS NOT SELLING THE DESIGNS IN THE O PEN MARKET I.E. TO ANY OTHER PARTY OTHER THAN ITS SUBSIDIARIES . HENCE, IT WAS NOT A CASE OF SALE OF COPY RIGHTED ARTICLES. THE L EARNED CIT DR FURTHER EMPHASIZED ON THE FACT THAT IT WAS USED BY THE ASSESSEE IN MANUFACTURING OF THE TURBINE/GENERATOR AND WAS NOT SOLD AS SUCH IN THE OPEN MARKET LIKE PURCHASE AND SALE OF A COPY RIGHTED BOOK OR SOFTWARE, ETC. THE LEARNED CIR DR FURTHER EMPHA SIZED ON THE FACT THAT IF THE VIEW OF THE ASSESSEE WAS ACCEPTED THEN EVERY TRANSACTION WOULD BECOME A CASE OF SALE AND IN THAT CASE, PROVISIONS RELATING TO ROYALTY WOULD BECOME REDUNDA NT. AT THIS STAGE, A QUESTION WAS POSED TO HIM THAT IF THE VIEW OF THE REVENUE IS ACCEPTED, THEN EVERY TRANSACTION WOULD BECOME A CASE OF ROYALTY, TO WHICH THE LEARNED CIT DR COULD NOT GIVE ANY EFFECTIVE REPLY. THE LEARNED CIR DR THEREAFTER PLACED RELIAN CE ON THE ORDER OF THE ASSESSING OFFICER. 7. THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED A DDITIONAL EVIDENCE AS REGARDS THE TREATMENT OF SUCH TRANSACTI ONS IN THE BOOKS OF NON-RESIDENT PARENT COMPANY WHICH WAS ADMI TTED AS THE LEARNED CIT DR DID NOT OBJECT FOR ADMISSION OF THE SAME. THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT AS PER THIS INFORMATION, IT WAS ABUNDANTLY CLEAR THAT SUCH TRAN SACTIONS WERE TREATED AS TRANSACTIONS OF SALE AND PURCHASE IN THE BOOKS OF PARENT COMPANY AND HAD BEEN TAXED AS BUSINESS PROFI TS AND NOT AS A ROYALTY. IT WAS FURTHER POINTED OUT THAT THE TAX RATE ON BUSINESS PROFIT WAS HIGHER THAN THE TAX RATE APPLIC ABLE TO ROYALTIES. THE LEARNED COUNSEL FOR THE ASSESSEE THEREAFTER CON TENDED THAT THE OWNERSHIP IN SUCH DRAWINGS WAS TRANSFERRED TO T HE ASSESSEE COMPANY ON DELIVERY OF DRAWINGS BY SUCH COMPANY TO THE ASSESSEE. HOWEVER, AS PER THE CONDITION OF SUCH SA LE TRANSACTION, THE ASSESSEE COULD NOT REPRODUCE IT ON ITS OWN OR COULD USE IT IN A MANNER NOT BEING PERMITTED BY THE SELLER. THUS, THE SALE TRANSACTION WAS SUBJECT TO CERTAIN CONDITI ON AND WHICH WAS A NORMAL CONDITION IN THE CASE OF PURCHASE OF A LL COPY-RIGHTED ARTICLES/GOODS. HENCE, SUCH TRANSACTION WAS A CASE OF OUT-RIGHT PURCHASE FOR A SPECIFIED PURPOSE. THE LEARNED COUNS EL FOR THE ASSESSEE FURTHER SUBMITTED THAT THE ASSESSEE DELIVE RED THESE DRAWINGS TO THE BUYERS OF PLANT AND MACHINERY AND S UCH CONDITION ALSO RESTRICTED SUCH BUYERS FROM USING SUCH DRAWING S FOR COMMERCIAL MANNER BENEFITS. THE LEARNED COUNSEL FOR THE ASSESSED, THEREAFTER, CONTENDED THAT THESE WERE SUB JECT TO THE CUSTOM DUTY AND REFUND OF CUSTOM DUTY HAD ALSO NOT BEEN CLAIMED WHICH WAS GENERALLY A CASE IN RESPECT OF AN ITEM RE CEIVED FOR A LIMITED USE OR FOR A LIMITED PERIOD. IT WAS ALSO S PECIFICALLY POINTED OUT THAT SUCH DESIGNS WERE PROCURED FOR SPECIFIC PR OJECTS ON A SINGLE USER BASIS AS THE SAME HAD TO BE GIVEN TO TH E BUYER OF PLANT AND MACHINERY MANUFACTURED BY THE ASSESSEE CO MPANY. THE LEARNED COUNSEL FOR THE ASSESSEE THEREAFTER CON TROVERTED THE FACTUAL FINDINGS OF THE ASSESSING OFFICER, PARTICUL ARLY IN REGARD TO THE ASSESSING OFFICERS CONTENTION THAT THE ASSESSE E HAD PAID MONEY FOR THE SAME DRAWING THREE TIMES AND REFERRED TO THE IT(TP)A NO.5/IND/2011, IT(TP)A NO.313/IND/2011, IT(TP)A NO.616/IND/2012,& IT(TP)A NO.120/IND/2014 25 VARIOUS PAGES OF THE PAPER BOOK IN THIS REGARD. TH E LEARNED COUNSEL FOR THE ASSESSEE ALSO SUBMITTED THAT THE AC TION OF THE ASSESSING OFFICER WAS A CASE OF CHANGE OF OPINION I N RESPECT OF THE SAME TRANSACTION WHICH HAD BEEN FOUND TO BE OF THE NATURE OF PURCHASES, BOTH IN THE COURSE OF PROCEEDINGS UNDER SECTION 144A AS WELL AS UNDER SECTION 92CA OF THE ACT. HENCE, F OR THIS REASON ALSO, THE ACTION OF THE ASSESSING OFFICER WAS NOT J USTIFIED. THE LEARNED COUNSEL FOR THE ASSESSEE THEREAFTER CONTEND ED THAT IT WAS A SETTLED LAW THAT THE SALE TRANSACTION DID NOT RES ULT IN ROYALTY AND IN THIS REGARD AGAIN SUBMITTED THAT THE TRANSFER OF SUCH DESIGNS BY THE ASSESSEE TO THE BUYERS OF GENERATORS IN AN UNBR IDLED MANNER ESTABLISHED THIS FACT. THE LEARNED COUNSEL FOR THE ASSESSEE FURTHER REITERATED THE SUBMISSIONS MADE BEFORE THE LEARNED COMMISSIONER OF INCOMETAX (APPEALS), PARTICULARLY I N RESPECT OF DRAWINGS BEING GOODS AND THE ACQUISITION OF DRAWING S ON OUT-RIGHT PURCHASE BASIS COULD NOT BE CONSIDERED AS A TRANSAC TION OF THE NATURE OF ROYALTY. THE LEARNED COUNSEL FOR THE ASS ESSEE FURTHER SUBMITTED THAT THE PROVISIONS OF DTAA WERE TO SUPER CEDE THE PROVISIONS OF THE INCOME TAX ACT AND FOR THIS PROPO SITION THE LEARNED CIT DR ALSO DID NOT DISAGREE. THE LEARNED C OUNSEL FOR THE ASSESSEE THEREAFTER PLACED RELIANCE ON THE DECISION OF THE HONBLE CALCUTTA HIGH COURT IN THE CASE OF DAVY ASHMORE IND IA LIMITED V. CIT; 190 ITR 626, WHEREIN THE HONBLE HIGH COURT HA D POINTED OUT THAT THE TRANSFEROR RETAINED THE PROPRIETARY RIGHT IN THE DESIGNS AND ALLOWED THE USE OF SUCH RIGHTS, THE CONSIDERATION R ECEIVED FOR SUCH USER WAS IN THE NATURE OF ROYALTY. HOWEVER, IN THE PRESENT CASE, THE ASSESSEE COMPANY WAS NOT ALLOWED TO USE SUCH RI GHT I.E. TO MAKE SIMILAR DESIGNS AT ITS LEVEL AND TO SELL THE S AME TO THIRD PARTIES AND TO PAY CONSIDERATION OUT OF SUCH SALES TO THE PARENT COMPANY AS IT WAS AN UNDISPUTED FACT THAT SUCH DESI GN WAS USED FOR A SPECIFIED PROJECT AND HAD BEEN HANDED OVER TO THE BUYER OF THE PLANT AND MACHINERY FOR THEIR REFERENCE, IF THE SITUATION SO REQUIRED. HE FURTHER CONTENDED THAT THE DECISION O F THE HONBLE CALCUTTA HIGH COURT IN THE CASE OF LEONHARDT ANDHRA UND PARTNER,GMBH V. CIT; 249 ITR 418 WAS NOT APPLICABLE AS IN THAT CASE THE ROYALTY WAS NOT DEFINED IN DTAA BETWEEN IN DIA AND GERMANY AND IN THE ABSENCE OF SUCH DEFINITION, THE STATUTORY DEFINITION AS CONTAINED IN SECTION 9(1)(VI) WAS APP LIED, WHEREAS IN THE PRESENT CASE, ARTICLE 12(3) EXISTED BETWEEN TWO COUNTRIES AND AS PER THAT DEFINITION, CONSIDERATION PAID WAS NOT TOWARDS RIGHT TO USE BUT IT WAS FOR THE USE OF DESIGNS AS SUCH AND, THEREFORE, THE AFORESAID DECISION OF THE HONBLE HIGH COURT WAS NO T APPLICABLE. THE LEARNED COUNSEL FOR THE ASSESSEE THEREAFTER REF ERRED TO THE RULING OF THE LEARNED COMMISSIONER OF INCOMETAX (AP PEALS) FOR ADVANCE RULING IN THE CASE OF PRE-QUIP CORPORATION V. CIT, AS REPORTED IN 255 ITR 354 (PAGES 140 TO 150 OF THE PA PER BOOK) WHEREIN IT HAS BEEN OPINED THAT TRANSACTION OF SALE OF ENGINEERING DRAWINGS AND DESIGNS BY US COMPANY TO INDIAN COMPAN Y DID NOT AMOUNT TO A TRANSACTION RESULTING INTO PAYMENT OF R OYALTY. THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE FACTS OF THIS CASE ARE IDENTICAL WITH THE FACTS OF THE PRESENT CA SE BEFORE THE TRIBUNAL AND THE ROYALTY AS PER ARTICLE 12(3) OF IN DO US DTAA WAS ALSO SIMILAR. HENCE, THE RATIO LAID DOWN IN THIS CA SE IS SQUARELY APPLICABLE TO THE PRESENT CASE. THE LEARNED COUNSE L FOR THE ASSESSED, THEREAFTER, REFERRED TO THE DECISION OF T HE TRIBUNAL IN THE CASE OF LUCENT TECHNOLOGIES HINDUSTAN LIMITED V. IT O AS IT(TP)A NO.5/IND/2011, IT(TP)A NO.313/IND/2011, IT(TP)A NO.616/IND/2012,& IT(TP)A NO.120/IND/2014 26 REPORTED IN 270 ITR 62 (AT) WHEREIN THE ASSESSEE HA D ACQUIRED HARDWARE AND SOFTWARE AND THE DEPARTMENT BIFURCATED THE TRANSACTION AS ONE OF SUPPLY OF HARDWARE AND THE OT HER OF THE SOFTWARE, TREATING THE SOFTWARE PART AS ROYALTY, TH E TRIBUNAL HELD THAT THE ASSESSEES TRANSACTION WITH THE NON-RESIDE NT COMPANY WAS FOR THE PURCHASE OF INTEGRATED EQUIPMENT WHICH CONSISTED HARDWARE AS WELL AS SOFTWARE AND IT WAS INSEPARABLE AND HAVING REGARD TO THE NATURE OF AGREEMENT, WHAT THE ASSESSE E HAD PURCHASED WAS A COPY RIGHTED ARTICLE AND NOT COPY R IGHT OF THE RIGHTS AND SIMILAR WAS THE POSITION HERE, HENCE, TH IS DECISION OF THE TRIBUNAL ALSO SUPPORTED THE CLAIM OF THE ASSESS EE. THE LEARNED COUNSEL FOR THE ASSESSEE THEREAFTER REFERRE D TO THE DECISION OF THE TRIBUNAL IN THE CASE OF INDIAN HOTE LS CO. LTD. V. ITO IN ITA NO.553/MUM/00 (REFER PAGES 163 TO 167 OF THE PAPER BOOK),WHEREIN INDIAN OIL HAD OBTAINED THE SERVICES OF A FOREIGN COMPANY TO PREPARE THE INTERIOR DESIGN WHICH HAD TO BE USED BY THE INDIAN COMPANY FOR THE PURPOSE OF RE-DESIGNING OR RENOVATING THE INTERIORS OF TAJ MAHAL HOTEL AT MUMBAI AND THE DESIGN SUPPLIED BY THE FOREIGN COMPANY BECAME THE PROPERTY OF INDIAN HOTEL COMPANY LIMITED (ASSESSEE) AND IN THAT BACKGR OUND, THE TRIBUNAL HELD THAT THE ASSESSEE COMPANY HAD PURCHAS ED AND ACQUIRED INTERIOR DESIGN ON A PRINCIPAL TO PRINCIPA L BASIS I.E. AS A BUYER AND IN THAT VIEW OF THE MATTER, THE PAYMENT B Y THAT COMPANY DID NOT AMOUNT TO ROYALTY. THE LEARNED COUNSEL FOR THE ASSESSEE RELIED UPON THE DECISION OF THE TRIBUNAL IN THE CAS E OF WIPRO LIMITED V. ITO AS REPORTED IN 94 ITD 9 FOR THE PROP OSITION THAT WHERE THE PAYMENT WAS FOR OBTAINING THE DATA AND US E IT THE WAY THE ASSESSEE WANTED TO USE IT, IT WAS THE USE OF A COPY-RIGHTED ARTICLE AND NOT A CASE OF TRANSFER OF RIGHT IN THE COPY-RIGHT OF THAT ARTICLE AND SIMILAR WAS THE CASE HERE WHEREIN THE A SSESSEE COMPANY GOT THE RIGHT TO USE OF A COPY-RIGHTED ARTI CLE AND NO RIGHT IN THE COPY-RIGHT OF THE DRAWINGS/DESIGNS AND THE N OTE ON THE HARD COPY OF SUCH DESIGNS CONFIRMED THIS POSITION I.E. T HE ASSESSEE HAD NO RIGHT IN THE COPY RIGHT OF THESE DRAWINGS/DESIGN S I.E. THE ASSESSEE HAD NO RIGHT IN THE COPY RIGHT OF THESE DR AWINGS/DESIGNS AND IT COULD USE ONLY AS PER THE TERMS AND CONDITIO NS OF THE AGREEMENT WITH ITS PARENT COMPANY FOR ITS OWN PURPO SES IN THE CAPACITY OF THE OWNER THEREOF. THEREAFTER, THE LEAR NED COUNSEL FOR THE ASSESSEE REFERRED TO THE DECISION OF THE TRIBUN AL IN THE CASE OF DCIT V. FINOLEX PIPES LIMITED AS REPORTED IN 106 TT J (PUNE) 741 WHEREIN THE TRIBUNAL HAD HELD THAT FEE PAYMENT FOR DESIGN DOCUMENTATION TO GERMAN COMPANY BY THE ASSESSEE IND IAN COMPANY FOR OUT-RIGHT SALE OF SUCH DOCUMENTATION WA S NOT ROYALTY AS PER DTAA. THE LEARNED COUNSEL FOR THE ASSESSEE ALSO RELIED UPON THE DECISION OF THE HONBLE KARNATAKA HIGH COU RT IN THE CASE OF JINDAL THERMAL POWER COMPANY LIMITED V. DCIT ( 2009) 225 CTR (KAR) 220. 8. THE LEARNED CIT DR, IN THE REJOINDER, CONT ENDED THAT IN THE CASE OF PRO-QUIP CORPORATION V. CIT (SUPRA), TH E LANGUAGE OF ARTICLE 12(3) OF DTAA WAS MATERIALLY DIFFERENT AND THE SAID DECISION WAS BASED ON SUCH LANGUAGE, HENCE, NOT AP PLICABLE TO THE FACTS OF THE CASE. THE LEARNED CIT DR FURTHER SUBMITTED THAT THE OTHER DECISIONS RELIED UPON BY THE ASSESSEE WER E FACTUALLY DIFFERENT AS IN THOSE CASES, THE ASSESSEE WAS THE U LTIMATE USER OF THOSE DESIGNS/DRAWINGS ALONG WITH THE PLANT AND MAC HINERY, WHEREAS IN THE PRESENT CASE, THE ASSESSEE MANUFACTU RED IT(TP)A NO.5/IND/2011, IT(TP)A NO.313/IND/2011, IT(TP)A NO.616/IND/2012,& IT(TP)A NO.120/IND/2014 27 TURBINE/GENERATOR AND SOLD SUCH TURBINE/GENERATORS. THE CIT DR FURTHER SUBMITTED THAT THE DECISION OF THE TRIBUNAL IN THE CASE OF LUCENT TECHNOLIGIES HINDUSTAN LIMITED (SUPRA) RATHE R SUPPORTED THE CASE OF THE REVENUE. THE CIT DEPARTMENTAL REP RESENTATIVE FURTHER SUBMITTED THAT THE BASIC DESIGN OBTAINED BY THE ASSESSEE COMPANY WAS FURTHER MODIFIED AND SUCH MODIFIED DESI GN WAS GIVEN TO THE BUYER OF THE TURBINE/GENERATOR AND NOT BASIC DESIGN, AS CONTENDED BY THE LEARNED COUNSEL FOR THE ASSESSE D. 9. WE HAVE CONSIDERED THE SUBMISSIONS MADE BY BOTH THE SIDES, MATERIAL ON RECORD AND THE ORDERS OF THE AUT HORITIES BELOW. IT IS NOTED THAT THE ASSESSEE IS ENGAGED IN MANUFAC TURING OF TURBINE/GENERATOR AS PER THE SPECIFICATIONS/REQUIRE MENTS OF ITS CUSTOMERS. FOR THIS PURPOSE, THE ASSESSEE PROCURES BASIC DESIGN FROM ITS PARENT COMPANY AND ACCORDINGLY MANUFACTURE S SUCH PLANT AND MACHINERY. IT IS ALSO NOTED THAT SUCH BASIC DE SIGN IS ALSO GIVEN TO THE BUYER OF PLANT AND MACHINERY BY THE AS SESSEE COMPANY. THE DISPUTE BEFORE US IS REGARDING THE NA TURE OF PAYMENT MADE BY THE ASSESSEE COMPANY TO ITS PARENT NON- RESIDENT COMPANY FOR OBTAINING SUCH DESIGNS. THE C ONCLUSIONS OF THE ASSESSING OFFICER AS WELL AS THE FINDINGS OF TH E LEARNED COMMISSIONER OF INCOMETAX (APPEALS) HAVE ALREADY BE EN REPRODUCED WHICH CONTAIN DETAILS OF JUDICIAL DECISI ONS RELIED UPON BY BOTH THE SIDES. IN OUR OPINION, IF THE VIEW OF THE ASSESSING OFFICER IS ACCEPTED, THEN THERE WILL NOT BE ANY TRA NSACTION OF SALE AND PURCHASE IN SUCH SITUATIONS AND EVERY TRANSACTI ON WOULD COME WITHIN THE MEANING OF TERM ROYALTY. FURTHER , IN OUR OPINION, THE BASIC DISTINCTION BETWEEN A TRANSACTION OF ROY ALTY AND OF OUT- RIGHT SALE AND PURCHASE IS TRANSFER OF OWNERSHIP TO THE BUYER AND THIS DISTINCTION HAS BEEN MAINTAINED EVEN IN THE PR OVISIONS OF SECTION 9(1)(VI) AS WELL AS OF DTAA. WE HAVE ALSO PERUSED THE NOTE ON THE HARD COPY OF SUCH DESIGNS. IN OUR OPIN ION, SUBSTANCE OF SUCH NOTE IS NOTHING BUT AN INDICATION THAT SUCH PRODUCT IS SOLD ONLY FOR SPECIFIC USE AND NO RIGHT IN COPY-RIGHT THEREOF HAS BEEN GIVEN TO THE BUYER BY THE TRANSFEROR/SELLER, MEANIN G THEREBY THAT SUCH ARTICLE/GOODS IN THE FORM OF DESIGNS COULD BE USED FOR SPECIFIC PURPOSES AND CANNOT BE USED FOR OTHER COMM ERCIAL GAINS BY THE BUYER. THIS CAN BE PUT IN DIFFERENT WORDS I .E. IT IS A CASE OF PURCHASE OF COPY RIGHTED ARTICLE AND NOT OF COPY RIGHTS THEREIN. THUS, ON THIS VERY FACT, WE DO NOT CONSIDER ANY NEC ESSITY TO GO INTO THE ISSUE FURTHER AND DEAL WITH THE JUDICIAL D ECISIONS CITED BY BOTH THE SIDES. HOWEVER, BEFORE PARTING, WE CONSID ER IT APPROPRIATE TO OBSERVE THAT IF THE VIEW OF THE REVE NUE THAT COPY RIGHTED ARTICLE COULD ONLY BE A TRADING ITEM OR OF THE NAT URE OF FINISHED GOODS ONLY, THEN A TRANSACTION OF SALE AND PURCHASE OF SUCH DRAWINGS/DESIGNS WOULD NECESSARILY BE CONSIDER ED AS A TRANSACTION OF PAYMENT OF ROYALTY, WHICH CANNOT B E CORRECT AS EVEN THE SOFTWARE HAS BEEN JUDICIALLY CLASSIFIED AS GOODS. WE ALSO DO NOT AGREE WITH THE CONTENTION OF THE REVENUE THA T WHEN THE GOODS ARE ACQUIRED FOR SELF-CONSUMPTION, THAT WOULD AMOUNT ONLY TO USE OF SUCH ITEMS, RESULTING INTO ROYALTY BECA USE ITEMS FOR SELF- CONSUMPTION FOR USE IN INTERMEDIATE PROCESS ARE ALS O ACQUIRED ON PRINCIPAL TO PRINCIPAL BASIS BY WAY OF PURCHASE. I T IS ALSO TO BE NOTED THAT IN THE HANDS OF NON-PARENT COMPANY, SUCH TRANSACTIONS HAVE BEEN ACCEPTED BY THE REVENUE AUTHORITIES OF TH AT COUNTRY AS OF THE NATURE OF BUSINESS PROFITS RESULTING FROM TH E SALE OF SUCH DRAWINGS. HENCE, WHEN THE SAME PROVISIONS OF DTAA ARE IT(TP)A NO.5/IND/2011, IT(TP)A NO.313/IND/2011, IT(TP)A NO.616/IND/2012,& IT(TP)A NO.120/IND/2014 28 APPLICABLE THEN THIS ACTION OF SUCH REVENUE AUTHORI TIES ALSO SUPPORTS THE CLAIMS OF THE ASSESSEE. TO SUM UP, EVE N AT THE COST OF REPETITION, WE STATE THAT IT IS A CASE OF PURCHA SE OF A COPY- RIGHTED ARTICLE ON PRINCIPAL TO PRINCIPAL BASIS AND NOT A CASE OF PAYMENT FOR TRANSFER OF RIGHT IN THE COPY RIGHT OF SUCH DESIGNS. IN THIS VIEW OF THE MATTER, WE CONFIRM THE FINDINGS OF THE LEARNED COMMISSIONER OF INCOMETAX (APPEALS). 10. IN THE RESULT, ALL THE APPEALS OF THE REVENUE F AIL AND ARE DISMISSED. ORDER PRONOUNCED IN OPEN COURT ON 30 TH APRIL, 2010. 3. IN THE AFORESAID ORDER, AN ELABORATE DISCUSSION HAS BEEN MADE BY THE TRIBUNAL. IF THE AFORESAID FACTS ARE KEPT IN JUXTAPOSITION WITH THE FACTS OF THE APPEAL IN HAND, WE FIND THAT THE ASSES SEE PURCHASES TECHNICAL DRAWINGS AND DESIGN FOR RS.4,14,18,313/- FROM ITS AUSTRIAN JOINT VENTURE COMPANY I.E. VA SPACE TECH ELIN, AUST RIA AND THE SAID EXPENDITURE WAS DIRECTLY CLAIMED TO BE MANUFACTURIN G EXPENSES AND WAS CLAIMED IN ITS P & L ACCOUNT UNDER THE HEAD MA NUFACTURING EXPENSES WHICH WERE DISALLOWED BY THE LD. ASSESSIN G OFFICER DOUBTING THE GENUINENESS OF THE EXPENSES. ADMITTEDL Y, THE AUDITED ACCOUNTS, TRADING AND P & L ACCOUNT AND DETAILS OF TECHNICAL DRAWINGS EXPENSES WERE DULY FURNISHED BY THE ASSESS EE BEFORE THE ASSESSING OFFICER AS WELL AS BEFORE THE LD. CIT(A). THE STAND OF THE ASSESSEE BEFORE THE REVENUE AUTHORITIES AS WELL AS BEFORE US IS THAT THE EXPENSES WERE INCURRED FOR PURCHASE OF TECHNICA L DRAWINGS AND DESIGN FROM ITS JOINT VENTURE COMPANY FOR BUSINESS EXPEDIENCY. UNCONTROVERTEDLY, THE IMPUGNED EXPENDITURE WAS FULL Y SUPPORTED BY BILL OF ENTRIES, CUSTOM CLEARANCE, SHIPPING AGENTS DOCUMENTS, PAYMENTS THROUGH BANKING CHANNEL WITH COMPLIANCE OF RULES AND REGULATION OF FOREIGN REGULATION ACT (AT THE RELEVA NT TIME). ALL THESE DOCUMENTS WERE NOT DISPUTED BY THE ASSESSING OFFICE R AND WERE DULY EXAMINED BY THE LD. CIT(A), MEANING THEREBY, THE EX PENSES WERE CLAIMED TO BE GENUINE BUSINESS EXPENDITURE. THERE I S CATEGORICAL FINDING IN THE IMPUGNED ORDER THAT THE GENUINENESS OF THE EXPENSES FOR INCURRING THE TECHNICAL DRAWINGS AND DESIGN WAS DULY ESTABLISHED AS THE COPIES OF THE INVOICES, PURCHASE ORDERS WERE DULY PRODUCED RIGHT FROM ASSESSMENT STAGE. EVEN OTHERWISE, THE LD . ASSESSING OFFICER HAS NOWHERE MENTIONED IN THE ASSESSMENT ORD ER THAT THE PAYMENTS FOR THE IMPUGNED EXPENSES WERE NOT MADE. T HE SUSPICION OF THE LD. ASSESSING OFFICER IS THAT THE TRANSACTIO NS RELATING TO DRAWINGS & DESIGN EXPENSES ARE NOTHING BUT AN AFTER THOUGHT. HOWEVER, NOTING CONCRETE HAS BEEN BROUGHT ON RECORD BY THE ASSESSING OFFICER IN SUPPORT OF HIS SUSPICION AS TO HOW THE PURCHASE ORDERS ARE NOT GENUINE. THE ASSESSEE HAS FURNISHED VARIOUS DOCUMENTS TO ESTABLISH THE GENUINENESS OF SUCH EXPE NSES AND THE TECHNICAL DESIGN WAS PURCHASED AS A MATTER OF BUSIN ESS EXPEDIENCY TO IMPLEMENT THE PROJECT, THEREFORE, WE FIND NO INF IRMITY IN THE STAND OF THE LD. CIT(A) ON THIS ISSUE. CONSEQUENTLY, AFFIRME D. OUR CONCLUSION WILL COVER GROUND NO.1 OF ITA NO.253/IND/2007 (ASSE SSMENT YEAR 2001-02) AND GROUND NO.2 OF ITA NO.255/IND/2007 (AS SESSMENT YEAR 2003-04) ALSO. IT(TP)A NO.5/IND/2011, IT(TP)A NO.313/IND/2011, IT(TP)A NO.616/IND/2012,& IT(TP)A NO.120/IND/2014 29 8.1 THE DEPARTMENT HAS ALSO NOT FILED ANY APPEAL AGAIN ST THE ORDER OF CIT(A) FOR A.Y.2004-05 HOLDING THAT TRANSACTION IS IN THE NATURE OF PURCHASE AND DESIGN AND DRAWINGS ARE NOT IN THE NAT URE OF ROYALTY. AS THE FACTS AND CIRCUMSTANCES DURING THE YEAR UNDER C ONSIDERATION ARE SAME, RESPECTFULLY FOLLOWING THE ORDER OF THE TRIBU NAL IN ASSESSEES OWN CASE, WE DELETE THE DISALLOWANCE MADE BY THE AO BY INVOKING SECTION 40(A)(I) FOR ALL THE YEARS UNDER CONSIDERAT ION. 9.1 DURING THE ASSESSMENT YEAR 2006-07, THE ASSESSEE H AD MADE PAYMENTS OF RS.4,32,74,022/- TO ITS NON-RESIDENT PA RENT COMPANY AND ITS SUBSIDIARIES FOR PURCHASE OF RAW MATERIALS AND COMPONENTS ETC. THE ASSESSEE COMPANY HAS ALSO MADE SALES OF RS. 1837512 6/- OF GENERATORS AND ITS EQUIPMENT PARTS TO ITS NON-RESID ENT PARENT COMPANY AND ITS SUBSIDIARIES. SINCE THE INTERNATIONAL TRANS ACTIONS WERE MORE THAN 5 CRORES, THE CASE WAS REFERRED TO THE TRANSFE R PRICING OFFICER BEING ASST. COMMISSIONER OF INCOME TAX TRANSFER PRI CING II, AHMEDABAD VIDE LETTER NO. ACIT 3(1) IBPLL07-0811 DA TED 27-10-2008 FOR COMPUTATION OF ARMS LENGTH PRICE U/S 92CA OF TH E 1. TAX ACT IN PURSUANCE TO CBDT INSTRUCTION NO. 10 OF 2004 DATED 20-9-2004 AFTER OBTAINING PRIOR APPROVAL OF THE COMMISSIONER OF INC OME TAX, BHOPAL ON 12-6-2008. THE FINDINGS/CONCLUSIONS/OBSERVATIONS ME NTIONED IN THE TRANSFER PRICING REPORT WERE TAKEN INTO CONSIDERATI ON BY AO WHILE FRAMING THE ASSESSMENT FOR THE CURRENT ASSESSMENT Y EAR AS PROVIDED IN SECTION 92CA (4) WHICH READS AS UNDER: 'ON RECEIPT OF THE ORDER UNDER SUB SECTION (3), THE ASSESSING OFFICER SHALL PROCEED TO COMPUTE THE TOTAL INCOME O F THE ASSESSEE UNDER SUB SECTION (4) OF SECTION 92C IN CONFORMITY WITH THE ARM'S LENGTH PRICE AS SO DETERMINED BY THE TRANSFER PRICI NG OFFICER' ACCORDINGLY U/S 144C(10) THE DRAFT AS ASSESSMENT OR DER DATED 24.12.2009 IS BEING FINALIZED AS FINAL ASSESSMENT O RDER AS UNDER :- THE FINDINGS OF THE TRANSFER PRICING REPORT DATED 1 4-10-2009 ARE DEALT IN THE ASSESSMENT AS UNDER: THE DETAILS OF THE INTERNATIONAL TRANSACTIONS OF TH E ASSESSEE COMPANY ARE DETAILED AS UNDER: IT(TP)A NO.5/IND/2011, IT(TP)A NO.313/IND/2011, IT(TP)A NO.616/IND/2012,& IT(TP)A NO.120/IND/2014 30 TRANSACTION AE AMOUNT (RS.) I)PURCHASE OF RAW MATERIAL II) SALE OF GENERATORS & GENERATOR PART III) TRAINING IV) TECHNICAL SERVICE V) CONSULTING PROVIDED FOR DESIGNING VI)RECHARGE OF EXPENSES VII) CLAIMS AGAINST WARRANTY VIII)REIMBURSEMENT OF EXPENSES V A TECH H YDRO GMBH & CO, AUSTRIA 17135713 7872948 1089304 1508058 14840000 677959 14720867 3358923 I) PURCHASE OF RAW MATERIAL II)SALES OF GENERATOR PARTS III)REIMBURSEMENT OF EXPENSES V A TECH SAT GMBH & CO. AUSTRIA 26138309 502178 160742 I) RECEIPT FOR TURBINE ERRECTION/INSPECTION SERVICE V A TECH PT INDONESIA 244209 I) INTER CORPORATE DEPOSIT VA TECH FINANCE (LRELAND) LTD, IRELAND 3104878 I) REIMBURSEMENT OF EXPENSES V A TECH ELIN EBG GMBH & CO.,AUSTRIA 680356 I)REIMBURSEMENT OF EXPENSES VA TECHNOLOGY AG, AUSTRIA 14952505 TOTAL:: 11,69,86,949 PURCHASE OF RAW MATERIALS: DURING THE YEAR UNDER CONSIDERATION, THE ASSESSEE C OMPANY HAS PURCHASED RAW MATERIAL FROM AES WORTH RS. 4,32,74,0 221-. THESE TRANSACTIONS ARE ANALYZED AS FOLLOWS: SELECTION OF TESTED PARTY IN THE TRANSFER PRICING DOCUMENTATION SUBMITTED BY THE ASSESSEE, THE ASSESSEE HAS SELECTED V.A.TECH HYDRO INDIA PVT. LTD .(INDIAN COMPANY) AS TESTED PARTY KEEPING IN VIEW COMPLEXITY OF FUNCTIONS PERFORMED AVAILABILITY OF COMPARABLE DATA AND REQUI RING MINIMUM ADJUSTMENT. THE SAME IS ADJUSTED AS TESTED PARTY FO R TRANSFER PRICING AUDIT. SELECTION OF MOST APPROPRIATE METHOD ON THE BASIS OF FUNCTIONS PERFORMED, ASSETS DEPLOYE D AND RISKS ASSUMED BY THE ASSESSE, TNMM METHOD HAS BEEN CHOSEN BY THE ASSESSEE AS THE MOST APPROPRIATE METHOD AND THE SAM E IS ACCEPTED. SELECTION OF PROFIT LEVEL INDICATOR (PLI) SINCE THE TRANSACTION UNDER SCRUTINY IS THE PURCHAS ES FROM THE AES, PBDIT ON SALES IS TAKEN AS THE PROFIT LEVEL INDICAT OR IN THE CASE OF THE ASSESSEE. SELECTION OF COMPARABLES THE ASSESSEE COMPANY HAS SELECTED 5 COMPARABLE COMP ANIES AS UNDER: IT(TP)A NO.5/IND/2011, IT(TP)A NO.313/IND/2011, IT(TP)A NO.616/IND/2012,& IT(TP)A NO.120/IND/2014 31 SL. NO COMPARABLES 2006 2005 2004 WEIGHTED AVERAGE (OPENING MARGIN ON OPERATING REVENU E ) 1 ALSTOM 3.12% 3.02% 2.47% 3% 2 BHEL 18.66% 17.27% 15.18% 17.36% 3 JYOTI LTD 10.82% 8.97% 1.47% 6.01% 4 POWERICS LTD NA 8.2% 9.33% 8.71% 5 TRIVENI ENGG 13.71% 8.7% 11.51% 11.78% ARITHMETIC MEAN = 9.37% THE MARGIN OF THE ASSESSEE COMPANY IS 10.28% AS AGA INST 9.37% OF THE COMPARABLE COMPANIES. HOWEVER, IT WAS FOUND THA T THE ASSESSEE HAS USED MULTIPLE YEAR DATA WHICH IS NOT IN ACCORDA NCE WITH RULE 10B(4). 10 . THE ASSESSEE IN ITS REPLY DATED 05/01/2009 SUBMIT TED AS UNDER :- IN THIS REGARD, WE WOULD LIKE TO SUBMIT THAT IN DE TERMINING THE ARMS LENGTH NATURE OF THE INTERNATIONAL TRANSACTION ENTE RED INTO BY THE ASSESSEE, THE DATA PERTAINING TO THE AY-2005-06, FY 2004-05 AND FY 2003-04 WAS USED, WHICH IS ALSO IN ACCORDANCE WITH THE PROVISO TO RULE 10B(4). THE ASSESSEE HAS USED AN AVERAGE OF TH E TWO/THREE YEAR DATA (WHEREVER AVAILABLE) TO JUSTIFY THE ARMS LENGTH NATURE OF THE INTERNATIONAL TRANSACTION BECAUSE OF CERTAIN FACTOR S WHICH ARE EXPLAINED BELOW. THE CONTRACTS SALES IN RESPECT OF THE PROJECTS UNDE RTAKEN BY THE ASSESSEE ARE RECOGNIZED BY THE ASSESSEE USING PERCE NTAGE OF COMPLETION (POC) METHOD. THE BILLING OF POC PROJE CTS RANGE FROM 2 TO 4 YEARS DEPENDING ON THE LENGTH OF THE PROJECTS AND PROFITABILITY CAN BE REASONABLY ASCERTAINED ONLY OVER THE PERIOD OF C ONTRACT. HENCE, FINANCIAL DATA FOR A SINGLE YEAR WOULD PRESENT DIST ORTED PROFITABILITY OF THE COMPANY AND IT WOULD BE INAPPROPRIATE TO USE SI NGLE YEAR DATA IN THIS INDUSTRY. ACCORDINGLY, THE USE OF MULTIPLE YEA R DATA GENERALLY CAPTURES MARKET CYCLES AND REDUCES THE LIKELIHOOD T HAT THE FINANCIAL RESULTS OF AN ANOMALOUS WILL DISTORT THE ARM'S LENG TH RANGES. IN CONSIDERATION OF THE ASSESSEE'S BUSINESS CYCLE, IND USTRY PROFILE AND ECONOMIC CONDITIONS, A TWO -THREE YEAR DATA IS APPR OPRIATE RATHER THAN THE USE OF A SINGLE YEAR DATA.' 11 . THE AO REJECTED THE ASSESSEES CONTENTION FOR TA KING AVERAGE OF 3 YEARS AS AGAINST USING THE DATA FOR FINANCIAL YEA R 2005-06 AND THE AO USED THE DATA PERTAINING TO THE FINANCIAL YEAR 2 005-06 ONLY AS A BENCHMARK THE ASSESSEES TRANSACTIONS. IT(TP)A NO.5/IND/2011, IT(TP)A NO.313/IND/2011, IT(TP)A NO.616/IND/2012,& IT(TP)A NO.120/IND/2014 32 12 . THEREAFTER THE AO COMPUTED ARMS LENGTH PRICE OF P URCHASES MADE FROM AES WHICH WORKED OUT TO BE RS.1,90,84,087 /- AS COMPARED TO THE TRANSACTIONS VALUE OF RS.4,32,74,022/-. THE AO FURTHER HELD THAT ASSESSEES INTERNATIONAL TRANSACTION RELATING TO SA LES MADE TO AES DOES NOT FALL WITHIN RANGE OF + 5 % AS AVAILABLE TO THE ASSESSEE AS PER PROVISO TO SECTION 92C(2) OF THE I.T. ACT, 1961. TH US, THE UPWARD ADJUSTMENT OF RS.2,41,89,935/- WAS MADE TO THE TOTA L INCOME OF THE ASSESSEE. 13. THE AO ALSO OBSERVED THAT THE ASSESSEE HAS CARRIED OUT SALES OF GENERATOR AND GENERATOR PARTS TO ITS AES AND ALS O INDEPENDENT PARTIES. ON ALL THESE PROJECTS COST + MARGIN HAVE B EEN COMPUTED AND DETAILS OF COST + MARGIN HAS BEEN WORKED OUT FOR VA RIOUS PROJECTS RELATED TO AE AS UNDER :- AMOUNT RECEIVED/RECEIVABLE FROM AE. NAME POC SALES COGS GROSS MARGIN GP/CRORES VA TECH HYDRO GMBH & CO. 2005-06 UPPER GOTVAND 1460734 1240710 220024 17.73% TONGBAI 663025 564262 98763 17.75% LANG YA SHAAN 3917081 3393030 524051 15.44% FRAMEUSTE/C.124 196289 172416 23873 13.85% UG BARS 444941 355330 89611 25.22% KARUN III 2161347 2533229 (371,882) -(14.68%) SHIWA TIDAL 415489 365221 50268 13.76% SILVON 2902301 2225771 676530 30.4% KARUN COMMISSIONING 1471846 338615 1133231 334.67% KAREBBE DESIGN 330279 288995 41285 14.29% MASO CORONA 1100116 998897 101219 10.13% GIL GEL GIBE-SPARES 79911 52364 27547 52.61% . 13.1 THE AO OBSERVED THAT THE TRANSACTIONS AS PER PROVI SO TO SECTION 92C(2) HAVING GROSS PROFIT MARGIN WITHIN TH E RANGE OF 11.85% TO 23.66% ARE ACCEPTED AT ARMS LENGTH MARGI N CONTROLLED TRANSACTIONS HAVING MARGINS MORE THAN 23.63%, WHICH WAS NOT DISTURBED IN VIEW OF THE PROVISIONS OF SECTION 92(3 ) AS THEY HAVE EFFECT OF REDUCING THE INCOME CHARGEABLE TO TAX. AC CORDINGLY, THE ADJUSTMENT WAS DONE ONLY IN CASE OF PROJECT KARUN I II, MASO CORONA. IT(TP)A NO.5/IND/2011, IT(TP)A NO.313/IND/2011, IT(TP)A NO.616/IND/2012,& IT(TP)A NO.120/IND/2014 33 THE TOTAL AMOUNT OF SUCH ADJUSTMENT WAS RS.8,97,262 /-. 14 . DURING THE SUBJECT YEAR UNDER ASSESSMENT, ANDRITZ INDIA HAD ENTERED INTO FOLLOWING INTERNATIONAL TRANSACTIO NS WITH ITS ASSOCIATED ENTERPRISES (AES): S. NO. TYPE OF TRANSACTION VALUE (IN RS.) 1. EXPORT OF GENERATORS AND RELATED PARTS 1,83,75,12 6 2. IMPORT OF RAW MATERIALS AND COMPONENTS 4,32,74,02 2 3. PAYMENT OF INTEREST ON INTER COMPANY DEPOSIT 31, 04,878 4. RECEIPT OF TURBINE ERECTION/ INSPECTION SERVICES 2, 44,209 5. RECEIPT OF TRAINING 10,89,304 6. RECEIPT OF TECHNICAL SERVICES 15,08,058 7. PROVISION OF CONSULTING SERVICES 1,48,40,000 8. PAYMENT OF CLAIMS AGAINST WARRANTY 1,47,20,867 9. PAYMENT OF COMMITMENT CHARGES 1,49,52,505 10. REIMBURSEMENT OF EXPENSES TO AES 42,00,021 11. REIMBURSEMENT OF EXPENSES INCURRED BY AES 6,77,959 14.1 IN RELATION TO TRANSACTION PERTAINING TO IMPORT OF RAW MATERIALS AND COMPONENTS FROM ITS AES, NO SEPARATE BENCHMARKI NG HAS BEEN CARRIED OUT BY THE ASSESSEE SINCE THE IMPORTS ARE O N A COST-TO-COST BASIS AND THE AES DO NOT CHARGE ANY MARK-UP ON THIS TRANSACTION. ACCORDINGLY, THE COST-TO-COST SUPPLY BASED ON ACTUA L COSTS INCURRED BY THE AES IS CONSIDERED AS THE ARMS LENGTH PRICE. FO R THIS PURPOSE, THE ASSESSEE HAS PLACED RELIANCE ON THE PROVISIONS CONT AINED UNDER SUB- SECTION (3) OF SECTION 92 WHICH INTER ALIA PROVIDES THAT THE PROVISIONS OF THIS SECTION SHALL NOT APPLY IN A CASE WHERE THE COMPUTATION OF INCOME UNDER SUB-SECTION (1) OR THE DETERMINATION O F THE ALLOWANCE FOR ANY EXPENSE OR INTEREST UNDER THAT SUB-SECTION, OR THE DETERMINATION OF ANY COST OR EXPENSE ALLOCATED OR APPORTIONED, OR, A S THE CASE MAY BE, CONTRIBUTED UNDER SUB-SECTION (2), HAS THE EFFECT O F REDUCING THE INCOME CHARGEABLE TO TAX OR INCREASING THE LOSS, AS THE CASE MAY BE, IT(TP)A NO.5/IND/2011, IT(TP)A NO.313/IND/2011, IT(TP)A NO.616/IND/2012,& IT(TP)A NO.120/IND/2014 34 COMPUTED ON THE BASIS OF ENTRIES MADE IN THE BOOKS OF ACCOUNT IN RESPECT OF THE PREVIOUS YEAR IN WHICH THE INTERNATI ONAL TRANSACTION WAS ENTERED INTO. 14.2 FURTHER, RELIANCE HAS ALSO BEEN PLACED ON CIRCULAR 14/2001 ISSUED BY THE CENTRAL BOARD OF DIRECT TAXES (CBDT ) WHICH CLARIFIES THAT TRANSFER PRICING REGULATIONS ARE NOT INTENDED TO BE APPLIED TO CASES WHERE THE ADOPTION OF THE ARMS LENGTH PRICE DETERM INED UNDER THE REGULATIONS WOULD RESULT IN A DECREASE IN OVERALL TAX INCIDENCE IN INDIA IN RESPECT OF THE PARTIES INVOLVED IN THE INTERNATI ONAL TRANSACTION. SINCE, THE APPLICATION OF AN ARMS LENGTH PRICE TO THE PRESENT CASE MAY RESULT IN REDUCTION OF THE OVERALL TAX INCIDENCE IN INDIA, THE COST ONLY REIMBURSEMENT BY THE AES WAS CONSIDERED TO BE IN CO MPLIANCE WITH THE IMPORT OF THE INDIAN TRANSFER PRICING REGULATIO NS. 14.3 IN ADDITION, ASSESSEE HAS CARRIED OUT A SECONDARY ANALYSIS (BY USING TNMM) TO CORROBORATE THE CONCLUSION THAT THE TRANSACTION PRICE ON ACCOUNT OF IMPORT OF RAW MATERIAL AND COMPONENTS MEETS THE ARMS LENGTH TEST UNDER THE INDIAN TRANSFER PRICING REGUL ATIONS. IN UNDERTAKING THE SECONDARY ANALYSIS, THE ASSESSEE HAD UNDERTAKEN ECONOMIC ANALYSIS CHOOSING TNMM AS THE MOST APPROPRIATE METH OD WITH ITSELF AS THE TESTED PARTY AND OPERATING PROFIT AS A RAT IO OF OPERATING REVENUE AS A PROFIT LEVEL INDICATOR. 14.5 WHILE CARRYING OUT THE TNMM ANALYSIS, THE ASSESSEE IDENTIFIED COMPARABLE COMPANIES ENGAGED IN SIMILAR BUSINESS AS THE ASSESSEE. FOR THE COMPANIES IDENTIFIED AS COMPARABLES, WEIGHT ED AVERAGE OF OPERATING PROFIT MARGINS EARNED ON OPERATING REVEN UE WAS COMPUTED USING THE FINANCIAL DATA AVAILABLE AT THE TIME OF U NDERTAKING THE TRANSFER PRICING STUDY (INCLUDING DATA UPTO TWO YEA RS PRIOR TO THE FINANCIAL YEAR FOR WHICH THE SEARCH WAS UNDERTAKEN) . SINCE, EVEN AFTER INCLUSION OF COST OF IMPORTS IN THE COST BASE, THE OPERATING PROFIT OF THE ASSESSEE WAS HIGHER THAN ARITHMETIC MEAN MARGIN OF COMPARABLE COMPANIES, THE TRANSACTION WAS CONCLUDED TO BE AT A RMS LENGTH. IT(TP)A NO.5/IND/2011, IT(TP)A NO.313/IND/2011, IT(TP)A NO.616/IND/2012,& IT(TP)A NO.120/IND/2014 35 14.6 IN RELATION TO ABOVE TRANSACTION, THE ASSESSEE HAD UNDERTAKEN AN ECONOMIC ANALYSIS CHOOSING THE CPM AS THE MOST A PPROPRIATE METHOD WITH GROSS PROFIT MARK-UP (GP) AS THE APPROP RIATE PROFIT LEVEL INDICATOR. IN ORDER TO UNDERTAKE THE ANALYSIS FOR I DENTIFICATION OF COMPARABLE TRANSACTIONS FOR THE EXPORT OF FINISHED GOODS, THE ASSESSEE HAS CONSIDERED THE TRANSACTIONS UNDERTAKEN UNDER SIMILAR CONDITIONS WITH UNRELATED PARTIES AS COMPARABLE TO ESTABLISH THE ALP. BASED ON SUCH ANALYSIS, SINCE THE OVERALL GP EARNED BY ASSESSEE FROM SALES TO AES WAS HIGHER THAN SALES TO UNRELATE D ENTITIES, THE TRANSACTION INVOLVING SALE OF GENERATORS & GENERATO R PARTS WAS CONCLUDED TO BE AT ARMS LENGTH. 15 . THE LD. TPO DID NOT AGREE WITH THE ANALYSIS UNDER TAKEN BY THE ASSESSEE. IN HIS ORDER DATED 14 OCTOBER 2009, PASSE D UNDER SECTION 92CA(3) OF THE ACT (COPY ENCLOSED AS EXHIBIT 5 OF THE PAPERBOOK ), THE LD. TPO RE-COMPUTED THE ARMS LENGTH PRICE AND BASED ON SAME PROPOSED AN ADDITION OF RS. 2,50,87,197 TO THE INCOME OF THE ASSESSEE. IN CONCLUDING THE ABOVE, THE LD. TPO MADE THE FOLLOWING OBSERVATI ONS: THE LD. TPO DID NOT CONCUR WITH THE ALP DETERMINED BY THE ASSESSEE AND IGNORED THE FACT THAT PURCHASES MADE B Y ASSESSEE FROM ITS AES ARE ON COST-TO-COST BASIS. THE LD.TPO PROCEEDED TO DETERMINE THE ALP OF SUBJE CT TRANSACTION USING TNMM AS MOST APPROPRIATE METHOD. HOWEVER, WHI LE DOING SO, THE LD. TPO: USED THE FINANCIAL DATA FOR COMPARABLE COMPANIES O NLY FOR FINANCIAL YEAR (FY) 2005-06 AND REJECTED THE MULT IPLE YEAR DATA AS USED BY THE ASSESSEE; USE THE FINANCIAL DATA AS AVAILABLE ON DATABASES I NSTEAD OF ANNUAL REPORTS, WHICH PROVIDE MORE AUTHENTIC INFORM ATION. REJECTED THE CONTENTION OF THE ASSESSEE FOR REJECT ION OF ONE OF COMPANIES SELECTED BY ASSESSEE AS COMPARABLE. THE ASSESSEE HAS ARGUED THAT DUE TO ONE COMPARABLE COMP ANIES IDENTIFIED BY ASSESSEE, BASED ON PRINCIPLES OF ROBU ST ANALYSIS, SHOULD BE REJECTED ON ACCOUNT OF DIFFERENCE IN TURN OVER; REJECTED THE REQUEST FOR ALLOWING WORKING CAPITAL ADJUSTMENT MADE BY THE ASSESSEE. IT(TP)A NO.5/IND/2011, IT(TP)A NO.313/IND/2011, IT(TP)A NO.616/IND/2012,& IT(TP)A NO.120/IND/2014 36 BASED ON ABOVE, THE LD. TPO CONCLUDED THAT SUBJECT TRANSACTION DOES NOT MEET THE ARMS LENGTH TEST AND ACCORDINGLY RECOMPUTED THE ALP OF THE SAME. SALE OF GENERATORS & GENERATOR PARTS TO AES THE LD. TPO ACCEPTED SELECTION OF CPM AS THE MOST APPROPRIATE METHOD. HOWEVER, HE DID NOT CONCUR WITH THE EVALUATION OF RELATED PARTY TRANSACTIONS ON AN AGGREGATE BASIS AND HAD PROCEEDED TO APPLY IT ON INDIVIDUAL TRANSACTIONS. BASED ON ALLEGED TRANSACTION BY TRANSACTION ANAL YSIS, THE LD. TPO RECOMPUTED THE ALP OF IMPUGNED TRANSACTION. 16 . FOLLOWING GROUNDS WERE FILED BEFORE THE DRP :- 1. FIRST GROUND OF OBJECTION BASED ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LD. TPO HAS ERRED IN LAW AND IN FACT, IN IGNORING THAT PURCHASES MADE BY ASSESSEE FROM ITS AE ARE ON COST-TO-COST BA SIS AND THAT AE HAVE NOT CHARGED ANY MARK-UP ON SAME AND ERRONEOUSLY PROCEEDED TO EVALUATE THE IMPUGNED TRAN SACTION USING TNMM; 2. SECOND GROUND OF OBJECTION WITHOUT PREJUDICE TO THE FIRST GROUND OF OBJECTION, BASED ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LD. TPO HA S FURTHER ERRED IN LAW AND IN FACT IN NOT ACCEPTING THE DETAI LED AND ROBUST SET OF COMPARABLE COMPANIES SUBMITTED BY THE ASSESS EE, WHILE UNDERTAKING THE ANALYSIS USING TNMM AS MOST APPROPRIATE METHOD 3. THIRD GROUND OF OBJECTION WITHOUT PREJUDICE TO AFORESAID GROUNDS OF OBJECTION , BASED ON FACTS AND CIRCUMSTANCES OF THE CASE, THE LD. TPO HA D ERRED IN LAW AND IN FACT, BY ADOPTING A FLAWED APPROACH BY U SING SINGLE YEAR DATA AS AGAINST THE MULTIPLE YEAR DATA USED BY THE ASSESSEE, TO COMPUTE THE ALP OF THE INTERNATIONAL T RANSACTION OF THE ASSESSEE USING TNMM 4. FOURTH GROUND OF OBJECTION WITHOUT PREJUDICE TO THE THIRD GROUND OF OBJECTION THAT MULTIPLE YEAR DATA SHOULD BE USED IN APPLYING TNMM, BASED ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LD. TPO HA D ERRED IN LAW AND IN FACT IN DISREGARDING THE PROFIT LEVEL IN DICATOR OF OPERATING PROFIT AS A PERCENTAGE OF OPERATING REVEN UE (OP/OR) AS CONSIDERED BY THE ASSESSEE WHILE APPLYING TNMM. 5. FIFTH GROUND OF OBJECTION IT(TP)A NO.5/IND/2011, IT(TP)A NO.313/IND/2011, IT(TP)A NO.616/IND/2012,& IT(TP)A NO.120/IND/2014 37 BASED ON THE FACTS AND CIRCUMSTANCES OF THE CASE, T HE LD. TPO HAS ERRED IN LAW AND IN FACT, IN DISREGARDING THE USE OF FINANCIAL INFORMATION OF COMPARABLE COMPANIES INCLUDING SEGMENTAL INFORMATION (WHERE AV AILABLE) EXTRACTED FROM THE RESPECTIVE ANNUAL REPORTS FOR DE TERMINING THE OPERATING MARGINS; AND IN DETERMINING THE OPERATING MARGIN OF COMPARABLE C OMPANIES USING FINANCIAL DATA OF COMPARABLE COMPANIES AS AVA ILABLE FROM PROWESS DATABASE 6. SIXTH GROUND OF OBJECTION BASED ON THE FACTS AND CIRCUMSTANCES OF THE CASE, T HE LD. TPO HAS ERRED IN LAW AND IN FACT, IN FAILING TO MAK E APPROPRIATE ADJUSTMENTS TO ACCOUNT FOR DIFFERENCES IN WORKING C APITAL EMPLOYED BY THE ASSESSEE VIS--VIS THE COMPARABLES AND IN THE PROCESS ALSO IGNORED INDIAN TRANSFER PRICING RE GULATIONS AND JUDICIAL PRECEDENCE. 7. SEVENTH GROUND OF OBJECTION BASED ON THE FACTS AND CIRCUMSTANCES OF THE CASE, T HE LD. TPO HAS ERRED IN LAW AND IN FACT, BY NOT TAKING COG NIZANCE OF THE FACT THAT SAME INTERNATIONAL TRANSACTION OF ASS ESSEE HAS BEEN ACCEPTED BY REVENUE AUTHORITIES TO BE AT ARMS LENGTH IN PREVIOUS YEARS 8. EIGHTH GROUND OF OBJECTION BASED ON THE FACTS AND CIRCUMSTANCES OF THE CASE, T HE LD. TPO HAS ERRED IN LAW AND IN FACT, IN MAKING AN UPWA RD TRANSFER PRICING ADJUSTMENT ON ACCOUNT OF PURCHASES MADE FRO M AE BY ALLEGING THAT ENTIRE DIFFERENCE IN OPERATING MARGIN S OF ASSESSEE AND COMPARABLE COMPANIES IS ON ACCOUNT OF PURCHASES BEING MADE BY ASSESSEE FROM AE AT HIGHER PRICE AND IGNORI NG THE FACT THAT PURCHASES FROM AE CONSTITUTE LESS THAN 5% OF THE TOTAL OPERATING COST OF THE ASSESSEE 9. NINTH GROUND OF OBJECTION BASED ON THE FACTS AND CIRCUMSTANCES OF THE CASE, T HE LD. AO HAS ERRED IN LAW AND IN FACT, IN NOT CONSIDERING TH E INTERNAL CPM ANALYSIS UNDERTAKEN BY THE ASSESSEE BY WAY OF AGGREGATION OF TRANSACTIONS IN ACCORDANCE WITH THE PROVISIONS OF THE ACT READ WITH THE RULES, FOR DETERMINATION O F THE ARMS LENGTH PRICE OF INTERNATIONAL TRANSACTION ON ACCOUN T OF SALE OF GENERATORS AND GENERATOR PARTS TO AES. 10. TENTH GROUND OF OBJECTION BASED ON THE FACTS AND CIRCUMSTANCES OF THE CASE, T HE LD. TPO HAS ERRED IN LAW AND IN FACT, IN FAILING TO ALL OW THE IT(TP)A NO.5/IND/2011, IT(TP)A NO.313/IND/2011, IT(TP)A NO.616/IND/2012,& IT(TP)A NO.120/IND/2014 38 ASSESSEE AN OPTION FOR FIXING THE ARMS LENGTH PRIC E AT A VARIANCE OF 5 PERCENT FROM THE ARITHMETIC MEAN DETE RMINED BY HIM AND HENCE ERRONEOUSLY ADJUSTING THE INCOME OF T HE ASSESSEE TO MEAN. 11. ELEVENTH GROUND OF OBJECTION BASED ON THE FACTS AND CIRCUMSTANCES OF THE CASE, T HE LD. AO/TPO HAD ERRED IN LAW AND IN FACT, AND HAD VIOLAT ED THE PRINCIPLES OF NATURAL JUSTICE BY NOT GIVING COGNIZA NCE TO THE DETAILED ANALYSIS AND TECHNICAL ARGUMENTS SUBMITTED BY THE ASSESSEE AND IN NOT ISSUING A SPEAKING ORDER 12. TWELFTH GROUND OF OBJECTION BASED ON THE FACTS AND CIRCUMSTANCES OF THE CASE, T HE LD. AO HAS ERRED IN LAW AND IN FACT, IN DISALLOWING THE DE PRECIATION CLAIMED ON CAPITAL ASSET PURCHASED FROM AE DURING A Y 2005- 06, THE VALUE OF WHICH HAD BEEN DETERMINED BY THE T HEN LD. TPO AS NIL ON ACCOUNT OF INDIAN TRANSFER PRICING PR OVISIONS. 13. THIRTEENTH GROUND OF OBJECTION BASED ON THE FACTS AND CIRCUMSTANCES OF THE CASE, T HE LD. AO HAS ERRED IN LAW AND ON FACT BY DISALLOWING THE PAY MENTS MADE BY THE ASSESSEE TO ITS OVERSEAS PARENT COMPANY DURI NG AY 2006-07 FOR THE PURCHASE OF TECHNICAL DRAWINGS AND DESIGNS AND ALLEGING THE SAME TO BE IN THE NATURE OF ROYALT Y ON WHICH TAX HAD TO BE WITHHELD AT THE TIME OF PAYMENT. 14. FOURTEENTH GROUND OF OBJECTION BASED ON THE FACTS AND CIRCUMSTANCES OF THE CASE, T HE LD. ASSESSING OFFICER HAS ERRED IN LAW AND IN FACT IN A LLEGING THAT THE PROVISION FOR WARRANTY HAS BEEN CREATED BY THE ASSESSEE ON AN ARBITRARY BASIS AND ACCORDINGLY IS NOT A DEDU CTIBLE EXPENDITURE WHILE COMPUTING THE INCOME TAX PAYABLE BY THE ASSESSEE. 17 . SUBMISSION OF ASSESSEE BEFORE THE AO WAS AS UNDER :- DURING THE COURSE OF TRANSFER PRICING ASSESSMENT PR OCEEDINGS, THE ASSESSEE HAD PROVIDED THE DETAILS OF THE INTERN ATIONAL TRANSACTIONS RELATING TO IMPORT OF MATERIAL AND COM PONENTS FROM ITS AE STATING THAT THE SAME HAVE BEEN CARRIED OUT ON COST TO COST BASIS AND THE AES DO NOT CHARGE ANY M ARK-UP ON SAME. SINCE THE AES DID NOT CHARGE ANY MARK, THE ASSESSEE HAS PLACED RELIANCE ON SECTION 92(3) OF THE ACT, WHICH INTER ALIA PROVIDES THAT THE PROVISIONS OF THIS SECTION SHALL NOT APPLY IN A CASE WHERE THE COMPUTATION OF INCOME UNDER SUB-SECT ION (1) OR THE DETERMINATION OF THE ALLOWANCE FOR ANY EXPEN SE OR INTEREST UNDER THAT SUB-SECTION, OR THE DETERMINATI ON OF ANY IT(TP)A NO.5/IND/2011, IT(TP)A NO.313/IND/2011, IT(TP)A NO.616/IND/2012,& IT(TP)A NO.120/IND/2014 39 COST OR EXPENSE ALLOCATED OR APPORTIONED, OR, AS TH E CASE MAY BE, CONTRIBUTED UNDER SUB-SECTION (2), HAS THE EFFE CT OF REDUCING THE INCOME CHARGEABLE TO TAX OR INCREASING THE LOSS, AS THE CASE MAY BE, COMPUTED ON THE BASIS OF ENTRIE S MADE IN THE BOOKS OF ACCOUNT IN RESPECT OF THE PREVIOUS YEA R IN WHICH THE INTERNATIONAL TRANSACTION WAS ENTERED INTO. FURTHER, RELIANCE HAS ALSO BEEN PLACED ON CIRCULAR 14/2001 ISSUED BY THE CBDT WHICH CLARIFIES THAT TRANSFER PR ICING REGULATIONS ARE NOT INTENDED TO BE APPLIED TO CASES WHERE THE ADOPTION OF THE ARMS LENGTH PRICE DETERMINED UNDER THE REGULATIONS WOULD RESULT IN A DECREASE IN OVERALL TAX INCIDENCE IN INDIA IN RESPECT OF THE PARTIES INVOLVED IN THE INTERNATIONAL TRANSACTION. SINCE, THE APPLICATION OF AN ARMS LE NGTH PRICE TO THE PRESENT CASE MAY RESULT IN REDUCTION OF THE OVE RALL TAX INCIDENCE IN INDIA, THE COST ONLY REIMBURSEMENT B Y THE AES WAS CONSIDERED TO BE IN COMPLIANCE WITH THE IMPORT OF THE INDIAN TRANSFER PRICING REGULATIONS. BASED ON THE ABOVE, THE IMPUGNED INTERNATIONAL TRAN SACTION CAN VALIDLY BE CONSIDERED TO MEET THE ARMS LENGTH TEST UNDER INDIAN TRANSFER PRICING PROVISIONS. FURTHER, THE LD. TPO, DURING THE PROCEEDINGS, REQUE STED THE ASSESSEE TO FURNISH COPIES OF SAMPLE INVOICES FOR P URCHASE OF RAW MATERIAL FROM AES, TO JUSTIFY COST TO COST BAS IS. IN RESPONSE TO THE SAME, ASSESSEE HAS SUBMITTED THAT S UCH INVOICES WERE NOT AVAILABLE WITH THE ASSESSEE AS TH E ASSESSEE DOES NOT HAVE ACCESS TO SUPPLIERS INVOICES OF ITS AE, AS THE SAME IS THE PROPRIETARY INFORMATION OF ITS AE. HOWEVER, IN SUPPORT OF THE CONTENTION THAT MATERIAL WAS SUPPLIED ON COST TO COST BASIS, ASSESSEE SUBMITTED TO THE LD. TPO THAT ITS AES PURCHASE MATERIAL FROM ITS SUPPLI ERS IN BULK. FURTHER, THE AE HAD TO INCUR SEVERAL OTHER EXPENSES LIKE FREIGHT, INSURANCE, STORE HANDLING COST, COST OF CO NVERSION ETC. FOR PROCUREMENT OF THE MATERIAL AND CONVERTING THE SAME INTO A FINISHED PRODUCT. ACCORDINGLY, THE AE SELLS MATERI AL TO ASSESSEE ON FULL COST BASIS. TO SUBSTANTIATE THE ABOVE, THE ASSESSEE HAS FURNISH ED A COPY OF THE CERTIFICATE OBTAINED FROM ITS AE CONFIRMING THAT AE HAD QUOTED AND INVOICED ALL GOODS AND SERVICES DELIVERE D TO ASSESSEE ON FULL COST BASIS. FURTHER, AE HAD CONFI RMED THAT IT DOES NOT HAVE ANY EXCESS COST COVER AND THE MARGIN RATE OF AE IS ZERO (COPY ENCLOSED AS EXHIBIT 6 OF THE PAPERBOOK ). BASED ON THE MANAGEMENT CERTIFICATE, ASSESSEE SUBMI TTED BEFORE THE LD. TPO THAT THE INTERNATIONAL TRANSACTI ON IN CONNECTION WITH IMPORT OF MATERIAL AND COMPONENTS F ROM ITS AES SHOULD BE CONSIDERED TO BE AT ARMS LENGTH. IT(TP)A NO.5/IND/2011, IT(TP)A NO.313/IND/2011, IT(TP)A NO.616/IND/2012,& IT(TP)A NO.120/IND/2014 40 18 . IN THE ORDER DATED 14 OCTOBER 2009 ISSUED BY THE LD. TPO TO THE ASSESSEE, THE LD. TPO HAS FAILED TO DISCUSS THE ASPECT OF THE IMPUGNED TRANSACTION BEING UNDERTAKEN BY ASSESSEE O N A COST-TO COST BASIS. AS THE TRANSACTIONS IN QUESTION HAVE BEEN C ARRIED OUT ON A COST TO COST BASIS BETWEEN THE ASSESSEE AND ITS AE, THE ASSESSEE, BY CORRECTLY PLACING RELIANCE ON THE PROVISIONS OF SEC TION 92(3) AND CIRCULAR 14 OF 2001, CONCLUDED THAT SUBJECT IMPUGNE D INTERNATIONAL TRANSACTION IS AT ARMS LENGTH. 19 . IN SUPPORT OF ITS ABOVE CONTENTION, THE ASSESSEE HAD SUBMITTED BEFORE THE LD. TPO, A COPY OF THE CERTIFICATE OBTAI NED FROM ITS AE CONFIRMING THAT AE HAD QUOTED AND INVOICED ALL GOOD S AND SERVICES DELIVERED TO ASSESSEE ON FULL COST BASIS. FURTHER, AE HAD CONFIRMED THAT IT DOES NOT HAVE ANY EXCESS COST COVER AND THE MARGIN EARNED BY THE AE IS ZERO 20 . THE LD. TPO DID NOT TAKE INTO CONSIDERATION THE A BOVE CERTIFICATE SUBMITTED BY THE ASSESSEE, WHILE DETERM INING THE ALP OF TRANSACTION INVOLVING IMPORT OF MATERIAL BY THE ASS ESSEE. THIS IS EVIDENT FROM THE FACT THAT ENTIRE ORDER OF LD. TPO IS SILENT ON THE ISSUE AND HAS SIMPLY DISCUSSES DETERMINATION OF ALP BY US ING TNMM. THIS SHOWS THAT LD. TPO APPROACHED THE CASE WITH A BIASE D MIND AND CHOSE TO IGNORE VALID DOCUMENTARY EVIDENCE IN HIS P OSSESSION TO ARRIVE AT HIS CONCLUSION. 21 . THE LD. TPO HAD IGNORED THE FACT DURING FY 2005-0 6, THERE HAS BEEN NO CHANGE IN THE NATURE AND TERMS OF INTERNATI ONAL TRANSACTIONS ENTERED INTO BY THE ASSESSEE VIS--VIS THE TRANSACT IONS UNDERTAKEN BY IT IN PRECEDING YEARS. FURTHER THERE HAS BEEN NO CH ANGE IN THE BUSINESS PROFILE, FUNCTIONS PERFORMED, ASSETS EMPLO YED AND RISKS ASSUMED BY ASSESSEE IN FY 2005-06. 22 . RULE 10C(2) OF INDIAN TRANSFER PRICING REGULATION PROVIDES THAT IN SELECTING THE MOST APPROPRIATE METHOD, THE FOLLO WING FACTORS SHALL BE TAKEN INTO ACCOUNT: IT(TP)A NO.5/IND/2011, IT(TP)A NO.313/IND/2011, IT(TP)A NO.616/IND/2012,& IT(TP)A NO.120/IND/2014 41 THE CLASS OR CLASSES OF ASSOCIATED ENTERPRISES ENT ERING INTO THE TRANSACTION AND THE FUNCTIONS PERFORMED BY THEM, TAKING INTO ACCOUNT ASSETS EMPLOYED OR TO BE EMPLOYED AND RISKS ASSUMED BY SUCH ENTERPRISES THE OECD GUIDELINES ALSO EMPHASIZE THE IMPORTANCE O F FUNCTIONAL SIMILARITY AS A FACTOR FOR COMPARABILITY ANALYSIS. IN THIS REGARD PARAGRAPH 1.20 OF THE OECD GUIDELINES STATES THAT: IN DEALINGS BETWEEN TWO INDEPENDENT ENTERPRISES, C OMPENSATION USUALLY WILL REFLECT THE FUNCTIONS THAT EACH ENTERP RISE PERFORMS (TAKING INTO ACCOUNT ASSETS USED AND RISKS ASSUMED). THERE FORE, IN DETERMINING WHETHER CONTROLLED AND UNCONTROLLED TRA NSACTIONS OR ENTITIES ARE COMPARABLE, COMPARISON OF THE FUNCTIONS TAKEN ON BY THE PARTIES IS NECESSARY. THE ABOVE-MENTIONED GUIDANCE LAID DOWN BY OECD HAS BEEN RELIED UPON BY BOTH BANGALORE INCOME-TAX APPELLATE TRIBUNA L (TRIBUNAL) AND DELHI TRIBUNAL. IN M/S AZTEC SOFTWARE & TECHNOLOGY SERVICES LTD V ACIT (I.T.A. NO.584/BANGALORE/2006), THE SPECIAL BENCH OF THE INCOME-TAX APPELLATE TRIBUNAL (TRIBUNAL) AGREED T HAT: BEFORE WE GO INTO EACH ONE OF THESE METHODS, THE F UNDAMENTAL REQUIREMENT, IN ANY OF THE METHOD SELECTED, IS THE SELECTION OF COMPARABLES, FOR BENCHMARKING INTERNATIONAL TRANS ACTIONS. THIS SELECTION OF A COMPARABLE SHOULD BE BASED ON FUNCTI ONAL, ASSET, AND RISK ANALYSIS OF BOTH THE PARTIES AND TRANSACTI ONS. SIMILARLY, IN THE RECENT TRIBUNAL RULING IN THE CAS E OF MENTOR GRAPHICS (NOIDA) PVT. LTD. (SUPRA) , THE TRIBUNAL USED THE ABOVE RATIO WHILE STATING THE FOLLOWING: THEREAFTER, FUNCTIONAL ANALYSIS IS CARRIED TO IDENTIFY FUNCTION S, RISK AND ASSETS OF UNCONTROLLED TRANSACTIONS AND CO MPARISON IS CARRIED WITH CHARACTERISTICS OF THE CONTROLLED TRAN SACTION. THIS IS NECESSARY TO FIND WHETHER COMPARABLE SELECTED AR E REALLY COMPARABLE AND RELIABLE . COMPARISON BASED ON FUNCTIONAL ANALYSIS INCLUDE ECONOMICALLY SIGNIFICANT ACTIVITIES AND RES PONSIBILITIES UNDERTAKEN OR TO BE UNDERTAKEN BY THE INDEPENDENT A ND ASSOCIATED ENTERPRISES. FURTHERMORE, IN AGREEMENT WITH OECD, THE MENTOR GRA PHICS CASE ALSO UNDERSCORES THE NEED FOR A CLOSE FUNCTIONAL SI MILARITY EVEN WHERE TNMM IS APPLIED. RELEVANT IN THIS REGARD ARE THE F OLLOWING EXTRACTS FROM THE DECISION. IT IS CLEAR THAT EVEN WHEN TNMM METHOD IS APPLIED TO DETERMINE ARMS LENGTH PRICE AS PER OECD GUIDELINES, FUNCTION AL PROFILE , ASSETS, ASSUMED RISKS OF CONTROLLED AND UNCONTROLLE D TRANSACTION ARE TO BE SEEN WHILE SCREENING. BESIDES, IT IS NOT POS SIBLE TO IGNORE SPECIFIC INDIAN REGULATIONS ON THE SUBJECT. IT(TP)A NO.5/IND/2011, IT(TP)A NO.313/IND/2011, IT(TP)A NO.616/IND/2012,& IT(TP)A NO.120/IND/2014 42 HENCE, BASED ON INDIAN TRANSFER PRICING REGULATIONS SUPPORTED BY JUDICIAL DECISIONS, IT IS CLEAR THAT A ROBUST FUNCT IONAL ANALYSIS IS REQUIRED EVEN WHERE TNMM IS APPLIED. 23 . AGAINST USE OF BHEL AS COMPARABLE, CONTENTION OF ASSESSEE BEFORE DRP WAS AS UNDER :- ASSESSEE HAD APPLIED WIDER COMPARABILITY CRITERIA WHILE SCREENING THE COMPANIES AT THE TIME OF PREPARING TR ANSFER PRICING STUDY; DETAILED EVALUATION OF ALL FACTORS SUCH AS FUNCTIONS PERFORMED, ASSETS EMPLOYED AND RISKS UNDERTAKEN HAD BEEN UNDER TAKEN SUBSEQUENTLY FOR ESTABLISHING COMPARABILITY OF INDEPENDENT COMPANIES; ASSESSEE HAD NOT CONSIDERED THE TURNOVER CRITERIO N AS ONE OF THE FACTORS IN DETERMINING THE COMPARABILITY EARLIE R. IN LIGHT OF ABOVE, ASSESSEE WISHES TO SUBMIT BEFORE THE HONBLE PANEL THAT BHEL SHOULD BE REJECTED AND A FINAL SET OF FOL LOWING FOUR COMPARABLE COMPANIES BE CONSIDERED, WHILE APPLYING TNMM: ALSTOM PROJECTS INDIA LIMITED JYOTI LIMITED POWERICA LIMITED TRIVENI ENGINEERING AND INDUSTRIES LIMITED THE OPERATING MARGIN OF THE AFORESAID COMPARABLE CO MPANIES IS AS FOLLOWS: S. NO. COMPARABLES WORKING CAP ITAL ADJUSTED OPERATING MARGIN ON OPERATING REVENUE (%) 1. ALSTOM PROJECTS INDIA LIMITED 3.10% 2. JYOTI LIMITED 10.82% 3. POWERICA LIMITED 10.27% 4. TRIVENI ENGINEERING & INDUSTRIES LIMITED 13.86% ARITHMETIC MEAN 9.51% IT(TP)A NO.5/IND/2011, IT(TP)A NO.313/IND/2011, IT(TP)A NO.616/IND/2012,& IT(TP)A NO.120/IND/2014 43 24 . HOWEVER, LD. TPO HAD FAILED TO CITE REASONS FOR N OT ACCEPTING ASSESSEES CONTENTION FOR CONSIDERING THE USE OF DE TAILED AND ROBUST SET OF FUNCTIONALLY MORE COMPARABLE COMPANIES. 25 . IN LIGHT OF ABOVE, THE 4 COMPANIES (EXCLUDING BHE L) SHOULD BE CONSIDERED AS COMPARABLE TO ASSESSEES BUSINESS OPE RATIONS. THESE COMPARABLE COMPANIES HAVE BEEN IDENTIFIED BASED ON A STRICT AND DETAILED FUNCTIONAL COMPARABILITY UNDERTAKEN HAVING REGARD TO THE BUSINESS PROFILE OF THE ASSESSEE. 26 . AS PER THE PROVISO TO SECTION 92C(2) OF THE ACT, AN ASSESSEE HAS THE OPTION TO DETERMINE THE TRANSACTION PRICE, WHICH MAY VARY FROM THE ARMS LENGTH PRICE BY +/- 5%. SECTION 92C(3) O F THE ACT PROVIDES THAT THE LD. TPO HAS TO DETERMINE THE ARMS LENGTH PRICE IN ACCORDANCE WITH SUB-SECTION (3) OF SECTION 92C. SEC TION 92C(3) FURTHER STATES THAT THE ARMS LENGTH PRICE SHALL BE DETERMI NED BY THE AO IN ACCORDANCE WITH SUB SECTION (1) AND (2) OF SECTION 92C. THEREFORE, IT SHOULD BE APPRECIATED THAT THE LD. TPO IS MANDATORI LY REQUIRED TO CALCULATE THE ARMS LENGTH PRICE IN ACCORDANCE WITH SECTION 92C (1) AND 92C(2) OF THE ACT. THE RELEVANT EXTRACT OF SEC TION 92C(2) OF THE ACT IS REPRODUCED BELOW. AS PER SECTION 92C(2), WHERE MORE THAN ONE PRICE IS DETERMINED BY THE MOST APPROPRIATE METHOD, THE ARMS LENGTH PRICE SHALL BE TAKEN TO BE THE ARITHMETICAL MEAN OF SUCH PRICES, OR, AT THE OPTION OF THE ASSESSEE, A PRICE WHICH MAY VARY FROM THE ARITHMETI CAL MEAN BY AN AMOUNT NOT EXCEEDING FIVE PER CENT OF SUCH ARITHMET ICAL MEAN SIMILARLY, NOTES ON CLAUSES - INCOME TAX (FINANCE B ILL, 2001) CLARIFIED THAT, UNDER THE EXISTING PROVISIONS CONTAINED IN SUB-SEC TION (2) OF THE SAID SECTION, THE MOST APPROPRIATE METHO D SHALL BE APPLIED FOR DETERMINATION OF ARMS LENGTH PRICE IN THE MANN ER PRESCRIBED. THE PROVISO TO SUB-SECTION (2) PROVIDES THAT IF THE APP LICATION OF THE MOST APPROPRIATE METHOD LEADS TO DETERMINATION OF MORE T HAN ONE PRICE, THE ARITHMETICAL MEAN OF SUCH PRICES SHALL BE TAKEN TO BE THE ARMS LENGTH PRICE IN RELATION TO THE INTERNATIONAL TRANS ACTION. IT IS PROPOSED TO SUBSTITUTE THE AFORESAID PROVISO TO SUB-SECTION (2) SO AS TO PROVIDE THAT WHERE THE MOST APPROPRIATE METHOD RESULTS IN M ORE THAN ONE PRICE, THE ARITHMETICAL MEAN OF SUCH PRICES OR, AT THE OPTION OF THE ASSESSEE, A PRICE WHICH DIFFERS FROM THE ARITHMETICAL MEAN BY AN AMOUNT NOT EXCEEDING FIVE PER CENT OF SUCH MEAN MAY BE TAKEN TO BE THE ARMS LENGTH PRICE IN RELATION TO THE INTERNATIONAL TRANSACTION IT(TP)A NO.5/IND/2011, IT(TP)A NO.313/IND/2011, IT(TP)A NO.616/IND/2012,& IT(TP)A NO.120/IND/2014 44 FROM THE ABOVE IT IS CLEAR THAT IN CASE THE APPLICA TION OF THE MOST APPROPRIATE METHOD RESULTS IN TWO OR MORE PRICES, T HE ASSESSEE IS REQUIRED TO COMPUTE THE ARMS LENGTH PRICE BY DETER MINING AN ARITHMETIC MEAN OF SUCH PRICES OR A 5% VARIATION OF THE ARITHMETIC MEAN THEREOF. THERE IS NO AMBIGUITY IN LAW IN RESPECT OF THE SAME. THUS, ANY ADJUSTMENT TO THE INCOME OF THE ASSESSEE SHOULD BE COMPUTED AFTER CONSIDERING A (+/-) 5% VAR IATION FROM THE ARITHMETIC MEAN, WHICHEVER IS FAVOURABLE TO THE ASSESSEE. FURTHER, THE TRANSFER PRICING IS NOT AN EXACT SCIEN CE. IT REQUIRES THE EXERCISE OF JUDGMENT ON THE PART OF BOTH THE TAX AD MINISTRATION AND TAXPAYER. PARA 1.12 AND 1.13 OF OECD GUIDELINES STATE THAT. THE ARM'S LENGTH PRINCIPLE IS SOUND IN THEORY SINCE IT PROVIDES THE CLOSEST APPROXIMATION OF THE WORKINGS OF THE OPEN MARKET IN CASES WHERE GOODS AND SERVICES ARE TRANSFERRED BETWEEN ASSOCIAT ED ENTERPRISES. WHILE IT MAY NOT ALWAYS BE STRAIGHTFORWARD TO APPLY IN PRACTICE, IT DOES GENERALLY PRODUCE APPROPRIATE LEVELS OF INCOME BETWEEN MEMBERS OF MNE GROUPS, ACCEPTABLE TO TAX ADMINISTRATIONS. FURTHER, THE HONBLE ITAT DELHI BENCH IN CASE OF M/S SONY INDIA (P) LIMITED VS. DEPUTY COMMISSIONER OF INCOME TAX (ITA 114 ITD 448), HAS HELD THAT: IN OUR VIEW, BOTH IN THE FIRST AS ALSO IN THE SECON D LIMB, IMPLICATIONS OF DETERMINED ARMS LENGTH PRICE ARE THE SAME EXCEPT F OR THE MARGINAL BENEFIT ALLOWED TO THE TAXPAYER UNDER THE SECOND LI MB. HENCE, WE ARE OF THE VIEW THAT SECOND LIMB IS APPLICABLE EVEN TO CASES WHERE THE TAXPAYER INTENDS TO CHALLENGE ARMS LENGTH PRIC E TAKEN AS ARITHMETIC MEAN AND DETERMINED THROUGH THE MOST APP ROPRIATE METHOD. AS STATED ABOVE, THE SECOND PROVISO IS INT ENDED TO GIVE MARGINAL RELIEF TO ALL TAXPAYERS AS DETERMINATION O F ARMS LENGTH PRICE IS NOT AN EXACT SCIENCE BUT IS AN APPROXIMATION. O PTION IS GIVEN TO THE TAXPAYER AS IN SOME CASES, VARIATION NOT EXCEED ING 5% OF ARITHMETIC MEAN MIGHT NOT SUIT THE TAXPAYER, AND, T HEREFORE, TAXPAYER IN SUCH CASES SHOULD NOT BE PUT TO A PREJUDICE. OT HERWISE, THERE IS NO DIFFERENCE BETWEEN THE FIRST AND THE SECOND LIMB OF THE PROVISION AS FAR AS RIGHT OF THE TAXPAYER TO CHALLENGE THE DETER MINED PRICE IS CONCERNED . THE SECOND LIMB ONLY ALLOWS MARGINAL RELIEF TO THE TAXPAYER AT HIS OPTION TO TAKE ALP NOT EXCEEDING 5% OF THE ARITHMETIC MEAN. THEREFORE, IN LINE WITH THE VIEW TAKEN BY KO LKATA BENCH OF THE TRIBUNAL, WE ARE OF THE VIEW THAT BENEFIT OF THE SE COND LIMB IS AVAILABLE TO ALL TAXPAYERS IRRESPECTIVE OF THE FACT THAT PRICE OF INTERNATIONAL TRANSACTION DISCLOSED BY THEM EXCEEDS THE MARGIN PROVIDED IN THE PROVISION.. 27 . IN LIGHT OF THE ABOVE AND THE OPTION ALLOWED TO T HE ASSESSEE BY PROVISO TO SECTION 92C(2), THE ACTION OF THE LD. TP O IN NOT APPLYING THE PROVISIONS OF PROVISO TO SECTION 92C(2) WAS AGA INST THE LEGAL PROVISIONS. IT(TP)A NO.5/IND/2011, IT(TP)A NO.313/IND/2011, IT(TP)A NO.616/IND/2012,& IT(TP)A NO.120/IND/2014 45 28 . IN VIEW OF THE ABOVE DISCUSSION, WE CAN CONCLUDE THAT BHEL IS NOT A COMPARABLE OWING TO THE SIGNIFICANT DIFFERENC E IN SIZE OF OPERATIONS AND TURNOVER. EVEN WE FOUND THAT BHEL HA D BEEN ACCEPTED AS NON-COMPARABLE BY THE TPO FOR THE ASS ESSMENT YEAR 2008-09. WE ALSO FOUND THAT TURNOVER OF SEGMENT OF BHEL WHICH HAS BEEN CONSIDERED AS COMPARABLE IS 100 TIMES MORE THA N THAT OF ASSESSEE. IT IS ALSO A MATTER OF RECORD THAT SAME I NTERNATIONAL TRANSACTION HAS BEEN ACCEPTED TO BE AT ARMS LENGTH IN THE PREVIOUS YEAR. ANYHOW AS PER PROVISO TO SECTION 92C(2), ADJU STMENT TO THE INCOME OF ASSESSEE IS TO BE RESTRICTED TO THE PROPO RTION OF THE INTERNATIONAL TRANSACTIONS AND CANNOT BE MADE TO EN TITY WHICH CONTAIN TRANSACTIONS TO THE UNRELATED PARTIES AS WELL AND A DJUSTMENT INCOME OF ASSESSEE IS TO BE RESTRICTED TO THE PROPORTION OF I NTERNATIONAL TRANSACTIONS WHICH IS ALLOWABLE INTERNATIONAL TRANS ACTIONS AND SINCE AS PER FOLLOWING CALCULATION, WHICH IS WITHIN + 5%, NO ADJUSTMENT IS REQUIRED. SINCE THE DIFFERENCE IS WITHIN + 5%, ADJUSTMENT MADE BY AO/TPO IN THE PURCHASES WERE NOT JUSTIFIED. 29 . NOW, WE COMPUTE THE AMOUNT OF ADJUSTMENT HAVING R EGARD TO THE VALUE OF INTERNATIONAL TRANSACTION OF THE ASSES SEE IN ASSESSMENT YEAR 2006-07 AND 2007-08, WHICH IS AS UNDER :- COMPUTATION OF WORKING OF ADJUSTMENT HAVING REGARD TO THE VALUE OF INTERNATIONAL TRANSACTIONS OF ASSESSEE FOR THE A.Y. 2006-07 : PARTICULARS AMOUNT (IN RS.) TOTAL SALES 1,09,89,76,568 LESS : OPERATING COST 98,60,14,227 OPERATING PROFITS (OP) 11,29,62,341 OP/SALES 10.28% ARMS LENGTH MARGIN AS DETERMINED BY AO 12.48% TRANSFER PRICING ADJUSTMENT-ADDITION ON ACCOUNT OF ARMS LENGTH PRICE MADE BY TPO(A) 2,41,89,935 PARTICULARS RELATED PARTY COST UNRELATED PARTY COST TOTAL EXPENDITURE (OTHER THAN RELATED PARTY EXPENDITURE 4,32,74,022 94,27,40,205 98,60,14,227 IT(TP)A NO.5/IND/2011, IT(TP)A NO.313/IND/2011, IT(TP)A NO.616/IND/2012,& IT(TP)A NO.120/IND/2014 46 RELATING TO DESIGN & DRAWINGS, TECHNICAL KNOW- HOW AND ROYALTY) RATIO (B) 4.39% 95.61% 100.00% PROPORTIONATE ADJUSTMENT BASED ON VALUE OF INTERNAT IONAL 10,61,644 TRANSACTIONS UNDERTAKEN WITH RELATED PARTY(C=AXB) ALP OF TRANSACTION 4,22,12,378 ACTUAL TRANSACTION VALUE 4,32,74,022 DIFFERENCE BETWEEN ALP AND TRANSACTION VALUE 2.52% TRANSACTION VALUE WITHIN 5% OF ALP YES COMPUTATION OF WORKING OF ADJUSTMENT HAVING REGARD TO THE VALUE OF INTERNATIONAL TRANSACTIONS OF ASSESSEE FOR THE A.Y. 2007-08 : PARTICULARS AMOUNT (IN RS.) TOTAL SALES 1,11,86,31,546 LESS : OPERATING COST 98,46,33,243 OPERATING PROFITS (OP) 13,39,98,303 OP/SALES 11.98% ARMS LENGTH MARGIN AS DETERMINED BY AO 13.23% TRANSFER PRICING ADJUSTMENT-ADDITION ON ACCOUNT OF ARMS LENGTH PRICE MADE BY TPO(A) 1,39,96,551 PARTICULARS RELATED PARTY COST UNRELATED PARTY COST TOTAL EXPENDITURE (OTHER THAN RELATED PARTY EXPENDITURE RELATING TO DESIGN & DRAWINGS, TECHNICAL KNOW-HOW AND ROYALTY) 7,17,40,637 91,28,92,606 98,46,33,243 RATIO (B) 7.29% 92.71% 100.00% PROPORTIONATE ADJUSTMENT BASED ON VALUE OF INTERNAT IONAL 10,19,792 TRANSACTIONS UNDERTAKEN WITH RELATED PARTY(C=AXB) ALP OF TRANSACTION 7,07,20,845 ACTUAL TRANSACTION VALUE 7,17,40,637 DIFFERENCE BETWEEN ALP AND TRANSACTION VALUE 1.44% TRANSACTION VALUE WITHIN 5% OF ALP YES IT IS CLEAR FROM THE ABOVE CALCULATION THAT TRANSAC TION VALUE IS WITHIN THE + 5% OF ALP, THEREFORE, ADJUSTMENT MADE BY THE AO/TPO WAS NOT IT(TP)A NO.5/IND/2011, IT(TP)A NO.313/IND/2011, IT(TP)A NO.616/IND/2012,& IT(TP)A NO.120/IND/2014 47 JUSTIFIED. ACCORDINGLY, WE DIRECT TO DELETE THE ADJ USTMENT MADE BY AO/TPO ON ACCOUNT OF PURCHASES/SALES TO AE IN ALL T HE YEARS UNDER CONSIDERATION. 30 . THE LAST GRIEVANCE OF THE ASSESSEE RELATES TO NOT ALLOWING CLAIM OF DEPRECIATION ON FIXED ASSETS WHICH WAS CAPITALIZ ED IN THE ASSESSMENT YEAR 2005-06. WE FOUND THAT ADJUSTMENT H AS BEEN PROPOSED BY TPO ON ACCOUNT OF DEPRECIATION CLAIMED ON CAPITAL ASSETS PURCHASED FROM AE DURING THE ASSESSMENT YEAR 2005-06. THE VALUE OF WHICH HAS BEEN DETERMINED BY THE THEN TPO AT NIL ON ACCOUNT OF INDIAN TRANSFER PRICING PROVISIONS. WE F OUND THAT THE AO HAD FOLLOWED THE FINDING ON ACCOUNT OF INTERNATIONA L TRANSACTION REGARDING PURCHASE OF CAPITAL ASSET FROM ITS AE AS PER ORDER U/S 92CA(3) OF THE ACT PASSED FOR THE AY 2005-06 AND TE XT AS MENTIONED IN THE ASSESSMENT ORDER U/S 143(3) IN THE ASSESSEE COMPANYS CASE FOR THE AY 2005-06. BASED ON SAME, HAVING REGARD TO THE VALUE OF SUCH ASSET BEING DETERMINED DURING AY 2005-06 AS NI L BY THE THEN LD. TPO, THE LD. AO HAD PROCEEDED TO DISALLOW THE DEPRE CIATION CLAIMED ON SUCH CAPITAL ASSET FOR AY 2006-07 AS WELL. 31 . IT WAS CONTENDED BY LEARNED AR THAT NO OPPORTUNIT Y OF BEING HEARD HAS BEEN GIVEN TO ASSESSEE BEFORE DISALLOWANC E OF DEPRECIATION CLAIMED ON CAPITAL ASSET PURCHASED FROM AE DURING A Y 2005-06, THE VALUE OF WHICH HAD BEEN DETERMINED BY THE THEN LD. TPO AS NIL. THE AO ERRED ON FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW BY DETERMINING ARMS LENGTH VALUE OF CAPITAL ASSET PUR CHASED FROM AE DURING AY 2005-06 AS NIL AND CONCLUDING FOR DISALLO WANCE OF DEPRECIATION THEREON CLAIMED DURING THAT YEAR. IN D OING SO, THE THEN LD. TPO HAD MISPLACED FACTS OF CASE. 32 . THE CONTENTION OF THE ASSESSEE BEFORE THE AO WAS AS UNDER :- DURING FY 2004-05, ASSESSEE RECORDED AN AMOUNT OF RS. 23,658,600 IN RELATION TO AN INSULATING TAPING MACH INE (CAPITAL ASSET UNDER CONSIDERATION) PURCHASED BY IT TO FROM ITS AE. THE MACHINE HAD BEEN PURCHASED BY THE AE DURING FY 2001 -02 FROM AN UNRELATED ENTITY AND WAS PROVIDED TO ASSESS EE DURING FY 2001-02 ONLY. IT(TP)A NO.5/IND/2011, IT(TP)A NO.313/IND/2011, IT(TP)A NO.616/IND/2012,& IT(TP)A NO.120/IND/2014 48 SUCH MACHINE WAS PUT TO USE BY THE ASSESSEE ON OCTO BER 1, 2002. NO CHARGE WAS MADE FOR THE SAME BY THE AE IN FY 2001-02. HOWEVER, THE AE RAISED INVOICE FOR SUCH MA CHINE ON THE ASSESSEE DURING THE FY 2004-05. FURTHER, SUCH MACHINE HAD ORIGINALLY BEEN PURCHASED BY AE FOR CHF 9,12,279 (INR EQUIVALENT AT THE EXCHANGE RATE P REVALENT ON THE DATE OF PURCHASE I.E. FEBRUARY 22, 2002 IS R S 2,62,37,144). DURING THE FY 2004-05, AE TRANSFERRED THIS MACHINE TO ASSESSEE AT A CONSIDERATION OF EURO 420,000 EQUIVAL ENT TO INR 23,658,600. THE ASSESSEE IN ITS TRANSFER PRICING DOCUMENTATION HAD MENTIONED THAT HAD IT CAPITALISED THE MACHINE IN ITS BOOKS OF ACCOUNT ON OCTOBER 1, 2002 (DATE OF MACHINE PUT TO USE), DURING THE PERIOD OCTOBER 1, 2 002 TO AUGUST 18, 2004 (DATE OF TRANSFER OF MACHINE), IT W OULD HAVE INCURRED DEPRECIATION AMOUNTING TO RS 2,112,097 ON ACCOUNT OF THE SAID ASSET. HENCE, NET WRITTEN DOWN VALUE OF THE MACHINE WOULD HAVE BEEN RS 24,125,047. THE CAPITALISED VALUE OF THIS ASSET AS ON AUGUST 18, 2004 IS RS 23,658,600 WHICH IS LOWER THA N THE WRITTEN DOWN VALUE OF THE ASSET CALCULATED. ACCORD INGLY, THE INTERNATIONAL TRANSACTION PERTAINING TO THE PURCHAS E OF ASSET BY ASSESSEE FROM ITS AE WAS DEMONSTRATED TO BE AT ARM S LENGTH FROM AN INDIAN TRANSFER PRICING PERSPECTIVE. THE ASSESSEE HAD FURTHER UNDERTAKEN A SECONDARY ANA LYSIS FOR THE SUBJECT TRANSACTION TO CORROBORATE THAT INTERNA TIONAL TRANSACTIONS OF ASSESSEE ARE AT ARMS LENGTH. IN T HIS REGARD, ASSESSEE HAD CONSIDERED TNMM AS MOST APPROPRIATE ME THOD AND HAD DEMONSTRATED THAT OPERATING MARGIN OF THE A SSESSEE (AFTER CONSIDERING DEPRECIATION ON SUCH ASSET) WAS HIGHER THAN ARITHMETIC MEAN MARGIN OF COMPARABLE COMPANIES . BASED ON SUCH ANALYSIS, THE TRANSACTION INVOLVING PURCHAS E OF CAPITAL ASSET WAS HELD TO BE AT ARMS LENGTH FROM AN INDIAN TRANSFER PRICING PERSPECTIVE. 32.1 THE ASSESSEE, DURING THE COURSE OF TRANSFER PRICIN G PROCEEDINGS FOR AY 2005-06 HAD SUBMITTED BEFORE THE THEN LD. TP O THAT THE MACHINE WAS PURCHASED BY AE IN THE FY 2001-02 FROM A NON-RELATED ENTITY I.E. M/S MICAMATION AG AND IT WAS SENT TO IN DIA ACCORDINGLY. THE VALUATION OF SAID MACHINE AS PER CUSTOMS RECORD WAS AT RS. 18,974,466 (INCLUDING CUSTOM DUTY). THE MACHINE WA S PUT TO USE DURING FY 2001-02, HOWEVER, THE PAYMENT FOR SAME HA D BEEN MADE DURING FY 2004-05 DUE TO INADVERTENT OVERSIGHT. FU RTHER, SINCE THE MACHINE HAS BEEN PURCHASED BY AE FROM AN UNRELATED THIRD PARTY, THE IT(TP)A NO.5/IND/2011, IT(TP)A NO.313/IND/2011, IT(TP)A NO.616/IND/2012,& IT(TP)A NO.120/IND/2014 49 CONSIDERATION PAID BY AE FOR PURCHASE OF MACHINE FR OM SUCH THIRD PARTY HAD BEEN USED AS A COMPARABLE UNCONTROLLED PR ICE FOR BENCHMARKING THE VALUE OF IMPUGNED INTERNATIONAL TR ANSACTION. 32.2 IT WAS ALSO THE ARGUMENT OF LEARNED AR THAT TH E TPO, WITHOUT PREJUDICE TO ITS CONTENTIONS, MENTIONED THAT EVEN I F IT IS CONSIDERED THAT CAPITAL ASSET PURCHASED BY ASSESSEE FROM ITS AE IS A TRANSACTION RELATING TO FY 2004-05, ITS DEPRECIATED VALUE WOULD HAD BEEN APPROXIMATELY BEEN RS. 80,04,844/- (RS. 1.89 CRORE LESS DEPRECIATION @ 25% FOR FY 02-03, 03-04 ON WDV) I.E. AFTER CONSID ERING DEPRECIATION OF 25% AS PER INCOME TAX ACT, 1961 FOR EACH OF THE THREE PRECEDING FINANCIAL YEARS. THE ASSESSEE ACCOUNTS FO R THE FIXED ASSETS AT COST OF ACQUISITION OR CONSTRUCTION LESS ACCUMUL ATED DEPRECIATION. THE COST OF FIXED ASSETS INCLUDES FREIGHT, PREOPERA TIVE EXPENSES, CAPITALIZED FOREIGN EXCHANGE LOSSES, DUTIES AND TAX ES INCURRED TO PUT THEM INTO USE. DEPRECIATION ON FIXED ASSETS IS PRO VIDED ON PRO-RATA FOR THE PERIOD OF USE ON STRAIGHT LINE METHOD, AT RATES SPECIFIED IN SCHEDULE XIV TO THE COMPANIES ACT, 1956. IT IS SIGN IFICANT TO NOTE THAT THE AFORESAID CONTENTION OF THE TPO FALLS SHORT OF MERIT AS HE HAD GROSSLY FAILED TO GIVE COGNIZANCE TO THE GENERALLY ACCEPTED ACCOUNTING POLICIES AND THE ACCOUNTING POLICY OF THE ASSESSEE TO ACCOUNT FOR THE FIXED ASSETS AND DEPRECIATION BY CONSIDERING THE C USTOMS VALUATION AS THE VALUE OF ASSET FOR ARRIVING AT THE CONCLUSIO N, THEREBY IGNORING THE OTHER INCIDENTAL COST LIKE FREIGHT, INSURANCE, OTHER INSTALLATION EXPENSES INCURRED BY ASSESSEE FOR PUTTING THE ASSET TO USE. 33 . WE HAVE CONSIDERED THE RIVAL CONTENTIONS, CAREFUL LY GONE THROUGH THE ORDERS OF THE AUTHORITIES BELOW AND FOU ND THAT DURING THE ASSESSMENT YEAR 2005-06, THE TPO HAS DISALLOWED THE TRANSACTIONS DETERMINING THE ALP TO BE NIL IN RESPECT OF PURCHAS E OF MACHINERY ON THE BASIS OF THAT IT IS A GRATUITOUS ACT OF PARENT COMPANY. DURING THE YEAR UNDER CONSIDERATION, THE AO HAD FOLLOWED THE O RDER PASSED BY THE TPO IN ASSESSMENT YEAR 2005-06 AND DISALLOWED T HE DEPRECIATION ON SUCH CAPITAL ASSETS IN THESE YEARS ALSO. WE FOUN D THAT SAME ISSUE IT(TP)A NO.5/IND/2011, IT(TP)A NO.313/IND/2011, IT(TP)A NO.616/IND/2012,& IT(TP)A NO.120/IND/2014 50 FOR A.Y.2005-06 IS STILL PENDING BEFORE THE CIT(A), THEREFORE, BEFORE FINALIZING THE MAIN ASSESSMENT YEAR IN WHICH VALUE WAS TAKEN AT NIL BY THE TPO, IT WILL BE PREMATURE TO DECIDE THE ISSUES DURING THE YEARS UNDER CONSIDERATION. DISALLOWANCE OF DEPRECIATION I S CONSEQUENTIAL TO THE DECISION OF ASSESSMENT YEAR 2005-06, WHICH IS P ENDING BEFORE THE CIT(A). HENCE, IN THE INTEREST OF JUSTICE AND FAIR- PLAY, WE RESTORE BACK THIS GROUND TO THE FILE OF THE AO IN ALL THE YEARS UNDER CONSIDERATION WITH A DIRECTION TO DECIDE THE SAME AFTER CONSIDERI NG THE ORDER PASSED BY CIT(A) IN THE A.Y.2005-06. WE DIRECT ACCORDINGLY . 34. IN THE RESULT, APPEALS OF THE ASSESSEE FOR ALL THE YEARS UNDER CONSIDERATION ARE ALLOWED IN PART IN TERMS INDICATE D HEREINABOVE. ',%-2 #$,- / 3 !' 4 5'6-# . 7 - / - 8 9 ORDER PRONOUNCED IN THE OPEN COURT ON THIS 03 /0 7 /2014. / 1&% . 4 :#2 03 / 07 /2014 / 9 SD/- SD/- ( ) (JOGINDER SINGH) ( . . ) (R.C.SHARMA) / JUDICIAL MEMBER / ACCOUNTANT MEMBER INDORE :# DATED 03 /07 /2014 *. . ./PKM , # . / PS !' #'$ / COPY OF THE ORDER FORWARDED TO : % & / BY ORDER, 1. !' ') / THE APPELLANT 2. *+') / THE RESPONDENT. 3. . 6- ( !' ) / THE CIT(A), INDORE 4. . 6- / CIT, INDORE 5. ?3 *-#@$ , !' 0 !@$% , / DR, ITAT, INDORE 6. A B / GUARD FILE. +?'- *- //TRUE COPY// IT(TP)A NO.5/IND/2011, IT(TP)A NO.313/IND/2011, IT(TP)A NO.616/IND/2012,& IT(TP)A NO.120/IND/2014 51 ' / ( ) ( ASSTT. REGISTRAR) , / ITAT INDORE