M/s. Chemetall Rai India Ltd., Pune V. Deputy Commissioner of Income-tax,

ITA 1720/PUN/2016

• Counselvise Citation: [2018] 118 COUNSELVISE.COM (IT) 9569 (ITAT-PUNE)
• Duration Of Justice: 2 year(s) 4 month(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 18-12-2018
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Next Hearing Date: 16-08-2018
• Assessment Year: 2009-2010
• Appeal Filed On: 11-08-2016
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: IS DIRECTED AGAINS T PASSED
• Keywords: Depreciation; Transfer pricing; International transaction; Revenue expenditure
• Section: 10B

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH B, PUNE BEFORE SHRI R.S. SYAL, VICE PRESIDENT AND SHRI PARTHA SARATHI CHADHURY, JUDICIAL MEMBER . / ITA NO.1720/PUN/16 / ASSESSMENT YEAR : 2009-10 M/S. CHEMETALL RAI INDIA LIMITED, GAT NO.569, VILLAGE KOREGAON BHIMA, PUNE NAGAR ROAD, TAL. SHIRUR, PUNE 412 207 PAN : AAACP2287P VS. DCIT, CIRCLE-1(1), PUNE (APPELLANT) (RESPONDENT) / ORDER PER R.S.SYAL, VP : THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST THE ORDER PASSED BY THE CIT(A) ON 18-07-2016 IN RELATION TO THE ASS ESSMENT YEAR 2009-10. 2. THE ASSESSEE HAS FILED CONCISE GROUNDS ASSAILING THE CORRECTNESS OF THE IMPUGNED ORDER ON THREE SCORES. TH E FIRST ISSUE IS THE DISALLOWANCE OF DEPRECIATION AMOUNTING TO RS.92,33,569 /- APPELLANT BY SHRI R.D. ONKAR RESPONDENT BY SHRI ANIL CHAWARE DATE OF HEARING 17-12-2018 DATE OF PRONOUNCEMENT 18-12-2018 ITA NO.1720/PUN/2016 M/S. CHEMETALL RAI INDIA LIMITED 2 ON INTANGIBLE ASSET, NAMELY, EXCLUSIVE RIGHTS GRANTED BY ME ANS OF A LICENSE TO THE ASSESSEE BY ITS ASSOCIATED ENTERPRISE (AE) UND ER THE TECHNOLOGY LICENSE AGREEMENT FOR MANUFACTURE AND SALE O F NEW LINE OF PRODUCTS IN INDIA. 3. BRIEFLY STATED, THE FACTS OF THE CASE ARE THAT THE ASSESSE E FILED ITS RETURN DECLARING TOTAL INCOME OF RS.9.87 CRORE AND ODD. CERTAIN INTERNATIONAL TRANSACTIONS WERE REPORTED IN FORM NO. 3CEB. TH E ASSESSING OFFICER (AO) MADE A REFERENCE TO THE TRANSFER PRICING OFFICER (TPO) FOR DETERMINING THE ARMS LENGTH PRICE (ALP) OF THE INTERNATIONAL TRANSACTIONS. ONE OF THE REPORTED INTERNATIONAL TRANSACTIONS WAS `PAYMENT FOR TECHNICAL KNOW-HOW FEES AMOUNTING TO RS.7,27,85,160/-. THE ASSESSEE APPLIED THE TRANSACTIONAL NET MARGIN METHOD (TNMM) AS THE MOST APPROPRIATE METHOD FOR DEMONSTRATING THAT THE FIRST SIX TRANSACTIO NS, INCLUDING THE INSTANT TRANSACTION, WERE AT ALP. THE ASSESSE E SELECTED CERTAIN COMPARABLES, WHOSE AVERAGE PROFIT LEVEL IN DICATOR (PLI) WAS WORKED OUT AT 7.01% AS AGAINST ITS OWN PLI OF 16 .27%. THAT IS HOW, THE ASSESSEE CLAIMED THE INTERNATIONAL TRANSACTION OF `PAYMENT OF TECHNICAL KNOW-HOW FEES AT ALP. DURING THE COURSE OF PROCEEDINGS BEFORE THE TPO, THE ASSESSEE STATED THAT IT EN TERED INTO AN AGREEMENT WITH CHEMETALL CORPORATION, USA AND GOT ITA NO.1720/PUN/2016 M/S. CHEMETALL RAI INDIA LIMITED 3 EXCLUSIVE RIGHTS TO USE TECHNICAL KNOW-HOW, INFORMATION, DOCUMENTATION INCLUDING TRADEMARK USE, CUSTOMERS LISTS AND AGREEMENTS TO MANUFACTURE AND DISTRIBUTE THE NEW PRODUCTS V IZ., MPP PRODUCTS, NAMELY, PAINT DETACK, INDUSTRIAL BOOTH ULTRASONIC CLEANERS AND PAINT BOOTH SLUDGE HANDLING CHEMICALS IN INDIA. THE ASSESSEE FURTHER SUBMITTED THAT CHEMETALL OAKITE INC. USA (SUBSIDIARY OF CHEMETALL GMBH SUBSEQUENTLY NAMED AS CHEMET ALL INC.) ACQUIRED INTANGIBLES, VIZ., GOODWILL AND CUSTOMER LIST OF MPP PRODUCTS FROM AN UNCONTROLLED INDEPENDENT THIRD PARTY, NAMELY , GE INDIA INDUSTRIAL P. LTD., FOR 1.79 MILLION US DOLLARS, WHICH, IN TURN, WERE TRANSFERRED TO THE ASSESSEE FOR 1.428 MILLION US DOLLAR S, THAT TRANSLATED INTO PAYMENT OF RS.7.27 CRORE AND ODD BY THE AS SESSEE TO ITS AE. THE TPO OBSERVED THAT THE ASSESSEE PAID A LUMP SUM ROYALTY FOR TECHNICAL KNOW-HOW OF RS.7.27 CRORE AS PER TECHNOLOGY LICENSE AGREEMENT DATED 31-03-2009 WHICH WAS, IN FACT, S IGNED ON 21-04-2009. THE TPO FURTHER NOTICED THAT THE ASSESSEE WAS TO PAY REGULAR ROYALTY @ 5% OF NET SALES FROM 01-04-2009 IN ADD ITION TO THE LUMP SUM ROYALTY OF RS.7.27 CRORE. HE NOTICED THAT THE ASSESSE E WAS PAYING PRODUCT ROYALTY PRIOR TO THE ABOVE AGREEMENT TO M /S. HEBRO CHEMIE GMBH AS PER AN AGREEMENT DATED 16-06-2005 . HE THUS HELD THAT THE ASSESSEE WAS NOT IN A POSITION TO DEMONSTRA TE AS TO HOW TECHNICAL KNOW-HOW WAS ACQUIRED AND USED FOR PROD UCTION. ITA NO.1720/PUN/2016 M/S. CHEMETALL RAI INDIA LIMITED 4 THIS LED TO THE DETERMINATION OF NIL ALP OF THIS TRANSACTION, WHICH RESULTING INTO THE RECOMMENDATION OF TRANSFER PRICING ADJUSTMEN T OF EQUAL AMOUNT AT RS.7,27,85,160/-. THE AO IN HIS FINAL ORDER DATED 25-04-2013 MADE THE ABOVE TRANSFER PRICING ADDITION. THE ASSESSEE CHALLENGED THE FINAL ASSESSMENT ORDER BEFORE THE LD. CIT(A) AND FURNISHED CERTAIN FURTHER DETAILS. THE LD. CI T(A) FORWARDED SUCH DETAILS TO THE AO FOR COMMENTS. THE TPO VID E HIS FIRST REMAND REPORT DATED 12-08-2015 REITERATED HIS EARLIER VIEW. SUBSEQUENTLY, ANOTHER REMAND REPORT OF THE TPO DATED 05-04 -2016 WAS ALSO SUBMITTED, IN WHICH HE OBSERVED THAT THE ASSESSEE V IDE AGREEMENT DATED 31-03-2009 PURCHASED THESE RIGHTS FOR 30 2 EXISTING PRODUCTS AND 10 FUTURE PRODUCTS FOR A CONSIDERA TION OF 1.428 MILLION DOLLARS AS AGAINST CHEMETALL CORPORATION ACQUIRING SUCH RIGHTS FROM A THIRD PARTY ON 31-12-2007 FOR A CONSID ERATION OF 1.816203 MILLION DOLLARS. SINCE CHEMETALL CORPORATION, USA ACQUIRED THESE RIGHTS IN AN EARLIER YEAR AND TRANSFERRED THE SAME TO THE ASSESSEE ON 31-03-2009, THE TPO DEPRECIATED THE COST O F ACQUISITION IN THE HANDS OF CHEMETALL CORPORATION, USA AND THUS FOUND OUT THE DEPRECIATED VALUE AS ON 31-03-2009 AT RS.1 .191883 MILLION DOLLARS OR RS.6,07,50,277/-. HE RE-COMPUTED THE A LP AT THIS LEVEL AND PROPOSED THE TRANSFER PRICING ADJUSTMENT OF RS.1,20,34,883/- (RS.7,27,85,160/- MINUS RS.6,07, 50,277/-) . ITA NO.1720/PUN/2016 M/S. CHEMETALL RAI INDIA LIMITED 5 4. THE LD. CIT(A), AFTER CONSIDERING THE REMAND REPORTS, ORDERS OF THE AUTHORITIES BELOW AND THE DETAILS FURNISHED BY THE ASSES SEE CAME TO HOLD THAT THE VIEW POINT OF THE TPO/AO IN PROPOSING/ MAKING THE TRANSFER PRICING ADJUSTMENT/ADDITION FOR A TOTAL PAY MENT OF RS.7.27 CRORE WAS NOT WARRANTED IN AS MUCH AS THE AS SESSEE CAPITALIZED SUCH AMOUNT AND SIMPLY CLAIMED DEPRECIATION ON IT FOR A SUM OF RS.92,33,569/-, WHICH WAS ALSO SEPARATELY ADDE D BACK BY THE AO IN THE FINAL ASSESSMENT ORDER. ERGO, HE CONCURRED WITH THE ACTION OF THE AO IN DISALLOWING THE DEPRECIATION CLAIM AMOUNTING TO RS.92.33 LAKHS ON THE GROUND THAT THE RELEVANT AGREEMENT WAS EXECUTED ON 21-04-2009, I.E. AFTER THE END OF THE FINANCIA L YEAR RELEVANT TO THE ASSESSMENT YEAR UNDER CONSIDERATION AND THE ASSESSEE DID NOT ACQUIRE ANY LEGAL OR CONSTRUCTIVE RIGHTS OVE R TECHNICAL KNOW-HOW DURING THE YEAR UNDER CONSIDERATION. T HE ASSESSEE HAS COME UP IN APPEAL BEFORE THE TRIBUNAL AGAIN ST SUCH A VIEW CANVASSED IN THE FIRST APPEAL. 5. WE HAVE HEARD BOTH THE SIDES AND GONE THROUGH THE RELE VANT MATERIAL ON RECORD. IT IS AN UNDISPUTED POSITION THAT THE ASSE SSEE PAID A SUM OF RS.7.27 CRORE DURING THE YEAR TO ITS ASSOCIA TED ENTERPRISE, NAMELY, CHEMETALL CORPORATION, USA FOR ACQUIRING EXCLUSIVE RIGHTS TO USE TECHNICAL KNOW-HOW ETC. FOR MANUFAC TURING ITA NO.1720/PUN/2016 M/S. CHEMETALL RAI INDIA LIMITED 6 AND DISTRIBUTING THE MPP PRODUCTS. THE ASSESSEE CAPITALIZED S UCH AMOUNT IN ITS BOOKS OF ACCOUNT AND CLAIMED DEPRECIATION F OR THE YEAR AT A SUM OF RS.92.33 LAKHS. THE AO NOT ONLY DISALLOW ED THE AMOUNT OF DEPRECIATION BUT ALSO MADE TRANSFER PRICING ADDITION EQUAL TO THE SUM PAID BY THE ASSESSEE ON THE BASIS OF THE TPOS ORIGINAL RECOMMENDATION. THE LD. CIT(A) HAS DELETED THE TR ANSFER PRICING ADDITION OF RS.7.27 CRORE WHILE SUSTAINING THE DEPREC IATION DISALLOWANCE. NO CROSS APPEAL HAVING BEEN FILED BY THE DEP ARTMENT HAS BEEN BROUGHT TO OUR NOTICE. THUS, IT BECOMES OVERT THA T THE REVENUE HAS ACCEPTED THE DELETION OF ADDITION OF RS.7.27 C RORE BY THE LD. CIT(A). 6. EVEN OTHERWISE, THE VIEW CANVASSED BY THE LD. CIT( A) IN DELETING SUCH AN ADDITION IS VALID AS PER LAW BECAUSE THE ASS ESSEE CAPITALIZED SUCH PAYMENT OF RS.7.27 CRORE FOR ACQUIRING TEC HNICAL KNOW-HOW AND CLAIMED DEPRECIATION OF RS.92.33 LAKH ON SU CH AN AMOUNT. SECTION 92(1) OF THE INCOME-TAX ACT, 1961 (HERE INAFTER ALSO CALLED `THE ACT) CLEARLY PROVIDES THAT ANY INCOME ARISIN G FROM INTERNATIONAL TRANSACTION SHALL BE COMPUTED HAVING REGARD TO THE ARMS LENGTH PRICE. THIS PROVISION MANDATES THAT IT IS ON LY THE ALP OF THE INCOME ARISING FROM THE INTERNATIONAL TRANSACTION WHIC H IS TAKEN INTO CONSIDERATION FOR COMPUTING THE TOTAL INCOME. IF THERE ITA NO.1720/PUN/2016 M/S. CHEMETALL RAI INDIA LIMITED 7 IS AN INTERNATIONAL TRANSACTION WHICH HAS NOT RESULTED INTO ANY DEDUCTION/INCOME FOR ITS FULL VALUE, THEN THE TRANSFER PRICING ADDITION, BY CALCULATING THE ALP OF THE INTERNATIONAL TRANSACTION, CAN BE MADE ONLY WITH REFERENCE TO THAT PART OF THE VALUE OF INTERNATIONAL TRANSACTION FOR WHICH INCOME/EXPENDITURE HAS BEEN RECOGNIZED. FOR EXAMPLE, IF AN ASSESSEE PURCHASES A CA PITAL ASSET FROM ITS AE FOR A SUM OF RS.100/-, WHICH IS CAPITALIZED AN D NO DEPRECIATION IS CLAIMED THEREON, THE ALP OF THE PURCHASE OF ASSET EVEN IF IT IS FOUND TO BE AT RS.90/-, WOULD NOT LEAD TO ANY T P ADJUSTMENT OF RS.10/- (RS.100 RS.90) IN THE YEAR OF IT S PURCHASE BECAUSE THE ASSESSEE DID NOT CLAIM ANY DEDUCTION ON ACCOU NT OF SUCH INTERNATIONAL TRANSACTION. IT WILL SIMPLY REDUCE THE ALP O F THE PURCHASE OF ASSET AT RS.90/- WHICH WILL BE RELEVANT IN SUB SEQUENT YEARS FOR THE PURPOSE OF GRANTING DEPRECIATION ALLOWANCE. IF, ON THE OTHER HAND, IN THE ABOVE EXAMPLE, THE ASSESSEE HAS CLAI MED DEPRECIATION IN THE YEAR OF PURCHASE OF THE ASSET AT, SAY RS.10/-, IT WILL BE THE AMOUNT OF DEPRECIATION WHICH WOULD UNDERGO CHANGE BY RE.1/- (RS.10, BEING DEPRECIATION ON THE PURCHASE PRIC E OF ASSET OF RS.100 MINUS RS.9/-, BEING DEPRECIATION ON THE ALP OF TH E INTERNATIONAL TRANSACTION OF PURCHASE PRICE AT RS.90), DUE TO THE TRANSFER PRICING ADDITION W.R.T. THE ALP OF THE PURCHASE PRICE OF ASSET. ITA NO.1720/PUN/2016 M/S. CHEMETALL RAI INDIA LIMITED 8 7. REVERTING TO THE FACTS OF THE INSTANT CASE, IT IS SEEN TH AT THE ASSESSEE PAID RS.7.27 CRORE AS TECHNICAL KNOW-HOW FEE TO ITS AE, AND CAPITALIZED THE SAME IN ITS BOOKS OF ACCOUNT WITHOUT CLAIMING THE SAME AS A REVENUE EXPENDITURE. IN SUCH A SCENARIO, NO EXCEPTION CAN BE TAKEN TO THE VIEW OF THE LD. CIT(A) IN DELETING THE TRAN SFER PRICING ADDITION OF RS.7.27 CRORE WHICH WAS NOT CLAIMED AS DEDUCTION BY THE ASSESSEE FOR THE PURPOSES OF COMPUTING IN COME DURING THE YEAR UNDER CONSIDERATION EXCEPT FOR DEPRECIATION . 8. COMING TO THE SUSTENANCE OF DEPRECIATION, IT IS SEEN THAT THE ASSESSEE PAID RS.7.27 CRORE AND THE TPO IN THE REVISED R EMAND REPORT HAS DETERMINED THE ALP OF THE INTERNATIONAL TRANSACTION OF PURCHASE OF TECHNICAL KNOW-HOW AT RS.6.07 CRORE, LEADING TO THE TRANSFER PRICING ADJUSTMENT OF RS.1.20 CRORE, WHICH STANDS SUPERIMPOSED ON THE ORIGINAL NIL ALP OF THE INTERNATIONAL TRANSACTION. ONCE, THERE IS A POSITIVE ALP OF THE INTERNATIONAL TRANSACTION OF PURCHASE OF ASSET, ORDINARILY, DEPRECIATION S HOULD HAVE BEEN ALLOWED W.R.T. SUCH ALP OF RS.6.07 CRORE. TH E LD. CIT(A) HAS CHOSEN TO DISALLOW THE FULL AMOUNT OF DEPRECIATION ON THE GROUND THAT THE AGREEMENT WITH THE AE WAS ENTERED INTO BY THE ASSESSEE ON 21-04-2009, I.E. AFTER THE CLOSE OF THE YEAR ALBEIT IT WAS EFFECTIVE FROM 31-03-2009. THE LD. FIRST APPELLATE AUTHORITY OPINED ITA NO.1720/PUN/2016 M/S. CHEMETALL RAI INDIA LIMITED 9 THAT SINCE NO ASSET WAS ACQUIRED AND SUCH TECHNICAL KNOW-HO W WAS NOT USED DURING THE YEAR, THERE COULD HAVE BEEN NO CLAIM OF DEPRECIATION ON SUCH AMOUNT. 9. THE FIRST THING TO BE DECIDED IS THE DETERMINATION OF TH E CORRECT ALP OF THE INTERNATIONAL TRANSACTION OF `PAYMENT OF TECHNICAL KNOW-HOW FEE PAID BY THE ASSESSEE AT RS.7.27 C RORE. THE TPO, IN THE REMAND PROCEEDINGS, FOUND THAT THE ASSESSEES AE PURCHASED THE SAME KNOW-HOW FROM G E INDIA FOR A SUM OF $1.8162 AND SOLD IT TO THE ASSESSEE ON 31.3.2009 FOR A SUM OF $1.428 (EQUIVALENT TO RS.7.27 CRORE). THE ASSESSEE URGE D TO THE TPO IN SUCH REMAND PROCEEDINGS THAT IT WAS AN INTERNAL COMPARABLE, WHICH OUGHT TO HAVE BEEN TAKEN INTO ACCOUNT F OR DETERMINING THE ALP OF THE INTERNATIONAL TRANSACTION OF PAYMENT O F TECHNICAL KNOW-HOW FEE UNDER THE COMPARABLE UNCONTROLLED PR ICE (CUP) METHOD. THE TPO ACCEPTED SUCH A CONTENTION AND APPLIE D THE CUP METHOD BY TAKING THE COMPARABLE UNCONTROLLED PRICE ON 31.12.2007 AT $1.816203. AFTER ADJUSTING IT WITH THE AMOUNT OF DEPRECIATION FOR THE INTERVENING PERIOD, HE DETERMINED THE ALP OF PURCHASE OF TECHNICAL KNOW-HOW BY THE ASSESSEE AT $1.19 1883 (EQUIVALENT TO RS.6.07 CRORE). THE LD. AR CHALLENGED THE DETERMINATION OF THE ALP IN THE ABOVE MANNER. ITA NO.1720/PUN/2016 M/S. CHEMETALL RAI INDIA LIMITED 10 10. WE DO NOT FIND ANYTHING AMISS IN THE ABOVE CALCULATION . THE ASSESSEE ITSELF OFFERED THE CUP METHOD AND THE COMPARABLE UNCONTROLLED TRANSACTION OF SALE OF THE TECHNICAL KNOW-HOW BY G E INDIA TO ITS AE IN 2007. IT IS MANIFEST THAT EVEN UNDER THE CUP METHOD, SOME ADJUSTMENTS ARE WARRANTED IN THE PRICE OF THE UNCONTROLLED TRANSACTION TO BRING THE SAME AT PAR WITH THE INTERNATIONAL TRANSACTION. RULE 10B(1)(A) OF THE INCOME-TAX RU LES, 1962, DEALING WITH THE DETERMINATION OF THE ALP UNDER THE CUP METHOD, PROVIDES AS UNDER : - (A) COMPARABLE UNCONTROLLED PRICE METHOD, BY WHICH, (I) THE PRICE CHARGED OR PAID FOR PROPERTY TRANSFER RED OR SERVICES PROVIDED IN A COMPARABLE UNCONTROLLED TRANSACTION, OR A NUMBER OF SUCH TRANSACTIONS, IS IDENTIFIED ; (II) SUCH PRICE IS ADJUSTED TO ACCOUNT FOR DIFFEREN CES, IF ANY, BETWEEN THE INTERNATIONAL TRANSACTION AND THE COMPA RABLE UNCONTROLLED TRANSACTIONS OR BETWEEN THE ENTERPRISE S ENTERING INTO SUCH TRANSACTIONS, WHICH COULD MATERIALLY AFFECT TH E PRICE IN THE OPEN MARKET ; (III) THE ADJUSTED PRICE ARRIVED AT UNDER SUB-CLAUS E (II) IS TAKEN TO BE AN ARMS LENGTH PRICE IN RESPECT OF THE PROPERTY TR ANSFERRED OR SERVICES PROVIDED IN THE INTERNATIONAL TRANSACTION ; 11. IT IS APPARENT FROM THE MANDATE OF SUB-CLAUSE (II) O F RULE 10B(1)(A) THAT THE PRICE OF THE PROPERTY TRANSFERRED IN A C OMPARABLE UNCONTROLLED TRANSACTION IS REQUIRED TO BE ADJUSTED TO ACCOUNT F OR DIFFERENCES BETWEEN THE INTERNATIONAL TRANSACTION AND THE ITA NO.1720/PUN/2016 M/S. CHEMETALL RAI INDIA LIMITED 11 COMPARABLE UNCONTROLLED TRANSACTIONS. RULE 10B(4), WHICH IS RELEVANT FOR OUR PURPOSE, UNEQUIVOCALLY PROVIDES AS UNDE R :- THE DATA TO BE USED IN ANALYSING THE COMPARABILITY OF AN UNCONTROLLED TRANSACTION WITH AN INTERNATIONAL TRAN SACTION SHALL BE THE DATA RELATING TO THE FINANCIAL YEAR IN WHICH TH E INTERNATIONAL TRANSACTION HAS BEEN ENTERED INTO : PROVIDED THAT DATA RELATING TO A PERIOD NOT BEING MORE THAN TWO YEARS PRIOR TO SUCH FINANCIAL YEAR MAY ALSO BE CONS IDERED IF SUCH DATA REVEALS FACTS WHICH COULD HAVE AN INFLUENCE ON THE DETERMINATION OF TRANSFER PRICES IN RELATION TO THE TRANSACTIONS BEING COMPARED. 12. A BARE PERUSAL OF THE SUB-RULE (4) BRINGS TO THE FORE THAT THE DATA TO BE USED IN ANALYSING THE COMPARABILITY OF AN UNCONTRO LLED TRANSACTION WITH AN INTERNATIONAL TRANSACTION SHALL BE THE DATA RELATING TO THE FINANCIAL YEAR IN WHICH THE INTERNATIONAL TRANSACTION HAS BEEN ENTERED INTO. HOWEVER THE PROVISO TO SUCH RU LE STIPULATES THAT DATA RELATING TO A PERIOD NOT BEING MORE THAN TWO YEARS PRIOR TO SUCH FINANCIAL YEAR MAY ALSO BE CONSIDERED IF SUCH DATA REVEALS FACTS WHICH COULD HAVE AN INFLUENCE ON THE DETERMINATION OF TRANSFER PRICE IN RELATION TO THE TRANSACTION BEING COMPARED. 13. TURNING TO THE FACTUAL PANORAMA BEFORE US, IT IS SE EN THAT THE ASSESSEE ITSELF PROPOSED THE COMPARABLE UNCONTROLLED TRANSA CTION OF SALE OF THE SAME TECHNICAL KNOW-HOW BY GE INDIA TO THE ASSE SSEES AE. THUS, THERE CAN BE NO DISPUTE ON THE SELECTION OF THE ITA NO.1720/PUN/2016 M/S. CHEMETALL RAI INDIA LIMITED 12 COMPARABLE UNCONTROLLED TRANSACTION. FURTHER, THE ASSESSEE PROPOSED THE CUP METHOD, WHICH HAS BEEN ACCEPTED BY THE T PO IN THE SECOND REMAND PROCEEDINGS. ONCE THERE IS AN ADMITTED COMPARABLE UNCONTROLLED TRANSACTION, WHICH HAS TO BE TAKEN FO R DETERMINING THE ALP OF THE INTERNATIONAL TRANSACTION, THEN IT IS B UT NATURAL THAT THE EFFECT OF DIFFERENCES BETWEEN THE COMPARAB LE UNCONTROLLED TRANSACTION AND THE INTERNATIONAL TRANSACTION, IF AN Y, SHOULD BE ADJUSTED. IN THE EXTANT CASE, THERE IS A TIME GAP OF LESS THAN TWO YEARS BETWEEN THE COMPARABLE UNCONTROLLED TRANSACTION AND THE INTERNATIONAL TRANSACTION. WHEN WE READ RULE 10B(1)( A)(II) AND (III) IN CONJUNCTION WITH RULE 10B(4), IT BECOMES CLEAR BEY OND ANY SHADOW OF DOUBT THAT NO EXCEPTION CAN BE TAKEN TO THE DETERMINATION OF THE ALP OF THE INTERNATIONAL TRANSACTION AT RS.6. 04 CRORE, AS THE SAME REPRESENTS THE COMPARABLE UNCONTROLLED PRICE OF $1.816203 AS ON 31.12.2007, WHICH HAS BEEN ADJUSTED TO $1.191883 UNDER THE PROVISIONS OF RULE 10B TO BRING IT AT PAR WITH THE INTERNATIONAL TRANSACTION TAKING PLACE LATER ON. WE, THEREFOR E, UPHOLD THE DETERMINATION OF THE ALP OF THE INTERNATIONAL TRANSACTION OF PURCHASE OF TECHNICAL KNOW-HOW. 14. AGAIN, WE REVERT TO THE CONTROVERSY AS TO WHETHER A NY DISALLOWANCE OF DEPRECIATION COULD HAVE BEEN MADE ON THE B ASIS OF ITA NO.1720/PUN/2016 M/S. CHEMETALL RAI INDIA LIMITED 13 THE ALP OF THE INTERNATIONAL TRANSACTION OF PURCHASE OF KNOW- HOW. WE HAVE NOTED ABOVE THAT THE LD. CIT(A) DISALLOWED DEPRECIAT ION ON THE GROUND THAT THE KNOW-HOW WAS NEITHER ACQUIRED NOR U SED BY THE ASSESSEE DURING THE YEAR. AU CONTRAIRE, THE LD. AR SUBMITTED THAT THE ASSESSEE, IN FACT, MANUFACTURED MPP PRODUCTS WITH THE HELP OF SUCH NEW TECHNICAL KNOW-HOW DURING THE YEAR AND EAR NED PROFIT THERE FROM. ON A SPECIFIC QUERY TO PROVE THE FACTUM OF H AVING MANUFACTURED MPP PRODUCTS WITH THE NEW TECHNICAL KNOW-HOW AN D ACTUALLY SOLD THE SAME DURING THE YEAR, THE LD. AR SUBMITTED TH AT SUCH DETAILS WERE FURNISHED TO THE TPO DURING THE COURSE OF THE PROCEEDINGS BEFORE HIM AND SUCH INVOICES CAN NOW ALSO B E VERIFIED. HE, HOWEVER, COULD NOT BRING TO OUR NOTICE COPIE S OF INVOICES DEPICTING SALE OF MPP PRODUCTS DURING THE YEAR MANUFACTURED WITH THE HELP OF TECHNICAL KNOW-HOW ACQUIRED F ROM CHEMETALL CORPORATION, USA. UNDER THE GIVEN CIRCUMSTANCES, W E SET-ASIDE THE IMPUGNED ORDER AND REMIT THE MATTER TO THE FILE OF AO/TPO FOR VETTING THE ASSESSEES CONTENTION OF HAVING SOLD MPP PRODUCTS, MANUFACTURED WITH THE HELP OF TECHNICAL KNOW-HOW ACQUIRED FROM CHEMETALL CORPORATION, USA, DURING THE YEAR U NDER CONSIDERATION. IF THE CONTENTION IS FOUND TO BE CORRECT, THEN DEPRECIATION SHOULD BE ALLOWED ON THE ALP OF THE INTERNATIONAL TRANSACTION OF ACQUIRING TECHNICAL KNOW-HOW FEE DETERMINED B Y THE ITA NO.1720/PUN/2016 M/S. CHEMETALL RAI INDIA LIMITED 14 TPO IN THE SECOND REMAND REPORT AT RS.6,07,50,277/-. I N CASE THE ASSESSEE FAILS TO SATISFY THE AO IN THIS REGARD, THEN THE DISALLOWANCE MADE BY THE AO AMOUNTING TO RS.92.33 LAKHS, M ADE WITH REFERENCE TO PAYMENT OF RS.7.27 CRORE, IS REQUIRED TO BE UPHELD. NEEDLESS TO SAY, THE ASSESSEE WILL BE ALLOWED A REA SONABLE OPPORTUNITY OF HEARING IN SUCH PROCEEDINGS. 15. THE SECOND ISSUE RAISED BY THE ASSESSEE IN ITS APPEAL IS AGAINST THE CONFIRMATION OF ADDITION OF RS.3,57,000/- TOWARDS PAYMENT OF ROYALTY. 16. THE AO MADE DISALLOWANCE ON THE GROUND THAT THE PAYME NT OF ROYALTY WAS NOT REQUIRED AS THE ASSESSEE DID NOT ACQUIRE THE IMPUGNED INTANGIBLE ASSET DURING THE YEAR NOR USED IT. THE LD. CIT(A) UPHELD THE ASSESSMENT ORDER ON THIS POINT. 17. WE HAVE HEARD BOTH THE SIDES AND GONE THROUGH THE RELEVANT MATERIAL ON RECORD. THE LD. AR SUBMITTED THAT THE AUTHORITIES BELOW ERRED IN MAKING AND CONFIRMING THE DISALLOWANCE OF RS .3.57 LAKHS TOWARDS PAYMENT OF ROYALTY. IT WAS SUBMITTED THAT THE ASSESSEE, AT NO STAGE, CLAIMED DEDUCTION FOR SUCH A SU M. IN VIEW OF THE ABOVE SUBMISSION MADE BY THE ASSESSEE, WE ARE S ATISFIED THAT IT WOULD BE IN THE FITNESS OF THINGS IF THE IMPUGNED ORDER ON THIS ITA NO.1720/PUN/2016 M/S. CHEMETALL RAI INDIA LIMITED 15 SCORE IS SET ASIDE AND THE MATTER IS RESTORED TO THE FILE OF AO . WE ORDER ACCORDINGLY AND DIRECT HIM TO EXAMINE THE ASSESSEES CLAIM IN THIS REGARD. IF IT IS FOUND THAT THE ASSESSEE DID NOT CLAIM ANY DEDUCTION FOR A SUM OF RS.3,57,000/- TOWARDS ROYALTY, TH EN OBVIOUSLY THERE CAN BE NO QUESTION OF MAKING DISALLOWANCE OF SUCH A SUM. IN THE OTHERWISE SCENARIO, THE AO WILL DECIDE AS PER LAW. 18. THE LAST ISSUE RAISED IN THIS APPEAL IS AGAINST THE CONFIRMA TION OF DISALLOWANCE OF RS. 1.09 CRORE. 19. THE FACTS APROPOS THIS ISSUE ARE THAT THE ASSESSEE R ECEIVED ONE TIME COMPENSATION OF RS.1.26 CRORE FOR TERMINATION OF AGEN CY AGREEMENT WITH ITS AE. SUCH A SUM WAS OFFERED FOR TAXATIO N. THE ASSESSEE BENCHMARKED THIS INTERNATIONAL TRANSACTION ALONG WITH OTHER FIVE TRANSACTIONS IN A COMBINED WAY UNDER THE TNMM. THE TPO COMPUTED THE ALP OF THIS INTERNATIONAL TRANSACTION AT RS.2.35 CRORE BY ANTICIPATING COMMISSION RECEIPT FOR FIVE SUBSEQUENT YEARS. HE THEN AVERAGED SUCH COMMISSION ON GROSS BASIS AND FOU ND OUT THE ALP AT RS.2.35 CRORE. THIS LED TO THE RECOMMENDATION OF THE TRANSFER PRICING ADJUSTMENT OF RS.1.09 CRORE, WHICH WAS M ADE BY THE AO IN THE FINAL ORDER. THE LD. CIT(A) COUNTENANCED THE SAME, AGAINST WHICH THE ASSESSEE HAS APPROACHED THE TRIBUNAL. ITA NO.1720/PUN/2016 M/S. CHEMETALL RAI INDIA LIMITED 16 20. WE HAVE HEARD BOTH THE SIDES AND GONE THROUGH THE RE LEVANT MATERIAL ON RECORD. THE TPO HAS DETERMINED THE ALP OF THE INTERNATIONAL TRANSACTION OF `RECEIPT OF ONE TIME COMPENSATION IN LIEU OF COMMISSION INCOME AT RS.2.35 CRORE BY CONSIDERING TH E AVERAGE OF GROSS COMMISSION INCOME FOR SUCCEEDING FIVE Y EARS. THE LD. AR HAS NOT, IN PRINCIPLE, DISPUTED THE MECHANISM OF TH E TPO. WE ARE IN AGREEMENT WITH THE VIEW POINT OF THE TPO THAT INCOME FOR THE SUBSEQUENT FIVE YEARS SHOULD HAVE BEEN TAK EN INTO CONSIDERATION RATHER THAN THE PRECEDING YEARS, AS HAS BEEN PUT FORTH ON BEHALF OF THE ASSESSEE BEFORE US. HOWEVER, WE CAN NOT COUNTENANCE THE VIEW OF THE TPO IN CONSIDERING THE GROSS AM OUNT OF COMMISSION AS THE BASIS FOR DETERMINING THE ALP OF THE COMPENSATION. IT IS ONLY THE NET AMOUNT, THAT IS, AFTER DEDUC TING THE EXPENSES FROM THE GROSS RECEIPT, WHICH COMES TO THE COF FERS OF THE ASSESSEE AND CONSTITUTES HIS INCOME. DETERMINING THE ALP OF SUCH A TRANSACTION BY ESTIMATING GROSS RECEIPTS, WOULD AMOUNT TO TAX ING ON THE BASIS OF RECEIPTS, RATHER THAN INCOME, WHICH IS IMPERMISSIBLE. UNDER THESE CIRCUMSTANCES, WE SET ASIDE THE IMPUGNED ORDER AND REMIT THE MATTER TO THE FILE OF AO/TPO FO R DETERMINING THE ALP OF THE INTERNATIONAL TRANSACTION OF `RECEIPT OF ONE TIME COMPENSATION AFRESH ON THE BASIS OF AVERAGE OF ITA NO.1720/PUN/2016 M/S. CHEMETALL RAI INDIA LIMITED 17 SUCCEEDING FIVE YEARS COMMISSION ON NET BASIS. NEEDLESS TO SAY, THE ASSESSEE WILL BE ALLOWED A REASONABLE OPPORTUNITY OF HEA RING. 21. IN THE RESULT, THE APPEAL IS ALLOWED FOR STATISTICAL PURPOSE S. ORDER PRONOUNCED IN THE OPEN COURT ON 18 TH DECEMBER, 2018. SD/- SD/- (PARTHA SARATHI CHAUDHURY) (R.S.SYAL) JUDICIAL MEMBER VI CE PRESIDENT PUNE; DATED : 18 TH DECEMBER, 2018 / COPY OF THE ORDER IS FORWARDED TO : 1. / THE APPELLANT; 2. / THE RESPONDENT; 3. ( ) / THE CIT (APPEALS)-13, PUNE 4. 5. THE PR. CIT-5, PUNE , , / DR B, ITAT, PUNE; 6. / GUARD FILE. // TRUE COPY // / BY ORDER, // TRUE COPY // SENIOR PRIVATE SECRETARY , / ITAT, PUNE ITA NO.1720/PUN/2016 M/S. CHEMETALL RAI INDIA LIMITED 18 DATE 1. DRAFT DICTATED ON 17-12-18 SR.PS 2. DRAFT PLACED BEFORE AUTHOR 17-12-18 SR.PS 3. DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER JM 4. DRAFT DISCUSSED/APPROVED BY SECOND MEMBER. JM 5. APPROVED DRAFT COMES TO THE SR.PS/PS SR.PS 6. KEPT FOR PRONOUNCEMENT ON SR.PS 7. DATE OF UPLOADING ORDER SR.PS 8. FILE SENT TO THE BENCH CLERK SR.PS 9. DATE ON WHICH FILE GOES TO THE HEAD CLERK 10. DATE ON WHICH FILE GOES TO THE A.R. 11. DATE OF DISPATCH OF ORDER. **