Kirby Building Systems India Ltd., Medak V. JCIT, Range-8, Hyderabad

ITA 1975/HYD/2011

• Counselvise Citation: 197522514 RSA 2011
• Duration Of Justice: 2 year(s) 7 month(s) 19 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 18-07-2014
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Assessment Year: 2007-2008
• Appeal Filed On: 29-11-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Depreciation; Transfer pricing; Business expenditure; International transaction; Initiation of penalty proceedings; Wholly owned subsidiary
• Section: 43B; 234B; 37(1); 92

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCHES B : HYDERABAD BEFORE SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER AND SHRI SAKTIJIT DEY, JUDICIAL MEMBER ITA.NO.1651/HYD/2010 ASSESSMENT YEAR 2006-2007 KIRBY BUILDING SYSTEMS INDIA LTD., PASHMYLARAM, MEDAK DIST. 502 307 PAN AABCK-0239-M VS. ADDL. CIT, RANGE-8 HYDERABAD. (APPELLANT) (RESPONDENT) ITA.NO.1975/HYD/2011 ASSESSMENT YEAR 2007-2008 KIRBY BUILDING SYSTEMS INDIA LTD., PASHMYLARAM, MEDAK DIST. 502 307 PAN AABCK-0239-M VS. JCIT, RANGE-8 HYDERABAD. (APPELLANT) (RESPONDENT) FOR ASSESSEE MR. FARROKH V. IRANI & MR. PANKAJ JAIN FOR REVENUE MR. D. SUDHAKAR RAO DATE OF HEARING 11.06.2014 DATE OF PRONOUNCEMENT 18.07.2014 ORDER PER B. RAMAKOTAIAH, A.M. THESE TWO APPEALS ARE BY ASSESSEE AGAINST THE RESPECTIVE ORDERS OF A.O. PASSED UNDER SECTION 143( 3) READ WITH SECTION 144C(1) OF THE I.T. ACT, 1961 MAKING ADDITI ONS UNDER SECTION 92CA OF THE I.T. ACT. IN A.Y. 2006-07 THERE IS ONE MORE ISSUE OF DISALLOWANCE OF SALES TAX DEFERRED UNDER S ECTION 43B OF THE I.T. ACT, 1961. SINCE, COMMON ISSUES ARE INVOLV ED IN THESE ASSESSMENT YEARS, THESE ARE HEARD TOGETHER AND DECI DED BY 2 ITA.NO.1651/HYD/2010 & 1975/HYD/2011 KIRBY BUILDING SYSTEMS INDIA LTD., PASHAMYLARAM, MEDAK DISTRICT. THIS ORDER. FOR THE SAKE OF REFERENCE, THE FACTS IN APPEAL FOR A.Y. 2006-07 ARE DISCUSSED ELABORATELY. 2. WE HAVE HEARD THE LD. COUNSEL AND LEARNED D.R. IN DETAIL AND PERUSED PAPER BOOKS CONTAINING PAGES 445. LD. COUNSEL ALSO PLACED ON RECORD A SEPARATE CASE LAW P APER BOOK AND ALSO BROCHURE CONTAINING ACTIVITIES OF THE ASSE SSEE COMPANY FOR EXPLAINING VARIOUS TECHNICAL ACTIVITIES OF THE ASSESSEE. ITA.NO.1651/HYD/2010 A.Y. 2006-07 : 3. THE ASSESSEE HAS RAISED 11 GROUNDS IN THIS APPE AL OUT OF WHICH, GROUND NOS.1 TO 8 PERTAIN TO T.P. ADJ USTMENTS. GROUND NO.9 PERTAINS TO DISALLOWANCE OF AN AMOUNT O F RS.13,45,52,755/- UNDER SECTION 43B. GROUND NO.10 I S ON LEVY OF INTEREST UNDER SECTION 234B AND 234D AND GROUND NO.11 IS ON INITIATION OF PENALTY PROCEEDINGS UNDER SECTION 271(1)(C). GROUND NO.10 IS CONSEQUENTIAL IN NATURE AND GROUND NO.11 IS PREMATURE IN NATURE AND THEREFORE, THEY NEED NOT BE ADJUDICATED AND ACCORDINGLY, GROUND NOS. 10 AND 11 ARE DISMISSED. 4. GROUND NOS. 1 TO 8 PERTAIN TO THE DISALLOWANCE OF PAYMENT OF ROYALTY AND TECHNICAL SERVICE FEE TO M/S . KIRBY BUILDING SYSTEMS, KUWAIT ANALYSED UNDER THE PROVISI ONS OF TRANSFER PRICING. BRIEFLY STATED, ASSESSEE M/S. KIR BY BUILDING SYSTEMS INDIA LTD., IS ENGAGED IN THE BUSINESS OF M ANUFACTURE OF PRE-ENGINEERED STEEL BUILDING SYSTEM (PEB) PRODU CTS. FOR THE YEAR UNDER CONSIDERATION, ASSESSEE FILED RETURN OF INCOME DECLARING TOTAL INCOME OF RS.6,82,39,910/-. A.O. NO TICED THAT IT HAD INTERNATIONAL TRANSACTIONS WITH ITS AE TO AN EX TENT OF 3 ITA.NO.1651/HYD/2010 & 1975/HYD/2011 KIRBY BUILDING SYSTEMS INDIA LTD., PASHAMYLARAM, MEDAK DISTRICT. RS.15,96,89,713/-. THE FOLLOWING ARE THE DETAILS OF INTERNATIONAL TRANSACTIONS ENTERED INTO BY AND BETW EEN THE TAXPAYER AND THE AE : NAME OF THE AE INTERNATIONAL TRANSACTION VALUE IN INR KIRBY KUWAIT 1. PAYMENT OF ROYALTY AND TECHNICAL SERVICES FEE. 2. PAYMENT OF INTEREST (ECB IN KUWAIT DINAR) 3. PAYMENTS TOWARDS REIMBURSEMENT OF EXPENSES 1) 137,037,502 2) 1,473,502 3) 657,120 KIMMCO PURCHASE OF INSULATING MATERIAL 19,429,932 ALGHANIM MAURITIUS PAYMENT OF INTEREST ON (EC8 IN USD) 1,031,517 5. THE TPO VIDE ORDER DATED 30.10.2009 ACCEPTED TH E OPERATING TRANSACTIONS CONSISTING OF PURCHASE OF I NSULATING MATERIAL AND OF PAYMENT OF INTEREST, REIMBURSEMENT EXPENSES AS AT ARMS LENGTH PRICE. HOWEVER, PAYMENT OF ROYAL TY AND TECHNICAL SERVICES FEE OF RS.13,70,97,902/- WERE CO NSIDERED AS NOT AT ARMS LENGTH. AFTER GIVING OPPORTUNITY TO TH E ASSESSEE, THE TPO WAS OF THE OPINION THAT THERE WAS NO NEED T O PAY ANY ROYALTY AND TECHNICAL SERVICE FEE TO THE AE. HIS OR DER VIDE PARA 10.2 TO 10.4 ON THE ISSUE IS AS UNDER : 10.2.ROYALTY/TECHNICAL SERVICES FEE PAID TO KIRBY KUWAIT (AE) DURING THE FINANCIAL YEAR UNDER CONSIDERATION, THE TAX PAYER HAS DEBITED AN AMOUNT OF RS.17,71,37,206/- TOWARDS ROYALTY AT THE RATE OF 7.5% ON SALES. DURING F.Y. 2 004-05, THE TAXPAYER HAS PAID ROYALTY AT RS.6,77,67,700/- TO KI RBY, KUWAIT (AE) AT THE RATE OF 3.5% ON SALES. 4 ITA.NO.1651/HYD/2010 & 1975/HYD/2011 KIRBY BUILDING SYSTEMS INDIA LTD., PASHAMYLARAM, MEDAK DISTRICT. AS PER THE AGREEMENT ENTERED BY AND BETWEEN THE TAX PAYER AND ITS AE AT CLAUSE-4, THE RATES FOR PAYMENT OF R OYALTY ARE GIVEN. EXCEPT THAT, NOTHING IS MENTIONED. WHAT IS T HE BASIS FOR WHICH ROYALTY IS PAID BY THE TAXPAYER REMAINED UNSUBSTANTIATED. IN ITS REPLY DATED 10.03.2009, THE TAXPAYER IN RESPONSE TO QUERY NO.10 HAS REPLIED AS UNDER : KIRBY INDIA HAS TECHNOLOGY COLLABORATION WITH KIRB Y KUWAIT. IN THIS REGARD, KIRBY INDIA HAS ENTERED INTO A TSA WITH KIRBY KUWAIT. THE INITIAL TERM OF THE AGREEMENT WAS FOR 7 YEARS STARTING FROM 1 ST APRIL, 2000 TO 31 ST MARCH, 2007. HOWEVER, OWING TO BUSINESS EXIGENCIES, THE TSA WAS AMENDED INTERMITTENTLY TO PROVIDE FOR WAIVER OF THE ROYALTY DURING THE YEARS 2000 TO 2004. THE AMENDMENTS HAVE RESULTED IN DEFERRING THE PAYMENT OF ROYALTY TO SUBSEQUENT YEAR S. HOWEVER, THE AMENDMENT IN THE ROYALTY RATES AND THE PAYMENTS TERMS ARE SUBJECT TO THE CONDITION THAT TH E ROYALTY PAYMENTS WILL NOT EXCEED THE POTENTIAL OUTFLOW AS A GREED IN THE ORIGINAL TSA. FURTHER, IN RESPECT OF THE LUMP S UN TECHNICAL FEE, THE SUM OF USD 2,000,000 WHICH WAS A GREED AS PER THE ORIGINAL TSA, HAS NOT BEEN REVISED BUT T HE PAYMENT TERMS HAVE BEEN AMENDED TO DEFER THE PAYMEN T OVER A CERTAIN NUMBER OF YEARS UP TO 2017. TAXPAYER FAILED TO FURNISH ANY FAR ANALYSIS IN RESP ECT OF ROYALTY PAYMENT. IT IS PERTINENT TO NOTE THAT NO RO YALTY WAS PAID BY THE TAXPAYER FROM YEAR 2000 TO 2004. JUST B ECAUSE RBI FIXED THE LIMITS OF ROYALTY RATES, THE SAME IS TAKEN AS BENCH MARK FOR PAYMENT OF ROYALTY. HOWEVER, ONE HAS TO UNDERSTAND THAT THE RBI LIMITS IS NOTHING TO DO WIT H DETERMINATION OF ARMS LENGTH PRICE UNDER THE PROVIS ION CONTAINED UNDER SECTION 92 OF I.T. ACT, 1961. RBI L IMITS ARE MEANT TO REGULATE FOREIGN EXCHANGE AS PART OF FOREX MANAGEMENT. THE REASON GIVE FOR NOT PAYING ROYALTY BY THE TAXPAYER BETWEEN THE YEARS 2000 TO 2004 IS THAT THE RE WERE NO PROFITS MADE DURING THE SAID FINANCIAL YEARS. TH IS IS NOT CORRECT. IN FACT, FOR F.Y. 2003-04, THE TAXPAYER HA S EARNED A NET PROFIT MARGIN OF 6.67%. THE CLAIM OF THE TAXPAY ER THAT THERE IS A SUBSTANTIAL EXPANSION OF THE MANUFACTURI NG FACILITY DURING THE F.Y. 2003-04 IS ALSO NOT CORRECT. NO SIG NIFICANT EXPANSION TOOK PLACE DURING THAT YEAR. PLANT MACHIN ERY VALUED AT RS.2,64,35,261 IS ONLY ADDED. A NET PROFI T OF RS.6,71,10,235 WAS MADE ON SALE OF RS.108,38,57,968 . THESE ARE NOT VALID REASONS FOR PAYING ROYALTY IN S OME YEARS AND NOT PAYING IN SOME OTHER YEARS. WHEN THE TAXPAY ER DID NOT PAID ROYALTY FROM YEAR 2000 TO 2004 (4 YEARS), THERE IS 5 ITA.NO.1651/HYD/2010 & 1975/HYD/2011 KIRBY BUILDING SYSTEMS INDIA LTD., PASHAMYLARAM, MEDAK DISTRICT. NO REASON/BASIS AS TO WHY THE ROYALTY SHOULD BE PAI D IN SUBSEQUENT YEARS, MORE SO, BASED ON AN AGREEMENT, W HICH IS NEVER IMPLEMENTED. ALSO, THE AMOUNT PAID TOWARDS TECHNICAL SERVICES AT RS.59,20,536/- REMAINED UNSUBSTANTIATED BY THE TAXPAYER WITH REFERENCE TO T HE BENEFITS DERIVED AND SERVICES RENDERED. THE TAXPAYE R FAILED TO BRING OUT ANY EVIDENCE IN SUPPORT OF THE TECHNIC AL SERVICES ACTUALLY RECEIVED. HONBLE SUPREME COURT IN THE CASE OF UNION OF INDIA VS. GOSALIA SHIPPING P. LTD., 113 ITR 307 (SC) HELD THA T : IT IS TRUE THAT ONE CANNOT PLACE OVER RELIANCE ON THE FARM WHICH THE PARTIES GIVE TO THEIR AGREEMENTS OR ON TH E LABEL WHICH THEY ATTACH TO THE PAYMENT DUE FROM ONE TO OT HER. ONE MUST HAVE REGARD TO THE SUBSTANCE OF THE MATTER AND IF NECESSARY, TEAR THE VEIL IN ORDER TO SEE WHETHER TH E TRUE CHARACTER OF A PAYMENT IS SOME THING OTHER THAN WHA T BY A CLEVER DEVIDE OF DRAFTING IT IS MADE TO APPEAR. 10.3. SHIFTING OF PROFITS TO NO TAX JURISDICTION : RULE OF SUBSTANCE OVER FORM IS THE KEY IN EXAMINING THE AGREEMENTS ENTERED BY AND BETWEEN THE TAXPAYER AND ITS A.E. IN RESPECT OF PAYMENT MADE TOWARDS ROYALTY AND TECHNICAL FEES AS THESE TRANSACTIONS ARE CONTROLLED . AFTER EXAMINING THE AVAILABLE INFORMATION/EVIDENCE ON REC ORD AND ANALYSIS THEREON, THE ONLY INFERENCE THAT CAN BE DR AWN IS THAT THESE TWO TRANSACTIONS THAT IS PAYMENT TOWARDS ROYALTY AND TECHNICAL SERVICES IS THAT THEY ARE NOT AT ARMS LENGTH. IN THE GUISE OF THESE PAYMENTS, THE TAXPAYER IS SHIFTI NG PROFITS TO NO TAX JURISDICTIONS LIKE KUWAIT AND MAURITIUS, THEREBY ENRICHING THEMSELVES WITHOUT PAYING TAXES THAT ARE DUE IN THE COUNTRY WHERE THE TAXPAYER OPERATES. THE PROFIT S DECLARED BY THE TAXPAYER ARE NOT COMENSURATING WITH THE FUNCTIONS PERFORMED AND RISK ASSUMED IN THE COUNTRY OF OPERATIONS. 10.4. BRAND VALUE : THE TAXPAYER HAS ALSO TAKEN BRAND VALUE AS ONE OF T HE FACTORS FOR PAYMENT OF THE SO-CALLED TECHNICAL SERVICES/ROYALTY. KIRBY, INDIA SETS ITS FOOTPRINT I N THE COUNTRY IN THE YEAR 2000. WHAT BRAND VALUE KIRBY, KUWAIT COMMANDS IN A COUNTRY LIKE INDIA WHERE THE USAGE OF PRE- ENGINEERED STEEL BUILDINGS ARE AT A NASCENT STAGE. ONLY AFTER 6 ITA.NO.1651/HYD/2010 & 1975/HYD/2011 KIRBY BUILDING SYSTEMS INDIA LTD., PASHAMYLARAM, MEDAK DISTRICT. YEAR 2000, THE INFRASTRUCTURE SECTOR HAS OPENED UP WHICH STARTED ACCEPTING THESE PRE-ENGINEERED STEEL STRUCT URES IN INDUSTRIAL SECTOR. PESBS ARE NOT CONSUMER PRODUCTS WHICH CAN BE BOUGHT OFF THE SHELF FROM ANY STORE. ALSO IT IS IMPORTANT TO NOTE THAT BRAND VALUE IS DEVELOPED FRO M THE CONTRIBUTIONS MADE BY ALL THE GROUP ENTITIES OF MNE S. THEREFORE, KIRBY, INDIA HAS DEVELOPED ITS OWN BRAND VALUE BY SPENDING HUGE AMOUNTS ON MARKETING, DEVELOPMENT AND ADVERTISEMENTS AS DISCUSSED IN THE EARLIER PART OF THIS ORDER. SIGNIFICANT COSTS HAVE BEEN INCURRED BY KIRBY, INDI A IN MARKETING OF ITS PRODUCT IN THE COUNTRY. ALSO, THE PESBS ARE CUSTOMIZED TO THE NEEDS OF THE CUSTOMERS WITH REFER ENCE TO LOCATIONS AND FUNCTIONALITY OF THE BUSINESS. THE PE SBS WHICH ARE PREVALENT IN KUWAIT CANNOT BE SIMPLY REPL ICATED HERE IN INDIA. KIRBY, INDIA HAS SPENT HUGE AMOUNTS IN MARKETING DEVELOPMENT AND BUSINESS PROMOTION TO FAMILIARIZE THEIR PRODUCTS. DEVELOPED IN-HOUSE EXPE RTISE AND MOST OF THE WORKS ARE ALSO OUTSOURCED ON JOB WORK B ASIS. THEREFORE, CREATION OF BRAND VALUE IS FROM ALL SIDE S AND FROM ALL ENTITIES OF A MULTINATIONAL GROUP. NO PAYMENT O N ACCOUNT OF BRAND VALUE BY THE TAXPAYER TO ITS AE IS NOT JUS TIFIED. IN VIEW OF THE ABOVE DISCUSSION, IT IS CONCLUDED TH AT THE PAYMENT MADE BY THE TAXPAYER TO ITS A.E. ON ACCOUNT OF TECHNICAL SERVICES IS EXCESSIVE AS ALREADY HUGE PAY MENTS WERE MADE IN THE PAST SEVERAL YEARS. NEITHER TAXPAY ER NOR ITS AE COULD SUBSTANTIATE THE ACTUAL TECHNICAL SERV ICES RENDERED, COSTS INCURRED/CONTRIBUTED, BENEFITS DERI VED. THE ARMS LENGTH PRICE OF THE PAYMENT MADE TOWARDS TECHN ICAL SERVICES IS AT RS.59,20,536/- IS TAKEN AS NIL UNDER CUP METHOD. AS THE PAYMENT OF ROYALTY ON SALES IS WITHO UT ANY BASIS AND HENCE THE TRANSACTION IS TREATED AS SHAM AND NO METHOD IS ADOPTED. THE ARMS LENGTH PRICE OF THE ROY ALTY PAID AT RS.17,71,37,206/- IS TAKEN AT NIL. ACCORDINGLY, HE HAS SUGGESTED DISALLOWANCE OF THE E NTIRE AMOUNT PERTAINING TO TECHNICAL SERVICES AND ROYALTY TO AN EXTENT OF RS.18.30 CRORES. 6. ASSESSEE FILED ITS OBJECTIONS BEFORE THE DRP. T HE DRP AFTER ANALYZING THE TRANSACTIONS OF THE AE AND VARIOUS AGREEMENTS ENTERED BY THE ASSESSEE WITH AE WITH REF ERENCE TO 7 ITA.NO.1651/HYD/2010 & 1975/HYD/2011 KIRBY BUILDING SYSTEMS INDIA LTD., PASHAMYLARAM, MEDAK DISTRICT. PAYMENT OF TECHNICAL FEE AND ROYALTY GAVE PARTIAL R ELIEF BY STATING AS UNDER : 8.3 AFTER GOING THROUGH THE ENTIRE MATERIAL PROVI DED BY THE TAXPAYER AND AFTER EXTENSIVE DISCUSSION OF THE TPO, WE ARE OF THE VIEW THAT KIRBY INDIA HAS ESTABLISHED A PLANT IN THE OUTSKIRTS OF HYDERABAD WITH TECHNICAL ASSISTANC E FROM ITS AE. DEFINITELY, THE AE HAS TO BE PAID IN TERMS OF ROYALTY AND TECHNICAL KNOWHOW FEE FOR THE SAME. THE MAIN QU ESTION HERE IS WHETHER THE TECHNICAL FEE/ROYALTY PAID VIS- A-VIS THE PROFIT EARNED BY THE TAXPAYER AND THE SERVICES REND ERED BY THE AE ARE ADEQUATE OR WHETHER THEY ARE WITHIN THE ALP. THE FOLLOWING TABLE GIVES THE FEE FOR TECHNICAL SERVICE S DEBITED INTO THE PROFIT & LOSS ACCOUNT BY THE TAXPAYER DURI NG THE LAST SO MANY YEARS AS UNDER : FINANCIAL YEAR TECHNICAL FEES PAID IN RS. 2005-06 59,20,536 2004-05 1,90,05,260 2003-04 1,02,87,965 2002-03 63,84,953 2001-02 10,74,145 2000-01 2,43,259 TOTAL 4,29,16,118 8.4. AS SEEN FROM THE ABOVE TABLE, THE TAXPAYER DUR ING THE LAST SIX YEARS HAS DEBITED TO THE PROFIT & LOSS ACCOUNT TO THE TUNE OF RS. 4,29,16,118/- ON ACCOUNT OF TECHNIC AL SERVICES. THE BENEFIT DERIVED BY THE TAXPAYER FROM THE ABOVE TECHNICAL SERVICES, WE ARE OF THE VIEW IS ADEQUATEL Y COMPENSATED AND HENCE FURTHER TECHNICAL FEE PAYMENT IN THIS YEAR IS NOT NECESSARY. THE ACTION OF THE TPO I N TAKING TECHNICAL FEE PAYABLE FOR THIS YEAR AS 'NIL' IS UPH ELD. IN RESPECT OF ROYALTY, DURING THE FINANCIAL YEAR UNDER CONSIDERATION THE TAXPAYER WAS PAYING THE ROYALTY @ 7.5% ON SALES AND DEBITED AN AMOUNT OF RS. 17.71 CRORES. AS ONE COULD SEE, THE AE IS DECLARING 15% PROFIT AND THE T AXPAYER HAS DECLARED NEARLY 6% PROFIT, WHEREAS THE ROYALTY PAYMENT IS @7.5% OF THE SALES. BESIDES, THIS MAKES US TO IN FER THAT THERE IS A SHIFTING OF PROFIT FROM INDIA TO ITS AE. WE ALSO TEND TO BELIEVE THAT SINCE SHIFTING OF PROFITS TO ITS AE IN COUNTRIES NON TAXABLE, THERE WOULD BE A TENDENCY TO SHIFT THE PROFIT FROM THE TAXPAYER TO ITS PARENT COMPANIES. NOW THE QUESTION 8 ITA.NO.1651/HYD/2010 & 1975/HYD/2011 KIRBY BUILDING SYSTEMS INDIA LTD., PASHAMYLARAM, MEDAK DISTRICT. IS HOW TO QUANTIFY THEM. DURING THE FY 2004-05, THE TAXPAYER HAS PAID THE ROYALTY @ 3.5% ON SALES OF RS . 6,77,67,700/-. WE ARE OF THE VIEW THAT DURING THIS YEAR ALSO THE ROYALTY PAYMENT OF 3.5% ON SALES WOULD MEET THE REQUIREMENT OF ALP. TO THIS EXTENT, THE TPO'S REPOR T IS MODIFIED I.E. ALP IN RESPECT OF ROYALTY PAYMENT IS CALCULATED AS UNDER : PRICE RECEIVED VIS-A-VIS THE ARMS LENGTH PRICE: THE PRICE CHARGED BY THE TAX PAYER TO ITS ASSOCIATE D ENTERPRISES IS COMPARED TO THE ARMS LENGTH PRICE AS UNDER : ARMS LENGTH PRICE OF PAYMENT MADE TOWARDS TECHNICAL SERVICES NIL PRICE SHOWN IN THE INTERNATIONAL TRANSACTIONS RS.5 9,20,536/- SHORTFALL BEING ADJUSTMENT U/S.92CA. RS.59,20,536/- ARMS LENGTH PRICE OF PAYMENT MADE TOWARDS ROYALTY RS.17,71,37,206/ - PRICE SHOWN IN THE INTERNATIONAL TRANSACTIONS RS. 8,26,64,030/ - SHORTFALL BEING ADJUSTMENT U/S.92CA. RS.9,44,73,176 /- SUMMARY OF ADJUSTMENTS U/S.92CA: (1) IN RESPECT OF PAYMENT MADE TOWARDS TECHNICAL SERVICES. RS.59,20,536 (2) IN RESPECT OF PAYMENT MADE TOWARDS ROYALTY RS.9,44,73,176 TOTAL RS.10,03,93,712 7. THUS THE ASSESSEE HAS GOT PARTIAL RELIEF FROM T HE DRP. THEREFORE, IT HAS RAISED VARIOUS GROUNDS ON TH E DENIAL OF CLAIM OF PAYMENT OF TECHNICAL SERVICES AND RESTRIC TION OF ROYALTY TO THE AE IN ITS GROUNDS 1 TO 8. 8. LD. COUNSEL DREW OUR ATTENTION TO THE ACTIVITIE S OF THE ASSESSEE COMPANY, RELIANCE ON TECHNICAL EXPERTI SE OF KIRBY BUILDING SYSTEMS, KUWAIT AND THE SEQUENCE OF EVENTS TO SUBMIT THAT ORIGINALLY ASSESSEE HAS ENTERED INTO A N AGREEMENT FOR TECHNICAL ASSISTANCE AND TECHNICAL SERVICES WIT H KIRBY 9 ITA.NO.1651/HYD/2010 & 1975/HYD/2011 KIRBY BUILDING SYSTEMS INDIA LTD., PASHAMYLARAM, MEDAK DISTRICT. BUILDING SYSTEMS KUWAIT ON 1 ST APRIL, 2000 IN WHICH IT UNDERTOOK TO PAY AN AMOUNT OF 2 MILLION US DOLLARS AS TECHNICAL SERVICE FEE. THIS AMOUNT WAS TO BE PAID, 1/3 RD ON APPROVAL OF COLLABORATION AGREEMENT FROM RESERVE BA NK OF INDIA, 1/3 RD ON DELIVERY OF KNOWHOW DOCUMENTATION AND BALANCE IN 4 YEARS AFTER THE PROPOSAL WAS APPROVED BY THE RBI. HOWEVER, VIDE AMENDED AGREEMENT DATED 07.09.2001 IT WAS UNDERSTOOD THAT LUMP SUM AMOUNT OF 2 MILLION USD WO ULD BE PAID IN 5 EQUAL INSTALLMENTS BEGINNING FROM THE YEA R DECEMBER, 2002 WITH MODIFIED TERMS OF PAYMENT OF RO YALTY AND TECHNICAL FEE. SINCE THE ASSESSEE COMPANY WAS INCURRING LOSSES AND WAS IN REQUIREMENT OF WORKING CAPITAL, T HERE WAS FURTHER AMENDMENT ON NOVEMBER 12, 2002 WITH FURTHER MODIFICATIONS. SINCE ASSESSEE PAID ONLY AN AMOUNT O F 0.4 MILLION US DOLLARS AS ON THAT DATE, THE TECHNICAL FEE WAS TO BE PAID AT 2,67,000 USD IN THE YEAR 2003 AND 1,00,000 USD EACH FROM 2004 TO 2016 AND BALANCE 33000 US DOLLARS IN THE YEAR 2017. IT WAS SUBMITTED THAT LUMP SUM TECHNICAL FEE PAYABLE AT THE TIME OF INITIAL OPERATIONS OF THE COMPANY WAS I N FACT DEFERRED SO AS TO SUIT THE ASSESSEE COMPANY IN ITS WORKING CAPITAL REQUIREMENT. ACCORDINGLY, IT WAS SUBMITTED THAT ASSESSEE PAID US $1,00,000 AS TECHNICAL FEE IN THE YEAR UNDER CONSIDERATION. 9. WITH REFERENCE TO ROYALTY, IT WAS SUBMITTED THA T IN THE ORIGINAL AGREEMENT DATED 01.04.2000 ROYALTY WAS PAYABLE ON DOMESTIC SALES AT 2.5% IN THE FIRST YEAR AND 5% FROM SECOND YEAR I.E., 2002 ONWARDS UP TO 31.03.2007. HOWEVER, ASSESSEE HAS NOT PAID ANY ROYALTY IN THE YEAR 2000-2001 AND VIDE AGREEMENT DATED 07.09.2001, THE TERMS WERE CHANGED TO PAY ROYALTY AT 5% ON DOMESTIC SALES AND 5% ON EXPORT SA LES FROM 10 ITA.NO.1651/HYD/2010 & 1975/HYD/2011 KIRBY BUILDING SYSTEMS INDIA LTD., PASHAMYLARAM, MEDAK DISTRICT. THE YEAR 2002 TO MARCH, 2007. IN SPITE OF THAT, ASS ESSEE DID NOT PAY ANY ROYALTY IN THE YEARS 2002 AND 2003. THE REFORE, VIDE AGREEMENT DATED 12.11.2002, THIS WAS CHANGED T O NO ROYALTY UP TO MARCH 2003 AND 7.5% ON DOMESTIC SALES AND 8% ON EXPORT SALES FOR 3 YEARS UP TO MARCH, 2007. THIS WAS HOWEVER, FURTHER MODIFIED VIDE AGREEMENT DATED 17.1 2.2005 TO NIL ROYALTY UP TO 2004 AND 7.5% ON DOMESTIC SALES FOR 3 YEARS AND 8% OF EXPORT SALES FOR 3 YEARS, THAT TOO UP TO MARCH, 2007. ALL THE AGREEMENTS WERE APPROVED BY RBI AS WELL AS INDUSTRIES DEPARTMENT, GOVERNMENT OF INDIA. IT WAS SUBMITTED T HAT ASSESSEE IN THE IMPUGNED YEAR HAS CLAIMED THE ROYAL TY AT 7.5% ON DOMESTIC SALES AND 8% ON EXPORT SALES. 10. IT WAS SUBMITTED THAT ASSESSEE HAS NEVER PAID ANY ROYALTY AT 3.5% ON DOMESTIC SALES AND TO THAT EXTEN T BOTH TPO AND DRP WRONGLY CONSIDERED THE PAYMENT AT 3.5% AND ALLOWED THE AMOUNT AT THAT RATE. IT WAS SUBMITTED THAT ROYA LTY IN A.Y. 2005-06 WAS PAID AT 7.5% ON DOMESTIC SALES WHICH WA S ALLOWED. AS FAR AS THE TECHNICAL KNOWHOW IS CONCERN ED, THIS AMOUNT WAS PAYABLE IN A LUMP SUM AMOUNT INITIALLY WHICH WAS DEFERRED AND ONLY USD 1,00,000 WAS PAID IN THE YEA R. 11. WITH REFERENCE TO THE TOTAL DENIAL OF TECHNICA L KNOWHOW FEES AND PARTIAL DENIAL OF ROYALTY BY THE D RP, IT WAS SUBMITTED THAT EITHER THE TPO OR THE DRP HAS NO JUR ISDICTION TO DENY THE CLAIM IN ITS ENTIRETY AS THEY HAVE ONLY POWER TO EXAMINE THE ARMS LENGTH PRICE OF THE PAYMENTS MADE TO AE. IT WAS FURTHER SUBMITTED THAT IN CASE OF T.P. ADJUSTME NTS, THE A.O. DISALLOWED THE ENTIRE CLAIM INVOKING THE PROVI SIONS OF SECTION 37(1), WHEREAS DRP PARTIALLY ALLOWED THE AM OUNT OF ROYALTY WITHOUT ANY COMPARATIVE STUDY UNDER VARIOUS METHODS 11 ITA.NO.1651/HYD/2010 & 1975/HYD/2011 KIRBY BUILDING SYSTEMS INDIA LTD., PASHAMYLARAM, MEDAK DISTRICT. PRESCRIBED UNDER THE PROVISIONS FOR EXAMINING THE A RMS LENGTH PRICE OF THE TRANSACTIONS ENTERED INTO BY THE ASSES SEE WITH ITS AE. SINCE THE TPO HAS NO JURISDICTION TO EXAMINE TH E ALLOWABILITY OF ROYALTY CLAIM, ACTION OF THE TPO/DR P IS NOT SUSTAINABLE. FOR THIS PROPOSITION, THE LD. COUNSEL RELIED UPON THE DECISIONS OF THE HONBLE HIGH COURT OF DELHI IN THE CASE OF CIT VS. EKL APPLIANCES LTD. 1068 OF 2011 DATED 29.0 3.2012 WHICH IN TURN, WAS FOLLOWED BY COORDINATE BENCHES O F ITAT, MUMBAI IN SC ENVIRO AGRO INDIA LTD. VS. DCIT ITA.NO S. 2057, 2058/MUM/2009 DT.07-11-2012 AND IN THE CASE OF THY SSEN KRUPP INDUSTRIES INDIA P LTD VS. ACIT, MUMBAI ITA.NO.7032/MUM/2011 DATED 27.11.2012 AND ALSO BY T HE COORDINATE BENCH AT HYDERABAD IN THE CASE OF DCIT V S. AIR LIQUIDE ENGINEERING INDIA P. LTD., IN ITA.NO.1040/H YD/ 2011 AND OTHERS DATED 13.02.2014. IT WAS THE SUBMISSION THAT A.O. CANNOT DISALLOW THE AMOUNT IN ITS ENTIRETY WITHOUT EXAMINING THE ARMS LENGTH PRICE OF THE TRANSACTION. 12. COMING TO THE OBSERVATIONS OF THE TPO THAT THE RE WAS SHIFTING OF PROFITS TO NO TAX JURISDICTION, IT WAS SUBMITTED THAT THIS ARGUMENT CANNOT BE ACCEPTED IN VIEW OF TH E PROVISIONS OF T.P. AND ALSO ON FURTHER FACT THAT AS SESSEE HAS PAID THE TAXES ON THE AMOUNTS IN INDIA. IT WAS SUBM ITTED THAT THE ROYALTY AND TECHNICAL FEE PAYABLE ARE ON NET BA SIS. THEREFORE, ASSESSEE HAS GROSSED-UP THE AMOUNTS AND TO AN EXTENT OF ABOUT 32% ASSESSEE HAS PAID TAXES INCLUDI NG SERVICE TAX, CESS AND OTHER TAXES. THE LD. COUNSEL REFERRED TO THE DETAILED SUBMISSIONS MADE BEFORE THE DRP ON THIS IS SUE. 13. IT WAS FURTHER CONTENDED THAT ASSESSEES AGREEMENTS WITH AE WERE APPROVED BY RBI AND ALSO BY THE 12 ITA.NO.1651/HYD/2010 & 1975/HYD/2011 KIRBY BUILDING SYSTEMS INDIA LTD., PASHAMYLARAM, MEDAK DISTRICT. DEPARTMENT OF INDUSTRIES AND THEREFORE, THE TPO/DRP HAS NO ROLE TO DENY THE CLAIM WHICH WAS APPROVED BY OTHER GOVERNMENT AUTHORITIES. LD. COUNSEL ON A CLARIFICAT ION ABOUT THE WORKING OF ROYALTY CLARIFIED THAT EVEN THOUGH T HE RATE AGREED/APPROVED STOOD AT 7.5% OF DOMESTIC SALES OR 8% OF EXPORT SALES, AS PER THE POLICY OF THE RBI THERE AR E VARIOUS EXCLUSIONS IN CONSIDERING THE TURNOVER. THEREFORE, THE EFFECTIVE DATE OF ROYALTY WAS MUCH LESS WHEREAS, THE DRP HAS APPROVED THE RATE AT 3.5% ON THE GROSS DOMESTIC SALES. THERE FORE, THERE IS A LITTLE VARIATION IN THE AMOUNTS TAKEN. 14. SUMMARISING THE ARGUMENTS, LD. COUNSEL SUBMITTED THAT DRP/TPO HAS NO JURISDICTION TO RESTR ICT THE AMOUNT TO NIL. LD. COUNSEL MADE VARIOUS PROPOSITION S AS UNDER AND AS SUPPORTED BY VARIOUS DECISIONS OF THE COORDINATE BENCHES/HIGH COURT. I. THAT TPO HAS TO APPLY METHOD WHILE CONSIDERING THE ADJUSTMENTS TO THE INTERNATIONAL TRANSACTIONS. FOR THIS HE RELIED ON (I) MERCK LTD., MUMBAI VS. DCIT, CIRCLE 6(3), MUMBAI ITA.NO.925/MUM/2007 DT. 19.07.2013. (II) JOHNSON & JOHNSON LTD., MUMBAI VS. CIT- LTU, MUMBAI ITA.NO.83/MUM/2011 DATED 05.02.2014. (III) KODAK INDIA P. LTD., MUMBAI VS. ACIT 10(1), MUMBAI ITA.NO.7349/MUM/2012 DATED 30.04.2013 (IV) REEBOK INDIA CO. VS. ACIT, NEW DELHI ITA.NO.5857/DEL/2012 DT. 14.06.2013 II. THE TPO HAS NO JURISDICTION TO QUESTION THE BUSINESS PRUDENCE OF THE ASSESSEE IN PAYING VARIOUS ROYALTIES/TECHNICAL KNOWHOW FEE. 13 ITA.NO.1651/HYD/2010 & 1975/HYD/2011 KIRBY BUILDING SYSTEMS INDIA LTD., PASHAMYLARAM, MEDAK DISTRICT. (I) JOHNSON & JOHNSON LTD., MUMBAI VS. CIT- LTU, MUMBAI ITA.NO.83/MUM/2011 DATED 05.02.2014. (II) REEBOK INDIA CO. VS. ACIT, NEW DELHI ITA.NO.5857/DEL/2012 DT. 14.06.2013 III. THE TPO HAS NO JURISDICTION TO DISALLOW THE ENTIRE AMOUNT WITHOUT DETERMINING THE ALP (I) SC ENVIRO AGRO INDIA LTD., MUMBAI VS. DCIT 3(3), MUMBAI ITA.NOS.2057 & 2058/MUM/2009 DATED 07.11.2012 (II) M/S. THYSSEN KRUPP INDUSTRIES INDIA P. LTD., MUMBAI VS. ACIT, C.C.3(3), MUMBAI ITA.NO.7032/MUM/2011 DT. 27.11.2012 IV. THE TPO HAS NO JURISDICTION TO DISALLOW OR DIFFER FROM THE AGREEMENTS WHICH ARE APPROVED BY OTHER GOVERNMENT AUTHORITIES LIKE DEPARTMENT OF INDUSTRIES OR BY RESERVE BANK OF INDIA. (I) SC ENVIRO AGRO INDIA LTD., MUMBAI VS. DCIT 3(3), MUMBAI ITA.NOS.2057 & 2058/MUM/2009 DATED 07.11.2012 V. THE BENEFIT DERIVED BY THE ASSESSEE IS ALSO NOT RELEVANT FOR CONSIDERING THE PAYMENT OF ROYALTY AND TECHNICAL KNOWHOW FEE AND RELIED ON THE FOLLOWING CASE LAWS (I) DCIT, CIRCLE1(1), HYDERABAD VS. M/S. AIR LIQUIDE ENGINEERING INDIA P. LTD., HYDERABAD ITA.NO.1040/HYD/2011 ETC., DT. 13.02.2014 (II) ACIT, CIR.4, AHMEDABAD VS. HITACHI HOME & LIFE SOLUTIONS (INDIA) LTD., ITA.NO.2361 & 2362/AHD/2008 ETC., DATED 24.09.2013. 15. LEARNED D.R. HOWEVER, RELIED ON THE DETAILED ORDERS OF THE TPO AND DRP TO SUBMIT THAT THERE IS N O NECESSITY TO PAY ROYALTY AT HIGHER AMOUNT AND SO THE AUTHORIT IES ARE WITHIN THE JURISDICTION TO RESTRICT THE AMOUNT AT N IL ON 14 ITA.NO.1651/HYD/2010 & 1975/HYD/2011 KIRBY BUILDING SYSTEMS INDIA LTD., PASHAMYLARAM, MEDAK DISTRICT. TECHNICAL SERVICES FEE AND 3.5% ON GROSS SALES AS F AR AS ROYALTY IS CONCERNED. HE RELIED ON THE ORDERS OF THE AUTHOR ITIES. 16. LD. COUNSEL, IN REPLY, ALSO CLARIFIED VARIOUS ISSUES RAISED AND PLACED ON RECORD A CUMULATIVE PAYMENT OF ROYALTY AND TECHNICAL SERVICES FEE BY THE ASSESSEE OVER A P ERIOD TO SUBMIT THAT EFFECTIVE RATE OF ROYALTY IS VERY MUCH LESS. IT WAS SUBMITTED THAT THE ASSESSEE HAS PAID CUMULATIVE ROY ALTY AS PERCENTAGE OF CUMULATIVE SALES AT 3.75% UP TO A.Y. 2009-2010. IT WAS SUBMITTED THAT THE PAYMENT OF TECHNICAL KNOW HOW AND ROYALTY SHOULD BE ALLOWED IN FULL. 17. WE HAVE CONSIDERED THE RIVAL CONTENTIONS AND EXAMINED THE ORDERS OF THE AUTHORITIES, DOCUMENTS P LACED ON RECORD AND RELEVANT CASE LAW RELIED UPON. KIRBY BUI LDING SYSTEMS INDIA P. LTD., IS A WHOLLY OWNED SUBSIDIARY OF ALGHANIM INDUSTRIES, A KUWAIT BASED MULTI-BILLION CONGLOMERATE. IT IS ONE OF THE WORLDS LARGEST PROD UCERS OF PRE- ENGINEERED STEEL BUILDINGS (IN SHORT PEB) AND HAS BEEN OPERATIONAL FOR MORE THAN 38 YEARS SINCE 1976. TO P IONEER THE PEB CONCEPT, IT HAS SET UP A PLANT IN INDIA IN THE YEAR 1999 WITH A MANUFACTURING FACILITY WITH A CAPACITY OF 60 ,000 MT PER ANNUM AT HYDERABAD. IT WAS SUBMITTED THAT KIRBY KUW AIT HAS EXTREMELY TALENTED POOL OF SKILLED STRUCTURAL ENGIN EERS, DESIGNERS AND DETAILERS CONVERSANT WITH INDIAN AND INTERNATIONALLY ACCLAIMED CODES AND ENGINEERING PRA CTICES. ALL THE BUILDINGS DESIGNED BY KIRBY ARE CUSTOM DESIGNED USING LATEST DOMESTIC/INTERNATIONAL CODES AND STANDARDS S UCH AS IS, MBMA, AISC, AISI AND AWS. PEB TECHNOLOGY HAS VARIOU S ADVANTAGES BEING FLEXIBILITY IN EXPANSION, FASTER I NSTALLATION, ENERGY EFFICIENT AND PRACTICALLY MAINTENANCE FREE W ITH SUPERB 15 ITA.NO.1651/HYD/2010 & 1975/HYD/2011 KIRBY BUILDING SYSTEMS INDIA LTD., PASHAMYLARAM, MEDAK DISTRICT. QUALITY AND ALSO EARTHQUAKE RESISTANT. IT HAS APPLI CATIONS STARTING FROM FACTORIES AND WAREHOUSE TO AIR-CRAFT HANGERS, STATIONS, SHIP YARDS, WORK-SHOPS, STADIUMS ETC. ASS ESSEE INDEED PIONEERED A NEW CONCEPT OF PRE-ENGINEERING S TEEL BUILDING WITH THE TECHNICAL HELP OF ITS AE. 18. THERE IS NO DISPUTE WITH REFERENCE TO THE FACT THAT ASSESSEE WAS PROMOTED BY THE KIRBY BUILDING SYSTEMS , KUWAIT AND ITS ORIGINAL TECHNICAL SERVICE AGREEMENT FOR PA YMENT OF LUMP SUM AMOUNT OF $ 2 MILLION DOLLARS AS TECHNICAL KNOWHOW FEE AND ROYALTY OF 2.5% IN THE FIRST YEAR AND 5% FR OM SECOND YEAR ONWARDS UP TO MARCH 31, 2007 WAS APPROVED BY T HE RBI AND MINISTRY OF INDUSTRIES. IT IS ALSO A FACT THAT ASSESSEE DID NOT REMIT ANY OF THOSE AMOUNTS IN THOSE YEARS AND T HE AGREEMENT WAS AMENDED PERIODICALLY. AS STATED ABOVE IN THE FACTS OF THE CASE, IN THE IMPUGNED YEAR ASSESSEE HA S PAID $ 1 LAKH DOLLARS AS TECHNICAL KNOWHOW FEE AND ROYALTY A T 7.5% ON DOMESTIC SALES AS PER THE AGREEMENTS ENTERED INTO A ND APPROVED BY THE AUTHORITIES. 19. IN THE GUISE OF EXAMINING THE PAYMENTS UNDER T .P. PROVISIONS, IT IS NOTICED THAT THE TPO HAS NOT ANAL YSED THESE PAYMENTS EITHER UNDER TNMM METHOD OR UNDER ANY OTHE R METHOD WHICH REQUIRE TO BE ANALYSED AS PER THE PROV ISIONS. HOWEVER, THE TPO HAS EXAMINED THE BUSINESS NECESSIT Y OF PAYMENT OF TECHNICAL KNOWHOW FEE AND ROYALTY UNDER THE PROVISIONS OF SECTION 37(1) RATHER THAN UNDER THE P ROVISIONS OF T.P. HIS DECISION OF NOT ALLOWING ANY ROYALTY PAYME NT OR TECHNICAL KNOWHOW PAYMENT AND DETERMINING THE ALP A T NIL CANNOT BE SUSTAINED IN VIEW OF THE FACT THAT THIS T ECHNICAL KNOWHOW FEE AND ROYALTY WERE AGREED UPON WHEN THE A SSESSEE HAS ORIGINALLY ENTERED INTO AGREEMENT AS ON 01.04.2 000 MUCH 16 ITA.NO.1651/HYD/2010 & 1975/HYD/2011 KIRBY BUILDING SYSTEMS INDIA LTD., PASHAMYLARAM, MEDAK DISTRICT. BEFORE THE T.P. PROVISIONS CAME ON STATUTE. IT MAY BE ANOTHER REASON THAT ASSESSEE HAS REVISED THE AGREEMENT AND PAID SUBSEQUENTLY, PARTLY IN THE IMPUGNED YEAR, BUT THAT DOES NOT PREVENT ASSESSEE CLAIMING EXPENDITURE WHICH WAS NEC ESSARY FOR ITS BUSINESS OPERATIONS IN VIEW OF THE AGREEMENT EN TERED AT THE TIME OF ESTABLISHING THE UNIT IN INDIA. HAD THERE B EEN NO REVISION OF THE AGREEMENT, THE PAYMENT OF TECHNICAL KNOWHOW FEE WOULD HAVE BEEN OVER BY THE YEAR 2002 ITSELF. A SSESSEE PAID IN A SENSE BELATEDLY THE SAME AMOUNT WHICH WAS PAYB LE ORIGINALLY DUE TO RESCHEDULING IN PAYMENT PERIOD. N O EXTRA AMOUNT WAS REQUIRED TO BE PAID. MOREOVER, ON THE EN TIRE TURNOVER IN THE INTERVENING YEARS, ASSESSEE ALSO WO ULD HAVE PAID ROYALTY. HOWEVER, DUE TO BUSINESS REQUIREMENTS , BOTH THE PARTIES AGREED TO REVISE THE ROYALTIES. TP PROVIS IONS DOES NOT EMPOWER THE TPO TO DECIDE ABOUT THE COMMERCIAL DECI SIONS AND DETERMINING THE ALP AT NIL THEREBY, DENYING THE ENTIRE CLAIM INSTEAD OF ALLOWING THE AMOUNT ON THE BASIS O F ALP TO BE DETERMINED UNDER THE PROVISIONS. 20. THE HONBLE DELHI HIGH COURT IN THE CASE OF CI T VS. EKL APPLIANCES ITA.NO.1068 OF 2011 AND 1070 OF 2011 DATED 29 TH MARCH, 2012 CONSIDERED SIMILAR ISSUE WHETHER THE T PO HAS POWER TO RESTRICT IN DETERMINING THE ALP AT NIL UNDER THE PROVISIONS OF T.P. WHEN HE WAS SUPPOSED TO HAVE DET ERMINED THE ARMS LENGTH PRICE OF THE INTERNATIONAL TRANSACT ION. THE HONBLE DELHI HIGH COURT AFTER EXAMINING THE FACTS OF THE CASE HELD UNDER : 19. THERE IS NO REASON WHY THE OECD GUIDELINES SH OULD NOT BE TAKEN AS A VALID INPUT IN THE PRESENT CASE I N JUDGING THE ACTION OF THE TPO. IN FACT, THE CIT (APPEALS) H AS REFERRED TO AND APPLIED THEM AND HIS DECISION HAS BEEN AFFIR MED BY THE TRIBUNAL. THESE GUIDELINES, IN A DIFFERENT FORM , HAVE 17 ITA.NO.1651/HYD/2010 & 1975/HYD/2011 KIRBY BUILDING SYSTEMS INDIA LTD., PASHAMYLARAM, MEDAK DISTRICT. BEEN RECOGNIZED IN THE TAX JURISPRUDENCE OF OUR COU NTRY EARLIER. IT HAS BEEN HELD BY OUR COURTS THAT IT IS NOT FOR THE REVENUE AUTHORITIES TO DICTATE TO THE ASSESSEE AS T O HOW HE SHOULD CONDUCT HIS BUSINESS AND IT IS NOT FOR THEM TO TELL THE ASSESSEE AS TO WHAT EXPENDITURE THE ASSESSEE CAN IN CUR. WE MAY REFER TO A FEW OF THESE AUTHORITIES TO ELUCI DATE THE POINT. IN EASTERN INVESTMENT LTD. V. CIT, (1951) 20 ITR 1, IT WAS HELD BY THE SUPREME COURT THAT THERE ARE USUAL LY MANY WAYS IN WHICH A GIVEN THING CAN BE BROUGHT ABO UT IN BUSINESS CIRCLES BUT IT IS NOT FOR THE COURT TO DEC IDE WHICH OF THEM SHOULD HAVE BEEN EMPLOYED WHEN THE COURT IS DECIDING A QUESTION UNDER SECTION 12(2) OF THE INCO ME TAX ACT. IT WAS FURTHER HELD IN THIS CASE THAT IT IS NOT NECESSARY TO SHOW THAT THE EXPENDITURE WAS A PROFIT ABLE ONE OR THAT IN FACT ANY PROFIT WAS EARNED. IN CIT V. WALCHAND & CO. ETC., (1967) 65 ITR 381, IT WAS HELD BY THE SUPREME COURT THAT IN APPLYING THE TEST OF COMMERCI AL EXPEDIENCY FOR DETERMINING WHETHER THE EXPENDITURE WAS WHOLLY AND EXCLUSIVELY LAID OUT FOR THE PURPOSE OF BUSINESS, REASONABLENESS OF THE EXPENDITURE HAS TO BE JUDGED FROM THE POINT OF VIEW OF THE BUSINESSMAN AND NOT OF THE REVENUE. IT WAS FURTHER OBSERVED THAT THE RULE THAT EXPENDITURE CAN ONLY BE JUSTIFIED IF THERE IS CORRE SPONDING INCREASE IN THE PROFITS WAS ERRONEOUS. IT HAS BEEN CLASSICALLY OBSERVED BY LORD THANKERTON IN HUGHES V . BANK OF NEW ZEALAND, (1938) 6 ITR 636 THAT EXPENDITURE IN THE COURSE OF THE TRADE WHICH IS UNREMUNERATIVE IS NONE THE LESS A PROPER DEDUCTION IF WHOLLY AND EXCLUSIVELY M ADE FOR THE PURPOSES OF TRADE. IT DOES NOT REQUIRE THE PRES ENCE OF A RECEIPT ON THE CREDIT SIDE TO JUSTIFY THE DEDUCTION OF AN EXPENSE. THE QUESTION WHETHER AN EXPENDITURE CAN B E ALLOWED AS A DEDUCTION ONLY IF IT HAS RESULTED IN A NY INCOME OR PROFITS CAME TO BE CONSIDERED BY THE SUPREME COU RT AGAIN IN CIT V. RAJENDRA PRASAD MOODY, (1978) 115 I TR 519, AND IT WAS OBSERVED AS UNDER: - WE FAIL TO APPRECIATE HOW EXPENDITURE WHICH IS OTH ERWISE A PROPER EXPENDITURE CAN CEASE TO BE SUCH MERELY BE CAUSE THERE IS NO RECEIPT OF INCOME. WHATEVER IS A PROPER OUTGOING BY WAY OF EXPENDITURE MUST BE DEBITED IRRESPECTIVE OF WHETHER THERE IS RECEIPT OF INCOME OR NOT. THAT IS THE PLAIN REQUIREMENT OF PROPER ACCOUNTING AND THE INTERPRETATION OF SECTION 57(III) CANNOT BE DIFFERE NT. THE DEDUCTION OF THE EXPENDITURE CANNOT, IN THE CIRCUMS TANCES, BE HELD TO BE CONDITIONAL UPON THE MAKING OR EARNIN G OF THE INCOME. 18 ITA.NO.1651/HYD/2010 & 1975/HYD/2011 KIRBY BUILDING SYSTEMS INDIA LTD., PASHAMYLARAM, MEDAK DISTRICT. IT IS NOTEWORTHY THAT THE ABOVE OBSERVATIONS WERE M ADE IN THE CONTEXT OF SECTION 57(III) OF THE ACT WHERE THE LANGUAGE IS SOMEWHAT NARROWER THAN THE LANGUAGE EMPLOYED IN SECTION 37(1) OF THE ACT. THIS FACT IS RECOGNISED IN THE JUDGMENT ITSELF. THE FACT THAT THE LANGUAGE EMPLOYE D IN SECTION 37(1) OF THE ACT IS BROADER THAN SECTION 57 (III) OF THE ACT MAKES THE POSITION STRONGER. 20. IN THE CASE OF SASSOON J. DAVID & CO. PVT. LTD . V. CIT, (1979) 118 ITR 261 (SC), THE SUPREME COURT REF ERRED TO THE LEGISLATIVE HISTORY AND NOTED THAT WHEN THE INC OME TAX BILL OF 1961 WAS INTRODUCED, SECTION 37(1) REQUIRED THAT THE EXPENDITURE SHOULD HAVE BEEN INCURRED WHOLLY, NECESSARILY AND EXCLUSIVELY FOR THE PURPOSES OF BU SINESS IN ORDER TO MERIT DEDUCTION. PURSUANT TO PUBLIC PROTES T, THE WORD NECESSARILY WAS OMITTED FROM THE SECTION. 21. THE POSITION EMERGING FROM THE ABOVE DECISI ONS IS THAT IT IS NOT NECESSARY FOR ASSESSEE TO SHOW THAT ANY LEGITIMATE EXPENDITURE INCURRED BY HIM WAS ALSO INC URRED OUT OF NECESSITY. IT IS ALSO NOT NECESSARY FOR ASSE SSEE TO SHOW THAT ANY EXPENDITURE INCURRED BY HIM FOR THE P URPOSE OF BUSINESS CARRIED ON BY HIM HAS ACTUALLY RESULTED IN PROFIT OR INCOME EITHER IN THE SAME YEAR OR IN ANY OF THE SUBSEQUENT YEARS. THE ONLY CONDITION IS THAT THE EXPENDITURE SHOULD HAVE BEEN INCURRED 'WHOLLY AND EXCLUSIVEL Y' FOR THE PURPOSE OF BUSINESS AND NOTHING MORE. IT IS THIS PRINCIPLE THAT INTER ALIA FINDS EXPRESSI ON IN THE OECD GUIDELINES, IN THE PARAGRAPHS WHICH WE HAVE QU OTED ABOVE. 22. EVEN RULE IOB(L)(A) DOES NOT AUTHORISE DISALLO WANCE OF ANY EXPENDITURE ON THE GROUND THAT IT WAS NOT NE CESSARY OR PRUDENT FOR ASSESSEE TO HAVE INCURRED THE SAME O R THAT IN THE VIEW OF THE REVENUE THE EXPENDITURE WAS UN- REMUNERATIVE OR THAT IN VIEW OF THE CONTINUED LOSSE S SUFFERED BY ASSESSEE IN HIS BUSINESS, HE COULD HAVE FARED BETTER HAD HE NOT INCURRED SUCH EXPENDITURE. THESE ARE IRRELEVANT CONSIDERATIONS FOR THE PURPOSE OF RULE 1 0B. WHETHER OR NOT TO ENTER INTO THE TRANSACTION IS FOR ASSESSEE TO DECIDE. THE QUANTUM OF EXPENDITURE CAN NO DOUBT BE EXAMINED BY THE TPO AS PER LAW BUT IN JUDGING THE ALLOWABILITY THEREOF AS BUSINESS EXPENDITURE, HE HA S NO AUTHORITY TO DISALLOW THE ENTIRE EXPENDITURE OR A P ART THEREOF ON THE GROUND THAT ASSESSEE HAS SUFFERED CONTINUOUS LOSSES. THE FINANCIAL HEALTH OF ASSESSEE CAN 19 ITA.NO.1651/HYD/2010 & 1975/HYD/2011 KIRBY BUILDING SYSTEMS INDIA LTD., PASHAMYLARAM, MEDAK DISTRICT. NEVER BE A CRITERION TO JUDGE ALLOWABILITY OF AN EX PENSE; THERE IS CERTAINLY NO AUTHORITY FOR THAT. WHAT THE TPO HAS DONE IN THE PRESENT CASE IS TO HOLD THAT ASSESSEE O UGHT NOT TO HAVE ENTERED INTO THE AGREEMENT TO PAY ROYALTY/B RAND FEE, BECAUSE IT HAS BEEN SUFFERING LOSSES CONTINUOU SLY. SO LONG AS THE EXPENDITURE OR PAYMENT HAS BEEN DEMONST RATED TO HAVE BEEN INCURRED OR LAID OUT FOR THE PURPOSES OF BUSINESS, IT IS NO CONCERN OF THE TPO TO DISALLOW T HE SAME ON ANY EXTRANEOUS REASONING. AS PROVIDED IN THE OEC D GUIDELINES, HE IS EXPECTED TO EXAMINE THE INTERNATI ONAL TRANSACTION AS HE ACTUALLY FINDS THE SAME AND THEN MAKE SUITABLE ADJUSTMENT BUT A WHOLESALE DISALLOWANCE OF THE EXPENDITURE, PARTICULARLY ON THE GROUNDS WHICH HAVE BEEN GIVEN BY THE TPO IS NOT CONTEMPLATED OR AUTHORISED. 23. APART FROM THE LEGAL POSITION STATED ABOVE, EV EN ON MERITS THE DISALLOWANCE OF THE ENTIRE BRAND FEE / R OYALTY PAYMENT WAS NOT WARRANTED. ASSESSEE HAS FURNISHED COPIOUS MATERIAL AND VALID REASONS AS TO WHY IT WAS SUFFERING LOSSES CONTINUOUSLY AND THESE HAVE BEEN R EFERRED TO BY US EARLIER. FULL JUSTIFICATION SUPPORTED BY FACTS AND FIGURES HAVE BEEN GIVEN TO DEMONSTRATE THAT THE INC REASE IN THE EMPLOYEES COST, FINANCE CHARGES, ADMINISTRATIVE EXPENSES, DEPRECIATION COST AND CAPACITY INCREASE H AVE CONTRIBUTED TO THE CONTINUOUS LOSSES. THE COMPARATI VE POSITION OVER A PERIOD OF 5 YEARS FROM 1998 TO 2003 WITH RELEVANT FIGURES HAVE BEEN GIVEN BEFORE THE CIT (AP PEALS) AND THEY ARE REFERRED TO IN A TABULAR FORM IN HIS O RDER IN PARAGRAPH 5.5.1. IN FACT THERE ARE FOUR TABULAR STA TEMENTS FURNISHED BY ASSESSEE BEFORE THE CIT (APPEALS) IN S UPPORT OF THE REASONS FOR THE CONTINUOUS LOSSES. THERE IS NO MATERIAL BROUGHT BY THE REVENUE EITHER BEFORE THE C IT (APPEALS) OR BEFORE THE TRIBUNAL OR EVEN BEFORE US TO SHOW THAT THESE ARE INCORRECT FIGURES OR THAT EVEN ON ME RITS THE REASONS FOR THE LOSSES ARE NOT GENUINE. 24. WE ARE, THEREFORE, UNABLE TO HOLD THAT THE TRI BUNAL COMMITTED ANY ERROR IN CONFIRMING THE ORDER OF THE CIT (APPEALS) FOR BOTH THE YEARS DELETING THE DISALLOWA NCE OF THE BRAND FEE L ROYALTY PAYMENT WHILE DETERMINING THE ALP. ACCORDINGLY, THE SUBSTANTIAL QUESTIONS OF LAW ARE A NSWERED IN THE AFFIRMATIVE AND IN FAVOUR OF ASSESSEE AND AG AINST THE REVENUE. THE APPEALS ARE ACCORDINGLY DISMISSED WITH NO ORDER AS TO COSTS. 20 ITA.NO.1651/HYD/2010 & 1975/HYD/2011 KIRBY BUILDING SYSTEMS INDIA LTD., PASHAMYLARAM, MEDAK DISTRICT. 20.1. THE PRINCIPLES LAID DOWN BY THE HONBLE DELH I HIGH COURT IN THE ABOVE SAID CASE EQUALLY APPLIES TO THE FACTS OF THE CASE. WHAT TPO HAS DONE IN THE PRESENT CASE IS TO H OLD THAT ASSESSEE NEED NOT PAY ANY ROYALTY OR TECHNICAL KNOW HOW FEE TO THE AE. EVEN THOUGH DRP HAS PARTLY MODIFIED THE PAY MENT OF ROYALTY, WHAT WE NOTICED IS THAT THEY ALSO MADE A M ISTAKE IN ALLOWING ONLY 3.5% OF ROYALTY WHEN IN FACT, THERE I S NO SUCH CLAIM IN ANY OF THE EARLIER YEARS. AS SUBMITTED BY THE LD. COUNSEL IN THE COURSE OF ARGUMENTS/PRESENTATION BEF ORE US ASSESSEE CLAIMED AT 7.5% IN EARLIER YEAR WHICH WAS ALSO ALLOWED. 20.2. MOREOVER, THE PAYMENT OF ROYALTY OVER THE PE RIOD UP TO A.Y. 2009-10 AND TECHNICAL KNOWHOW FEE WAS SUMMARIZED BY THE ASSESSEE IN THE FOLLOWING TABLE W HICH WAS FILED DURING THE COURSE OF HEARING BEFORE US IN ORD ER TO SUBSTANTIATE THE ARGUMENTS THAT THE CUMULATIVE ROYA LTY AS PERCENTAGE OF CUMULATIVE SALES IS MUCH LESS AT 3.08 % UP TO THE IMPUGNED YEAR WHICH IS STILL LESS THAN WHAT THE DRP ALLOWED. A.Y. NET SALES OF PEBS (EXCLUDING EXCISE DUTY) RS. CR. PBIT RS. CR. ROYALTY PAYMENT RS. CR. TECHNICAL FEE PAYMENT RS. CR. ROYALTY (AS % OF SALES) CUMULATIVE ROYALTY AS % OF CUMULATIVE SALES. 2001-02 47.15 -1.69 --- 0.02 0.05% 0.05% 2002-03 76.32 5.66 --- 0.11 0.14% 0.11% 2003-04 85.81 6.17 --- 0.64 0.74% 0.37% 2004-05 100.68 8.78 --- 1.03 1.02% 0.58% 2005-06 193.34 17.46 5.36 1.78 3.69% 1.78% 2006-07 231.69 13.05 13.26 0.45 5.92% 3.08% 2007-08 292.78 23.01 15.82 0.44 5.56% 3.79% 21 ITA.NO.1651/HYD/2010 & 1975/HYD/2011 KIRBY BUILDING SYSTEMS INDIA LTD., PASHAMYLARAM, MEDAK DISTRICT. 2008-09 390.54 29.33 15.75 0.39 4.14% 3.88% 2009-10 816.69 54.08 33.06 0.49 4.11% 3.96% 20.3. FURTHER AS THERE WAS A MISMATCH OF PERCENTAG ES IN THE ROYALTY CLAIMED, CLARIFICATION WAS SOUGHT IN TH E COURSE OF ARGUMENT AND LD. COUNSEL EXPLAINED THAT EVEN THOUGH ROYALTY HAD A FIXED PERCENTAGE OF 7.5% AGREED, IT WAS NOT O N GROSS SALES BUT ON NET SALES, AS RBI HAS EXCLUDED VARIOUS AMOUNTS. IT WAS ALSO SUBMITTED THAT DRP WITHOUT STUDYING THE TERMS AND CONDITIONS OF PAYMENT OF ROYALTY AS APPROVED, A LLOWED ROYALTY AT 3.5% ON GROSS SALES WHICH TECHNICALLY IS ALSO ALMOST EQUIVALENT TO THE ROYALTY CLAIMED BY THE ASSESSEE O N NET SALES BASIS. IT WAS SUBMITTED THAT AS PERCENTAGE OF SALES , ROYALTY PAYMENT IN THE IMPUGNED YEAR WAS ONLY 5.92%. BE THA T AS IT MAY, WE ARE NOT IN A POSITION TO APPROVE THE ACTION OF THE A.O. / DRP IN RESTRICTING THE ROYALTY AND TOTAL DENIAL O F TECHNICAL SERVICES FEE WITHOUT ANY BASIS AT NIL UNDER THE GUI SE OF T.P. PROVISIONS. IN VIEW OF THIS, WE ARE NOT IN AGREEMEN T WITH THE ACTION OF THE TPO / DRP. 20.4. IN THE COURSE OF ARGUMENTS, LD. COUNSEL MADE VARIOUS PROPOSITIONS ON PAYMENTS OF ROYALTY AND TEC HNICAL SERVICES FEE AND CITED THE DECISIONS OF THE COORDIN ATE BENCHES OF THE TRIBUNAL IN THE CASE OF SC ENVIRO AGRO INDIA LTD., MUMBAI VS. DCIT 3(3), MUMBAI ITA.NO.2057 & 2058/MUM/2009 DATED 07.11.2012, M/S. THYSSEN KRUPP INDUSTRIES INDIA P. LTD., MUMBAI VS. ACIT, CC 3(3), M MUMBAI IN ITA.NO.7032/MUM/2011 DT. 27.11.2012, AIR LIQUID INDIA P. LTD., VS. DCIT, CIRCLE 1(1), HYDERABAD ITA.NO.1159/ HYD/2011 ETC., DT. 13.02.2014 AND HOST OF OTHER DECISIONS A S STATED IN 22 ITA.NO.1651/HYD/2010 & 1975/HYD/2011 KIRBY BUILDING SYSTEMS INDIA LTD., PASHAMYLARAM, MEDAK DISTRICT. THE SUBMISSIONS ABOVE TO SUBSTANTIATE VARIOUS PROPO SITIONS. SUFFICE TO SAY THAT WE HAVE CONSIDERED VARIOUS LEGA L PRINCIPLES ON THE ISSUE. WE ARE OF THE OPINION THAT APART FROM LEGAL POSITION, EVEN ON MERITS THE DISALLOWANCE OF ENTIRE TECHNICAL KNOWHOW PAYMENT AND PART DISALLOWANCE OF ROYALTY PA YMENT TO AE WAS NOT WARRANTED. 21. THERE IS ONE MORE ASPECT TO THE ABOVE ISSUE. T HE AGREEMENTS WERE PERIODICALLY APPROVED BY RBI AND BY MINISTRY OF INDUSTRY AND ASSESSEE WAS PAYING THE AMOUNTS AS PER THE AGREEMENTS. EVEN THOUGH APPROVAL BY THE OTHER GOVER NMENTAL AUTHORITIES DOES NOT PREVENT TPO IN EXAMINING THE A LP AS PER THE PROVISIONS OF THE ACT, WHAT WE NOTICED WAS THAT TPO DID NOT EXAMINE THE ISSUE UNDER THE T.P. PROVISIONS AT ALL BUT TOOK UPON THE ROLE OF AN A.O. IN ANALYZING THE COMMERCIA L EXPEDIENCY OF PAYMENT OF ROYALTY AND TECHNICAL KNOW HOW UNDER THE PROVISIONS OF SECTION 37(1). SINCE THE AG REEMENTS WERE APPROVED BY THE AUTHORITIES AND CONSIDERING TH E FACTS OF THE CASE, WE ARE OF THE OPINION THAT THE ROYALTY FE E AND TECHNICAL KNOWHOW ARE AT ARMS LENGTH AND THAT ASSE SSEES CLAIM SHOULD BE ALLOWED AS SUCH. THERE IS NO INFORM ATION BROUGHT ON RECORD BY THE TPO THAT THE PAYMENT AT 7. 5% ON THE NET SALES IS NOT AT ARMS LENGTH AS THERE WAS NO OT HER COMPARABLE CASE BROUGHT ON RECORD. GENERALLY, THE GOVERNMENT OF INDIA IS APPROVING THE ROYALTY PAYMEN TS AT 7.5% OF THE SALES AND THIS APPROVAL GIVEN BY THE RBI AND MINISTRY OF INDUSTRY IS AT PAR WITH SIMILAR AGREEMENTS BEING AP PROVED IN OTHER CONTRACTS/AGREEMENTS. CONSIDERING THESE ASPEC TS, WE ARE OF THE OPINION THAT ROYALTY AND TECHNICAL KNOWHOW P AYMENTS MADE BY THE ASSESSEE TO ITS AE ARE CONSIDERED AT AR MS LENGTH 23 ITA.NO.1651/HYD/2010 & 1975/HYD/2011 KIRBY BUILDING SYSTEMS INDIA LTD., PASHAMYLARAM, MEDAK DISTRICT. AND THEREBY, THE GROUNDS RAISED BY THE ASSESSEE ON THIS ISSUE ARE ALLOWED. A.O. IS DIRECTED TO ALLOW THE AMOUNTS AS CLAIMED. CORPORATE TAX MATTERS: 22. GROUND NO.9 PERTAIN TO DISALLOWANCE OF AMOUNT OF RS.3,45,52,755/- PERTAINING TO SALES TAX DEFERMENT UNDER THE PROVISIONS OF A.P. VAT ACT, 2005. A.O. DISALLOWED T HE AMOUNT INVOKING THE PROVISIONS OF SECTION 43B ON THE REASO N THAT ASSESSEE DID NOT FURNISH ANY INFORMATION WITH REFER ENCE TO DEFERMENT AND THE ITAT IN THE CASE OF KREBS BIO-CHE MICAL INDUSTRIES IN A.YS. 2002-03 AND 2003-04 IN ITA.NOS. 1035 AND 1036/HYD/2006 DATED 29.01.2008 SUPPORTED THE CASE O F THE REVENUE. 22.1. ASSESSEE CONTESTED BEFORE THE DRP THAT A.O. DID NOT ISSUE ANY SHOW CAUSE NOTICE WHILE DISALLOWING T HE AMOUNT AND THE JUDGMENT OF KREBS BIO-CHEMICAL INDUSTRIES ( SUPRA) DOES NOT APPLY TO THE ASSESSEE. IT ALSO CONTENDED T HAT DECISION OF HONBLE SUPREME COURT IN THE CASE OF GUJARAT POL YCRETE P LTD VS. CIT IS ALSO NOT APPLICABLE. ASSESSEE PLACED NUM BER OF DOCUMENTS SUPPORTING THE AMOUNT INTO A DEFERRED LOA N BUT THE DRP WAS OF THE VIEW THAT THE DOCUMENTS WERE NOT COM PLETE. ACCORDINGLY, IT CONFIRMED THE ORDER OF THE A.O. 23. BEFORE US, LD. COUNSEL CONTENDED THAT ASSESSEE HAS PLACED ALL THE DOCUMENTS BEFORE THE A.O. AS WEL L AS BEFORE THE DRP AND REFERRED TO THE ORDER OF THE DRP IN LAT ER YEAR A.Y. 2007-08 WHEREIN CLEAR FINDINGS WERE GIVEN BY DRP AB OUT THIS AND ALLOWED THE OBJECTION RAISED BY THE ASSESSEE IN THAT YEAR. 24. AFTER CONSIDERING THE RIVAL CONTENTIONS, WE AG REE WITH ASSESSEES OBJECTION WITH REFERENCE TO DISALLO WANCE OF THE 24 ITA.NO.1651/HYD/2010 & 1975/HYD/2011 KIRBY BUILDING SYSTEMS INDIA LTD., PASHAMYLARAM, MEDAK DISTRICT. AMOUNT. AS SEEN FROM THE ORDER OF THE DRP IN A.Y. 2 007-08, THE DRP ON THE BASIS OF THE EVIDENCES FURNISHED BEF ORE IT, ALLOWED THE AMOUNT BY STATING AS UNDER: 10. LAST GROUND OF OBJECTION RELATES TO THE DISALL OWANCE OF SALES TAX UNDER 43B OF THE INCOME TAX ACT. THE A .O. DISALLOWED THE CLAIM OF THE ASSESSEE STATING THAT I T FAILED TO PRODUCE A COPY OF THE AGREEMENT WITH THE SALES TAX DEPARTMENT ON CONVERSION OF DEFERMENT INTO INTEREST FREE LOAN. THE A.O. ALSO CITED THE DECISION OF THE ITAT IN THE CASE OF KREBS BIO-CHEMICALS INDUSTRIES LIMITED DATED 29. 01.2008 THAT SUCH AGREEMENT IS A NECESSARY CONDITION TO PRE VENT ADDITION U/S. 43B. HOWEVER, IT IS ARGUED THAT SUCH STIPULATION IS NOT THERE IN THE ORDER OF THE ITAT A CCORDING TO THE AR. THE AR SRI M.P. LOHIA CLEARLY POINTED OUT T HAT PARA-9 OF THE HONBLE ITAT IS IN FAVOUR OF THE ASSESSEE. H OWEVER, THE AR PLACED BEFORE US THE AGREEMENT IN DOCUMENT N O. 28414, DATED 06.04.2001 WHEREIN AGREEMENT IS CONCLU DED BETWEEN DCCT, CHARMINAR DIVISION AND ASSESSEE COMPA NY ON THE DETERMENT OF THE SALES TAX AND CONVERSION OF THE SAME INTO LOAN. AS PER THIS DOCUMENT, WHICH THE PHOTOCOP Y IS ENCLOSED HEREWITH, RS.321,05,458/- IS THE BENEFIT A VAILED UNDER SALES TAX DEFERMENT SCHEME. THEY HAVE ALSO PR ODUCED THE LETTER OF ASST. COMMISSIONER, LARGE TAX PAYERS UNIT, CHARMINAR DIVISION IN THEIR FAVOUR. FURTHER, THE FI NAL ASSESSMENT ORDER FOR THE YEAR 2006-07 UNDER CST ACT , 56 DATED 25.11.2009 IS ALSO PRODUCED IN SUPPORT OF THE IR STAND THAT THE IMPUGNED SUM IS COVERED BY DEFERMENT. CONS IDERING ALL THE EVIDENCES PRODUCED AND THE AGREEMENT COPY O F WHICH IS ENCLOSED HEREWITH, RELIEF IS GRANTED TO THE ASSE SSEE. ON THIS GROUND, THE OBJECTION IS ALLOWED. 24.1. SINCE THE FACTS ARE SIMILAR AND THE CLAIM AL SO BEING SIMILAR, WE DIRECT THE A.O. TO ALLOW THE AMOUNT IN THIS YEAR AS WELL. GROUND NO.9 IS ACCORDINGLY ALLOWED. 25. IN THE RESULT, ITA.NO.1651/HYD/2010 OF THE ASSESSEE IS ALLOWED. 25 ITA.NO.1651/HYD/2010 & 1975/HYD/2011 KIRBY BUILDING SYSTEMS INDIA LTD., PASHAMYLARAM, MEDAK DISTRICT. ITA.NO.1975/HYD/2011 A.Y. 2007-08 26. IN THIS APPEAL, ASSESSEE HAS RAISED 14 GROUNDS . GROUND NOS. 1 TO 12 ON THE ISSUE OF T.P. ADJUSTMENT S MADE. GROUND NO.13 IS LEVY OF INTEREST UNDER SECTION 234B WHICH IS STATUTORY IN NATURE. GROUND NO.14 IS INITIATION OF PENALTY PROCEEDINGS. THE GROUNDS 13 AND 14 ARE ACADEMIC IN NATURE AND NEED NOT BE ADJUDICATED. ACCORDINGLY, THEY ARE DISMISSED. 27. NOW COMING TO GROUND NOS. 1 TO 12 PERTAINS TO T.P. ADJUSTMENTS. EVEN THOUGH DRP IN EARLIER YEAR A LLOWED THE ROYALTY PAYMENT AT 3.5%, DRP IN THIS YEAR DIFFERED FROM THAT AND UPHELD THE TPOS ACTION OF DISALLOWING THE ENTI RE TECHNICAL SERVICES FEE OF RS.58,22,935/- AND ROYALTY PAYMENT OF RS.20,81,35,663/-. FOR THE DETAILED REASONS GIVEN I N EARLIER APPEAL ON SIMILAR ISSUE, WE DO NOT APPROVE THE DISA LLOWANCE OF ENTIRE AMOUNT INVOKING THE PROVISIONS OF T.P. FOR T HE REASONS STATED THEREIN, WE MODIFY THE ORDER OF DRP AND DIRE CT THE A.O. TO ALLOW THE AMOUNTS AS CLAIMED. THESE GROUNDS ARE CONSIDERED AS ALLOWED. 28. IN THE RESULT, ITA.NO.1975/HYD/2011 OF THE ASSESSEE IS ALLOWED. 29. TO SUM-UP, ITA.NO.1651/HYD/2010 AND ITA.NO.1975/HYD/2011 OF THE ASSESSEE ARE ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 18.07.2014. SD/- SD/- (SAKTIJIT DEY) (B.RAMAKOTAIAH) JUDICIAL MEMBER ACCOUNTANT MEMBER HYDERABAD, DATED 18 TH JULY, 2014 VBP/- 26 ITA.NO.1651/HYD/2010 & 1975/HYD/2011 KIRBY BUILDING SYSTEMS INDIA LTD., PASHAMYLARAM, MEDAK DISTRICT. COPY TO 1. KIRBY BUILDING SYSTEMS INDIA LTD., PLOT NO.8-15, IDA, PHASE-III, PASHMYLARAM, MEDAK DISTRICT 502 30 7. C/O. MR. FARROKH V. IRANI, ADVOCATE, 305B, CHUR CHGATE CHAMBERS, V.T. MARG, MUMBAI 400 020. 2. ADDL.CIT, RANGE-8, I.T. TOWERS, MASAB TANK, HYDE RABAD. 3. DISPUTES RESOLUTION PANEL, 4A, I.T. TOWERS, A.C. GUARDS, HYDERABAD 500 004. 4. ADDL. CIT (TRANSFER PRICING), HYDERABAD 5. D.R. B BENCH, ITAT, HYDERABAD.