DCIT, Circle-8(1), Hyd, Hyderabad V. Kirby Building Systems India Ltd.,Medak, Medak

ITA 316/HYD/2015

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 98377 (ITAT-HYDERABAD)
• Duration Of Justice: 4 month(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 07-08-2015
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: A
• Next Hearing Date: 05-08-2015
• Assessment Year: 2010-2011
• Appeal Filed On: 30-03-2015
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Depreciation; Transfer pricing; Business expenditure; International transaction; Commercial expediency
• Section: 92C; 143(3); 37(1); 92

Judgement Text

ITA NO.316 OF 2015 KIRBY BUILDING SYSTEMS INDIA LTD MEDAK PAGE 1 OF 19 IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD A BENCH, HYDERABAD BEFORE SMT. P. MADHAVI DEVI, JUDICIAL MEMBER AND SHRI INTURI RAMA RAO, ACCOUNTANT MEMBER ITA NO.316/HYD/2015 (ASSESSMENT YEAR: 2010-11) DY. COMMISSIONER OF INCOME TAX, CIRCLE 8(1) HYDERABAD VS. M/S. KIRBY BUILDING SYSTEMS INDIA LTD MEDAK PAN: AABCK 0239 M (APPELLANT) (RESPONDENT) FOR REVENUE : SHRI D. SRINIVAS, DR FOR ASSESSEE : SHRI FARROKH V. IRANI DATE OF HEARING : 05.08.2015 DATE OF PRONOUNCEMENT : 07 .08.2015 O R D E R PER SMT.P. MADHAVI DEVI, J.M. THIS IS A REVENUE APPEAL FOR THE A.Y 2010-11 AGAIN ST THE ORDER U/S 143(3) R.W.S. 144C(1) OF THE I.T. ACT, 19 61, DATED 30.01.2015. 2. BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE CO MPANY IS ENGAGED IN THE BUSINESS OF MANUFACTURE OF PRE-ENGIN EERED BUILDING SYSTEM PRODUCTS, FILED ITS RETURN OF INCOM E ON 13.10.2010 DECLARING TOTAL INCOME OF RS.6,40,81,725 . ON VERIFICATION OF THE RECORD, THE AO OBSERVED THAT AS SESSEE HAS ENTERED INTO INTERNATIONAL TRANSACTIONS EXCEEDING R S.15.00 CRORES. THEREFORE, HE MADE A REFERENCE TO THE TPO U /S 92C OF THE ACT FOR DETERMINATION OF THE ARMS LENGH PRICE OF I NTERNATIONAL TRANSACTIONS. ITA NO.316 OF 2015 KIRBY BUILDING SYSTEMS INDIA LTD MEDAK PAGE 2 OF 19 3. DURING THE TRANSFER PRICING PROCEEDINGS U/S 92CA (3) OF THE ACT, THE TPO OBSERVED THAT THE ASSESSEE HAS ENTERED INTO VARIOUS INTERNATIONAL TRANSACTIONS WITH ITS AES AND THE PA YMENT OF ROYALTY AND TECHNICAL SERVICES UNDER A COMMON AGREE MENT FOR BOTH TECHNICAL KNOWHOW FEES AND ROYALTY TO ITS AE A T KUWAIT WAS ONE OF THE TRANSACTION. AS PER THE SAID AGREEMENT, ASSESSEE PAID ROYALTY @ 7.5% ON THE SALES AMOUNTING TO RS.9,39,74 ,409 AND RS.61,77,041 TOWARDS TECHNICAL FEE. HE OBSERVED THA T ROYALTY AND FEE FOR TECHNICAL SERVICES ARE TRANSACTIONS FOR INT ANGIBLE SERVICES AND THEREFORE, TPO ACCEPTED THE CUP METHOD ADOPTED BY THE ASSESSEE AS THE MOST APPROPRIATE METHOD AND FURTHER OBSERVED THAT TWO INDEPENDENT COMPARABLES I.E. M/S COLD STEE L CORPORATION AND TIGER STEEL ENGINEERING (P) LTD WER E ADOPTED BY THE TPO IN THE ASSESSEES OWN CASE IN THE EARLIER A .YS AND THE ASSESSEE HAD RAISED SIMILAR OBJECTIONS AGAINST THES E COMPANIES BEFORE THE TPO FOR THE RELEVANT A.Y ALSO. AFTER CO NSIDERING ASSESSEES OBJECTIONS AT LENGTH, THE TPO HELD THAT THESE TWO COMPARABLES WERE SELECTED FOR COMPARISON AND ANALYS IS ON THE BASIS OF INFORMATION FURNISHED BY THE TAX PAYER ITS ELF. FURTHER, TPO ALSO OBSERVED THAT FOR FINANCIAL YEAR 2009-10 A ND THE PRECEEDING PREVIOUS YEARS FROM THE P&L A/C, IT IS E VIDENT THAT MOST OF THE WORK IS OUTSOURCED BY THE ASSESSEE ON J OB WORK BASIS. THEREFORE, HE CAME TO THE CONCLUSION THAT AS SESSEE HAS ENGAGED THIRD PARTIES TO GET THE WORK DONE ON THE P ROJECTS UNDERTAKEN IN A SIGNIFICANT WAY, MEANING THEREBY, T HAT THE WORK INVOLVED IS A LOW END JOB WHICH DOES NOT REQUIRE AN Y SPECILIAZED SKILLS. THEREFORE, HE WAS OF THE OPINION THAT THERE WAS NO NEED FOR OBTAINING ANY TECHNICAL SERVICES BY THE ASSESSEE FR OM ITS AE. AS REGARDS PAYMENT OF ROYALTY, THE TPO HELD THAT UNLES S IT IS SHOWN THAT TANGIBLE AND DIRECT BENEFIT IS DERIVED BY THE ASSESSEE AND THAT THE ROYALTY PAYMENT MADE, IS COMMENSURATE WITH THE ITA NO.316 OF 2015 KIRBY BUILDING SYSTEMS INDIA LTD MEDAK PAGE 3 OF 19 BENEFIT THAT IS DERIVED OR ACCEPTED TO BE DERIVED W HEN PARTIES DEAL WITH EACH OTHER AT ALP, THE ALP OF SUCH PAYMEN T OF ROYALTY WOULD HAVE TO BE TREATED AS EITHER NIL OR ONLY TO THE EXTENT IT IS SHOWN THAT THE BENEFIT ACTUALLY WAS DERIVED FROM SU CH PAYMENT. HE OBSERVED THAT SINCE THE ASSESSEE HAS NOT RECEIVE D ANY TECHNICAL ASSISTANCE FROM ITS AE, THE ALP OF THE PA YMENT MADE BY THE ASSESSEE TO ITS AES ON ACCOUNT OF INTANGIBL E/ROYALTY AND TECHNICAL SERVICE FEES IS NIL. HE ACCORDINGLY MADE ADJUSTMENT OF THE ENTIRE AMOUNT OF RS.,9,39,74,409 AND RS.61,77,0 41 U/S 92CA OF THE I.T. ACT. SIMILARLY, THE TPO ALSO MADE ADJUSTMENT OF RS.1,07,99,889 AS AN ALP ADJUSTMENT ON REIMBURSEMEN T OF EXPENSES RECEIVED. ON THE BASIS OF THE SAID T.P. OR DER, AO PROPOSED THE DRAFT ASSESSMENT ORDER DATED 19.03.201 4. AGAINST THE SAID ORDER, ASSESSEE PREFERRED OBJECTIONS BEFOR E THE DRP. THE DRP, VIDE ORDER DATED 24.12.2014 OBSERVED THAT THE ASSESSEE HAD ENTERED INTO SIMILAR INTERNATIONAL TRANSACTIONS WITH ITS AE IN THE EARLIER A.YS I.E. A.YS 2006-07, 2007-08, 2008-0 9 AND 2009- 10 AND THE ISSUE HAD TRAVELLED UPTO THE TRIBUNAL AN D THE TRIBUNAL BY ITS ORDER DATED 18.07.2014 IN ITA NOS.1651/HYD/2010 & ITA NO. 1975/HYD/2011 AND ORDER S DATED 19.11.2014 IN ITA NOS. 1759/HYD/2011 AND ITA NO.262/HYD/2014 HAS DECIDED THE ISSUE IN FAVOUR OF THE ASSESSEE. THE DRP DELETED THE ALP ADJUSTMENT PROPO SED BY THE AO. PURSUANT TO THE SAME, THE FINAL ASSESSMENT ORDE R WAS PASSED U/S 143(3) R.W.S. 144C(1)OF THE ACT WITHOUT MAKING ANY TP ADJUSTMENT ON ROYALTY AND REIMBURSEMENT OF EXPEN SES. AGAINST THIS ORDER, DATED 30.01.2015, THE REVENUE I S IN APPEAL BEFORE US. 4. THE LD DR, WHILE SUPPORTING THE TRANSFER PRICING ORDER, SUBMITTED THAT THE DRP HAS ERRED IN HOLDING THAT TH E ROYALTY ITA NO.316 OF 2015 KIRBY BUILDING SYSTEMS INDIA LTD MEDAK PAGE 4 OF 19 PAYMENT/FEE FOR TECHNICAL SERVICES IS NOT WARRANTED , THOUGH THE TPO HAS HELD THAT THE APPLICANT WAS NOT ABLE TO SUB STANTIATE THAT ANY BENEFIT WAS DERIVED BY THE TAX PAYER BY TH E SERVICES PROVIDED BY THE AE REQUIRING SUCH PAYMENTS. 5. THE LD COUNSEL FOR THE ASSESSEE, ON THE OTHER HA ND, REITERATED THE SUBMISSIONS MADE BY THE ASSESSEE BEF ORE THE AUTHORITIES BELOW AND HAS ALSO RELIED UPON THE DECI SION OF THE TRIBUNAL IN ASSESSEES OWN CASE FOR THE EARLIER A.Y S WHEREIN SIMILAR TRANSACTIONS HAVE BEEN ANALYSED BY THE TRIB UNAL AND THEREAFTER RELIEF GRANTED TO THE ASSESSEE. A COPY O F THE SAID ORDER OF THE TRIBUNAL IS FILED BEFORE US. 6. HAVING REGARD TO THE RIVAL CONTENTIONS AND ALSO THE MATERIAL ON RECORD, WE FIND THAT THE ASSESSEE HAD ENTERED IN TO INTERNATIONAL TRANSACTIONS FOR PAYMENT OF ROYALTY A ND FEE FOR TECHNICAL SERVICES VIDE AGREEMENT DATED 1.4.2000. F URTHER WE FIND THAT THIS AGREEMENT HAD UNDERGONE SEVERAL AMEN DMENTS AND THE ASSESSEE HAD STARTED PAYING ROYALTY ONLY FR OM THE P.Y 2005-06 ONWARDS. THEREFORE, THE ALP ADJUSTMENT OF T HESE TRANSACTIONS HAS ARISEN ONLY FROM P.Y 2005-06 ONWAR DS. THIS TRIBUNAL, IN ASSESSEES OWN CASE FOR A.YS 2006-07 O NWARDS, HAD CONSIDERED THIS ISSUE AT LENGTH AND HAD COME TO THE CONCLUSION THAT IT IS NOT REQUIRED BY THE ASSESSEE TO DEMONSTR ATE THAT PAYMENT OF ROYALTY IS JUSTIFIED AS SUCH AGREEMENTS ARE PERIODICALLY APPROVED BY THE RBI AND BY THE MINISTR Y OF INDUSTRIES AND THE ASSESSEE WAS PAYING THE AMOUNT A S PER THE AGREEMENTS. FOR COMING TO THE CONCLUSION, THE TRIBU NAL RELIED UPON THE DECISION OF THE HON'BLE DELHI HIGH COURT I N THE CASE OF CIT VS. EKL APPLIANCES (ITA NOS.1068 OF 2011 AND 10 70 OF 2011 DATED 29.03.2012). THIS DECISION OF THE TRIBUNAL W AS ALSO ITA NO.316 OF 2015 KIRBY BUILDING SYSTEMS INDIA LTD MEDAK PAGE 5 OF 19 FOLLOWED BY THE COORDINATE BENCH OF THIS TRIBUNAL I N ASSESSEES OWN CASE FOR A.YS 2008-09 AND 2009-10 HOLDING THAT THE ROYALTY PAID BY THE ASSESSEE WAS AT ALP. THE RELEVANT PARAG RAPHS ARE REPRODUCED HEREUNDER FOR THE SAKE OF READY REFERENC E: 4. GROUND NOS. 1 TO 8 PERTAIN TO THE DISALLOWANCE OF PAYMENT OF ROYALTY AND TECHNICAL SERVICE FEE TO M/S. KIRBY BUI LDING SYSTEMS, KUWAIT ANALYSED UNDER THE PROVISIONS OF TRANSFER PR ICING. BRIEFLY STATED, ASSESSEE M/S. KIRBY BUILDING SYSTEMS INDIA LTD., IS ENGAGED IN THE BUSINESS OF MANUFACTURE OF PRE-ENGINEERED STEEL BUILDING SYSTEM (PEB) PRODUCTS. FOR THE YEAR UNDER CONSIDERATION, A SSESSEE FILED RETURN OF INCOME DECLARING TOTAL INCOME OF RS.6,82, 39,910/-. A.O. NOTICED THAT IT HAD INTERNATIONAL TRANSACTIONS WITH ITS AE TO AN EXTENT OF RS.15,96,89,713/-. THE FOLLOWING ARE THE DETAILS OF INTERNATIONAL TRANSACTIONS ENTERED INTO BY AND BETWEEN THE TAXPAY ER AND THE AE : NAME OF THE AE INTERNATIONAL TRANSACTION VALUE IN INR KIRBY KUWAIT 1. PAYMENT OF ROYALTY & TECHNICAL SERVICES FEE 137,037,502 2. PAYMENT OF INTEREST (ECB IN KUWAIT DINAR) 1,473,502 3. PAYMENTS TOWARDS REIMBURSEMENT OF EXPENSES 657,120 KIMMCO PURCHASE OF INSULATING MATERIAL 19,429,932 ALGHANIM MAURITIUS PAYMENT OF INTEREST ON (ECB IN USD) 1,031,517 5. THE TPO VIDE ORDER DATED 30.10.2009 ACCEPTED THE OPERATING TRANSACTIONS CONSISTING OF PURCHASE OF INSULATING M ATERIAL AND OF PAYMENT OF INTEREST, REIMBURSEMENT EXPENSES AS AT A RM'S LENGTH PRICE. HOWEVER, PAYMENT OF ROYALTY AND TECHNICAL SE RVICES FEE OF RS.13,70,97,902/- WERE CONSIDERED AS NOT AT ARM'S L ENGTH. AFTER GIVING OPPORTUNITY TO THE ASSESSEE, THE TPO WAS OF THE OPINION THAT THERE WAS NO NEED TO PAY ANY ROYALTY AND TECHNICAL SERVICE FEE TO THE AE. HIS ORDER 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 H AS DEBITED AN AMOUNT OF RS.17,71,37,206/- TOWARDS ROYALTY AT THE RATE OF 7. 5% ON SALES. DURING F.Y. 2004-05, THE TAXPAYER HAS PAID ROYALTY AT RS.6,77,6 7,700/- TO KIRBY, KUWAIT (AE) AT THE RATE OF 3.5% ON SALES. AS PER THE AGREEMENT ENTERED BY AND BETWEEN THE TAX PAYER AND IT'S AE AT CLAUSE-4, THE RATES FOR PAYMENT OF ROYALTY ARE GIVE N. EXCEPT THAT, NOTHING IS MENTIONED. WHAT IS THE BASIS FOR WHICH ROYALTY IS P AID BY THE TAXPAYER ITA NO.316 OF 2015 KIRBY BUILDING SYSTEMS INDIA LTD MEDAK PAGE 6 OF 19 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 WIT H KIRBY KUWAIT. THE INITIAL TERM OF THE AGREEMENT WAS FOR 7 YEARS S TARTING FROM 1ST APRIL, 2000 TO 31ST MARCH, 2007. HOWEVER, OWING TO BUSINESS EXIGENCIES, THE TSA WAS AMENDED INTERMITTENTLY TO P ROVIDE FOR WAIVER OF THE ROYALTY DURING THE YEARS 2000 TO 2004. THE AMENDMENTS HAVE RESULTED IN DEFERRING THE PAYMENT O F ROYALTY TO SUBSEQUENT YEARS. HOWEVER, THE AMENDMENT IN THE ROY ALTY RATES AND THE PAYMENTS TERMS ARE SUBJECT TO THE CONDITION THA T THE ROYALTY PAYMENTS WILL NOT EXCEED THE POTENTIAL OUTFLOW AS A GREED IN THE ORIGINAL TSA. FURTHER, IN RESPECT OF THE LUMP SUN T ECHNICAL FEE, THE SUM OF USD 2,000,000 WHICH WAS AGREED AS PER THE OR IGINAL TSA, HAS NOT BEEN REVISED BUT THE PAYMENT TERMS HAVE BEE N AMENDED TO DEFER THE PAYMENT 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 ROYALTY WA S PAID BY THE TAXPAYER FROM YEAR 2000 TO 2004. JUST BECAUSE RBI FI XED THE LIMITS OF ROYALTY RATES, THE SAME IS TAKEN AS BENCH MARK F OR PAYMENT OF ROYALTY. HOWEVER, ONE HAS TO UNDERSTAND THAT THE RB I LIMITS IS NOTHING TO DO WITH DETERMINATION OF ARMS LENGTH PRI CE UNDER THE PROVISION CONTAINED UNDER SECTION 92 OF I.T. ACT, 1961. RBI LIMITS 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 THERE WERE NO PROFITS MADE DURI NG THE SAID FINANCIAL YEARS. THIS IS NOT CORRECT. IN FACT, FOR F.Y. 2003-04, THE TAXPAYER HAS EARNED A NET PROFIT MARGIN OF 6.67%. T HE CLAIM OF THE TAXPAYER THAT THERE IS A SUBSTANTIAL EXPANSION OF T HE MANUFACTURING FACILITY DURING THE F.Y. 2003-04 IS ALSO NOT CORREC T. NO SIGNIFICANT EXPANSION TOOK PLACE DURING THAT YEAR. PLANT MACHIN ERY VALUED AT RS.2,64,35,261 IS ONLY ADDED. A NET PROFIT OF RS.6,7 1,10,235 WAS MADE ON SALE OF RS.108,38,57,968. THESE ARE NOT VALID RE ASONS FOR PAYING ROYALTY IN SOME YEARS AND NOT PAYING IN SOME OTHER YEARS. WHEN THE TAXPAYER DID NOT PAID ROYALTY FROM YEAR 2000 TO 200 4 (4 YEARS), THERE IS NO REASON/BASIS AS TO WHY THE ROYALTY SHOULD BE PAID IN SUBSEQUENT YEARS, MORE SO, BASED ON AN AGREEMENT, WHICH IS NEV ER IMPLEMENTED. ALSO, THE AMOUNT PAID TOWARDS TECHNICAL SERVICES AT RS.59,20,536/- REMAINED UNSUBSTANTIATED BY THE TAXPAYER WITH REFER ENCE TO THE BENEFITS DERIVED AND SERVICES RENDERED. THE TAXPAYE R FAILED TO BRING OUT ANY EVIDENCE IN SUPPORT OF THE TECHNICAL SERVIC ES ACTUALLY RECEIVED. HON'BLE SUPREME COURT IN THE CASE OF UNION OF INDIA VS. GOSALIA SHIPPING P. LTD ., 113 ITR 307 (SC) HELD THAT : IT IS TRUE THAT ONE CANNOT PLACE OVER RELIANCE ON THE FARM WHICH THE PARTIES GIVE TO THEIR AGREEMENTS OR ON THE LABEL WH ICH THEY ATTACH TO THE PAYMENT DUE FROM ONE TO OTHER. ONE MUST HAVE RE GARD TO THE SUBSTANCE OF THE MATTER AND IF NECESSARY, TEAR THE VEIL IN ORDER TO SEE ITA NO.316 OF 2015 KIRBY BUILDING SYSTEMS INDIA LTD MEDAK PAGE 7 OF 19 WHETHER THE TRUE CHARACTER OF A PAYMENT IS SOMETHIN G OTHER THAN WHAT BY A CLEVER DEVIDE OF DRAFTING IT IS MADE TO A PPEAR.' 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 IT'S A.E. I N RESPECT OF PAYMENT MADE TOWARDS ROYALTY AND TECHNICAL FEES AS THESE TRANSACTIONS ARE CONTROLLED. AFTER EXAMINING THE AV AILABLE INFORMATION/EVIDENCE ON RECORD AND ANALYSIS THEREON , THE ONLY INFERENCE THAT CAN BE DRAWN IS THAT THESE TWO TRANS ACTIONS THAT IS PAYMENT TOWARDS ROYALTY AND TECHNICAL SERVICES IS T HAT THEY ARE NOT AT ARMS LENGTH. IN THE GUISE OF THESE PAYMENTS, THE TA XPAYER IS SHIFTING PROFITS TO NO TAX JURISDICTIONS LIKE KUWAIT AND MAU RITIUS, THEREBY ENRICHING THEMSELVES WITHOUT PAYING TAXES THAT ARE DUE IN THE COUNTRY WHERE THE TAXPAYER OPERATES. THE PROFITS DECLARED B Y 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 IN THE COUNTRY IN THE YEAR 2000. WHAT BRAND VALUE KIRBY, KUWAIT COMMANDS IN A COUNTRY LIKE INDIA WHERE THE U SAGE OF PRE- ENGINEERED STEEL BUILDINGS ARE AT A NASCENT STAGE. ONLY AFTER YEAR 2000, THE INFRASTRUCTURE SECTOR HAS OPENED UP WHICH STARTED ACCEPTING THESE PRE-ENGINEERED STEEL STRUCTURES 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 B RAND VALUE IS DEVELOPED FROM THE CONTRIBUTIONS MADE BY ALL THE GR OUP ENTITIES OF MNES. 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 CUS TOMIZED TO THE NEEDS OF THE CUSTOMERS WITH REFERENCE TO LOCATIONS AND FUNCTIONALITY OF THE BUSINESS. THE PESBS WHICH ARE PREVALENT IN K UWAIT CANNOT BE SIMPLY REPLICATED HERE IN INDIA. KIRBY, INDIA HAS S PENT HUGE AMOUNTS IN MARKETING DEVELOPMENT AND BUSINESS PROMOTION TO FAMILIARIZE THEIR PRODUCTS. DEVELOPED IN-HOUSE EXPERTISE AND MO ST OF THE WORKS ARE ALSO OUTSOURCED ON JOB WORK BASIS. THEREFORE, C REATION OF BRAND VALUE IS FROM ALL SIDES AND FROM ALL ENTITIES OF A MULTINATIONAL GROUP. NO PAYMENT ON ACCOUNT OF BRAND VALUE BY THE TAXPAYE R TO ITS AE IS NOT JUSTIFIED. IN VIEW OF THE ABOVE DISCUSSION, IT IS CONCLUDED TH AT THE PAYMENT MADE BY THE TAXPAYER TO ITS A.E. ON ACCOUNT OF TECH NICAL SERVICES IS EXCESSIVE AS ALREADY HUGE PAYMENTS WERE MADE IN THE PAST SEVERAL YEARS. NEITHER TAXPAYER NOR ITS AE COULD SUBSTANTIA TE THE ACTUAL TECHNICAL SERVICES RENDERED, COSTS INCURRED/CONTRIB UTED, BENEFITS DERIVED. THE ARMS LENGTH PRICE OF THE PAYMENT MADE TOWARDS ITA NO.316 OF 2015 KIRBY BUILDING SYSTEMS INDIA LTD MEDAK PAGE 8 OF 19 TECHNICAL 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 MET HOD IS ADOPTED. THE ARMS LENGTH PRICE OF THE ROYALTY 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. TH E DRP AFTER ANALYZING THE TRANSACTIONS OF THE AE AND VARIOUS AG REEMENTS ENTERED BY THE ASSESSEE WITH AE WITH REFERENCE TO PAYMENT O F TECHNICAL FEE AND ROYALTY GAVE PARTIAL RELIEF BY STATING AS UNDER : '8.3 AFTER GOING THROUGH THE ENTIRE MATERIAL PROVID ED BY THE TAXPAYER AND AFTER EXTENSIVE DISCUSSION OF THE TPO, WE ARE OF THE VIEW THAT KIRBY INDIA HAS ESTABLISHED A PLANT IN TH E OUTSKIRTS OF HYDERABAD WITH TECHNICAL ASSISTANCE FROM ITS AE. DE FINITELY, THE AE HAS TO BE PAID IN TERMS OF ROYALTY AND TECHNICAL KN OWHOW FEE FOR THE SAME. THE MAIN QUESTION HERE IS WHETHER THE TECHNIC AL FEE/ROYALTY PAID VIS-A-VIS THE PROFIT EARNED BY THE TAXPAYER AN D THE SERVICES RENDERED BY THE AE ARE ADEQUATE OR WHETHER THEY ARE WITHIN THE ALP. THE FOLLOWING TABLE GIVES THE FEE FOR TECHNICA L SERVICES 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 T HE TUNE OF RS. 4,29,16,118/- ON ACCOUNT OF TECHNICAL SERVICES. THE BENEFIT DERIVED BY THE TAXPAYER FROM THE ABOVE TECHNICAL SERVICES, WE ARE OF THE VIEW IS ADEQUATELY 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 UPHELD. IN RE SPECT OF ROYALTY, DURING THE FINANCIAL YEAR UNDER CONSIDERATION THE T AXPAYER WAS PAYING THE ROYALTY @7.5% ON SALES AND DEBITED AN AM OUNT OF RS. 17.71 CRORES. AS ONE COULD SEE, THE AE IS DECLARING 15% P ROFIT AND THE TAXPAYER 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 TE ND TO BELIEVE THAT SINCE SHIFTING OF PROFITS TO ITS AE IN COUNTRIES NO N TAXABLE, THERE WOULD BE A TENDENCY TO SHIFT THE PROFIT FROM THE TA XPAYER TO ITS PARENT COMPANIES. NOW THE QUESTION IS HOW TO QUANTIFY THEM . DURING THE FY 2004-05, THE TAXPAYER HAS PAID THE ROYALTY @ 3.5% O N SALES OF RS. 6,77,67,700/-. WE ARE OF THE VIEW THAT DURING THIS YEAR ALSO THE ITA NO.316 OF 2015 KIRBY BUILDING SYSTEMS INDIA LTD MEDAK PAGE 9 OF 19 ROYALTY PAYMENT OF 3.5% ON SALES WOULD MEET THE REQ UIREMENT OF ALP. TO THIS EXTENT, THE TPO'S REPORT IS MODIFIED I.E. A LP 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. 59,20,536/- SHORTFALL BEING ADJUSTMENT U/S.92CA. RS.59,20,536/- ARMS LENGTH PRICE OF PAYMENT MADE TOWARDS ROYALTY R S.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 SE RVICES. RS.59,20,536 (2) IN RESPECT OF PAYMENT MADE RS.9,44,73,176 TOWARDS ROYALTY TOTAL RS.10,03,93,712 7. THUS THE ASSESSEE HAS GOT PARTIAL RELIEF FROM TH E DRP. THEREFORE, IT HAS RAISED VARIOUS GROUNDS ON THE DENIAL OF CLAIM O F PAYMENT OF TECHNICAL SERVICES AND RESTRICTION OF ROYALTY TO TH E AE IN ITS GROUNDS 1 TO 8. 8. LD. COUNSEL DREW OUR ATTENTION TO THE ACTIVITIES OF THE ASSESSEE COMPANY, RELIANCE ON TECHNICAL EXPERTISE OF KIRBY B UILDING SYSTEMS, KUWAIT AND THE SEQUENCE OF EVENTS TO SUBMIT THAT OR IGINALLY ASSESSEE HAS ENTERED INTO AN AGREEMENT FOR TECHNICAL ASSISTA NCE AND TECHNICAL SERVICES WITH KIRBY BUILDING SYSTEMS KUWAIT ON 1ST 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, 1/3RD ON APPROVAL OF COLLABORATION AGREEMENT FROM RESERVE BANK OF IND IA, 1/3RD ON DELIVERY OF KNOWHOW DOCUMENTATION AND BALANCE IN 4 Y EARS AFTER THE PROPOSAL WAS APPROVED BY THE RBI. HOWEVER, VIDE AME NDED AGREEMENT DATED 07.09.2001 IT WAS UNDERSTOOD THAT L UMP SUM AMOUNT OF 2 MILLION USD WOULD BE PAID IN 5 EQUAL IN STALLMENTS BEGINNING FROM THE YEAR DECEMBER, 2002 WITH MODIFIE D TERMS OF PAYMENT OF ROYALTY AND TECHNICAL FEE. SINCE THE ASS ESSEE COMPANY WAS INCURRING LOSSES AND WAS IN REQUIREMENT OF WORK ING CAPITAL, THERE WAS FURTHER AMENDMENT ON NOVEMBER 12, 2002 WITH FUR THER MODIFICATIONS. SINCE ASSESSEE PAID ONLY AN AMOUNT O F 0.4 MILLION US ITA NO.316 OF 2015 KIRBY BUILDING SYSTEMS INDIA LTD MEDAK PAGE 10 OF 19 DOLLARS AS ON THAT DATE, THE TECHNICAL FEE WAS TO B E PAID AT 2,67,000 USD IN THE YEAR 2003 AND 1,00,000 USD EACH FROM 200 4 TO 2016 AND BALANCE 33000 US DOLLARS IN THE YEAR 2017. IT WAS S UBMITTED THAT LUMP SUM TECHNICAL FEE PAYABLE AT THE TIME OF INITI AL OPERATIONS OF THE COMPANY WAS IN FACT DEFERRED SO AS TO SUIT THE ASSE SSEE COMPANY IN ITS WORKING CAPITAL REQUIREMENT. ACCORDINGLY, IT WAS SU BMITTED THAT ASSESSEE PAID US $1,00,000 AS TECHNICAL FEE IN THE YEAR UNDER CONSIDERATION. 9. WITH REFERENCE TO ROYALTY, IT WAS SUBMITTED THAT IN THE ORIGINAL AGREEMENT DATED 01.04.2000 ROYALTY WAS PAYABLE ON DO MESTIC 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 AN Y 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 SALES FROM THE YEAR 2002 TO MARCH, 2007. IN SPITE OF THAT, ASSESSEE DID NOT PAY ANY ROYALTY IN THE YEARS 2002 AND 2003. THEREFORE, VIDE AGREEMENT DATED 12.11.2002, THIS WA S CHANGED TO 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 WA S HOWEVER, FURTHER MODIFIED VIDE AGREEMENT DATED 17.12.2005 TO NIL ROY ALTY UP TO 2004 AND 7.5% ON DOMESTIC SALES FOR 3 YEARS AND 8% OF EX PORT SALES FOR 3 YEARS, THAT TOO UP TO MARCH, 2007. ALL THE AGREEMEN TS WERE APPROVED BY RBI AS WELL AS INDUSTRIES DEPARTMENT, GOVERNMENT OF INDIA. IT WAS SUBMITTED THAT ASSESSEE IN THE IMPUGNED YEAR HAS CL AIMED THE ROYALTY AT 7.5% ON DOMESTIC SALES AND 8% ON EXPORT SALES. 10. IT WAS SUBMITTED THAT ASSESSEE HAS NEVER PAID A NY ROYALTY AT 3.5% ON DOMESTIC SALES AND TO THAT EXTENT BOTH TPO AND D RP WRONGLY CONSIDERED THE PAYMENT AT 3.5% AND ALLOWED THE AMOU NT AT THAT RATE. IT WAS SUBMITTED THAT ROYALTY IN A.Y. 2005-06 WAS P AID AT 7.5% ON DOMESTIC SALES WHICH WAS ALLOWED. AS FAR AS THE TEC HNICAL KNOWHOW IS CONCERNED, THIS AMOUNT WAS PAYABLE IN A LUMP SUM AM OUNT INITIALLY WHICH WAS DEFERRED AND ONLY USD 1,00,000 WAS PAID I N THE YEAR. 11. WITH REFERENCE TO THE TOTAL DENIAL OF TECHNICAL KNOWHOW FEES AND PARTIAL DENIAL OF ROYALTY BY THE DRP, IT WAS SUBMIT TED THAT EITHER THE TPO OR THE DRP HAS NO JURISDICTION TO DENY THE CLAI M IN ITS ENTIRETY AS THEY HAVE ONLY POWER TO EXAMINE THE ARM'S LENGTH PR ICE OF THE PAYMENTS MADE TO AE. IT WAS FURTHER SUBMITTED THAT IN CASE OF T.P. ADJUSTMENTS, THE A.O. DISALLOWED THE ENTIRE CLAIM I NVOKING THE PROVISIONS OF SECTION 37(1) , WHEREAS DRP PARTIALLY ALLOWED THE AMOUNT OF ROYALTY WITHOUT ANY COMPARATIVE STUDY UND ER VARIOUS METHODS PRESCRIBED UNDER THE PROVISIONS FOR EXAMINI NG THE ARM'S LENGTH PRICE OF THE TRANSACTIONS ENTERED INTO BY TH E ASSESSEE WITH ITS AE. SINCE THE TPO HAS NO JURISDICTION TO EXAMINE TH E ALLOWABILITY OF ROYALTY CLAIM, ACTION OF THE TPO/DRP IS NOT SUSTAIN ABLE. FOR THIS PROPOSITION, THE LD. COUNSEL RELIED UPON THE DECISI ONS OF THE HON'BLE HIGH COURT OF DELHI IN THE CASE OF CIT VS. EKL APPL IANCES LTD . 1068 OF 2011 DATED 29.03.2012 WHICH IN TURN, WAS FOLLOWE D BY COORDINATE BENCHES OF ITAT, MUMBAI IN SC ENVIRO AGRO INDIA LTD . VS. DCIT ITA.NOS. 2057, 2058/MUM/2009 DT.07-11-2012 AND IN T HE CASE OF ITA NO.316 OF 2015 KIRBY BUILDING SYSTEMS INDIA LTD MEDAK PAGE 11 OF 19 THYSSEN KRUPP INDUSTRIES INDIA P LTD VS. ACIT, MUMB AI ITA.NO.7032/MUM/2011 DATED 27.11.2012 AND ALSO BY T HE COORDINATE BENCH AT HYDERABAD IN THE CASE OF DCIT VS. AIR LIQU IDE ENGINEERING INDIA P. LTD., IN ITA.NO.1040/HYD/ 2011 AND OTHERS D ATED 13.02.2014. IT WAS THE SUBMISSION THAT A.O. CANNOT D ISALLOW THE AMOUNT IN ITS ENTIRETY WITHOUT EXAMINING THE ARMS L ENGTH PRICE OF THE TRANSACTION. 12. COMING TO THE OBSERVATIONS OF THE TPO THAT THER E WAS SHIFTING OF PROFITS TO NO TAX JURISDICTION, IT WAS SUBMITTED TH AT THIS ARGUMENT CANNOT BE ACCEPTED IN VIEW OF THE PROVISIONS OF T.P . AND ALSO ON FURTHER FACT THAT ASSESSEE HAS PAID THE TAXES ON TH E AMOUNTS IN INDIA. IT WAS SUBMITTED THAT THE ROYALTY AND TECHNICAL FEE PAYABLE ARE ON NET BASIS. THEREFORE, ASSESSEE HAS GROSSED-UP THE AMOUN TS AND TO AN EXTENT OF ABOUT 32% ASSESSEE HAS PAID TAXES INCLUDI NG SERVICE TAX, CESS AND OTHER TAXES. THE LD. COUNSEL REFERRED TO T HE DETAILED SUBMISSIONS MADE BEFORE THE DRP ON THIS ISSUE. 13. IT WAS FURTHER CONTENDED THAT ASSESSEE'S AGREEM ENTS WITH AE WERE APPROVED BY RBI AND ALSO BY THE DEPARTMENT OF INDUS TRIES AND THEREFORE, THE TPO/DRP HAS NO ROLE TO DENY THE CLAI M WHICH WAS APPROVED BY OTHER GOVERNMENT AUTHORITIES. LD. COUNS EL ON A CLARIFICATION ABOUT THE WORKING OF ROYALTY CLARIFIE D THAT EVEN THOUGH THE 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 EFFECTI VE DATE OF ROYALTY WAS MUCH LESS WHEREAS, THE DRP HAS APPROVED THE RAT E AT 3.5% ON THE GROSS DOMESTIC SALES. THEREFORE, THERE IS A LITTLE VARIATION IN THE AMOUNTS TAKEN. 14. SUMMARISING THE ARGUMENTS, LD. COUNSEL SUBMITTED THAT DRP/TPO HAS NO JURISDICTION TO RESTRICT THE AMOUNT TO NIL. LD. COUNSEL MADE VARIOUS PROPOSITIONS AS UNDER AND AS S UPPORTED BY VARIOUS DECISIONS OF THE COORDINATE BENCHES/HIGH CO URT. I. THAT TPO HAS TO APPLY METHOD WHILE CONSIDERING T HE ADJUSTMENTS TO THE INTERNATIONAL TRANSACTIONS. FOR THIS HE RELIED ON (I) MERCK LTD., MUMBAI VS. DCIT, CI RCLE 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), M UMBAI ITA.NO.7349/MUM/2012 DATED 30.04.2013 (IV) REEBOK INDIA CO. VS. ACIT, NEW DELHI ITA.NO.58 57/DEL/2012 DT. 14.06.2013 ITA NO.316 OF 2015 KIRBY BUILDING SYSTEMS INDIA LTD MEDAK PAGE 12 OF 19 II. THE TPO HAS NO JURISDICTION TO QUESTION THE BUS INESS PRUDENCE OF THE ASSESSEE IN PAYING VARIOUS ROYALTIES/TECHNICAL KNOWHOW FEE. (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.58 57/DEL/2012 DT. 14.06.2013. III. THE TPO HAS NO JURISDICTION TO DISALLOW THE E NTIRE 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., MU MBAI VS. ACIT, C.C .3(3), MUMBAI ITA.NO.7032/MUM/2011 DT. 27.11.2012 I V. 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 INDI A. (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 KN OWHOW FEE AND RELIED ON THE FOLLOWING CASE LAWS (I) DCIT, CIRCLE1(1), HYDERABAD VS. M/S. AIR LIQUID E 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., DAT ED 24.09.2013. 15. LEARNED D.R. HOWEVER, RELIED ON THE DETAILED OR DERS OF THE TPO AND DRP TO SUBMIT THAT THERE IS NO NECESSITY TO PAY ROYALTY AT HIGHER AMOUNT AND SO THE AUTHORITIES ARE WITHIN THE JURISD ICTION TO RESTRICT THE AMOUNT AT NIL ON TECHNICAL SERVICES FEE AND 3.5 % ON GROSS SALES AS FAR AS ROYALTY IS CONCERNED. HE RELIED ON THE OR DERS OF THE AUTHORITIES. 16. LD. COUNSEL, IN REPLY, ALSO CLARIFIED VARIOUS I SSUES RAISED AND PLACED ON RECORD A CUMULATIVE PAYMENT OF ROYALTY AN D TECHNICAL SERVICES FEE BY THE ASSESSEE OVER A PERIOD TO SUBMI T THAT EFFECTIVE RATE OF ROYALTY IS VERY MUCH LESS. IT WAS SUBMITTED THAT THE ASSESSEE HAS PAID CUMULATIVE ROYALTY AS PERCENTAGE OF CUMULATIVE SALES AT 3.75% UP TO A.Y. 2009-2010. IT WAS SUBMITTED THAT THE PAYMEN T OF TECHNICAL KNOWHOW AND ROYALTY SHOULD BE ALLOWED IN FULL. 17. WE HAVE CONSIDERED THE RIVAL CONTENTIONS AND EX AMINED THE ORDERS OF THE AUTHORITIES, DOCUMENTS PLACED ON RECO RD AND RELEVANT CASE LAW RELIED UPON. KIRBY BUILDING SYSTEMS INDIA P. LTD., IS A WHOLLY ITA NO.316 OF 2015 KIRBY BUILDING SYSTEMS INDIA LTD MEDAK PAGE 13 OF 19 OWNED SUBSIDIARY OF ALGHANIM INDUSTRIES, A KUWAIT B ASED MULTI- BILLION CONGLOMERATE. IT IS ONE OF THE WORLD'S LARG EST PRODUCERS OF PRE- ENGINEERED STEEL BUILDINGS (IN SHORT 'PEB') AN D 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 KUWAIT HAS E XTREMELY TALENTED POOL OF SKILLED STRUCTURAL ENGINEERS, DESI GNERS AND DETAILERS CONVERSANT WITH INDIAN AND INTERNATIONALLY ACCLAIME D CODES AND ENGINEERING PRACTICES. ALL THE BUILDINGS DESIGNED B Y KIRBY ARE CUSTOM DESIGNED USING LATEST DOMESTIC/INTERNATIONAL CODES AND STANDARDS SUCH AS IS, MBMA, AISC, AISI AND AWS. PEB TECHNOLOG Y HAS VARIOUS ADVANTAGES BEING FLEXIBILITY IN EXPANSION, FASTER I NSTALLATION, ENERGY EFFICIENT AND PRACTICALLY MAINTENANCE FREE WITH SUP ERB QUALITY AND ALSO EARTHQUAKE RESISTANT. IT HAS APPLICATIONS STAR TING FROM FACTORIES AND WAREHOUSE TO AIR-CRAFT HANGERS, STATIONS, SHIP YARDS, WORK-SHOPS, STADIUMS ETC. ASSESSEE INDEED PIONEERED A NEW CONCE PT OF PRE- ENGINEERING STEEL 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 PAYMENT OF LUMP SUM AMOUNT OF $ 2 MILLION DOLLARS AS TECHNICAL KNOWHOW FEE AND ROYALT Y OF 2.5% IN THE FIRST YEAR AND 5% FROM SECOND YEAR ONWARDS UP TO MA RCH 31, 2007 WAS APPROVED BY THE RBI AND MINISTRY OF INDUSTRIES. IT IS ALSO A FACT THAT ASSESSEE DID NOT REMIT ANY OF THOSE AMOUNTS IN THOSE YEARS AND THE AGREEMENT WAS AMENDED PERIODICALLY. AS STATED A BOVE IN THE FACTS OF THE CASE, IN THE IMPUGNED YEAR ASSESSEE HAS PAID $ 1 LAKH DOLLARS AS TECHNICAL KNOWHOW FEE AND ROYALTY AT 7.5% ON DOMEST IC SALES AS PER THE AGREEMENTS ENTERED INTO AND APPROVED BY THE AUT HORITIES. 19. IN THE GUISE OF EXAMINING THE PAYMENTS UNDER T. P. PROVISIONS, IT IS NOTICED THAT THE TPO HAS NOT ANALYSED THESE PAYMENT S EITHER UNDER TNMM METHOD OR UNDER ANY OTHER METHOD WHICH REQUIRE TO BE ANALYSED AS PER THE PROVISIONS. HOWEVER, THE TPO HA S EXAMINED THE BUSINESS NECESSITY OF PAYMENT OF TECHNICAL KNOWHOW FEE AND ROYALTY UNDER THE PROVISIONS OF SECTION 37(1) RATHER THAN UNDER THE PROVISIONS OF T.P. HIS DECISION OF NOT ALLOWING ANY ROYALTY PA YMENT OR TECHNICAL KNOWHOW PAYMENT AND DETERMINING THE ALP AT NIL CANN OT BE SUSTAINED IN VIEW OF THE FACT THAT THIS TECHNICAL K NOWHOW FEE AND ROYALTY WERE AGREED UPON WHEN THE ASSESSEE HAS ORIG INALLY ENTERED INTO AGREEMENT AS ON 01.04.2000 MUCH BEFORE THE T.P. PROVISIONS CAME ON STATUTE. IT MAY BE ANOTHER REASON THAT ASSE SSEE HAS REVISED THE AGREEMENT AND PAID SUBSEQUENTLY, PARTLY IN THE IMPUGNED YEAR, BUT THAT DOES NOT PREVENT ASSESSEE CLAIMING EXPENDI TURE WHICH WAS NECESSARY FOR ITS BUSINESS OPERATIONS IN VIEW OF TH E AGREEMENT ENTERED AT THE TIME OF ESTABLISHING THE UNIT IN IND IA. HAD THERE BEEN NO REVISION OF THE AGREEMENT, THE PAYMENT OF TECHNI CAL KNOWHOW FEE WOULD HAVE BEEN OVER BY THE YEAR 2002 ITSELF. ASSES SEE PAID IN A SENSE BELATEDLY THE SAME AMOUNT WHICH WAS PAYABLE ORIGINA LLY DUE TO RESCHEDULING IN PAYMENT PERIOD. NO EXTRA AMOUNT WAS REQUIRED TO BE PAID. MOREOVER, ON THE ENTIRE TURNOVER IN THE INTER VENING YEARS, ITA NO.316 OF 2015 KIRBY BUILDING SYSTEMS INDIA LTD MEDAK PAGE 14 OF 19 ASSESSEE ALSO WOULD HAVE PAID ROYALTY. HOWEVER, DUE TO BUSINESS REQUIREMENTS, BOTH THE PARTIES AGREED TO REVISE THE ROYALTIES. TP PROVISIONS DOES NOT EMPOWER THE TPO TO DECIDE ABOUT THE COMMERCIAL DECISIONS AND DETERMINING THE ALP AT NIL THEREBY, DENYING THE ENTIRE CLAIM INSTEAD OF ALLOWING THE AM OUNT ON THE BASIS OF ALP TO BE DETERMINED UNDER THE PROVISIONS. 20. THE HON'BLE DELHI HIGH COURT IN THE CASE OF CIT VS. EKL APPLIANCES ITA.NO .1068 OF 2011 AND 1070 OF 2011 DATED 29TH MARCH, 2012 CONSIDERED SIMILAR ISSUE WHETHER THE TPO HAS P OWER TO RESTRICT IN DETERMINING THE ALP AT NIL UNDER THE PROVISIONS OF T.P. WHEN HE WAS SUPPOSED TO HAVE DETERMINED THE ARMS LENGTH PRI CE OF THE INTERNATIONAL TRANSACTION. THE HON'BLE DELHI HIGH C OURT AFTER EXAMINING THE FACTS OF THE CASE HELD UNDER : '19. THERE IS NO REASON WHY THE OECD GUIDELINES SHO ULD NOT BE TAKEN AS A VALID INPUT IN THE PRESENT CASE IN JU DGING THE ACTION OF THE TPO. IN FACT, THE CIT (APPEALS) HAS R EFERRED TO AND APPLIED THEM AND HIS DECISION HAS BEEN AFFIRMED BY THE TRIBUNAL. THESE GUIDELINES, IN A DIFFERENT FORM, HA VE BEEN RECOGNIZED IN THE TAX JURISPRUDENCE OF OUR COUNTRY EARLIER. IT HAS BEEN HELD BY OUR COURTS THAT IT IS NOT FOR THE REVENUE AUTHORITIES TO DICTATE TO THE ASSESSEE AS TO HOW HE SHOULD CONDUCT HIS BUSINESS AND IT IS NOT FOR THEM TO TELL THE ASSESSEE AS TO WHAT EXPENDITURE THE ASSESSEE CAN INCUR. WE M AY REFER TO A FEW OF THESE AUTHORITIES TO ELUCIDATE THE POIN T. IN EASTERN INVESTMENT LTD. V. CIT , (1951) 20 ITR 1, IT WAS HELD BY THE SUPREME COURT THAT 'THERE ARE USUALLY MANY WAYS IN WHICH A GIVEN THING CAN BE BROUGHT ABOUT IN BUSINESS CIRCLE S BUT IT IS NOT FOR THE COURT TO DECIDE WHICH OF THEM SHOULD HA VE BEEN EMPLOYED WHEN THE COURT IS DECIDING A QUESTION UNDER SECTION 12(2) OF THE INCOME TAX ACT'. IT WAS FURTHER HELD IN THIS CASE THAT 'IT IS NOT NECESSARY TO SHOW THAT THE EXPENDITURE WAS A PROFITABLE ONE OR THAT IN FACT AN Y PROFIT WAS EARNED'. IN CIT V. WALCHAND & CO . ETC., (1967) 65 ITR 381, IT WAS HELD BY THE SUPREME COURT THAT IN APPLY ING THE TEST OF COMMERCIAL EXPEDIENCY FOR DETERMINING WHETH ER THE EXPENDITURE WAS WHOLLY AND EXCLUSIVELY LAID OUT FOR THE PURPOSE OF BUSINESS, REASONABLENESS OF THE EXPENDIT URE HAS TO BE JUDGED FROM THE POINT OF VIEW OF THE BUSINESSMAN AND NOT OF THE REVENUE. IT WAS FURTHER OBSERVED THAT THE RU LE 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 NE W ZEALAND, (1938) 6 ITR 636 THAT 'EXPENDITURE IN THE COURSE OF THE TRADE WHICH IS UN-REMUNERATIVE IS NONE THE LESS A PROPER DEDUCTION IF WHOLLY AND EXCLUSIVELY MADE FOR THE PU RPOSES OF TRADE. IT DOES NOT REQUIRE THE PRESENCE OF A RECEIP T ON THE CREDIT SIDE TO JUSTIFY THE DEDUCTION OF AN EXPENSE' . THE QUESTION WHETHER AN EXPENDITURE CAN BE ALLOWED AS A DEDUCTION ONLY IF IT HAS RESULTED IN ANY INCOME OR PROFITS CAME TO BE CONSIDERED BY THE SUPREME COURT AGAIN IN CIT V. ITA NO.316 OF 2015 KIRBY BUILDING SYSTEMS INDIA LTD MEDAK PAGE 15 OF 19 RAJENDRA PRASAD MOODY , (1978) 115 ITR 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 BECAUSE THE RE IS NO RECEIPT OF INCOME. WHATEVER IS A PROPER OUTGOING BY WAY OF EXPENDITURE MUST BE DEBITED IRRESPECTIVE OF WHETHER THERE IS RE CEIPT OF INCOME OR NOT. THAT IS THE PLAIN REQUIREMENT OF PROPER ACCOUN TING AND THE INTERPRETATION OF SECTION 57(III) CANNOT BE DIFFERENT. THE DEDUCTION OF THE EXPENDITURE CANNOT, IN THE CIRCUMSTANCES, BE HE LD TO BE CONDITIONAL UPON THE MAKING OR EARNING OF THE INCOM E.' 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 EMPLOYED 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 REFERRED TO THE LEG ISLATIVE HISTORY AND NOTED THAT WHEN THE INCOME 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 BUSINESS IN ORDER TO MERIT DEDUCTION. PURSUANT T O PUBLIC PROTEST, THE WORD 'NECESSARILY' WAS OMITTED FROM THE SECTION . 21. THE POSITION EMERGING FROM THE ABOVE DECISIONS IS THAT IT IS NOT NECESSARY FOR ASSESSEE TO SHOW THAT ANY LEGITIMATE EXPENDITURE INCURRED BY HIM WAS ALSO INCURRED OUT OF NECESSITY. IT IS ALSO NOT NECESSARY FOR ASSESSEE TO SHOW THAT ANY EXPENDITURE INCURRED BY HIM FOR THE PURPOSE OF BUSINESS CARRIED ON BY HIM H AS ACTUALLY RESULTED IN PROFIT OR INCOME EITHER IN THE SAME YEA R OR IN ANY OF THE SUBSEQUENT YEARS. THE ONLY CONDITION IS THAT THE EX PENDITURE SHOULD HAVE BEEN INCURRED 'WHOLLY AND EXCLUSIVELY' FOR THE PURPOSE OF BUSINESS AND NOTHING MORE. IT IS THIS PRINCIPLE THA T INTER ALIA FINDS EXPRESSION IN THE OECD GUIDELINES, IN THE PARAGRAPH S WHICH WE HAVE QUOTED ABOVE. 22. EVEN RULE IOB(L)(A) DOES NOT AUTHORISE DISALLOW ANCE OF ANY EXPENDITURE ON THE GROUND THAT IT WAS NOT NECESSARY OR PRUDENT FOR ASSESSEE TO HAVE INCURRED THE SAME OR THAT IN THE V IEW OF THE REVENUE THE EXPENDITURE WAS UN- REMUNERATIVE OR THA T IN VIEW OF THE CONTINUED LOSSES SUFFERED BY ASSESSEE IN HIS BU SINESS, HE COULD HAVE FARED BETTER HAD HE NOT INCURRED SUCH EXPENDIT URE. THESE ARE IRRELEVANT CONSIDERATIONS FOR THE PURPOSE OF RULE 1 0B. WHETHER OR NOT TO ENTER INTO THE TRANSACTION IS FOR ASSESSEE T O 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 HAS NO AUTHORITY TO DISALLOW THE EN TIRE EXPENDITURE OR A PART THEREOF ON THE GROUND THAT ASSESSEE HAS S UFFERED CONTINUOUS LOSSES. THE FINANCIAL HEALTH OF ASSESSEE CAN NEVER BE A ITA NO.316 OF 2015 KIRBY BUILDING SYSTEMS INDIA LTD MEDAK PAGE 16 OF 19 CRITERION TO JUDGE ALLOWABILITY OF AN EXPENSE; THER E IS CERTAINLY NO AUTHORITY FOR THAT. WHAT THE TPO HAS DONE IN THE PR ESENT CASE IS TO HOLD THAT ASSESSEE OUGHT NOT TO HAVE ENTERED INTO T HE AGREEMENT TO PAY ROYALTY/BRAND FEE, BECAUSE IT HAS BEEN SUFFERIN G LOSSES CONTINUOUSLY. SO LONG AS THE EXPENDITURE OR PAYMENT HAS BEEN DEMONSTRATED 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 OECD GUIDE LINES, HE IS EXPECTED TO EXAMINE THE INTERNATIONAL TRANSACTION A S HE ACTUALLY FINDS THE SAME AND THEN MAKE SUITABLE ADJUSTMENT BU T A WHOLESALE DISALLOWANCE OF THE EXPENDITURE, PARTICULARLY ON TH E GROUNDS WHICH HAVE BEEN GIVEN BY THE TPO IS NOT CONTEMPLATED OR A UTHORISED. 23. APART FROM THE LEGAL POSITION STATED ABOVE, EVE N ON MERITS THE DISALLOWANCE OF THE ENTIRE BRAND FEE / ROYALTY PAYM ENT WAS NOT WARRANTED. ASSESSEE HAS FURNISHED COPIOUS MATERIAL AND VALID REASONS AS TO WHY IT WAS SUFFERING LOSSES CONTINUOU SLY AND THESE HAVE BEEN REFERRED TO BY US EARLIER. FULL JUSTIFICA TION SUPPORTED BY FACTS AND FIGURES HAVE BEEN GIVEN TO DEMONSTRATE TH AT THE INCREASE IN THE EMPLOYEES COST, FINANCE CHARGES, ADMINISTRAT IVE EXPENSES, DEPRECIATION COST AND CAPACITY INCREASE HAVE CONTRI BUTED TO THE CONTINUOUS LOSSES. THE COMPARATIVE POSITION OVER A PERIOD OF 5 YEARS FROM 1998 TO 2003 WITH RELEVANT FIGURES HAVE BEEN GIVEN BEFORE THE CIT (APPEALS) AND THEY ARE REFERRED TO I N A TABULAR FORM IN HIS ORDER IN PARAGRAPH 5.5.1. IN FACT THERE ARE FOUR TABULAR STATEMENTS FURNISHED BY ASSESSEE BEFORE THE CIT (AP PEALS) IN SUPPORT OF THE REASONS FOR THE CONTINUOUS LOSSES. T HERE 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 MERITS THE REASON S FOR THE LOSSES ARE NOT GENUINE. 24. WE ARE, THEREFORE, UNABLE TO HOLD THAT THE TRIB UNAL COMMITTED ANY ERROR IN CONFIRMING THE ORDER OF THE CIT (APPEA LS) FOR BOTH THE YEARS DELETING THE DISALLOWANCE OF THE BRAND FEE L ROYALTY PAYMENT WHILE DETERMINING THE ALP. ACCORDINGLY, THE SUBSTAN TIAL QUESTIONS OF LAW ARE ANSWERED IN THE AFFIRMATIVE AND IN FAVOU R OF ASSESSEE AND AGAINST THE REVENUE. THE APPEALS ARE ACCORDINGL Y DISMISSED WITH NO ORDER AS TO COSTS'. 20.1. THE PRINCIPLES LAID DOWN BY THE HON'BLE DELHI 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 HOLD THAT ASSESS EE NEED NOT PAY ANY ROYALTY OR TECHNICAL KNOWHOW FEE TO THE AE. EVE N THOUGH DRP HAS PARTLY MODIFIED THE PAYMENT OF ROYALTY, WHAT WE NOTICED IS THAT THEY ALSO MADE A MISTAKE IN ALLOWING ONLY 3.5% OF R OYALTY WHEN IN FACT, THERE IS NO SUCH CLAIM IN ANY OF THE EARLIER YEARS. AS SUBMITTED BY THE LD. COUNSEL IN THE COURSE OF ARGUMENTS/PRESE NTATION BEFORE US ASSESSEE CLAIMED AT 7.5% IN EARLIER YEAR WHICH W AS ALSO ALLOWED. 20.2. MOREOVER, THE PAYMENT OF ROYALTY OVER THE PER IOD UP TO A.Y. 2009-10 AND TECHNICAL KNOWHOW FEE WAS SUMMARIZED BY THE ITA NO.316 OF 2015 KIRBY BUILDING SYSTEMS INDIA LTD MEDAK PAGE 17 OF 19 ASSESSEE IN THE FOLLOWING TABLE WHICH WAS FILED DUR ING THE COURSE OF HEARING BEFORE US IN ORDER TO SUBSTANTIATE THE ARGU MENTS THAT THE CUMULATIVE ROYALTY AS PERCENTAGE OF CUMULATIVE SALE S IS MUCH LESS AT 3.08% UP TO THE IMPUGNED YEAR WHICH IS STILL LESS T HAN 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 % 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 - 08 282.78 23.01 15.82 0.44 5.56% 3.79% 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 PERCENTAGE S IN THE ROYALTY CLAIMED, CLARIFICATION WAS SOUGHT IN THE COURSE OF ARGUMENT AND LD. COUNSEL EXPLAINED THAT EVEN THOUGH ROYALTY HAD A FI XED PERCENTAGE OF 7.5% AGREED, IT WAS NOT ON GROSS SALES BUT ON NET S ALES, AS RBI HAS EXCLUDED VARIOUS AMOUNTS. IT WAS ALSO SUBMITTED THA T DRP WITHOUT STUDYING THE TERMS AND CONDITIONS OF PAYMENT OF ROY ALTY AS APPROVED, ALLOWED ROYALTY AT 3.5% ON GROSS SALES WHICH TECHNI CALLY 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 THAT 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 OF TECHNICAL SERVICES FEE WITHOUT ANY BASIS AT NIL UNDER THE GUISE OF T.P. PROVISIONS. IN VIEW OF THIS, WE ARE NOT IN AGREEMENT WITH THE ACTION OF THE TPO / DRP. 20.4. IN THE COURSE OF ARGUMENTS, LD. COUNSEL MADE V ARIOUS PROPOSITIONS ON PAYMENTS OF ROYALTY AND TECHNICAL S ERVICES FEE AND CITED THE DECISIONS OF THE COORDINATE BENCHES OF TH E 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., ITA NO.316 OF 2015 KIRBY BUILDING SYSTEMS INDIA LTD MEDAK PAGE 18 OF 19 VS. DCIT, CIRCLE 1(1), HYDERABAD ITA.NO.1159/HYD/20 11 ETC., DT. 13.02.2014 AND HOST OF OTHER DECISIONS AS STATED IN THE SUBMISSIONS ABOVE TO SUBSTANTIATE VARIOUS PROPOSITIONS. SUFFICE TO SAY THAT WE HAVE CONSIDERED VARIOUS LEGAL PRINCIPLES ON THE ISS UE. WE ARE OF THE OPINION THAT APART FROM LEGAL POSITION, EVEN ON MER ITS THE DISALLOWANCE OF ENTIRE TECHNICAL KNOWHOW PAYMENT AN D PART DISALLOWANCE OF ROYALTY PAYMENT TO AE WAS NOT WARRA NTED. 21. THERE IS ONE MORE ASPECT TO THE ABOVE ISSUE. TH E AGREEMENTS WERE PERIODICALLY APPROVED BY RBI AND BY MINISTRY OF IND USTRY AND ASSESSEE WAS PAYING THE AMOUNTS AS PER THE AGREEMEN TS. EVEN THOUGH APPROVAL BY THE OTHER GOVERNMENTAL AUTHORITIES DOES NOT PREVENT TPO IN EXAMINING THE ALP AS PER THE PROVISIONS OF T HE ACT, WHAT WE NOTICED WAS THAT TPO DID NOT EXAMINE THE ISSUE UNDE R THE T.P. PROVISIONS AT ALL BUT TOOK UPON THE ROLE OF AN A.O. IN ANALYZING THE COMMERCIAL EXPEDIENCY OF PAYMENT OF ROYALTY AND TEC HNICAL KNOWHOW UNDER THE PROVISIONS OF SECTION 37(1) . SINCE THE AGREEMENTS WERE APPROVED BY THE AUTHORITIES AND CONSIDERING THE FAC TS OF THE CASE, WE ARE OF THE OPINION THAT THE ROYALTY FEE AND TECHNIC AL KNOWHOW ARE AT ARM'S LENGTH AND THAT ASSESSEE'S CLAIM SHOULD BE AL LOWED AS SUCH. THERE IS NO INFORMATION BROUGHT ON RECORD BY THE TP O THAT THE PAYMENT AT 7.5% ON THE NET SALES IS NOT AT ARM'S LE NGTH AS THERE WAS NO OTHER COMPARABLE CASE BROUGHT ON RECORD. GENERAL LY, THE GOVERNMENT OF INDIA IS APPROVING THE ROYALTY PAYMEN TS AT 7.5% OF THE SALES AND THIS APPROVAL GIVEN BY THE RBI AND MINIST RY OF INDUSTRY IS AT PAR WITH SIMILAR AGREEMENTS BEING APPROVED IN OT HER CONTRACTS/AGREEMENTS. CONSIDERING THESE ASPECTS, WE ARE OF THE OPINION THAT ROYALTY AND TECHNICAL KNOWHOW PAYMENTS MADE BY THE ASSESSEE TO ITS AE ARE CONSIDERED AT ARM'S LENGTH A ND THEREBY, THE GROUNDS RAISED BY THE ASSESSEE ON THIS ISSUE ARE AL LOWED. A.O. IS DIRECTED TO ALLOW THE AMOUNTS AS CLAIMED. TAKING THE SAID DECISIONS INTO CONSIDERATION AND AL SO THE FACT THAT THE TPO HAS FOLLOWED HIS APPROACH FOR THE EARL IER A.YS IN HOLDING THAT THE ALP ADJUSTMENT WAS NECESSARY, WE A RE INCLINED TO APPLY THE DECISION OF THE COORDINATE BENCH FOR T HE EARLIER A.YS ALSO TO THE A.Y IN THE APPEAL BEFORE US. WE FIND TH AT THE DRP HAS ONLY FOLLOWED THE DECISION OF THE ITAT IN ASSESSEE S OWN CASE FOR EARLIER A.YS. AS THE DRP HAS ONLY FOLLOWED THE PREC EDENT ON THE ISSUE IN THE ASSESSEES OWN CASE AND HAS ACCORDINGL Y ISSUED DIRECTIONS TO THE AO AND THE ASSESSMENT ORDER IS IN CONSONANCE WITH SUCH DIRECTIONS OF THE DRP, WE DO NOT FIND ANY REASON TO INTERFERE WITH THE SAME. ITA NO.316 OF 2015 KIRBY BUILDING SYSTEMS INDIA LTD MEDAK PAGE 19 OF 19 7. IN THE RESULT, REVENUES APPEAL IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 7 TH AUGUST, 2015. S D/ - S D/ - (INTURI RAMA RAO) (P. MADHAVI DEVI) ACCOUNTANT MEMBER JUDICIAL MEMBER HYDERABAD, DATED 7 TH AUGUST, 2015. VNODAN/SPS COPY TO: 1. DY. COMMISSIONER OF INCOME TAX, CIRCLE 8(1), C BLOC K, IT TOWERS, AC GUARDS, HYDERABAD 2. M/S. KIRBY BUILDING SYSTEMS INDIA LTD., PLOT NOS. 8 TO 15, PASHAMYLARAM, PHASE-III, IDA, MEDAK 502307 3. DRP, HYDERABAD 4. ADD.CIT (T.P) HYDERABAD 5. THE DR, ITAT, HYDERABAD 6. GUARD FILE BY ORDER