Owens Corning Industries India Private Limited, Hyderabad, Mahabubnagar V. ACIT Circle-5(1) Hyderabad, Hyderabad

ITA 569/Hyd/2017

• Counselvise Citation: [2021] 107 COUNSELVISE.COM (IT) 2288 (ITAT-HYDERABAD)
• Duration Of Justice: 4 year(s) 6 month(s) 22 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 22-10-2021
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: DB-B
• Next Hearing Date: 05-10-2021
• Assessment Year: 2012-2013
• Appeal Filed On: 30-03-2017
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: Y V S T SAI
• Keywords: Business expenditure; Commercial expediency
• Section: 143(3); 13; 22; 92

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD B BENCH, HYDERABAD. BEFORE SHRI S.S. GODARA, JUDICIAL MEMBER AND SHRI L . P . SAHU, ACCOUNTANT MEMBER (THROUGH VIRTUAL HEARING) ITA NO. 569 /HYD/20 17 (ASSESSMENT YEAR : 20 12 - 13 ) M/S. OWENS CORNING INDUSTRIES (INDIA) PVT. LTD., HYDERABAD. PAN AAACV 9858N ..APPELLANT. VS. ASST. COMMISSIONER OF INCOME TAX, CIRCLE 5(1), HYDERABAD. ..RESPONDENT. APPELL ANT BY : SHRI S.P. CHIDAMBARAM. RESPONDENT BY : SHRI YVST SAI. (D.R.) DATE OF HEARING : 05.10. 2021. DATE OF PRONOUNCEMENT : 22 . 10 .2021. O R D E R PER SHRI S.S. GODARA, J.M. : THIS ASSESSEE'S APPEAL FOR ASSESSMENT YEAR 2012 - 13 ARISES AGAINST THE ACIT, CIRCLE 5(1), HYDERABAD S ASSESSMENT DT.31.01.2017 FRAMED IN FURTHERANCE TO THE DISPUTE RESOLUTION PANEL (DRP) - 1, BANGALORES DIRECTIONS DT.20.12.2016 IN F. NO.90/DRP - 1/2016 - 2017 INVOLVING 2 ITA NO. 569/HYD/2017 PROCEED INGS U/S. 143(3) R.W.S. 92CA(3) OF THE INCOME TAX ACT, 1961 ('THE ACT'). HEARD BOTH THE PARTIES. CASE FILE PERUSED. 2. COMING TO THE ASSESSEE'S SOLE SUBSTANTIVE GRIEVANCE THAT THE LEARNED LOWER AUTHORITIES HAVE ERRED IN LAW AND ON FACTS IN RESTR ICTING ITS R OYALTY EXPENSES CLAIM @ 4% ON NET SALES TO 1.5% THEREOF RESULTING IN A RMS L ENGTH P RICE ALP ADJUSTMENT/ADDITION OF RS.2,88,36,810; WE FIND THE SAME IS NO MORE RES INTEGRA AS THE TRIBUNALS CO - ORDINATE BENCH ORDER IN REVENUES AND TAX PAYER CROSS APPEAL S NO.549 AND 595/HYD/2014 DT.13.10.2014 FOR ASST. YEAR 2009 - 10 HAS ALREADY DECLINED THE FORMER S CONTENTION AS FOLLOWS : 8. SUB - GROUND NOS. 2.3 TO 2.9 RELATE TO RESTRICT ION OF PAYMENT OF ROYALTY TO 2% (INSTEAD OF 5% AND 4%) OF THE NET SALES BY THE ASSESSEE TO OWENS CORNING INVEST COOPERATIEF U.A., NETHERLANDS. THE TPO RESTRICTED THE PAYMENT OR ROYALTY TO RS. 2,04,46,304 THEREBY ENHANCING THE TOTAL INCOME OF THE ASSESSEE U /S. 92CA(3) BY AN AMOUNT OF RS. 2,35,81,168. THE TPO ARRIVED AT THIS CONCLUSION OF RESTRICTION OF ROYALTY PAYMENT BY THE ASSESSEE BY BENCH - MARKING IT (I.E., PERFORM COMPARABILITY ANALYSIS) WITH THE PAYMENT OR ROYALTY BY A COMPARABLE COMPANY. ON PERFORMING COMPARABILITY ANALYSIS, THE TPO ARRIVED AT A SINGLE COMPARABLE VIZ., ASAHI INDIA GLASS LTD., HOLDING THAT THE SAID COMPARABLE (M/S. ASAHI INDIA GLASS LTD.) WAS HAVING A JOINT VENTURE AND WAS SIMILAR IN COMPOSITION WITH THE ASSESSEE AND THAT THE COMPARABLE HAD PAID 1.91% OF THE TURNOVER AS ROYALTY AND HENCE THE ASSESSEE ROYALTY RATE WAS ALSO BE THE SAME I.E., 2%. 9. WHILE ARRIVING AT THIS CONCLUSION, THE TPO CONSIDERED THE SUBMISSIONS OF THE ASSESSEE AND AGREED THAT THE ASSESSEE RECEIVED TECHNICAL ASSISTAN CE WHILE DISAGREEING WITH THE QUANTUM OF ROYALTY PAYMENT FOR THE SAID ASSISTANCE BY THE ASSESSEE AT 5% AND 4% OF THE NET OF ITS SALES. THE TPO HELD THAT BY THESE ROYALTY PAYMENTS THERE IS NO COMPARABLE INCREASES IN TURNOVER OR PROFITS FOR FINANCIAL YEAR 20 06 - 07, 2007 - 08 AND 2008 - 09 AND HENCE THE VALUE ADDITION OF ROYALTY WAS NOT APPARENT. 3 ITA NO. 569/HYD/2017 10. THE TPO ALSO PERUSED THE ROYALTY AGREEMENT AND OTHER DETAILS SUBMITTED BY THE ASSESSEE WHERE IT WAS SEEN THAT THE ASSESSEE WAS GRANTED NON - EXCLUSIVE, NONTRANSFERABLE LICENCE TO MAKE PAYMENTS IN INDIA AND ALSO TO SELL PRODUCTS TO AFFILIATES. THE LICENSOR (OWENS CORNING INVEST COOPERATIEF U.A., NETHERLANDS) GRANTED RIGHT TO USE 'OWENS CORNING' MARK AND THE ROYALTY AGREEMENT FURTHER REQUIRED THE LICENSEE (THE ASSESSEE) T O PAY THE LICENSOR 4% OF THE NET SALES. THE TPO WAS GIVEN COPIES OF EMAILS WHICH REFLECTED THE TANGIBLE ASSISTANCE RENDERED TO THE ASSESSEE BY THE LICENSOR/ PAYEE AND THE TPO WAS ALSO PROVIDED WITH POWERPOINT PRESENTATION DETAILING MANUFACTURING PROCESS OF THE ASSESSEE. THE ASSESSEE ALSO SUBMITTED TO THE TPO THAT THE TRADE MARK OF GLASS FIBRE FOR NON - TEXTILE PURPOSES UNDER THE NAME 'ADVANTEX' WAS SUPPLIED BY OWENS CORNING INVEST COOPERATIEF U.A., NETHERLANDS. 11. THE TPO HELD THAT GRANT OF 'TRADE MARK' IS WRONGLY MENTIONED AS 'PATENT' IN THE TPO'S ORDER PAGE 8 DOES NOT DETERMINE THE ARMS LENGTH NATURE OF TRANSACTION AND THE ROYALTY RIGHT MAINLY DEPENDS ON THE PREMIUM OF THE INTANGIBLE COMMANDS IN THE MARKET, THE UNIQUENESS OF THE INTANGIBLE AND ALSO THE PER IOD FOR WHICH THE UNIQUENESS REMAINS. THE TPO INSTEAD CARRIED OUT A STUDY TO OBTAIN COMPARABLE TRANSACTIONS IN THE OPEN MARKETS AND THE ROYALTY RIGHT PAID BY SUCH COMPARABLE COMPANIES AND ARRIVED AS STATED ABOVE AT THE RATE OF 2% AND ADOPTED THE RATE OF RO YALTY PAYMENT IN THE CASE OF ASAHI INDIA GLASS LTD. 12. THE DRP WHILE AGREEING TO THE CUP METHOD ADOPTED BY THE TPO ONLY FOR ROYALTY TRANSACTION OF THE ASSESSEE DIRECTED THE AO TO TAKE INTO ACCOUNT BOTH AE AND NON - AE SALES FROM WHICH THE COMPONENT OF EXC ISE DUTY ALONE SHOULD BE DEDUCTED WHICH RESULTED IN NET SALES OF RS. 108,84,81,414 AND ON THIS SUM THE ADJUSTMENT U/S. 92CA(3) SHOULD BE WORKED OUT. 13. WE HAVE HEARD BOTH THE PARTIES. FROM THE FACTS AND CIRCUMSTANCES OF THE CASE BEFORE US, IT IS CLEAR T HAT THE ASSESSEE WAS BEING RENDERED TECHNICAL ASSISTANCE THROUGH THE ROYALTY AGREEMENT ENTERED INTO WITH OWENS CORNING INVEST COOPERATIEF U.A., NETHERLANDS AND THE ROYALTY AGREEMENT HAS BEEN IN APPLICATION FROM 1.7.2008. WE ARE OF THE OPINION THAT THE TPO WAS INCORRECT IN GOING INTO THE BUSINESS EXPEDIENCY OF PAYMENT OF ROYALTY AND ARRIVING AT THE CONCLUSION OF THE QUANTUM OF THE ROYALTY. WE FIND SUPPORT FOR THIS PROPOSITION IN THE DECISION OF HONBLE DELHI HIGH COURT IN CIT VS. EKL APPLIANCES (345 ITR 241) (DEL) WHEREIN THE HONBLE DELHI HIGH COURT HAD OCCASION TO CONSIDER THE DISALLOWANCE OF ROYALTY BY TPO AND HELD THAT IF THE EXPENDITURE HAS BEEN INCURRED OR LAID OUT FOR THE PURPOSES OF BUSINESS IT IS NO CONCERN OF THE TPO TO DISALLOW THE SAME ON ANY EXTR ANEOUS REASONS. IN THE CASE OF ERICSSON INDIA PVT. LTD. VS. DCIT (ITA NO. 5141/DEL/ 2011) THE DELHI HIGH COURT DECISION IN CIT VS. EKL APPLIANCES (SUPRA) WAS FOLLOWED WHEREIN IT WAS HELD THAT 'IT WOULD BE WRONG TO HOLD THAT THE EXPENDITURE SHOULD BE DISALL OWED ONLY ON THE GROUND THAT THESE EXPENSES WERE NOT REQUIRED TO BE INCURRED BY THE ASSESSEE'. 14. WE ALSO DRAW SUPPORT FROM THE DECISION OF AHMEDABAD BENCH IN KHS MACHINERY (P) LTD. VS ITO (146 TTJ 692) WHERE IN THE TRIBUNAL ON THE ISSUE OF DISALLOWANCE MADE BY TPO OF PAYMENT OF ROYALTY HELD THAT 4 ITA NO. 569/HYD/2017 'THE ASSESSEE HAD NOT MADE THE ONE - TIME PAYMENT BUT MAKING THE CONTINUOUS PAYMENT TO THE KNOW - HOW PROVIDER WHICH HAS BEEN ACCEPTED BY THE DEPARTMENT IN THE PAST. THE ASSESSEE HAS BEEN CHARGING 5 PER CENT ROYALTY ON EACH AND EVERY TRANSACTION AND THEREFORE THE SAID PAYM ENT CANNOT BE SAID TO HAVE BEEN PAID ON THE AGGREGATE AMOUNT, AS ARGUED BY LEARNED CIT - DEPARTMENTAL REPRESENTATIVE. THE FINDINGS OF THE AO IN CONSIDERING THE ROYALTY CHARGES AS NIL AS ALP CANNOT BE ACCEPTED SINCE THE AO IN THE PRESENT CASE HAS NOT BROUGHT ON RECORD, THE ORDINARY PROFITS WHICH CAN BE EARNED IN SUCH TYPE OF BUSINESS. THEREFORE IN OUR VIEW THE PAYMENT OF ROYALTY IS NOT HIT BY THE PROVISIONS OF S. 92 OF THE ACT AND THERE IS NO REASON TO HOLD THAT THE EXPENSES SHOULD NOT BE ALLOWED UNDER S. 37(1 ) OF THE ACT, SINCE THE EXPENDITURE HAS BEEN INCURRED BY THE ASSESSEE DURING THE COURSE OF BUSINESS AND IS HAVING THE NEXUS WITH THE BUSINESS OF THE ASSESSEE. THEREFORE THE PAYMENT OF ROYALTY IS A BUSINESS EXPENDITURE WHICH HAS BEEN INCURRED WHOLLY AND EX CLUSIVELY FOR THE PURPOSE OF BUSINESS OF THE ASSESSEE AND SAME IS TO BE ALLOWED IN TOTO AS A MATTER OF COMMERCIAL EXPEDIENCY. THEREFORE, THE CASE LAWS RELIED UPON BY THE LEARNED CIT DEPARTMENTAL REPRESENTATIVE ARE OF NO BENEFIT TO THE REVENUE. THE REASONAB LENESS OF EXPENDITURE IN THE PRESENT CIRCUMSTANCES AND FACTS OF CASE CANNOT BE DOUBTED AND ACCORDINGLY THE A 0 IS DIRECTED TO ALLOW THE CLAIM OF THE ASSESSEE AND THE ORDER OF LEARNED CIT(A) IS REVERSED .... ' 15. WE ALSO DRAW SUPPORT FROM THE DIVISION OF COORDINATE BENCH M/S. AIR LIQUIDE ENGG. INDIA (P) LTD., VS DCIT (ITA NO. 1040/HYD/2011, 1159/HYD/2011 AND 1408/HYD/2010) DATED 13TH FEBRUARY 2014 WHEREIN IT WAS HELD THAT 18. HENCE, WHAT WE SEE IS THE TPO SITTING ON JUDGMENT ON THE BUSINESS AND COMMERC IAL EXPEDIENCY OF THE ASSESSEE WHICH IS ERRONEOUS AS PER THE PROVISIONS OF THE ACT AS LAID DOWN CLEARLY BY THE HON'BLE DELHI HIGH COURT IN EKL APPLIANCES (SUPRA). 19. IT IS ALSO NOTED THAT VARIOUS TRIBUNALS SUCH AS DCIT VS. SONA OKEGAWA PRECISION FORGINS LIMITED (ITA NO. 5386/DEL/2010), HERO MOTOCORP LIMITED VS. ADDL. CIT (ITA NO. 5130/DEL/2010). THYSSENKRUPP INDUSTRIES INDIA LTD VS ADDL. CIT (ITA NO. 6460/MUM/2012), ABHISHEK AUTO INDUSTRIES LTD. VS. CIT (ITA NO. 1433/DEL/2009) HAVE TAKEN A VIEW THAT REI APPROVAL OF THE ROYALTY RATES ITSELF IMPLIES THAT THE PAYMENTS ARE AT ARM'S LENGTH AND HENCE NO FURTHER ADJUSTMENT NEEDS TO BE MADE VIEWED FROM THIS ANGLE TOO.' 16. FURTHERMORE, THE ASSESSEE CLAIMED THAT THE ROYALTY AGREEMENT WAS ORIGINALLY ENTERED WITH SAINT GOBAIN VETROTEX FRANCE S.A.) FROM 1.7.2001 TO 30.6.2008 AND THAT AGREEMENT CALLED FOR 5% OF NET 'EX - FACTORY SALES PRICE' AS ROYALTY PAYMENT. FURTHER, BY WAY OF A SUPPLEMENTARY AGREEMENT DT. 8.5.2002 THE APPROVAL FOR PAYMENT TOWARDS FOREIGN TECHNOLOGY TRANSFER SANCTIONED BY RBI WAS INCORPORATED IN THE ORIGINAL AGREEMENT (REFER PAGE 6 & 7 OF TPO ORDER DT. 13.12.12). FINALLY IT IS SEEN THAT SAINT GOBAIN VETROTEX FRANCE S.A. IS NOW KNOWN AS OWENS COMING INVEST COOPERATIEF, NETHERLANDS WITH WHICH SUBSEQUEN T AGREEMENT DT. 1.7.2008 WAS MADE AND UNDER WHOM THE PAYMENTS WERE MADE IN THE IMPUGNED ASSESSMENT YEAR 2009 - 10. IN SHORT, THE ASSESSEE HAS CLAIMED THAT THE ROYALTY PAYMENTS WERE BASED ON AGREEMENT WHICH WAS APPROVED BY RBI AND HENCE THE TPO CANNOT QUESTIO N THE SAME. 17. WE FIND MERIT IN THIS CLAIM THAT ONCE THE RBI APPROVAL OF ROYALTY RATE WAS OBTAINED THE PAYMENT WAS CONSIDERED TO BE HELD AT ARM'S - LENGTH. IT IS ALSO NOTED THAT VARIOUS TRIBUNALS 5 ITA NO. 569/HYD/2017 SUCH AS AIR LIQUIDE ENGG. INDIA (P) LTD, HYDERABAD (ITA NO. 1159, L040/HYD/2011 & ITA NO.1408/ HYD/ 2010), DCIT VS. SONA OKEGAWA PRECISION FORGINS LIMITED (ITA NO. 5386/DEI/2010), HERO MOTOCORP LIMITED VS. ADDL. CIT (ITA NO. 5130/DEL/2010), THYSSENKRUP INDUSTRIES INDIA LTD VS ADDL. CIT (ITA NO. 6460/MUM/2012), ABHI SHEK AUTO INDUSTRIES LTD. VS. CIT (ITA NO. 1433/DEL/2009) HAVE TAKEN A VIEW THAT RBI APPROVAL OF THE ROYALTY RATES ITSELF IMPLIES THAT THE PAYMENTS ARE AT ARM'S LENGTH AND HENCE NO FURTHER ADJUSTMENT NEEDS TO BE MADE VIEWED FROM THIS ANGLE TOO. 18. WE, T HEREFORE, ALLOW THE GROUNDS OF THE ASSESSEE WITH RESPECT TO GROUND NO. 2.3 AND 2.9 (I.E. THE TPO ERRED M HOLDING THAT NO TANGIBLE BENEFITS WERE DERIVED BY THE ASSESSEE OUT OF ROYALTY PAYMENTS MADE BY IT AND RESTRICTED THE PAYMENT TO 2% OF NET SALES). WE A LSO ALLOW THE GROUND NO. 2.9 OF THE ASSESSEE (I.E., TRANSACTIONS MADE UNDER ROYALTY AGREEMENT APPROVED BY RBI ARE TO BE CONSIDERED TO BE AT ARM'S - LENGTH). WE DO NOT FIND THE NEED TO ADJUDICATE THE OTHER GROUNDS NAMELY. 2.4 TO 2.8 RAISED BY THE ASSESSEE. THERE IS NO DISPUTE BETWEEN THE PARTIES THAT THE ASSESSEE'S IMPUGNED ROYALTY PERTAINS TO THE VERY AGREEMENT 0 ONLY. WE THUS ADOPT JUDICIAL CONSISTENCY IN ABSENCE OF ANY DISTINCTION ON LAW AS WELL AS FACTS AND DELETE THE IMPUGNED ADJUSTMENT. 3. NO O THER GROUND HAS BEEN PRESSED BEFORE US. 4. THIS ASSESSEE'S APPEAL IS ALLOWED IN ABOVE TERMS. ORDER PRONOUNCED IN THE OPEN COURT ON 22ND OCT . , 2021. SD/ - SD/ - (L .P. SAHU) (S.S. GODARA) ACCOUNTANT MEMBER JUDICIAL MEMBER HYDERABAD, DT. 22 . 10 .2021. * REDDY GP 6 ITA NO. 569/HYD/2017 COPY TO : 1. M/S. OWENS CORNING INDUSTRIES (INDIA) PVT. LTD., THGIMMAPUR - 509 325, KOTHUR MANDAL, MAHABOOBNAGAR DISTRICT, TELANGANA. 2. ACIT, CIRCLE 5(1), HYDERABAD. 3. 4. 5. DR, ITAT, HYDERABAD. 6. GUARD FILE. BY ORDER SR. PVT. SECRETARY, ITAT, HYDERABAD.