John Crane Sealing Systems India Private Limited, CHENNAI V. DCIT, CHENNAI

ITA 785/CHNY/2016

• Counselvise Citation: [2017] 127 COUNSELVISE.COM (IT) 6177 (ITAT-CHENNAI)
• Duration Of Justice: 1 year(s) 5 month(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 15-09-2017
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: D
• Next Hearing Date: 19-06-2017
• Assessment Year: 2011-2012
• Appeal Filed On: 30-03-2016
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: RAGUNATHAN SAMPATH
• Assessee Lawyers: PATHALAVATH PEERYA
• Keywords: Capital asset; Depreciation; Transfer pricing; International transaction; Capital expenditure
• Section: 143(3)

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL BENCH D, CHENNAI , ! ' . # , $ %& ' BEFORE SHRI SANJAY ARORA, ACCOUNTANT MEMBER AND SHRI DUVVURU RL REDDY, JUDICIAL MEMBER ./ITA NO.621/MDS/2016 $ ( )( / ASSESSMENT YEAR: 2011-12 DY. COMMISSIONER OF INCOME TAX, CORPORATE CIRCLE-2(2), ROOM NO.512, 5 TH FLOOR, CHENNAI 600 034. VS. JOHN CRANE SEALING SYSTEMS (INDIA) PVT. LTD., NO.1, GROUND FLOOR, CASA BLANCA, NO.6, CASA MAJOR ROAD, EGMORE, CHENNAI 600 008. [PAN: AAACJ 2131J] ( /APPELLANT ) ( / RESPONDENT ) ./ITA NO.785/MDS/2016 $ ( )( / ASSESSMENT YEAR: 2011-12 JOHN CRANE SEALING SYSTEMS INDIA PVT. LTD., NO.1, GROUND FLOOR, CASA BLANCA, NO.6, CASA MAJOR ROAD, EGMORE, CHENNAI 600 008. [PAN: AAACJ 2131J] DY. COMMISSIONER OF INCOME TAX, CORPORATE CIRCLE-2(2), ROOM NO.512, 5 TH FLOOR, CHENNAI 600 034. ( /APPELLANT ) ( / RESPONDENT ) *+ - . / APPELLANT BY : SHRI PATHALAVATH PEERYA, CIT /0*+ - . / RESPONDENT BY : SHRI RAGUNATHAN SAMPATH, ADVOCATE - 1 / DATE OF HEARING : 19.06.2017 2) - 1 / DATE OF PRONOUNCEMENT : 15.09.2017 /ORDER 2 ITA NOS.621 & 785/MDS/2016 (AY 2011-12) JOHN CRANE SEALING SYSTEMS IND IA PVT. LTD. PER SANJAY ARORA, AM : THESE ARE CROSS APPEALS BY THE ASSESSEE AND THE RE VENUE, DIRECTED AGAINST THE ASSESSMENT U/S. 143(3) R/W S.144C(1) OF THE INC OME TAX ACT, 1961 (THE ACT HEREINAFTER) FOR THE ASSESSMENT YEAR (AY) 2011-12 D ATED 29.01.2016, MADE IN PURSUANCE TO THE DIRECTIONS BY THE DISPUTE RESOLUTI ON PANEL-2, BANGALORE (DRP FOR SHORT) DATED 30.11.2015. 2. THE ASSESSMENT INVOLVES BOTH TRANSFER PRICING (T P) RELATED AND CORPORATE TAX (CT) ISSUES; THE REVENUES APPEAL CONCERNING ON LY THE LATTER. WE SHALL TAKE THEM IN THAT ORDER. TRANSFER PRICING MATTERS 3. THE ASSESSEE IS IN THE BUSINESS OF: A) MANUFACTURER OF MECHANICAL SEALS, PARTS AND SEAL ING SYSTEMS; B) PROVISION OF CAD DESIGN SERVICES. THE ENGINEERING DESIGN CENTER OPERATES FROM BANGALO RE, CATERING TO DESIGN AND DRAWING REQUIREMENTS OF JOHN CRANE UK LIMITED (JCUK ). THE ASSESSEES PRODUCTS ARE USED PRIMARILY USED IN PUMPS, TURBINES AND COMPRESSORS. BESIDES, THE ASSESSEE IS ALSO ENGAGED IN THE MANUFACTURE OF ELECTRICAL AND RELATED PRODUCTS, WHICH THUS REPRESENT THE THIRD DIVISION, TITLED OTHERS. THE MANUFACTURING KNOW-HOW, DESIGN, ETC. IS PROVIDED BY THE SMITHS GROUP, OF WHICH THE ASSESSEE IS A PART, ALSO BEING SUPPLIED K EY RAW MATERIALS, SUCH AS MEMBRANE, IMPORT OF WHICH THEREFORE CONSTITUTES AN INTERNATIONAL TRANSACTION. THE PRODUCTS MANUFACTURED ARE SOLD UNDER THE BRAND NAME JOHN CRANE FOR SEAL PRODUCTS AND METASTREAM FOR COUPLING PRODUCTS. SO ME PRODUCTS ARE ALSO EXPORTED TO THE ASSOCIATED ENTERPRISE/S (AE/S). THE PRINCIPAL ISSUE ARISING IN THE TRANSFER PRICING IS IF THE RESULTS OF THE OTHERS SEGMENT SHOULD BE INCLUDED FOR EVALUATING THE RESULTS OF THE MANUFACTURING DIVISIO N, I.E., MANUFACTURE OF SEALS AND COUPLINGS, AS DONE BY THE ASSESSEE PER ITS TP S TUDY. THE TRANSFER PRICING 3 ITA NOS.621 & 785/MDS/2016 (AY 2011-12) JOHN CRANE SEALING SYSTEMS IND IA PVT. LTD. OFFICER (TPO) DID NOT FIND ANY FAULT WITH THE TRANS ACTIONAL NET MARGIN METHOD (TNMM), USING OPERATING PROFIT (OP) TO OPERATING CO ST (OC) AS THE PROFIT LEVEL INDEX (PLI), ADOPTED BY THE COMPANY AS THE MO ST APPROPRIATE METHOD (MAM) FOR BENCH MARKING THE MANUFACTURING AND CAD S ERVICES DIVISIONS; IN FACT, FINDING THE RESULTS OF THE TWO SEGMENTS BETTE R THAN THAT DISCLOSED BY THE COMPARABLES, SO THAT NO TP ADJUSTMENT WAS CALLED FO R. HOWEVER, THE OTHERS DIVISION, BEING IN RELATION TO ELECTRICAL COMPONENT S, FUNCTIONALLY DIFFERENT PRODUCT FROM INDUSTRIAL SEALS AND COUPLINGS, HAD TO BE SEPARATELY TESTED FOR ITS MARGIN. BESIDES, THERE WERE DIFFERENCES IN SCALE OF OPERATIONS; THE HYPERTAC AND POLYPHASER DIVISIONS, FALLING UNDER THE OTHERS SE GMENT, BEING IN THE INITIAL STAGES OF LAUNCH. THE LOSSES OF THESE DIVISIONS, TH EREFORE, COULD NOT BE SET OFF AGAINST THE MANUFACTURING DIVISION. THE OTHERS SE GMENT DISCLOSING A LOSS OF 25.61 PER CENT, AS AGAINST AN OPERATING MARGIN OF C OMPARABLES, DRAWN FROM THE ELECTRICAL INDUSTRY, AT 10.42 PER CENT, THUS RESULT ED IN AN UPWARD TP ADJUSTMENT OF . 36,93,828/-. THE SAME FOUND FAVOUR WITH THE LD. D RP FOR THE SAME REASONS, THE RELEVANT PART OF WHICH WHOSE ORDER REA DS AS UNDER: 3.1 AS REGARDS ABOVE OBJECTIONS OF THE ASSESSEE T HE TPO HAS OBSERVED THAT THE OTHER SEGMENT REPRESENTS THE HYPE RTAC AND POLYPHASER DIVISIONS OF JOHN CRANE INDIA, WHICH IS ENGAGED IN MANUFACTURE OF SPECIFIC PRODUCTS, VIZ. CONNECTORS AND SURGE PROTEC TION DEVICES, THE ASSESSEE SUBMITTED THAT HYPERTAC AND POLYPHRASER DI VISIONS WERE IN THE INITIAL STAGES OF LAUNCH, RESULTING IN ADDITIONAL C OSTS OF SELLING AND MARKETING COSTS, TRAVEL COSTS, LEGAL AND PROFESSION AL FEE. THIS OFFICE WAS OF THE OPINION THAT THE SCALES OF OPERATIONS OF THE TWO SEGMENTS VARY AND THE COSTS RELATING TO A PRODUCT IN INITIAL STAGES H AS BEEN SET OFF AGAINST THE PROFITS GENERATED BY A MORE MATURE SEGMENT, GENERAT ING PROFITS. ALSO THE SAME HAS BEEN DISCLOSED AS SEPARATE IN THE FINANCIA LS OF THE ASSESSEE. HENCE A SCN WAS ISSUED TO ASSESSEE PROPOSING TO TES T TWO SEGMENTS INDEPENDENTLY AND AN ADJUSTMENT PROPOSED TO THE INT ERNATIONAL TRANSACTIONS OF THE 'OTHER' SEGMENT ON ACCOUNT OF L OSSES. ON CONSIDERATION OF REPLY OF THE ASSESSEE, THE TPO OBS ERVED THAT THIS OFFICE DOES NOT FIND MERIT IN THE ARGUMENT THAT THE MANUFA CTURING OF THE TWO PRODUCTS NAMELY, INDUSTRY SEALS AND ELECTRIC COMPON ENTS, OF DIFFERENT SCALE OF OPERATIONS AND END USE, CONSTITUTE AN INTE RLINKED TRANSACTION OR A BUNDLE OF PRODUCTS. AS EVIDENT FROM THE EXAMPLES GI VEN IN THE OECD GUIDELINES, SUCH GUIDELINES ARE APPLICABLE FOR AGGR EGATES SUCH AS 4 ITA NOS.621 & 785/MDS/2016 (AY 2011-12) JOHN CRANE SEALING SYSTEMS IND IA PVT. LTD. EQUIPMENTS AND CONSUMABLES. ACCORDINGLY THE TPO TRE ATED 'OTHERS' AS A SEPARATE SEGMENT. CONSIDERING THE ABOVE, THIS PANEL FINDS THE ACTION OF TPO TO TREAT THE ACTIVITIES AS TWO INDEPENDENT SEGMENTS FULLY JUSTIF IED. 3.2 FOR THE REASONS MENTIONED ABOVE THE TPO HAS TO REJECT THE TP STUDY OF ASSESSEE AND INITIATE A FRESH TP STUDY BY SEARCHING FOR THE COMPARABLES IN THE DATA BASE. ELEVEN COMPARABLES WE RE SELECTED BY THE TPO WITH AVERAGE OPERATING MARGIN OF 10.24% AND THE ASSESSEE WAS ISSUED A FRESH SHOW-CAUSE NOTICE. THE OBJECTIONS FI ELD BY THE ASSESSEE WERE CONSIDERED BY THE TPO HOWEVER, THE SAME WERE R EJECTED FOR THE REASONS MENTIONED BY THE TPO AT PAGE 5 OF HIS ORDER . 3.3 THE TPO FOUND THE MARGIN SHOWN BY THE ASSESSEE IN MANUFACTURING SEGMENT AND CAD SEGMENT ARE ACCEPTABLE VIS-A-VIS TH E COMPARABLES AND HE PROCEEDED TO ADJUST THE MARGIN TO DETERMINE ALP ONLY IN 'OTHERS' SEGMENT THAT RESULTED IN AN UPWARD ADJUSTMENT OF RS . 36,93,828. THUS, IT CAN BE SEEN THAT THE ASSESSEE WAS GIVEN DUE OPPORTU NITY, BENCHMARKING DONE AFTER DUE ANALYSIS AND THE TPO HAD JUSTIFICATI ONS FOR THE ACTION HE HAS TAKEN. 3.4 HENCE, CONSIDERING THE ABOVE, THE OBJECTIONS OF THE ASSESSEE CANNOT BE ACCEPTED. THE ORDER BY THE TPO BEING CONFIRMED THUS, THE ASSE SSEE IS IN APPEAL. 4. WE HAVE HEARD THE PARTIES, AND PERUSED THE MATER IAL ON RECORD. THE COMPANY'S OPERATIONS PREDOMINANTLY RELATE TO M ANUFACTURE AND TRADE OF MECHANICAL SEALS AND COUPLINGS (MANUFACTURING AN D RELATED SERVICES). THE ASSESSEE PROVIDES COMPUTER AIDED DESIGN (CAD) AND D RAWING SERVICES (CAD SERVICES) TO THE JOHN CRANE GROUP COMPANIES. IT ALS O MANUFACTURES ELECTRICAL COMPONENTS, NAMELY, CONNECTORS AND SURGE SUPPRESSOR S, PROVIDING RELATED SERVICES (OTHERS). THE PRIMARY REPORTING DISCLOSURE S FOR BUSINESS SEGMENTS, AS ENVISAGED IN ACCOUNTING STANDARD (AS) 17 ON SEGMENT REPORTING, ARE COMPLIED WITH, DISCLOSING ALL THE THREE SEGMENTS. HOW COULD, THEN, WE WONDER, CONNECTORS & SURGE SUPPRESSORS, FALLING UNDER OTHERS, BE CON SIDERED AS PART OF THE MANUFACTURING DIVISION. A REPORTABLE SEGMENT UNDER AS 17 INCLUDES A BUSINESS SEGMENT, WHICH IS BY DEFINITION A DISTINGUISHABLE C OMPONENT OF AN ENTERPRISE, 5 ITA NOS.621 & 785/MDS/2016 (AY 2011-12) JOHN CRANE SEALING SYSTEMS IND IA PVT. LTD. ENGAGED IN PROVIDING AN INDIVIDUAL PRODUCT OR SERVI CE, OR GROUP OF RELATED PRODUCTS AND SERVICES, AND IS SUBJECT TO RISKS AND RETURNS THAT ARE DIFFERENT FROM THOSE OF OTHER BUSINESS SEGMENTS. BEING ELECTRICAL COMPONENTS, STATED TO BE SUPPLIED TO POWER PLANTS, A DIFFERENT CLASS OF CUST OMERS, HOW COULD THEY BE EQUATED WITH MECHANICAL SEALS AND COUPLINGS, I.E., USED IN ENGINEERING INDUSTRY. THE INCONGRUITY THE DIFFERENCE BETWEEN THE ENGINE ERING AND ELECTRICAL INDUSTRY BEING APPARENT AND, IN FACT, ADMITTED INASMUCH AS T HE TWO SEGMENTS ARE REPORTED SEPARATELY UNDER THE SEGMENTAL REPORTING, IS FURTHE R ACCENTUATED BY THE FACT THAT THE ELECTRICAL PRODUCTS AND SERVICES ARE IN THE INITIAL PHASE OF THEIR LAUNCH, BEARING, AS STATED, ADDITIONAL COSTS, PRIMARILY FOR SELLING AND MARKETING. THE ASSESSEE HAS ALSO NOT BEEN ABLE TO FURNISH ANY COGE NT REASON TOWARD REGARDING THE OTHERS DIVISION, REPORTED SEPARATELY UNDER TH E SEGMENTAL REPORTING, PERTAINING TO A DIFFERENT INDUSTRY, SEPARATELY FOR TP (ANALYSIS) PURPOSES. THE PRODUCT CATEGORY IS DECIDEDLY DIFFERENT. THE LD. AU THORIZED REPRESENTATIVE (AR) ALSO COULD NOT, ON BEING QUESTIONED POINTEDLY IN TH E MATTER, FURNISH ANY SATISFACTORY REPLY DURING HEARING. WE, ACCORDINGLY, FIND NO REASON FOR THE OTHERS DIVISION BEING BENCHMARKED SEPARATELY. BE THAT AS IT MAY, WITHOUT DOUBT, THE SCALE OF OPE RATIONS, WHICH TAKES TIME TO STABILIZE, IMPACTS THE PROFITS ADVERSELY IN THE INITIAL STAGES IN-AS-MUCH AS THE OVERHEAD COSTS MAY NOT GET FULLY ABSORBED AT LOWER VOLUMES, RESULTING IN A HIGHER PROPORTION OF SUCH COSTS (TO TURNOVER). IN F ACT, SUCH EXPENDITURE MAY ALSO BE ON A HIGHER SIDE IN THE INITIAL PHASE, I.E., IN ABSOLUTE TERMS. WE, THEREFORE, ONLY CONSIDER IT PROPER THAT THE TNM METHOD, ON WHI CH BASIS THE PROFIT (MARGIN) ON THIS SEGMENT HAS ALSO BEEN TESTED (BY THE TPO), IS DONE BY AVERAGING THE RESULTS OF THE COMPARABLES OVER A PERIOD OF THREE Y EARS, ENDING WITH THE RELEVANT YEAR. THAT IS, BY TAKING THE 3-YEAR WEIGHTED AVERAG E FOR EACH COMPARABLE. SPREADING THE COMPARISON OVER A LARGER PERIOD WOULD OPERATE MORE FAIRLY IN-AS- MUCH AS IT COULD CAUSE TO EVEN OUT THE FLUCTUATIONS OVER TIME, DECREASING THE IMBALANCES AND DIFFERENCES (BETWEEN THE COMPARABLES AND THE TESTED PARTY) THAT 6 ITA NOS.621 & 785/MDS/2016 (AY 2011-12) JOHN CRANE SEALING SYSTEMS IND IA PVT. LTD. MAY ARISE ON ACCOUNT OF VARIATION IN SALES, WHICH A RE BOUND TO OBTAIN WITH TIME, OR FOR DIFFERENCES DUE TO OPERATING AT DIFFERENT PH ASES OF THE ECONOMIC CYCLE. IT MAY BE, WE ARE CONSCIOUS, THAT THE ASSESSEES OWN R ESULTS (FOR THIS DIVISION) MAY NOT OBTAIN FOR THREE YEARS. HOWEVER, IT NEEDS TO BE APPRECIATED THAT WE ARE ADVOCATING A 3 YEAR TIME PERIOD FOR COMPARISON SO A S TO PROVIDE A BROADER FRAMEWORK TO BRING FORTH A MORE REPRESENTATIVE FIGU RE OF THE PROFIT RATIO IN THE SAID INDUSTRY, CONSIDERING THAT THE ASSESSEE IS IN THE INITIAL PHASE OF LAUNCH OF THE SAID PRODUCTS, ENTAILING A HIGHER PROPORTION OF OVE R-HEAD COSTS VIS-A-VIS SALES. IT IS, AFTER ALL, NOBODYS CASE THAT THE SAID INDUSTRY IS EITHER SUFFERING FROM CONTRACTION (UNDER-UTILIZATION), OR OTHERWISE REPOR TING DOWNTURN OR LOSSES. THE BURDEN TO FURNISH AND PRESENT THE DATA BEFORE THE A O/TPO IS ON THE ASSESSEE, WHICH THE REVENUE SHALL VERIFY, ISSUING DEFINITE FI NDINGS OF FACT. TO THIS LIMITED EXTENT, THE MATTER IS THEREFORE RESTORED BACK. WE M AY ALSO CLARIFY THAT WHERE THE DATA ( QUA COMPARABLES) IS NOT AVAILABLE FOR THREE YEARS, AS WHERE IT IS NOT AVAILABLE IN THE PUBLIC DOMAIN, A SHORTER PERIOD MA Y BE SUBSTITUTED, THE PURPORT BEING TO ARRIVE AT AS REPRESENTATIVE A PLI (OF THE COMPARABLES) AS POSSIBLE. WE DECIDE ACCORDINGLY. CORPORATE TAX MATTERS 5. THE FIRST ISSUE IN CORPORATE TAXATION SEGMENT IS THE ASSESSEES CLAIM FOR . 14,03,176/- TOWARD LOSS ON OUTSTANDING DERIVATIVE C ONTRACTS, I.E., IN RESPECT OF FOREIGN EXCHANGE ASSETS. THE SAME HAS BEEN DISALLOW ED BY THE REVENUE AS NOTIONAL AND SPECULATIVE IN NATURE. THE RELIANCE ON THE DECISION IN THE CASE OF CIT V. WOODWARD GOVERNOR INDIA (P.) LTD. [2009] 312 ITR 254 (SC) BY THE ASSESSEE HAS BEEN MET, FINDING THE SAID DECISION AS DISTINGUISHABLE IN-AS-MUCH AS THE SAME IS NOT WITH REGARD TO RESTATEMENT OF FO RWARD CONTRACT AT THE END OF THE FINANCIAL YEAR. 6. WE HAVE HEARD THE PARTIES, AND PERUSED THE MATER IAL ON RECORD. 7 ITA NOS.621 & 785/MDS/2016 (AY 2011-12) JOHN CRANE SEALING SYSTEMS IND IA PVT. LTD. THE ASSESSEES CASE IS BASED ON ACCOUNTING STANDAR D (AS) 11 ISSUED BY ICAI, NOTIFIED U/S. 211(3C) OF THE COMPANIES ACT, 1 956. SUPPORT IS ALSO DRAWN FROM THE DECISION IN WOODWARD GOVERNOR INDIA (P.) LTD. (SUPRA). THE BASIS OF THE REVENUES DENIAL OF THE CLAIM IS THAT THE LOSS IS NOTIONAL, BESIDES BEING SPECULATIVE IN NATURE. THE LOSS, AS STATED, HAS BEE N INCURRED BY THE ASSESSEE IN HEDGING THE FOREIGN EXCHANGE RISK ON ACCOUNT OF FLU CTUATION IN EXCHANGE RATE IN RESPECT OF ITS RECEIVABLES, BEING DENOMINATED IN FO REIGN CURRENCY. NOW, CLEARLY, THE COST OF HEDGING THE EXCHANGE RATE FLUCTUATION R ISK IN RESPECT OF A CURRENT (TRADING) ASSET OR LIABILITY IS REVENUE IN NATURE, I.E., IS ON REVENUE ACCOUNT. AS-11 PRESCRIBES AMORTIZING THE SAID HEDGING COST OR, AS THE CASE MAY BE, GAIN, OVER THE PERIOD OF THE CONTRACT, I.E., (ORDINARILY) TILL THE TIME THE CORRESPONDING ASSET IS REALIZED OR THE LIABILITY IS DISCHARGED. THERE I S NOTHING UNREALIZED ABOUT THE LOSS IN-AS-MUCH AS THE ASSESSEE HAS INCURRED THE HE DGING COST, INCURRING A LIABILITY IN ITS RESPECT. FURTHER, AS THE AMOUNT TO BE REALIZED, OR REQUIRED TO DISCHARGE THE LIABILITY, STANDS CRYSTALLIZED BY VIR TUE OF THE HEDGING CONTRACT, THERE IS NO NEED TO MARK THE FOREIGN EXCHANGE ASSET (OR LIABILITY) TO MARKET. IT IS ONLY IN RESPECT OF SUCH ASSETS/LIABILITIES, CONTRAC TED IN FOREIGN CURRENCY, WHICH ARE OPEN AS ON THE BALANCE SHEET DATE, I.E., HAVE NOT BEEN CLOSED BY CONTRACTING A FIXED EXCHANGE RATE BY ENTERING INTO A FORWARD CONTRACT, SO THAT THE VALUE OF THE SAME THAT MAY BE REALIZED, OR REQUIRED TO DISCHARGE THE SAME, IN TERMS OF THE REPORTING CURRENCY (INR, IN THE INSTAN T CASE), IS UNCERTAIN, THAT THE SAME WOULD REQUIRE BEING RESTATED AT THE CURRENT VA LUE AS AT THE VALUATION (BALANCE SHEET) DATE. WE, THEREFORE, HAVE NO HESITA TION IN HOLDING THAT THE LOSS, TO THE EXTENT IT IS ON THE COST OF HEDGING THE EXPO SURE ON CUSTOMER RECEIVABLES, IS AN ALLOWABLE EXPENSE, ALLOWABLE ON PROPORTIONATE BA SIS, I.E., UP TO THE TIME ELAPSED UP TO THE BALANCE SHEET DATE. THE BALANCE C OST RELATES TO FOLLOWING YEAR/S AND, ACCORDINGLY, SHALL STAND TO BE CLAIMED (OFFERE D AS INCOME) FOR THAT YEAR. THIS, OF COURSE, HAS TO BE FOLLOWED CONTRACT-WISE. THIS WOULD ALSO BE IN CONSONANCE WITH THE MERCANTILE METHOD OF ACCOUNTING . 8 ITA NOS.621 & 785/MDS/2016 (AY 2011-12) JOHN CRANE SEALING SYSTEMS IND IA PVT. LTD. WE HAVE EXPLAINED THAT THE AMOUNT THAT THE ASSESSE E SHALL RECEIVE (OR IS LIABLE TO PAY) AT A FUTURE DATE IS FIXED, HAVING SO LD (BOUGHT) THE FOREIGN CURRENCY AT THE FORWARD RATE, THE VALUE (IN REPORTING CURREN CY) OF THE FOREIGN EXCHANGE ASSET/LIABILITY GETS CRYSTALLISED, OBVIATING THE NE ED TO RESTATE THE SAME (SAY, RECEIVABLES), SO HEDGED, ON THE BASIS OF FOREIGN EX CHANGE RATE AS ON THE BALANCE SHEET DATE (AS, E.G., 31.03.2011). THE LOSS/GAIN, I F ANY, ON SUCH RESTATEMENT HAS THEREFORE TO BE IGNORED. THE ASSESSEE MAY THOUGH RE STATE THE FOREIGN EXCHANGE ASSET/LIABILITY, SINCE CRYSTALLISED, AT THE FORWARD RATE CONTRACTED, AGAIN, SPREADING THE GAIN/LOSS THAT MAY ARISE ON THIS ACCOUNT OVER T HE PERIOD OF THE FORWARD CONTRACT. THERE IS, AGAIN, NOTHING UNREALIZED ABOUT SUCH LOSS/GAIN IN-AS-MUCH AS THE DIFFERENCE BETWEEN THE RATE BOOKED AND THAT CON TRACTED IS BOUND TO BE PAID OR, AS THE CASE MAY BE, RECEIVED BY ASSESSEE AT THE END OF THE CONTRACT PERIOD. OF COURSE, THIS WOULD APPLY ONLY TO THE ASSETS HEDGED BY ENTERING INTO A FORWARD CONTRACT, AND NOT THAT WHICH ARE NOT SO. THE COST/G AIN ON SUCH (UN-HEDGED) ASSETS/LIABILITIES, IN-SO-FAR AS THEY ARE ON REVENU E ACCOUNT, I.E., IN RELATION TO TRADING ASSETS OR LIABILITIES, WOULD BE LIABLE TO B E ALLOWED AS DEDUCTION OR, AS THE CASE MAY BE, INCLUDED AS INCOME FOR THE RELEVANT YE AR. WE MAY NOT DWELL FURTHER ON THIS THE ASPECT OF THE MATTER INASMUCH AS THE IM PUGNED SUM ARISES OUT OF A FORWARD CONTRACT, AND THAT IN FACT IS THE BASIS FOR THE REVENUE TO DISTINGUISH THE DECISION IN WOODWARD GOVERNOR INDIA (P.) LTD. (SUPRA). WE DECIDE ACCORDINGLY. 7. THE NEXT ISSUE IN THE ASSESSEES APPEAL IS IN RE SPECT OF CLAIM FOR PROVISION FOR WARRANTY CLAIMS. THE ASSESSEE EXTENDS WARRANTY ON ITS DIFFERENT PRODUCTS, VIZ. MECHANICAL SEALS, PARTS, SEALING SYSTEMS, COUP LINGS, COUPLING PARTS, CONNECTORS, ETC. THIS WARRANTY IS FOR A PERIOD OF 1 8 MONTHS FROM THE DATE OF SUPPLY OF THE PRODUCT OR 12 MONTHS FROM THE DATE OF ITS COMMISSIONING, WHICHEVER IS EARLIER . DURING THE WARRANTY PERIOD, REPAIR COSTS, INCLUDI NG COST OF REPLACEMENTS, ARE TO BE BORNE BY THE ASSESSEE. TO C OVER THE SAID COSTS, TO BE 9 ITA NOS.621 & 785/MDS/2016 (AY 2011-12) JOHN CRANE SEALING SYSTEMS IND IA PVT. LTD. INCURRED IN FUTURE, BEING IN RESPECT OF CURRENT YEA R SALES, THE ASSESSEE PROVIDES FOR THE SAME AT 1.5% OF THE TOTAL ELIGIBLE SALES (I .E., SALES WHICH CARRY THE WARRANTY) MADE DURING THE YEAR. THE SAID ACCOUNTING POLICY, IT CLAIMS, IS IN ACCORDANCE WITH AS-29 PROVISIONS, CONTINGENT LIA BILITIES AND CONTINGENT ASSETS, NOTIFIED U/S. 211(3C) OF THE COMPANIES ACT . FURTHER, RELIANCE IS ALSO PLACED ON THE DECISION IN ROTORK CONTROLS INDIA (P.) LTD. V. CIT [2009] 314 ITR 62 (SC), WHEREIN THE APEX COURT UPHELD THE PROVISIO N FOR WARRANTY AS A DEDUCTIBLE EXPENDITURE WHERE THE FOLLOWING CONDITIO NS ARE SATISFIED: A) THERE IS A PRESENT OBLIGATION AS A RESULT OF A P AST EVENT; B) THERE IS PROBABLE OUTFLOW OF RESOURCES FOR SETTL ING AN OBLIGATION; AND C) RELIABLE ESTIMATE CAN BE MADE OF THE AMOUNT OF T HE OBLIGATION. ALL THE THREE CONDITIONS ARE CLAIMED TO BE SATISFIE D, SO THAT THE PROVISION FOR WARRANTY, AS CLAIMED, BE ALLOWED. THIS IS THE ASSES SEES CASE. THE MOVEMENT IN THE PROVISION FOR WARRANTY FOR THE CURRENT YEAR IS AS UNDER: (AMO UNT IN .) YEAR ENDING MARCH 31, 2011 2010 OPENING PROVISION 6,146,641 6,061,008 ADD: PROVISION MADE DURING THE YEAR 3,116,597 2,74 5,931 (LESS): EXCESS PROVISION WRITTEN BACK DURING THE PE RIOD - - --------------------------------- 9,263,238 8,806,939 (LESS): UTILISED DURING THE PERIOD (3,893,037) (2,660,298) --------------------------------- CLOSING PROVISION 5,370,201 6,146,641 -------------------------------- THE REVENUES OBJECTION IS THAT NO ANALYSIS, BASED ON EMPIRICAL EVIDENCE, AS TO HOW MUCH PROVISION HAS ACTUALLY BEEN UTILIZED FROM YEAR TO YEAR, STANDS MADE, AND THE ASSESSEE CONTINUES TO CLAIM A FIXED PERCENT AGE (1.5%) OF SALES FROM YEAR TO YEAR. ONLY A PROVISION MADE ON A SCIENTIFIC BASI S, I.E., WHICH HAS A STRONG CORRELATION WITH THAT UTILIZED, WOULD QUALIFY TO BE ALLOWED. THE LD. DRP HAS SOUGHT TO ESTABLISH THIS VARIATION PER THE FOLLOWIN G CHARTS: 10 ITA NOS.621 & 785/MDS/2016 (AY 2011-12) JOHN CRANE SEALING SYSTEMS IND IA PVT. LTD. CHART A: HOW PROVISION SHOULD BE MADE: (AS % AGE OF SALES) YEAR ONE TWO THREE FOUR PROVISION 0.50 0.43 0.45 0.41 ACTUAL CLAIM 0.43 0.45 0.41 0.43 DIFFERENCE 0.07 (0.02) 0.04 (0.02) CUMULATIVE DIFFERENCE 0.07 0.05 0.09 0.07 CHART B : ASSESSEES METHOD: (AS % AGE OF SALES) THE SAME HAS ALSO BEEN REPRESENTED GRAPHICALLY IN I TS ORDER, SO THAT THE DIFFERENCE BETWEEN THE PROVISION MADE AND THAT UTIL IZED THEREFORE KEEPS INCREASING FROM YEAR TO YEAR, LEADING TO A SYSTEMAT IC EVASION OF TAX, AS UNDER: YEAR ONE TWO THREE FOUR PROVISION 0.50 0.50 0.50 0.50 ACTUAL CLAIM 0.43 0.45 0.41 0.43 DIFFERENCE 0.07 0.05 0.09 0.07 CUMULATIVE DIFFERENCE 0.07 0.12 0.21 0.28 11 ITA NOS.621 & 785/MDS/2016 (AY 2011-12) JOHN CRANE SEALING SYSTEMS IND IA PVT. LTD. THE LD. DRP, ACCORDINGLY, DIRECTED THAT THE DIFFER ENCE BETWEEN THE AMOUNT OF TOTAL PROVISION OUTSTANDING (I.E., . 92,63,238/-) AND THE ACTUAL UTILIZATION ( . 38,93,037/-) FOR THE CURRENT YEAR, BE DISALLOWED (ADDED BACK). THE SAME, I.E., . 53,70,201/- WAS ACCORDINGLY INCLUDED BY THE ASSES SING OFFICER (AO) IN COMPUTING THE ASSESSEES BUSINESS I NCOME FOR THE YEAR, SO THAT, AGGRIEVED, THE ASSESSEE IS IN APPEAL. 8. WE HAVE HEARD THE PARTIES, AND PERUSED THE MATER IAL ON RECORD, GIVING OUR CAREFUL CONSIDERATION TO THE MATTER. THE REVENUE, AS WE UNDERSTAND, HAS NOT ASSAILED TH E NEED FOR PROVISIONING IN THE INSTANT CASE, WHICH INDEED CANNOT BE IN-AS-M UCH AS, WITHOUT DOUBT, EXPENDITURE ON REPAIRS, REPLACEMENTS, ETC. IS TO BE , IN CASE OF A CLAIM, INCURRED FOR THE WARRANTY PERIOD, EXTENDING BEYOND THE CURRE NT YEAR; RATHER, EVEN BEYOND THE FOLLOWING YEAR WHERE THE SALES ARE MADE TOWARD THE END OF THE (CURRENT) YEAR. THE QUESTION RAISED AND THE DOUBT EXPRESSED B Y THE REVENUE IS WITH REGARD TO THE QUANTUM OF THE PROVISION, BEING MADE CONSIST ENTLY AT A CONSTANT RATE (OF 1.5% OF SALES), I.E., WITHOUT REFERENCE OR REGARD T O THE CLAIMS ARISING FROM YEAR TO YEAR, RESULTING IN AN ACCUMULATION OF PROVISION, WHICH IS AT . 53.70 LACS AT THE YEAR-END. THE PROVISION TO BE CARRY FORWARD IS ONLY WITH REFERENCE TO THE SALES THAT WOULD BEAR THE WARRANTY, I.E., FOR THE P ERIOD AFTER 31.03.2011, WITH THAT UP TO SEPTEMBER, 2009 HAVING EXHAUSTED THEIR WARRAN TY AND, THUS, NO LONGER COVERED UNDER THE WARRANTY CLAUSE. TO SAY, THEREFOR E, AS DOES THE REVENUE, THAT THE ENTIRE WARRANTY PROVISION OUTSTANDING AS AT THE YEAR-END (31.03.2011) IS IN EXCESS, IS EQUALLY WRONG. WE MAY, IN THIS REGARD, E XHIBIT THE MANNER IN WHICH THE WARRANTY REQUIRED, EVEN RECKONING THE SAME AT 1 .5%, BE COMPUTED: MONTH SALE ( .) WP(1) WP(2) WS PW OCTOBER, 2009 1000 (SAY) APRIL, 2011 UPTO MARCH, 2011 (200) AFTER MARCH, 2011 (800) 800 12 NOVEMBER, 2009 -- -- -- -- -- 12 ITA NOS.621 & 785/MDS/2016 (AY 2011-12) JOHN CRANE SEALING SYSTEMS IND IA PVT. LTD. WP(1) WARRANTY PERIOD AS PER 18 MONTH CONDITION WP(2) WARRANTY PERIOD AS PER 12 MONTH CONDITION WS SALES SUBJECT TO WARRANTY PW PROVISION FOR WARRANTY @ 1.5% THIS EXERCISE IS TO BE CARRIED UP TO MARCH, 2011, A ND WOULD YIELD, AS A RESULT, THE PROVISION REQUIRED TO BE CARRIED OVER AS ON 31.03.2 011, THE YEAR-END, I.E., EVEN GOING BY THE RATE AT WHICH THE PROVISION IS BEING M ADE (1.5%). WHETHER THE SAID RATE IS REASONABLE OR NOT WOULD RE QUIRE A SEPARATE EXERCISE, ENTAILING A COMPARISON OF THE CLAIMS MATU RING OVER (SAY) THE LAST THREE YEARS WITH THE RESPECTIVE SALES, I.E., THE SALES MA DE DURING THE RELEVANT PERIOD FOR WHICH THE CLAIMS HAVE BEEN RECEIVED. WE MAY, AGAIN, FOR THE SAKE OF CLARITY AND BETTER UNDERSTANDING, EXHIBIT THE SAME AS UNDER: MONTH SALE WARRANTY CLAIMS Y1 Y2 Y3 TOTAL APRIL, 2007 1000 (SAY) 5 2 -- 7 MAY, 2007 1100 (SAY) 8 1 -- 9 UPTOMARCH,11 TOTAL PS: Y1/Y2/Y3 REPRESENT THE YEAR OF SALE, THE FOLLOW ING YEAR, AND THE YEAR NEXT. THE WEIGHTED AVERAGE FOR A REASONABLE LONG PERIOD ( 3-4 YEARS) COULD BE TAKEN TO GENERATE A FAIRLY REPRESENTATIVE RATE OF CLAIMS OF WARRANTY THAT MATURE. IN VIEW OF THE FOREGOING, THE MATTER BEING FACTUAL, WE CONS IDER IT PROPER TO RESTORE THIS ISSUE BACK TO THE FILE OF THE AO, TO ALLOW THE ASSE SSEE AN OPPORTUNITY TO ESTABLISH THE EXTENT TO WHICH THE PROVISION AS ON 31.03.2011, ON THE BASIS OF FACTS, COULD BE REGARDED AS REASONABLE. THE RELEVANT INFORMATION BEING WITH THE ASSESSEE, IT SHALL EXTEND FULL COOPERATION IN THE MATTER, FAILIN G WHICH THE AO MAY TAKE DRAW INFERENCES PERMISSIBLE ON THE BASIS OF THE INFORMAT ION AVAILABLE. IT IS OPEN FOR THE PARTIES TO FURTHER IMPROVISE THE WORKING SUGGES TED BY THE TRIBUNAL, WHICH ARE 13 ITA NOS.621 & 785/MDS/2016 (AY 2011-12) JOHN CRANE SEALING SYSTEMS IND IA PVT. LTD. ONLY INDICATIVE. NEEDLESS TO ADD, THE EXCESS WOULD WARRANT AN ADD-BACK, WHICH MAY ALSO BE REFLECT IN ACCOUNTS BY A WRITE BACK OF THE PROVISION. BEFORE PARTING, WE MAY FURTHER ADD, WITHOUT PREJUDI CE, THAT THERE IS NOTHING AMISS IN THE WRITE-BACK OF AN OUTSTANDING P ROVISION, I.E., WHERE IT EXCEEDS THE AMOUNT CLAIMED AS PROVISION FOR THE REL EVANT YEAR. THIS IS AS A PROVISION IS, BY DEFINITION, AN APPROXIMATION, AND IS ACCORDINGLY TO BE REVISITED EACH YEAR IN LIGHT OF THE OBTAINING FACTS AND INFOR MED ESTIMATES DICTATED THEREBY. THE PROVISION TO BE MADE (OR REVERSED) EACH YEAR IS THE ADDITIONAL AMOUNT, IF ANY, THAT MAY BE REQUIRED TO DISCHARGE THE OBLIGATI ON ARISING OUT OF TRANSACTIONS UP TO THE RELEVANT YEAR. THAT WOULD THEREFORE COVER A CASE WHERE NO FURTHER PROVISION IS REQUIRED, AS WHERE THE PROVISION ALREA DY MADE IS SUFFICIENT, OR EVEN IN EXCESS, IN WHICH LATTER CASE, IT SHALL REQUIRE B EING WRITTEN BACK TO THAT EXTENT. WE DECIDE ACCORDINGLY. 9. GROUNDS 1, 3 TO 5, 8, 10 TO 13 OF THE ASSESSEES APPEALS WERE NOT PRESSED, AND HAVE THEREFORE BEEN OMITTED FOR ADJUDICATION. REVENUES APPEAL 10. THE SAME IS DELAYED BY A PERIOD OF 32 DAYS, THE REASON FOR WHICH IS STATED PER AN AFFIDAVIT DATED 03.06.2016 BY THE CONCERNED ASSESSING OFFICER, FILING THE APPEAL MEMO (FORM-36). CONSIDERING THE ENTIRETY OF THE FACTS, WE ARE INCLINED TO ADMIT THE APPEAL, CONDONING THE SAID DELAY. 11. THE ONLY ISSUE ARISING IN THE REVENUES APPEAL IS WITH REGARD TO THE TREATMENT OF THE ROYALTY PAYMENT MADE BY THE ASSESS EE. DURING THE COURSE OF THE ASSESSMENT PROCEEDINGS, THE AO OBSERVED THE ASSESSE E TO HAVE MADE A LUMP SUM PAYMENT OF . 2,68,21,785/- TO JOHN CRANE UK LTD. (JCUK) FOR T ECHNICAL KNOW-HOW LICENSE/S. THE SAME WAS ACCORDINGLY REGARD ED BY HIM AS AN ACQUISITION OF AN ENDURING BENEFIT FOR THE PURPOSES OF ITS BUSINESS AND, ACCORDINGLY, BEING IN THE NATURE OF AN INTANGIBLE A SSET, LIABLE FOR CLAIM OF 14 ITA NOS.621 & 785/MDS/2016 (AY 2011-12) JOHN CRANE SEALING SYSTEMS IND IA PVT. LTD. DEPRECIATION @ 25%, I.E., . 67,05,446/-, WHICH WAS ALLOWED, EFFECTING THUS A NET DISALLOWANCE FOR THE DIFFERENCE, I.E., . 2,01,16,339/-. THE ASSESSEE BEFORE THE LD. DRP CLAIMED THAT IT WAS NEITHER A CASE OF P URCHASE OF A CAPITAL ASSET NOR A CASE OF LUMP SUM PAYMENT. JCUK HAD GRANTED NON EXCL USION LICENSE FOR USE OF ITS IPS FOR MANUFACTURE AND SALE/DISTRIBUTION OF IT S LICENSED PRODUCTS. UNDER THE TERMS OF THE AGREEMENT, THE ASSESSEE IS LIABLE TO P AY ROYALTY AS A PERCENTAGE (5.5%) OF THE NET SALES OF THE LICENSED PRODUCTS MA NUFACTURED AND SOLD/DISTRIBUTED BY THE ASSESSEE, AND WHICH FOR THE RELEVANT YEAR AMOUNTS TO . 268.22 LACS. THE MERE USE OF THE JCUKS IPS, COMPRI SING PATENTS, COPY-RIGHTS, RIGHTS TO INVENTIONS, TRADEMARKS AND SERVICE MARKS, KNOW-HOW, ETC., WOULD NOT AMOUNT TO ACQUIRING A CAPITAL ASSET. RELIANCE WAS P LACED ON A NUMBER OF DECISIONS LISTED AT PARA 7.1 OF THE ORDER U/S. 144C (5) BY THE LD. DRP. THE LD. DRP, ON CONSIDERATION OF THE SAME WAS OF THE VIEW T HAT THE PROVISIONS OF S. 40(A)(I)/40(A)(IA) OF THE ACT WOULD APPLY IN-AS-MUC H AS THE AMOUNT IS A ROYALTY, WHICH, IN TERMS OF S. 91(VI), HAD ACCRUED IN INDIA. THE PROVISION IN FACT HAD BEEN AMENDED RETROSPECTIVELY (W.E.F. 01.06.1976) BY FINA NCE ACT, 2010. THE MATTER WAS ACCORDINGLY RESTORED BACK TO THE FILE OF THE AO WITH THE FOLLOWING DIRECTIONS: 7.1.3 IN VIEW OF ABOVE, THE AO IS DIRECTED TO VERI FY WHETHER THE ASSESSEE HAS COMPLIED WITH THE REQUIREMENTS OF THE PROVISION OF SECTION 194J OF THE IT ACT AS REGARDS PAYMENT OF ROYALTY AN D TO TAKE APPROPRIATE ACTION UNDER SECTION 40(A)(I) IN CASE OF NON-COMPLI ANCE OF THE SAID PROVISION. AGGRIEVED, THE REVENUE IS IN APPEAL, RAISING THE FO LLOWING GROUNDS: 1. THE ORDER OF THE DISPUTE RESOLUTION PANEL IS CO NTRARY TO THE LAW AND FACTS OF THE CASE. 2.1 THE DRP OUGHT TO HAVE APPRECIATED THAT AS PER T HE AGREEMENT ASSESSEE HAS MADE A LUMP SUM PAYMENT TO M/S. JOHN C RANE UK WHICH HAD ENDURING BENEFIT OUT OF THE ROYALTY PAYMENT. 2.2 THE DRP OUGHT TO HAVE APPRECIATED THE DECISION OF THE HON'BLE SUPREME COURT IN THE CASE OF M/S. SOUTHERN SWITCH G EAR LTD. (232 ITR 359). 2.3 THE DRP OUGHT TO HAVE APPRECIATED THE FACT THAT IN THE ASSESSEES 15 ITA NOS.621 & 785/MDS/2016 (AY 2011-12) JOHN CRANE SEALING SYSTEMS IND IA PVT. LTD. OWN CASE FOR EARLIER ASSESSMENT YEARS THE CIT(A) HA D TREATED 25% OF ROYALTY PAYMENTS AS CAPITAL IN NATURE AND THE BALAN CE AS REVENUE. 3. FOR THESE AND OTHER GROUNDS THAT MAY BE ADDUCED AT THE TIME OF HEARING, IT IS PRAYED THAT THE ORDER OF THE LEARNED DRP BE SET ASIDE AND THAT OF THE ASSESSING OFFICER BE RESTORED. 12. WE HAVE HEARD THE PARTIES, AND PERUSED THE MATE RIAL ON RECORD. THE ASSESSEES CASE; IN FACT, THAT OF BOTH THE PARTIES BEFORE US, IS THAT THE ISSUE STANDS COVERED BY THE DECISION BY THE TRIBUNAL FOR EARLIER YEARS, I.E., DATED 17/11/2016, FOR AYS. 2008-09 TO 2010-11 (IN ITA NOS. 1885 TO 18 88/MDS /2015), COPY OF WHICH WAS PLACED ON RECORD. THE TRIBUNAL WAS OF THE VIEW THAT THE DECISION BY THE HONBLE JURISDICTIONAL HIGH COURT IN SOUTHERN SWITCH GEAR LTD. V. CIT [1984] 148 ITR 272 (MAD) IS APPLICABLE IN THE FACTS AND CIRCUMSTANCES OF THE CASE. ACCORDINGLY, 25% OF THE ROYALTY WAS TREATED A S CAPITAL EXPENDITURE, AND THE BALANCE 75% AS ON REVENUE ACCOUNT (REFER PARAS 6.1 TO 6.6 OF ITS ORDER). THE DECISION IN SOUTHERN SWITCH GEAR LTD. (SUPRA) STANDS AFFIRMED BY THE HONBLE COURT IN SOUTHERN SWITCH GEAR LTD. V. CIT [1998] 232 ITR 359 (MAD), CITED BY AND RELIED UPON BY THE REVENUE BEFORE US. WE, ACCOR DINGLY, HAVE NO HESITATION IN, ADOPTING THE SAID DECISION, CLARIFYING THAT THE AOS DECISION IN TREATING THE ENTIRE ROYALTY PAYMENT AS CAPITAL EXPENDITURE WOULD STAND CONFINED TO ONLY 25% THEREOF. SIMILARLY, THE DECISION OF THE LD. DRP, TR EATING THE ENTIRE AMOUNT AS REVENUE, ALSO STANDS UPHELD TO THE EXTENT OF 75% TH EREOF. THAT IS, THE ACTION OF BOTH THE AO/DRP STANDS CONFIRMED IN PART. THE AO SH ALL, CONSEQUENTLY, RESTRICT THE CLAIM FOR DEPRECIATION WITH REFERENCE TO 25% OF THE IMPUGNED SUM. FOR THE BALANCE 75%, THE DECISION BY THE LD. DRP SHALL HOLD , SO THAT THE APPLICABILITY OR OTHERWISE, IN THE FACTS AND CIRCUMSTANCES THE CASE, OF SECTION 40(A)(I), WOULD HAVE TO BE EXAMINED BY THE AO. WE STATE SO INASMUCH AS WE OBSERVE NO FINDING BY THE AO IN THE MATTER. THE ORDER BY THE TRIBUNAL IS ALSO SILENT ON THIS ASPECT OF THE MATTER, AND NEITHER HAS THE ASSESSEE DISPUTED T HE RELEVANT FINDING BY THE LD. DRP, EITHER PER ITS APPEAL OR EVEN OTHERWISE BEFORE US. OF COURSE, THE PAYMENT 16 ITA NOS.621 & 785/MDS/2016 (AY 2011-12) JOHN CRANE SEALING SYSTEMS IND IA PVT. LTD. BEING TO A NON-RESIDENT (JCUK), THE SAME SHALL HAVE TO BE EXAMINED W.R.T. SEC.195, AND REFERENCE TO S. 194J BY THE LD. DRP IS CLEARLY A MISTAKE. WE, ACCORDINGLY, ONLY CONSIDER IT PROPER THAT THE MATTE R IN RESPECT OF THE APPLICABILITY (OR OTHERWISE) OF SECTION 40(A)(I) IN THE FACTS AND CIRCUMSTANCES CASE FOR THE BALANCE 75% OF THE ROYALTY ALLOWED BY THE ASSESSEE TO JOHN CRANE UK, IS RESTORED TO THE FILE OF THE AO FOR ADJUDICATION AFR ESH IN ACCORDANCE WITH LAW, AND AFTER AFFORDING A REASONABLE OPPORTUNITY OF HEA RING TO THE ASSESSEE. LEST WE BE CONSTRUED AS HAVING, IN SO DIRECTING, TRAVELLED OUTSIDE OUR AMBIT, DRAW REFERENCE TO THE FOLLOWING DECISIONS REGARDING THE SCOPE OF THE POWERS OF THE TRIBUNAL, RENDERED IN DIFFERENT FACT SETTINGS: KAPURCHAND SHRIMAL V. CIT [1981] 131 ITR 451 (SC); HUKUMCHAND MILLS LTD V. CIT [1967] 63 ITR 232 (SC); CIT V. C.C.C. HOLDINGS [2003] 260 ITR 433 (MAD); CIT V. INDIAN EXPRESS (MADURAI) PVT. LTD. [1983] 140 ITR 705 (MAD); THANTHI TRUST V. ASST. CIT [1999] 238 ITR 117 (MAD); AHMEDABAD ELECTRICITY CO. LTD. V. CIT [1993] 199 ITR 351(BOM-FB); CONTROLLER OF ESTATE DUTY V. R.BRAHADEESWARAN [1987] 163 ITR 680 (MAD); CIT V. CELLULOSE PRODUCTS OF INDIA LTD . [1985] 151 ITR 499 (GUJ-FB). WE DECIDE ACCORDINGLY. 13. IN THE RESULT, BOTH THE ASSESSEES AND REVENUE S APPEALS ARE PARTLY ALLOWED. ORDER PRONOUNCED ON SEPTEMBER 15, 2017 AT CHENNAI . SD/- SD/- ( ! ' . # ) (DUVVURU RL REDDY) $ /JUDICIAL MEMBER ( ) (SANJAY ARORA) /ACCOUNTANT MEMBER /CHENNAI, 3 /DATED, SEPTEMBER 15, 2017 EDN 4 - /$156 76)1 /COPY TO: 1. *+ /APPELLANT 2. /0*+ /RESPONDENT 3. 81 ( )/CIT(A) 4. 81 /CIT 5. 69: /$1$ /DR 6. : ( ; /GF