DCIT 1(1), MUMBAI V. CABOT INDIA LTD, MUMBAI

ITA 857/MUM/2010

• Counselvise Citation: 85719914 RSA 2010
• Duration Of Justice: 1 year(s) 3 month(s) 26 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-05-2011
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: L
• Next Hearing Date: 29-03-2011
• Assessment Year: 2005-2006
• Appeal Filed On: 04-02-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Assessee Lawyers: SHRIM M GOLAVALA
• Keywords: Depreciation; Transfer pricing; International transaction; Rule of consistency; Revenue expenditure; Capital expenditure
• Section: 143(3); 32; 37; 263

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH L, MUMBAI BEFORE SHRIP.M.JAGTAP, ACCOUNTANT MEMBER &SHRI N.V. VASUDEVAN, JUDICIAL MEMBER. I.T.A. NO. 6622/MUM/2009. ASSESSMENT YEAR : 2005-06. AND C.O.NO.170/MUM/2010 (IN ITA NO. 6622/MUM/2009) ASSESSMENT YEAR : 2005-06. M/S CABOT INDIA LTD., DY. COMMISSIONER OF INCOME-TAX C/O KALYANIWALLA&MISTRY, VS . 1(1), MUMBAI. ARMY &NEVY BLDG., 3 RD FLOOR, 148, MAHATMA GANDHI ROAD, FORT, MUMBAI-400 001. PAN AAACU1414F APPELLANT/CROSS OBJECTOR. RESPONDENT. AND I.T .A. NO.857/MUM/2010 ASSES SMENT YEAR : 2005-06. DY. COMMISSIONER OF INCOME-TAX, M/S CABOT INDIA LTD. 1(1), MUMBAI. VS. MUMBAI. APPELLANT. RESPONDENT. ASSESSEE BY : SHRIM.M.GOLAVALA. DEPARTMENTBY : SMT. MALATHI R. SRIDHARAN. ITA NO.6622/MUM/2009 ITA NO.857/MUM/2010& C.O. NO. 170/MUM/2020 2 O R D E R PER P.M. JAGTAP, A.M. : THESE TWO APPEALS, ONE FILED BY THE ASSESSEE BEING ITA NO. 6622/MUM/2009 AND OTHER FILED BY THE REVENUE BEING ITA NO. 857/MU M/2010, ARE CROSS APPEALS WHICH ARE DIRECTED AGAINST THE ORDER OF LEARNED CIT (APPEALS)-15, MUMBAI DATED 23-11-2009 AND THE SAME ARE BEING DISPOSED OF BY TH IS SINGLE COMPOSITE ORDER ALONG WITH THE CROSS OBJECTION FILED BY THE ASSESSE E BEING C.O. NO. 170/MUM/2010. 2. AT THE TIME OF HEARING BEFORE US, GROUND NO.4 RA ISED IN THE APPEAL OF THE ASSESSEE CLAIMING BENEFIT OF VARIATION TO THE EXTEN T OF (+/ -) 5% IN RESPECT OF TRANSFER PRICING ADJUSTMENT HAS NOT BEEN PRESSED BY THE LEARNED COUNSEL FOR THE ASSESSEE. THE SAME IS ACCORDINGLY DISMISSED AS NOT PRESSED. 3. THE COMMON ISSUE RAISED IN THE REMAINING GROUNDS OF THE ASSESSEES APPEAL AS WELL AS GROUND NO.2 OF THE REVENUES APPEAL RELA TES TO THE ADDITION OF RS.2,06,48,218/- MADE BY THE AO ON ACCOUNT OF TRANS FER PRICING ADJUSTMENT WHICH HAS BEEN SUSTAINED BY THE LEARNED CIT(APPEALS) TO T HE EXTENT OF RS.1,37,65,579/-. 4. THE ASSESSEE IN THE PRESENT CASE IS A COMPANY IN CORPORATED IN INDIA WHICH IS ENGAGED IN THE BUSINESS OF MANUFACTURING OF CARBON BLACK. M/S CABOT CORPORATION, BOSTON, USA (THE PARENT AE) IS HOLDING 60% SHARES O F THE ASSESSEE COMPANY. DURING THE YEAR UNDER CONSIDERATION, THE ASSESSEE C OMPANY ENTERED INTO INTERNATIONAL TRANSACTIONS WITH ITS VARIOUS ASSOCIA TED ENTERPRISES (AES) INCLUDING PAYMENT OF ROYALTY AMOUNTING TO RS.5,62,67,879/- MA DE TO CABOT CORPORATION, USA. THE ASSESSEE COMPANY HAD ENTERED INTO A FOREIG N TECHNOLOGY COLLABORATION AGREEMENT WITH CABOT CORPORATION, USA DATED DECEMBE R 19,1990 FOR ITA NO.6622/MUM/2009 ITA NO.857/MUM/2010& C.O. NO. 170/MUM/2020 3 MODERNIZATION OF CARBON BLACK PLANT UNDER ENERGY CO NSERVATION SCHEME. AS PER THE SAID AGREEMENT, ROYALTY WAS PAYABLE AT THE RATE OF 2% ON THE DOMESTIC SALES. THE SAID AGREEMENT WAS RENEWED IN APRIL, 1998 WHERE BY THE RATE OF ROYALTY PAYABLE BY THE ASSESSEE WAS RETAINED AT 2%. A SUPPL EMENTARY AGREEMENT, HOWEVER, WAS ENTERED INTO ON 19-01-1999 WHEREBY THE RATE OF ROYALTY FOR TRADE GRADE OF THE PRODUCT MANUFACTURED BY THE ASSESSEE WAS INCREASED TO 3%. ANOTHER AGREEMENT WAS ENTERED INTO ON 3 RD JULY, 2004 WHEREBY THE RATE OF ROYALTY PAYABLE BY THE ASSESSEE TO CABOT CORPORATION WAS INCREASED TO 5% O N CARCASS PRODUCT WHEREAS THE RATE OF ROYALTY OF TRADE GRADE PRODUCT WAS RETA INED AT 3%. THE INCREASE IN THE RATE OF ROYALTY ON CARCASS PRODUCT WAS MADE EFFECTI VE FROM NOVEMBER 27, 2003. ACCORDINGLY A TOTAL ROYALTY PAYMENT OF RS.5,62,67,8 60/- WAS MADE BY THE ASSESSEE TO CABOT CORPORATION IN THE YEAR UNDER CONSIDERATIO N, THE DETAILS OF WHICH ARE AS UNDER : GRADE AMOUNTS (RS) CARCASS (5%) 2,66,19,453 TRADE (3%) 2,25,15,217 4,91,34,670 ADD : R&D CESS 24,56,733 5,15,91,403 ADD: SHORT PROVISION FOR PRECEDING YEAR 46,76,457 TOTAL 5,62,67,860 ======== 5. IN ITS TRANSFER PRICING STUDY/ANALYSIS, THE PAYM ENT OF ROYALTY MADE TO CABOT CORPORATION, USA AS ABOVE WAS CLAIMED TO BE AT ARM S LENGTH BY THE ASSESSEE ITA NO.6622/MUM/2009 ITA NO.857/MUM/2010& C.O. NO. 170/MUM/2020 4 COMPANY ON THE BASIS OF COMPARABLE UNCONTROLLED PRI CE (CUP) METHOD ADOPTED BY IT. WHEN THIS MATTER RELATING TO COMPUTATION OF ARMS LENGTH PRICE IN RELATION TO THE INTERNATIONAL TRANSACTIONS WAS REFERRED BY THE AO TO THE TPO U/S 92CA(1), THE TPO NOTED FROM THE SUPPLEMENTARY AGREEMENT DATED 3 RD JULY, 2004 THAT NO REASONS WERE SPECIFICALLY ASSIGNED FOR THE ENHANCED ROYALTY RATE OF 5% AGREED TO BE PAID BY THE ASSESSEE TO CABOT CORPORATION FOR CARCASS PRODU CT. ON PERUSAL OF THE SAID AGREEMENT, HE ALSO NOTED THAT THERE WAS NO CHANGE I N THE TERMS OF TECHNOLOGY THAT WAS BEING SUPPLIED BY CABOT CORPORATION, USA TO THE ASSESSEE COMPANY AND THE ONLY REASON GIVEN FOR INCREASING THE RATE OF ROYALT Y WAS NEW REGULATIONS WITH REGARD TO APPROVAL FOR PAYMENT OF ROYALTY UNDER AUT OMATIC ROUT. HE, THEREFORE, REQUIRED THE ASSESSEE TO EXPLAIN THE INCREASE IN TH E RATE OF ROYALTY PAYABLE ON THE CARCASS GRADE OF PRODUCTS TO 5% AS AGAINST 2% AGREE D EARLIER. IN REPLY, AN ELABORATE SUBMISSION WAS MADE ON BEHALF OF THE ASSESSEE JUSTI FYING THE SAID INCREASE ON VARIOUS GROUNDS. THE SAID SUBMISSION WAS CONSIDERED AND DISCUSSED BY THE TPO IN RESPECT OF EACH AND EVERY MATERIAL POINT RAISED BY THE ASSESSEE GIVING HIS FINDING THEREON IN PARAGRAPH NO. 5.1.3 OF HIS ORDER AS UNDE R : (A) THE ASSESSEE HAS ENTERED INTO AN AGREEMENT WITH THE ARS FOR TRANSFER OF TECHNOLOGY ON AN ON-GOING BASIS. THE COLLABORATI ON AGREEMENT DATED 7 TH AUGUST, 1990 WAS APPROVED BY THE RESERVE BANK OF I NDIA. THERE IS NO CHANGE IN THE TERMS OF THE AGREEMENT GO VERNING THE FLOW OF TECHNOLOGY / KNOW-HOW ETC., WHICH THE AE WAS TO PROVIDE TO THE ASSESSEE. ALL THE SUBSEQUENT AGREEMENTS ENTERED BET WEEN THE ASSESSEE AND THE AE ARE BY WAY OF SUPPLEMENTARY AGREEMENT, W HEREIN ONLY THE OPERATING PART IN RESPECT OF THE RATE OF ROYALTY PA YABLE BY THE RECIPIENT OF THE TECHNOLOGY TO THE PROVIDER OF THE TECHNOLOGY IS ALTERED. THERE IS NO ALTERATION IN THE SCHEME OF SERVICES / BENEFITS WHICH ARE INTENDED TO BE PROVIDED BY THE AE TO THE ASSESSEE. THAT THE AE IS A WORLD LEADER IN THE MANUFACTURING CARBON BLACK IS NOT CHALLENGED HERE. IT IS BECAUSE OF THE TECHNOLOGICAL ADVANTAGE ENJOYED BY THE PAREN T (AE) THAT THE ASSESSEE IS ABLE TO CATER TO THE GROWING INDIAN MAR KET. THE INDIAN ITA NO.6622/MUM/2009 ITA NO.857/MUM/2010& C.O. NO. 170/MUM/2020 5 COMPANY IS ALMOST FULLY HELD (97.54%) BY THE PARENT COMPANY. NOTHING HAS BEEN BROUGHT ON RECORD, WHICH GOES TO S UGGEST THAT THE AE HAS TRANSFERRED OR HAD INTENDED TO TRANSFER TECH NOLOGY / KNOW-HOW OVER AND ABOVE THE ONE STIPULATED IN AGREEMENT DATE D AUGUST, 1990. (B) THE ASSESSEE HAS TAKEN THE CONTENTION THAT MAJO R IMPROVEMENT ACTIVITY WAS STARTED IN THE CARCASS UNIT BECAUSE OF WHICH TH E QUALITY OF THE PRODUCT INCREASED, VARIABILITY GOT DECREASED, ETC. THE ASSESSEE HAS GIVEN FIGURES PERTAINING TO MARCH, 2003 TO MARCH, 2 006 IN SUPPORT OF THE IMPROVEMENT RECORDED IN THE MANUFACTURING OF TH E PRODUCT AS A RESULT OF THE TECHNOLOGICAL SUPPORT RECEIVED FROM A E. IN THIS REGARD, IT MAY BE POINTED OUT THAT ALL THESE STRIDES RECORDED BY THE ASSESSEE VERY MUCH FORMED THE PART OF THE TECHNOLOGICAL AGREEMENT ALREADY ENTERED BY THE ASSESSEE WITH THE AE IN THE YEAR 1990. THERE IS NOTHING IN THE SUPPLEMENTARY AGREEMENT, WHICH IS ENABLING THE ASSE SSEE TO RECORD BETTER PERFORMANCE. THE SUPPLEMENTARY AGREEMENT IS ONLY ENHANCING THE RATE OF ROYALTY PAYABLE TO THE AE. THE TECHNOLO GY THAT IS BEING TRANSFERRED IS ON CONTINUOUS BASIS AND IS GOVERNED BY THE CLAUSES OF THE TECHNOLOGICAL COLLABORATION AGREEMENT INITIALLY ENTERED IN THE YEAR 1990WHICH GOT RENEWED IN THE YEAR 1998. (C) THE ASSESSEE HAS ALSO TAKEN THE ARGUMENT THAT T HE PARENT, NAMELY CABOT CORPORATION, USA IS ENGAGED IN SIGNIFICANT R & D ACTIVITY FOR ITS PLANT LOCATED IN MASSACHUSETTS AND TEXAS. THE A DVANCES IN PRODUCT AND PROCESS DEVELOPMENTS ARE PASSED ON TO THE SUBSI DIARIES. IT IS ALSO CONTENDED BY THE ASSESSEE THAT FOR THE F.Y. ENDING SEPT. 2004 CABOT CORPORATION HAD SPENT USD 53 MILLIONS, WHICH GOT IN CREASED TO USD 59 MILLIONS FOR THE YEAR ENDING SEPT.,2005. ACCORDI NG TO THE ASSESSEE, THE R & D TO SALES RATIO OF THE AE WORKS OUT TO BE 2.8%. THE ASSESSEE HAS GIVEN THE ACCOUNTS OF THE AE IN SUPPORT OF THE CONTENTION TAKEN. ON PERUSAL OF THE ACCOUNTS OF THE AE, IT IS SEEN TH AT THE AMOUNTS SEPNT BY CABOT CORPORATION FOR THE YEAR ENDING SEPT., 200 3 WAS USD 64 MILLIONS, A FACT, WHICH HAS BEEN CONVENIENTLY IGNOR ED BY THE ASSESSEE WHILE MAKING A CASE FOR ITSELF. THAT THE AE OF THE ASSESSEE IS INDULGING INTO SUBSTANTIAL R & D IS NOT CHALLENGED HERE. WHAT IS CHALLENGED HERE IS THE RATE OF HIGHER ROYALTY THAT THE ASSESSEE MUST PAY TO THE AE FOR RECEIVING THE SAME TECHNOLOGICAL SERV ICES. NO CASE HAS BEEN MADE BY THE ASSESSEE WITH REGARD TO THE HIGHER RECOVERIES THAT ITA NO.6622/MUM/2009 ITA NO.857/MUM/2010& C.O. NO. 170/MUM/2020 6 ARE WARRANTED TO BE MADE BY THE PARENT FROM THE SUB SIDIARIES WORD- WIDE IN ORDER TO COMPENSATE FOR CONTINUED R & D ACT IVITIES. (D) THE ASSESSEE HAS ALSO SUBMITTED THAT IT IS LIKE LY TO GET BENEFITED IN FUTURE FROM THE RESEARCH AND DEVELOPMENT UNDER-TAKE N BY THE AE. THE CONTENTION TAKEN BY THE ASSESSEE DESERVES TO BE REJECTED ON THE FACE OF ITSELF. THE SUBJECTIVE ASSESSMENT OF THE FU TURE BENEFIT CANNOT BE THE ARGUMENTS FOR ENHANCED RATE OF ROYALTY THAT THE ASSESSEE NEEDS TO PAY, OVER AND ABOVE WHAT IT IS GETTING WITHIN TH E CONFINES OF THE AGREEMENT ALREADY IN EXISTENCE. THE FUTURE BENEFIT, IN ANY CASE, WOULD HAVE ACCRUED TO THE ASSESSEE, HAD THE RATE OF ROYAL TY BE NOT REVISED FROM 2% TO 5%. THERE IS NOTHING ON RECORD THAT GOES TO SUGGEST THAT THE FUTURE BENEFITS OF THE TECHNOLOGY LIKELY TO BE RECEIVED FROM THE AE WOULD NOT HAVE ACCRUED TO THE ASSESSEE WITHOUT THE PAYMENT OF HIGHER RATE OF ROYALTY. ON THE CONTRARY, IT IS SURPRISING THAT THE PAYMENT OF ROYALTY AT A HIGHER RATE IS SOUGHT TO BE JUSTIFIED BY THE ASSESSEE WHEN THE PROFITS OF THE ASSESSEE ARE DECLINING. THE OPER ATING PROFILE OF THE ASSESSEE IS WORTH NOTING IN THIS REGARD. ITEM YEAR I A.Y. 03-04 (IN CRORES) YEAR II A.Y. 04-05 (IN CRORES) YEAR III A.Y. 05-06 (IN CRORES) TURNOVER 148.77 153.72 145.87 GROSS PROFIT 26.74 15.11 0.28 OPERATING PROFIT 12.46 1.17 (17.04) NET PROFIT 8.62 0.93 (10.68) TOTAL COST 137.51 153.06 164.09 GP/SALES % 18 9.83 0.19 NP/SALES % 6 0.60 (07.32) OP/SALES % 8 1.15 (11.68) OP/TC % 9 1.16 (10.38) AS IS EVIDENT FROM THE ABOVE, DURING THE LAST 3 YEA RS THE TURNOVER OF THE ASSESSEE HAS HARDLY CHANGED (ON THE CONTRARY, I T HAS DECLINED FROM RS.148.7 CRORES IN A.Y. 2003-04 TO RS.146.77 CRORES IN A.Y. 2005- 06). THE TOTAL COSTS OF THE ASSESSEE HAVE INCREASED FROM RS.137 CRORES IN THE A.Y. 2003-04 TO RS.164 CRORES IN THE A.Y. 20 05-06. THE ITA NO.6622/MUM/2009 ITA NO.857/MUM/2010& C.O. NO. 170/MUM/2020 7 OPERATING PROFITS OF THE ASSESSEE HAVE GONE DOWN SH ARPLY DURING THIS PERIOD. IN FACT, DURING THE YEAR IN QUESTION, THE A SSESSEE IS MAKING OPERATING LOSSES. THE BUSINESS MAY MAKE PROFITS OR LOSSES AS A RESULT OF ACQUISITION OF TECHNOLOGY, BUT WHEN A CONTENTION IS TAKEN WITH REGARD TO THE BETTER PERFORMANCE AND PRODUCTIVITY A CHIEVED BY THE ASSESSEE AS A RESULT ACQUISITION OF SUCH TECHNOLOGY , THEN THE CONTENTION TAKEN CANNOT STAND IN TOTAL DISREGARD TO THE PERFOR MANCE ON RECORD. THE CONTRADICTION BETWEEN THE CONTENTION TAKEN BY T HE ASSESSEE WITH REGARD TO THE HIGHER PRODUCTIVITY AND THE PERFORMAN CE ACHIEVED AS A RESULT OF HIGHER ROYALTY PAYMENTS CANNOT BE MORE AP PARENT. ACCORDINGLY, THE CONTENTION TAKEN BY THE IS REJECTE D. (E) THE ASSESSEE HAS SUBMITTED A CHART FOR THE ROYA LTY CHARGED BY THE AE FROM OTHER COUNTRIES. AS PER THE CHART SUBMITTED BY THE ASSESSEE, THE ROYALTY PAID AT A RATE OF 5% WEIGHS FAVOURABLY TO T HE RATE PAID BY THE SUBSIDIARIES IN AUSTRALIA, INDONESIA ETC.IN THIS RE GARD, IT MUST BE APPRECIATED HAT THE ASSESSEE IS USING A CUP METHOD FOR BENCH- MARKING THIS TRANSACTION. ACCORDINGLY, ONE CONTROLL ED TRANSACTION CANNOT BE COMPARED WITH ANOTHER CONTROLLED TRANSACT ION. BESIDES, THE GEOGRAPHIC AND ECONOMIC DIFFERENCES PREVAILING IN O THER COUNTRIES HAVE TO BE CONSIDERED WHILE EXAMINING THEM ON THE B ASIS OF CUP METHOD. EVEN SO, THE ASSESSEE HAS NOT PROVIDED SUFF ICIENT INFORMATION IN RESPECT OF THE ROYALTY CHARGED BY THE AE FROM IT S SUBSIDIARIES LOCATED IN THE ASIA PACIFIC REGION. AS PER HE CHART GIVEN, THE RATE OF ROYALTY OBTAINABLE IN CASE OF MALAYSIA IS 3.5% WHIC H IS FAR LESS THAN BEING PAID BY THE ASSESSEE AT A RATE OF 5%. ACCORDI NGLY, THE CONTENTION TAKEN BY THE ASSESSEE IS REJECTED ON THIS COUNT ALS O. (F) THE ASSESSEE HAS FURTHER SUBMITTED THAT THE DAT A CULLED FROM THE WEBSITE OF SIA WITH REGARD TO THE APPROVAL GIVEN BY THE GOVT. OF INDIA FOR PAYMENT OF ROYALTY IN CHEMICAL INDUSTRY JUSTIFY THE PAYMENT OF ROYALTY TO THE AE AT THE RATE AGREED FOR THIS YEAR. THE ASSESSEE HAS SUBMITTED THAT FOR THIS INDUSTRY, THE APPROVED RATE OF ROYALTY RANGES FROM 3% TO 8% OF SALES. AS THE ROYALTY PAID AT A RA TE OF 5% VERY MUCH FALLS WITHIN THIS RANGE, THEREFORE, AS PER CUP METH OD THE SAME SHOULD SAID THROUGH TO BE CONSIDERED TO BE AT ARMS LENGTH . THE FALLACY IN THE ARGUMENT OF THE ASSESSEE IS QUITE BIZARRE: FOR, (I) THE DATA PICKED UP FOR COMPARISON IS NOT CONTEMPORANEOUS AS ALL THE FI GURES ARE PERTAINING TO THE YEAR 2000, 2001 & 2002. DURING TH ESE YEARS, THE RATE ITA NO.6622/MUM/2009 ITA NO.857/MUM/2010& C.O. NO. 170/MUM/2020 8 OF ROYALTY PAID BY THE ASSESSEE COULD BE CONSIDERED TO BE COMPARABLES TO THE APPROVED RATES OF SIA THEASSESSEE IS SEEKING TO COMPARE THE HIGHER RATE OF ROYALTY PAYABLE FOR THIS YEAR AGAINS T THE ROYALTY PAYABLE BY THE OTHER COMPANIES IN THE EARLIER YEARS. (II) M OST OF THE ROYALTY PAYABLE BY THE INDIAN COMPANIES IS TO THEIR OVERSEA S PARENT, WHICH IS IN THE NATURE OF CONTROLLED TRANSACTIONS AND CANNOT BE BENCH-MARKED WHILE APPLYING CUP METHOD. (III) THE DATA ITSELF IS INSUFFICIENT AND FAILS TO PROVIDE ANY BASIS TO THE PRICE SETTING MEC HANISM WHEREBY THE REQUIREMENT OF THE BUSINESS MANDATED PAYMENT OF ROY ALTY AT A HIGHER RATE FOR THE TECHNOLOGY / KNOW-HOW SOUGHT TO BE REC EIVED BY THE ASSESSEE BY ENTERING INTO A SUPPLEMENTARY AGREEMENT TO THAT EFFECT. IN VIEW OF THIS, THE ARGUMENT OF THE ASSESSEE IS REJEC TED. (G) THE ASSESSEE HAS FURTHER SUBMITTED THAT IN THE POST LIBERALIZATION ERA IN THE COUNTRY, THE BARRIERS OF THE INDUSTRY INSULATIO NS ARE GETTING BROKEN. THE ASSESSEE HAS SUBMITTED THAT IF THE SAME TECHNOL OGIES WERE TO BE ACQUIRED FROM AN OUTSIDER IT WOULD HAVE CHARGED NOT LESS THAN 10% OF THE FEES. THE ARGUMENT OF THE ASSESSEE IS HYPOTHETI CAL IN NATURE. IT DEFIES THE BASIC PRINCIPLE OF TRANSFER PRICING. TRA NSFER PRICING IS ALL ABOUT CONSIDERING THE CONTROLLER TRANSACTIONS OF AN ASSESSEE WITH ITS AES WITH THE UNCONTROLLED TRANSACTIONS, OF INDEPEND ENT PARTIES. THERE IS NOTHING HYPOTHETICAL ABOUT IT. IF, SUFFICIENT DA TA REGARDING THE UNCONTROLLED TRANSACTION IS NOT OBTAINABLE OR IS NO T RELIABLE ENOUGH, THEN A DIFFERENT METHOD AS PROVIDED IN THE ACT HAS TO BE CONSIDERED TO DETERMINE THE ARMS LENGTH NATURE OF THE TRANSACTIO NS. THE LIBERALIZED REGIME ENABLES THE COMPANIES TO HAVE ACCESS TO VARI OUS TECHNOLOGIES AND MAKE PAYMENTS FOR THEM, WHICH WERE RESTRICTED S O FAR. BUT IT CANNOT BE AN ARGUMENT FOR MAKING HIGHER PAYMENT FOR RECEIVING THE SAME SERVICE. THE ASSESSEE HAS FAILED TO ESTABLISH THAT IT HAS RECEIVED A TECHNOLOGICAL BENEFIT, OVER AND ABOVE, THE AGREEMEN T ENTERED WITH THE AE IN THE YEAR 1990 AND 1998, SO AS TO CALL FOR A H IGHER RATE OF ROYALTY IN THE YEAR IN QUESTION. INDEED, THE ONLY REASON FO R MAKING PAYMENT OF ROYALTY AT A RATE HIGHER THAN THE PREVAILING RATE T HAT ONCE CAN MAKE OUT FROM A READING OF THE SUPPLEMENTARY AGREEMENT IS TH E LIBERALIZATION REGIME OF THE ECONOMY RATHER THAN ANY HITHERTO UNEX TENDED SERVICE TO BE RENDERED BY THE AE TO THE ASSESSEE. ITA NO.6622/MUM/2009 ITA NO.857/MUM/2010& C.O. NO. 170/MUM/2020 9 IN VIEW OF THE ABOVE DISCUSSION, THE EXPLANATION OF FERED BY THE ASSESSEE JUSTIFYING INCREASE IN THE RATE OF ROYALTY OF CARCASS GRADE OF PRODUCTS WAS NOT ACCEPTED BY THE TPO AND ADOPTING THE RATE OF ROYALTY AT 2% ON THE S AID PRODUCT AS ARMS LENGTH PRICE, HE HELD THAT THE ROYALTY PAID BY THE ASSESSE E IN EXCESS OF 2% WAS LIABLE TO BE DISALLOWED. ON THE BASIS OF TPOS REPORT, ADDITION OF RS.2,06,48,218/- WAS MADE BY THE AO TO THE TOTAL INCOME OF THE ASSESSEE ON AC COUNT OF TRANSFER PRICING ADJUSTMENT IN THE ASSESSMENT COMPLETED U/S 143(3) V IDE AN ORDER DATED 22-12- 2008. 6. AGAINST THE ORDER PASSED BY THE AO U/S 143(3), A N APPEAL WAS FILED BY THE ASSESSEE BEFORE THE LEARNED CIT(APPEALS) CHALLENGIN G THEREIN INTER ALIA THE ADDITION MADE BY THE AO ON ACCOUNT OF TRANSFER PRICING ADJUS TMENT. DURING THE COURSE OF APPELLATE PROCEEDINGS BEFORE THE LEARNED CIT(APPEAL S), THE SUBMISSIONS MADE BEFORE THE TPO JUSTIFYING THE INCREASE IN RATE OF R OYALTY PAID ON CARCASS GRADE OF PRODUCTS WERE REITERATED ON BEHALF OF THE ASSESSEE AND AFTER REPRODUCING THE SAME IN HIS IMPUGNED ORDER, THE LEARNED CIT(APPEALS) DEC IDED THE ISSUE RELATING TO ADDITION MADE ON ACCOUNT OF TRANSFER PRICING ADJUST MENT VIDE PARAGRAPH NO.7.4 TO 7.7 OF HIS ORDER WHICH READ AS UNDER: 7.4 I HAVE PERUSED THE ASSESSMENT ORDER, THE TPOS ORDER AND DETAILED SUBMISSION ALONG WITH THE EVIDENCES OF TECHNOLOGY A ND SUPPORT PROVIDED BY THE FOREIGN PRINCIPAL IN LIEU OF ROYALTY PAYMENT. T HE APPELLANT HAS PAID ROYALTY TO PARENT COMPANY ON A) A TREAD GRADE CARBON BLACK OF 3% OF SALES. B) ON CARCASS GRADE CARBON BLACK OR 5% OF SALES. 7.5 IN THE PRECEDING YEAR ON CARCASS GRADE CARBON B LACK THE ROYALTY WAS PAID AT 2% BUT THIS YEAR SINCE THE SAME WAS ENHANCE D TO 5% IT LEAD TO DISALLOWANCE OF 3%. IT IS RELEVANT TO ADD THAT ROYA LTY PAID ON OTHER INTERCONNECTED TRADE GRADE CARBON BLACK AT 3% HAS BEEN ACCEPTED AS A CUP BY THE TPO S BEING AT ARMS LENGTH PRICE. ITA NO.6622/MUM/2009 ITA NO.857/MUM/2010& C.O. NO. 170/MUM/2020 10 7.6 IT IS A FACT THAT THE APPELLANT HAS EXTENSIVELY DOCUMENTED AND SUBSTANTIATED THE BENEFITS DENIED BY HE APPELLANT I N LIEU OF ROYALTY PAYMENT. THIS DOCUMENTATION JUSTIFIES THE PAYMENT OF ROYALTY BUT THE RATE (2% OR 5%) IS SUBJECT MATTER OF DISPUTE. IT IS SEEN FROM THE C OMMENTARY FILED Y THE APPELLANT DURING THE APPELLATE PROCEEDINGS THAT THE RE IS NO TECHNOLOGICAL DIFFERENCES BETWEEN TREAD GRADE CARBON BLACK ON WHI CH 3% ROYALTY HAS BEEN PAID AND THE CARCASS GRADE CARBON BLACK WHERE IT HA S JUMPED TO 5% THIS YEAR. THE ONLY DIFFERENCE IS OF MINOR NATURE AND THAT REL ATES TO PELLET SIZE. THEREFORE ONCE THE RATE OF 3% IS ACCEPTED AS CUP FO R THE TRADE GRADE THE SAME RATE NECESSARY MUST APPLY TO CARCASS GRADE. MO RE SO WHEN THEY ARE CLOSELY INTERRELATED AND ALMOST IDENTICAL. IT MAY N OT BE OUT OF PLACE TO MENTION THAT THIS RATE COMPARES FAVOURABLY WITH THA T CHARGED BY CABOT CORPORATION TO THE OTHER GROUP ENTITIES OF CABOT IN THE ASIA PACIFIC REGION. 7.7 IN VIEW OF WHAT IS STATED ABOVE, I RESTRICT THE TRANSFER PRICING ADJUSTMENT/DISALLOWANCE TO 2% OF ROYALTY PAID IN RE SPECT OF CAR CASES GRADE CARBON BLACK SO AS TO BRING IT PAR 3% RATE FOR TRAD E GRADE CARBON BLACK. IN MONETARY TERMS RS.1,37,65,579/- IS CONFIRMED AND RS .68,82,639/- IS DELETED. 7. THE LEARNED CIT(APPEALS) THUS ADOPTED THE RATE O F ROYALTY AT 3% ON CARCASS GRADE OF PRODUCTS AS ARMS LENGTH PRICE AND RESTRIC TED THE ADDITION OF RS.2,06,48,218/- MADE BY THE AO ON ACCOUNT OF TRANS FER PRICING ADJUSTMENT TO RS.1,37,65,579/- ALLOWING A RELIEF OF RS.68,82,639/ -. AGGRIEVED BY THE ORDER OF THE LEARNED CIT(APPEALS), THE ASSESSEE AND REVENUE BOTH HAVE RAISED THIS ISSUE IN THE PRESENT APPEALS FILED BEFORE THE TRIBUNAL. 8. WE HAVE HEARD THE ARGUMENTS OF BOTH THE SIDES AN D ALSO PERUSED THE RELEVANT MATERIAL ON RECORD. ALTHOUGH THE LEARNED COUNSEL FO R THE ASSESSEE HAS MADE ELABORATE SUBMISSIONS WITH REFERENCE TO THE DETAILS AND DOCUMENTS FURNISHED IN HIS PAPER BOOK INCLUDING THE WRITTEN SUBMISSIONS FILED BEFORE THE AUTHORITIES BELOW IN AN ATTEMPT TO EXPLAIN AND JUSTIFY THE INCREASE IN T HE RATE OF ROYALTY FROM 2% TO 5% AGREED TO BE PAID BY THE ASSESSEE TO CABOT CORPORAT ION, USA, WE FIND THAT THE ISSUE ITA NO.6622/MUM/2009 ITA NO.857/MUM/2010& C.O. NO. 170/MUM/2020 11 INVOLVED IN THE PRESENT CASE IS RELATING TO THE ADD ITION MADE ON ACCOUNT OF TRANSFER PRICING ADJUSTMENT AND FOR DECIDING THE SAID ISSUE, WHAT IS RELEVANT TO BE SEEN IS WHETHER THE RATE AT WHICH ROYALTY WAS PAID BY THE A SSESSEE TO ITS ASSOCIATE ENTERPRISE VIZ. CABOT CORPORATION, USA IS AT ARMS LENGTH PRICE OR NOT. THE JUSTIFIABILITY OF INCREASE IN RATE OF ROYALTY FROM 2% AS PAID IN THE EARLIER YEAR TO 5% IN THE YEAR CONSIDERATION ALONE, THEREFORE, IS NOT RELEVANT TO DECIDE THE SAID ISSUE. AS A MATTER OF FACT, THE ROYALTY AT THE RATE OF 2% WAS PAID BY THE ASSESSEE TO ITS ASSOCIATE ENTERPRISE ITSELF AND THE SAID TRANSACTIO N THUS WAS A CONTROLLED TRANSACTION WHICH CANNOT BE TAKEN AS A BENCH MARK FOR DECIDING AS TO WHETHER THE ROYALTY PAID BY THE ASSESSEE TO M/S CABOT CORPORATION AT THE RAT E OF 5% WAS AT ARMS LENGTH. THIS EXERCISE OF ASCERTAINING WHETHER THE ROYALTY S O PAID IS AT ARMS LENGTH HAS TO BE DONE INDEPENDENTLY AS PER THE PROCEDURE LAID DOW N IN THE RELEVANT PROVISIONS OF THE ACT AS WELL AS THE RULES PRESCRIBED. IN THIS RE GARD, IT IS OBSERVED THAT ROYALTY PAID AT THE RATE OF 5% WAS CLAIMED TO BE AN ARMS L ENGTH PRICE BY THE ASSESSEE ON THE BASIS OF CUP METHOD. THE AO, ON THE OTHER HAND, HAS NOT REFERRED TO ANY METHOD SPECIFICALLY AND MADE THE ADDITION ON ACCOUN T OF TRANSFER PRICING ADJUSTMENT TAKING THE RATE OF 2% AT WHICH ROYALTY W AS PAID BY THE ASSESSEE IN THE EARLIER YEARS AS A BENCH MARK. AS ALREADY OBSERVED BY US, THE SAID ROYALTY AT THE RATE OF 2% WAS PAID BY THE ASSESSEE COMPANY TO ITS ASSOCIATE ENTERPRISE AND THE SAME, THEREFORE, COULD NOT BE TAKEN AS A COMPARABLE UNCONTROLLED PRICE. 9. AT THE TIME OF HEARING BEFORE US, THE LEARNED R EPRESENTATIVES OF BOTH THE SIDES HAVE ACCEPTED IN REPLY TO A QUERY RAISED BY T HE BENCH THAT THE PRODUCT MANUFACTURED BY THE ASSESSEE BEING UNIQUE AND THE T ECHNOLOGY OR TECHNICAL INPUT PROVIDED BY CABOT CORPORATION, USA ALSO BEING UNIQU E ONE, IT IS VERY DIFFICULT TO FIND OUT A CASE INVOLVING SUPPLY OF SIMILAR TECHNOL OGY OR TECHNICAL INPUT SO AS TO ASCERTAIN A COMPARABLE UNCONTROLLED PRICE PAID FOR THE ROYALTY. IT IS NO DOUBT TRUE ITA NO.6622/MUM/2009 ITA NO.857/MUM/2010& C.O. NO. 170/MUM/2020 12 THAT THE RESULTS DERIVED FROM APPLYING THE CUP METH OD WILL GENERALLY BE THE MOST DIRECT AND RELIABLE MEASURE OF AN ARMS LENGTH PRIC E FOR THE CONTROLLED TRANSACTION. HOWEVER, IT IS ALSO TRUE THAT THE SUCCESS OF THE SA ID METHOD IS SUBJECT TO THE CONDITION THAT AN UNCONTROLLED TRANSACTION HAS NO D IFFERENCES WITH THE CONTROLLED TRANSACTION THAT WOULD AFFECT THE PRICE AND IF AT A LL THERE ARE ANY DIFFERENCES, THEY ARE ONLY MINOR DIFFERENCES THAT HAVE A DEFINITE AND REASONABLY ASCERTAINABLE EFFECTS ON PRICE FOR WHICH APPROPRIATE ADJUSTMENTS CAN BE M ADE. WHILE MANY FACTORS ARE TO BE CONSIDERED IN DETERMINING THE COMPARABILITY OF T RANSACTION, SIMILARITY OF PRODUCTS OR SERVICES WILL HAVE THE GREATEST EFFECT ON COMPARABILITY UNDER THIS METHOD. COMPARABILITY UNDER THIS METHOD DEPENDS ON CLOSE SIMILARITY WITH RESPECT TO VARIOUS FACTORS INCLUDING ESPECIALLY THE QUALITY OF PRODUCT, THE CONTRACTUAL TERMS ETC. 10. IT IS OBSERVED THAT THERE IS, HOWEVER, NO DATA AVAILABLE IN THE PRESENT CASE IN RESPECT OF UNCONTROLLED COMPARABLE TRANSACTIONS WH ICH HAVE A SIMILARITY OR AT LEAST A CLOSE SIMILARITY WITH THE TRANSACTIONS OF THE ASS ESSEE WITH ITS ASSOCIATE ENTERPRISE M/S CABOT CORPORATION, USA INVOLVING PAYMENT OF ROY ALTY AND IN THE ABSENCE OF THE SAME, WE ARE OF THE CONSIDERED VIEW THAT CUP ME THOD ADOPTED BY THE ASSESSEE FOR TRANSFER PRICING ANALYSIS CANNOT BE CONSIDERED AS MOST APPROPRIATE METHOD TO DETERMINE THE ARMS LENGTH PRICE. IN OUR OPINION, T HE ARMS LENGTH PRICE NEEDS TO BE DETERMINED BY THE MOST APPROPRIATE METHOD, DETERMIN ATIONOF WHICH WOULD DEPEND, INTER ALIA, ON THE NATURE OF TRANSACTIONS, FUNCTION S PERFORMED BY THE ASSOCIATED ENTERPRISE ETC. RULE 10C(2) OF INCOME TAX RULES, 19 62 PRESCRIBES THE FOLLOWING FACTORS WHICH ARE RELEVANT FOR DETERMINATION OF THE MOST APPROPRIATE METHOD : (2) IN SELECTING THE MOST APPROPRIATE METHOD AS SP ECIFIED IN SUB-RULE (1), THE FOLLOWING FACTORS SHALL BE TAKEN INTO ACCOUNT NAMEL Y :- ITA NO.6622/MUM/2009 ITA NO.857/MUM/2010& C.O. NO. 170/MUM/2020 13 (A) THE NATURE AND CLASS OF THE INTERNATIONAL TRAN SACTION; (B) THE CLASS OR CLASSES OF ASSOCIATED ENTERPRISES ENTERING INTO THE TRANSACTION AND THE FUNCTIONS PERFORMED BY THEM TAKING INTO ACC OUNT ASSETS EMPLOYED OR TO BE EMPLOYED AND RISKS ASSUMED BY SUCH ENTERPRISE ; (C) THE AVAILABILITY, COVERAGE AND RELIABILITY OF D ATA NECESSARY FOR APPLICATION OF THE METHOD; (D) THE DEGREE OF COMPARABILITY EXISTING BETWEEN TH E INTERNATIONAL TRANSACTION AND THE UNCONTROLLED TRANSACTION AND BETWEEN THE EN TERPRISES ENTERING INTO SUCH TRANSACTIONS; (E) THE EXTENT TO WHICH RELIABLE AND ACCURATE ADJUS TMENTS CAN BE MADE TO ACCOUNT FOR DIFFERENCES, IF ANY, BETWEEN THE INTERN ATIONAL TRANSACTION, AND THE COMPARABLE UNCONTROLLED TRANSACTION OR BETWEEN THE ENTERPRISES ENTERING INTO SUCH TRANSACTIONS; (F) THE NATURE, EXTENT AND RELIABILITY OF ASSUMPTIO NS REQUIRED TO BE MADE IN APPLICATION OF A METHOD. 11. IN OUR OPINION, IF THE FACTS OF THE PRESENT CAS E ARE CONSIDERED IN THE LIGHT OF THE ABOVE FACTORS, CUP METHOD CANNOT BE REGARDED AS MOST APPROPRIATE METHOD FOR DETERMINING ARMS LENGTH PRICE OF THE ROYALTY PAID BY THE ASSESSEE TO M/S CABOT CORPORATION, USA AS THEREIS NO DATA AVAILABLE IN RE SPECT OF UNCONTROLLED TRANSACTIONS WHICH ARE SIMILAR OR AT LEAST CLOSELY SIMILAR TO THE TRANSACTIONS OF THE ASSESSEE COMPANY WITH ITS ASSOCIATED ENTERPRISE CAB OT CORPORATION, USA. WE, THEREFORE, SET ASIDE THE ORDER OF THE LEARNED CIT(A PPEALS) AS WELL AS THAT OF THE ASSESSING OFFICER ON THIS ISSUE AND RESTORE THE MAT TER TO THE FILE OF THE AO WITH A DIRECTION TO DO THE EXERCISE OF DETERMINING THE ARM S LENGTH PRICE BY APPLYING THE MOST APPROPRIATE METHOD KEEPING IN VIEW THE FACTS A ND CIRCUMSTANCES OF THE CASE AND AFTER AFFORDING PROPER AND SUFFICIENT OPPORTUNI TY TO THE ASSESSEE OF BEING HEARD. THE RELEVANT GROUNDS OF THE ASSESSEES APPEAL ON TH IS ISSUE AS WELL AS GROUND NO.2 OF THE REVENUES APPEAL ARE ACCORDINGLY TREATED AS ALLOWED FOR STATISTICAL PURPOSES. ITA NO.6622/MUM/2009 ITA NO.857/MUM/2010& C.O. NO. 170/MUM/2020 14 12. IN GROUND NO.1 OF ITS APPEAL, THE REVENUE HAS C HALLENGED THE ACTION OF THE LEARNED CIT(APPEALS) IN DELETING THE ENTIRE ADDITIO N OF RS.5,62,67,879/- MADE BY THE AO TREATING THE ROYALTY EXPENDITURE AS CAPITAL EXPENDITURE. 13. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, TH E CLAIM OF THE ASSESSEE FOR DEDUCTION ON ACCOUNT OF ROYALTY PAID TO M/S CABOT C ORPORATION, USA WAS EXAMINED BY THE AO FROM THE FOREIGN TECHNOLOGY COLL ABORATION AGREEMENT BETWEEN THE ASSESSEE COMPANY AND M/S CABOT CORPORATION, USA . ON SUCH EXAMINATION, HE WAS OF THE OPINION THAT THE ROYALTY HAS BEEN PAID B Y THE ASSESSEE FOR MODERNIZATION OF CARBON BLACK PLANT UNDER ENERGY CONSERVATION SCH EME IN ORDER TO BE COMPETITIVE AND TO IMPROVE PERFORMANCE. HE HELD THAT THE ASSESS EE THUS HAS ACQUIRED TECHNOLOGY IN TERMS OF COLLABORATION AGREEMENT AND THE QUID PROQUO FOR ACQUIRING THE TECHNOLOGY WAS THAT THE ASSESSEE WAS REQUIRED T O PAY AN ANNUAL ROYALTY AT PERCENTAGE OF SALES. HE HELD THAT THE PAYMENT OF RO YALTY THUS WAS IN LIEU OF TECHNICAL KNOW-HOW RECEIVED BY THE ASSESSEE FROM TH E FOREIGN COMPANY AND THE SAME BEING IN THE NATURE OF ENDURING ADVANTAGE TO T HE ASSESSEE COMPANY, THE ROYALTY WAS CAPITAL EXPENDITURE. FOR THIS CONCLUSIO N, HE RELIED ON THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF SOUTHERN SWITC H GEAR LTD. (232 ITR 359) WHEREIN IT WAS HELD THAT GRANT OF TECHNICAL AID FEE S FOR SETTING UP FACTORY AND RIGHT TO SELL THE PRODUCT AS PER COLLABORATION AGREEMENT WAS NOT ALLOWABLE AS REVENUE EXPENDITURE AND IT WAS TO BE TREATED AS CAPITAL EXP ENDITURE. 14. THE DECISION OF THE AO DISALLOWING THE ROYALTY PAYMENT BY TREATING IT AS CAPITAL EXPENDITURE WAS CHALLENGED BY THE ASSESSEE IN AN APPEAL FILED BEFORE THE LEARNED CIT(APPEALS). DURING THE COURSE OF APPELLAT E PROCEEDINGS BEFORE THE LEARNED CIT(APPEALS), ELABORATE SUBMISSION WAS MADE ON BEHALF OF THE ASSESSEE IN SUPPORT OF ITS CLAIM THAT PAYMENT OF ROYALTY WAS A REVENUE EXPENDITURE WHICH, AS ITA NO.6622/MUM/2009 ITA NO.857/MUM/2010& C.O. NO. 170/MUM/2020 15 SUMMARIZED BY THE LEARNED CIT(APPEALS) IN HIS IMPUG NED ORDER IS REPRODUCED HEREUNDER : (A) THE APPELLANT HAS BEEN IN THE BUSINESS OF MANUFACTU RING CARBON BLACK FOR MORE THAN 40 YEARS; (B) THE FOREIGN COMPANY WAS REQUIRED UNDER THE TERMS OF THE AGREEMENT TO RENDER TECHNICAL ADVICE AND ASSISTANCE IN CONNECTIO N WITH MANUFACTURE IN THE SAME FIELD, WHERE THE COMPANY WAS ALREADY MANUF ACTURING AND DOING BUSINESS; (C) BY INCURRING THE SAID EXPENDITURE, THE APPELLANT DI D NOT ENTER INTO A NEW BUSINESS OR A NEW FIELD OR ACQUIRE ANY ASSET; (D) IN THE CONTEXT OF THE CURRENT COMPETITIVE BUSINESS ENVIRONMENT, SUCH AN EXPENDITURE IS NOTHING BUT A DAY-TO-DAY EXPENDITURE INTENDED TO IMPROVE THE EFFICIENCY AND PROFITABILITY OF THE EXISTING BU SINESS. (E) THE ASSESSING OFFICER ACCEPTS THAT THE EXPENDITURE HAS BEEN INCURRED TO IMPROVE THE PROFITABILITY OF THE COMPANY- HIS SUBSE QUENT INFERENCE THAT THE EXPENDITURE IS CAPITAL IS WHOLLY ERRONEOUS. (F) THE APPELLANT HAS NOT ACQUIRED ANY KNOW-HOW BY WAY OF AN ASSET. IT IS ONLY ENTITLED TO THE USE OF KNOW-HOW TO ASSIST IN I TS MANUFACTURING PROCESS. (G) THE REFERENCE BY THE ASSESSING OFFICER TO SECTION 3 2 IS MISCONCEIVED, BECAUSE THE APPELLANT IS NOT THE OWNER OF THE TECHN ICAL KNOW-HOW. THE DENIAL OF DEDUCTION UNDER SECTION 37 ON THE GROUND THAT THE PAYMENT IS COVERED UNDER SECTION 32 IS LEGALLY AND FACTUALLY E RRONEOUS. (H) THE RELIANCE ON THE DECISION IN SOUTHERN SWITCH GEA R LTD. V/S. CIT (232 ITR 359) IS MISCONCEIVED IN FACT AND LAW. (I) THE GENERAL THRUST OF THE AGREEMENT IS FOR RECEIVIN G OF TECHNICAL INFORMATION AND NOT FOR OUTRIGHT SALE OF PROPRIETAR Y RIGHTS, AS THE APPELLANT IS THE NON-EXCLUSIVE LICENSEE IN INDIA WI TH NO RIGHT TO SUB- LICENSE. (J) THE APPELLANT HAS ISO CERTIFICATION AND HAS TO CONS TANTLY ENDEAVOUR NOT ONLY TO MAINTAIN HIGH TECHNICAL STANDARDS FOR ITS O WN SURVIVAL BUT ALSO KEEP ITSELF COMPETITIVE IN ITS LINE OF BUSINESS. (K) THE ASSESSING OFFICER ERRED IN IGNORING THE ASSESSM ENT RECORD OF THE APPELLANT, WHEREIN THIS EXPENDITURE HAS BEEN ALLOWE D AS A REVENUE EXPENDITURE RIGHT FROM 1990. (L) THE ASSESSING OFFICER ALSO ERRED IN IGNORING THE DE CISION OF THE COMMISSIONER OF INCOME TAX UNDER SECTION 263 IN ASS ESSMENT YEAR ITA NO.6622/MUM/2009 ITA NO.857/MUM/2010& C.O. NO. 170/MUM/2020 16 2003-2004, WHEN THIS MATTER WAS LOOKED INTO, AND TH EREAFTER THE PROCEEDINGS WERE DROPPED. 15. IN SUPPORT OF THE ABOVE SUBMISSION, RELIANCE WA S PLACED ON BEHALF OF THE ASSESSEE ON THE FOLLOWING JUDICIAL PRONOUNCEMENTS. I ALEMBIC CHEMICAL WORKS CO. LTD. V/S C.I.T. 177 ITR 377 (S.C.) II C.I.T. V/S TELCO 123 ITR 538 (BOM.) III ANTIFRICTION BEARINGS CORPORATION LTD. V/S C.I.T. 114 ITR 335 (BOM.) IV KIRLOSKAR PNEUMATIC CO. LTD. V/S C.I.T. 136 ITR 746 (BOM.) V. BAJAJ TEMPO V/S C.I.T. 16. THE SUBMISSION MADE ON BEHALF OF THE ASSESSEE O N THIS ISSUE WAS EXAMINED BY THE LEARNED CIT(A) IN THE LIGHT OF MATERIAL PLAC ED ON RECORD BEFORE HIM INCLUDING THE RELEVANT AGREEMENTS ENTERED INTO BETW EEN THE ASSESSEE COMPANY AND CABOT CORPORATION, USA. HE FOUND THAT THE SILENT FE ATURES OF THE SAID AGREEMENTS AS RELEVANT TO THE ISSUE UNDER CONSIDERATION WERE A S UNDER : 4.4 AS PART OF THE TECHNOLOGY PACKAGE, CABOT WILL PROVIDE TECHNICAL DATA AND INSTRUCTIONS CONCERNING THE FOLLOWING ADDITIONA L GRADES OF CARBON BLACK, NOT PRESENTLY MADE BY THE COMPANY, WHICH THE REACTO R DESCRIBED IN (1) ABOVE HAS THE CAPABILITY TO PRODUCE; N299, N357, N234 & N 351. 4.5 ALL PLANT, LAYOUT AND STANDARD DESIGNS AND TEC HNICAL DATA COMPRISING THE TECHNOLOGY PACKAGE SHALL HAVE BEEN USED IN COMM ERCIAL OPERATION AND PROVEN IN AT LEAST FOUR (4) PLANS OF CABOT. THE TEC HNOLOGY PACKAGE WILL BE ITA NO.6622/MUM/2009 ITA NO.857/MUM/2010& C.O. NO. 170/MUM/2020 17 IN SUCH A FORM THAT A COMPETENT LOCAL ENGINEERING F IRM SHOULD BE ABLE TO COMPLETE THE DETAILED DESIGN. 4.6 THEREAFTER, ARTICLE IV PROVIDES FOR CERTAIN TE CHNICAL SERVICES AND, IN PARTICULAR, TRAINING OF THE APPELLANT EMPLOYEES. 4.7 UNDER ARTICLE XI, THE ASSESSEE IS REQUIRED TO MAINTAIN STRICK CONFIDENTIALITY AND IS NOT PERMITTED TO PART WITH I NFORMATION TO ANY THIRD PARTY. 4.8 UNDER ARTICLE XII, THERE IS NO RIGHT OF ASSIGNA BILITY OR SUB LICENSING UNLESS THE PARENT COMPANY GIVES WRITTEN CONSENT AND AGREES ON THE TERMS AND CONDITIONS SUCH SUB LICENSING. 17. AFTER ANALYZING THE ABOVE FEATURES OF THE AGREE MENT, THE FOLLOWING FACTS WERE FOUND TO HAVE EMERGED BY THE LEARNED CIT(APPEA LS) WHICH, ACCORDING TO HIM, WERE MATERIAL FOR CONSIDERATION : I) THE APPELLANT IS A SINGLE FACTORY, SINGLE PRODUCT C OMPANY MANUFACTURING CARBON BLACK SINCE 1963. II) IT HAS ISO CERTIFICATION AND HAS TO CONSTANTLY ENDE AVOUR TO MAINTAIN HIGH TECHNICAL STANDARDS FOR ITS OWN SURVIVAL AND T O KEEP ITSELS COMPETITIVE. III) THE GENERAL THRUST OF THE AGREEMENT IS FOR RECEIVIN G OF TECHNICAL INFORMATION AND ASSISTANCE AND NOT FOR OUTRIGHT SAL E OF PROPRIETARY RIGHTS. 18. AFTER HAVING CONSIDERED THE ABOVE FACTS EMERGIN G FROM RECORD AND KEEPING IN VIEW THE DECISION OF HONBLE SUPREME COURT IN TH E CASE OF ALEMBIC CHEMICAL WORKS CO. LTD. V/S C.I.T. (SUPRA) AS WELL AS THAT O F BOMBAY HIGH COURT IN THE CASE OF KIRLOSKAR PNEUMATIC CO. LTD. V/S C.I.T. 136 ITR 746, THE LEARNED CIT(APPEALS) CONCLUDED THE ISSUE IN FAVOUR OF THE ASSESSEE FOR T HE FOLLOWING REASONS GIVEN IN PARA 4.12 AND 4.13 OF HIS IMPUGNED ORDER : ITA NO.6622/MUM/2009 ITA NO.857/MUM/2010& C.O. NO. 170/MUM/2020 18 4.12 CONSIDERING THE ABOVE JUDGMENTS, I HOLD THE E XPENDITURE IS ONLY FOR THE BETTERMENT AND IMPROVEMENT OF THE VERY SAME LIN E OF BUSINESS WHICH THE ASSESSE IS CARRYING ON FOR MORE THAN 40 YEARS. THE BUSINESS ENVIRONMENT IS CHANGING SO QUICKLY THAT INDIAN COMPANIES NEED TO R ESPOND PROACTIVELY FOR SHEER SURVIVAL. AFTER ECONOMIC LIBERALIZATION, KEE PING ABREAST OF THE LATEST DEVELOPMENTS, UPDATING KNOWLEDGE, USING NEWER, BETT ER AND IMPROVED TECHNIQUES OF PRODUCTION, AND TOOLS OF MANAGEMENT I S A NECESSITY FOR INDIAN COMPANIES TO FUNCTION IN AN ENVIRONMENT WHERE WORLD CLASS COMPANIES ARE PERMITTED TO ENTER. IT HAS TO BE BORNE IN MIND THAT THE ASSESSEE HAS ONLY THE RIGHT TO USE THE RELEVANT INFORMATION AND KNOWLEDGE AND THE SAME CANNOT BE TRANSFERRED OR DISCLOSED TO ANY THIRD PARTY. FURTHE R, BEING THE HOLDER OF ISO CERTIFICATION, THE ASSESSEE IS REQUIRED TO ADHERE T O INTERNATIONAL QUALITY STANDARD, AND TO MAINTAIN CERTIFICATION, A REGULAR FLOW OF INFORMATION IS NECESSARY. HAVING REGARD TO THE CITED DECISIONS, IT MUST BE HELD THAT THE ASSESSEE DID NOT ACQUIRE ANY ASSET OR ADVANTAGE OF AN ENDURING NATURE. SUCH EXPENDITURE MERELY ENABLES THE ASSESSEE TO IMPROVE ITS EFFICIENCY AND PROFITABILITY WITHOUT TOUCHING THE CAPITAL STRUCTUR E, AND THE SAME IS, THEREFORE, REVENUE IN NATURE. 4.13 THE RELIANCE PLACED BY THE ASSESSING OFFICER O N EXPLANATION 4 BELOW SECTION 32(1) IS MISCONCEIVED. THE APPELLANT IS NOT THE OWNER OF THE KNOWHOW. FURTHER, THE SAID EXPLANATION APPLIES ONLY FOR THE PURPOSES OF SECTION 32(1). THE SAID EXPLANATION CANNOT DECIDE W HAT IS REVENUE OR CAPITAL. IT IS ONLY AN ENABLING PROVISION FOR CLAIM ING DEPRECIATION. IT IS NOT A DISABLING PROVISION FOR CLAIMING REVENUE EXPENDITUR E. ALSO, THE RELIANCE BY THE ASSESSING OFFICER ON THE DECISION OF SOUTHERN S WITCH GEAR LTD. (232 ITR 359) IS EQUALLY MISCONCEIVED. IN THE JUDGMENT O F THE MADRAS HIGH COURT (148 ITR 272) ONLY 25% OF THE ROYALTY HAD BEE N DISALLOWED AND 75% HAD BEEN DULY ALLOWED AS REVENUE EXPENDITURE. EVEN SO, THE SAID DECISION NEEDS TO BE CONFINED TO ITS OWN PECULIAR FACTS, AS THE HEAD NOTES OF BOTH THE JUDGMENTS STATE THAT THERE WERE CLAUSES IN THE COLL ABORATION AGREEMENT CONTEMPLATING SETTING UP OF A FACTORY. IT IS UNDER THESE PECULIAR FACTS THAT 25% OF THE ROYALTY EXPENDITURE WAS TREATED AS CAPIT AL. IN THE INSTANT CASE, THE FACTORY OF THE APPELLANT WAS SET-UP IN 1963, AND TH E EXPENDITURE INCURRED IN THE CURRENT YEAR CAN UNDER NO CIRCUMSTANCE BE EQUAT ED WITH THE SETTING UP OF A FACTORY. THE APPELLANT HAS BEEN ENGAGED IN THE SA ME FIELD OF MANUFACTURE FOR MORE THAN 40 YEARS. ITA NO.6622/MUM/2009 ITA NO.857/MUM/2010& C.O. NO. 170/MUM/2020 19 19. THE LEARNED CIT(APPEALS) ALSO NOTED THAT PAYMEN T OF ROYALTY MADE BY THE ASSESSEE TO M/S CABOT CORPORATION, USA RIGHT FROM Y EAR 1990 WAS CLAIMED AND ALLOWED AS A REVENUE EXPENDITURE. HE FURTHER NOTED THAT THIS ISSUE WAS A SUBJECT MATTER OF PROCEEDINGS U/S 263 FOR ASSESSMENT YEAR 2 003-04 AND THE LEARNED C.I.T. AFTER EXAMINING ALL THE RELEVANT ASPECTS DID NOT CO NSIDER IT FIT TO WITHDRAW THE DEDUCTION ALLOWED BY THE AO ON ACCOUNT OF ROYALTY P AYMENT TREATING THE SAME AS REVENUE EXPENDITURE. KEEPING IN VIEW THE RULE OF CO NSISTENCY AS WELL AS THE REASONS GIVEN IN PARAGRAPH NO. 4.12 AND 4.13 OF HIS IMPUGNE D ORDER EXTRACTED ABOVE, THE LEARNED CIT(APPEALS) HELD THAT ROYALTY PAID BY THE ASSESSEE TO CABOT CORPORATION, USA WAS ALLOWABLE AS REVENUE EXPENDITURE AND ACCORD INGLY HE DELETED THE DISALLOWANCE MADE BY THE AO ON THIS ISSUE. 20. WE HAVE HEARD THE ARGUMENTS OF BOTH THE SIDES A ND ALSO PERUSED THE RELEVANT MATERIAL ON RECORD. THE LEARNED DR AT THE TIME OF H EARING BEFORE US HAS MAINLY RELIED ON ARTICLE 2 OF THE TECHNOLOGY AGREEMENT BET WEEN ASSESSEE AND CABOT CORPORATION, USA WHEREBY PLANS, LAYOUTS, DESIGNS AN D TECHNICAL DATA REQUIRED FOR A CARBON BLACK REACTOR WERE TO BE SUPPLIED BY THE U SA COMPANY TO THE ASSESSEE COMPANY AS PART OF TECHNOLOGY PACKAGE. SHE HAS POIN TED OUT THAT TECHNICAL DATA, STANDARD DESIGNS AND PLANS FOR IMPROVING THE PROCES SING AND HANDLING, PELLETIZING AND DRYING SYSTEMS WAS ALSO TO BE SUPPLIED BY THE U SA COMPANY TO THE ASSESSEE COMPANY. SHE CONTENDED THAT IT WAS THUS A CLEAR CAS E OF TRANSFER OF TECHNOLOGY BY THE USA COMPANY TO THE ASSESSEE COMPANY AND THE PAY MENT MADE FOR SUCH TRANSFER IN THE FORM OF ROYALTY WAS A CAPITAL EXPEN DITURE AS RIGHTLY HELD BY THE AO. HOWEVER, AS POINTED OUT BY THE LEARNED COUNSEL FOR THE ASSESSEE, PLANS, LAYOUTS, DESIGNS AND TECHNICAL DATA AS PER ARTICLE 2 OF THE TECHNOLOGY AGREEMENT WERE TO BE SUPPLIED BY THE USA COMPANY TO THE ASSESSEE COMPANY FOR REINFORCING CARBON BLACK REACTOR CAPABLE OF UTILIZING PREHEATED AIR AT 650 DEGREE C. SIMILARLY, ESSENTIAL ITA NO.6622/MUM/2009 ITA NO.857/MUM/2010& C.O. NO. 170/MUM/2020 20 DATA, STANDARD DESIGNS AND PLANS WERE TO BE SUPPLIE D FOR IMPROVING THE PROCESSING AND HANDLING, PELLETIZING AND DRYING SYSTEMS IN USE BY THE COMPANY AT THE PLANT AS ON THE DATE OF THE AGREEMENT IN ORDER TO INCREASE T HE THROUGHPUT OF CARBON BLACK. AS RIGHTLY HELD BY THE LEARNED CIT(APPEALS) ON INTE RPRETATION OF ARTICLE 2 OF THE TECHNOLOGY AGREEMENT, THE THRUST WAS THUS FOR THE B ETTERMENT AND IMPROVEMENT OF THE VERY SAME LINE OF BUSINESS IN WHICH THE ASSESSE E COMPANY WAS ENGAGED FOR MORE THAN 40 YEARS. MOREOVER, THE ASSESSEE WAS GIVE N ONLY THE RIGHT TO USE THE RELEVANT INFORMATION AND KNOWLEDGE BY THE US COMPAN Y AND IT WAS NOT ALLOWED TO TRANSFER OR DISCLOSE THE SAME TO ANY THIRD PARTY. T HE ASSESSEE THUS CANNOT BE SAID TO HAVE ACQUIRED ANY ASSET OR ADVANTAGE OF ENDURING NA TURE AND THE EXPENDITURE ON PAYMENT OF ROYALTY WAS INCURRED MERELY TO IMPROVE I TS EFFICIENCY AND PROFITABILITY. 21. IN THE CASE OF ALEMBIC CHEMICAL WORKS CO. LTD. V/S C.I.T. (SUPRA),HONBLE SUPREME COURT HAS HELD THAT THE IMPROVISATION IN T HE PROCESS AND TECHNOLOGY IN SOME AREAS OF THE ENTERPRISE WAS SUPPLEMENTAL TO T HE EXISTING BUSINESS AND THERE BEING NO MATERIAL TO HOLD THAT IT ACCOUNTED TO A NE W OR FRESH VENTURE, THE PAYMENT MADE WAS ON ACCOUNT OF REVENUE EXPENDITURE. HONBLE SUPREME COURT FURTHER HELD THAT THE RELEVANT AGREEMENT PERTAINED TO A PRODUCT ALREADY IN THE LINE OF THE ASSESSEES ESTABLISHED BUSINESS AND NOT TO A NEW PR ODUCT. WHAT WAS STIPULATED IN THE AGREEMENT WAS IN RESPECT OF IMPROVEMENT IN THE OPERATIONS OF EXISTING BUSINESS AND ITS PROFITABILITY NOT REMOVED FROM THE AREA OF THE DAY TO DAY BUSINESS OF THE ASSESSEES ESTABLISHED ENTERPRISE. IT WAS HELD THAT THE FINANCIAL OUTLET UNDER THE AGREEMENT WAS FOR THE BETTER CONDUCT AND IMPROVEMEN T OF THE EXISTING BUSINESS AND IT WAS THUS EXPENDITURE OF REVENUE NATURE. IN THE C ASE OF KIRLOSKAR PNEUMATIC CO. LTD. V/S C.I.T (SUPRA), THE ASSESSEE WAS MANUFACTUR ING AIR COMPRESSOR. IT ENTERED INTO AN AGREEMENT WITH G MAINLY TO ACQUIRE TECHNICA L KNOWHOW FOR MANUFACTURE AND SALE OF CERTAIN PRODUCTS. G AGREED TO PROVIDE D RAWINGS AND INFORMATION AND ITA NO.6622/MUM/2009 ITA NO.857/MUM/2010& C.O. NO. 170/MUM/2020 21 KEEP THE ASSESSEE INFORMED ABOUT RESEARCH AND DEVEL OPMENT. THE FEES AGREED TO BE PAID WAS INCLUSIVE OF LUMP-SUM CONSIDERATION FOR TH E DRAWINGS AND ROYALTY OF 2% FOR THE RIGHT TO USE PATENTS IN THE NAME OF G. IN T HESE FACTS AND CIRCUMSTANCES, IT WAS HELD BY THE HONBLE BOMBAY HIGH COURT THAT WHIL E CONSTRUING SUCH AGREEMENT, THEY MUST BE CONSIDERED AS A WHOLE WITHO UT PUTTING EMPHASIS ON VARIOUS CLAUSES IN ISOLATION. IT WAS HELD THAT THE INTENTION OF THE ASSESSEE WAS TO ACQUIRE TECHNICAL KNOWLEDGE OR KNOWHOW FOR CERTAIN PERIOD AND THE DRAWINGS ACQUIRED WERE PART OF TECHNICAL KNOWLEDGE. IT WAS H ELD THAT THE ASSESSEE THUS DID NOT ACQUIRE ANY ASSET OR BENEFIT OF ENDURING NATURE AND THE PAYMENTS MADE UNDER THE AGREEMENT WERE ALLOWABLE AS REVENUE EXPENDITURE . 22. IT MAY ALSO BE PERTINENT TO NOTE HERE THAT A SI MILAR PAYMENT OF ROYALTY UNDER THE SAME TECHNOLOGY AGREEMENT WAS MADE BY THE ASSES SEE RIGHT FROM THE YEAR 1990 AND THE DEDUCTION CLAIMED FOR THE SAME AS REVENUE E XPENDITURE WAS ALLOWED CONSISTENTLY BY THE DEPARTMENT IN THE EARLIER YEARS . AS FURTHER NOTED BY THE LEARNED CIT(APPEALS) IN HIS IMPUGNED ORDER, THIS ISSUE WAS THE SUBJECT MATTER OF PROCEEDING U/S 263 FOR ASSESSMENT YEAR 2003-04 AND THE LEARNED C.I.T. AFTER EXAMINING THE SAME, DID NOT FIND ANY ERROR IN THE O RDER OF THE AO ALLOWING THE DEDUCTION CLAIMED BY THE ASSESSEE ON ACCOUNT OF PAY MENT OF ROYALTY BEING EXPENDITURE OF REVENUE NATURE. AS SUCH, CONSIDERING ALL THE FACTS OF THE CASE AND KEEPING IN VIEW THE DECISION OF HONBLE SUPREME COU RT IN THE CASE OF ALEMBIC CHEMICAL WORKS CO. LTD. V/S C.I.T. (SUPRA) AS WELL AS THAT OF HONBLE BOMBAY HIGH COURT IN THE CASE OF KIRLOSKAR PNEUMATIC CO. L TD. V/S C.I.T (SUPRA) AND THE RULE OF CONSISTENCY, WE FIND NO JUSTIFIABLE REASON TO INTERFERE WITH THE IMPUGNED ORDER OF THE LEARNED CIT(APPEALS) HOLDING THAT THE EXPENDITURE INCURRED BY THE ASSESSEE ON PAYMENT OF ROYALTY WAS REVENUE IN NATUR E AND DELETING THE ITA NO.6622/MUM/2009 ITA NO.857/MUM/2010& C.O. NO. 170/MUM/2020 22 DISALLOWANCE MADE BY THE AO TREATING THE SAME AS CA PITAL EXPENDITURE. THE SAME IS, THEREFORE, UPHELD AND GROUND NO.1 OF THE REVENU ES APPEAL IS DISMISSED. 23. IN ITS CROSS OBJECTION, THE ASSESSEE COMPANY HA S RAISED ITS ALTERNATIVE CLAIM THAT IF THE EXPENDITURE ON PAYMENT OF ROYALTY IS HE LD TO BE A CAPITAL EXPENDITURE, DEPRECIATION THEREON MAY BE ALLOWED. AS WE HAVE ALR EADY UPHELD THE IMPUGNED ORDER OF THE LEARNED CIT(APPEALS) ALLOWING THE SAID EXPENDITURE AS REVENUE EXPENDITURE, THE ISSUE RAISED BY THE ASSESSEE IN IT S CROSS OBJECTION HAS BECOME INFRUCTUOUS. WE, THEREFORE, DISMISS THE CROSS OBJEC TION FILED BY THE ASSESSEE AS THE SAME HAS BECOME INFRUCTUOUS. 24. IN THE RESULT, THE APPEAL OF THE ASSESSEE AS WE LL AS THAT OF THE REVENUE IS TREATED AS PARTLY ALLOWED AS INDICATED ABOVE WHEREA S THE CROSS OBJECTION OF THE ASSESSEE IS DISMISSED. ORDER PRONOUNCED ON THIS 31ST DAY OF MAY, 2011. SD. SD. (N.V. VASUDEVAN) (P.M. JAGTAP) JUDICIAL MEMBER ACCO UNTANT MEMBER MUMBAI, DATED: 31ST MAY, 2011. WAKODE ITA NO.6622/MUM/2009 ITA NO.857/MUM/2010& C.O. NO. 170/MUM/2020 23 COPY TO : 1. APPELLANT 2. RESPONDENT 3. C.I.T. 4. CIT(A) 5. DR, D-BENCH. (TRUE COPY) BY ORD ER ASSTT. REGISTR AR, ITAT, MUMBAI BENCHES, MUMBAI. ITA NO.6622/MUM/2009 ITA NO.857/MUM/2010& C.O. NO. 170/MUM/2020 24