S. 37(1): Non-compete fee to ex-MD is revenue expenditure
A payment has to be seen from the context of commercial and business expediency. If the outgoing expenditure is so inextricably linked or related to carrying on or conduct of the business, that is, it can be regarded as integral part of the profit earning process and not for any acquisition of asset or a right of permanent character and incurring of the expenditure is a condition for carrying on the business, then such an expenditure may be regarded as revenue expenditure. Here the agreement for payment of non-compete fee was only to protect the existing business for a temporary period to ward off completion so that assessee company can get stabilizing period without its long serving MD. Here no new assets of any enduring benefit has arisen to the assessee on such payment. If the advantage is not for longer period and not enduring in nature, then such a payment of non-compete fee is nothing but business expenditure which is on revenue account. On similar facts and circumstances, the Hon'ble Delhi High Court also in the case of Eicher Ltd. (supra), after discussing various case laws came to the conclusion that payment of non-compete fee for eliminating competition in the two wheeler business cannot be held that assessee has acquired capital asset of enduring nature.
S. 80-IB: Excise duty refund is "derived" from the undertaking. Liberty India 316 ITR 218 (SC) is distinguishable
The AO has denied 80IB deduction on excise duty refund for the sole reason that it cannot be treated as income derived from eligible business of the undertaking. However, as can be seen from the facts brought on record, there is no dispute that assessee has paid the excise duty on the goods manufactured and sold and as such it forms part of the sale price of assessee. Therefore, payment of central excise duty is integrally connected with the manufacturing and sale of goods produced by assessee. It is also not in dispute that as per the industrial policy resolution declared for the state of J&K and consequent to Central Excise Department Notification, assessee became eligible for refund of excise duty paid after set off of CENVAT credit. Therefore, in sum and substance, it is only a refund of an amount already paid by assessee and reduced from the sale price while computing the profit. Therefore, when assessee gets refund of an expenditure already incurred the same has to be deemed to be the profits and gains of business or profession carried on by assessee in terms of section 41(1)(a) of the Act. In that view of the after, excise duty refund received by assessee has to be treated as part of the business profit, hence, eligible for deduction u/s 80IB of the Act. Otherwise also, as payment of excise duty is directly linked with the manufacturing of goods, refund of excise duty has to be treated as income derived from eligible business as provided u/s 80IB. In the aforesaid view of the matter, assessee will be eligible to claim deduction u/s 80IB on the income accruing from refund of excise duty. So far as the ratio in case of Liberty India Vs. CIT 316 ITR 218, the facts are clearly distinguishable and do not apply to the facts of the present case. In case of Liberty India 316 ITR 218, the hon'ble Supreme Court was considering the profits derived from sale/transfer of DEPB/Duty Draw Back Benefits. DEPB/Duty Draw Back Benefits, is given under a scheme framed under the Customs Act and it is transferable, in other words, it is a marketable commodity. Excise duty refund by assessee in the present case is neither a marketable commodity nor transferable. It is only a refund of expenditure already incurred by assessee, hence the decision of the Hon'ble Supreme Court in case of Liberty India (supra) will not apply.
Transfer Pricing: Law on aggregation of several international transactions to determine the Arms' Length Price explained
1) Whether the payment of royalty is interlinked and interconnected with the other international transactions of the assessee with its AE's?
2) Where different international transactions with the AE are interconnected and interlinked, whether the aggregation of the transactions is required and the comparables are also be considered on aggregate basis.
(i) As per the Indian Income-Tax Act, ideally, the transfer pricing is to be made on a transaction by transaction basis. However, Rule 10A(d) provides that the term 'transaction' includes a number of closely linked transactions. Thus, in cases where separate transactions are so closely linked or are closely inter-related or continuous and where application of the arm's length principle on a transaction by transaction basis becomes cumbersome for all involved and would not lead to an accurate result, recourse is often had to evaluate transactions following an 'aggregation' principle. Due to increasing presence of composite contracts and 'package deals' in an MNE group, the aggregation of transactions become necessary as a composite contract may contain a number of elements including royalties, leases, sale and licenses all packaged into one deal. One would usually want to consider the deal in its totality to understand how various elements relate to each other, but the components of the composite package deal may or may not, depending on the facts and circumstances of each case, need to be evaluated separately to arrive at the appropriate transfer price. Aggregation issue may also arise when looking at uncontrolled comparables. This is because third party information is not often available at the transaction level. In such circumstances, entity level information is the only recourse available. Therefore, whether ALP-principle is to be applied on a transaction by transaction basis or on an aggregation basis depends on the facts of each case and is not universally or generally applied in all composite contracts involving multiple transactions.
(ii) In the case before us, the assessee has entered into various transactions which include purchase of raw-material, components and consumables, capital assets and payment towards royalty, technical assistance, IT support fee, payment of warranty claims, training fee, reimbursement of expenses etc. It is the case of the assessee that all these transactions are inter-linked. However, on perusal of the TP documents filed along- with return of income, we find that the payment of royalty is not part of a composite contract/agreement but is on account of a separate Technical Assistance Agreement entered into by the assessee with its AE. The assessee is required to pay the royalty under the Technical Assistance Agreement for use of certain Technical and manufacturing know-how proprietary to Toyota Motor Corporation/Aisin Takaoka Company which is developed by them by virtue of their investment in research and development.
(iii) From the above details, it is seen that the payment of royalty is independent of the purchase of raw materials, components, tools, packing materials, fixed assets etc. The royalty is exclusively towards the use of know-how in the manufacturing process undertaken by the assessee and is therefore not in any way interlinked or inter-connected with other transactions and it would not lead to inaccurate result if it is analyzed separately. In such a situation, we are of the opinion that the contract of payment of royalty can be analyzed separately and the ALP of such a payment can be determined independently. The 'L' bench of the Tribunal at Mumbai, in the case of UCB India(P) Ltd. vs. Ass.CIT, reported in (2009) 121 ITD 131(Mum), held that, when in an enterprise, only similar transactions are undertaken, i.e. all the transactions are of the same type, same class and of similar variety, and the enterprise does not have any other transaction which is not similar, in such a situation, the operating margins of the enterprise would be the TNMM of a class of transactions. In view of the same, we do not see any reason to take a different stand from that of the AO on this issue.
S. 147: After the expiry of the time limit for issue of s. 143(2) notice, the AO has no jurisdiction to make a reference to the TPO. The TPO's report cannot form the basis for reopening the assessment
The assessee filed the return of income of 29th October 2007, and that the time limit for issuance of notice, under section 143(2), selecting the case for scrutiny assessment expired on 30th September 2008. It is also an admitted position that it was only on 24th December 2009 that the Assessing Officer made a reference, under section 92CA(3), to the Transfer Pricing Officer for determination of arm's length price of the international transactions entered into by the assessee with its associated enterprises. This reference to the TPO, and the resulted proceedings before him, culminated in the order dated 15th October 2010 proposing an arm's length price adjustment of Rs 2,80,91,619. As there were no proceedings pending before the Assessing Officer, nor was, for that purpose, the case of the assessee was even picked up for scrutiny assessment under section 143(3), the Assessing Officer proceeded to reopen the assessment, which had by then achieved finality, by reopening the assessment. On a challenge by the assessee to the reopening HELD by the Tribunal:
A reference to the Transfer Pricing Officer, in the absence of any proceedings pending before the Assessing Officer, is indeed unsustainable in law. As held by Hon'ble Karnataka High Court, in the case of the CIT Vs SAP Labs Pvt Ltd [judgment dated 25th August 2014 in ITA Nos. 842 of 2008 and 339 of 2010] , unless an income tax return, in respect of which notice under section 143(2) can be issued, is pending before the Assessing Officer, a reference to the Transfer Pricing Officer cannot be made by the AO. As to what is the relevance of an order passed by the Transfer Pricing Officer's order, in a situation in which the reference itself is unsustainable in law, we find guidance from Hon'ble Bombay High Court's judgment in the case of CWT Vs Sona Properties (327 ITR 592). That was a case in which the Assessing Officer had made a reference to the Departmental Valuation Officer after the end of the assessment proceedings. Their Lordships held that such a reference could not have been made under the scheme of the Act because the assessment proceedings had come to an end before the point of time when such a reference was made, and as such the reference itself was legally invalid. The stand of the revenue was that even if reference to the DVO is to be held to be invalid, the DVO's report constituted information and as such it could be a good basis for coming to the conclusion that wealth has escaped assessment. Rejecting this plea, Their Lordships observed that, "a report called by an authority having no jurisdiction would be a nullity at law and consequently proceedings based solely on such report considering the requirement of s.17 would be illegal and will have to be quashed" . In effect thus, it is held that when reference itself is invalid, the report received as a result of the said reference cannot constitute material for forming the belief that an income or wealth tax escaped assessment. This precisely applies to the situation before us. There is no contrary decision by any of the Hon'ble Courts above, including the Hon'ble jurisdictional High Court. However, this binding judicial precedent is distinguished by the authorities below on the ground that while DVO's report is not binding on the Assessing Officer, the TPO's order is binding on the Assessing Officer. That aspect of the matter, however, is wholly irrelevant inasmuch the reassessment proceedings were quashed in Sona Properties' case (supra) for the short reason of illegality for reference rather than on the consequence of the report obtained as a result of the reference. We are not inclined to accept the plea that the material facts of this case vis-à-vis that of Sona Properties' case, so far as relevant to the principle of law laid down by Hon'ble Bombay High Court, are any different. The distinction being sought to be made out by the revenue authorities is devoid of legally sustainable merits.
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