In this case, one of the ground raised by Revenue was whether in the facts and circumstances of the case, the Dispute Resolution Panel was right in directing AO to delete proposed addition on account of reversal of provision for Royalty of Rs.1,39,18,474/-, though the assessee had failed to reconcile the figures in this regard with the payer’s books of account.
Briefly, in the facts of the case, the assessee was subsidiary of Volkswagen AG. The Volkswagen Group was one of the world’s leading automobile manufacturers and the largest car maker in Europe. The assessee was nonresident company based in Czech Republic, wherein Skoda developed manufactured and marketed passenger cars throughout the world. The assessee company had subsidiary in India i.e. Skoda Auto India Pvt. Ltd., which was engaged in assembly, marketing and sale of motor vehicles, parts and accessories. For the year under consideration, the assessee filed return of income declaring total income of Rs. 44,47,30,190/-. The case of assessee was selected for scrutiny. From the details furnished by the assessee, the AO noted that during the year under consideration, the assessee had received certain amounts from Skoda Auto India Pvt. Ltd. (SAIPL) and Volkswagen Group Sales India Pvt. Ltd. and Volkswagen India Pvt. Ltd.
In respect of reversal of royalty of Rs. 1.39 crores during the course of assessment proceedings, the assessee was requested to explain the basis of royalty payment worked out initially as per the books of account. The assessee submitted revised royalty computation. However, the assessee could not explain the basis and could not reconcile the sale figures in the revised working of royalty payment with reference to the sales figures reflected in the audited statement of accounts of SAIPL for financial year 2009-10 to ascertain the correctness of royalty working. Therefore, claim of reversal of royalty provision was not accepted. In view thereof, sum of Rs. 1.39 crores which was not considered by the assessee as income, was added to the total income returned by the assessee.
The assessee pointed out that SAIPL had made provision of Rs.6.29 crores towards royalty payable for assessment year 2010-11. As per provisions of section 195 of the Income Tax Act,1961(for short ‘the Act’), the tax was required to be deducted on the date of booking of particular expense or payment, whichever was earlier. Accordingly, to comply with the said provisions, SAIPL deducted tax on Rs. 6.29 crores. Subsequently, SAIPL reversed the excess provision amounting to Rs. 1.39 crores in its books of account. The assessee for the year under consideration actually accrued and received sum of Rs. 4.94 crores as royalty and the same was offered to tax. It was further explained that in view of Technology Transfer and Trademark License Agreement (TTA) dated 01.10.2001 between assessee and SAIPL, the assessee received royalty @ 8% on export sales and 5% on domestic sales. Since the amount was linked to quantum of sales, it was difficult to ascertain the exact amount of royalty for a particular year till the time the sales figure for the said year was finalized and hence, the provision was made to royalty payable to Skoda. But subsequently, SAIPL determined the actual amount of royalty due to assessee company and reversed excess provision. The assessee claimed before the DRP that it had submitted detailed working of royalty which was not considered by the AO. The DRP accepted the submissions of assessee and directed the AO to delete proposed addition of Rs.1.39 crores and also allow corresponding TDS credit.
The learned Members of the ITAT, Pune observed that the issue raised is in respect of difference between the provision made on account of royalty and actual royalty booked for SAIPL for the year under consideration. SAIPL had made provision of Rs. 6.29 crores in its books of account being royalty payable to the assessee for the year under consideration and had accordingly deducted tax at source. However, before proceeding further, it may be pointed out that basis of royalty is the sales made during the year, wherein as per agreement between the parties royalty is payable @ 5% on export sales and 8% on domestic sales. The assessee pointed out that earlier provision was made at Rs. 6.29 crores by SAIPL in its books of account. However, while finalizing books of account, the said provision was reduced to Rs.4.90 crores. The assessee has accounted for royalty of Rs. 4.90 crores. The TDS though was deducted at Rs. 6.29 crores and the assessee has also claimed the benefit of TDS deducted on Rs. 6.29 crores, but deduction under section 10(6A) of the Act has been claimed only in respect of TDS due on Rs. 4.90 crores. SAIPL in its audited books of account which is accompanied to audited accounts in form No.3 CEB, has only debited Rs. 4.90 crores. In the totality of the above said facts and circumstances, what has to be accounted for by the assessee is revised royalty at Rs. 4.90 crores and not the royalty which was provision made during the year before finalization of figures of sales at Rs. 6.29 crores. The learned Members of the ITAT upheld the order of DRP in deleting proposed addition of Rs. 1.39 crores.