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2019 (8) TMI 448 - AT - Income TaxTP Adjustment - Royalty payment to its Associated Enterprises (AEs) - HELD THAT:- As admitted position that the assessee paid Royalty to its AEs as per the rates approved by the RBI. The TPO determined Nil ALP simply on the ground that the AEs to whom the assessee paid Royalty had discontinued production of such products and the assessee was making exports to them also. Such reasons are not germane in the determination of the ALP. TPO is required to determine the ALP of an international transaction under one of the methods mandated under rule 10B of the Income-tax Rules, 1962. Nothing of the sort has been done in the instant case. TPO got influenced with extraneous reasons, which have no bearing on the determination of the ALP of an international transaction. It is further observed that similar issue of payment of royalty came up for consideration before the Tribunal in assessee’s own case [2019 (8) TMI 369 - ITAT PUNE] for the earlier assessment years in which deletion of transfer pricing addition on payment of royalty by FAA has been upheld. Considering that the payment of Royalty to the AEs was as per RBI norms, we are satisfied that the view taken by the ld. CIT(A) is unassailable. This ground, therefore, fails. TP addition in the international transaction of 'Export of manufactured finished goods’ - HELD THAT:- ALP of the international transaction of Export of manufactured finished goods is required to be separately done. We have held above that the CUP is not the most appropriate method in the given circumstances. In such a condition, there is a need for resorting to another suitable method for determining the ALP of international transaction of Export of manufactured finished goods. We, therefore, set aside the impugned order and remit the matter to the file of the AO/TPO for a fresh determination of ALP of the international transaction of Export of manufactured finished goods by the assessee. It is, however, made clear that the transfer pricing adjustment, if any, resulting from such fresh determination of the ALP should be restricted only to the value of international transactions of ₹ 3.09 crore. The other part of the international transaction of Export of manufactured finished goods with the value of ₹ 47.86 crore, which has been accepted by the TPO at ALP, cannot be now interfered with. Needless to say, the assessee will be allowed a reasonable opportunity of hearing in such fresh proceedings. TP addition in respect of international transaction of Receipt of indenting commission - HELD THAT:- As the transaction is that of earning commission, ideally, the benchmarking should also have been done with reference to an uncontrolled transaction of earning commission only. Notwithstanding the fact that the TPO was required to take the comparable uncontrolled transaction as that of rendering of marketing services alone, he started with the entity level figures of the assessee which also include sale of self goods ostensibly involving altogether different functions, assets and risks vis-à-vis earning commission on sale for AEs. Thereafter again, he went off the mark by excluding the amount of raw material costs etc. and depreciation from the base of total costs by overlooking the fact that the figure of profit taken up by him also included profit from sale of manufactured goods. DR was fair enough to accept that the amount of depreciation ought to have been included. Even if we presume the initial step of adoption of the entity level profit of the assessee, including that from sale of self goods as correct, with which we do not otherwise agree, then also the total costs contributing to the manufacturing profit should have been considered, which obviously include raw material cost and depreciation, as has been held in the first appeal. CIT(A) has found the ALP of commission income at ₹ 13.79 crore as against the transacted value of commission income at ₹ 13.38 core, which is within plus minus 5% range, not calling for any transfer pricing addition. We, therefore, accord our imprimatur to the view taken by the ld. CIT(A) on this score. This ground is not allowed. Disallowance u/s 35DD - 1/5th of the fees paid to Registrar of Companies for increasing the authorized capital on amalgamation - HELD THAT:- Both the sides are in agreement that the facts and circumstances of the instant ground are mutatis mutandis similar to those of the preceding years, in which similar ground has been allowed in favour of the assessee. Following the precedents, we allow this ground of appeal. Disallowance being, 40% of expenses on premises considering the same as capital in nature - HELD THAT:- Both the sides agree that similar issue has been decided by the Tribunal against the assessee in its order for the A.Y. 2004-05. In the absence of the ld. AR pointing out any difference in the facts or law on this issue for the instant and the preceding year, following the view taken for the A.Y. 2004-05 [2019 (8) TMI 369 - ITAT PUNE] we uphold the capitalization of expenses in relation to the premises @ 40%. At the same time, it is directed that the assessee be allowed depreciation on such capitalized amount. Disallowance of Miscellaneous expenses - HELD THAT:- Similar issue came up for consideration before the Tribunal for earlier years as well. After allowing full deduction towards software expenses and fees for handling share record and making full disallowance for warranty expenses, Gifts and Donation, the Tribunal has restricted the addition to 15% of the balance expenses. Following the same view, we set aside the impugned order on this score and direct the AO to compute the amount disallowable out of Miscellaneous expenses in accordance with the directions given for the immediately two preceding years on this score. Addition on account of commission - HELD THAT:- Here again we find it is an admitted position that similar issue has been determined by the Tribunal in favour of the assessee in its orders for the A.Ys. 2002-03 to 2004-05. Following the same, we countenance the impugned order on this score. This ground is not allowed. Disallowance of payment of VRS as not eligible for deduction u/s 35DDA - HELD THAT:- Similar issue came up for consideration before the Tribunal in assessee’s own case for earlier years as well. The Tribunal has held the assessee to be entitled to deduction u/s.35DDA on the basis of incurring of liability. A further direction has been given to ensure that the assessee does not get deduction on actual payment basis.The impugned order is set aside to this extent and the matter is remitted to the AO for allowing deduction only towards incurring of liability, i.e. on accrual of liability towards VRS u/s.35DDA and that no amount should be allowed as deduction on payment basis. Deduction u/s.35DD of amalgamation expenses - stamp duty for transfer of immovable assets - HELD THAT:- Both the sides are consensus ad idem that similar issue has been determined by the Tribunal in favour of the assessee in earlier years. Following the precedents, we dismiss this ground of appeal by the Revenue Deduction towards provision for warranty - HELD THAT:- The Tribunal has discussed this aspect in para no. 15 onwards of its order for the A.Y. 2003-04 and restored the matter to the file of the AO holding, inter alia, that the provision for warranty should be allowed at 0.4% of net sales and further no deduction should be allowed for actual expenses. As the facts are similar, we direct the AO to follow the same course of directions to the extent applicable for the year under consideration. Education cess on income-tax paid for the year - Addition u/s 40(a)(ii) - HELD THAT:- It is seen that relying on Circular F. No. 91/58/66-ITJ(19) dt. 18th May, 1967, the Hon’ble Rajasthan High Court in Chambal Fertilisers and Chemicals Ltd. [2018 (10) TMI 589 - RAJASTHAN HIGH COURT] has held that Education cess is not disallowable u/s 40(a)(ii). Depreciation on the amount of capital expenditure - HELD THAT:- For the A.Y. 2004-05 [2019 (8) TMI 369 - ITAT PUNE] Tribunal noticed that the assessee purchased a property during the year and carried out suitable repairs/renovation to make it fit for use. The decision of the ld. CIT(A) capitalizing 40% of the expenditure as against 80% done by the AO, was approved by the Tribunal. Once a particular amount has been held to be capital expenditure on a building purchased by the assessee, the same has to be subjected to depreciation. As the Tribunal has approved the capitalizing of certain amount to Building account, we, therefore, direct the AO to allow depreciation on such amount as per law.
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