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2015 (10) TMI 2049 - ITAT MUMBAI

2015 (10) TMI 2049 - ITAT MUMBAI - TMI - Disallowance of R&D expenses in respect of product adaptability and demonstration expenses - Held that:- The issue of R&D expenses are recurring in nature and are incurred on yearly basis. Similar nature of expenditure have been allowed from the stage of the Tribunal and also by the Assessing Officer in pursuant of the finding given in earlier years. As stated in assessee’s line of business R & D expenses are continuous process without which assessee cann .....

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7; 74,85,711/-, which was claimed as revenue expenditure by the assessee, sum of ₹ 55 lakhs has been held to be ‘capital expenditure’ on which depreciation has been allowed, then for the balance amount of ₹ 19,85,707/- also on the same reasoning it has to be held as ‘capital expenditure’, on which the assessee should be liable for depreciation u/s 32. Such a claim cannot be disallowed merely on the ground that assessee had not deducted TDS and therefore is to be disallowed u/s 40(a)( .....

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e is inherent inconsistency in the finding of the DRP. Accordingly, on these facts we hold that depreciation should be allowed on the balance amount of ₹ 19,85,707/- also as has been done/allowed for the sum of ₹ 55 lakhs.- Decided in favour of assessee.

Transfer pricing adjustment - international transaction of import of seeds made by the assessee from its AE - adoption of MAP - Held that:- The entire transfer pricing adjustment has been made after rejecting the assessee’ .....

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nd circumstances, we also direct the TPO/Assessing Officer to adopt RPM as most appropriate method for benchmarking the transaction of import of seeds to its AE and carry out comparability analysis for benchmarking the assessee’s gross margin and determined the appropriate ALP.

Addition on account of fall in gross profit margin - Held that:- there are exceptional items in this year like inventory written off aggregating to ₹ 16,36,68,410/- and extra ordinary increase in sales ex .....

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ore the DRP. To this extent, we agree with the contention of the Ld. DR that if the TP adjustments are deleted, then there would be no telescoping and the entire addition made on account of fall in gross margin will get sustained. Accordingly, we direct the Assessing Officer that in case the TP adjustments are deleted after adopting the RPM as MAM, then the entire GP addition should be sustained. - ITA No. : 365/Mum/2012 - Dated:- 16-9-2015 - SHRI G S PANNU, ACCOUNTANT MEMBER AND SHRI AMIT SHUKL .....

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fficer has erred in law and on facts in rejecting the books of account, trading results and thereby making the best judgment assessment u/s 144; (ii) The Ld. Assessing Officer has erred in law and on facts in disallowing R&D expenses in respect of product adaptability and demonstration expenses for sums aggregating to ₹ 74,40,373/-; (iii) The Ld. Assessing Officer has erred in law and on facts in not granting depreciation u/s 32 in respect of compensation received which has been treate .....

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/s Seminis Inc. USA, which is a world s largest vegetable seeds company and offers several distinct hybrid seeds. As against the return of loss of ₹ 22,67,56,028/-, the assessment in the case of the assessee was completed at a loss of ₹ 29,76,983/- after making the various additions/disallowances, including transfer pricing adjustment of ₹ 15,40,31,031/-. 3. At the outset, the Ld. Counsel for the assessee, Shri Rajan Vora submitted that, so far as the issue relating to disallow .....

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sing Officer has disallowed the expenditure on R&D on the ground that no details were furnished. He further submitted that the details of product adaptability and demonstration expenses are appearing at page 148 of the paper book, which were there before the Assessing Officer as well as DRP, are as under: Sr. No. Depreciation Amount of Rs. 1 Production Department 35,15,768 2 Quality Department 1,94,184 3 Research & Development Department 21,42,066 4 Research & Development Foundation .....

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ith value added traits, which are suitable to all climatic zones of India. For these purpose continued R & D expenses are incurred on yearly basis and are recurring in nature. Similar issue has come for consideration before the Tribunal in AY 2003-04 and in AY 2006- 07 which was decided in favour of the assessee. In the assessment year 2006-07, the Tribunal had set aside this issue following the directions of the DRP. In pursuance thereof, the Assessing Officer has allowed these expenditures .....

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ord, we find that the issue of R&D expenses are recurring in nature and are incurred on yearly basis. Similar nature of expenditure have been allowed from the stage of the Tribunal and also by the Assessing Officer in pursuant of the finding given in earlier years. As stated by Ld. Counsel, in assessee s line of business R & D expenses are continuous process without which assessee cannot carry out its business. Hence such a R & D expenses need to be allowed under section 35D. As rega .....

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8377; 74,85,711/- as compensation to Ceekay Seeds for termination of agreement dated 13.10.2006. The Assessing Officer has treated the entire expenditure as capital in nature and did not allow the assessee s claim for revenue expenditure. The DRP has upheld the action of the Assessing Officer and treated the compensation paid as capital in nature. However, the DRP directed the Assessing Officer to grant depreciation on the amount of ₹ 55,00,004/- on which tax was deducted at source. In res .....

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not allowed as revenue expenditure, then also depreciation should be allowed on such a capital expenditure. The Ld. DR on the other hand, strongly relied upon the order of the DRP. 7. After considering the relevant observation and the finding of the DRP and also the submissions made by the parties, we find that, if out of the total claim of expenditure of ₹ 74,85,711/-, which was claimed as revenue expenditure by the assessee, sum of ₹ 55 lakhs has been held to be capital expenditur .....

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oked only in the cases where the assessee is claiming revenue expenditure and not where it has been held to be disallowable as capital expenditure and secondly, if provision of 40(a)(ia) is to be invoked then the entire expenditure has to be first treated as revenue expenditure and then it has to be examined, whether it attracts TDS provisions. Thus, there is inherent inconsistency in the finding of the DRP. Accordingly, on these facts we hold that depreciation should be allowed on the balance a .....

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Profit to Net Sales (GP/Sales) as the Profit Level Indicator (PLI) and identified eight comparables for benchmarking the Arm s Length Price of the assessee. The assessee s gross margin was (-) 44.57% whereas, the arithmetic mean of gross margins of the comparables based on single year data was (-) 29.93%. The Transfer Pricing Officer however has disregarded the assessee s Transfer Pricing Analysis by rejecting the RPM method and instead adopted TNMM on entity level as the Most Appropriate Metho .....

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activity of trading of seeds wherein the PLI (OP/OI) is at - 12.44%. The comparable companies along with their PLI are as under :- Sr. No. Name of comparable PLI for FY 2006-07 (OP/OI) 1 Gujarat State Seeds Corpn. Ltd. 8.77% 2 Kaveri Seed Co. Ltd.* 23.86% 3 Syngenta India Ltd. 27.80% 4 Mahyco Vegetable Seeds Ltd. NA Arithmetic Mean 20.14% Assessee -12.44% Thus, from the above table, it can be seen that the PLI of the assessee is significantly less compared to PLI of the 3 comparables. Therefore, .....

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of international Transaction 154,031,031 9. Shri Rajan Vora, submitted that, so far as the TP adjustments are concerned, similar issue was also involved in the earlier years, wherein similar TP adjustment has been deleted from the stage of the Tribunal. The Tribunal vide order dated 13th May, 2011 for the assessment year 2006-07 has directed the TPO to consider RPM as the most appropriate method for benchmarking the international transaction of import of seeds and then carry out TP and comparabi .....

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submitted that here in this year in the case of the assessee, a huge addition on account of gross profit was made by the Assessing Officer after rejecting the books of account, in the draft assessment order. The assessee before the DRP had written a letter dated 27.09.2011 stating that if G.P. additions are to be sustained then transfer pricing adjustment should be telescoped in such GP additions. Accordingly, the DRP has given direction to the Assessing Officer, that no separate TP addition of .....

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RPM is applied, then no adjustment would be required to be made. On the issue of GP addition also, Mr. Vora made his detail submissions as to why on the facts of the assessee s case no addition is called for. 11. On the other hand, the Ld. DR submitted that, once the assessee itself has given a letter to the DRP agreeing for TP adjustment, to be telescoped from the addition of gross profit which the DRP has agreed, then assessee cannot backtrack from such an offer and plead that such an adjustme .....

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TPO. This selection of most appropriate method of TNMM by the department has been found to be inappropriate by the Tribunal in the earlier years and assessee s RPM has been accepted. As a result of adopting RPM as MAM, similar adjustments made in the earlier assessment years stands deleted. Thus, as a matter of judicial precedence and without there being any change of material facts and circumstances, we also direct the TPO/Assessing Officer to adopt RPM as most appropriate method for benchmarki .....

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tment on account of TP is removed then such an addition will get enhanced. On the merits of the addition made on account of gross profit margin, it is seen from the records that the Assessing Officer has rejected the books of account mainly on the ground that assessee s GP margin is very low in this year as compared to previous year G.P. rate of 46.47% and secondly, the assessee could not produce the relevant records on the ground that the record maintained at the assessee s office at Aurangabad .....

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stly, on account of inventory written off in the profit and loss account at ₹ 16,34,68,410/- and secondly on account of increase in expenses incurred in relation to sales, like scheme discount, trade discount and compensation paid to dealers aggregating to ₹ 6,12,55,579/-. Such an extra ordinary items were not there in the earlier years. It was because of these factors that the assessee s GP come down. If these extra items are removed then GP will come to 42.70% as compared to 46.74% .....

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