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2016 (10) TMI 423 - ITAT MUMBAI

2016 (10) TMI 423 - ITAT MUMBAI - TMI - Applying most appropriate method for benchmarking royalty transactions - Held that:- We find that while passing the order for the last AY the TPO had held that TNMM was the most appropriate method for benchmarking, that he had made an adjustment of ₹ 1. 50 crores under the head royalty payment, that the Tribunal had decided the issue in favour of the assessee. We find that the TPO had not given any reasons for not following the TNMM as most appropria .....

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Held that:- Since, the finding on the issue of warranty provision under normal computation of income will have bearing on the computation of book profit u/s 115JB, therefore, we remit this issue of adjustment u/s 115JB to the record of AO for decision the same as per law. - Addition to the income of the assessee in respect of purchase of fixed assets - Held that:- We find that the machine purchased by the assessee was included in the WIP. In the case of Ciena India (P. )Ltd. (2015 (5) TMI 3 .....

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Therefore,we are of the opinion that matter should be restored back to the file of the AO for determine the depreciation and restrict the disallowance to that extent only. Effective ground of appeal, raised by the assessee,is decided in its favour, in part - ITA No. 4851/Mum/2013, ITA No. 4898/Mum/2013 - Dated:- 5-10-2016 - Shri Rajendra, Accountant Member And Saktijit Dey, Judicial Member Revenue by: Shri Sanjeev Jain-DR Assessee by: Shri Rushabh Vora ORDER Per Rajendra A. M. Challenging the or .....

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31. 1. 12, determining the income of the assessee at ₹ 3. 85crores under the normal provisions and at ₹ 4. 76 crores under MAT provisions. ITA No. 4851/Mum/2013 : 2. First effective Ground(GOA 1-6)of appeal filed by the AO is about applying most appropriate method for benchmarking royalty transactions. During the assessment proceed - ings, the AO found that the assessee had entered into International Transactions(IT. s)relating to purchase of components, valuing ₹ 22. 93 crore .....

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ing employee cost and increase profit margin. After considering the submissions of the assessee and the Technical Know-how agreement, the TPO held that under the agreement the licensor was required to impart transfer and convey the technical know-how, that the assessee had not manufactured any component or machine, that it was involved only in assembling of the components, that contention of the assessee that on account of the technology it was able to command better prices was not acceptable, i .....

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n of ₹ 63, 64, 620/- as advised by the TPO. 2. 1. Aggrieved by the order of the AO, the assessee preferred an appeal before the First Appellate Authority (FAA). Before him, the assessee made elaborate submissions about technical know-how, on-going technical support new technological development, upgrade for the machine design and software and technical assistance provided by the AE. It was further argued that the TPO had ignored the fact that the net profit of the company had increased ove .....

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er considering the submission of the assessee and the assessment order, the FAA held that similar issue of disallowance/adjustment of payment made towards royalty was considered by him while deciding appeal for AY. 2007-08, that it was held that entity level TNMM was the most appropriate method to bench mark the international transaction relating to purchase of components, sale of components and payment of royalty, that the facts of the case under consideration were similar to the earlier years .....

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e further held that assembly of machines required very high level of precision and accuracy that it was a manufacturing process per se, that the TPO had not carried out some fact finding exercise in respect of the comparables. Finally, he held that the AO was not justified in holding that payment of royalty should be taken at Nil, that the addition made by the AO had to be deleted. 2. 2. Before us, the DR supported the order of the TPO and stated that the TPO had applied CUP Method. The AR state .....

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the Tribunal had decided the issue in favour of the assessee. We find that the TPO had not given any reasons for not following the TNMM as most appropriate method the year under consideration. No doubt the income tax authorities are not bound by the orders of the earlier years, but they have to pass a reasoned order for deviating from the stand taken from the earlier years. We find that the TPO has not brought on record the differences, if any, of the facts of the earlier AY. and the year under .....

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sessee s company. During the year under consideration, the assessee has under taken international transaction relating to purchase and sale of components, payment of royalty and reimbursement (payment) with its AE. The assessee bench marked the International transaction relating to purchase of components valuing ₹ 22. 93 crores by using Cost Plus Method (CPM) as most appropriate method. For the international transaction relating to sale of components and payment of royalty, the assessee ha .....

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ee is not at arm s length. The TPO has applied TNMM as most appropriate method for bench marking, the international transaction and worked out an adjustment at ₹ 1. 80 crores but since the payment of royalty being only at ₹ 1. 50 crores, the ALP of such payment of royalty has been determined by the TPO at Nil and accordingly made an adjustment of ₹ 1. 50 crores. On appeal, the Commissioner of Income Tax(Appeals) enhance the assessment by making the adjustment in respect of the .....

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o ₹ 2, 56, 62, 326/- as against the adjustment made by the TPO at ₹ 1, 50, 68, 228/-. Consequently, a differential amount of ₹ 1, 05, 94, 098/- was directed to be enhanced. 8. We have heard the Ld. AR as well as Ld. DR and considered the relevant material on record. Though the assessee has carried out various international transaction regarding payment of royalty, purchase of component and sale of component, however, the TPO made adjustment only with respect to royalty payment .....

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profit at 8. 33% against the operating profit at the entity level of the assessee at 4. 71%. Though we do not approve the approach of the Commissioner of Income Tax(Appeals) for bench marking the purchase of component by taking the entity level results of the assessee instead of considering the data of international transactions only. Even otherwise as per the transfer pricing provisions/regulation each and every international transaction has to be bench marked by comparing Independent Uncontro .....

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as under: Sl.No. Particulars As per assessee (Form 3CEB) As per TPO ALP determined as per appellate order 1. Operating Income(OI) 62,30,58,589 62,30,58,589 62,30,58,589 2. PLI(OP/SALES) 4.71% 7.61% 8.83 3. Operating Profit (OP) 2,93,53,747 4,74,14,758 5,50,16,073 4. Operating Cost 59,37,04,842 57,56,43,831 56,80,42,516 Adjustment Rs.256,62,326(Rs.59,37,04,842-Rs.56,80,42,516) 9. The Commissioner of Income Tax(Appeals) appeal has determined the ALP being operating cost at ₹ 56, 80, 42, 516 .....

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f the assessee which includes all the international transactions, therefore, when the over all price of the assessee is within the range of 5% of ALP being the arithmetic mean then no adjustment is permitted. Respectfully, following the above order of the Tribunal for the AY 2007-08 (supra), we decide the effective Ground of appeal against the AO. 3. Next effective ground of appeal is about deleting the addition of ₹ 22. 38 lakhs under the head provision for warranty (GOA-7-9). It was brou .....

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and claim that the provision for warranty is based on the actual expense incurred in the earlier years, however the Commissioner of Income Tax(Appeals) has not discussed the fact and aspect whether the provision is based on reliable estimates or not. The decision of Hon ble Supreme Court in case of Rotork Controls India Pvt. Ltd. Vs CIT (supra) has been considered by the Hon ble Madras High Court in the recent decision in case of Renowned Auto Products Mfrs. Ltd. Vs ITO, 354 ITR 127 in para 12 .....

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observed at paragraphs 14 and 16 as follows (pages 607 and 608): We reject the claim of the assessee on both counts. As far as the reliance placed on the decision reported in Rotork Controls India P. Ltd. v. CIT [2009] 314 1TR 62 (SC) is concerned, in considering the claim on a provision made for warranty claim, the apex court held that a provision is recognised when: (a) an enterprise has a present obligation as a result of a past event; (b) it is probable that an outflow of resources will be r .....

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h further held at paragraph 18 that the provision for service charges payable by the assessee by way of warranty provision was not made on any scientific data. By applying the facts of the case to the law declared by the apex court, it was further observed therein that the provision made was only on ad hoc basis which was a fact recorded by the Tribunal. Here also, the Commissioner as well as the Tribunal categorically found that the assessee had not proved the provision of warranty expenses bas .....

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the said decision of the apex court. We do not find any merits in the appeal and, therefore, both the questions of law are answered against the assessee. Accordingly, the tax case appeal is dismissed. No costs. 21. Accordingly, we set aside this issue to the record of the Assessing Officer to decide this issue after examination of relevant facts as well as in light of the decision on this point. Since, the finding on the issue of warranty provision under normal computation of income will have be .....

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ixed assets. During the assessment proceedings, the AO found that the assessee had purchased one used machining centre and accessories, amounting to ₹ 45. 06lakhs from own group entities. During the TP proceedings the assessee was asked to provide cost of assets recorded in the books of the AE in respect of the asset. The TPO observed that inspite of sufficient time provided the assessee failed to provide requisite information, that it contended that before acquiring the machine it had obt .....

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-Rs. 28. 00 lakhs). The AO while passing the order made an adjustment of ₹ 17. 06 lakhs to the total income of the assessee. 4. 1. During the appellate proceedings before the FAA, the assessee contended that adjustment made by the AO would not have any impact on the taxable income for the year, that the machinery in question was part of the capital work in progress (CWIP) as on 31. 3. 2008, that the adjustment proposed by the TPO would only reduce the value of CWIP to be carried forward to .....

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determine the income arising from the transaction, that the assessee itself had reflected the transaction as IT in its audit report and had determined ALP following TNMM , that as per the provisions of section 92(1) of the Act, assessee s IT undertaking had to be taxed as per the normal provisions of the Act and in addition to the same had to be governed by the principles of Arms-length price (ALP), that in section 92-92F of the Act or Rule-10B-10C there was no differentiation in respect of the .....

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