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2016 (10) TMI 522 - ITAT CHENNAI

2016 (10) TMI 522 - ITAT CHENNAI - TM - Transfer pricing adjustment - downward adjustments made by the ld. TPO considering comparative statements - Held that:- We on perusing the comparative statement showing computation of royalty, find the Arms Length Price (ALP) at 4.6% as against Royalty on sales @1.14% and there is also a variation of percentage on sales admitted by the assessee. Considering the apparent facts and material, we are of the opinion that the matter has to be relooked as the per .....

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by the assessee company is Revenue in nature and the objects for which it is offered is for social cause and amendment to Sec. 37(1) of the Act inserted with Finance Act, 2014 is subsequent to assessment year. Therefore, the same is not applicable and assessee company relied the judicial decision of CIT vs. Madras Refineries Ltd [2008 (9) TMI 309 - SUPREME COURT ]. Considering the apparent facts, we are of the opinion that the expenditure is for a specific cause for the benefit of society was no .....

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t and further due to amendment to Sec. 2(24) (xviii) w.e.f. 01.04.2015 subsidy or a grant defined was made taxable under Income Tax. So, considering the apparent facts, provisions of law, industrial policy regulations direct the ld. Assessing Officer to delete the addition of VAT subsidy as being in the nature of Capital Receipt and it is to be treated accordingly and allow the ground of the assessee. - Disallowance of provisions for operation, maintenance and warranty - Held that:- Authoris .....

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ication that the said provisions are reversed on the first day of next financial year and entries are passed in the Books and therefore, we remit the disputed issue for limited purpose to the file of the ld. Assessing Officer for verification and examination and assessee should be provided adequate opportunity of being heard before deciding the issue on merits. The ground of the assessee is allowed for statistical purpose. - Non grant of TDS credit - Held that:- We considering the apparent f .....

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nvestments in subsidiary companies for the purposes of calculation of disallowance under Rule 8D(2) and the assessee should be provided adequate opportunity of being heard before passing the order on merits. The ground of the Department is allowed for statistical purpose. - I.T.A. No.766/Mds/2016, I.T.A. No.786/Mds/2016 - Dated:- 17-8-2016 - SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SHRI G. PAVAN KUMAR, JUDICIAL MEMBER For The Assessee : Shri. B. Ramakrishnan, FCA For The Department : Shri. An .....

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his common order for the sake of convenience, first, we take up assessee appeal in ITA No.786/Mds/2016 of assessment year 2011-2012 for adjudication. 2. The assessee has raised the following grounds of appeal:- 1. For that the direction of the Dispute Resolution Panel is contrary to law, facts and circumstances of the case. 2. For that the Dispute Resolution Panel erred in confirming the Downward adjustment to the tune of _2,95,08,102/- on payment of Royalty to AE for use of Technical Know-how f .....

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162/- received from Andhra Pradesh Government treating the same as revenue receipt without appreciating the fact that the amendment u/s 2(24)(xviii) in this regard is prospective in nature. 5. For that the Dispute Resolution Panel erred in confirming the action of the Assessing Officer in disallowing the provision for operation, maintenance and warranty debited to Profit and Loss Account to the tune of ₹ 29,68,000/- stating that the same is excess. 6. For these grounds and such other groun .....

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otal income of =47,26,67,501/-. The case was selected for scrutiny and notices u/s. 143(2) and 142(1) of the Act were issued. In compliance the ld. Authorised Representative of assessee appeared from time to time and filed information. The ld. Assessing Officer in the assessment found that assessee has international transactions exceeding =15 Crores and reference was made to Transfer Pricing Officer (hereinafter TPO ) by letter dated 13.03.2014 for determining Arms s Length Price (ALP) of intern .....

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ce u/s.14A of the Act and the ld. Assessing Officer completed assessment based on the directions. 4. The Transfer Pricing Officer has made downward adjustment to the extent of =2,95,08,102/- on payment of Royalty to the Associate Enterprises (Associated Enterprise) for use of technical knowhow for Manufacture of Wind Electric Generator. The assessee has a Associate Enterprises M/s. Regan Renewable Energy Generation Global Limited and the amount of =9,87,05,926/- was paid as Royalty for knowhow f .....

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espect of sales within India and outside India. The assessee on usage of technical knowhow in the relevant period has paid a Royalty of =9,87,05,926/- to Regen Cyprus. In the assessment proceedings, ld. Assessing Officer referred to the Transfer Pricing Officer and based on Royalty payments, the TPO made downward adjustment by restricting payment of Royalty to Regen Cyprus to the extent of =6,92,00,000/- only and excess treated for the purpose of addition and the assessee filed objections with t .....

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1) as per Transfer Pricing Report. Under the erstwhile regulatory laws payment of royalty was permitted to the extent of 5% on domestic sales and 8% in respect of export sale. But in the present case, the rate of royalty has worked to 1.14% which is well within the regulated rates. The ld. TPO relied on the FEMA provisions and could not decide on the business or commercial expediency of the assessee. Once the TNMM is applied there is no necessity for separate analysis and adjustment of Royalty. .....

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ssee company maintained the necessary documentation of the international transactions as per Section 92D read with Rule 10D. The Assessee company had also submitted details of the technology knowhow it obtained from its AE and the details of the Royalty payments made.Furthermore, ITAT are of the opinion that once TNMM has been applied to the Assessee company's transaction, it covers under its ambit the Royalty transactions in question too and hence separate analysis and consequent deletion o .....

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ANo.1159/Hyd/2011 have to be applied. Further, the learned Counsel for the assessee had also invited our attention to page 53 wherein the operating cost has been declared at ₹ 98,61,88,320/- and the same has been reflected in the P&L account for the year ending 31st March, 2005 at page 234 of the paper book. At page 245 of the paper book under 'Selling Expenses' the amount of ₹ 2,02, 94,565/- against royalty has already been taken into account. Hence, we find that royalty .....

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held by the DRP is unsustainable and is to be deleted. Hence Ground No. 2 is held in favour of the assessee. Hence, the appeal of the Revenue ITANo.l040/Hyd/2011 is dismissed and Assessee's appeal in ITA No. 1159/Hyd/2011 is allowed. No disallowance can be made towards payment of royalty if payments exclusively made for purpose of trade. In the case of Akzo Nobel Chemicals (India) Ltd. vs. DCIT in ITA No.1477/PN/2010, the Pune Bench held that Tribunal in assessee s own case vide ITA No.1477/ .....

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their cost from the sales value for the purposes of computing net sales value eligible for royalty payment is liable to be set-aside. We hold so. As a result, the order of the CIT(A) on this aspect is setaside and the Assessing Officer is directed to delete the addition of ₹ 19,54,132/- made on account of excess royalty. In the result, the appeal of the assessee for assessment year 2001-02 vide ITA No. 1169/PN/2011 is partly allowed. Certain raw materials used in production process cannot .....

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t made of royalty by assessee than approved by SIA to justify its disallowance by way of TP adjustment. CIT (A) could not appreciate those infirmities in order of TPO despite same were specifically brought to his notice on behalf of assessee and confirmed TP adjustment made by TPO in respect of royalty payment which was totally unjustified. Therefore, impugned addition deleted. Assessee's ground allowed. In absence of excess payment made of royalty by assessee than approved by SIA, disallowa .....

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2004-05, while working on same basis, the resultant ALP derived was lower than book value of the international transaction as declared by assessee, therefore, book value of the international transactions accepted to be at the arm's length price and consequently, entire addition of ₹ 5,22,28,112 deleted by CIT(A) was upheld . In the case of ACIT vs. Kehin Panalfa Ltd, the Delhi Tribunal held that Besides similar issue of royalty payment is decided in favor of the assessee is decided by .....

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stries (supra). Since the Royalty was being paid from 1997 and was continuously examined by the AO, then in the absence of any new facts to hold that there was no need to pay the royalty was uncalled for. and prayed for allowing the appeal. 4.3 Contra, , the ld. Departmental Representative relied on the orders of ld. Assessing Officer and DRP and vehemently opposed to the grounds. 4.4 We heard the rival submissions, perused the material on records and judicial decisions. The crux of the issue be .....

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ed by ERNST & YOUNG referred at page 18 to 60 of the paper book and also highlightened Audit report form no. 3CEB at page 70 of paper book were the international transactions with Associated Enterprise and method used being TNMM method disclosed alongwith comparative statements, on Royalty. The ld. TPO is of the opinion that assessee company has paid excess Royalty were as he considered the deduction of Brought out components and calculated Royalty on sales at 8% and relying on the actual sa .....

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on sales admitted by the assessee. Considering the apparent facts and material, we are of the opinion that the matter has to be relooked as the percentage computed by the ld.TPO is 1.14% in comparison with the Arms Length Price margin being 4.60%. Therefore, we remit the disputed issue for recalculation to the file of ld. TPO to consider Royalty payment on brought out components based on technical specifications. The ground of the assessee is allowed for statistical purpose. 5. The second groun .....

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ter dated 24.03.2015 explaining the nature of assessee company contribution and its social responsibility initiatives to foster a better future for children in neighborhood communities, by significantly strengthening the social institutions that generally influence well being of children, Family, school and community in general which are strategic areas of focus of the Company. The ld. Assessing Officer considered the submissions and nature of expenses incurred for business purpose is of the vie .....

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Panel has confirmed the order of the Assessing Officer. Aggrieved by the order, the assessee assailed an appeal before Tribunal. 5.3 Before us, ld. Authorised Representative submitted that the assessee has incurred the expenditure for a social cause and ld. Assessing Officer erred in observing that the expenditure is for non business purpose whereas the expenses are in the nature of Revenue and incurred for the purpose of business. The ld. DRP confirmed the findings of the ld. Assessing Officer .....

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business and goodwill and within the commercial expediency and prayed for allowing the appeal. 5.4 Contra, the ld. Departmental Representative relied on the order Assessing Officer and Dispute Resolution Panel and vehemently opposed to the grounds. 5.5 We heard the rival submissions, perused the material on records and judicial decisions. The expenditure incurred towards corporate social responsibility by the assessee company is Revenue in nature and the objects for which it is offered is for s .....

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nd of the assessee is allowed. 6. The third ground raised by the assessee is that DRP has confirmed the addition of =7,09,35,162/- subsidiary received from Andhra Pradesh Government was reflected in the profit and loss account and claimed as Capital receipt while computing total income. 6.1 The ld. Authorised Representative explained that the company has accounted subsidiary in the Books of account for Income Tax purpose and it is capital in nature and not taxable. The objects of the scheme is t .....

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decisions. But the ld. Assessing Officer considered the object of the company and is of the opinion that it is only a refund of VAT liability and being in the nature of supplementary trading receipt and elaborately dealt at page 8 & 9 of his order and finally considered the subsidy as Revenue receipt and made an addition. Aggrieved by the order, the assessee filed an appeal before Dispute Resolution Panel. 6.2 The Dispute Resolution Panel confirmed the order of the ld. Assessing Officer. Agg .....

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ncentive given to the assessee by the State Government is to set up a new unit in State and shall be a Capital receipt and supported his arguments with decision of CIT vs. Kirloskar Oil Enginess Ltd (364 ITR 88) wherein held that Capital incentive given to assessee by State Government to enable assessee to set up a new unit in State would be capital receipts . In the case of CIT vs. Ponni Sugars & Chemicals Ltd (129 Taxmann 231) the Jurisdictional High Court held that the subsidy amount rece .....

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, pertaining to the Industrial Policy for the State of Jammu & Kashmir, is capital receipt. The Co-ordinate Bench has held in the case of Ford India (P) Ltd vs. DCIT (2013) (156 TTJ 1) that assessee received capital subsidy under a scheme for accelerating industrial development in State, same could not be taxed as a Revenue receipt. Further in the case of DCIT vs. Reliance Industries Limited (2004) (88 ITD 273) (Mum) (SB) it was held that if subsidy was given for expansion/setting up of indu .....

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the nature of a capital receipt provided for expansion or setting up of unit of industrial backward area. Subsidy is exempted from tax based on the modality or sources of funds and relied on the decision of DICT vs. Reliance Industries Limited 88 ITD 273 (Mum) (SB). The assessee received capital subsidiary under a scheme for accelerating industrial development in the State and same could not be taxed as a revenue receipt. Further, the decision relied by the ld. Assessing Officer based on Sahney .....

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ations. Further any subsidy granted to project cannot be in the characteristic of Revenue receipt and prayed for allowing the appeal. 6.4 Contra, the ld. Departmental Representative relied on the orders of ld. Assessing Officer and DRP were the DRP has confirmed that the ld. Assessing Officer was justified in treating the VAT subsidy as Revenue receipt. 6.5 We heard the rival submissions, perused the material on record and judicial decisions cited. The only contention of the ld Authorised Repres .....

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c Generators Manufacturing Unit in the state with a investment of =500 crores and also on request of the assessee company for 100% VAT reimbursement for ten years, Government has considered to grant 75% VAT reimbursement to the assessee company for a period of five years both on output and input VAT and entitled for concessions and incentives as per Industrial Investment policy 2005-2010. The ld. Authorised Representative demonstrated the letter dated 09.01.2008 issued by the Government of Andhr .....

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y or a grant defined was made taxable under Income Tax. So, considering the apparent facts, provisions of law, industrial policy regulations, and relY on decision of Shree Balaji Alloys vs. CIT (2011) 198 Taxmann 122 (J & K), subsequently Hon ble Supreme Court has upheld the decision in Civil Appeal No.10061/2011, dated 19.04.2016 by dismissing the Revenue appeal. We respectfully following the Supreme Court decision and direct the ld. Assessing Officer to delete the addition of VAT subsidy a .....

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to cover expected expenditure on serving failed parts of WEG over the period of warranty and during the current year the company has created such provision. In Business operations chartered engineer estimated the cost at =1,31,000/- per machine whereas the assessee has claimed =1,50,000/- per machine. Therefore, difference of =19,000/- per machine is disallowed by the ld. Assessing Officer as excess provision aggregating to =46,33,000/-. The assessee filed letter dated 31.03.2015 explaining tha .....

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assailed an appeal before Tribunal. 7.3 Before us, ld. Authorised Representative argued that the ld. DRP has erred in confirming the action of the ld. Assessing Officer in disallowing provision of warranty to the extent of =29,68,000/- the action of the ld. Assessing Officer is not acceptable as there is no necessity to disallow a particular line item or expenditure resulting in timing difference and further tax rates are same in both years or alternatively, the ld. Authorised Representative exp .....

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cial decisions cited. The ld. Authorised Representative contention that the difference in the value between the provisions made by the assessee and the Chartered Engineer certificate is disallowed but there is no necessity as tax rate for both assessment years are same. The differential sum alternatively if not allowed it needs to be considered in the year of reversal being next year. Further, this provisions are reversed in the next assessment year. We are of the opinion that the ld. Assessing .....

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sessee is on Non grant of TDS credit to the extent of =68,45,307/-. 8.1 The ld. Assessing Officer while passing the order denied TDS credit in the tax liability without mentioning any reasons. The ld. Assessing Officer probably has not granted TDS credit as this information was not updated or non available of TDS credit in form 26AS issued by M/s. Regen Infra(P) Ltd. We considering the apparent facts and the TDS credit available with the assessee, direct the ld. Assessing Officer to verify the f .....

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y Renewable Energy Generation Private Limited =11,55,00,000/- and Regen Renewable Energy Generation Global Ltd (foreign company) =24,12,49,000/-. The ld. Assessing Officer computed disallowance u/sec. 14A r.w.r 8D (2) on second and third limb irrespective of the fact that no dividend income was received by the assessee during the previous year. The assessee filed objections before DRP and based on the Co-ordinate Bench decisions the DRP held that no disallowance of expenditure u/s.14A r.w.r. 8D .....

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h. The investments are made in foreign company and does not fetch any income and being part of business strategy and the investments in Domestic and foreign country on the basis of commercial expediency were the investments are made with profit motive but not to earn exempted income were dividend income is incidental. The ld. Assessing Officer has not considered the financial statements that the assessee company is having interest free funds of =132 crores whereas investments in Indian subsidiar .....

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rd the rival submissions, perused the material on record and judicial decisions cited. The crux of the issue being the assessee has made investments in subsidiary/sister companies and the contention that own funds are generated out of business and no borrowed funds were utilized for the purpose of investments. Further, investments in subsidiary/sister company shall not be considered for the purpose of calculation of disallowance under Rule 8D(2). The ld. Authorised Representative drew our attent .....

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, the ld. Assessing Officer shall consider that the investments in subsidiaries are made in ordinary course of business. We found that there are no findings in the assessment order on this subsidiary/group companies which are considered as investments for calculating disallowance u/sec. 14A r.wr.8D(2) and rely on the Co-ordinate Bench decision of M/s. Rane Holdings vs. ACIT, Chennai in ITA No.115/Mds/2015, dated 06.01.2016 were it was held as under:- Taking note of the above decisions and the de .....

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In regard to applicability of Section 14A of the Act read with Rule 8D also; the above view will be applicable. Moreover in the case EIH Associated Hotels Ltd v. DCIT reported in 2013 (9) TMI 604 in ITA No.1503, 1624/Mds/2012 dated 17th July, 2013, it has been held by the Chennai Bench of the Tribunal as follows:- Disallowance U/s. 14A rw Rule 8D - CIT upheld disallowance - Held that - investments made by the assessee in the subsidiary company are not on account of investment for earning capita .....

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