TMI Blog2016 (12) TMI 454X X X X Extracts X X X X X X X X Extracts X X X X ..... utation of deduction u/s 80IB. See M/s ACG Associated Capsules Pvt. Ltd. [2012 (2) TMI 101 - SUPREME COURT OF INDIA ] Transfer pricing adjustment - ALP - applying operating profit margin being average of comparables selected - whetehr adjustment arising out of the Arm's Length Price (ALP) is to be restricted to only International Transactions with the Associated Enterprise instead of entire turnover of the assessee ? - Held that:- Differential operating profit margin is to be applied only on the international transaction entered and not the total sales turnover. See CIT vs. Ratilal Becharlal & Sons [2015 (11) TMI 1524 - BOMBAY HIGH COURT] We find that assessee has declared net operating profit margin of 3.73% during the course of assessment proceedings and thereafter has submitted a revised calculation of operating profit margin discussed above in para 28 and calculated at 4.51%. As against this ld. Assessing Officer made addition to the returned income of assessee by applying 7.27% operating profit margin being average of comparables selected by him which was sustained to 5.78% by ld. CIT(A). From going through these figures we find that the difference of operating profit ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o.1 which reads as below has not been pressed by the assessee and, therefore, the same is dismissed as not pressed. 1. The learned Commissioner of Income Tax (Appeals) UCIT (A) erred in fact and in law in confirming the action of the AO in reopening the assessment by invoking the provisions of section 147 of the Income Tax Act, 1961 and completing the assessment, commenced under invalid and improper exercise of powers u/s 147 of the Act. 5. Ground no 2. Reads as follows :- 2. The learned CIT (A) erred in fact and in law in confirming the action of the AO in holding that the following items of income are not derived from industrial undertaking and therefore the Appellant is not entitled to deduction under 80IB on these items of income: Particular Amount Interest on Margin Money Deposit 6,56,890 Total 6,56,890 6. At the outset ld. AR submitted that the issue in this ground is as to whether assessee is eligible for deduction u/s 80IB for interest on margin money on fixed deposit is squarely covered by judgment of Hon. Bom. High Court in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llation by the assessee, used in India; (b) such machinery or plant Is Imported into India from any country outside India; and (c) no deduction on account of depreciation in respect of such machinery or plant has been allowed or is allowable under the provisions of this Act in computing the total income of any person for any period prior to the date of the installation of the machinery or plant by the assessee. Explanation 2.- Where in the case of an industrial undertaking, any machinery or plant or any part thereof previously used for any purpose is transferred to a new business and the total value of the machinery or plant or part so transferred does not exceed twenty percent of the total value of the machinery or plant used in the business then, for the purposes of clause (II) of this sub-section, the condition specified therein shall be deemed to have been complied with; (iv) in a case where the industrial undertaking manufacturers or produces articles or things, the undertaking employs ten or more workers in a manufacturing process carried on with the aid of power, or employs twenty or more workers in a manufacturing process carried on without the aid of po ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to be excluded for the purpose of 80IB deduction. Ground No. 2, 3 4 are partly allowed and ground No. 5 is dismissed. 9. From going through the findings of ld. CIT(A) we observe that assessee is having some trading activities also along with manufacturing and ld. CIT(A) has directed the Assessing Officer to carry out necessary verification to calculate the profits attributable to the manufacturing activities only which are eligible for deduction u/s 80IB of the Act. As regards the claim of assessee for allowing deduction u/s 80IB for interest on fixed deposit given as margin money towards secured/credit from bank we observe that to the extent if the interest is from such fixed deposit which have been used to get the working limits from bank, judgment of Hon. Bombay High Court in the case of CIT vs. Jagdishprasad M. Joshi (supra) is squarely applicable wherein it was held that profits and gains derived from the business of the industrial undertaking interest on fixed deposits from bank and other interest income are eligible for deduction u/s 80IA of the Act. However, from going through the assessment order and the order of ld. CIT(A) we observe that assessee has not substan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Explanation (baa) to section 80 HHC states that 'profits of the business' means the profits of the business as computed under the head 'Profits and Gains of Business or Profession' as reduced by the receipts of the nature mentioned in clauses (1) and (2) of the Explanation (baa). Thus, profits of the business of an assessee will have to be first computed under the head 'Profits and Gains of Business or Profession1 in accordance with provisions of sections 28 to 44D. In the computation of such profits of business, all receipts of income, which are chargeable as profits and gains of business under section 28, will have to be included Similarly, in computation of such profits of business, different expenses which are allowable under sections 30 to 44D have to be allowed as expenses. After including such receipts of income and after deducting such expenses, the total of the net receipts are profits of the business of the assessee computed under the head 'Profits and gains of business or Profession1 from which deductions are to made under clauses (I) and (2) o/Explanation (baa). [Para 9] Under clause (I) o/Explanation (baa), ninety per cent of any receipts ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and chargeable to tax under section 28, and if any quantum of the rent or interest of the assessee is allowable as an as an expenses in accordance with sections 30 to 44D and is not to be included in the profits of the business of the assessee as computed under the head Profits and Gains of Business or Profession , ninety per cent of such quantum of the receipt of rent or interest will not be deducted under clause (1) o/Explanation (baa) to section 80HHC. In other words, ninety per cent of not the gross rent or gross interest but only the net interest or net rent, which has been included in the profits of business of the assessee as computed under the head 'Profits and Gains of Business or Profession', is to be deducted under clause '!' (^Explanation (baa) to section 80HHC for determining the profits of the business, [Para 12] In the result, the appeal is allowed and the impugned order of the High Court is to be set aside. The matter is remanded to the Assessing Officer to work out the deductions from rent and interest in accordance with this judgment. [Para 17] 14. Respectfully following the judgment of Hon. Supreme Court in the above referred case, we a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .92E of the Act, As per this report assessee entered into international transaction with its Associated Enterprise (AE) namely- Liquid Controls Inc.(LCI) which is holding company having 26% voting power in assessee company and is associated enterprise in terms of clause (a) of section 92A(2). It will be worthwhile to discuss the product in which assessee deals in. The assessee i.e. LCIPL deals in high accuracy custody transfer liquid measurement and oil delivery equipments including aircraft refueling, LPG delivery equipment which are manufactured by Liquid Control Inc. or LCIPL itself. During the course of assessment proceedings assessee submitted a report on transfer pricing study of LCIPL for FY 2001-02 discussing the details relating to the scope of this study, summary of approach, frame work of transfer pricing regulations, over view of the AE, company overview, industry scenario, functional analysis-objective, functions performed, risks assumed, assets employed, economic analysis and conclusion. As per the reply of assessee dated 16.3.2006 in which assessee has given the basis of selecting the comparables and the operating profit margin for calculating arms length price with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... turing is incorrect as the assessee is engaged in both the manufacturing and trading activities. Accordingly the Assessing Officer applied the difference of the average operating sales ratio of 7.27% as against operating/sales ratio of 3.73% shown by the assessee and applied the difference of 3.54% [7.27% (-) 3.73%] on the total turnover of the assessee and made addition of ₹ 26,39,609/- to the arms length price u/s 92C(3) of the Act. 20. In appeal before ld. CIT(A) challenging the impugned addition of ₹ 26,39,608/- assessee also contended that the arms length price calculated by ld. Assessing Officer is not more than 5% of the value of international transaction thereby leaving no question to exercise the option of section 92C of the Act and also appealed that the excess of operating profit/upon sales ratio should have been applied only to the international transaction rather than total turnover of the assessee. Apart from this, assessee made following submissions before ld. CIT(A) against the addition made by the AO. i. The AO has neither accepted the list of comparables as per original study nor has accepted the list as per revised study. No specific reason is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of four comparables arrived by the AO. v. Total transactions with associate enterprise do not exceed even 20% of total amount of similar transaction. In such a situation If addition Is made in the manner as laid In the order then such addition would exceed even gross taxable come offered by the appellant. 21. Ld. CIT(A) observed that out of the four surviving set of comparables are Bhartia Industries Ltd. 5.68%, Indfos Industries Ltd. 6.28%, Daniel Measurement 5.38% and Roop Telsonic 11.75% rejected Roop Telsonic Ultrasonic Ltd. 11.75% operating margin (being much higher) and accepted the remaining three as were having the operating margin between 5.68% to 5.38% and on average took the percentage of 5.78% as against the assessee s margin of 3.73% and accordingly after applying the difference of 2.05% in the total sales sustained addition of ₹ 15,28,582/- by observing as follows :- 6.3. I have carefully considered the facts of the case and the submissions of the appellant. For determination of arm's length price the appellant had provided set of comparables from 11 companies using the 'Prowess' data base. The AO also proposed a comparable case of Dani ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5.78% and as against that the appellant margin is 3.73%. Accordingly, the addition to the extent of difference of 2.05% on the total sale of about ₹ 7.4565 crores is ₹ 15,28,582/- is confirmed. Ground no.6 is partly allowed. 22. Aggrieved, assessee is now in appeal before the Tribunal. 23. Ld. AR submitted that assessee company which is engaged in the business of manufacturing and sale of positive displacement mass flow meters, pumps and turbine is 100% subsidiary company of Liquid Controls Inc. incorporated in USA (LCI) and part of Idex Corporation Group which has substantial experience, know-how and market presence, the manufacturer of positive displacement , mass flow meters, turbine and pumps etc., Assessee i.e. LCIPL has entered into cross border transactions with the LCI with regard to import of components and finished goods from LCI, export of fabricated items to LCI and payment of technical charges to technicians of LCI. Ld. AR also discussed about the ownership structure , overview of the associated enterprise, industrial scenario, functional analysis along with objects, functions performance, risks assumed, assets employment and its characterization. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7.27% 7.27% Difference to be added to income of assessee D=C-B 3.54% 3.54% ALP @ 103.54% (Rs. In crores) E=A+(A*D) 3.40 3.28 95% of ALP (Rs. In crores) F=E*95% 3.23 3.12 105% of ALP (Rs. In crores) G=E*105% 3.57 3.45 Value of international transaction is within range of +5% 3.28 3.17 26. On the other hand, ld. DR vehemently argued and supported the orders of lower authorities and also to the working of ld. CIT(A). Ld. DR submitted that the appeal of the department has already been dismissed due to low tax effect and submitted that power of TPO to select comparables is not limited to the document but has also the power to other source in order to find out the comparables and urged urge that the order of ld. CIT(A) should be upheld. 27. We have heard the rival contentions and perused the record placed befor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Profit After Tax Add: Interest Finance Charges Add: Provision for Taxation Less: Prior Period Adjustments (Net) Less: Interest Income 1,468,777 2,290,723 3,759,500 575,000 4,334,500 314,686 4,019,814 656,890 Opera ting Margini 3,362,924 Sales 74,565,221 Operating Margin (%) 4.51% 29. As against the revised operative margin of 4.51% ld. CIT(A) has upheld 5.78%. On going through the three comparables of which operating profit margin has been taken by CIT(A), we find that Bhartia Industries Ltd. is engaged in the business of electronic device, Indfos Industries Ltd. is manufacturing of Hydraulic Systems and also Pressure and Temperature Controllers and so is Denial Measurement Ltd. We also observe that during the course of assessment in the list of comparables given by assessee it has itself included Bhartia Industries Ltd. Furthe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ue's contention that the adjustment arising out of the Arm's Length Price (ALP) has to be made to the entire turnover of the Respondent Assessee instead of restricting the same only to the International Transactions entered into by the Respondent Assessee with its Associated Enterprises. The Tribunal by the impugned order negatived the contention as the same is contrary to the clear mandate for Section 92 of the Act, which permits taxation only of income arising from International Transactions having regard to its ALP. (c) The Revenue being aggrieved submits that the adjustment has to be made on the entire universe of transactions entered into by the Respondent Assessee and not restricted only to its International Transactions with Associated Enterprise. In support, reliance was placed upon the fact that two appeals filed by the Revenue being Income Tax Appeal No.298 of 2013 (The Commissioner of Income-tax v. Super Diamonds) and Income Tax Appeal No.2068 of 2011 (The Commissioner of Income Tax v. Ankit Diamonds) raising a similar issue have been admitted on 5th May, 2014 and 16th February, 2015 respectively. On the other hand, the Respondent Assessee invites our attent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ansaction entered and not the total sales turnover. 30.1 As regards alternate plea of ld. AR that no addition was called for in the case of assessee u/s 92C of the Act , as provisions of section 92CB of the Act relating to the power of Board along with the proviso to section 92C(2) squarely applies to the assessee as the difference in operating profit margin adopted by ld. Assessing Officer vis- -vis operating profit margin declared by assessee is within the tolerance range of 5%. We observe that assessee has substance in the alternate plea for being covered by proviso to section 92C(2) of the Act. We find that assessee has declared net operating profit margin of 3.73% during the course of assessment proceedings and thereafter has submitted a revised calculation of operating profit margin discussed above in para 28 and calculated at 4.51%. As against this ld. Assessing Officer made addition to the returned income of assessee by applying 7.27% operating profit margin being average of comparables selected by him which was sustained to 5.78% by ld. CIT(A). From going through these figures we find that the difference of operating profit margin at which the international transaction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 77; 15,69,000/- being excess remuneration paid to MD by observing as under :- 11.3. I have carefully considered the facts of the case, submissions of the appellant and assessment order. For claim of any business expenditure the onus is cast upon the appellant to justify that it was incurred wholly and exclusively for business purposes. To justify the Managing Director's remuneration the appellant ought to have furnished details of nature and extent of services rendered by the MD. The private sector remuneration is dictated by performance and the appellant ought to have justified the remuneration In terms of services rendered, terms of employment, performance of the company etc. Otherwise, the comparison with the earlier year is a fairly good estimate. The decision cited by the appellant is distinguished of the facts as that in the case the details of nature and extent of service justified the increase in remuneration. The appellant insisted that the details are available and In fact were also discussed with the AO. In view of these facts, the AO Is directed to verify the details provided by the appellant and inter-alia parameters suggested above, to ascertain whether the re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tention of Revenue that the payment has been made to a relative as specified in section 40A(2)(b) of the Act. We find it relevant to discuss the provisions of section 40A(2)(b) of the Act which reads as follows :- Section 40A(2)(b) in The Income- Tax Act, 1995 (b) The persons referred to in clause (a) are the following, namely:- (i) where the assessee is an individual any relative of the assessee; (ii) where the assessee is a company, any director of the firm, association of persons or company, partner of the Hindu undivided family firm, of member if the association or family, or family, or any relative of such director, partner or member; (iii) any individual who has a substantial interest in the business or profession of the assessee, or any relative of such individual; (iv) a company, firm, association of persons or Hindu undivided family having a substantial interest in the business or profession of the assessee or any director, partner or member of such company, firm, association or family, or any relative of such director, partner or member; (v) a company, firm, association of persons or Hindu undivided family of which a director, partner or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eme Court in the case of Upper India Publishing House (P) Ltd. vs. CIT (supra) wherein it has been held that expenditure is unreasonable or not is essentially a question of fact and unless it is first held that such expenditure was excessive or unreasonable, the question of applicability of s.40A(2)(a) becomes academic. 36. We further observe that in the case of disallowing the remuneration paid to director being disallowed as excessive or unreasonable was held in favour of assessee by the Co-ordinate Bench in the case of Jagdama Rollers Flour Mill Ltd. vs. ACIT (supra)by observing as under :- Provisions of s. 40A are non obstante provisions and, therefore, have an overriding effect over the other provisions allowing the deductions. This provision presupposes allowability of the expenditure otherwise. If the expenditure is not allowable under the provisions of ss. 28 to 39 then the question of making disallowance under s. 40A would not arise. It is only in these cases where the deduction is allowable under ss. 28 to 39 but the expenditure is found to be excessive or unreasonable, the disallowance under s. 40A can be made if payment on account of expenditure is made to the pe ..... X X X X Extracts X X X X X X X X Extracts X X X X
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