TMI Blog2017 (1) TMI 110X X X X Extracts X X X X X X X X Extracts X X X X ..... tment. Receipts from sale of scrap and export entitlement should be included in the operating profits - Held that:- The scrap is the bi-product of the direct manufacturing, and prima facie, we are of the view that the same ought to have been reduced from the raw-material cost. If the receipts on account of sale of scarp goes to reduce, cost of raw materials, needless to say it is part of operating profits. Similarly, the export entitlements is also nothing but realization of export sales and is closely linked to the export. The assessee has produced the TPO’s order for the asst year 2013-14 wherein the TPO had accepted assessee’s TP study including the receipt on account of sale of scrap and export entitlement as part of operating profits. Therefore, we are of the view that this matter needs fresh examination by the TPO and accordingly we remit this issue to the TPO for de-nova consideration. The TPO shall dispose of the issue as expeditiously as possible after affording a reasonable opportunity of hearing to the assessee. Upward revision of Tooling division - as argued by the assessee that the TPO disregarded the lower capacity utilization of the assessee's plant - Held ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... emuneration and director’s remuneration should be attributable towards investment, the return on which is exempt being dividend income. Therefore, the Assessing Officer has rightly invoked the provisions of section 14A r.w.r 8D(iii) of I T Rules and disallowed ₹ 13,65,688/-. - IT (TP) A No. 70/Coch/2016 Stay Petiion No. 08/Coch/2016 - - - Dated:- 26-12-2016 - Shri B P Jain, AM And George George K, JM Assessee By : Sh Sathyanarayanan Revenue By : Sh Shantom Bose, CIT-DR ORDER Per George George K, JM This appeal, at the instance of the assessee, is directed against the assessment order dated 14.1.2016 passed u/s 143(3) rws 144C of the I T Act. The relevant assessment year is 2011-12. The assessee has also filed Stay Petition seeking stay of recovery of outstanding tax arrears amounting to ₹ 17,41,32,510/-. 2 Briefly stated the facts of the case are as follows: The assessee is engaged in the business of manufacture of connectors and various types of tools. The assessee company had two divisions namely, Connector division and Tooling division. It is a subsidiary of FCI France which holds 97.68% of its equity shares. For the assessment year 201 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ith the appellant company. d) The Ld.AO/TPO/DRP erred in not making working capital adjustments for computing the PLI of comparable companies. e) The Ld.AO/TPO/DRP went wrong in not considering sale of unused raw materials accounted as scrap as a deduction in raw material consumption. They erred in not considering it as part of the operating income. f) The Ld.AO/TPO/DRP went wrong in considering receipt from sale of export entitlements as part of operating income. 2. The Ld.DRP/AO/TPO went wrong in making an upward transfer pricing adjustment in the tooling division amounting to ₹ 5,07,58,397/-. The Ld.DRP erred in disregarding written submissions filed and the explanations/information furnished at the time of hearing. a) The Ld.DRP/AO/TPO erred in disregarding the TP study conducted by the appellant for the reason that there is some clerical error in accounting the sales. The appellant had filed revised/rectified statements without the clerical classification error before the AO and the DRP which has not been considered. b) The Ld.DRP/AO/TPO has not considered the significant factor relating to lower capacity utilization while reckoning the ALP ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Volumes of transactions to take it under internal TNMM is inadequate. 5.3 In the written submissions it was stated that the upward revision made by the TPO is an error for the following reasons: - The TPO compared companies which are not even broadly comparable with the assessee Company. - It is now well settled that the volume of transactions is not insignificant. Further the turnover to non AE-exports is ₹ 34 crores is not insignificant against ₹ 235 crores to AE-exports. - The TPO has not made any adjustment for working capital adjustment between the appellant Company and the compared entities. - Sale of scrap and export entitlements have not been considered for computing the PLI. 5.4 However, in the course of hearing of the appeal, the ld AR confined his submissions to the following issues: i) Internal TNMM should be adopted; ii) Assessee should be granted working capital adjustment iii) Receipts from sale of scrap and export entitlement should be included in the operating profits. Internal TNMM should be adopted: 5.5 It was submitted by the ld AR that the TPO ought to have relied on the internal comparables and oug ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... It has to be demonstrated in the facts of the case that because of favourable working capital position or otherwise of the same, the profit of the comparables in the open market were impacted. The submission of the assessee has been considered. The written submission filed along with form 35A and the summary submitted during the hearing have been perused. The details provided by the assessee relating to the comparables are not supported with specific factual details and evidence to make out a case for consideration in favour of its contention. As such, the contention for granting working capital adjustment cannot be accepted. In view of above, this Panel finds that the approach of the TPO is justified and acceptable. The objections of the assessee are rejected. 6.2 We notice that the assessee in its TP study has not given adequate details for grant of working capital adjustments. Moreover, the comparables selected by the assessee has not been granted the working capital adjustment. Hence, the TPO has rightly rejected the claim of the assessee to grant working capital adjustment. It is ordered accordingly. Hence, ground no.1(d) is rejected. Receipts from sale of scrap a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e receipt on account of sale of these scrap should be taken as operating profits. Further, it was submitted that for the subsequent assessment year, during the course of proceeding before the TPO for the assessment year 2013-14, there was a proposal to exclude the sale proceeds of scrap and export entitlements profits from the operating turnover of the assessee and on assessee s objection, the said proposal was dropped. A copy of the TPO s order dated 28.10.2016 for the AY 2013-14 was placed on record. 7.4 As regards the sale of scrap, we notice that the scrap is the bi-product of the direct manufacturing, and prima facie, we are of the view that the same ought to have been reduced from the raw-material cost. If the receipts on account of sale of scarp goes to reduce, cost of raw materials, needless to say it is part of operating profits. Similarly, the export entitlements is also nothing but realization of export sales and is closely linked to the export. The assessee has produced the TPO s order for the asst year 2013-14 wherein the TPO had accepted assessee s TP study including the receipt on account of sale of scrap and export entitlement as part of operating profits. Theref ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... considered. However, no such data could be furnished. This adjustment cannot be claimed as mater of routine, as observed by the TPO, especially in case of a company which has been in business for several decades, and without demonstrating how its capacity utilization compared with that of the industry as a whole. The assessee cannot claim that underutilization of capacity justified sale of goods to AEs at lower prices. Thus, TPO has also given cogent reasons and justification for rejecting the claim of assessee for this adjustment. Therefore, it will not be possible to consider this objection of the assessee. 8.4 We notice that the Tooling Division of the assessee has been in operation for more than ten years. There is no specific reasons given by the assessee as to why the capacity utilization is only at 40% and it should be given adjustments. Normally adjustment is given for underutilization of capacity when the unit is in its infancy, lockout due to workers unrest, power cuts etc., In the instant case, the assessee has not stated any specific reason for underutilization of its capacity. Moreover the assessee has not furnished any details with regard to the capacity utiliza ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld DR present was duly heard. 10.2 We have heard the rival submissions and perused the material on record. An identical issue was decided in favour of the assessee by the Cochin Bench of the Tribunal in the case of Appollo tyres Ltd (supra). The relevant findings of the Tribunal read as follows: 9. We have considered the rival submissions on either side and also perused the material available on record. Section 32(1)(iia) reads as follows: 32(1)(iia) in the case of any new machinery or plant (other than ships and aircraft), which has been acquired and installed after the 31st day of March, 2005, by an assessee engaged in the business of manufacture or production of any article or thing, a further sum equal to twenty per cent of the actual cost of such machinery or plant shall be allowed as deduction under clause (ii): Provided that no deduction shall be allowed in respect of (A) Any machinery or plant which, before its installation by the assessee, was used either within or outside India by any other person; or (B) Any machinery or plant installed in any office premises or any residential accommodation, including accommodation in the nature of a guest-house ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 180 days, the deduction shall be restricted to 50% of the amount calculated at the prescribed rate. Therefore, if the machinery is put to use in any particular year, the assessee is entitled for 50% of the prescribed rate of additional depreciation. The Income-tax Act is silent about the allowance of the balance 10% additional depreciation in the subsequent year. Taking advantage of this position, the assessee now claims that the year in which the machinery was put to use the assessee is entitled for 50% additional depreciation since the machinery was put to use for less than 180 days and the balance 50% shall be allowed in the next year since the eligibility of the assessee for claiming 20% of the additional depreciation cannot be denied by invoking Second Proviso to section 32(1)(ii) of the Act. 12 This issue was considered by the Delhi Bench of this Tribunal in the case of Cosmo Films Ltd (supra). The revenue has taken a similar ground as taken before this Tribunal that the assessee cannot carry forward the additional depreciation to be allowed in the subsequent assessment year. The Delhi Bench of this Tribunal after considering the provisions of section 32(1)(iia) and prov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... alculated in the year of acquisition but restricted for that year to 50% on account of usage. The so earned incentive must be made available in the subsequent year. The overall deduction of depreciation u/s 32 shall definitely not exceed the total cost of machinery and plant . In view of this matter, we set aside the orders of the authorities below and direct to extend the benefit. We allow ground no.2 of the assessee s appeal. Since we have decided ground no.2 in favour of assessee, there is no need to decide the alternate claim raised in ground no.3. The same is dismissed. 13. This issue was also considered by another bench of this Tribunal at Delhi in SIL Investment Ltd (supra). At page 233 of the TTJ, the Tribunal has observed as follows: 40. There is nothing on record to show that the directions given by the learned CIT(A) are not proper. The eligibility for deduction of additional depreciation stands admitted, since 50 per cent thereof had already been allowed by the AO in the asst.yr.2005-06, i.e. the immediately preceding assessment year. Therefore, obviously, the balance 50 per cent of the deduction is to be allowed in the current year, i.e. asst.yr. 2006-07. T ..... X X X X Extracts X X X X X X X X Extracts X X X X
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