TMI Blog2018 (9) TMI 1691X X X X Extracts X X X X X X X X Extracts X X X X ..... e were excluded while computing operating margins of assessee - The case of Revenue was that the same are non-operating income and hence, the same are to be excluded from operating margins of assessee - held that:- We find that similar issue has been decided by the Hon ble Bombay High Court in CIT Vs. Welspun Zucchi Textiles Ltd. [2017 (1) TMI 1037 - BOMBAY HIGH COURT] and it has been laid down that DEPB benefit arising to the assessee therein was operating revenue includable in arriving at operating profit. Export incentives and scrap sales are to be included as operating income. Accordingly, we hold that export incentives are to be considered as operating income of assessee, while benchmarking international transactions of assessee. Benefit of range of +/-5% is available if the variation does not exceed the said tolerance margin. Disallowance made under section 14A - formula adopted by the assessee of allocating the cost to earning of exempt income has been adopted for working out disallowance - Held that:- Disallowance under section 14A of the Act is to be restricted to ₹ 17,63,981/-. Hence, the ground of appeal partly allowed. Disallowance made under section 35(2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 000/- to the value of international transactions entered into by the Appellant with its Associated Enterprises in respect of export of 1C engines and components. 1.2 The learned DCIT pursuant to the directions of the learned DRP erred in law and on the facts and in circumstances of the case in disregarding the benchmarking done by the Appellant following aggregation of transactions approach using third party comparable companies whilst following aggregation of transactions approach himself using internal comparables . 2. Rejection of benchmarking done by the Appellant : 2.1 The learned DCIT pursuant to the directions of the learned DRP erred in law and on the facts and in circumstances of the case in rejecting the third party comparable companies selected by the Appellant for benchmarking the manufacturing function. 3. Inappropriate comparison of profitability between export to Associated Enterprises (AEs) segment and domestic sales segment ignoring differences in Functions, Assets and Risks (FAR), differences in products sold and comparison of controlled transactions with controlled transactions 3.1 The learned DCIT pursuant to the directions of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ase and without providing cogent reasons in considering PLI as operating profit to total cost as against operating profit to sales as selected by the Appellant. 6. Benefit of the variation / reduction of 5 percent from the arithmetic mean 6.1 The learned DCIT pursuant to the directions of learned DRP has erred in law and on the facts and in circumstances of the case in not granting the benefit of +/- 5 percent as per proviso to section 92C (2) of the Act. 7. Disallowance of expenses under section 14A of the Act 7.1 The learned DCIT pursuant to the directions of the learned DRP erred in disallowing the expenses allegedly incurred in relation to exempt income earned by the Appellant. 8. Disallowance of deduction under section 35(2AB) of the Act 8.1 The learned DCIT pursuant to the directions of the learned DRP erred in law and circumstances of the case in disallowing the Appellant's claim for weighted deduction under section 35(2AB) of the Act. 8.2 Without prejudice to the above, the learned DRP erred in not directing the learned DCIT to make a reference to the Department of Scientific Industrial Research ('DSIR') as per provisions of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed by the orders of Assessing Officer/DRP/TPO and is in appeal before us. 10. We find that the issues raised in the present appeals are similar to the issues adjudicated by the Tribunal in assessee s own case in various assessment years starting from assessment year 2005-06 to 2009-10. The Tribunal had decided the issues vide various orders which are as under:- 1. ITA No.594/PUN/2013 CO No.53/PUN/2014, relating to assessment year 2005-06, order dated 29.01.2016; 2. MA No.41/PUN/2016, relating to assessment year 2005-06, order dated 16.08.2017; 3. ITA No.115/PUN/2011, relating to assessment year 2006-07, order dated 03.03.2017; 4. ITA No.1681/PUN/2011, relating to assessment year 2007-08, order dated 21.08.2017; 5. ITA No.2417/PUN/2012, relating to assessment year 2008-09, order dated 30.10.2017 and 6. ITA No.309/PUN/2014, relating to assessment year 2009-10, order dated 15.05.2018 11. The learned Authorized Representative for the assessee while arguing the present appeal has pointed out that the issues which have been raised in the present appeal are squarely covered by the latest order of Tribunal in assessment year 2009-10, wherein earlier orders of Trib ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e margins of assessee are to be compared with average margins of external comparable companies. The relevant findings of Tribunal vide order dated 15.05.2018 are in paras 11 and 12 and following the same parity of reasoning, we allow the issue in favour of assessee. However, the issue raised vide grounds of appeal No.3.3 to 3.5 on without prejudice basis, in view of our allowing the issue in favour of assessee, would become academic in nature and the same are thus, dismissed. 17. The next issue raised vide ground of appeal No.4.1 is against treatment of export incentives while computing operating margins of assessee. The Assessing Officer/TPO held the same to be non-operating in nature, hence the same were excluded while computing operating margins of assessee. 18. The learned Authorized Representative for the assessee pointed out that the issue now stands covered by the ratio laid down by the jurisdictional High Court in CIT Vs. Welspun Zucchi Textiles Ltd. (2017) 391 ITR 211 (Bom). He further pointed out that the said decision of the Hon ble Bombay High Court has been followed by the Pune Bench of Tribunal in Carraro India Pvt. Ltd. Vs. ACIT in ITA No.1629/PUN/2013 and cros ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tic mean. The said issue has also been decided by the Tribunal in assessment years 2007-08, 2008-09 and 2009-10. Accordingly, we hold that the benefit of range of +/-5% is available if the variation does not exceed the said tolerance margin. The ground of appeal No.6.1 is thus, allowed. 25. The next issue raised by the assessee by way of ground of appeal No.7.1 is corporate issue against disallowance made under section 14A of the Act. 26. The learned Authorized Representative for the assessee herein pointed out that the issue stands covered by the orders of Tribunal in assessment years 2008-09 and 2009-10, wherein the formula adopted by the assessee of allocating the cost to earning of exempt income has been adopted for working out disallowance. He referred to the details placed at page 435 of Paper Book and pointed out that disallowance would work out to ₹ 17,63,981/- under section 14A of the Act. 27. The learned Departmental Representative for the Revenue placed reliance on the orders of authorities below. 28. We have heard the rival contentions and perused the record. The assessee during the year under consideration had earned exempt income of ₹ 10.55 cro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (2AB) of the Act but the provisions of the Act do not prescribe any methodology of approval to be granted by the prescribed authority vis- -vis expenditure from year to year. The amendment brought in by the IT (Tenth Amendment) Rules w.e.f. 01.07.2016, wherein separate part has been inserted for certifying the amount of expenditure from year to year and the amended form No.3CL thus, lays down the procedure to be followed by the prescribed authority. Prior to the aforesaid amendment in 2016, no such procedure / methodology was prescribed. In the absence of the same, there is no merit in the order of Assessing Officer in curtailing the expenditure and consequent weighted deduction claim under section 35(2AB) of the Act on the surmise that prescribed authority has only approved part of expenditure in form No.3CL. We find no merit in the said order of authorities below. 46. The Courts have held that for deduction under section 35(2AB) of the Act, first step was the recognition of facility by the prescribed authority and entering an agreement between the facility and the prescribed authority. Once such an agreement has been executed, under which recognition has been given to the f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd domestic sales, by the Assessing Officer. The assessee has raised grounds of appeal No.3.1 and 4.1 in this regard and grounds of appeal No.4.2 and 4.3 are on without prejudice basis in assessment year 2010-11. Similar issue was raised by way of grounds of appeal No.2.1, 3.1 and 3.2 and other grounds of appeal i.e. grounds of appeal No.3.3 to 3.5 were on without prejudice basis. Following the same parity of reasoning as in earlier years, we allow grounds of appeal No.3.1 and 4.1 and hold that grounds of appeal No.4.2 and 4.3 would become academic. 41. The assessee in ground of appeal No.5.1 has raised the issue of treatment of export incentive as operating income which was also raised in earlier year vide ground of appeal No.4.1. Following the same parity of reasoning, we hold that export incentive is to be included as part of operating income while computing operating margins of assessee. 42. The issue in ground of appeal No.6.1 raised by assessee is against approach adopted by Assessing Officer in application of net profit to cost as PLI as against the approach of assessee of net profit to sales. Similar issue was raised vide ground of appeal No.5.1 in assessment year 201 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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