TMI Blog2017 (6) TMI 1290X X X X Extracts X X X X X X X X Extracts X X X X ..... scrap were accounted for in the books of account. However, scrap which was available at the end of year had not been shown as part of the closing stock. The estimated value of the stock which has been upheld by the CIT (A) is also ₹ 75,000/- as against the same, the assessee during the year under consideration had sold scrap for about ₹ 18 crores, which has been included as receipts of the business for the year under consideration by the assessee. In view thereof, where a consistent approach has been followed by the assessee, we find no merit in the inclusion of value of scrap as on the close of the year at ₹ 75,000/- as part of income of assessee. The ground of appeal No.4 raised by the assessee is thus, allowed. Transfer Pricing adjustment of manufacturing wire segment - assessee applied TNMM method with net profit margin as the Profit Level Indicator (PLI) in order to benchmark the arm's length price of its aforesaid four divisions - TPO proposed to adopt Cost Plus Method - CPM method could not be applied to compare the results shown in the domestic market with the results shown of export to associated enterprises - export activity of assessee was only to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which has been referred in paras above. Accordingly, we allow the claim of assessee in this regard. The TPO is directed to apply the TNNM method on single year's data and compute the adjustment, if any, in the hands of assessee. Adjustment of management service fees payment - expenses were on arm's length - Revenue authorities could not question the business needs of assessee and their commercial decisions so long as the assessee's claim is prudent and acceptable - TPO in reject the claim was that the assessee had not derived any tangible benefits from the services received - HELD THAT:- assessee has established the factum of receipt of management services from Sandvik group entities, in accordance with the terms of agreement entered into by the assessee with Sandvik AB, Sweden and where the additional evidence in this regard was filed before the CIT (A), who in turn, has considered the same and has held that services provided by Sandvik group entities were in accordance with the agreement and were actually rendered by the associated enterprises. He also referred to the order of TPO in remand report, who had not doubted that the management services were not rendered at all but ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TAX, RANGE – 10, PUNE [2015 (12) TMI 1742 - ITAT PUNE] and the facts being similar, we uphold the order of CIT (A) in allowing the expenditure incurred on software application. Addition on account of closing stock of obsolete inventory - HELD THAT:- The issue arising before us is identical to the issue before the Tribunal in assessment year 2004-05 in SANDVIK ASIA PVT. LTD. VERSUS THE JT. COMMISSIONER OF INCOME TAX, RANGE – 10, PUNE [2015 (12) TMI 1742 - ITAT PUNE] and the said issue raised by the Revenue has been dismissed. Following the same parity of reasoning, we uphold the order of CIT (A) in deleting addition of ₹ 19,52,000/- made on account of value of obsolete inventory as part of closing stock. The grounds of appeal No.4a and 4b raised by the Revenue are thus, dismissed. Set off of losses of newly set up EOU unit against its other business income - HELD THAT:- The issue arising in the present appeal is squarely covered by the order of Tribunal in assessee's own case (supra) in assessment year 2004-05 and following the same parity of reasoning, we dismiss the ground of appeal No.6 raised by the Revenue - ITA NO. 1750 & 1804 /PUN./ OF 2013 - - - Dated:- 14-6-2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... owed in earlier years. 7. The learned CIT (A) erred in rejecting the transfer pricing analysis undertaken by the assessee by aggregating its international transactions. 8. The learned CIT (A) erred in making an addition of ₹ 625,621 by holding that international transactions of the Manufacturing - Wires segment were not at arm's length. 9. The learned CIT (A) erred in rejecting the selection of the TNMM adopted by the assessee as the most appropriate method in the circumstances of the case and comparing net profit margins with external comparables for computing the arm's length price of international transactions of its Manufacturing of wire segment. 10. The learned CIT (A) erred by making an addition of ₹ 625,621 by adopting the cost plus method as the most appropriate method in the circumstances of the case for computing the arm's length price of international transactions of its Manufacturing of wire segment. 11. The learned CIT (A) erred by confirming the addition of ₹ 12,05,814/- by holding that the International transactions of Exports of Seamless tubes and pipes is not at arm's length by erroneously applying the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng nature of the said software? 4a. Whether on the facts and circumstances of the case and in law, @ the CIT (A) was justified in deleting the addition of ₹ 19,52,000/- to closing stock being provision for obsolete inventory when the provision has been made on the basis of internal guidelines and not as per provisions of Income Tax Act which provides for valuation of closing stock either at cost or at market price, whichever is less? 4b. Whether on the facts and circumstances of the case and in law, the CIT (A) was justified in deleting the addition of ₹ 19,52,000/- to closing stock being provision for obsolete inventory by holding that the decision of the Hon'ble Supreme Court in the case of Rotork Controls Ltd [314 ITR 62] is applicable here, when the same relates to provision for warranty and hence misplaced ? 5. Whether on the facts and circumstances of the case and in law, the CIT (A) was justified in estimating the value of closing stock of scrap @ ₹ 5/- per kg on adhoc basis, without assigning any reason whatsoever and without substantiating the said allowance. 6. Whether on the facts and circumstances of the case and in law, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... - on obsolete stock. 12. The learned Authorized Representative for the assessee pointed out that the issue raised in the present ground of appeal is squarely covered by the order of Tribunal in assessee's own case relating to assessment year 2004-05. 13. The learned Departmental Representative for the Revenue on the other hand, placed reliance on the orders of authorities below. 14. We have heard the rival contentions and perused the record. The assessee had made provision of Excise duty amounting to ₹ 60,000/- which as per the assessee, was included in the closing stock and was also paid before the due date of filing the return of income. We find that similar issue of provision of Excise duty on obsolete stock arose before the Tribunal in assessment year 2004-05 in ITA No.248/PN/2012 in the appeal filed by the assessee and cross appeal filed by the Revenue in ITA No.2469/PN/2012. Vide order dated 04.12.2015, the Tribunal held the assessee to be entitled to claim the deduction observing as under:- 20. We find similar issue of advance payment of Excise duty in an accounting year, which is to be adjusted as and when goods were lifted by the assessee from its f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rtmental Representative for the Revenue relied on the orders of Assessing Officer and CIT (A). 21. We have heard the rival contentions and perused the record. The assessee is consistently following the method of accounting, wherein whenever scrap was sold by the assessee, the receipts from the sale of such scrap were accounted for in the books of account. However, scrap which was available at the end of year had not been shown as part of the closing stock. The estimated value of the stock which has been upheld by the CIT (A) is also ₹ 75,000/- as against the same, the assessee during the year under consideration had sold scrap for about ₹ 18 crores, which has been included as receipts of the business for the year under consideration by the assessee. In view thereof, where a consistent approach has been followed by the assessee, we find no merit in the inclusion of value of scrap as on the close of the year at ₹ 75,000/- as part of income of assessee. The ground of appeal No.4 raised by the assessee is thus, allowed. 22. The grounds of appeal No.5 and 6 raised by the assessee have become infructuous as the relief has been granted in earlier years and hence, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... there was export sale to the associated enterprises and there were domestic sales and therefore, the split function results in respect of domestic sales and export sales could validly serve as internal comparables. The TPO was of the view that internal comparable would be comparable than the external comparables and further the benchmarking done by the assessee following the combined approach method was found to be not acceptable. The TPO proposed to adopt Cost Plus Method in respect of manufacturing wire segment taking the internal comparability between two segments of domestic sales and export sales to associated enterprises. The assessee had earned gross profit from the domestic sales at 32.59% and in case of associated enterprises at 19.13% and difference in gross profit level worked out to 13.46%. The assessee was thus, show caused to explain as to why the difference in the earning of gross profit between the domestic sales and export sales to the associated enterprises i.e. 13.46%, which comes to ₹ 6,25,621/- should not be added on account of arm's length price of international transactions relating to export of wires to associated enterprises. In response thereto, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e at ₹ 6,25,621/-. The learned Authorized Representative for the assessee objected to the use of CUP method and also pointed out how CUP method had to be applied. He also pointed out that the activities undertaken by the assessee were intrinsically bundled and hence, aggregation approach should have been applied. He pointed out that aggregation approach is accepted in the earlier years and also in later years. He also referred to the order of Tribunal in assessment year 2008-09 in this regard. 30. The learned Departmental Representative for the Revenue pointed out that aggregation in the case of assessee was not possible and the TPO had applied the CPM method and had considered the rate of GP as comparison in order to benchmark the arm's length price of international transactions. 31. We have heard the rival contentions and perused the record. The first issue raised by the assessee under the transfer pricing division is in respect of adjustment made on account of arm's length price of the manufacturing division i.e. export of wire. The assessee had aggregated the international transactions under the said segment i.e. export of finished goods with import of raw m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ear 2007-08. Further in assessment year 2008-09, the addition was made in the hands of assessee by rejecting TNNM method and the aggregation approach, but the appeal of assessee was quashed by the Tribunal on technical aspects. The second plea raised by the assessee in this regard is that if aggregation approach is applied, then no comparison can be made between domestic sales and exports to associated enterprises as both the activities have controlled transactions of imports, service charges, management fees, etc. and hence, are tainted. We find merit in the plea of assessee that where transactions under the same segment are inter-linked, then they are to be aggregated in the hands of assessee. This plea of aggregation has been accepted and adopted in the hands of assessee in the earlier years and even in the later years. Accordingly, the same merits to be applied in the year under consideration also. 33. The next plea raised by the assessee is as to whether after aggregation of transactions under the segment, TNNM method or CUP method is the most appropriate method to be applied to the international transactions undertaken by the assessee. The plea of assessee is that both the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of record how the facts of the current year are different from the fact in A.Ys. 2004-05 and 2005-06 as in those years the TNMM was adopted by the assesse for determining the ALP which has been accepted as a most appropriate method by the TPO without any objection or reservation. The assessee has also filed the copy of the TPO order for the A.Y. 2008-09 which is also placed at Page Nos. 353 - 354 of the P/B-2. 17. There is no dispute on the proposition that the doctrine of the res judicata is not applicable to tax proceedings but at the same time if there is no change of the facts in respect of the a particular issue and the Revenue has a particular approach or method to determine the taxability then there must be consistency and this view is expressed by the Hon'ble Supreme Court in the case of Radhasoami Satsang v. CIT 193 ITR 321 (SC). It is also certainly strange that in the A.Y. 2008-09 the TPO has again accepted the TNMM method as an appropriate method which was adopted by the assessee and has not disturbed the result. We may refer here to the few decisions of the other Co-ordinate Benches in which it is held that when the facts involved are similar in various years ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... no risk of bad debts, no product liability risk in export segments whereas the assessee has to bear all these risks in the domestic segment. The contractual statements also defer in the domestic segment vis-a-vis export segments. There are different characteristics and contractual terms in the two segments and further geographical and marked differences are also present. Thus, we are of the view that it is very difficult to make suitable adjustments for these differences, hence the CMA method is not appropriate method for determining the ALP. The learned TPO, in our view, has thus erred in adopting the CMA method as appropriate method. 51. We also find substance in the alternative plea of the learned Authorised Representative in the defective working out of the total of production of the goods sold to the AE by the learned TPO. The learned TPO has computed gross profit margins in the domestic segment at 23.54 per cent while in the export segment at 5.42 per cent. The difference between the two has been calculated at 18.12 per cent and the same is employed to the total cost of production of the goods sold to the AE and addition of ₹ 58,54,128 has been made. In this workin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ject CUP method or TNMM adopted by the assessee to determine the arm's length price (ALP). We thus hold that the addition made by the learned TPO as a result of incorrect application of CPM is not justified. It is pertinent to note that in the succeeding asst. yr. 2007-08, the assessee has adopted TNMM for determining the ALP, which has been accepted by the learned TPO. In the case of Brintons Carpets Asia (P.) Ltd. v. Dy. CIT (supra), Pune Bench of the Tribunal has followed the decision of Mumbai Bench of the Tribunal in the case of Asstt. CIT v. NGC Network (India) (P.) Ltd. ITA No. 5307/Mum/2006, dt. 23rd Feb., 2011 (para 15) [reported at (2011) 56 DTR (Mumbai)(Trib) 1-Ed.] on the rule of consistency and need for not taking the domestic comparables and need for taking up the external comparable in matters of the =transfer pricing' adjustments. It was held further that the uncontrolled transactions and the external comparables which was adopted by the officer in subsequent year holds relevant for current assessment year as well. We thus while setting aside order in question of the learned TPO, direct the learned TPO to accept claim of the assessee regarding the ALP based ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of appeal No.7 to 10 are disposed of as indicated above. 36. Further, the next segment in which addition has been made in the hands of assessee is Export of Seamless tubes and pipes of ₹ 12,04,814/-. The learned Authorized Representative for the assessee pointed out that under the said division, the assessee was engaged in the manufacture of sophisticated pipes of different categories numbering about 30. The assessee pointed out that under the said division, it had aggregated all the international transactions and had applied TNNM method to the segmental results. He further referred to the orders of TPO in assessee's own case, wherein the same aggregation approach and TNNM method has been applied by the TPO and no addition was made in assessment years 2002-03 to 2004-05 and thereafter, from assessment years 2006-07 to 2012-13. The learned Authorized Representative for the assessee further pointed out that the total exports were to the tune of ₹ 82 crores and the sales in the domestic market were to the tune of ₹ 11 crores. He referred to the order of TPO, wherein each of the categories was compared and to work out the adjustment of ₹ 12,05,814/- unfav ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... T (A) upheld the said addition in the hands of assessee by rejecting the plea of assessee on all counts and upheld the addition of ₹ 12,05,814/-. 40. The first aspect of the issue raised is whether aggregation approach is to be applied in order to benchmark the arm's length price of international transactions. The said aggregation approach has been accepted by the TPO himself while benchmarking the said international transactions for which, segmental details were available in assessment years 2002-03 to 2004-05 and thereafter, from assessment year 2006-07 onwards. Only in the year under appeal, the said aggregation approach has not been accepted. Since the facts of the present case are identical to the facts in earlier and subsequent years, we find no merit in the said stand of the TPO. Where the transactions are inter- linked, then aggregation approach is to be applied as held by us in the paras hereinabove in respect of division of manufacturing of wires. The said aggregation approach has been applied by the TPO himself in assessee's own case in both the preceding and succeeding years except the year under consideration. Since there is no difference in the factua ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Representative for the assessee placed reliance on the order of CIT (A) with special reference to pages 36 and 37 of the said order. 45. We have heard the rival contentions and perused the record. Briefly, in the facts relating to the issue are that the assessee had paid management service fees of ₹ 4,41,44,973/- to Sandvik AB Sweden, based on the terms of agreement entered into between the parties. The assessee had received various management services from Sandvik AB Sweden. The said Sandvik AB Sweden was providing the said services within Sandvik group and cost pertaining to the services rendered was allocated to all the group companies on the basis of various allocation keys, which were basically drivers of cost. The assessee claimed the said expenses to be at arm's length and it also pointed out that the Revenue authorities could not question the business needs of assessee and their commercial decisions so long as the assessee's claim is prudent and acceptable. The TPO however, was of the view that the existence of agreement does not evidence the receipt of services. The TPO adopted the arm's length price of the said transactions at Nil and made an upward ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nly by Sandvik AB Sweden but also by various companies forming part of Sandvik group, wherein Sandvik AB Sweden acted as conduit. The cost incurred in providing the services by the providing parties were collected and pooled at Sandvik AB level and further recharged as per the terms of agreement to the recipient Sandvik group entities. 48. The next plea of the TPO in rejecting the claim was that the assessee had not derived any tangible benefits from the services received and in this regard, reference was made to the table of evidences on services received and the benefits derived therefrom. Further, the plea of assessee was that in subsequent years i.e. assessment years 2006-07 to 2008-09, the management fees paid by the assessee were allowed as deduction by the Assessing Officer. Reliance was placed on series of decisions in this regard. 49. The CIT (A) allowed the claim of assessee observing as under:- 2.6.24 I have carefully considered the arguments of the learned TPO and the learned AO. I have also perused the additional evidence furnished by the Appellant. First of all, I find that the learned TPO in his remand report on examination of the additional evidence has n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ese contradictions drastically reduce the reliability of the observation in the remand report. 2.6.26 Thirdly, I find on perusal of the additional evidence that the management services were actually rendered by the AE. As mentioned above, the learned TPO in remand report also not doubted that the management services were not rendered at all. The learned TPO has stated that management services were rendered but were rendered by the group entities not by the AE. If management services were indeed rendered then it follows that the arm's length price of such payment cannot be 'nil.' In such circumstances, the arm's length price of such payment will have to be determined by using one of transfer pricing methods. The learned TPO has obviously has not carried out this exercise as he had determined ALP of this payment as 'nil' in absence of supporting evidence of the receipt of services. However, as discussed, ALP of this payment cannot be considered as 'nil'. 2.6.27 Fourthly, the learned AO has stated that the income has a character of dividend in the hands of Sandvik AB. According to the learned AO, as far as the Appellant is concerned, payment i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt, then there is no merit in making any adjustment on account of payment of management fees. Upholding the order of CIT (A), we reverse the findings of the TPO in this regard as the same are without any basis, in view of specific covenants of the agreement entered into by the assessee with Sandvik AB, Sweden. 51. The second point which has been considered by the CIT (A) is that the said management service fees have been taxed in the hands of recipient Sandvik AB, Sweden. Where the Assessing Officer Incharge of assessment of Sandvik AB, Sweden has accepted income arising on rendering of management services and the same being taxed in the hands of provider of services, then the claim of assessee that it had paid management services fees to Sandvik AB, Sweden, is to be allowed in the hands of assessee. 52. Another aspect to be seen is that where the management services have actually been rendered, may be, by Sandvik entities, then the arm's length price of such a transaction cannot be taken at Nil. The assessee has applied TNNM method to determine the arm's length price of payment of management fees by aggregating the transactions at Nil. Accordingly, we hold that no ad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ordingly, the Assessing Officer allowed depreciation @ 60% on the aforesaid expenditure resulting an addition of ₹ 16,74,348/-. 32. The CIT (A) allowed the claim of the assessee, in view of the appellate order relating to assessment year 2002-03. 33. The Revenue is in appeal against the order of CIT (A). 34. We find that similar issue of disallowance of software expenses being of enduring nature, arose before the Tribunal in assessee's own case in ITA Nos.2053 2054/PN/2012 in Revenue's appeal against the assessee. The Tribunal vide order dated 31.12.2014 with lead order in assessee's appeal in ITA Nos.1841 1842/PN/2012 along with cross appeals in ITA Nos.2053 2054/PN/2012 vide pars 19 to 21 considered the identical issue of allowability of expenditure incurred on applications software and allowed the claim of the assessee. The relevant findings of the Tribunal vide paras 22 and 22.1 are as under:- 22. We have considered the rival arguments made by both the sides. We find the issue stands squarely decided in favour of the assessee by the decision of the Hon'ble Bombay High Court in the case of CIT v. Lubrizol India Ltd. reported i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the order of CIT (A) in deleting the addition of ₹ 19,52,000/- made on account of closing stock of obsolete inventory. 60. The learned Authorized Representative for the assessee in this regard also pointed out that the said issue is also covered by the order of Tribunal in Revenue's appeal filed for assessment year 2004-05. 61. We find that similar issue arose before the Tribunal in assessment year 2004-05 and the Tribunal vide paras 36 to 43 deliberated upon the issue. The findings of Tribunal are as under:- 43. We have heard the rival contentions and perused the record. The assessee was consistently following the method of accounting of its obsolete inventory which has been consistently followed from year to year. Where there is recognition of the value of obsolete stock on a scientific basis, then provision made on that basis cannot be objected to by the Assessing Officer as the Department has been accepting the consistent method followed by the assessee both in the earlier and subsequent years. In view of the principle of consistency and in the absence of any evidence brought on record to dis-believe the method followed by the assessee, we find no merit i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Anr. (supra) in an appeal relating to assessment year 2004-05 where reassessment proceedings were initiated under section 147/148 of the Act on several issues, considered the reason to believe recorded by the Assessing Officer with regard to set off of loss incurred by unit eligible for deduction u/s. 10B of the Act. The Assessing Officer had reopened the assessment on the surmise that since the income of the Crab Stick Unit was exempted from tax under section 10B, the loss of that unit was wrongly set off against the normal business income. The Hon'ble High Court noted that after the substitution of section 10B of the Act by the Finance Act of 2000, the provisions provided for deduction of such profit or gains as were derived by 100% EOU for the period prescribed under that section. The Hon'ble High Court thus held that the basis on which the assessment was sought to be reopened was belied by a plain reading of the provisions and the Assessing Officer was in error in proceeding on the basis that because the income was exempted, the loss was not allowable. The Hon'ble High Court further considered that all the four units of the assessee were eligible under section 10B ..... X X X X Extracts X X X X X X X X Extracts X X X X
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