TMI Blog2019 (8) TMI 448X X X X Extracts X X X X X X X X Extracts X X X X ..... FAA has been upheld. Considering that the payment of Royalty to the AEs was as per RBI norms, we are satisfied that the view taken by the ld. CIT(A) is unassailable. This ground, therefore, fails. TP addition in the international transaction of 'Export of manufactured finished goods - HELD THAT:- ALP of the international transaction of Export of manufactured finished goods is required to be separately done. We have held above that the CUP is not the most appropriate method in the given circumstances. In such a condition, there is a need for resorting to another suitable method for determining the ALP of international transaction of Export of manufactured finished goods. We, therefore, set aside the impugned order and remit the matter to the file of the AO/TPO for a fresh determination of ALP of the international transaction of Export of manufactured finished goods by the assessee. It is, however, made clear that the transfer pricing adjustment, if any, resulting from such fresh determination of the ALP should be restricted only to the value of international transactions of ₹ 3.09 crore. The other part of the international transaction of Export of manufactured finis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nses on premises considering the same as capital in nature - HELD THAT:- Both the sides agree that similar issue has been decided by the Tribunal against the assessee in its order for the A.Y. 2004-05. In the absence of the ld. AR pointing out any difference in the facts or law on this issue for the instant and the preceding year, following the view taken for the A.Y. 2004-05 [ 2019 (8) TMI 369 - ITAT PUNE] we uphold the capitalization of expenses in relation to the premises @ 40%. At the same time, it is directed that the assessee be allowed depreciation on such capitalized amount. Disallowance of Miscellaneous expenses - HELD THAT:- Similar issue came up for consideration before the Tribunal for earlier years as well. After allowing full deduction towards software expenses and fees for handling share record and making full disallowance for warranty expenses, Gifts and Donation, the Tribunal has restricted the addition to 15% of the balance expenses. Following the same view, we set aside the impugned order on this score and direct the AO to compute the amount disallowable out of Miscellaneous expenses in accordance with the directions given for the immediately two preceding ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ar and carried out suitable repairs/renovation to make it fit for use. The decision of the ld. CIT(A) capitalizing 40% of the expenditure as against 80% done by the AO, was approved by the Tribunal. Once a particular amount has been held to be capital expenditure on a building purchased by the assessee, the same has to be subjected to depreciation. As the Tribunal has approved the capitalizing of certain amount to Building account, we, therefore, direct the AO to allow depreciation on such amount as per law. - ITA No.736/PUN/2011, ITA No.732/PUN/2011 - - - Dated:- 5-8-2019 - Shri R.S. Syal, Vice President And Shri Partha Sarathi Chaudhury, Judicial Member For the Assessee : Shri R. Murlidhar And Shri Prashant Gandhi For the Revenue : Shri Sandip Garg, CIT ORDER PER R.S.SYAL, VP : These two cross appeals one by the assessee and the other by the Revenue - arise out of the order passed by the Commissioner of Income-tax (Appeals)-V, Pune on 28-02-2011 in relation to the assessment year 2005-06. 2. First three grounds taken by the Revenue in its appeal are agains ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee, in the opinion of the TPO, could not provide any details in respect of costs incurred by the concerned AEs for the development of the technology provided to the assessee, he determined Nil ALP of the transaction of payment of Royalty. The AO made an addition of the equal amount, which came to be deleted in the first appeal. 4. We have heard both the sides and gone through the relevant material on record. It is found as an admitted position that the assessee paid Royalty to its AEs as per the rates approved by the RBI. The TPO determined Nil ALP simply on the ground that the AEs to whom the assessee paid Royalty had discontinued production of such products and the assessee was making exports to them also. In our considered opinion, such reasons are not germane in the determination of the ALP. The TPO is required to determine the ALP of an international transaction under one of the methods mandated under rule 10B of the Income-tax Rules, 1962. Nothing of the sort has been done in the instant case. The TPO got influenced with extraneous reasons, which have no bearing on the determination of the ALP of an international transaction. It is further observed that s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uch goods to third parties, the amount of sales would have been ₹ 5,33,87,694/- (₹ 3.09 crore + ₹ 2.24 crore). As the assessee deliberately exported similar goods to its AE at price lower than that charged from non-AEs, the TPO held that the lower amount charged at ₹ 2.24 crore was liable to be considered as transfer pricing adjustment. The AO made this addition, which got sustained at the hands of the ld. first appellate authority. 6. We have heard both the sides and gone through the relevant material on record. The assessee declared an international transaction of `Export of manufactured finished goods with value at ₹ 50.95 crore, whose ALP was determined by the assessee under the TNMM by aggregating it with other two international transactions of `Payment of Royalty and `Import of raw materials and components . The TPO did not accept the aggregation of transactions and determined the ALP of payment of Royalty separately under the CUP method. As regards the transaction of export of such manufactured finished goods which were also exported to the non-AEs to the tune of ₹ 3.09 crore, the TPO applied the CUP method by considerin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rice charged from AE is more than that charged from non-AEs even for more quantity. The entire case is like this. Normally, the quantity of sale of similar products to non- AEs is several times higher than that sold to AEs. On an overview of Annexure-1, it is found that no doubt the assessee charged less price from its AEs vis- -vis non-AEs, but such lower prices are invariably conjoined with much higher number of units sold. In certain cases, the assessee charged its AEs at prices higher than that charged from non-AEs for similar products. The ld. AR explained that though the products are similar but these were customized as per the requirements of the non-AEs, which position has not been controverted on behalf of the Revenue. That apart, it is seen that there is difference in locations of AEs and non-AEs. Whereas the biggest buyer AE, namely, Power Tools Distribution N.V. is situated in Belgium; the biggest buyer non-AEs, namely, Bogala Graphite Lanka Ltd. is situated in Sri Lanka. 8. Rule 10B(2) of the Income-tax Rules, 1962 (hereinafter also called `the Rules ) provides that the comparability of an international transaction with an uncontrolled transaction sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and functional difference. Reverting to facts of the extant case, we find that since there are significant differences in the sales made by the assessee to its AEs and non-AEs, the effect of which has neither been given by the TPO nor it has been shown that how it can be given, we hold that the action of the authorities below in applying the CUP as the most appropriate method cannot be countenanced. 10. Having held that the CUP is not the most appropriate method in the given circumstances, there is a need to determine the ALP of the international transaction under another suitable method. The ld. AR vehemently argued that in such a scenario of the Tribunal not approving the application of the CUP method by the authorities, the ALP determination by the assessee under the TNMM would revive not calling for any transfer pricing addition. This contention in our considered opinion is sans merit. We have noticed above that the assessee aggregated three international transactions including payment of Royalty and the instant transaction of Export of manufactured finished goods and processed them under the TNMM on aggregate basis. Thus the operating profit computed by the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... able opportunity of hearing in such fresh proceedings. 11 Another ground raised by the Revenue in its appeal is against the deletion of transfer pricing addition of ₹ 9.84 crore in respect of international transaction of Receipt of indenting commission. 12. The factual matrix of this ground is that the assessee received commission amounting to ₹ 13,40,48,708/- for rendering marketing services to its AE. The assessee applied separate TNMM in respect of this international transaction and showed that the receipt of commission was at ALP. The TPO observed that the assessee effected sales for its AEs amounting to ₹ 136.03 crore, against which it received commission in question. He further noticed that apart from rendering marketing services to its AEs, the assessee also marketed its own products and the expenses incurred for both the activities were combined. He, therefore, held that the commission received by the assessee from its AE should be equal to the profit generated by it from marketing of own goods. He computed the assessee s profit before interest and tax at ₹ 69.79 crore. The amount of manufacturing and other expenses, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enterprise, in a comparable uncontrolled transaction, or a number of such transactions, is determined ; (iii) the normal gross profit mark-up referred to in sub-clause (ii) is adjusted to take into account the functional and other differences, if any, between the international transaction and the comparable uncontrolled transactions, or between the enterprises entering into such transactions, which could materially affect such profit mark-up in the open market ; (iv) the costs referred to in sub-clause (i) are increased by the adjusted profit mark-up arrived at under sub-clause (iii) ; (v) the sum so arrived at is taken to be an arm s length price in relation to the supply of the property or provision of services by the enterprise . 14. The first step under this method is to determine the direct and indirect costs of production incurred by the enterprise in respect of services provided to an associated enterprise. The TPO has worked out the amount of such expenses incurred by the assessee on sale of the AEs products at ₹ 11.30 crore. The second step under this method talks of finding out the normal gross pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ufactured goods. The ld. DR was fair enough to accept that the amount of depreciation ought to have been included. Even if we presume the initial step of adoption of the entity level profit of the assessee, including that from sale of self goods as correct, with which we do not otherwise agree, then also the total costs contributing to the manufacturing profit should have been considered, which obviously include raw material cost and depreciation, as has been held in the first appeal. On considering the position in this manner, the ld. CIT(A), on pages 27 and 28 of the impugned order, has found the ALP of commission income at ₹ 13.79 crore as against the transacted value of commission income at ₹ 13.38 core, which is within plus minus 5% range, not calling for any transfer pricing addition. We, therefore, accord our imprimatur to the view taken by the ld. CIT(A) on this score. This ground is not allowed. 15. Ground no.1 of the assessee s appeal is against the confirmation of disallowance u/s.35DD of the Act at ₹ 2,10,000/-, being, 1/5th of the fees paid to Registrar of Companies for increasing the authorized capital on amalgamation. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n, the Tribunal has restricted the addition to 15% of the balance expenses. Following the same view, we set aside the impugned order on this score and direct the AO to compute the amount disallowable out of Miscellaneous expenses in accordance with the directions given for the immediately two preceding years on this score. 21. Ground no.5 of the Revenue s appeal is against deletion of addition of ₹ 2,84,04,988/- made by the AO on account of commission. 22. The facts apropos this issue are that the assessee claimed deduction for commission amounting to ₹ 4,82,98,788/-. The AO found that supporting evidence was available only for a sum of ₹ 1,98,93,800/-. The remaining amount of ₹ 2,84,04,988/- was disallowed by the AO. This addition came to be deleted in the first appeal, against which the Revenue has come up in appeal before the Tribunal. 23. Here again we find it is an admitted position that similar issue has been determined by the Tribunal in favour of the assessee in its orders for the A.Ys. 2002-03 to 2004-05. Following the same, we countenance the impugned order on this score. This grou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e same course of directions to the extent applicable for the year under consideration. 31. The assessee has raised the following two additional grounds : 1. Claim of Education Cess : The Appellant prays that the liability for education cess on income tax paid for the year ought to be allowed as tax deductible expenses while computing the taxable income. 2. Claim of Depreciation : Consequent to the decision of Hon ble ITAT in the AY 2004- 05, in relation to disallowance of expenditure of premise amounting to ₹ 14,18,515, being 40% of the total expenditure incurred during the year, which are held to be capital in nature for such year under consideration, i.e. AY 2004-05, the Appellant prays for allowance of the depreciation the same, in the subsequent years, including AY 2005-06. 32. The Hon ble Supreme Court in National Thermal Power Company Ltd. Vs. CIT (1998) 229 ITR 383 (SC) has observed that the purpose of the assessment proceedings before the taxing authorities is to assess correctly the tax liability of an assessee in accordance with law. If, for example, as a resul ..... X X X X Extracts X X X X X X X X Extracts X X X X
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