TMI Blog2020 (4) TMI 749X X X X Extracts X X X X X X X X Extracts X X X X ..... on of the TPO is that the assessee was not required to incur the said expenses. But it was under jurisdiction of the Assessing Officer whether particular expenditure was incurred wholly and exclusively for the purpose of business and not in the domain of the TPO to hold that in view of the warranty etc., the assessee was not required to incur expenditure on firewall charges. The contention of the assessee seems plausible that motors were required to checked for content of moisture acquired in transport from India to the USA, i.e., the destination point and it was the responsibility of the assessee to provide defect free motors to the end customers. Thus, respectfully following the finding of EKL APPLIANCES LTD [ 2012 (4) TMI 346 - DELHI HIGH COURT] we delete the transfer pricing adjustment. - ITA No.5257/Del./2011 And ITA No.1060/Del/2014 - - - Dated:- 19-2-2020 - Sudhanshu Srivastava, Judicial Member And Shri O.P. Kant, Accountant Member For the Assessee : Shri Kamal Sawhney, Adv., Shri Anshul Sharma, CA, Shri Prashant Mehar Chandani, Adv. And Shri Divyansh Singh, Adv. For the Department : Shri Sanjay I. Bara, CIT(DR) ORDER PER O.P. KANT, AM: These a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and integrated undertaking , which could be eligible for benefit under section 10B of the Act. 5. On the facts and in the circumstances of the case and in law, the learned AO erred in proposing and the Hon ble DRP further erred in confirming the action of learned AO by rejecting the Appellant s claim of the deduction under Section 10B of the Act ignoring the factual position that the new unit is a 100 percent EOU duly approved by the prescribed authorities. 6. On the facts and in the circumstances of the case and in law, the learned AO erred in proposing and the Hon ble DRP further erred in observing that the Appellant s case was a case of reconstruction of the business already in existence and that there was no emergence of a new physically separate industrial unit, despite all the relevant facts placed on record by the Appellant. 7. On the facts and in the circumstances of the case and in law, the learned AO as well as Hon ble DRP erred in not following the order passed by Hon ble Commissioner (Appeals) [Hon ble CIT(A) ] for previous assessment years ( AY ) i.e. AY 2003-04 to AY 2006-07, wherein Hon ble CIT(A) has upheld the Appellant s claim of deduction under Sec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y ground of appeal either before or at the time of hearing of this appeal. 3. Briefly stated facts of the case are that, the assessee filed return of income on 25.10.2017, declaring income of ₹ 16,27,03,930/-. The case was selected for scrutiny and notice under section 143(2) of the Income-tax Act, 1961 (in short the Act ) was issued and complied with. During the assessment proceedings, the Assessing Officer noted that the assessee company deals in manufacturing of Fractional Horse Power (FHP) Motors, Electric Fans Laminations used in motors. Besides, assessee-company is also engaged in trading of pumps and integral horse power motors and export of computer software. The company was registered with the Software Technology Parks of India w.e.f. 10.06.2005 and manufacturing activity commenced w.e.f. 01.08.2005 from the undertaking located at Laxmi Towers, Nagarjuna Hills, Hyderabad. The assessee had claimed deduction of ₹ 1,20,01,770/- under Section 10B of the Act for the first time from the assessment year 2006-07. The assessee carried out manufacturing functions from facility situated at Faridabad through two plants- an Export Oriented Unit ( EOU ) and Do ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... therefore, in view of the decision of the Hon ble Delhi High court in the case of CIT Vs. Tata Communication Internet Services Ltd. (2012) 204 Taxman 606 (Del) deduction has to be allowed for entire period of 10 years, if the conditions have been fulfilled in the initial year. 4.1 On the contrary, learned DR relied on the order of the lower authorities. 4.2 We have heard the rival submissions of the parties and perused the relevant material on record. In the year under consideration, the Assessing Officer relying on the order of the immediately preceding year held that Export Oriented Unit ( EOU ) is just an expansion of the existing unit and not an integrated new unit. The learned DRP also upheld the same. We find that the Tribunal in ITA No. 3650/Del/2009 and 1196/Del/2010 for assessment years 2005-06 and 2006-07 respectively, following the earlier order deleted the disallowance of deduction under Section 10B of the Act observing as under: 4. We have gone through the order dated 26.03.2019 passed in assessee s own case for the AY s 2003-04 and 2004-05 in the appeals preferred by the revenue, wherein in respect of the claim of deduction u/s 10B of the Act, a coordin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... He submitted that payment of firewall charges was made by the assessee to its AE was an integral part of the manufacturing function, the same was aggregated and benchmarked using the TNMM as the most appropriate method. The learned counsel submitted that the learned TPO rejected the arguments put-forth by the assessee stating the following reasons: a) An unrelated party would not make such a payment; b) If the AE wishies to test all the motors for its satisfaction, then it amounts to duplicative service and no separate payment is required to be made by the assessee. c) No unrelated party would make payment for testing of motors in which no fault is detected; d) No independent party would pay such testing charges when goods are covered by warranty; and 5.1 The learned TPO in view his observations, benchmarked the transaction applying CUP method and valued at nil. 5.2 The learned counsel for the assessee submitted that the learned TPO/DRP has ignored the following points which are primary reasons for which the assessee is incurring such expenses: (i) Impact on the brand reputation: It is important to understand that the main reason behind incurr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee to the Ld. TPO / Ld. DRP (on sample basis for AY 2007-08) (For back-to-back invoices please refer pg 611-693 of PBII). (iv) Cost not related to AE: It is hereby stated that the AE is a distributor of goods which are manufactured by the Assessee. It has also been stated before the lower authorities that the AE retains only 10% of revenue and the balance is remitted back to the Assessee. Hence, the profit is that of the Assessee with limited returns to the AE - a gross margin of 10%. Under these circumstances it that the AE would not bear such expense of testing when it is earning only minimal returns. Should the AE start to bear these expenses it s margins would take a hit. In any third party set-up such costs can never be passed onto the distributor. 5.3 Further, the learned counsel also submitted that why such testing was required and how it was different from warranty and other expenses, which are as follows: 11. The Ld. TPO has compared this expense with warranty' expenses. It is true that Assessee provides warranty, but this expense is separate and distinct to firewall charges. Any motor that does not contain moisture may also have functional pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ngle comparable. In relation to the same, the Assessee wishes to rely on the following judicial rulings, wherein it has been held that it is imperative to have a Comparable uncontrolled transaction. 17. In the case of Gates Unitta India Company Private Limited (ITA No. 2745/Chny/2017) (refer para 8, page 8 of the ruling; to be handed over by the counsel) wherein it was held that: 8. From the above, it is obvious that for selecting a Comparable Uncontrolled Price method, the price charged or paid for property transferred or services provided in a comparable uncontrolled transaction, or a number of such transaction is to be identified. In this case, admittedly, no such companies were identified by the TPO or DRP. Therefore, this Tribunal is of the considered opinion that the matter needs to be reconsidered by the authorities below. 18, In the case of SNF (India) Pvt. Ltd. (ITA No. 279 280/VIZ/2017) (refer para 15, page 22 23 of the ruling; to be handed over by the counsel) wherein it was held that: 15. During the appeal hearing, the Id.AR argued that the payment of royalty is interlinked with the manufacturing activity and other trading transitions, theref ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the decision of the Hon ble Jurisdictional High Court in the case of EKL Appliances Ltd. (ITA No.1068/2011 ITA No. 1070/2011), wherein the Hon ble Court has held that the assessee is not required to demonstrate that the expenditure has actually resulted in profit or income either in the same year or in any of the subsequent year. The only condition is that the expenditure should have been incurred wholly and exclusively for the purpose of business. The relevant finding of the Hon ble High Court (supra) is reproduced as under: 21. The position emerging from the above decisions is that it is not necessary for the Respondent to show that any legitimate expenditure incurred by him was also incurred out of necessity. It is also not necessary for the Respondent to show that any expenditure incurred by him for the purpose of business carried on by him has actually resulted in profit or income either in the same year or in any of the subsequent years. The only condition is that the expenditure should have been incurred wholly and exclusively for the purpose of business and nothing more. It is this principle that inter alia finds expression in the OECD guidelines, in the paragr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orised. 5.8 In the instant case, the assessee has incurred expenditure and not making payment of mark-up is not adverse to the entity in Indian Jurisdiction. The assessee has claimed the expenditure paid by the AE on its behalf. The contention of the TPO is that the assessee was not required to incur the said expenses. But it was under jurisdiction of the Assessing Officer whether particular expenditure was incurred wholly and exclusively for the purpose of business and not in the domain of the TPO to hold that in view of the warranty etc., the assessee was not required to incur expenditure on firewall charges. The contention of the assessee seems plausible that motors were required to checked for content of moisture acquired in transport from India to the USA, i.e., the destination point and it was the responsibility of the assessee to provide defect free motors to the end customers. Thus, respectfully following the finding of the Hon ble Delhi High Court (supra), we delete the transfer pricing adjustment of ₹ 2,54,42,211/-. Accordingly, the appeal of the assessee is allowed. ITA No.1060/Del/2014 Assessment Year: 2009-10 6. Now, we take up the appea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... red percent Export Oriented Unit despite the fact that the Appellant satisfied all the conditions laid down under section 10B of the Act. 5.1 That on the facts and in the circumstances of the case and in law, both the Ld. AO and the Ld. DRP erred in rejecting the Appellant s claim of the deduction under section 10B of the Act ignoring the factual and legal position that the new unit is a hundred percent Export Oriented Unit duly approved by the prescribed authorities and a separate undertaking for the purpose of deduction under section 10B of the Act. 5.2 That on the facts and in the circumstances of the case and in law, both the Ld. AO and the Ld. DRP erred in holding that no separate industrial unit came into existence for manufacturing of new articles or things. 5.3 That on the facts and in the circumstances of the case and in law, both the Ld. AO and the Ld. DRP erred in holding that the new hundred percent Export Oriented Unit was an expansion of the existing unit and not an integrated new unit. 5.4 That on the facts and in the circumstances of the case and in law, both the Ld. AO and the Ld. DRP erred in holding that the Appellant has not started a new hun ..... X X X X Extracts X X X X X X X X Extracts X X X X
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