TMI Blog2021 (2) TMI 1146X X X X Extracts X X X X X X X X Extracts X X X X ..... bove illustration, not impacting the overall operating profits for comparison, applies to the composition of individual items of expenses also, such as depreciation in our case. Thus the contention of the ld. AR seeking depreciation adjustment on the ground that some of the items of assets possessed by the assessee did not appear in the schedule of assets of the comparables, is sans merit. Depreciation claim includes depreciation on certain Intangible assets - Claim of the assessee is that depreciation on the Intangible Assets, listed on page 372 of the paper book, should be ignored, as it is alien to the Manufacturing activity and hence do not qualify under sub-clause (i) of Rule 10B(1)(e). A list of six Intangible assets has been given, out of which the dispute is only w.r.t. five items, viz., Goodwill, Computer software, Noncompete fees, Technical knowhow and Customer relationships. It is evident and also admitted on behalf of the assessee that the first three intangible assets, namely, Goodwill Computer software and Non-compete fees are common to both the Manufacturing and Trading activities of the assessee. As such, depreciation on these three items of intangible assets i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that these three items were not liable to be considered as operating income by relying on Rule 10TA, giving mechanism for the determination of the operating profit under clause (k) - what is relevant in this context is to find out the treatment given to them at the time of the creation of provision for Tooling expenses or Testing expenses on one hand or the payment of Sales tax on the other. In case these three items, at the time of their creation/payment - whether in this year or in any preceding year - were taken as part of operating costs, then the sequitur is that their reversal in the year under consideration would also draw the same colour, namely, that of operating nature and would constitute operating income and vice versa. The ld. AR did not readily have the relevant data to demonstrate their nature at the time of their creation/payment. Under these circumstances, we set aside the impugned order and remit the matter to the file of AO/TPO for seeing if the provisions of Tooling and Testing, at the time of their creation, were taken as part of the operating cost. In case, the answer is found to be in affirmative, then naturally, their reversal in the year under consider ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r this purpose was not available. This was countered by the ld. AR, who submitted that the relevant data was produced. In such circumstances, we set-aside the impugned order to this extent and remit the matter to the file of AO/TPO for allowing the working capital adjustment afresh as per law after giving reasonable opportunity of hearing to the assessee. Comparable selection - non-inclusion of two companies, namely, G.K.N. Driveline (India) Private Limited and Exedy India Limited - These two companies were directed to be not considered as these were not part of the assessee s TP study report . By now, it is fairly settled through several precedents that an assessee can make out a fresh case before the higher authorities for inclusion or otherwise of a company in the list of comparables, even though it was not before the authorities below. In view of the fact that the DRP has brushed aside the assessee s claim for inclusion of the above referred two companies only on the ground that these were not part of the assessee s TP study report, we cannot countenance the same. The impugned order is set-aside and the matter is restored to the file of AO/TPO for examining the assessee s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as an admitted position that the assessee deposited the employees contribution towards EPF and ESIC before the due date u/s 139(1) of the Act. Respectfully following the aforenoted precedents, we order for the deletion of the addition. Disallowance towards contribution to the employees gratuity fund and contribution to superannuation fund - AO invoked the provisions of section 40A(7) for disallowing the claim made by the assessee on the premise of non-approval of the funds from the Commissioner of Income-tax - HELD THAT:- Considering the provisions of section 40A(7) of the Act, it is apparent that the deduction can be allowed only if the Gratuity and Superannuation Funds are duly approved by the Commissioner of Income-tax. As the requisite funds are still pending approval from the ld. Commissioner of Income-tax, we are constrained to directly grant any deduction in this regard. It is expected that the ld. CIT will shortly pass an order on the assessee s applications. The matter is sent back to the AO, who will decide the matter in conformity with such order of the ld. CIT. - ITA No.473/PUN/2018 - - - Dated:- 25-2-2021 - Shri R.S. Syal, Vice President And Shri Partha Sar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tions grouped under the Manufacturing activity . The Dispute Resolution Panel (DRP) provided marginal relief. Giving effect to the directions of the DRP, the AO recomputed the transfer pricing adjustment at ₹ 22,60,76,000/-, against which the assessee has come up in appeal before the Tribunal. 5. The assessee has agitated the working of its PLI along with two comparables. Firstly, we espouse the issues concerning with the assessee s own PLI. Certain items of operating revenue as well as operating costs have been disputed herein. Before we venture to examine such claims ad seriatim, it is necessary to take note of the fact that the TPO has decided the inclusion or exclusion of certain items of the assessee s costs and revenue in dispute, by resorting to the definitions of `operating revenue and `operating expense as given in rule 10TA of the Rules, which fall under the Safe Harbour Rules as prescribed under the Chapter Safe Harbour Rules for International Transactions . 6. Section 92CB(1) of the Act, at the material time, provided that the determination of the ALP u/ss 92C or 92CA shall be subject to safe harbour rules. Sub-section (2) states that: the Board may, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lculation of `operating revenue , gets triggered only when the option of the safe harbour rules is exercised by an assessee under due process mandated under Rule 10TE. A fortiori , where an assessee has not exercised option for the safe harbour, the entire set of Rules from 10TA to 10TG gets freezed and cannot be operationalised. This conclusion is further corroborated by the opening language of rule 10TA giving meaning to various expressions through clauses (a) to (m). It unambiguously mandates that the definitions given hereunder apply only for the purposes of this rule and rule 10TB to 10TG. Thus the definition clause in rule 10TA has its force only within the ambit of the safe harbour rules and not beyond that. 8. As against that, determination of ALP as per the TNMM, under consideration, is governed by rule 10B(1)(e). This rule has no reference whatsoever to rule 10TA. Neither rule 10TA anywhere provides for its extension to rule 10B. Thus, it is manifest that in determination of the ALP under the TNMM, or for that matter any other method under rule 10B, the rule 10TA is not relevant. The assessment year under consideration is 2013- 14. Neither the safe harbour rules apply ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion or higher percentage of depreciation in terms of the value of assets or turnover etc. Any adjustment towards depreciation in the computation of the PLI can be granted only when it is charged by the assessee at higher rates vis- -vis those of comparables and not otherwise as has been consistently held by the Tribunal in several decisions. 10.3.1. The first relief which the assessee seeks is the modification in the direction of the DRP that depreciation adjustment should be worked out in the hands of the comparables and not the assessee. In order to appreciate this contention, it would be apposite to consider the mandate of the TNMM as given in rule 10B(1)(e), reading as under:- (e) transactional net margin method, by which,- ( i ) the net profit margin realised by the enterprise from an international transaction or a specified domestic transaction entered into with an associated enterprise is computed in relation to costs incurred or sales effected or assets employed or to be employed by the enterprise or having regard to any other relevant base; ( ii ) the net profit margin realised by the enterprise or by an unrelated enterprise from a comparable uncontroll ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... comparables. It was ergo, urged that depreciation on such assets of the assessee be excluded from its overall depreciation amount. 10.4.2. It can be seen from the afore extracted sub-clauses of rule 10B(1)(e) that there is a fixed numerator, being, the net profit margin in the calculation of the assessee as well as of the comparables. Denominator may undergo change depending upon the facts and circumstances of each case. In some cases, it may be costs incurred, while in others, it may be sales effected or assets employed or any other relevant base. Raison d etre for the delegated legislature to always have the Operating profit as numerator is to deduce a comprehensive and all-impacting figure catering to all the situations and different business models that may have been adopted by the assessee and comparables. This can be understood with the help of an example. An assessee may be carrying on business from its own premises. In that case, there will be depreciation on building cost but no building rent cost. Another company, selected as a comparable, may be running its business from the rented premises. In that case, there will be only rent cost but no depreciation on buildi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ational transaction and the later step under sub-clause (iii) requires adjusting the operating profit of comparables in the backdrop of the operating profit margin of the assessee from the international transaction . In other words, all the operating costs and operating revenues qua the international transaction are to be considered in the earlier step. Operating costs qualifying for inclusion in the cost base are all the costs direct or indirect; close or remote which are incurred in relation to the international transaction. Thus, so long as there remains some link or connect between an operating cost and the international transaction, howsoever far-fetched it may be, the same is liable to be considered for the purpose. As a natural corollary, the costs incurred by an assessee, which are not in relation to the international transaction under consideration, go out of reckoning and hence cannot be considered in the determination of operating profit of the enterprise under the subclause (i). This can be understood with the help of an example. Suppose an assessee is engaged in Trading activity only and has applied the TNMM on an aggregate basis. All the costs (other than no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cannot be any dispute that Technical know-how can be used only for manufacturing and not trading activity. When we are determining the ALP of the international transactions of the `Manufacturing activity , the same is also liable to be considered even if some of the goods manufactured are sold in domestic market to unrelated enterprises. It is another matter that the transfer pricing addition will have to be restricted only to the international transactions. The last item of Intangible asset is `Customer relationships . The ld. AR could not precisely provide us the nature of this intangible asset or its manner of user. If it was utilized only for Trading segment, then depreciation on the same will require exclusion under rule 10B(1)(e)(i). In case, it was used either exclusively or jointly for the Manufacturing activity, which international transaction has been benchmarked by the TPO, then depreciation on the same will warrant inclusion in the operating costs. The impugned order on this issue is set aside. The AO/TPO is directed to verify this aspect and then decide accordingly. II. Prior period expenses 11.1. The next operating cost disputed by the assessee is `Prior pe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t be proved. We, therefore, uphold the impugned order on this score. III. Tooling provision reversal, Testing provision reversal and Sales tax refund 12.1. The assessee computed its PLI by including Tooling provision reversal, Testing provision reversal and Sales tax refund as part of operating revenue. The TPO held that these three items were not liable to be considered as operating income by relying on Rule 10TA, giving mechanism for the determination of the operating profit under clause (k). 12.2. We have noted supra that rule 10TA is not relevant in determining the ALP under rule 10B(1)(e). Ergo, decision as to a particular item of revenue, being operating or non-operating, needs to be taken in the hue of commercial principles de hors definition given in rule 10TA. In the context of the three items under consideration, namely, Tooling Expenses provision reversal, Testing provision reversal and Sales tax refund, we find that what is relevant in this context is to find out the treatment given to them at the time of the creation of provision for Tooling expenses or Testing expenses on one hand or the payment of Sales tax on the other. In case these three items, at the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oidance of tax. Sub-section (1) of section 92 provides that: `Any income arising from an international transaction shall be computed having regard to the arm s length price . Thus it is graphically clear that the ALP and the consequential transfer pricing adjustment is contemplated only in respect of the international transactions and not the entity level transactions. It is seen from the TPO s order that he computed the transfer pricing adjustment under the `Manufacturing activity in respect of entity level transactions. It is, therefore, directed that the transfer pricing adjustment should be restricted to the international transaction alone. The impugned order is set-aside pro tanto for giving effect to this direction. 15. The next argument of the assessee is that the working capital adjustment should not have been refused. It has been fairly submitted that no such issue was taken up before the TPO. It was only before the DRP for the first time that the assessee sought such an adjustment. Relevant discussion has been made in para 5.2 of the direction in which the claim of the assessee has been rejected only on the ground that the data of comparables for this purpose was no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... upon to file details for proving the receipt of services and the benefits derived therefrom. In the absence of any satisfactory explanation tendered by the assessee, the TPO determined Nil ALP of the international transaction and proposed transfer pricing adjustment of the equal amount. No succor was allowed by the DRP which led to the making of transfer pricing addition by the AO in the impugned order. 17.3. We have heard the rival submissions and gone through the relevant material on record. It is seen that the assessee claimed to have incurred ₹ 11.71 crore to Dana Corporation, USA for receipt of Sales, General and Administration services. The TPO determined Nil ALP primarily on the ground that the assessee could not adduce any evidence for receipt of services and also that no benefit was derived from such services. In our considered opinion, there is no rationale in applying the `benefit test while determining the ALP of intra-group services. Once a particular expenditure is incurred for which services are received, it does not matter whether or not such services resulted into any benefit to the assessee. This reasoning of the authorities below is jettisoned. 17.4. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct and made the disallowance u/s.43B. The case of the assessee is that no disallowance was called for since the payment was made before the due date of filing of return u/s 139(1) of the Act. The DRP, did not provide any reprieve to the assessee. 18.2. We have heard the rival submissions and perused the relevant material on record. The issue is no more res integra . The Hon ble Apex Court in the case of CIT v. Alom Extrusions Limited (2009) 319 ITR 306 (SC) has held that the amendment to first proviso and omission of the second proviso to section 43B by the Finance Act, 2003, is retrospective. The Hon ble Delhi High Court in the case of CIT v. Aimil Limited (2010) 321 ITR 508 (Delhi) has allowed deduction in respect of employees share when the amount was paid before the due date. When we consider these two judgments, it is manifested that both the employer s and employees contribution are allowable as deduction if these are deposited albeit belatedly under the respective Acts, but before the due date of filing of return u/s 139(1) of the Act. Similar view has been taken by the Hon ble Bombay High Court in CIT Vs. Ghatge Patil Transports Ltd. (2014) 368 ITR 749 (Bom). 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