TMI Blog2017 (6) TMI 1346X X X X Extracts X X X X X X X X Extracts X X X X ..... g 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 [ 2015 (12) TMI 1742 - ITAT PUNE] wherein as held that the assessee is entitled to the claim of deduction under section 43B of the Act as the aforesaid amount admittedly, was paid before the due date of filing the return of income for the instant assessment year, as certified by the Auditor in the audit report in Annexure 7 attached to the Form No.3CD, wherein it has been certified that the amount of Excise duty paid up to date of filing the return of income. Adhoc addition by valuing the stock of scrap as on 31.03.2005 - assessee explained that it was its policy not to value any scrap at the close of the year and the said policy was consistently followed from year to year - CIT(A) restricted the addition by revaluing the stock @ ₹ 5 per Kg., estimated on adhoc basis - HELD THAT:- 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 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... acturing 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 factual aspects, we find no merit in the approach adopted by the TPO. Once the aggregation approach is to be applied, then thereafter, CUP method cannot be applied because both the activities having controlled transactions of import of service charges, management fees, etc. and hence, are tainted. See RACOLD THERMO LIMITED [ 2015 (10) TMI 1747 - ITAT PUNE] and JOHN DEERE INDIA PVT. LTD., (JOHN DEERE EQUIPMENT PVT. LTD.) [ 2015 (3) TMI 318 - ITAT PUNE] 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. Reasonable opportunity of hearing shall be given to the assessee in this regard. Adjustment made to international transactions of management service fees - Receipt of management services from Sandvik group entities - HELD THAT:- We find merit in the claim of assessee and in view of gamut of evidences filed by the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essment year. Balance loss, if any, would be carried forward to the succeeding years to be adjusted as per the provisions of the Act. Ground of appeal raised by the Revenue is also dismissed. - ITA No.1750/PUN/2013, ITA No.1804/PUN/2013 - - - Dated:- 14-6-2017 - MS. SUSHMA CHOWLA, JM AND SHRI M.K.AGGARWAL, AM For the Assessee : Shri Jehangir D. Mistri For the Respondent : Shri Suhas Kulkarni ORDER PER SUSHMA CHOWLA, JM: The cross appeals filed by the assessee and the Revenue are against the order of CIT(A)-IT/TP, Pune, dated 05.07.2013 relating to assessment year 2005-06 against the order passed under section 143(3) of the Income Tax Act, 1961 (in short the Act ). 2. The cross appeals filed by the assessee and the Revenue were heard together and are being disposed of by this consolidated order for the sake of convenience. 3. The assessee in ITA No.1750/PUN/2013 has raised the following grounds of appeal:- 1. The learned CIT(A) erred in passing the impugned order which was not in accordance with law, the statutory provisions, and which is void and of no legal effect. 2. The Ld. CIT(A) erred in upholding an ad-hoc disallowance u/s.l4A of & ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 CUP (Comparable Uncontrolled Price) method. 12. The learned CIT(A) erred in failing to apply the provisions of the proviso to s 92C(2) of the Act. 4. The Revenue in ITA No.1804/PUN/2013 has raised the following grounds of appeal:- 1a Whether on the facts and circumstances of the case and in law the CIT(A) was justified in admitting additional evidence under Rule 46A, when the CIT(A) has himself agreed with the TPO's observation that the onus is on the assessee to establish the transfer price by furnishing necessary supporting evidence, as Rule 10D clearly provided the nature of documents, which the assessee is required to maintain for this purpose? 1b. Whether on the facts and circumstances of the case and in law the CIT(A) was justified in admitting additional evidence under Rule 46A when the CIT(A) has himself agreed that the TPO has provided adequate time to the assessee for submission of evidence and without establishing the reasonable cause which prevented the assessee from furnishing such e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... whatsoever and without substantiating the said allowance. 6. Whether on the facts and circumstances of the case and in law, the CIT(A) was justified in allowing the losses suffered by newly set up EOU against its other business income, when the income of the EOU is exempt u/s 10A/10B of the I.T. Act, 1961?. 5. The ground of appeal No.1 raised by the assessee is general and hence, the same is dismissed. 6. The issue in ground of appeal No.2 raised by the assessee is against disallowance under section 14A of the Act at ₹ 1 lakh. 7. Briefly, in the facts relating to the issue, the Assessing Officer during the course of assessment proceedings had noted that the assessee had claimed interest expenditure of ₹ 2,61,75,000/-. The assessee had made long term investment in shares of M/s. Sandvik Smith Asia Ltd. and the Assessing Officer applying the methodology as prescribed in Rule 8D of the Income Tax Rules, 1962 (in short the Rules ), worked out the disallowance at ₹ 4,52,000/-. 8. The CIT(A) restricted the disallowance to ₹ 1 lakh, against which the assessee is in appeal. 9. The assessee is aggrieved by the observations of the CIT(A) in para 2.8 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xcise duty in an accounting year, which is to be adjusted as and when goods were lifted by the assessee from its factory, was held as allowable as deduction under section 43B of the Act, since the said section recognized the deduction for payment of tax, duty, etc. as allowable on payment basis. The said ratio was laid down by the Chandigarh Special Bench of Tribunal in DCIT Vs. Glaxo Smithkline Consumer Healthcare Ltd. (supra). Following the same parity of reasoning, we hold that the assessee is entitled to the claim of deduction of ₹ 10,06,000/- under section 43B of the Act as the aforesaid amount admittedly, was paid before the due date of filing the return of income for the instant assessment year, as certified by the Auditor in the audit report in Annexure 7 attached to the Form No.3CD, wherein it has been certified that the amount of Excise duty paid up to date of filing the return of income, exceeded sum of ₹ 1.86 crores. The ground of appeal No.2 raised by the assessee is thus, allowed. 15. Following the same parity of reasoning, we allow the claim of assessee and ground of appeal No.3 is thus, allowed. 16. Now, coming to the ground of appeal No.4 raised ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 6 raised by the assessee have become infructuous as the relief has been granted in earlier years and hence, the same are dismissed. 23. Now, coming to the grounds of appeal No.7 to 10 raised by the assessee which are against the Transfer Pricing adjustment of manufacturing wire segment at ₹ 6,25,621/-. The ground of appeal No.11 is against the TP adjustment of exports of Seamless tubes and pipes at ₹ 12.06 lakhs. 24. Brief facts of the issue are that, reference under section 92CA(1) of the Act was made for computation of arm's length price of international transactions detailed in the audit report in Form 3CEB. The Transfer Pricing Officer (the TPO) thereafter, issued show cause notice to the assessee. The assessee was engaged in the business of manufacturing carbide tools and hard material tools that were used in drilling and machining. The products manufactured by the assessee were used in automobiles, general engineering, steel infrastructure and mining industries. The total turnover of the assessee for the year ending 31.03.2005 was ₹ 568 crores, on which the assessee had declared net profit before tax at ₹ 113.26 crores. The assessee was sub ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tional transactions relating to export of wires to associated enterprises. In response thereto, the assessee furnished its submissions which were considered by the TPO. The TPO rejected the plea of assessee of combined transaction approach. The TPO also rejected the plea of assessee that the CPM cannot be applied observing as under:- 7.4.3 In view of the facts of the case and discussion as above an adjustment of ₹ 6,25,621/- is made to the international transaction relating to export to AE under Manufactured Wires Segment to the AE and consequent to this adjustment the income of the assessee shall be increased by ₹ 6,25,621/- 26. The Assessing Officer made adjustment on account of arm's length price of international transactions at ₹ 6,19,04,219/- which constituted of ₹ 12,05,814/- + ₹ 1,59,27,811/- + ₹ 4,41,44,973/- + ₹ 6,25,621/-. At this juncture, we are concerned with the addition of ₹ 6,25,621/-. 27. Before the CIT(A), the plea of assessee was that CPM cannot be considered as most appropriate method because there were controlled transactions in both associated enterprises and non-associated enterprises transactions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... transactions under the said segment i.e. export of finished goods with import of raw material, allocation of fees for IT support and management / operational services and reimbursement / recovery of expenses. The assessee had applied TNNM method and held the transaction to be at arm s length. The case of assessee was that aggregation approach should be accepted and TNNM method should be applied. It was also explained by the assessee that there were significant differences in assessee s FAR profile with respect to the domestic and export business. The assessee also explained that under the said division, it was majorly making domestic sales to the extent of ₹ 24.10 crores and the export activity was only to the extent of 2% of the overall wire manufacturing activity and was undertaken to utilize the spare manufacturing capacity. The total export sales to the associated enterprises were about ₹ 46 lakhs. Another point raised by the assessee with regard to the said transaction was that where import / service charges / management fees, etc. were the controlled transactions in respect of both the activities, then both were tainted and CPM method could not be applied to comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... transactions undertaken by the assessee. The plea of assessee is that both the activities i.e. domestic and the export to the associated enterprises undertaken by the assessee have controlled transactions and hence, CUP method is not the most appropriate method to be applied. We find support from the order of Tribunal in John Deere India (P.) Ltd. Vs. DCIT (2015) 56 taxmann.com 412 (Pune Trib.), wherein the Tribunal vide order dated 20.02.2015 had decided the issue on both the aspects i.e. where a method has been consistently followed by the assessee why the same should not be applied to benchmark its international transactions and also the issue of application of TNMM method as compared to CUP method applied by the TPO. The Tribunal vide paras 16 to 21 has observed as under:- 16. We have heard the rival submissions of the parties and perused the record. We have also considered all the decisions and precedents relied on by both the parties. On this ground there are two sub issues first is rejection of the TNMM method adopted by the assessee and substituting the said method with CUP by the TPO/DRP and second issue is in respect of the ALP adjustment made by the Assessing Of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enches in which it is held that when the facts involved are similar in various years and the Revenue has accepted the method adopted by the assessee in some years then there is no reason to take a different stand in the subsequent years without explaining the reasons how the facts in the said year are different than the preceding years: i. Alfa Laval (I) Ltd. 149 ITD 285 (Pune). ii. H.A. Shah Co. Vs. CIT 30 ITR 618 (Bom). iii. Brintons Carpets Asia (P) Ltd. 139 TTJ 177 (Pune) iv. Drilbits International Pvt. Ltd. 62 DTR 171 (Pune). v. Agility Logistics (P) Ltd. 145 ITD 566 (Mum). vi. Skol Breweries Ltd. 153 TTJ 257 (Mum).‖ 34. The Tribunal further dealt with the second aspect of the issue i.e. the application of most appropriate method and observed as under:- 22. Let us deal with another objection of the TPO on the appropriate method whether the TNMM which is adopted by the assessee is a correct appropriate method or CUP which is applied by the TPO. This issue stands covered in favour of the assessee by the decision of the ITAT, Pune in the case of Drill bits International Pvt. Ltd. (supra). In the said case the TPO had rejected TNMM method and had c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... E and addition of ₹ 58,54,128 has been made. In this working, the learned TPO has failed to appreciate that during the year, the assessee has paid processing charges to the local contractors of ₹ 16,98,742 i.e. in respect of products sold in the domestic segment, hence the same should not have been allocated to the export segment. Besides, there is no reason to doubt the submission of the assessee that major time of the junior and serior staff is utilized for the domestic segment since while dealing with various public sector units by the assessee several follow ups like collection of the orders, physical despatch of goods, follow up for the payment etc., are required to be done, hence major part of the total expenditure is to be allocated to the domestic unit and balance to the export segments. We are thus of the view that learned TPO was not justified in rejecting such submission of the assessee treating the same as having no basis. In our view, the apportionment of these costs is justified because major time of the employees is devoted towards the domestic segment. We also find substance in the submission of the learned Authorised Representative that assessee has als ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TPO to accept claim of the assessee regarding the ALP based on TNMM. The issue raised in the related grounds is decided in favour of the assessee. 23. The Ld. Counsel has also placed his reliance on the decision of the ITAT, Pune in the case of Alfa Laval (I) Ltd. (supra). In the said case also the assessee had exported industrial products to its AEs as well as sold in the domestic market. The assessee had adopted TNMM but the said method was rejected by the TPO, and TPO substituted CPM in the place of TNMM. When the matter reached before the Tribunal it is held that CPM cannot be applied since there were various differences in the export segment and domestic segment such as market functions, geographic difference, volume difference, credit risk, related party transactions etc. In our opinion the said principles are clearly applicable in the present case. As we have already observed that the assessee has also share in the domestic market and we again compared the parameters of the domestic market with the export market as there is a difference in the export segment and domestic segment on account of credit risks, marketing, warranty, etc. etc. We, therefore, hold that on princi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ut the adjustment of ₹ 12,05,814/- unfavourable items were added and favourable items of ₹ 50 lakhs were ignored. 37. The learned Departmental Representative for the Revenue in this regard referred to the order of TPO at page 16. 38. We have heard the rival contentions and perused the record. Briefly, in the facts relating to the issue, the assessee had applied aggregation approach, wherein it had aggregated international transactions of export of finished goods, import of raw materials, payment of commission, allocation of fees for IT support and management / operational services, reimbursement / recovery of expenses and had applied TNNM method to benchmark the said transaction. The plea of assessee before the TPO was that there was significant FAR and other differences with respect to exports to associated enterprises and sale to third parties in the said division of Seamless tubes and pipes and the application of CUP method was not correct, as the aggregate sale value of such sale to associated enterprises was just ₹ 4.49 crores, which was less than 6% of total export of Seamless Tube and Pipes to associated enterprises which were ₹ 82.22 crores. It ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nce there is no difference in the factual aspects, we find no merit in the approach adopted by the TPO. Once the aggregation approach is to be applied, then thereafter, CUP method cannot be applied because both the activities having controlled transactions of import of service charges, management fees, etc. and hence, are tainted. In this regard, we find support from the ratio laid down by the Pune Bench of Tribunal in John Deere India (P.) Ltd. Vs. DCIT (supra) and Recold Thermo Ltd. Vs. DCIT (2015) 63 taxmann.com 215 (Pune Trib.), 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. Reasonable opportunity of hearing shall be given to the assessee in this regard. The ground of appeal No.11 is allowed as indicated above. ITA No.1804/PUN/2013 (Revenue s appeal) 41. The issue in grounds of appeal No.1a and 1b is against the admission of additional evidence. The assessee had furnished certain additional evidence before the CIT(A), which was forwarded to the Assessing Officer and the remand report was o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and made an upward adjustment of ₹ 4.14 crores, in the absence of assessee furnishing the evidence in support of its claim that any services rendered were availed by it. The assessee before the CIT(A) furnished voluminous additional evidence in support of its contention that it had received management services from Sandvik AB Sweden. Sample copies of documents, presentation reports, e-mails, advises thereunder, material, etc. evidencing the receipt of services were furnished by way of additional evidence. The said additional evidence was referred to the Assessing Officer, who in turn, referred the same to the TPO. The TPO in para (i).(i)(f) of his remand report dated 01.04.2013 on the additional evidence stated as under:- It is seen from the copies of e-mail correspondence submitted by the assessee as additional it is noted that the said correspondence is with the personnel of Sandvik group concerns other than Sandvik AB. In other words the evidence produced by the assessee do not show that any service is received from Sandvik AB Sweden. In fact, the management fee agreement is with Sandvik AB Sweden and the entire management fees of ₹ 4.41 crores are paid to Sandv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot questioned as to whether the services were not rendered at all or not by the AE. The learned TPO has observed that the payment should not be allowed because the services were rendered by the entities other than Sandvik AB, Sweden. The Appellant has explained this practice by inviting attention to the relevant provision in its agreement with the AE and has stated that Sandvik AB, Sweden has acted as a conduit whereas, according to the definition clause, the group companies, which actually provide management services through Sandvik AB are 'providing party'. The term 'providing party' is also used in the portion of the agreement reproduced by the learned TPO in his Order passed u/s 92CA(3). The definition clause 1.1 of the Agreement, defines the term 'providing party as 'All or some of the Sandvik companies, to which management services are provided'. Accordingly, the services provided by the Sandvik group entities is in accordance with the agreement and no adverse inference can be drawn for the same. Therefore, the learned TPO's objection would be without basis in view of the specific provisions in the service agreement. 2.6.25 Secondly, I find ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd. The term dividend is defined u/s 2(22) of the Act and under Article 10(3) of the India-Sweden DTAA. Commercially dividend can be described as distribution of the company's profits. I do not find any material brought on record by the learned AO on the basis of which he has concluded that impugned payment represents distribution of profits. It is fundamental that, the payment is disallowed by the learned AO will not assume a particular character without basis and without supporting evidence. I do not find any such supporting evidence, in these circumstance, at best, the payment can be disallowed because the Appellant did not furnish supporting evidence, but the AO should have supporting evidence to state that the payment of is of a particular character, which the learned AO does not have. Therefore, I am unable to accept the earned AO's conclusion that this payment is in nature of dividend. 2.6.28 In view of the above discussion, I am of the view that the action of the learned TPO to determine ALP of the international transactions of the payment of management services as nil cannot be sustained. I delete the addition of ₹ 4,41,44,973 based on the transfer p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... transfer pricing adjustment on the transaction of payment of management services to Sandvik AB, Sweden. 53. Another aspect on which the Assessing Officer had disallowed the claim was that the payment was in the nature of dividend. Once the amount has been taxed in the hands of recipient i.e. Sandvik AB, Sweden, as income on account of rendering of management services, there is no merit in the said stand of Assessing Officer in treating the said payment to be dividend and accordingly, the same is dismissed. The grounds of appeal No.2a and 2b raised by the Revenue are thus, dismissed. 54. The issue raised vide ground of appeal No.3 by the Revenue is against directions of CIT(A) in treating the software application of ₹ 60,98,995/- as revenue expenditure. 55. The learned Authorized Representative for the assessee at the outset pointed out that the issue is squarely covered by the order of Tribunal in assessee s own case relating to assessment year 2004-05. 56. The learned Departmental Representative for the Revenue placed reliance on the order of Assessing Officer. 57. We have heard the rival contentions and perused the record. Similar issue of allowability of sof ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ftware which has to be upgraded from time to time due to change in technology has to be allowed as revenue expenditure. The relevant observation of the Hon ble High Court at para 3 of the order reads as under : 3. So far as question B is concerned, the Tribunal has held that the computer software expenses incurred by the respondent-assessee was revenue in nature. The expenses were incurred to obtain the application software which gets upgraded from time to time due to change in technology. This licence being for limited period would have to be renewed from time to time. In the aforesaid circumstances, the Tribunal held that considering the nature of the software licence i.e. application software, the same has to be allowed as a revenue expenditure. In view of the finding of fact arrived at further by the Tribunal that the expenses have been incurred on application software which is for a limited time frame and has to be renewed from time to time, we see no reason to entertain question B as framed by the revenue. 22.1 Respectfully following the decision of the jurisdictional High Court cited (Supra), the order of the CIT(A) on this issue is upheld and the ground raised by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4 ITR 62 (SC) had upheld the provision for warranty made by the said assessee in its books of account and its admissibility being on scientific basis. Following the same simili of reasoning, we uphold the order of CIT(A) in this regard and dismiss the grounds of appeal No.2 and 4 raised by the Revenue. 62. The issue arising before us is identical to the issue before the Tribunal in assessment year 2004-05 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. 63. The ground of appeal No.5 raised by the Revenue is against deletion of addition made on account of estimation of value of closing stock of scrap @ ₹ 5/- per Kg. on adhoc basis. The said issue is linked to the issue raised by the assessee vide ground of appeal No.4 and we have already decided the said issue in favour of the assessee. Accordingly, the ground of appeal No.5 raised by the Revenue is dismissed. 64. The issue raised vide ground of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... held that The assessee was entitled to a deduction in respect of the profits of the three eligible units while the loss sustained by the fourth unit could be set off against the normal business income. In these circumstances, the Hon'ble High Court held that the basis on which the assessment was sought to be reopened was contrary to the plain language of section 10B of the Act. 53. The learned Authorized Representative for the assessee has further placed reliance on the ratio laid down by the Hon ble Bombay High Court in CIT Vs. Black Veatch Consulting (P.) Ltd. (supra), which was in connection with the deduction allowable under section 10A of the Act. The Hon'ble Bombay High Court in CIT Vs. Black Veatch Consulting Pvt. Ltd. (supra) also observed that section 10A was a provision which was in the nature of a deduction and not an exemption. The Hon'ble High Court further held that the deduction under section 10A, in our view, was to be given effect to at the stage of computing the profits and gains of business. This is anterior to the application of the provisions of section 72 which deals with the carry forward and set off of business losses. The Hon'ble High ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
