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TMI Blog2021 (9) TMI 635X X X X Extracts X X X X X X X X Extracts X X X X ..... mparability anda more direct and closer relationship to the transaction? 2. Whether, the Ld.CIT(A)-IT/TP, Pune has erred on facts and in law, while allowing the adjustment made on account of Sales Commission, when perfectly comparable internal segment was available and disregarding the fact that all International Transactions should have been separately benchmarked by ACIL? 3. Whether on the facts and circumstances of the case, the CIT(A) was justified in allowing the software expenses of Rs. 1,26,000/- when the onus to prove the genuineness of the expenses was not discharged by the assessee inspite of opportunity allowed by the A.O and also when in fact the CIT(A) has not given a finding on the genuineness of the claim? 4. Whether on the facts and circumstances of the case, the CIT(A) was justified in allowing expenditure incurred on account of repair and maintenance for which no documentary evidence was produced of Rs. 96,776/-, when in fact the CIT(A) has not given a finding on the genuineness of the claim? 5. Whether on the facts and circumstances of the case, the CIT(A) was justified in restricting the addition made out of miscellaneous expenditure of Rs. 2,59,407/- to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rnational transactions : Sl.No. Description Amount (Rs) Method 1 Import of raw material and components 1,86,70,42,829 TNMM 2 Import of finished goods 1,74,70,85,852 TNMM 3 Export of finished goods 1,13,75,17,625 TNMM 4 Import of Capital goods 87,61,495 5 Payment of Royalty 6,41,38,716 TNMM 6 Receipt of sales commission 34,30,50,057 TNMM 7 Payment of commission 1,33,97,434 TNMM 8 Payment of consultancy fees 20,45,414 TNMM 9 Payment of management fees 1,89,14,290 TNMM 10 Provision of administrative support services 4,91,75,419 TNMM 11 Provision of IT enabled design engineering services 32,58,75,250 TNMM 12 Recovery of warranty expenses 3,00,54,240 TNMM 13 Amounts written back 3,09,485 TNMM Sub Total A 5,60,73,68,106 Allocation of common costs 14 Certification Fees paid 8,67,511 TNMM 15 Communication Expenses 4,50,13,073 TNMM 16 Information Technology Related Expenses 2,66,07,182 TNMM Sub Total B 7,24,87,766 Reimbursement of expenses 17 Medical Insurance of Expats 2,31, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Textiles Mills Ltd (2012) 254 CTR (Mad) 423. 6. As regards to the disallowance of Repairs and Maintenance Expenses of Rs. 1,01,869/-, the ld.CIT(A) following his order in assessee's own case for earlier years i.e., A.Ys. 2009-10 had directed the Assessing Officer for the deletion of the same. As regards to the disallowance of Miscellaneous Expenditure of Rs. 2,59,407/-, ld.CIT(A) out of the disallowance of Rs. 2,59,407/-, confirmed the disallowance only to the extent of Rs. 1,00,000/-. Regarding to the disallowance of commission expenditure of Rs. 39,60,335, ld.CIT(A) following his own order in respondent / assessee's own case for the earlier assessment year 2008-09 had deleted the addition. 7. Aggrieved by the order of ld.CIT(A), the Revenue is in appeal before us. 8. In Ground No.1, the Revenue challenges the decision of ld.CIT(A) deleting the Arms Length Price adjustment on account of payment of Royalty. The brief factual matrix of the issue in ground No.1 as under : During the previous year relevant to the assessment year under consideration, the respondent / assessee made a payment of royalty to it's Associated Enterprise (hereinafter referred as "A.E.") i.e., Atlas Copco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... India Pvt Ltd., reported in (2015) 94 CCH 0338 (Bombay High Court) wherein it is held that the royalty paid at 3% of the sales to arrive at the ALP is much below the royalty for trade mark and which is allowed to be paid. He also placed reliance on the orders of the Tribunal in assessee's own case for earlier assessment years wherein the Tribunal had deleted the similar addition by holding that comparison of one controlled transaction cannot be made with another controlled transaction. 13. We heard the rival submissions and perused the material on record. The issue in the present ground of appeal relates to the determination of ALP of the transaction of payment of royalty. Admittedly, the royalty was paid @ 5% of domestic sales and 8% of the export sales in consideration of receipt of technology in the form of know-how, technical training and technical assistance for the purpose of manufacturing the compressors. The TPO determined the ALP of the royalty payment at 3% of the sales by taking it as appropriate benchmark. The TPO adopted this benchmark considering the transaction of payment of royalty by it's A.E. i.e., Wuxi Atlas Copco Compressor Co Ltd., which is undisputedly contro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , the view taken by the Tribunal does not call for any interference as it is in accordance with the self-evident provisions of law. Thus, this question as proposed does not give rise to any substantial question of law. Thus not entertained." 14. We found that the decision referred by the Co-ordinate Bench of the Tribunal in assessee's own case for earlier assessment years i.e., 2005-06, 2007-08 and 2008-09 are in consonance with the above principle of law and therefore, the ld.CIT(A) merely followed the order of Tribunal in earlier orders. In these circumstances, we do not see any reason to interfere with the order of ld.CIT(A). Accordingly, the ground No.1 of appeal filed by the Revenue stands dismissed. 15. In Ground No.2 of appeal, the Revenue challenges the decision of ld.CIT(A) deleting the addition on ALP adjustment on account of receipt of commission for Marketing Services at Rs. 7.23 crores. The brief factual matrix of the issue in ground No.2 is as under : During the previous year relevant to the assessment year under consideration, the appellant received indenting commission for the services rendered to it's A.E. The functions performed by the appellant are described ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ost, the cost of material and depreciation should be excluded as result of which percentage of marketing cost to total cost was arrived at 41.36%. Then TPO proceeded to allocate the total profits earned by the respondent / assessee in terms of percentage of cost between two segments. Accordingly, the TPO attributed profits to marketing functions in the proportion of percentage cost at 59.36 crores. When the profit is converted into percentage of sales, it worked out to 4.58%. Then the TPO calculated the profit attributable to marketing functions on sales of 354.56 crores @ 16.24 crores. Then after including the cost incurred on marketing A.E. products of Rs. 26.11 crores, the TPO arrived at 42.35 crores as the amount ought to have been received on marketing services from A.E. as against the actual receipt of Rs. 34.52 crores and the difference was proposed as T.P. Adjustment. 17. On appeal before the ld.CIT(A), the ld.CIT(A) following his decision in assessee's own case in earlier years deleted the adjustments. 18. Being aggrieved with the order of ld.CIT(A), Revenue is in appeal before us in the present appeal. 19. The ld. CIT DR had vehemently contested that the ld.CIT(A) ough ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e;-vis earning commission on sale for AEs. Thereafter again, he went off the mark by excluding the amount of raw material costs etc. and depreciation from the base of total costs by overlooking the fact that the figure of profit taken up by him also included profit from sale of manufactured 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 Rs. 13.79 crore as against the transacted value of commission income at Rs. 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 allow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... become academic in the present facts. Thus, we see no reason to entertain this appeal. However, we make it clear that the issues of law which has been raised in the present appeal are left open for consideration in an appropriate case." The ratio that can be culled out from the above decision is that when the TPO had not adopted any of methods prescribed u/s 92CA of the I.T. Act, no adjustment on account of ALP can be made by TPO. Therefore, the order of the ld.CIT(A) though does not contain independent reasoning, keeping in view of the order of the Tribunal for earlier years on identical issue in assessee's own case on the principle of consistency and ratio of decision of Hon'ble Bombay High Court in the case of CIT Vs. Kodak India (P) Ltd. (supra), we uphold the order of ld.CIT(A). Thus, the ground No.2 of the appeal filed by the Revenue is dismissed. 22. In ground No.3, the Revenue challenges the decision of Ld.CIT(A) deleting addition on account of Software Development Expenses at Rs. 1,26,000/-. The brief factual matrix of the issue in ground No.3 is as under : 23. During the course of assessment proceedings, the Assessing Officer found that the assessee had incurred an e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cision of the ld.CIT(A) is in line with the decision of jurisdictional High Court, we do not find any reason to interfere with the decision of ld.CIT(A). Accordingly, ground No.3 of the Revenue stands dismissed. 29. In ground No.4 the Revenue challenges the decision of ld.CIT(A) holding that the expenditure incurred on the renovation of lease premises of Rs. 1,01,869/- is revenue in nature. The brief factual matrix of the issue in ground No.4 is as under : During the previous year relevant to the assessment year under consideration, the respondent / assessee incurred an expenditure of Rs. 1,01,869/- on renovating the lease premises which are used for the business purpose of the respondent / assessee at Bangalore. From details of expenditure, it is evident that the expenditure is incurred on interior work, electrical work and painting etc. The Assessing Officer capitalized this expenditure and allowed the depreciation at 5% and the balance amount of Rs. 96,776/- was disallowed. 30. On appeal before ld.CIT(A), the ld.CIT(A) deleted the addition by holding that no new asset was brought into existence and no enduring benefit was accrued to the assessee as a result of this expenditu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... incurred in the nature as incurred by the Assessee herein cannot be considered as Capital expenditure. However, as pointed out by Mr. M. Swaminathan, learned Senior Standing Counsel for the Revenue, Madras Auto Service (P.) Ltd. (supra), related to the Assessment Year 1968-1969. Thereafter, Section 32(1A) had been inserted with effect from 01.04.1970 and this provision had been clarified by Explanation 1 with effect from 01.04.1988. Consequently, the correct provision which is applicable to these cases are Explanation 1 to Section 32(1) of the Act. 16. It is not in dispute that the Assessees had taken on lease the premises and had put up further additional construction and had also renovated and incurred expenses for improvement of the building. The contention of Mr. M. P.Senthil Kumar, learned counsel placed only in the written submissions and not advanced during oral arguments that the Court cannot examine the lease agreements since they were not registered has to be rejected because, the lease documents are being examined only to determine a collateral transaction viz., nature of expenditure incurred by Assessee. It is a fact that the Assessee had taken on lease the premises i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... leasehold land or structure or work shall be construed as if the same is owned by the assessee, is not applicable to the case of the assessee and the Expln. 1 to S.32(1) of the Act is not attracted to the instant case of the assessee at all." The aforesaid Judgement cited by the learned counsel for the Assessee are therefore not applicable to the facts of the present case in view of amended law. 19. In Silver Screen Enterprises v. CIT [1972] 85 ITR 578 (Punj. & Har.), while examining whether expenditure incurred on repairs to chairs, renovation of building and modernisation of cinema house taken on lease by the Assessee, it was held that they are capital expenditure since it brought an enduring benefit. The relevant discussion on this aspect is quoted below:- "It cannot be denied that the amount spent for the construction of the verandh, office room, side room and bath rooms brought into existence an asset of an enduring nature. It is no one's case that only the existing verandah, office, side room or bath rooms were repaired. What appears is that these constructions were brought into being for the purpose of modernising the cinema hall. Therefore, the construction of ve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he premises, the amount paid on account of such repairs." 21. In the present case, the Assesses had incurred substantial expenditure towards renovation leading to enduring benefit. They are not merely repairs. The Assessees had also incurred expenditures towards improvement and construction of the building. These cannot be termed as 'repairs'. Consequently, this alternate submission is rejected by us. The second alternate submission advanced by Mr. M.P. Senthil Kumar that the case should be remitted back to the Assessing Officer is also rejected since the fact have been addressed and settled by the Authorities below and it had been concurrently found that the expenditure were capital in nature. The issue of bifurcating the said expenses as capital and revenue would therefore not arise. 22. In view of the above reasons, we hold that the substantial questions of law have to be answered in favour of the Revenue and against the Assessee and the Appeals filed by the Revenue have to be allowed. Accordingly, the Appeals are allowed. No costs." 36. Thus, in view of the above legal position, the expenditure incurred on rented premises cannot be treated as revenue in view of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s, the Assessing Officer had called for details of total commission expenditure of Rs. 17,65,74,867/-. Out of which, the assessee could not furnish the confirmations from the parties to the extent of Rs. 39,60,335/-. Therefore, the Assessing Officer dismissed the same. 44. On appeal before ld.CIT(A), ld.CIT(A) following his earlier decision for the assessment year 2008-09 deleted the same on the ground that the ld.CIT(A) had not conducted any fresh verification to prove the genuineness of the transaction or otherwise of the case. 45. Being aggrieve by the order of ld.CIT(A), Revenue is in appeal before us. 46. Before us, the learned CIT DR has prayed that the matter may be remitted back for further enquiry. 47. On the other hand, the learned counsel for the respondent / assessee submitted that the similar disallowance was deleted by this Tribunal in assessee's own case for A.Ys. 2002-03 to 2007-08 and similarly, the Hon'ble Bombay High Court also confirmed the order of the Tribunal deleting the addition on account of commission expenditure in assessee's own case. 48. We heard the rival submissions and perused the material on record. The issue in the present appeal relates to t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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