TMI Blog2022 (2) TMI 1186X X X X Extracts X X X X X X X X Extracts X X X X ..... he resultant gross amount which should have been received by the assessee as commission comes to ₹ 42.38 crore. As against that, the assessee actually received Commission income of ₹ 44.30 crore, which is explicitly at ALP. We, therefore, approve the conclusion of the Ld. CIT(A) in deleting the addition TPO applied `other method' as the most appropriate method for determining the ALP of the international transaction, which method came into vogue, as per Rule 10AB, only from the A.Y. 2012-13 under consideration and the assessee has not objected to the application of this method. This method obviously could not have been nor has actually been applied by the assessee or the TPO in any of the earlier years. There can be no denial that different amounts of the ALP emerge under different methods. Secondly, for the earlier years, the amount of Sale considered by the Revenue for determining the ALP consisted of sale of manufactured goods; sale of traded goods and commission. Au contraire, the amount of sale at ₹ 2075.81 crore considered in the entire exercise for the year under consideration is only of manufactured goods and has no components of traded goods or com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... HELD THAT:- We deem it proper to remit the matter to the file of the AO for carrying out necessary verification in this regard and then decide the issue accordingly. To clarify, if the AO, after capitalizing 80% of repairs cost for the assessment year 2004-05, continued with the enhanced value of block in the subsequent years as well, then the amount of depreciation on the excess 40%, [as the capitalization reduced by the CIT(A)], should be disallowed. If, on the other hand, the AO had not increased the value of block of assets in succeeding years by 80% of capitalization done by him for the assessment year 2004-05, then further depreciation should be allowed on 40% of the capitalization as upheld by the Tribunal in its order for the assessment year 2004-05. Needless to say, the assessee will be allowed reasonable opportunity of hearing to the assessee Additional ground of consequential claim of depreciation on the expenditure of software - HELD THAT:- We find that the additional ground of the assessee cannot survive if the AO, after capitalizing the software expenditure for the assessment year 2007-08, continued with the enhanced value of block of assets for the purpose of d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Chaudhury, Member (J) For the Appellant: Shivraj B. More For the Respondents : R. Muralidhar ORDER Per R. S. Syal, VP These two cross appeals - one by the Revenue and the other by the assessee - arise out of the order passed by the CIT(A)-13, Pune on 16-11-2016 in relation to the assessment year 2012-13. 2. The Revenue has filed revised grounds, which have not been objected to by the assessee. The only issue raised in the revised grounds is against the deletion of transfer pricing adjustment amounting to ₹ 8.52 crore made by the Assessing Officer (AO) in the international transaction of Receipt of Commission . 3. Briefly stated, the facts of the case are that the assessee is engaged in manufacturing of compressors and mining production tools. The return of income was filed accompanied by Form No. 3CEB containing details of the international transactions. The Assessing Officer (AO) made a reference to the Transfer Pricing Officer (TPO) for determining the arm's length price (ALP) of the international transactions. The controversy concerning the Departmental appeal is qua the 'Receipt of Commission' amounting to ₹ 44,29,79,820/- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ule 10AB for determining the ALP of this international transaction. This method, in turn, provides that: `For the purposes of clause (f) of sub-section (1) of section 92C, the other method for determination of the arms' length price in relation to an international transaction or a specified domestic transaction shall be any method which takes into account the price which has been charged or paid, or would have been charged or paid, for the same or similar uncontrolled transaction, with or between non-associated enterprises, under similar circumstances, considering all the relevant facts.' The invocation of `other method' as the most appropriate method by the TPO for determining the ALP of the international transaction as against the TNMM applied by the assessee, has not been disputed on behalf of the assessee. Even otherwise also, this method talks of any method which takes into account the price which has been charged or paid, or would have been charged or paid. 5. The TPO worked out the amount of transfer pricing adjustment at ₹ 8.52 crore with the help of the following table given at pages 12 and 13 of his order: Total costs as above ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1370.81 B2 Manufacturing Expenses 339.59 339.59 B3 Administrative, Selling Distribution Expenses 87.84 87.84 B4 Depreciation 42.77 42.77 C Profit Before Interest and Tax (PBIT) 257.41 257.41 D Total Costs contributing to profits (B) 1,841 427.42 E Marketing Expenses relating to sale of products (B.3) 87.84 87.84 F Marketing Expenses as % of Total Costs contributing to profits (E)/ (D) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1841 crore, the TPO considered only Marketing expenses at ₹ 87.84 crore and Manufacturing expenses at ₹ 339.59 crore in his computation of profit and thus ignored the other two expenses, namely, Material Consumption cost of ₹ 1370.81 crore and Depreciation of ₹ 42.77 crore. In this manner, the TPO computed operating profit relatable to Manufacturing and Marketing costs in the ratio of 4.77% : 18.45% as extrapolated to 20.55 : 79.45. That is how, he ascribed the share of profit from the Marketing expenses in the overall kitty of profit from the Manufacturing segment of the assessee at ₹ 52.90 crore in quantitative terms and 2.55 in percentage terms. It is here that he went off the track. While attributing profit to Marketing function from the assessee's own manufacturing activity, the TPO considered only two expenses, namely, Manufacturing and Marketing and proceeded with the presumption that only these two constituents of the total costs contributed to the earning of profits; and the Material Cost and Depreciation did not play any role in earning the profit from the manufacturing activity. In our considered opinion, this approach adopted by the TP ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nts of the ALP emerge under different methods. Secondly, for the earlier years, the amount of Sale considered by the Revenue for determining the ALP consisted of sale of manufactured goods; sale of traded goods and commission. Au contraire, the amount of sale at ₹ 2075.81 crore considered in the entire exercise for the year under consideration is only of manufactured goods and has no components of traded goods or commission. In that view of the matter, the findings given by the Tribunal for such earlier years do not per se apply to the year under consideration. However, in view of our discussion made above pointing out infirmities in the TPO's ALP determination, we hold that the transfer pricing addition under `other method' as per rule 10AB was not justified, which has been rightly deleted in the first appeal. 9. Now we espouse the appeal of the assessee in which the following three additional grounds have been taken: Claim for Education Cess 1. 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. Consequential claim of Depreciatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Tribunal in earlier years has also allowed the assessee's similar additional ground. 12. Having heard both the sides and gone through the relevant material on record, it is seen as an admitted position that the Tribunal in the assessee's own case for earlier years has allowed such additional ground by relying on the judgment of Hon'ble jurisdictional High Court in Sesa Goa Ltd. Vs. JCIT as well as the judgment of Hon'ble Rajasthan High Court in Chambal Fertilisers and Chemicals Ltd. and Another Vs. JCIT (2018) 102 CCH 0202 (Raj-HC). However, it is pertinent to note that the Finance Bill, 2022 has proposed an amendment to section 40(a)(ii) by insertion of Explanation 3 w.e.f. 01-04-2005, reading as under: Explanation 3 - For the removal of doubts, it is hereby clarified that for the purposes of this sub-clause, the term 'tax' shall include and shall be deemed to have always included any surcharge or cess, by whatever name called, on such tax. 13. In view of the above proposed amendment, it is manifest that the legislature has proposed to neutralize the effect of the above referred judgments granting deducting towards Education Cess. As the propo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... responding value of block of assets for the next year onwards. Ordinarily, if a particular amount is capitalized by the AO and depreciation is granted in that year, the value of block of assets is accordingly increased for subsequent years as well and depreciation at the enhanced value is granted. If the action of the AO of capitalization is partly modified and the extent of capitalization is reduced, then amount of depreciation granted on the higher value of block of assets by considering the original amount disallowed by the AO, requires corresponding reduction in the claim of depreciation. If such is the position, then the amount of depreciation for the subsequent years should be rather reduced. 16. Adverting to the facts, when the Ld. CIT(A) reduced capitalization of building block from 80% to 40% which got echoed by the Tribunal, then the depreciation in the subsequent years should be allowed only on the reduced value of block of assets at 40% rather than 80% made by the AO. However, the Ld. AR stated that the AO did not give effect to his action of capitalizing 80% of repairs to the block of building in subsequent years. Under such circumstances, we deem it proper to remit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he ALP of the international transaction to the extent of exports amounting to ₹ 263.91 crore. For the remaining amount, the TPO observed that the price charged by the assessee from its AEs was inadequate vis- -vis that charged for similar goods from non-AEs. Applying the CUP method to that extent, he proposed transfer pricing adjustment of ₹ 71.00 lakh, which was made by the AO and thereafter confirmed in the first appeal. 21. Having heard both the sides and gone through the relevant material on record, it is seen that similar point came up for consideration before the Tribunal in earlier years and for the first time in relation to the assessment year 2005-06. The Tribunal discussed this issue in para Nos. 5 to 10 of its order, a copy placed at page 159 onwards of the paper book, and in the final analysis sent the matter to the AO/TPO for fresh determination in accordance with certain direction contained therein. This view has been followed in succeeding years as well. Both the sides are consensus ad idem that the facts and circumstances of the ground under consideration are mutatis mutandis similar to those of earlier years. Respectfully following the view taken for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Supreme Court in the case of East India Pharmaceutical Works Ltd. Vs. CIT (1997) 224 ITR 627 (SC). Similar view has been taken by the Hon'ble Dehi High Court in CIT vs. Tin Box Company (2003) 260 ITR 637 (Del), holding that when the capital and interest free unsecured loan with the assessee far exceeded the interest free loan advanced to the sister concern, disallowance of part of interest out of total interest paid by the assessee to the bank was not justified. More recently, the Hon'ble Supreme Court in CIT(LTU) VS. Reliance Industries Ltd. (2019) 410 ITR 466 (SC) has reiterated the same view. When we examine the amount of Investments at ₹ 32.00 crore as against the availability of Share Capital and Reserves at ₹ 802.78 crore, it becomes evident that the amount of such Investments is much less than the amount of Shareholders' fund. We, therefore, order to delete the first component of disallowance on account of interest amounting to ₹ 8,61,647/-. 26. The second component of disallowance is ₹ 8.00 lakh towards administrative expenses, which was computed by applying 0.50% of the average value of the investments in terms of Rule 8D(2)(iii). S ..... X X X X Extracts X X X X X X X X Extracts X X X X
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