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TMI Blog2022 (2) TMI 1186X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Rs. 44,29,79,820/-. The assessee applied the Transactional Net Margin (TNMM) method for demonstrating the international transaction at ALP. The TPO noticed that the amount of commission charged by the assessee varied between 3-20% of the sale value of the products of the Associated Enterprises sold through the assessee. Taking cognizance of the fact that the assessee was also engaged in sale of its own manufactured goods, the TPO proceeded to determine the ALP of the Commission income w.r.t. the compensation for marketing effort in the sale of the assessee's own manufactured goods. Rejecting the TNMM, he resorted to 'other method' as per Rule 10AB of the Income-tax Rules, 1962. In the hue of this method, he considered the figure of the assessee's total cost under the Manufacturing function at Rs. 1841.00 crore with corresponding revenue of Rs. 2075.81 crore. He considered the individual items of Marketing and Manufacturing expenses and found out their perce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the amount of transfer pricing adjustment at Rs. 8.52 crore with the help of the following table given at pages 12 and 13 of his order: Total costs as above 1,841.00 Marketing expenses related to sale of product 87.84 Marketing Expenses as % of Total Costs 4.77% Manufacturing expenses 339.59 Manufacturing expenses as % of total cost 18.45% Overall profit of the company 257.41 Profit attributable to marketing and manufacturing function is in the ratio of 20.55 to 79.45 Portion of profit attributable to marketing function (20.55% of 257.41) 52.90 % Marketing profit to sales (Rs. 52.90 crores/2075.81 crores) 2.55% Sales value of product sold by AE in India 532.78 Marketing profit to be earned from sale of AE's product (2.55% of 532.78 crores) 13.58 Add : Expenditure incurred by the company on sale of AE's products 39.24 Amount of commission to be received 52.82 Amount of commission actually received 44.30 Amount of commission less received 8.52 6. The basic figures of this Table were picked up by the TPO from those supplied by the assessee, at his instance, for finding out the amount of profit attributable to marketing effort in the overall ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y Marketing expenses at Rs. 87.84 crore and Manufacturing expenses at Rs. 339.59 crore in his computation of profit and thus ignored the other two expenses, namely, Material Consumption cost of Rs. 1370.81 crore and Depreciation of Rs. 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 Rs. 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 TPO is flawed. One cannot conceive carrying out manufactu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Rs. 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 Depreciation on the Expenditure of Premises 2. Consequent to the decision of Hon'ble ITAT fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rd 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 proposal mooted through the Finance Bill, 2022 is likely to be passed shortly, the deduction which was otherwise elig ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 the matter to the file of the AO for carrying out necessary verification in this regard and then decide the issue acc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the price charged by the assessee from its AEs was inadequate vis-à-vis that charged for similar goods from non-AEs. Applying the CUP method to that extent, he proposed transfer pricing adjustment of Rs. 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 the earlier years, we set-aside the impugned order to this extent and remit the matter to the file of AO/TPO for re-deciding this issue in line ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y (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 Rs. 32.00 crore as against the availability of Share Capital and Reserves at Rs. 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 Rs. 8,61,647/-. 26. The second component of disallowance is Rs. 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). Such disallowance made and sustained in the first appeal is strictly in conformity with the said rule and, therefore, does not require any interference. We, therefore, sustain the addition at Rs. 8.00 lakh as ..... X X X X Extracts X X X X X X X X Extracts X X X X
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