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TMI Blog2022 (7) TMI 678X X X X Extracts X X X X X X X X Extracts X X X X ..... 2017 are filed by the Revenue. 2. At the outset itself it was stated by the Ld.Counsel for the assessee that adjudication of the appeal of the assessee pertaining to A.Y. 2006-07 would take care of the remaining appeals also, since there was a solitary issue in the remaining appeals which was common and identical to that raised in Assessment Year 2006-07, relating to transfer pricing adjustment made on account of determination of the arm's length price of the International Transaction of payment of royalty by the assessee to its Associate Enterprise. It was pointed out that the disallowance was made for identical reasons, in the background of identical facts and circumstances. The ld. D.R. fairly agreed with the same. Therefore, all the appeals were taken up together for hearing with the appeal of the assessee for A.Y. 2006-07 being treated as the lead case. The decision rendered in the ground which is common to the other appeals also will apply mutatis mutandis to the other appeals. 3. ITA No. 2948/Ahd/2010 (A.Y.2006-07) (Assessees Appeal) 4. Ground No.1 & 6, it was stated were general in nature. The same are therefore not being dealt with by us. 5. Ground no. 2 reads as under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sitive claim was made by the assessee only from A.Y. 2003-04 onwards when it had profits and the impugned year i.e. A.Y. 2005-06 was the last year of claim of deduction. The investment in Plant and Machinery ,being the total cost debited under the head Plant and Machinery by the assessee as per its Books of accounts during the relevant year, amounted to Rs.3,74,00,831/- and the investment in the block of computers was reflected at Rs. 1,24,84,568/-. As per the Revenue, the total of the two i.e. Rs. 4,98,85,399/- was the investment in Plant and Machinery by the assessee for the purposes of determining its SSI Status as per the notification issued under the IDR Act, which exceeding the limit of investment in plant and machinery specified therein of Rs. 1 crore, the assessee did not qualify as an SSI unit and was therefore not eligible to claim exemption u/s. 80IB of the Act. As per the assessee however out of its total investment in Plant and Machinery of Rs. 3.74 crores, only investment of Rs. 46,47,971/- qualified as plant and machinery since the rest being Moulds, Dies, Jigs, Fixtures, Tools etc. were to be excluded as per the notification itself. The calculation submitted by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bunal where the issue was decided in favour of the assessee holding that the exclusion by the assessee of Tools, Jigs, Dies and Moulds was in accordance with the Notification issued by the IDR Act itself and therefore was correct. * That in subsequent year also, i.e A.Y 2004-05, the dispute arose and the ITAT following its order in the preceding year allowed the assessee's claim. * That in A.Y. 2005-06 again the claim was not allowed by the A.O. but was allowed in first appeal by the ld. CIT(A). 12. In this regard, our attention was drawn to the order of the ITAT in the case of the assessee for A.Y. 2003-04 in ITA No. 2289/Ahd/2006 dated 19/12/2008 , placed before us at paper book page no. 104 to 117 ,more particularly to page No. 106 to 115 where the issue has been dealt with at para 9.3 and 9.3.1 as under: 9.3. In the light of aforesaid provisions, we have to determine the status of taxpayer's industrial undertaking. In the case under consideration is that of manufacturing bottling plants. Therefore, it has to be seen which are the plant and machinery installed for the purpose of manufacturing bottling plants. Only the actual cost of such machinery, as on the last day of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd the cost of consumables stores while determining value of plant and machinery in order to ascertain the status of industrial undertaking of the taxpayer. 13. Our attention was also drawn to the order of the ITAT in the case of the assessee for A.Y. 2004-05 in ITA No. 79/Ahd/2008 dated 10/02/2012 placed before us at paper book page no. 118 to 135, particularly to page no. 124, para 8, wherein following the order of the ITAT in the preceding year, the claim of the assessee was allowed. 14. As for the Revenue's contention of inclusion of computers as plant and machinery it was contended that this issue was also considered in A.Y. 2003-04 by the ITAT and the matter restored to the A.O. to determine whether the computers were integral to the manufacturing process or not and to include in the value of plant and machinery if found so. Our attention was drawn to Para 9.3.2 is as under: 9.3.2. As regards computer hardware and software the Ld. A.R. on behalf of the taxpayer argued that computers are installed in office and therefore have to be excluded in terms of decision of the ITAT in the case of Samir Diamond Mfg. P. Ltd. 67 ITD 25 (Ahd.) There is no finding in the order of either ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... per IDR Act, to include a machine as a whole and not exclude moulds and jigs which were integral part of the machinery, and further that the verification of computers as per the direction of the ITAT in A.Y. 2003-04 was carried out by an Inspector who was illiterate in computer skill. Ld.DR pointed out that on the AO stating so, the assessee itself requested before the DRP for fresh verification to be carried out by a literate team, which was carried out and the report submitted did not help the cause of the assessee at all, since the computers and its software were found to be in the nature of customized software/operating systems like ERP, AutoCAD being used in the entire process of the assessee right from allocation of material to requisition of production, issue of inventory and even quality control function which clearly showed that the software's were being used in manufacturing process and the related hardware accordingly was attributable to the production process undertaken by the assessee and that further the assessee was unable to verify the inclusion and exclusion to Plant and Machinery stating that considerable time had elapsed since March 2006 and due to change in loc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aid provision of the Act, the argument of the assessee is examined as under: During the course of its submission over inventory management, the assessee has submitted that its production and management of production including inventory data is managed a specialized inventory software. Since inventory is closely integrated with manufacturing, production without this software is not possible computer along with the inventory software valued at Rs. 1 ,17,64,388/- which therefore form an integral part of plant and machinery, have not boon stated to be part of the plant and machinery although in ifs submissions made, the assessee has stated that the computers and specialized software are used for manage of inventory of raw materials, machine components and products clearly establishing that it is not possible for the assessee to continue manufacturing without the use of computers. The computers have been i of ally ignored by the assessee for the purpose of computation of plant and machinery although the notification referred to by the assessee does not provide exclusion or these from plant and machinery. 17. The Ld.DR further drew our attention to the findings of the DRP rejecting th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... India's notification no. SO-857(E) dated 10.12.1999 issued under Industrial (Development and Regulation) Act, 1951 as under: Total cost debited under head Plant and Machinery Original cost Original cost 3,74,00.831 Less: Items excluded in terms of Para b (i) of Notification no. SO 857EUR dated 10/12/1999 Mould 78,02,436 Dies 23,75,327 Jig 17,24,908 Fixture 7,04,134 Patterns 33,18,178 Tools 75,90447 Factory equipment being racks, tables, pallets etc. 70,68,312 Consumables 1,01,359 3,06,85,100 67,15,732 Less other exclusions from the cost Development cost incurred to develop source of raw material were capitalized to plant and machinery as product development cost 5,65,960 Pre-operative revenue expenses capitalized not forming part of cost of individuals assets 14,71,865 Deletions during the year 29,936 20,67,761 Net Balance of Plant and Machinery 46,47,971 5.16. From the above, it can been seen that the assesse has excluded the value of Patterns at Rs. 33,18,178/- Fixture at Rs. 7,04,134/- and Factory equi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mently contested the inclusion therein of Moulds ,Jigs ,Dyes etc. to the tune of Rs.3,27,52,860/- as specifically excluded from the definition of Plant and Machinery as per definition of the said term in the IDRA Act and has also contested inclusion of investment in Computers ,both hardware and software, of Rs.1,24,84,568/- as not related to its manufacturing activity and not qualifying therefore as Plant and Machinery. We are not in agreement with the contention of the Ld.Counsel for the assessee. The reason is very simple. It is not denied that as per Section 11B of the IDR Act read with aforesaid notification it is the investment in Plant and Machinery of the industrial undertaking which is to be considered for the qualifying quantum of investment. The term Plant and Machinery has not been defined under the IDR Act, but on a perusal of the defining section i.e. Section 3 of the IDR , subclause( k) states that words and expressions used in the Act but not defined in the Act and defined in the Companies Act shall have the meaning respectively assigned to them in that Act. Therefore it is the Companies Act which has to be looked at for definition of terms not defined in the IDR Act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ses in the meanwhile and certain machinery having been sold or become obsolete, the verification was not possible. Therefore it is clearly evident that as per the IDR Act read with Notification issued also, the cost of plant and machinery as reflected in the books of the assessee was to be considered and the Revenue had rightfully considered the said figure at Rs.3,74,00,831/- . 19. Even otherwise taking up each exclusion we find that with respect to computers sought to be excluded valuing Rs.1,24,84,568/-, the only contention of the Ld.Counsel for the assessee was that in A.Y 2003-04,the computers were physically verified by the AO as to whether they could be said to be integral to the manufacturing process ,on the directions of the ITAT, and were not so found. This contention, we find merits no consideration since we find much water has flown since the verification done in AY 2003-04. We have noted from the DRP order that this argument was taken before it also to which the Revenue had countered saying that the Inspector deputed then was not competent to make the said verification of computers. And the assessee therefore had requested fresh verification to be done in the impugned ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion/ sale/inventory detail needed to be accounted for on a real time basis and the software generated requisite reports including production and inventory forecasting ,production/sales forecasting ,inventory ordering and scheduling etc. That without this system the plant of the assessee cannot be run and therefore these software alongwith hardwares constitute Plant and Machinery. The AO detailed the extensive coverage of these software in the operations of the assessee company noting them to be installed in all areas of operation. He noted integrated manufacturing applications installed in the computers at shop floor which were found to be integrated with all other computers of the company by installing modems as well as Oracle and Lotus Notes softwares. He also noted the fact of huge repair and maintenance charges being paid for maintaining the systems amounting to Rs.2.8 lacs which he noted was charged only on specialzed computer systems. The assessee has countered by merely contending that only cost of software of IMMS /ERP be considered as Plant and Machinery and that the software was only for handling stores. The DRP /AO, we hold, has rightly held the cost of ERP software alon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y Rs.5,15,186/- worth of Tools and Jigs separately. The DRP held therefore that as per the assesses own claim only assets to the tune of Rs.5,15,186/- classified as Tools and Jigs and the bifurcation therefore done by the assessee of its stated Plant and Machinery was clearly stripping the Machine only to its Frame taking out many components and claiming them to be Tools ,Jigs and Dyes. c) that even as per the notification of the IDRA Patterns ,Fixtures, and factory equipment amounting to Rs.33,18,178/-,Rs.7,04,134/- and Rs.70,68,312/- resp., could not be excluded . d) That the exclusion of development cost incurred to develop source of raw material and pre-operative Revenue expenses of Rs.5,65,960/- and Rs.14,71,865/- resp. aws incorrect as the assessee itself had capitalized these items in the cost of Plant and Machinery and claimed depreciation on the same also. 21. The assessee, we find, had nothing to state in justification of its claim of exclusion of items in the nature of Patterns ,fixtures and Factory equipments which it had itself treated as Plant and Machinery but excluded as per IDRA notification and which the DRP noted did not qualify for exclusion as per the noti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not there before the ITAT. 24. In view of the above we uphold the findings of the DRP/AO that the assessee did not qualify as an SSI Unit and was therefore not eligible to deduction u/s 80IB of the Act. The order of the AO denying deduction u/s 80IB of Rs.1,06,13,472/- is accordingly upheld. Ground of appeal No.2 of the assessee is dismissed. 25. Ground no. 3 reads as under: "The Learned Dispute Resolution Panel, Ahmedabad has erred in not allowing Upward Revision of Rs. 39,52,277/- and Royalty Payment of Rs. 1,37,75,772/- being computation of arm's length price in relation to international transactions though fully explained. The addition made be deleted." 26. At the outset it was pointed that that the grievance raised by the assessee in the said ground related to transfer pricing adjustment on two international transactions of the assessee with its associate enterprise. (i) The payment of royalty to its AE of Rs. 39,52,277/-,ALP determined by AO/DRP at Nil ii) upward adjustment of Profits to the tune of Rs.1,37,75,772/-on account of purchases from AE 27. Ld. Counsel for the assessee first took the issue of transfer pricing adjustment made on account of payment of royal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... determined at NIL by the TPO. Reliance was placed on the following case law - * CIT vs. Lever India Exports Ltd. [2017]78 taxmann.com 88 (Bom) * CIT-I Vs. Cushman and Wakefield (India) (P.) Ltd. [2014] 46 taxmann.com 317 (Delhi) * Eaton Fluid Power Ltd. Vs. ACIT [2018] 92 taxmann.com 158 (Pune Tribunal) v) Another AE could not have been treated as a comparable. 29. The CIT-DR on the other hand relied on the DRP's order more particularly pointing out the fact that the AE had not charged any royalty from its associate emprise. Therefore the payment of royalty by the assessee to its AE was justifiably treated as not as arm's length. 30. We have heard both the parties, gone through the orders of the authorities below and also the various case laws cited by the assessee before us. We find merit in the contention of the assessee. Undeniably the AO has treated the ALP of the royalty transaction as Nil for the reason that the AE did not recover any such payment from its other AE's. Firstly it is basic and fundamental that ALP of an international transaction refers to the value at which the transaction would have been conducted at arm's length, ruling out any scope of manipulati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt in the past. The assessee has been charging 5% royalty each and every transaction and therefore the said payment cannot be said to have been paid on the aggregate amount, as argued by Ld. CIT-DR. The findings of the Assessing Officer in considering the royalty charges as nil as arms length price cannot be accepted since the AO in the present case has not brought on record, the ordinary profits which can be earned in such type of business. Therefore in our view the payment of royalty is not hit by the provisions of Section 92 of the Act and there is no reason to hold that the expenses should not be allowed u/s.37(1) of the Act, since the expenditure has been incurred by the assessee during the course of business and is having the nexus with the business of the assessee. Therefore the payment of royalty is a business expenditure which has been incurred wholly and exclusively for the purpose of business of the assessee and same is to be allowed in toto as a matter of commercial expediency. Therefore, the case laws relied upon by the Ld. CIT-DR are of no benefit to the Revenue. The reasonableness of expenditure in the present circumstances and facts of case, cannot be doubted and ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Counsel for the assessee before us was that it had objected to the adoption of the PBIT of the assessee company @7.03% pointing out that none of the data as regards revenue or cost were matching with the profit and loss account of the assessee and had submitted summary of the financial information also to the ACIT TPO-2. Our attention in this regard was drawn to the letter of the ACIT TPO-2, Ahmedabad addressed to the assessee pointing out the proposed adjustment to be made to the purchase transaction of the assessee on the direction of the DRP to adopt the PBIT to sales as opposed to PBIT to sales adopted by the assessee, placed before us at paper book page no. 82 to 86. Drawing our attention to Annexure-B of the said letter it was pointed out that the same comprised of computation of the PBIT to sales of the assessee company at 7.03% by the TPO. Our attention was drawn to paper book at page no. 87 & 88 being the objection filed by the assessee in response to the aforesaid calculation of adjustment proposed by the TPO pointing out therein that none of the data taken by the TPO matched with the profit and loss account of the assessee. It was pointed out that the DRP had failed to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Loss of Rs. 38,75,690/- though fully explained. The addition made be deleted." 40. Briefly facts relation to the issue are that during the course of assessment proceedings, it was noticed that the assessee had claimed foreign exchange loss of Rs. 22,56,487/-. Perusal of the ledger account indicated that the assessee had debited an amount of Rs. 61,06,497/- towards foreign exchange loss while an amount of Rs. 38,50,009/- had been credited as gain. The AO noted that the total debits included an amount of Rs. 38,75,690/- on account of re-statement of loans availed for capital work. Holding this amount as being of a capital nature which should have gone either in form of restatement of capital items or restatement of the loan amount, he disallowed the claim of Rs.38,75,690/- as revenue expenditure. 41. Before us the solitary plea of the ld. Counsel for the assessee was that necessary directions be given for allowing depreciation on the foreign exchange loss so treated as capital expenditure. 42. In view of the above, since the ld. Counsel for the assessee has fairly conceded this ground, the disallowance of foreign exchange loss amounting to Rs. 38,75,690/- relating to loss availe ..... X X X X Extracts X X X X X X X X Extracts X X X X
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