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TMI Blog2022 (12) TMI 683X X X X Extracts X X X X X X X X Extracts X X X X ..... considering Nile Ltd. as comparable in applying Transactional Net Margin Method on invalid ground that Nile Ltd. is engaged in different kinds of activity i.e. glass lined equipment division, lead division and wind energy." 3. The Learned Commissioner (Appeal) erred in disallowing Rs. 91,624/- on ad-hoc basis being 10% of the value of purchases from Glass Steel Parts and Services (Unit of Pfaulder Inc.). 4. The Learned Commissioner (Appeal) erred in disallowing Rs. 19,926/- on ad-hoc basis being 10% of the value of services received from Pfaulder Inc. 5. The Learned Commissioner (Appeal) erred in disallowing Rs. 60,873/- on ad-hoc basis being 10% of the value of services received from Mavag AG. 6. The Learned Commissioner (Appeal) erred in directing the A.O. to work out ALP of loan given to foreign subsidiary at the rate of interest Swiss Libor + 200 basis. 7. The Learned Commissioner (Appeal) erred in confirming the disallowance of Rs. 3,22,431/- being administrative expenses u/s. 14A of the Act, considering them incurred in relation to exempted dividend income. 8. The appellant prays for appropriate relief on the above grounds of appeals. 9. The appellant craves lea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... om Glass Steel Parts and Services (Unit of Pfaulder Inc.). 4. The Learned Commissioner (Appeal) erred in disallowing Rs. 1,54,680/- on ad-hoc basis being 10% of the value of services received from Pfaulder Werke GMBH. 5. The Learned Commissioner (Appeal) erred in directing the A.O. to work out ALP of loan given to foreign subsidiary at the rate of interest Swiss Libor + 200 basis. 6. The appellant prays for appropriate relief on the above grounds of appeals. 7. The appellant craves leave to add, alter, amend, substitute, or withdraw any of the above grounds of appeal as circumstances may justify." Additional Grounds of appeal: "Appellant craves leave to raise this additional ground of appeal before the Hon'ble ITAT. This is a legal ground and therefore as per the decision of Hon'ble Supreme Court in the case of National Thermal Power (229 ITR 383) it can be raised before the Hon'ble ITAT. 1. On the facts and circumstances of the case and in law, Both lower authorities erred in not allowing deduction of cess paid by the appellant without appreciating fact that cess is revenue expenditure and same is not debarred by section 40(a)(ii) of the Act. Appellant c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f appeal: "Appellant craves leave to raise this additional ground of appeal before the Hon'ble ITAT. This is a legal ground and therefore as per the decision of Hon'ble Supreme Court in the case of National Thermal Power (229 ITR 383) it can be raised before the Hon'ble ITAT. 1. On the facts and circumstances of the case and in law, Both lower authorities erred in not allowing deduction of cess paid by the appellant without appreciating fact that cess is revenue expenditure and same is not debarred by section 40(a)(ii) of the Act. Appellant craves leave to add, amend, alter, change, delete and edit the above ground of appeal before or at the time of the hearing of the appeal." Department's grounds of appeal: "1. The Ld. CIT(A) has erred in law and on facts in partly deleting upward adjustment made by the AO with regard to Arms length price without properly appreciating the facts of the case and the material brought on record. 2. The Ld. CIT(A) has erred in law and on facts in deleting the disallowance of provisions for differential warranty amounting to Rs. 26,20,000/- without properly appreciating the facts of the case and the material brought on record. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ating cost of the company on entity level and made an adjustment of Rs. 1,83,53,946/- under section 92CA of the Act. 5. Before Ld. CIT(Appeals), the assessee submitted that the AO has not followed the due procedure while determining the ALP of the assessee's transactions. The assessee objected to the determination of ALP under TNMM in respect of international transactions. He further objected to Nile Ltd. being excluded from the list of comparables while computing ALP. Ld. CIT(Appeals) observed that the related party transactions for purchases are minor (less than 2%) as compared to the total direct and indirect cost. The Ld. CIT(Appeals) further observed that the AO has applied the TNMM on the total operating cost incurred by the assessee by taking PLI of 13.26%. However, the Ld. CIT(Appeals) observed that the transaction the assessee are in the nature of sale and purchase of equipment, rendering of service, warranty etc. These transactions are not related and the nature of transaction itself shows that it cannot be said that the price of one transaction has been affected by the other transaction or group of transactions which have been termed as "international transactions". ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... transaction in assessee's line of business, ALP cannot be computed if Nile Ltd. is to be excluded from the list of comparables. The AO excluded Nile Ltd. on the ground that firstly, the assessee did not give the details of any search process carried out by him for selection of comparables and in the TP report the assessee gave names of only two comparables Swiss Glass Coats Equipments Ltd. and Nile Ltd. for the purpose of computation of ALP in respect of international transactions, secondly, Nile Ltd. is functionally different from the assessee's business since from the annual accounts of the company, it is seen that it is engaged in different kind of activities which have been classified into three divisions: glass lined equipment division, lead division and wind energy division, where the turnover of the glass lined equipment division is only 21% of the total turnover and consequently, this entity cannot be compared as comparable on the entity level with the assessee. The AO further observed that in respect of Nile Ltd., while the glass lined equipment division contributed 21% of the total revenue, the utilisation of assets of this division is 43% of the total assets. Con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... apital intensive, and hence it is not functionally comparable to the assessee's case. Though the Department has impliedly accepted Nile Ltd. as a comparable while computing TNMM, but since the issue of segmental accounts was not raised/examined at any earlier point in time by the Department, it is not possible to ascertain whether the facts in respect of Nile Ltd. as a comparable in the earlier years are same as compared to facts prevailing in the present year. The Department has raised the issue of comparability of Nile Ltd. as a comparable with the assessee for the first time during the year under consideration and in any of the earlier years, this issue was not considered or analysed by the Department. Further, though the assessee made factual and legal submissions on this issue before Ld. CIT(Appeals) in support of the acceptability of Nile Ltd. as a comparable, however, he also inadvertently omitted to make any observation/given any findings in respect of the same in the appellate order. 8.1. Accordingly, in our considered view, in the interests of justice, this ground is being restored to the file of Ld. CIT(Appeals) for adjudication on this aspect in light of the argume ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the market rate of Swiss Libor at the beginning of the quarter with additional spread margin of 1.25% per annum. The assessee has selected CUP method as the most appropriate method. The interest income of Rs. 31,35,469/- has been credited under the head income in the profit loss account (iii) the AO has computed ALP under TNMM without assigning any reason The assessee submitted that where assessee is not in the business of granting loans, the arm's-length interest rate is not the interest rate charged by the domestic bank as a comparable rate. The appropriate arm's-length interest in such case would be Libor based on CHF Libor based interest rates. Since the assessee has charged interest more than the Swiss Libor rate, interest received is to be considered to be at arm's-length. 14. In appeal, Ld. CIT(Appeals) partly allowed the assessee's appeal with the following observations: "16. The transaction at Sr. No. 17 being receipt interest income from its AE has been explained by the appellant as at Arm's length price, as it has charged the interest rate by taking into account the Swiss LIBOR and an additional spread of 1.25%. The appellant has also produced q ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that account. The new investments have been made from the redemption of investment in dividend income only. Regarding the administrative expenses, the assessee submitted that it has not incurred much expenditure and has itself disallowed an amount of Rs. 96,326/- as per the audit report under section 44AB of the Income Tax Act. On perusal of the submissions and the records of the assessee, Ld. CIT(Appeals) accepted the assessee's contention that the assessee has sufficient interest free funds for making investments in shares and mutual funds. He further accepted that the assessee has been able to demonstrate that the funds for making the investments were separate and there is no mixing of fund. The investments in interest free funds were made from a bank account held in Citibank, Mumbai and the funds in that account were interest free. Further, the examination of the interest expenditure shows that such interest expenditure is in the relation to specific expenditure only and cannot be considered for making general disallowance out of interest by applying the Rule 8D. However, regarding the administrative expenses, the Ld. CIT(Appeals) observed that the assessee made disallowanc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rmity with the order of the Tribunal, deleting the entire disallowance u/s. 14A of the Act on the ground that assessee had sufficient interest free funds out of which investment was made is in conformity with the judgment of Hon. Jurisdictional High Court in the case of Principal, CIT vs. India Gelatine and Chemicals Ltd. (supra). Respectfully following the judgment of Hon. Gujarat High Court in the case of Principal CIT vs. India Gelatine & Chemicals Ltd. (supra) and the observation made above, we find that no disallowance is called for in the second limb of rule 8D relating to interest expenditure. Now coming to the third limb towards administrative cost to be calculated @ 0.5% of the average value of investment, we find that ld. CIT(A) has deleted this disallowance by observing that assessee had made specific disallowance of Rs. 30,347/-, that dividend income of Rs. 8,19,154/- assessee has reinvested Rs. 3,26,406/- in the units of mutual funds and no satisfaction of the Assessing Officer in the assessment order as well as no finding that the assessee has incurred more than Rs. 30,347/- 12. We observe that the third limb of the rule -8D of the Rules r.w.s. sec. 14A of the Act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unds. 19. In the result, the appeal of the assessee is partly allowed. Now we shall discuss the Departments appeal : Ground number 1: deletion of upward adjustment of Rs. 1,83,53,946/- made on international transactions : 20. Since in the assessee's appeal, we have restored the matter back to the file of Ld. CIT(Appeals) on whether Nile Ltd. should be included as comparable while computing the ALP in the assessee's set of facts, Ground of Appeal No. 1 of Department's appeal would have to be adjudicated based on the outcome of the decision of Ld. CIT(Appeals) and accordingly, the same is not being adjudicated at this stage. Ground number 2: deletion Rs. 1,90,05,000/- made on account of interest expenditure under section 36(1)(iii) of the Act: 21. The brief facts in relation to this ground of appeal are that the AO made disallowance out of interest paid by the assessee on the ground that the assessee had made investment in various subsidiaries on which no interest has been charged. The AO was of the opinion that the assessee had not furnished any evidence to prove that they are having interest-free funds and have made advances from those interest-free funds to its ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ourse of assessment proceedings, it was noticed that the assessee has made investments of Rs. 15,83,75,000 in various subsidiaries. It was contended that the assessee has sufficient interest free advances to make these investments. The Assessing Officer however brushed aside the plea and proceeded to compute interest @12%, on notional basis, on such interest free advances and allow the interest deduction under section 36(1)(iii) to that extent. Aggrieved, assessee carried the matter in appeal before the CIT(A) and the learned CIT(A), following the view taken by him for the assessment year 2009-10, deleted the said disallowance. The Assessing Officer is aggrieved of the relief so granted by the CIT(A) and is in appeal before us. 10. Having heard the rival contentions and having perused the material on record, we see no reasons to interfere in the matter as learned CIT(A)'s order for the assessment year 2009-10, based on which impugned relief was given, has since been confirmed by a coordinate bench vide order dated 6 September 2016 and the learned Departmental Representative has dispute that material facts of the case are same. In view of these discussions, as also bearing in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of appeal is accordingly allowed. 25. Before us, Ld. D.R. placed reliance on the observations made by the AO in the assessment order. In response, the counsel for the assessee submitted that the case is directly covered by the decision in the assessee's own case for assessment year 2010-11 by ITAT vide order dated 4th March, 2019 in ITA number 951 and 1370/Ahd/2015. 26. We have heard the rival contentions and perused the material on record. We observe that this issue is directly dealt with by the ITAT in the aforementioned case and the issue is decided in favour the assessee with the following observations: "12. In ground no. 3, the Assessing Officer has raised the following grievance: The learned CIT(A) has erred in law and on facts in deleting the addition of Rs. 56,35,500 on account of royalty payment without appreciating the facts that the said payment was made for the use of landmark. 13. So far as this disallowance is concerned, the Assessing officer noted that the assessee has made a royalty payment of Rs. 75,10,000, but in the assessment years 2005-06 to 2009-10, the similar payments have been disallowed as capital expenditure. The Assessing Officer also noted t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not pressed. Accordingly, the addition grounds raised by the assessee for assessment year 2011-12 are dismissed as withdrawn. Department appeal for Assessment Year 2011-12: Ground number 1: deletion of upward adjustment made on international transactions: 31. Since in the assessee's appeal, we have restored the matter back to the file of Ld. CIT(Appeals) on whether Nile Ltd. should be included as comparable while computing the ALP in the assessee set of facts, Ground of Appeal No. 1 of Department's appeal would have to be adjudicated based on the outcome of the decision of Ld. CIT(Appeals) and accordingly, the same is not being adjudicated at this stage. Grounds of Appeal No. 2 of Department's appeal: deleting the addition of Rs. 62,95,500/- on account of royalty payment: 32. The facts of the case are similar to assessment year 2010-11. In light of observations/conclusion made by us for assessment year 2010-11 in the preceding paragraphs, we are hereby dismissing the Department's appeal on this issue. 33. Accordingly, ground number 3 of the Department's appeal is dismissed. Grounds of Appeal No. 3: deletion of disallowance of provision for differential wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctly covered in favour of the assessee in assessee's own case for assessment year 2005-06 by Ahmedabad ITAT order in ITA number 2014/Ahd/2016, wherein the ITAT allowed the assessee's appeal on this issue with the following observations: 6. We are of the considered view CIT(A) has correctly appreciated the fact in perspective in light the position of law properly as rendered by the Honourable Supreme Court in Rotork Controls India Private Limited (supra) and the Honourable Gujarat High Court in Hitachi home and life solution India Ltd. (supra), without repeating the content of the order of the CIT(A) reproduce hereinabove, we see no reason to take a different view in the matter. We thus decline to interfere with the order of CIT(A). 35.1. Respectfully following the judgement of the ITAT in assessee's own case for assessment year 2005-06 as reproduced above, we find no infirmity in the order of Ld. CIT(Appeals) and we hereby dismiss the Department's appeal on this issue. 36. In the result ground number 3 of the Department's appeal is dismissed. Assessment year 2012-13: Assessee's Appeal: 37. We observe that ground numbers 2, 3 and 4 of the assessee' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9;s appeal with the following observations: "7.3 I have carefully considered the facts of the case, the assessment order and the written submission of the appellant. The AO has disallowed education expenditure on the ground that there is no nexus between business expenditure and profitability and income of the assessee. "7.3.1 The appellant on the other hand has submitted that Mr. Tarak Patel has been appointed as Executive Director from January 30, 2007. He has been granted approval by Board of Directors by Board Resolution dated 28th April, 2011. Further it was decided that the company will bear 50% of the training programme and Mr. Tarak Patel shall sign an agreement with company that he will work with company for period of 3 years and in case he leaves early he should reimburse the expenses incurred in proportion to the years of services left. This education programme has given better management skills, work efficiency etc. and which will act the profitability of the company in long time. Considering the indirect personal benefit to the director, the company has already recovered 50% expenditure. Further in case of CIT v. U.P. Asbestos Limited (2012) 83 CCH 0127 (All. HC) i ..... X X X X Extracts X X X X X X X X Extracts X X X X
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