TMI Blog2022 (12) TMI 683X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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 arguments put forward by the counsel for the assessee on this issue on whether it would be appropriate for Nile Ltd. to be excluded as comparable, since as per the assessee it is one of the eminent players in this line of business and exclusion thereof would render the entire exercise of computation of ALP meaningless in the instant set of facts. On this issue, the file is being restored to Ld. CIT(Appeals) for fresh adjudication after giving due opportunity of hearing to the assessee. ALP of loan given by the assessee to foreign subsidiary at the rate of interest Swiss Libor + 200 basis points - HELD THAT:- We observe that the assessee has itself charged the lesser interest by 25 basis points (bps) as compared to what was quoted by Citibank. This fact was also observed by Ld. CIT(Appeals) in the appellate order. In view of the above, in the interest of justice, we are restricting the addition to interest rate at Swiss Libor plus 150 basis points, equivalent to the quotation obtained by the assessee from Citibank i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rtner's foreign education was to be allowed when post graduate course underwent was directly related to profession carried on by firm. CIT(Appeals) has not erred in facts and in law in deleting the additions made by the AO, considering the facts of the present case. - ITA Nos. 1370/Ahd/2015, 2003/Ahd/2016, 2827/Ahd/2016, 951/Ahd/2015, 2212/Ahd/2016 and 2213/Ahd/2016 - - - Dated:- 29-11-2022 - Shri Waseem Ahmed , Accountant Member And Shri Siddhartha Nautiyal , Judicial Member Assessee by: Shri S. N. Soparkar, Sr. A. R. Shri Parin Shah , A. R. Revenue by: Shri Atul Pandey , Sr. D. R. ORDER PER : SIDDHARTHA NAUTIYAL , JUDICIAL MEMBER : - These are three cross appeals filed by the assessee and the Department for assessment years 2010-11, 2011-12 and 2012-13. Since common issues are involved in all the years under consideration, the same are being taken up together. 2. The grounds of appeals are taken up as follows:- Assessment year 2010-11: Assessee's ground of appeal: 1. The Learned Commissioner (Appeal) failed to understand the facts and circumstances of the case. 2. The Learned Commissioner (Appeal) erred in not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... disallowance of Rs. 1,90,05,000/- made on account of interest expense u/s. 36(1)(iii) of the Act without appreciating the fact that once the funds are put into the business, they lose identity. 3. The Ld. 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 fact that the said payment was made for the use of Trademark. 4. On the facts and in the circumstances of the case, the Ld. CIT(A) ought to have upheld the order of the Assessing Officer. 5. It is, therefore, prayed that the order of the Ld. CIT(A) may be set aside and that of the Assessing Officer may be restored to the above extent. Assessment year 2011-12: Assessee's ground of appeal: 1. The Learned Commissioner (Appeal) failed to understand the facts and circumstances of the case. 2. The Learned Commissioner (Appeal) erred in not deciding ground no 2(d) as under: The learned Assessing officer erred in fact and in law in not 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... order of the Assessing Officer. 5. It is, therefore, prayed that the order of the Ld. CIT(A) may be set aside and that of the Assessing Officer may be restored to the above extent. 6. The appellant craves leave to amend or alter any ground or add a new ground, which may be necessary. Assessment year 2012-13: Assessee's ground of appeal: 1. The Learned Commissioner (Appeal) failed to understand the facts and circumstances of the case. 2. The Learned Commissioner (Appeal) erred in not deciding ground no 2(e) as under: The learned Assessing officer erred in fact and in law in not 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. 23,287/- on ad-hoc basis being 10% of the value of purchases from Glass Steel Parts and Services (Unit of Pfaudler Inc.). 4. 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 Libo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ounds for deduction of cess paid by the assessee and the additional ground relating to proportionate adjustment in respect of international transaction with associated Enterprises in absence of segmental accounts. Accordingly the additional Grounds are being dismissed as being not pressed. Ground number 2: Exclusion of Nile Ltd. as comparable in applying Transaction Net Margin Method (TNMM) 4. The brief facts in relation to this ground of appeal are that the assessee is engaged in the business of manufacturing corrosion resistant glass lined equipment used primary in chemical, pharmaceutical and allied industries. During the year under consideration, the assessee had entered into certain international transactions. The AO rejected the TP document on the ground that Nile Ltd. cannot be considered as a comparable. Further, the assessee had selected cost plus method (CPM) as most appropriate method in some of the cases. The AO however rejected the CPM adopted by the assessee on the ground that in public databases as well as in the annual reports of the companies, the calculation of such gross profit margin was not available and therefore, the application of CPM can only be o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee is in appeal against us on the ground firstly, that Ld. CIT(Appeals) has not adjudicated on whether Nile Ltd. has been correctly excluded from the list of comparables while computing ALP and secondly, Ld. CIT(Appeals) has erred in disallowing and adding back certain percentage of sales/purchase on ad hoc basis. 6. Before us, the counsel for the assessee in respect of this ground of appeal submitted that Ld. CIT(Appeals) has erred in facts and in law in not adjudicating on the issue of why Nile Ltd. should be excluded from the list of comparables. The counsel for the assessee submitted that the assessee had given detailed submissions on this issue before the Ld. CIT(Appeals), however, at the time of passing the order, Ld. CIT(Appeals) completely ignored the assessee's submissions on this issue and proceeded to compute the ALP in respect of each of the individual international transactions undertaken by the assessee and made ad hoc disallowances @10% in respect of some of the transactions. The counsel for the assessee submitted that ALP in respect of international transactions cannot be accurately computed in absence of Nile Ltd. as a comparable company for the reason t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... forth other companies which could be taken as comparable once Nile Ltd. is excluded, and the entire ALP was computed on the basis of one comparable company i.e. Swiss Glass Coats, which makes the whole exercise of computation of ALP erroneous and skewed. Further, Ld. CIT(Appeals) has omitted to completely consider this aspect in the appellate order. 7. In response, the DR relied upon the observations made by AO in his order. 8. We have heard the rival contentions and perused the material on record. From perusal of the records, we observe that Ld. CIT(Appeals) has not made any observation/conclusion in respect of this issue of exclusion of Nile Ltd. as a comparable company raised by the assessee. The assessee had specifically raised this issue before Ld. CIT(Appeals), however, we observe from the records that the Ld. CIT(Appeals) has not made any observations on this issue on hand. We further observe from the records that the assessee for earlier years had worked out TNMM by including Nile Ltd. as comparable and this working was not challenged by the AO in the assessment orders placed on record before us for assessment years 2007-08, 2008-09 and 2009-10. However, we equally n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der Inc. and 10% of value of services received from Mavag AG. Since the issue for consideration in the above Grounds 3 to 6 is connected with ground number 1 of the assessee's appeal, the same are also being restored to the file of the Ld. CIT(Appeals) for fresh adjudication in light of the findings made in respect of ground number 1 above. 12. In the result, Ground Numbers 3 to 5 of the assessee's appeal are allowed for statistical purposes. Ground number 6 : ALP of loan given by the assessee to foreign subsidiary at the rate of interest Swiss Libor + 200 basis points : 13. The brief facts in relation to this ground of appeal are that the assessee, during the course of business, had provided a loan to its wholly-owned foreign subsidiary in connection with acquisition of company situated in Switzerland, engaged in a similar business as that of the assessee company. On the said loan, the assessee had charged interest based on the market rate of Swiss Libor (CHF Libor) plus an additional spread margin of 1.25% per annum. However, the AO did not accept the ALP of the assessee and computed the ALP as per TNMM. In appeal before Ld. CIT(Appeals), the assessee submit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly directed to work out the Arm's length price and make the addition. The ground of appeal is accordingly, partly allowed. 15. The assessee is in appeal before us against the aforesaid additions made by Ld. CIT(Appeals). In the instant facts, we observe that the assessee has itself charged the lesser interest by 25 basis points (bps) as compared to what was quoted by Citibank. This fact was also observed by Ld. CIT(Appeals) in the appellate order. In view of the above, in the interest of justice, we are restricting the addition to interest rate at Swiss Libor plus 150 basis points, equivalent to the quotation obtained by the assessee from Citibank in respect of the said loan. 16. In the result, ground number 7 of the assessee's appeal is partly allowed. Ground number 7: disallowance of Rs. 3,22,431/- being administrative expenses under section 14A of the Act: 17. The brief facts in relation to this ground of appeal are that the AO made disallowance under section 14A of the Act by applying the provisions of Rule 8D. The AO held that the funds of the assessee were mixed and the assessee had incurred certain expenditure for earning exempt income. AO acco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... needs to be disallowance has to be worked out in view of the provisions of Rule 8D and applying the same, he held that the disallowance made by the AO amounting to Rs. 3,22,431/- is in accordance with Rule 8D in respect of administrative expenses and accordingly, the same is required to be disallowed. 18. We observe that in the immediately previous assessment year 2009-10, the ITAT vide order dated 06-09-2016 made the following observations in respect of disallowance of administrative expenditure towards exempt income: 11. From going through the above method we find that three limbs which in total arrives at the amount of disallowance 14A of the Act. In the first limb ld. Assessing Officer has made disallowance but the assessee has himself offered Rs. 30,347/- as disallowance towards specific expenditure for earning exempt income as observed by auditor as well as by ld. CIT(A) and we also accept the same. Going further towards disallowance under second limb relating to interest expenditure we find that as per the detailed submissions made by assessee before the lower authorities, the observation made by ld. CIT(A), decision of the Coordinate Bench in the case of assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ces including idle business funds for use of banking services for the specific movement of funds round the year and more importantly towards safeguarding the investments against any possible losses. These all activities involve elements of cost of the company which being not calculable in general, are thus taken care of by third limb of Rule 8D of the Rules r.w.s. 14A of the Act. 13. We further find that ld. CIT(A) in his order deleting the impugned addition has observed that out of the dividend income of Rs. 8,19,154/- assessee has reinvested Rs. 6,43,206/- and also has observed that long term capital gain of Rs. 14,55,875/- on account of redemption of mutual funds was taxable in nature. Therefore, in the given facts and circumstances of the case we are of the view that as against 0.5% of the average investment of Rs. 11.35 crores working out at Rs. 5,67,450/- lump sum disallowance of Rs. 2,50,000/- will be justified towards administrative cost incurred on maintaining investment in shares and mutual funds. Accordingly total disallowance of Rs. 2,80,347/- (Rs. 30,347/- + 2,50,000/-) is held to be disallowance u/s. 14A of the Act. Accordingly the ground of Revenue is partly all ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Further, the decision given by honourable Bombay High Court In the Case of Reliance Utilities [313 ITR 340], would also be applicable on the present set of facts as the interest free funds available with the appellant far exceeds the advances given to the subsidiaries. It is also noted that the interest expenditure that has been incurred by the appellant is of specific nature and it cannot be contended that it is on the funds which have been advanced to the sister concern. The issue of interest expenditure has been discussed by me in the preceding pages while deciding the issue of interest disallowance under section 14A. In view of these facts and circumstances, and also relying on the findings given by my predecessor in A. Y. 2009 - 10, the disallowance made by the AO under section 36(1)(iii) is directed to be deleted. The ground of appeal is accordingly allowed. 22. On the basis of facts placed before us, we observe that this issue has been decided in favour of the assessee in the assessee's own case before ITAT vide order dated 4 March 2019. The relevant act extracts of the order are been reproduced here in under for ready reference: 8. In ground no. 2, the As ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... O held that the assessee has not been able to explain the basis of royalty payment. The AO followed the findings given for assessment year 2009-10 and pointed out that no new facts have been brought on record by the assessee. In appeal, Ld. CIT(Appeals) allowed the assessee's appeal with the following observations: The appellant on the other hand has submitted that the appellant company had the user right and no ownership is there with it. The payment of royalty was related to the sales made by use of technology supplied by the owner of the trademark. The use of trademark did not create any asset or permanent right in favour of the appellant. The agreement for using of trademark is for only seven years and the appellant has paid annual charges. It has also been pointed out by the appellant that the similar disallowance made in earlier years have been deleted by CIT(A), and honourable IT AT in A. Y. 2005 - 06 has also rejected departmental appeal on the issue. On a careful consideration of entire facts of the case, it is noted that the issue is covered in favour of the appellant by the orders of my predecessor in earlier year. It is also noted that the appellant is pay ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essment year 2009-10, based on which impugned relief was given, has since been confirmed by a coordinate bench vide order dated 6th September 2016 and the learned Departmental Representative has not been able to point out any material difference in the facts of the case of the said assessment year vis- -vis the facts of the case of this year. As a matter of fact, there is no dispute that material facts of the case are same. In view of these discussions, as also bearing in mind entirety of the case, we approve the conclusions arrived at by the CIT(A) and decline to interfere in the matter. 14. Ground no. 3 is thus dismissed. 26.1. Respectfully following the decision in the assessee's own case, which are concurring with the observations made by Ld. CIT(Appeals) in the appellate order as well, we are hereby dismissing the Department's appeal on this issue. 27. Accordingly, ground number 3 of the Department's appeal is dismissed. Assessment year 2011-12 28. We observe that ground numbers 2, 3, 4 and 5 of the assessee's appeal are similar to that of assessment year 2010-11 and the observations and conclusions for AY 2010-11 would apply to assessment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he same. In appeal, the Ld. CIT(Appeals) allowed the assessee's appeal with the following observations: 8.3 The similar issue has been decided by Commissioner (Appeals)-2 in Assessment Year 2010-11 in appeal no. CIT(A)-2/DCIT/Cir.4/100/13-14 vide appellate order dated 13/02/2015. The findings given in said order are reproduced here under:- I have carefully considered the facts of the case, the assessment order and the written submission of the appellant. The AO has made a disallowance of the provision of warranty made by the appellant in the profit and loss account. It has been held by him that the expenses were not crystallised and there was an element of uncertainty in the provision. The appellant on the other hand has submitted that the provision has been made on a systematic and scientific basis. The actual expenditure incurred during the year has been reduced and only the net provision has been made. It is further been pointed out by the appellant that the provision has been made is in accordance with the policies adopted by it in the preceding years. It has further been pointed out by the appellant that the disallowance made in A. Y. 200-10 has been deleted by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cordingly, the addition grounds raised by the assessee for assessment year 2012-13 are dismissed as withdrawn. Department appeal for Assessment Year 2012-13: Ground number 1: Deletion of upward adjustment made on international transactions: 40. 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. Ground number 2: deleting disallowance of provision for differential warranty expense of Rs. 20,20,000/- 41. The facts and issues under consideration in respect of this ground are identical to assessment year 2011-12, and accordingly, our observations and conclusions for assessment a 2011-12 would apply to assessment year 2012-13 as well. 42. Accordingly, ground number 2 of the Department's appeal is dismissed. Ground number 3: deleting disallowance of education expense amounting to Rs. 35,97,769/- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a careful consideration of entire facts of the case, it is noted that the issue is covered in favour of the appellant. The amount of Rs. 35,97,769/- claimed by the assessee as education expenditure is an allowable expenditure. The disallowance made by the AO is directed to be deleted. The ground of appeal is accordingly, allowed. 44. In appeal before us, DR relied upon the observations made by the AO in the assessment order. In response, the counsel for the assessee placed reliance on the observations made by Ld. CIT(Appeals) in the appellate order. He further placed reliance on several cases on this issue and submitted that the issue is directly covered in favour of the assessee in view of the above rulings. 45. We have heard the rival contentions and perused the material on record. We observe that in the case of Mallige Medical Centre (P.) Ltd. [2015] 61 taxmann.com 298 (Karnataka), the High Court held that where daughter of managing director of assessee-company which was running a hospital was sent abroad for acquiring specialised knowledge in medical field and after acquiring same, she was working with assessee, expenses incurred towards daughter's education w ..... X X X X Extracts X X X X X X X X Extracts X X X X
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