TMI Blog2022 (12) TMI 860X X X X Extracts X X X X X X X X Extracts X X X X ..... of the ld DR that the assessee is not a contract manufacturer which are incorrect observations on the part of the TPO/AO. Argument of the ld DR that the assessee itself followed TNMM method as mentioned in Form 3CEB, we observe the same was a mistake as the assessee in the TPSR mentioned CPM as MAM correctly and also placed the documents justifying and corroborating the fact that the assessee has followed CPM for benchmarking the domestic transactions between eligible unit and non-eligible unit. We also observe that OECD guidelines, UNTP manual ICAI guidance Note also refer to CPM to be applicable where the semi-finished goods are transferred job work is done. Appeal of revenue dismissed. Additional depreciation u/s 32(1)(iia) - assessee had made some additions to fixed asset in the latter half of F.Y. 2012-13 and consequently the assets were put to use for less than 180 days - additional depreciation has been denied by the AO on the ground that there was no provision in the Statute granting additional depreciation to the assessee which has not been allowed in the preceding assessment year in which the conditions were made on the ground that the provision of Section 32( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Accordingly the AO is directed to allow depreciation on this amount at the applicable rate of depreciation after capitalizing the loss. The ground no. 6 raised by the revenue is partly with the above observations. - I.T.A. Nos. 263 & 264/Kol/2020 - - - Dated:- 23-6-2022 - Shri Rajesh Kumar, Accountant Member Shri Sonjoy Sarma, Judicial Member For the Appellant Shri Siddharth Jhajharia, FCA Shri Sujoy Sen, Advocate For the Respondent Shri Amol Kamat, CIT Shri Tushar Dhawal Singh, CITDR ORDER Per Shri Rajesh Kumar, AM: These are the two appeals preferred by the revenue and two cross-objections filed by the assessee against the orders of the Commissioner of Income Tax(Appeals)- 22, Kolkata [hereinafter referred to as CIT(A) ] both even dated 31.10.2019 for the assessment years 2014-15 2015-16 respectively. 2. Though the Registry has pointed out that the appeal is time barred, however, in view of the decision of the Hon ble Supreme Court in the case of Miscellaneous Application No. 665 of 2021 in SMW(C ) No. 3 of 2020, the period of filing appeal during the COVID-19 pandemic is to be excluded for the purpose of counting the limitation period. In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... od without any cogent reasons whereas the AO/TPO treated the TNMM as the most functional method applicable for benchmarking. 5. Facts in brief are that the assessee has three manufacturing units at Kolkata, Faridabad and Rudrapur. The unit at Rudrapur was set up in FY 2007-08 relevant to AY 2008-09 and is eligible for deduction u/s 80IC of the Act. And this being the 7th assessment year for the purpose of deduction u/s 80IC of the Act. The assessee has been claimed deduction u/s 80IC for AY 2008-09 which has been accepted by the revenue in the scrutiny assessment which culminated u/s 143(3) of the Income Tax Act, 1961 (hereinafter referred to as the Act). The assessee had specified domestic transactions between two units during the year and accordingly the AO referred the matter to TPO after obtaining due approval from PCIT for determining the arms length price(hereinafter called as ALP) of the said specified domestic transactions. The TPO passed an order u/s 92CA(3) of the Act dated 04.10.2017 in relation to specified domestic transactions proposing arm s length price adjustment of Rs. 12,06,40,000/- by rejecting Cost Plus Method followed by the assessee and adopting TNMM as MA ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the appellant In the backdrop of the transfer pricing order passed by the AO u/s 92CA(3)of the Act. The documents and details furnished by the appellant before the Id. TPO has also been carefully perused. In order to adjudicate the issue Involved. It is first necessary to appreciate the background facts Involved In the present case. The appellant company Is engaged in the business of gears, shafts, gearboxes and couplings having manufacturing units at Kolkata, Faridabad and Rudrapur. From the Id. TPO's order, it is noted that the units at Faridabad and Rudrapur are engaged in manufacture of automobile gears. The Unit at Rudrapur is located In a industrially backward district as notified In Section 80IC of the Act and therefore the appellant has claimed deduction in respect of the profits derived by such eligible unit. During the relevant financial year, the eligible unit at Rudrapur had inter-unit transfers of raw materials and semi-finished goods with its non-eligible unit at Faridabad. Since these transactions fell within the ambit of Section 80IA(8) (10), the appellant obtained o certificate In Form 3CEB from a Chartered Accountant who certified that the transactions were ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion by him or on his behalf in the production or manufacture of other articles, the value shall be one hundred and ten percent of the cost of production on manufacture of such goods. Rule 9 Provided that in a case where the related person does not sell the goods but uses or consumes such goods in the production or manufacture of articles, the value shall be determined in the manner as specified in Rule 8. 3. In the present case, the semi-finished goods is utilized for consumption by the Rudrapur Unit for production of final automobile gear. As per Excise Rules, the value of such semifinished goods transferred to AE is required to be 110% of the cost of production. Accordingly, it is noted that the appellant acted in conformity with the Excise Rules, when it sold semi-finished goods to the AE at one hundred and ten percent of the value of the cost of production. The relevant statement of cost of production as certified by the cost auditor along with the relevant Excise Rules and sample excise returns as furnished by the appellant are found to be in order. In view of the foregoing therefore I find sufficient merit in the application of CPM by the appellant-company a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r Unit, it is to be stated that such material is of semifinished stage, and the relevant excise valuation has also been furnished by the appellant along with the Cost Audit Report. The detailed calculation of the valuation is also available in the Cost Audit Report, and therefore the valuation is also acceptable and moreover the valuation being in accordance with the Audit Report, in my carefully considered view of the matter, the same while not being conclusive in itself, does bear substantial value in the eyes of the statute. Further, the method followed in Transfer Pricing report or documentation as submitted is not final. The aim of transfer pricing study is to determine the arm's length price, and the same can be arrived at by placing materials at a later stage before the Ld. TPO or Ld. A.O., and in this case, I observe that the appellant has placed adequate material at a later stage before the TPO / A.O, and there was adequate opportunity for the Authorities concerned to examine such materials. I observe that for the case at hand, the appellant-company has duly submitted before the Ld. TPO as regards the justification or following CPM method, although in the Transfer Pric ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d on the same the inter-unit transfers are held to be at arm's length. The Ld. AO/TPO is accordingly directed to delete transfer pricing adjustment of Rs.12,06,40,000/-and accordingly re-compute the eligible deduction u/s 80-IC of -the Act. These grounds of appeal therefore stands allowed. 7. The Ld. D.R. submitted before that the Bench the assessee itself in form 3CEB submitted along with the return of income has applied TNMM as MAM and certified that the transactions were at ALP which the assessee tried to change before the TPO to CPM method despite the fact the TNMM was set out in the TPSR. The ld DR submitted that in the TPSR the assessee has furnished net profit margin and net gross profit margin and therefore the CPM is not correct. The ld DR argued that application of CPM required comparison of gross margin and not net margin. The ld DR also submitted that CPM is not applicable to routine manufacturers. The ld DR submitted that the TPO has rightly adopted TNMM for determining the ALP of transactions between inter units as there were huge variation in the profit margin of the two units. The Ld. D.R. submitted that both these units are operating independently and man ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he TPO has merely compared the net profit margin of Faridabad unit and Rudrapur unit and considered the variance in net profit margin of two units at 30.87% and applied the same as internal TNMM. The Ld. A.R stated that the unit at Rudrapur and Kolkata are not functionally similar or comparable as Faridabad unit is manufacturing gears for tractors and bigger trucks with plant and machinery also being very old whereas the Rudrapur unit manufactures 3rd 4th gears for small trucks solely supplying them to Tata Motors Ltd. and thus is as working captive unit of Tata Motors Ltd. The Ld. A.R. thus stated that Rudrapur unit is a contract manufacturer of Tata Motors. Rudrapur unit procures semi-finished goods from Faridabad unit in the form of shafts/blanks which are used for manufacturing and further processed to produce the 3rd 4th gears for small truck of Tata. The Ld. A.R., while referring to the direct, indirect cost based on the costing records which were duly certified by the auditors of the company and gross profit margin, submitted that cost plus method was rightly followed by the assessee. The Ld. A.R. submitted that TPO has ignored all the facts and records as placed before ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... /2006 dated 14.05.2010, Wipro QE Healthcare (P) Ltd.- ITA 603/2015 (Kar-HC) dated 19.07.2018, Greaves Travel (I) Ltd.-ITA 6903/Kol/2016 dated 02.09.2019, Loreal India (P) Ltd.-TS-58-HC-2013(Bom)-TP and R S Software (I) Ltd.- TS-1359-ITAT- 2018-Kol-TP. The Ld. A.R. also referred to the net margin of the assessee vis- -vis other comparables and submitted that the margin of the assessee was much higher than the other comparables. On the issue of assessee being the contract manufacturer, the Ld. A.R submitted that the Rudrapur is a contract manufacturer and it procures semi-finished goods, raw materials from Faridabad unit and similar job work is also done on behalf of Faridabad unit by it and therefore CPM is most appropriate method. On the arguments of the Ld. D.R. that the assessee itself followed TNMM method as certified in Form 3CEB,the Ld. Counsel for the assessee submitted that though in Form 3CEB it is mentioned as TNMM wrongly but in the TPSR, CPM was duly mentioned which was accepted by the Ld. CIT(A). The Ld. A.R referred to the decision of Mattel Toys (I) Ltd.-34 taxmann.com 203 (MUM ) wherein it has considered the CPM as the most appropriate method under the similar facts. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on u/s 80IC of the Act. We observe on the basis of records before us that both these units at Faridabad and Rudrapur unit were manufacturing different products. Faridabad units manufactures gears for tractors and bigger trucks whereas Rudrapur unit produces 3rd 4th gear for small truck manufactured by Tata Motors Ltd and is contract manufacturer. The Rudrapur unit procures semi finished goods in the form of shaft/blank from Faridabad unit and the same is further subjected to manufacturing processes for production of 3rd 4th gears as such. During the year, specified domestic transactions between eligible unit and non-eligible unit were made and ALP was determined at 22.10 cr . Similarly Rudrapur unit also does some job work for non eligible unit which was transferred at a price of Rs. 4.11 cr. The assessee followed CPM as most appropriate method on the strength of the reasoning that the direct and indirect cost were available as per costing records CAS-4 which were duly certified by CA and a gross profit margin of 10% was added to arrive at the transfer price. The TPO proposed the adjustment in the arm s length price on the ground that there is huge difference in profit margin o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e industries, we are of the view that price as determined by the assessee is at ALP. On the other hand, we do not find in the merit of the submissions of the ld DR that the assessee is not a contract manufacturer which are incorrect observations on the part of the TPO/AO. As regards the argument of the ld DR that the assessee itself followed TNMM method as mentioned in Form 3CEB, we observe the same was a mistake as the assessee in the TPSR mentioned CPM as MAM correctly and also placed the documents justifying and corroborating the fact that the assessee has followed CPM for benchmarking the domestic transactions between eligible unit and non-eligible unit. We also observe that OECD guidelines, UNTP manual ICAI guidance Note also refer to CPM to be applicable where the semi-finished goods are transferred job work is done. We have also perused the order of Ld. CIT(A) wherein the Ld. CIT(A) while allowing the appeal as this issue has followed the decisions in the case of Hughes Systique (I) (P) Ltd.- 36 taxmann.com 41 (Delhi), Aztec Software Tech. Services Ltd.- 107 ITD 141(Bang)(SB), Gharda Chemicals Ltd.- 35 SOT 406 (Mum).Considering all these facts and circumstances and rat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the appeal of the assessee wherein the similar issue has been decided in favour of the assessee. 15. After hearing the rival parties and perusing the material on record, we note that 4the additional depreciation has been denied by the AO on the ground that there was no provision in the Statute granting additional depreciation to the assessee which has not been allowed in the preceding assessment year in which the conditions were made on the ground that the provision of Section 32(1)(iia) of the Act provides that the assessee is entitled to claim depreciation @ 50% of the of the normal rates as prescribed under clause (iia) and the said benefit has been specially granted w.e.f. 1.4.2016 by Finance Act,2015 from AY 2016-17 . We note that the issue has been decided by the coordinate bench in M/s Birla corporation Ltd. vs. DCIT (supra) by holding that assessee is entitled to remaining 50% of the depreciation in the subsequent year where the said depreciation could not be claimed in preceding assessment year because of the reason that the asset was put to use for less than 180 days in terms of provision of Section 32(1)(ii) of the Act. The operative part of the case M/s Birla corpor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ere is no restrictive condition in the clause for the eligibility of the assessee to claim additional depreciation. When the assessee is eligible for depreciation @ 20%, in the absence of any specific provision, the AO cannot cut down the scope of deduction by referring to second proviso to section 32(1)(ii) of the Act. He also pointed out that even if there is any contradiction between sections 32(1)(iia) and second proviso to section 32(1)(ii), it has to be reconciled so as to give harmonious effect to the legislative intent. The benefits conferred on the assessee by way of incentive provision cannot be taken away by adopting an implied meaning to second proviso to section 32(1)(ii) of the Act. Since the second proviso to section 32(1)(ii) does not expressly prohibit the allowance of the balance 50% depreciation in the subsequent year, second proviso to section 32(1)(ii) shall not be interpreted to mean that it impliedly restrict the additional depreciation to be allowed in the subsequent assessment year. We are of the view that the assessee now is entitled for 50% additional depreciation, because in the year in which the machinery was first put to use the assessee claimed only 5 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act comes into play. Consequently the AO disallowed Rs. 1,65,65,143/- and added to the same to the income of the assessee. 18. In the appellate proceedings, the Ld. CIT(A) allowed the appeal of the assessee on the ground that the loss is not an account of foreign currency fluctuations as the assessee has no direct exposure to foreign currency and is not incurred by the assessee but an arrangement by the bank further to which the assessee is not a part. The ld CIT(A) thus observed that the assessee has obtained loan in Indian currency and subsequent conversion by bank to facilitate the customer does not fall within the ambit of Section 43A of the Act. The Ld. CIT(A) observed that entire arrangement was facilitated by the bank and is not covered u/s 43A of the Act and the said charges are bank charges recovered by the bank from the assessee by relying on the decision of co-ordinate bench in the case of Cooper Corporation (P) Ltd. vs. DCIT in 159 ITD 165 (Pune). 19. After hearing both the parties and perusing the material on record and minutely analyzing the provisions of Section 43A, we find that an amount debited by the bank of Rs. 1,65,65,143/- as bank charges is in fact the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... then the depreciation may be allowed by allowing capitalization of the loss under relevant assets. Since we have decided the issue in the revenue appeal in favour of the revenue by reversing the order of ld CIT(A) on the issue of allowing loss on foreign exchange fluctuations as expenses, the ground no. 3 becomes infructuous and is accordingly dismissed. Further we have given direction in para 18 supra directing the AO to capitalize the loss of Rs. 1,65,65,143/- under the relevant assets and allow depreciation as per the provisions of section 32 of the Act. Cosequently the ground no. 4 in the cross objection is allowed. ITA No. 264/Kol/2020 CO No. 05/Kol/2021 A.Y. 2015-16. 21. The issue raised by the revenue in ground no. 1 to 4 is identical to one as decided by us in ground no. 1 to 4 in ITA No. 263/Kol/2020 A.Y. 2014-15 dismissing these ground by upholding the order of ld CIT(A) by upholding the CPM as MAM. Therefore our decision would, mutatis mutandis, apply to ground no 1 to 4 of this appeal and accordingly ground no. 1 to 4 are dismissed. Similarly in the CO the assessee has taken ground no. 1 2 in support of order ld CIT(A) on the issue of upholding the CPM as M ..... X X X X Extracts X X X X X X X X Extracts X X X X
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