TMI Blog2022 (2) TMI 1338X X X X Extracts X X X X X X X X Extracts X X X X ..... s company not comparable with the assessee company. Accordingly, we direct the A.O./TPO to exclude this company. M/s. Bharat Insecticides Ltd - principal product dealt by the company is stated as pesticides formulation . The total revenue from operations is shown at ₹ 261.88 crores in the profit loss account and the entire turnover pertains to pesticides formulation only as per information given at page Nos.2370 2371. We also notice that this company has not reported any other operating revenues in the profit loss account meaning thereby, the assessee has not carried out any toll manufacturing works during the year under consideration, as submitted by Ld. A.R. Accordingly, we are unable to appreciate the contentions of Ld. A.R. Accordingly, we do not find any other reason to exclude this company from the list of comparable companies. Accordingly, we confirm the order of the AO in including this company as comparable company. Disallowance of claim of capital expenditure u/s 35(1)(iv) - HELD THAT:- As finding of Ld DRP would make it clear that the assessee s role is only to provide services for R D activity of its AE, i.e., it is carrying on the R D activity ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sue to the file of AO. The AO may take a decision on this issue afresh after considering the details, information and explanation that may be furnished by the assessee. After hearing the assessee, the AO may take appropriate decision in accordance with law. Disallowance of claim of foreign exchange fluctuation on External Commercial Borrowing (ECB) - assessee had availed ECB of USD 20,00,000/- from its foreign AE and said loan was used to acquire assets for its R D activity - HELD THAT:- As noticed that the AO had disallowed the claim for deduction of capital expenditure u/s 35(1)(iv) - as already confirmed the said disallowance. We also directed the AO to allow applicable depreciation on the capital expenses so disallowed. Consequent thereto, the claim of deduction of loss arising on revaluation of outstanding balance of ECB cannot be allowed u/s 35(1)(iv) of the Act. We noticed that the AO has disallowed the claim holding it to be notional loss. Though the view taken by the AO may not be right, yet the disallowance has to be confirmed for the reasons discussed above. Accordingly, we confirm the disallowance made by the AO. It is not clear as to whether the provisions of se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rs.1,03,58,338/- when we dealt with the issue in the earlier paragraph. However, the loss arising on revaluation of ECB loan was shown in the break-up details given above. Hence this difference needs to be reconciled and it has to be shown by the assessee that both the figures pertain to same claim. Accordingly, we direct the AO to examine the claim of double disallowance and delete the double disallowance, if any. There should not be any dispute that the realised losses pertaining to revenue account is allowable as deduction. The AO may verify the details and allow the deduction. We are unable to understand as to why the assessee did not offer the amount pertaining to Forward contract premium and MTM transaction as its income. Accordingly, we restore this issue to the file of AO for examining this issue. Disallowance of interest expenditure - HELD THAT:- As submitted that the Ld DRP directed the AO to examine the above said claim of the assessee, but the AO retained the disallowance in the final assessment order without carrying out necessary examination. In view of the above, we restore this issue to the file of AO for examining the claim of the assessee in accordance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arma) division of FMC Corporation, USA. The support services provided by it are in the form of business development services, SAP Application Support Services, Human Resource Services and Regulatory Affair Management Services to its Associated Enterprises. 4. The first issue relates to the addition made on account of transfer pricing adjustment. The assessee has prepared segmental results for two segments, viz., Manufacture and sale of products and Sourcing business support services . The TPO has proposed transfer pricing adjustment in respect of Manufacture and Sale of products . The assessee had reported sales of Rs.252.10 crores and service income of Rs.0.31crores. The assessee had declared operating profit of Rs.11.54 crores in this segment, i.e., the operating expenses was shown at Rs.240.87 crores. 4.1 The TPO noticed that the assessee has not properly allocated/apportioned the expenses. He also noticed that the assessee as considered Foreign exchange fluctuation loss and Product development expenses as non-operating in nature. Accordingly, he rejected the segmental results prepared by the assessee. He prepared the segmental results by reallocating some of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . A.R. did not press M/s. Lokmangal Bio-Tech Pvt. Ltd. at the time of hearing. Accordingly, the assessee seeks exclusion of only two companies. In Ground No.2.10, the assessee is contending that the transfer pricing adjustment should be restricted to the international transactions entered with the associated enterprises only. 4.5 We shall first take up Ground No.2.10. With regard to the plea of the assessee to restrict the transfer pricing adjustment to international transactions entered with A.E only, the Ld. A.R. placed his reliance on the decision rendered by Mumbai bench of Tribunal in the case of Hindustan Unilever Ltd. Vs. ACIT (2012) 28 Taxmann.com 142, wherein the Tribunal held that the transfer pricing adjustment should be restricted to the international transactions entered with AE. The Ld. A.R. submitted that the revenue challenged the above said decision of the Tribunal before Hon ble Bombay High Court. However, the question of law raised by the revenue in this regard was not admitted by Hon ble Bombay High Court for the reason that the said issue is covered in favour of the assessee by the decision rendered by it in the case of CIT Vs. Tara Jewellers Exports Pvt. Lt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s, viz., pesticides, plant growth regulators, etc. Further, this company also acts as toll manufacturer i.e. doing job work for other companies. He submitted that TPO has wrongly understood that the assessee herein is also engaged in toll manufacturing, whereas the fact remain the assessee gets his product processed/manufactured by other toll manufacturers. He submitted that this company also does not have segmental results. Accordingly, he submitted that this company cannot be considered as a comparable to the assessee. 4.11 We heard Ld. D.R. on this comparable and perused the record. The annual report of the company pertaining to assessment year 2014-15 (F Y 2013-14) is placed at page Nos. 2370 to 2408. We notice that the principal product dealt by the company is stated as pesticides formulation . The total revenue from operations is shown at ₹ 261.88 crores in the profit loss account and the entire turnover pertains to pesticides formulation only as per information given at page Nos.2370 2371. We also notice that this company has not reported any other operating revenues in the profit loss account available at page No.2371, meaning thereby, the assessee has not c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shown that because of the research done by it, it has got patents in its name. As far as the assessee is concerned, it is a work being carried out at the instruction, direction and supervision of the patent company and that work incidentally happens to be related to R D. This is an incentive given to Indian companies to encourage investment in R D and not for doing work for some company located abroad. Therefore, we approve of the disallowance u/s 35(1)(iv). As far as depreciation u/s 32 also, we note that as per the Masters Agreement the assessee would not be able to claim ownership over the research and development undertaken by it. In the circumstance, the assessee would not be eligible for claim of depreciation. Accordingly this objection is rejected. 5.3 The Ld A.R submitted that the AO has rejected the claim of capital expenditure in respect of research and development activities only on the reason that it is not related to the business carried on by the assessee. He submitted that the R D activities support the manufacturing and trading business of both the assessee and its parent company. Hence the benefit of R D activity is used by the assessee in its business ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Rs.1,86,04,299/- claimed by the assessee after deducting the depreciation of Rs.23,94,873/- claimed in the books of account. The AO may examine the claim of the assessee for allowing correct amount of depreciation, if the above said claim is not in accordance with the rates prescribed under the Income tax Rules. 6.0 The next issue relates to the disallowance of payroll expenses u/s 40(a)(i) of the Act.The AO noticed that the assessee has paid a sum of Rs.97,69,258/- to its AE FMC Corporation, USA as Payroll expenses and it did not deduct TDS there from. When enquired, the assessee submitted that the above said sum represented only reimbursement of salary and related cost of an employee who was deputed by its AE. It was further submitted that the said employee was working with the assessee under its supervision and direction. It was submitted that the above said reimbursement has been made on actual basis without any mark up and hence the same is not liable for tax deduction at source u/s 195 of the Act. The AO did not accept the above said explanations of the assessee. The relevant observations made by the AO are:- (a) The assessee has submitted only certain debit note ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... we notice that the assessee has furnished the agreement, if any, entered between the assessee and the AE/expatriate in connection with the deputation of that employee to the assessee. Further, it is the observation of the tax authorities, the assessee has not explained about the nature of services rendered by the expatriate to the assessee. It is the case of the AO that the expatriate was working on behalf of the AE and hence he might have provided technical services to the assessee on behalf of the AE, even though the assessee refutes the same. Before us, the assessee has submitted that the details of Payroll expenses have been submitted in the paper book. However, what is required to be examined in the present context is the terms and conditions of agreed between the assessee and its AE, the nature of services rendered by the expatriate to the assessee etc. In the absence of the factual details, it would be difficult to apply the legal principles laid down by the Hon ble Karnataka High Court in the above said case. Under these set of facts, we are of the view that this issue requires fresh examination at the end of AO. The assessee should furnish the terms and conditions of agre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... allowance of Product development expenses of Rs.4,36,88,418/-. The assessee submitted before the AO that it has incurred these expenses with the intention of expanding the existing line of business. The assessee submitted that incurring of this kind of expenses is an integral part of profit earning process and it aids the assessee to continuously improve its portfolio of products. The assessee also relied upon the decision rendered by Chandigarh bench of ITAT in the case of Glaxo Smithkline Consumer Health care Ltd (112 TTJ 94) and also the decision rendered by Hon ble Karnataka High Court in the case of Bharat Earth Movers Ltd (47 CTR 244) and also by Chennai bench of ITAT in the case of Magnetic Meter Systems India Ltd etc. It was submitted that these expenses did not result in any enduring benefit to the assessee. 8.1 The AO did not accept the explanations of the assessee. The AO took the view that these expenses would give enduring benefit to the assessee once the products developed by it are put to commercial use. The AO also examined the nature of expenses and noticed that these expenses have been incurred for registration studies of product Carbosulfan, various diseases o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sets in the depreciation schedule and accordingly did not claim depreciation thereon. The AO took the view that the assessee should recognize the assets taken on lease as its capital asset and should have claimed depreciation and finance charges as per Accounting Standard 19 issued by ICAI. He further held that the finance lease gives enduring benefit to the assessee and it cannot be called as operating lease. Accordingly he disallowed the claim for deduction of finance lease charges. In this regard, he took support of the decision rendered by Delhi bench of ITAT in the case of Rio Tinto India (P) Ltd (ITA No.363 (Delhi)/2012 dated 22-06-2012. 9.1 The Ld DRP also confirmed the disallowance. It also held that the assessee cannot be granted depreciation as the relevant information are not available on record. 9.2 This issue is now settled by Hon ble Supreme Court in the case of ICDS vs CIT (2013)(350 ITR 527)(SC), wherein the Hon ble Apex Court held that the lessor is the owner of the leased property in case of finance lease and he is entitled to depreciation on it. The contra is that the lessee is eligible to claim the lease payments as deduction. Hence the view taken by the t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... However, the loss arising on revaluation of ECB loan was shown as Rs.1,04,19,728/- in the break-up details given above. Hence this difference needs to be reconciled and it has to be shown by the assessee that both the figures pertain to same claim. Accordingly, we direct the AO to examine the claim of double disallowance and delete the double disallowance, if any. 10.4 There should not be any dispute that the realised losses pertaining to revenue account is allowable as deduction. The AO may verify the details and allow the deduction. 10.5 We are unable to understand as to why the assessee did not offer the amount of Rs.88,56,806/- pertaining to Forward contract premium and MTM transaction as its income. Accordingly, we restore this issue to the file of AO for examining this issue. 11.0 The next issue pertains to disallowance of interest expenditure of Rs.10,07,131/- payable to Micro, Small and Medium Enterprises. It is the submission of the Ld A.R, the outstanding amount shown as payable to Micro, Small and Medium Enterprises pertains to the principal portion of supplies made by those enterprises to the assessee, i.e., it does not include any interest component. It was su ..... X X X X Extracts X X X X X X X X Extracts X X X X
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