TMI Blog2019 (4) TMI 2142X X X X Extracts X X X X X X X X Extracts X X X X ..... ght on record by the AO that the assessee has made payment for setting up or formation of trust. Admittedly the assessee made the payment to the trust, but the payment to the trust does not mean that it is not a business expense. As such if the expenses are incurred in connection with the business, then it is eligible for deduction u/s 37(1) of the Act provided the same is not in the nature of capital and personal expenses. In the case on hand the AO has not brought on record whether the expenditures are capital or personal nature. The AO has not doubted the genuineness of the transaction. AO did not call any information regarding the transaction from the trust by using his power given under section 133(6) of the Act. Thus this expenditure should be allowable as business expenditure u/s 37(1) of the Act. Accordingly, we dismiss the ground of appeal raised by the Revenue. Nature of expenditure - expenditure made to associates enterprises for the use of technological know-how - Assessee has debited sum as fee for technical know-how in respect of its DTA units and claimed that such fee represents the royalty payment determined as a percentage of net sales under the terms of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... D] has not raised any ground against the action of the Ld.CIT (A) for deletion of allocation of depreciation on residential quarters between DTA and EOU unit. Thus it is clear that once the Revenue has not challenged the action of the Ld.CIT (A), then the order of the Ld.CIT (A) reaches its finality. As such it is settled law that the Revenue cannot challenge the same in the subsequent year until unless there was some change in the facts and circumstances. Admittedly there was no change in the facts and circumstances regarding the claim of the assessee for the depreciation in respect of residential quarters and its allocation thereof. Therefore we are of the view, that there cannot be any disallowance on account of allocation of the depreciation of the residential quarters. In this regard we find support and guidance from the judgment of Hon ble supreme court in case of Radhasoami Satsang vs. CIT [ 1991 (11) TMI 2 - SUPREME COURT] - thus we hold that there cannot be any allocation of the depreciation claimed by the assessee in respect of its residential quarters towards the DTA unit. Allocation of the depreciation on SAP R3 expenses and renovation of the building - SAP R3 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 03 (9) TMI 43 - BOMBAY HIGH COURT] .- In addition to the above, we also note that the Delhi ITAT in case of Smt. Sujata Grover [ 2001 (11) TMI 232 - ITAT DELHI-E] where in it was held that the assessee is entitled to deduction under section 80HHC of the Act in respect of the impugned income - Decided in against revenue. Deduction under section 80HHC - Service income, scrap sales, handling charges, and GEB - HELD THAT:- The word interest in clause (baa) of the Explanation connotes net interest and not gross interest . Therefore, in deducting such interest, the Assessing Officer will take into account the net interest, i.e ., gross interest as reduced by expenditure incurred for earning such interest. Where, as a result of the computation of profits and gains of business or profession, the Assessing Officer treats the interest receipt as business income, the deduction should be permissible in terms of Explanation (baa) of the net interest, i.e., the gross interest less the expenditure incurred for the purposes of earning such interest. The nexus between obtaining the loan and paying interest thereon (laying out the expenditure by way of interest) for the purpose of ea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... EPB income - Admittedly the impugned income is eligible for deduction under section 80HHC(3) of the Act. We also note that the issue involved in the instant case stands covered in favor of the assessee by the judgment of Hon ble Apex court in the case of CIT Vs. Avani exports [ 2015 (4) TMI 193 - SUPREME COURT] . Accordingly, we direct the AO to consider the aforesaid amount for working out the deduction under section 80HHC of the Act. Discount of early payment of suppliers bill - Admittedly the impugned income is arising in the course of the business of the assessee. We also note that the AO in his assessment order has also not treated the impugned income as income from other sources. Therefore the same cannot be treated as income from other sources and accordingly the same is eligible for deduction under section 80HHC of the Act. We direct the AO to consider the aforesaid amount for working out the deduction under section 80HHC of the Act. Octroi refund, reversal of the provisions, for the excise duty and for the testing charge - Admittedly the impugned income is arising in the course of the business of the assessee. We also note that the AO in his assessment order has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e existing building. There was no change brought to our notice about the structural in the existing building out of such expenses. Accordingly we direct the AO to delete the addition made by him by treating the repairing expenses as capital in nature. Disallowing the expenditure on scientific research claimed u/s 35(1) - HELD THAT:- As assessee has conducted the scientific research activity and therefore the assessee is eligible for deduction in respect of capital expenditure under section 35 of the Act. However, the onus lies on the assessee to prove on the basis of documentary evidence that it has carried out the scientific research activity. As such we note that, the Ld.AR for the assessee before us has not brought any iota of evidence suggesting that the assessee has carried out any scientific research activity. Thus in the absence of sufficient documentary evidence, we do not find any reason to disturb the finding of the Ld.CIT (A). Hence the ground of appeal of the assessee is dismissed. Addition of the unutilized CENVAT Credit in the valuation of closing stock - As we note that the assessee has been recording its transactions of purchase, sales, and valuation of in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1 )(iv) and (v). 2.(a) On the facts and in the circumstances of the case and in law, the Id. CIT(A) erred in holding the payment of Rs. 5,54,00,000/- to the associate concerns covered by section 40A(2)(b), in the name of fee for use of technical knowhow, for the manufacture of the assessee's products, as revenue expenditure, without determining the matter on merits and by solely relying on his order for the assessment year 2003-04, which has been contested by the Department as erroneous. (b) On merits, the Id. CIT(A) failed to appreciate the binding ratio of the apex court's decision in the case of Scientific Engineering House Pvt. Limited. Vs CIT 157 ITR 86 (SC) and further failed to take note of the fact that, in allowing the expenditure in earlier years, undue reliance was placed on the formal recitals in the agreements with the associate concerns presenting the lump sum payment for acquisition of technical knowhow as periodical payment of fee for the use of the said knowhow and such presentation at the cost of substance is immaterial for determining the basic character of payment as capital or revenue as settled in Assam Bengal Cement Co. Ltd. vs CIT 27 ITR 34 (SC ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on below section 80HHC, without appreciating the import of residuary clause of any other receipt of a similar nature , which excludes all those receipts which do not form part of turnover akin to export turnover in order to avoid distortion in the working of profits derived from the export in the ratio of export turnover to total turnover, apportioning only the profit from the total of domestic and export turnover. (b) The CIT(A) failed to appreciate the connotation of 'derived from' in the substantive provision of section 80HHC(1) encompassing only direct receipts from turnover as settled in the case of CIT vs Sterling Foods 237 ITR 579 (SC) and that clause (baa) of the Explanation read with section 80HHC(3) only provides a machinery to realise the intent of this restrictive expression in the substantive provision, as settled in the following decisions: i. CIT u sK.K.Doshi Co. 245 ITR 849 (Bom) based on CIT vs Sterling Foods 237 ITR 579 (SC). ii. CIT vs Kantilal Chottalal 246 ITR 439 (Bom). \ Hi. CIT vs Pravin M mehta 246 ITR 445 iii. Alembic Chemical Works Ltd. vs DCIT 266 ITR 46 (Guj) holding insurance claim and other miscellaneous income as excludible u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in appeal The order of the CIT(A) to the above extent may be set aside and that of the A.O be restored. The first issue raised by the Revenue in ground No. 1 is that the Ld.CIT (A) erred in deleting the addition made by AO u/s 40A(9) for Rs. 20,38,747/- on account of payment to Prasanna trust for the training of the employees. 2. Briefly stated facts are that the assessee is a limited company and engaged in the business of the manufacturing of various types of balls and roller bearings. The assessee in the year under consideration claimed an expenditure in its Profit and loss account as employees training expenses for Rs. 20,38,746/- only. The assessee claimed that the expenditure had been incurred on three to four days of the carrier training program conducted by Presanna trust for the development and growth of the employee. Hence the above-stated expenditure is allowable under section 37(1) of the Act as these expenditures were incurred wholly and exclusively for the business. 2.1 However, AO rejected the contention of the assessee by observing that the above-stated payment has been made for setting up and formation of the trust other than the fund as covered under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Act provided the same is not in the nature of capital and personal expenses. 6.2 In the case on hand the AO has not brought on record whether the expenditures are capital or personal nature. The AO has not doubted the genuineness of the transaction. 6.3 The AO did not call any information regarding the transaction from the trust by using his power given under section 133(6) of the Act. 6.4 In view of the above, this expenditure should be allowable as business expenditure u/s 37(1) of the Act. Accordingly, we dismiss the ground of appeal raised by the Revenue. The second issue raised by the Revenue in the ground no. 2(a) and 2(b) is that the Ld.CIT (A) erred in holding the payment of Rs. 5,54,00,000/- as revenue expenditure made to associates enterprises for the use of technological know-how. 7. The assessee in the year under consideration has debited Rs. 5,54,00,000/- fee for technical know-how in respect of its DTA units. The assessee claimed that such fee represents the royalty payment determined as a percentage of net sales under the terms of the collaboration agreement. 7.1 However, the AO rejected the contention of the assessee by observing that the i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed between FAG AUTOMOBILTECHNIK AG on one part referred as the Collaborator and FAG Bearings (India) Ltd. as other part mentioned as the Indian Company . The said Collaborator is a subsidiary of FAG Kugel Fischer George Schaefer AG incorporated under the laws of the Federal Republic of Germany. Clause -(c) on page No.1 of the said agreement states that the Indian Company and the Collaborator have over the years entered into diverse agreements for supply of knowhow and technical assistance in respect of diverse types of bearings. The present agreement was in respect of know-how and technical services in respect of the following products. Clutch Release Bearings Altemator Bearings Wheet Bearings Hub units (All generations) Tensioner Icer Assemblies From the side of the assessee by referring the types of the products, i.e., bearings, etc. the main argument was that there were new product introduced but mainly the technical assistance was to improve the quality of the existing products. 6.1. Apart from the above specifications, it has also been brought to our notice that the know-how as such was not the property of the assessee. The know-how remained the property of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ture towards improvisation for the existing business is to be considered a revenue expenditure. In the present appeal, undisputedly the know-how related to the existing manufacturing operation of ball bearings, i.e.stated to be same type of product. It cannot be ruled out that in a fast growing era of new technologies the outdated or obsolete technologies are required to be replaced and that expenditure can be held a business requirement. 6.4. It has also been noted while reading the clauses of the agreement that one of the clause is about the non-portability. Therefore, this clause has demonstrated that the knowhow was not the property of the assessee. Rather, the said Collaborator has imposed a condition of confidentiality and secrecy which leads to an inference that the property belonged to the said Collaborator. Rather, we are inclined to draw an inference that the transfer of know-how in the present set of facts and circumstances was restricted for the use rather than its acquisition. In the light of the reasons assigned hereinabove and considering the totality of the evidence placed on record duly supported by the precedents cited, we hereby hold that the payment of Rs. 43 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an opinion different from the one taken by an earlier Bench, it should place the matter before the President of the Tribunal, so that he could have the case referred to a Full Bench of the Tribunal consisting of three or more members for which there is provision in the IT Act itself. 11.2 We also find that the Hon ble supreme court case of Ambika Parsad Mishra Vs. State of U.P. and Others vide writ pettion no 1543 of 1977 vide order dated 09-05-1980 has taken the similar view as taken by the Hon ble High court (supra) as under: Thus we get the statutory perspective of agrarian reform and so, the constitutionality of the Act has to be tested on the touchstone of Art 31A which is the relevant protective armour for land reform laws. Even here, we must state that while we do refer to the range of constitutional immunity Art. 31A confers on agrarian reform measures we do not rest our decision on that provision. Independently of Art. 31A, the impugned legislation can withstand constitutional invasion and so the further challenge to Art. 31A itself is of no consequence. The comprehensive vocabulary of that purposeful provision obviously catches within its protective net the prese ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on because it paralyses, by perennial suspense, all legislative and administrative action on vital issues deterred by the brooding threat of forensic blowup. This, if permitted, may well be a kind of judicial destabilisation of State action too dangerous to be indulged in save where national. crisis of great moment to the life, liberty and safety of this country and its millions are at stake, or the basic direction of the nation itself is in peril of a shakeup. It is surely wrong to prove Justice Roberts of the United States Supreme Court right when he said. 11.3 In view of the above, we do not find any reason to interfere in the finding of the Ld. CIT-A. Accordingly, we direct the AO to delete the addition made by him. Hence the ground of appeal of the Revenue is dismissed. The third issue raised by the Revenue in Ground No. 3 is that the Ld. CIT (A) erred in reducing the addition made by AO/TPO for Rs. 9.18 crores to Rs. 1.79 crores on account of royalty payment of Rs. 1,46,67,000/- and margin of DTA unit of Rs. 7,71,00,000/-. 12. The AO during assessment proceeding observed that assessee has entered into the various international transaction with its associated enterpr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 020866 243644865 876200928 12.1 The assessee also furnished vide letter dated 30-10-2006 segments wise operating margin of its Business in respect of its manufacturing ( DTA EOU) and distribution segments as detailed under: DTA EOU Total manufacturing Trading Total Manufacturing Trading OP/Net sales (%) 6.97 35.83 11.32 9.29 11.05 OP=PBIT 3) However, the assessee further revised its and comparables PLI vide letter dated 9-11-2006. According to this letter, the assessee determined its PLI at 13% and the comparable PLI at 9.05% by using the TNMM method. The necessary details relevant to the determination of ALP stand as under: Assessee selected itself as a tested party, Used TNMM for ALP Worked out its PLI @13%(at entity level ) as PBIT on net sales. Worked out PLI of comparable @9.05%. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2/2006 replied as under:- Regarding the addition of Rs. 7,71,00,000/- TPO ought to have accepted the basis and working of operating profit margin (for short OPM) as submitted in the letter dated 3010-2006 and 9-11-2006. TPO has bifurcated the profit and loss account into DTA and EOU unit separately and compared the OPM of the comparable companies as a whole with OPM of DTA units. TPO ought to have made a comparison at Company level without bifurcating the business in segment wise. TPO has calculated PBIT as against the PBDT. TPO has excluded two companies and added one new company in a comparable list of companies without giving the opportunity. PBIT of it (assesses) is 13% as computed vide its letter dated 9.11.2006 while TPO computed at 10.03% without giving the opportunity. Regarding the addition of Rs. 1,12,41,715/- for royalty for EOU division: The technology keeps on regularly updating which requires a cost in such up-gradation. Therefore it cannot be assumed that the AE has recovered the cost of the technology incurred by it in the earlier years. Thus the technology cost cannot be assumed as nil. The adjustment on account of roy ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... PO was not correct to exclude the same from working of comparable margins. Further, regarding the inclusion of MBL, it is submitted that MBL is not comparable one since out of total sales of MBL only 11.57% belong to sales of bearing while 44% belong to sales of bushes. Without prejudice to its claims as stated above that it has further made a reference to the order of the Ld.CIT (A)-111, Baroda for AY 2002-03 in its own case who held that profit margin cannot be applied to the entire sales of DTA unit and profit margin should be applied only to the transaction with AE. The assessee further submitted that if the same is followed, the addition would work out to Rs. 81,00,848/(21,95,35,197/- *3.69%) only as against the addition of Rs. 7,71,00,000/-. 13.2 The Ld. CIT (A) after considering the submission made by assessee held that difference of profit margin of 3.69% (10.66-6.97) should be applied in respect of the transaction with the AE only. Accordingly the Ld. CIT-A directed the AO to re-work the disallowance on this basis and check the arithmetical accuracy of the appellant s submission. Being aggrieved by the order of Ld.CIT (A), Revenue and the assessee are in ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... us submitted as under: Assessee ground No. 5 CIT(A) erred in partially confirming the adjustment proposed by TPO u/s. 92C and alternatively u/s.42A(2) in respect of royalty and total adjustment of Rs. 179 lakh. CIT(A) erred in holding that only royalty and FTS paid at 1.5% of sales value may be treated as arm s length price. The TPO/AO erred in rejecting the Report in form no. 3CEB. The TPO and AO erred in computing ALP on a basis different than that adopted by the appellant company despite the fact that the ALP had been correctly computed and certificate of CA obtained. The CIT(A) erred in holding that royalty and FTS paid to the extent of only 1.5% of sales may be treated as ALP thus confirming addition to the extent of Rs. 98.42 lakh. The TPO and AO erred in determining the comparable margin at 10.66% instead of 6.97 worked out by Appellant. CIT(A) erred in confirming action of TPO/AO in separating profits of DTA and EOU and comparing profits of DTA on account of lower profits acce3pting comparable margin at 10.66% instead of 6.97%. CIT(A) erred in confirming allocation of expenses between DTA and EOU on the basis of turnover and not accepting allocation m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee is reproduced as under: Finding of the ITAT in Assessee s appeal ITA No. 793/AHD/2006 in respect of adjustment in DTA segment 28.3. We have considered the rival contentions of the respective representative parties. We find force into the contention of the ld.counsel for the assessee that the Artificial Bifurcation of DTA and EOU is de hors the provisions of Law, DTA Segment has no exports but comparable companies has exports and incorrect computation by the ld.CIT(A). It is pointed out by the ld. counsel for the assessee that it can be seen that the figure of Rs. 8,43,42,316/- is arrived at by the following method:- a. International Transactions in the nature of Revenue Expenses debited to the Profit and Loss Account (other than Royalty) of Rs. 4,01,14,355 (Rs. 8,88,38,750 minus 4,87,24,395 of Royalty). b. Added to above, the Royalty of the DTA Segment of Rs. 4,87,24,395 giving aggregate of Rs. 8,88,38,750. c. Added to above, the International Transaction in the nature of Revenue Expenditure CREDITED to at the P L Account of Rs. 74,03,728. d. Added to above, the International Transaction in the nature of capital Goods, part of the Balance Sheet ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eard to both the parties. Thus, ground No.6 is allowed for statistical purposes. Finding of the ITAT in Assessee s appeal ITA No. 793/AHD/2006 in respect of adjustment in Royalty segment 29. Coming to ground No.7, we have heard the parties and gone through the written submissions. We find that the ld.CIT(A) in its order has held that royalty @ 1.5% only represent reasonable royalty. This finding is on the basis of the appellate order pertaining to AY 2001-02. It is also held that the benchmarking of royalty is to be done for EOU as well as DTA. The grievance of the assessee is that the ld.CIT(A) erred in relying upon the rates of royalty for the controlled transaction of SKF. The contention of the assessee is that the fundamental principle of CUP is that the comparable transaction has to be uncontrolled Transaction , meaning thereby that it has to be a transaction between two parties who are not related to each other. SKF transaction is not eligible to be treated as CUP as it is with related party. The another contention of the assessee is that the TPO and ld.CIT(A) has relied upon the rates of royalty paid by the assessee during the earlier years. The contention is tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nue are dismissed. The interconnected issue raised by the Revenue in ground no. 4, 5 and 6 is regarding the error committed by the ld. CIT-A as detailed below: Entire depreciation of Rs. 2,56,519/- on the residential quarters allocated in the computation of income of DTA units Entire depreciation of Rs. 34,22,521/- on data processing machines allocated in the computation of income of DTA units. Entire advertisement expenses of Rs. 2,06,78,311/- allocated in the computation of income of DTA units. In other words, all the grounds of appeal relate to the apportionment of expenses between DTA and EOU units of the assessee. 17. There were certain common expenses incurred amounting to Rs. 4,60,20,828.00 for its DTA and EOU unit, but the assessee charged all of them towards DTA unit only. However, the AO being dissatisfied with the working of the assessee, proposed to allocate such expenses in the manner as detailed below: Total Amount DTA EOU 1. Depr. On Residential Building 256,519 222,675 33, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on of the assessee by observing as under: a. The assessee has not been able to adduce any evidence to substantiate its claim that the residential quarters were used exclusively by the employee of DTA unit only. Therefore, the depreciation of Rs. 33,844/- out of total depreciation of Rs. 2,56,519/- was allocated to EOU unit and accordingly the remaining amount was added to total the income of the assessee. b. The data processing machines work as network systems to connect all the offices/ units for coordinating various functions of DTA and EOU unit. Therefore the segregation of its use between DTA and EOU unit is not possible. Therefore the depreciation of Rs. 4,51,547/-out of total depreciation of Rs. 34,22,521/- is allocated to EOU unit. Accordingly the same was added to total income of the assessee. c. Regarding the use of the car, the assessee failed to furnish any evidence by way of logbook or any other record to substantiate that the CAR was used exclusively for DTA unit. Moreover, the cars in question are used by the chairman and managing director who are equally responsible for the DTA unit and EOU unit. Therefore depreciation of Rs. 2,43,403/-out of total depreciat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ta processing machines and expenditure on advertisement expenses in my order at Para 28 for A.Y 2003-04. Under the circumstances, in this year also the action of the Assessing Officer with regard to the apportionment of expenses in respect of these three items is cancelled. However, it is seen that the action of the Assessing Officer with regard to the depreciation on motor car had been confirmed. The facts remaining the same, the action of the Assessing Officer in this year is also confirmed. As regards the depreciation of SAP costs, it is observed that the appellant has not brought any material on record to show that the expenditure incurred in this behalf relate only to the activities of the DTA unit and does not relate to the activities of EOU unit. It is observed that SAP R-3 is applied equally to the maintenance of accounts and records of both the DTA and the WOU. Similarly, it has not been shown that the renovation of building is only relating to the DTA building. Under the circumstances, it cannot be said that the expenditure relates only to the DTA unit. Therefore, the re-apportionment of expenditure as done by the Assessing Officer in respect of two claims of expend ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... i. Allocation of depreciation on motor car 20.2 Both the parties relied on the order of authorities below as favorable to them. 21. We have heard the rival contentions and perused the materials available on record. At the outset, we find that in the identical facts and circumstances in the own case of the assessee (supra), the ITAT has deleted / confirmed the addition made by the AO. The relevant extract of the order is reproduced as under: Regarding the deletion of the additions (depreciation on data processing machine and allocation of advertisement expenses) 14. We have heard the rival contentions. We find that there is nothing on record to show that the DTA processing machines have actually been used for the EOU unit We also find merit in the contention of the learned consul that the assessee was not required to market its product to the EOU unit as the entire production was sold to F AG Germany which was responsible for the marketing and selling of the product in foreign markets. In view of the above facts and taking into consideration the detailed finding of the learned Commissioner of Income tax appeal we do not find any reason to interfere in the finding of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt view of the matter and if there was no change it was in support of the assessee we do not think the question should have been reopened and contrary to what had been decided by the Commissioner in the earlier proceedings, a different and contradictory stand should have been taken. We are, therefore, of the view that these appeals should be allowed and the question should be answered in the affirmative, namely, that the Tribunal was justified in holding that the income derived by the Radhasoami Satsang was entitled to exemption under sections 11 and 12. 21.3 In view of the above, we hold that there cannot be any allocation of the depreciation claimed by the assessee in respect of its residential quarters towards the DTA unit. Now coming to fresh issue of apportionment of depreciation on SAP R3 cost and depreciation on renovation of building. Regarding the allocation of the depreciation on SAP R3 expenses 21.4 At the outset we note that the SAP R3 expenses have been treated as revenue expenditure by us vide paragraph no. 73 of this order. Thus the question of allocating the depreciation on SAP R3 does not arise. 21.5 However, it is important to note that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd No. 7 is interconnected with the issue raised by the Revenue as discussed above. Therefore we have clubbed them together for the sake of convenience. The issue raised by the assessee in ground No. 7 in ITA 80/AHD/2008 is reproduced as under: 7. The learned CIT(A) erred in fact and in law in confirming action of the Assessing Officer in reworking deduction u/s.80HHC of the Income Tax Act, 1961 by making various adjustments to the claim of the appellant. a. The learned CIT(A) erred in fact and in law in confirming action of the AO in reducing the following amounts from the profits of business for the purpose of computing deduction u/s.80HHC of the Act on the ground that they do not constitute business income. Sr.No. Nature of Income Amount (Rs.in lacs) a) Service Income 248.00 b) Income from Investments 14.00 c) Income from UTI 34.00 d) Write Back of Provisions 64.00 e) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Octroi refund 39,00,000/- Reversal of provision 19,92,966/- GEB deposit 6,68,412/- Others 17,09,574/- Total 7,36,16,094/- Aggrieved, assessee preferred an appeal before the Ld.CIT (A). 23. The assessee before the Ld.CIT (A) submitted as under: Note : the finding of the CIT-A ITAT has been given for all the items listed above in subsequent paragraphs together for the sake of convenience. In relation to write back of credit balance of creditors/debtors for Rs. 25,51,856/- 24. The assessee before the CIT-A claimed that the deduction is allowable under section 80HHC of the Act on the amount written back as it is arising in the connections of business. The assessee in support of his claim relied on the Judgment of ITAT Mumbai in case of Extrusion Process (P) Ltd. reported in 106 ITD 336. CIT-A order 24.1 The Ld.CIT (A) regarding the writing back of old credit balance of Rs. 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r the head Profits gains of business or profession . In the present case, the interest income from customers and sales tax set off have been computed and assessed under the head Profits gains of business or profession as part of the operational income and not under the head Income from other sources . Therefore, the said income could not be deducted from the business profits while computing the deduction under section 80HHC of the Income-tax Act. The decisions relied upon by the Tribunal have been distinguished in the case of Bangalore Clothing Co. (supra). In the case of Bangalore Clothing Co. (supra), it is held that the Assessing Officer must ascertain the nature of receipt in each case independently. Interest income may or may not be out of business activity. If it is not part of operational business income, then, the Assessing Officer would have been justified in excluding the same for the purpose of deduction under section 80HHC of the Act. However, in the present case, the Assessing Officer has accepted that the interest income received from customers as well as sales tax set off are assessable under the head Profits gains of business or profession . Therefore, ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e included in such profit. Any other receipt of similar nature means receipt similar to brokerage, commission, interest, rent, charges. The write back provided under section 41(1) for the purpose of nullifying the effect of earlier deductions claimed towards central excise liability is not a receipt similar to brokerage, commission, interest or rent charges. Therefore Explanation (baa ) has no application either. 10. On the other hand, we emphatically find that any amount of profit construed under section 41(1) is nothing but business profits in its texture, colourand character. Therefore, the Assessing Officer is not justified in excluding the amount of Rs. 1,71,35,268 in computing the business profits for the purpose of section 80HHC. We direct the Assessing Officer to accept the computation of deduction under section 80HHC rendered by the assessee by including the income of Rs. 1,71,35,268. 26.2 In view of the above, we do not find any reason to interfere in the order of the Ld.CIT-A. Hence the ground of appeal of the Revenue is dismissed. In relation to Gain on forex Rs. 1,16,29,805/- 27. The assessee submitted that the income from the foreign currency fluctuat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd inspection charges of Rs. 43,28,111/-. Consultancy fees were received from FAG Germany for providing consultancy service on marketing, industrial commercial information of the product of FAG Germany in India. The service includes providing customer education by arranging seminars, conferences, exhibition, and distribution of technical information in respect of product of FAG Germany. ii. Regarding the inspection charges, the company deputes the engineers to certify the genuineness of FAG bearings. The company charge fees for the said service as inspection charges. This income is purely related to business of the assessee. The assessee in support of his claim relied on the Judgment of Bombay High Court in the case of CIT v/s International Data Management Ltd. Reported in 261 ITR 177. iii. Income from sale of scrap is directly related to the manufacturing activity of the appellant because it is generated due to the manufacturing process of the assessee. Similarly appellant has relied on the judgment of ITAT (Chennai Bench) in the case of JCIT v/s Kadri Mills (CBE) Ltd. reported in 76 TTJ 38. iv. Regarding the business income of loading and unloading charges, the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ss of exports. (ii) In the specific context of clause (baa) of the Explanation to section 80HHC, while determining the profits of the business , the Assessing Officer has to undertake a twostep exercise in the following sequence. He has to first compute the profits of the business under the head Profits and gains of business or profession. In other words, he will have to compute business profits, in terms of the Act, by applying the provisions of sections 28 to 44. (iii) In arriving at profits of the business by the above method, the Assessing Officer will exclude all such incomes which partake the character of income from other sources which in any event are treated under sections 56 and 57 and are therefore not to be reckoned for the purposes of section 80HHC. The Assessing Officer will apply the law as explained in the judgments of the Kerala High Court which have been affirmed by the Supreme Court. (iv) Where surplus funds are parked with the bank and interest is earned thereon, it can only be categorised as income from other sources. This receipt merits separate treatment under section 56 which is outside the ring of profits and gains from business and professi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is distinguishable from the facts of the present case. Therefore we are reluctant to place our reliance on the said case law. Hence, the ground of appeal of the assessee is partly allowed. Sale of scrap and insurance claim and handling charges 33.2 We have heard the rival contentions of both the parties and perused the materials available on record. Admittedly the impugned income is arising in the course of the business of the assessee. We also note that the AO in his assessment order has also not treated the impugned income as income from other sources. Therefore the same cannot be treated as income from other sources and accordingly the same is eligible for deduction under section 80HHC of the Act. In holding so, we find support and guidance from the judgment of Hon ble Bombay High Court in the case ofAlfa Laval India Ltd Vs. DCIT reported in 133 taxman 740 wherein the issue was decided in favour of the assessee. The relevant extract has already been reproduced in the preceding paragraph. 33.3 In addition to the above, we also note that the ITAT (Chennai Bench) in the case of JCIT v/s Kadri Mills (CBE) Ltd. reported in 76 TTJ 38 has also held that the assessee is e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ome. However, the assessee is entitled to the deduction for the expenses incurred by it against such income. Therefore we direct the AO to reduce the expenses incurred by the assessee from the interest income as discussed above. Thus the AO will reduce 90% of the balanced interest income for working out the profit of the business eligible for deduction under section 80 HHC of the Act. As such the AO will consider only the net income of the assessee before reducing 90% of the interest income while working out the deduction under section 80HHC of the Act. In this regard, we place our reliance on the order of the Hon ble Delhi HC in case of CIT Vs. Shri Ram Honda power equip reported in 207 CTR 689. The relevant extract of the judgment has been reproduced in the preceding paragraph. 33.6 In view of the above the ground of appeal of the assessee is partly allowed. In relation to Income from investment and income from UTI 34. The assessee before the Ld. CIT-A submitted that only net amount might be considered for working out the deduction under section 80HHC of the Act by relying on the Judgment of Delhi High Court in the case of CIT v/s Shri Ram Honda Power Equipment repo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he profit to work out the deduction under section 80HHC of the Act. The assessee similarly submitted regarding the Insurance claim that it is not income rather it represents the reimbursement of expenses without no profit element. Therefore, there is no need to exclude the same from the profit to workout the deduction under section 80HHC of the Act. The assessee relied on various judgments including the order of ITAT Ahmedabad in case of Gujarat Alkalies chemicals ltd reported in 77 TTJ 245 and also placed reliance on the judgment of Kadri mills (CBE) Ltd. Vs. reported in 76 TTJ 38. CIT-A order 37.1 The Ld.CIT (A) regarding the freight and insurance claim observed that these receipts are in the nature of income, but the same cannot be said to be business income. Therefore the Ld. CIT-A confirmed the action of the AO. ITAT order Being aggrieved by the order of the Ld. CIT (A), the assessee is in appeal before us. 38. The Ld. AR before us reiterated the submission as made before the Ld. CIT-A. On the other hand the Ld. DR relied on the order of authorities below. 39. We have heard the rival contentions of both the parties and perused the materials availa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fit will be available to the assessees whose assessments have already been concluded. In other words, in this type of substantive amendment, retrospective operation can be given onlyif it is for the benefit of the assessee but not in a case where it affects even a fewer section of the assessees. 27. We, accordingly, quash the impugned amendment only to this extent that the operation of the said section could be given effect from the date of amendment and not in respect of earlier assessment years of the assessees whose export turnover is above Rs. 10 crore. In other words, the retrospective amendment should not be detrimental to any of the assessees. 42.1 In view of the above, we are inclined to reverse the order of the Ld. CIT-A. Accordingly, we direct the AO to consider the aforesaid amount for working out the deduction under section 80HHC of the Act. Hence the ground of appeal of the assessee is allowed. In relation to a discount of early payment of suppliers bill of Rs. 12,39,571/- 43. The assessee submitted before the Ld.CIT (A) that the assessee company received a discount from the supplier on account of early payment. Such early payment would lead to a redu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 81.92 which has been deducted while computing profits of business. It has also been noticed by the Tribunal that interest income to the tune of Rs. 68,534 directly related to the export business as such excess interest earned was credited by the bank on early payment of foreign bills of exchange. These findings are findings of fact. The Assessing Officer also while reducing the profit of business for the purpose of computing income of the assessee has not treated the receipt of interest differently. It clearly goes to show that while computing the taxable income of the assessee he has taken the basis as profit shown as profit and loss account which included deduction on account of outgoing of interest as noticed above. No separate treatment has been given by the Assessing Officer in considering the income from interest receipt. Neither has he adjusted the profits shown in the profit and loss account by making addition of Rs. 1,27,000 as income from interest to be treated separately nor has such income been computed under the head of income from any other sources. Under these circumstances, there is no reason to reduce profit of business as computed under the head of profits and gai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as income from other sources. Therefore the same cannot be treated as income from other sources and accordingly the same is eligible for deduction under section 80HHC of the Act. In holding so, we find support and guidance from the judgment of Hon ble Bombay High Court in the case of Alfa Laval India Ltd Vs. DCIT reported in 133 taxman 740. The relevant finding of the judgment has already been reproduced in the preceding paragraphs. 49.1 In view of the above, we are inclined to reverse the order of the Ld.CIT (A). Accordingly we direct the AO to consider the aforesaid amount for working out the deduction under section 80HHC of the Act. Hence the ground of appeal of the assessee is allowed. In relation to other Rs. 17,09,574/- 50. The assessee before the Ld. CIT-A submitted that these are small amount accruing during the normal course of the business. Therefore the same should be considered as business income. 51. At the outset, we note that the Ld. AR before us has not advanced any argument suggesting that income is arising in the course of the business. Thus in the absence of any information contrary to the finding of the Ld.CIT (A), we are inclined to uphold the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ract of the order is reproduced as under: 20. We have heard the rival contentions. We have also perused the judicial pronouncement referred by the learned DR in the case of TATA BP SOLAR INDIA limited versus Additional Commissioner of income tax of ITA No. 3381 Mumbai/2009/A.Y. 2004-05. We find that in this case it was held that export turnover of the EOU which was enjoying deduction under section 10B was to be included in the total turnover but not in the computation of deduction under section 80HHC(3)(a).The relevant part of this judicial pronouncement is reproduced as under:- We have already seen the provisions of s. 80HHC(3)(a) of the Act, which refers to profits derived from export of goods manufactured then the profit derived from such export shall be the amount which bears to the profits of the business the same proportion as the export turnover in respect of such goods bears to the total turnover of the business carried on by the assessee. The expression such before the expression export turnover only means that the export turnover referred to is the turnover of the goods manufactured whose profits are being computed under s. 80HHC(3)(a). We cannot therefore ignor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2). Baroda ( the AO ) in treating expenses in the nature of repairs to building amounting to Rs. 10,35,052 as capital expenditure instead of revenue expenditure as claimed by the appellant. 2. The learned CIT(A) erred in fact and in law in confirming action of the AO in making addition of Rs. 67.07,658 by disallowing expenditure on scientific research claimed u/s, 35(1) of the Act despite the fact that the appellant had furnished complete details for substantiating the claim. 3. The learned CIT(A) erred in fact and in law in confirming action of the AO in considering SAP R/3 running cost amounting to Rs, 3,29,44,739 as capital expenditure, .. 4. The learned CIT(A) erred in fact and in law in confirming the action of the AO in including an amount of Rs. 1,58.86.554 in the total income of the appellant on the ground that the valuation of the closing stock is required to be done by including therein the unutilized cenvat credit, despite the fact that the sum was already shcmn as current asset and not claimed as deduction. The learned AO also erred in fact and in law in not valuing the opening stock tor the year under consideration by the same method by including therein th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t is required to be made. Particulars Total Amount (Rs.) Allocated to (Rs.) Allocated to EOU (Rs.) Depreciation on Motor Car 18,44.880 16,01,477 2,43.403 Depreciation on Software Upgradation / Development of Addl, Programme of SAP R/3 treated as capital expenditure 1.97.66.844 1.71.58,924 26,07.920 Depreciation on Repairs to Building 1.03.505 89,850 13.655 TOTAL 2,17,15,229 1,88,50,251 28,64,978 7. The learned CIT(A) erred in fact and in law in confirming action of the AO in revoking deduction u/s.80HHC of the Income Tax Act, 1961 by making various adjustment to the claim of the appellant. a. The learned CIT(A) erred in fact and in law in confirming action of the AO in reducing the following amounts from the profits of business for the purpose of computing deduction u/s.80HHC of the Act on the ground that they do no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... awing interest u/s.244A of the Income Tax Act, 1961. 12. The learned CIT(A) erred in fact and in law in forming the initiation of penalty proceedings u/s.271(1)(c) of the Act. The first issue raised by the Assessee in ground no. 1 is that the Ld.CIT (A) erred in fact and law treating repairs to building amounting to Rs. 10,35,052/- as capital expenditure instead of revenue expenditure as claimed it. 59. The assessee has claimed building renovation and modernization expenses of Rs. 10,35,052/- as revenue expenses. On question by the AO, Assessee submitted that the expenses incurred for replacing the worn out and dilapidated portions of the building, entire process of renovation and modernization, the size of the building remained same, its use continued to be the same as office. There are only cosmetics changes which are not in the nature of new construction or increase in the size of capacity. 59.1 It is also submitted by the assessee that value of Gross block of building of Rs. 1779 lacs. However the renovation and modernization expenses amounting to Rs. 10.35 lacs only which is only 0.6% of the total value of the assets. 59.2 Further assessee submitted that during ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... facilitating the assessee's trading operations or enabling the management and conduct of the assessee's business to be carried on more efficiently or more profitably while leaving the fixed capital untouched, the expenditure would be on revenue account, even though the advantage may endure for an indefinite future. The test of enduring benefit is, therefore, not a certain or conclusive test and it cannot be applied blindly and mechanically without regard to the particular facts and circumstances of a given case. 63.1 Regarding this we also find support and guidance from the judgment of Hon ble Gujarat High Court in the case of CIT Vs. Bharat Suryodaya Mills Co. Ltd. reported in 202 ITR 942 wherein it was held as under: An old wall was required to be rebuilt because of demolition. Thus, the expenditure which was incurred was more in the nature of repairs rather than creation of a new capital asset. A wall was required to be built by the assessee as a necessity for running his business. The Tribunal was, therefore, right in holding that the expenditure was allowable as revenue expenditure. 63.2 We also note that, the case law relied upon by the AO i.e. Ballimal Na ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been manufactured by it. 64.2 In view of the above, the AO concluded that the above stated expenditure is not admissible under section 35(1) of the Act and accordingly disallowed the same. The same was added to the total income of the assessee. Aggrieved assessee preferred an appeal before the Ld.CIT (A). 65. The assessee before the Ld.CIT (A) has submitted the breakup of R D expenditure as detailed under: i) Taly surf PG1 machine with Ultra Software Rs. 19.86 lacs ii) Rdial clearance measuring instrument Rs. 17.58 lacs iii) FedralAitGuage Micron Rs. 7.40 lacs iv) Spares/Parts/other item Rs. 22.23 lacs Rs. 67.07 lacs 65.1 The assessee also claimed to have acquired these machineries exclusively for R D division and it has developed new variety of bearing namely Taper roller bearings . 65.2 The above machines are used to check the quality of the component used in the manufactured product. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... scientific research. 35. (1) In respect of expenditure on scientific research, the following deductions shall be allowed XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX (iv) in respect of any expenditure of a capital nature on scientific research related to the business carried on by the assessee, such deduction as may be admissible under the provisions of sub-section (2) 68.1 A plain reading of the provision of section 35(1)(iv) reveals that the capital expenses incurred for the purpose of scientific research can be claimed as deduction. Further scientific research is defined u/s 43(4) of the Act. The relevant extract as read under: Definitions of certain terms relevant to income from profits and gains of business or profession. 43. In sections 28 to 41 and in this section, unless the context otherwise requires 75 XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX 4) 97 [(i) scientific research means any activities for the extension of knowledge in the fields of natural or applied science including agriculture, animal husbandry or fisheries;] (ii) references to expenditure incurred on scien ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ments were helpful in conducting such scientific research. 68.4 As such we note that, the Ld.AR for the assessee before us has not brought any iota of evidence suggesting that the assessee has carried out any scientific research activity. Thus in the absence of sufficient documentary evidence, we do not find any reason to disturb the finding of the Ld.CIT (A). Hence the ground of appeal of the assessee is dismissed. The third issue raised by the Assessee in ground no 3 is that the Ld.CIT (A) erred in treating SAP R/3 running cost amounting to Rs. 3,29,44,739/- as capital expenditure. 69. The assessee in the year under consideration claimed an expenditure of Rs. 3,29,44,739/- towards license user fees and maintenance fee of SAP R/3. On question by the AO the assessee submitted that it has entered into contract with M/S FAG, Germany for organizing services from IBM, Germany for customization and implementation of SAP R/3 software. 69.1 According to above stated contract the assessee company has made payment for license user fees and maintenance fee every month after the deduction of TDS. Further, Assessee submitted that the above stated expenditure has been allowed as re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. ACIT (2007) 108 TTJ (Bang) 531 the Co-ordinate Bench of Tribunal has held that expenditure on purchase of application software is allowable as revenue expenditure as it is an aid in manufacturing process rather than the tool and though there is an enduring benefit there is no acquisition of capital asset. In case of GE Capital Services India Ltd. 106 TTJ 65 (Del), the Co-ordinate Bench has held that software being the filed of vast change technology which needs update and upgradation regularly, expenditure on software is allowable as Revenue expenditure. Before us, Revenue has not brought on record any contrary binding decision in its support. We, therefore following the aforesaid decisions, are of the view that the expenditure incurred by the assessee has to be allowed as revenue expenditure. We direct accordingly. Thus, this ground of assessee is allowed. Relevant finding of the ITAT in ITA No. 817/AHD/2006 59. Before us, both the parties submitted that the ground nos.II to IV raised in Revenue s appeal are identical to the grounds raised in assessee s appeal in ITA No.793/Ahd/2006. We, therefore, for the similar reasons stated while deciding the assessee s appeal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 75.1 The CIT (A) observed that assessee has not denied the applicability of the provisions of section 145A of the Act. Thus it is required to follow the inclusive method of accounting for CENVAT. Accordingly the Ld. CIT-A confirmed the order of the AO by observing that the CENVAT amount should be included in the value of closing stock but this year s opening stock need not be disturbed. However, the Ld. CIT-A further directed to allow the deduction for the amount duty as per the provisions of section 43B of the Act. Thus the Ld. CIT-A partly allowed the ground of appeal of the assessee. Being aggrieved by the order of Ld.CIT (A), the assessee is in appeal before us. 76. The Ld. AR before us submitted that there was no impact on the income of the assessee for not using the exclusive method of accounting. Therefore there is no addition on account of CENVAT is warranted. 77. The ld. AR accordingly claimed if the addition is made on the closing stock on account of CENVAT Credit, then the excise paid on the purchase should also be added in the purchase. 78. The Ld. DR before us relied on the order of the authorities below. 79. We have heard the rival contentions and per ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e the addition made by him. Hence, the ground of appeal of the assessee is allowed. The fifth issue raised by the assessee in ground no 5 is that the Ld.CIT (A) erred in fact and law confirming the adjustment to the income of appellant in respect of royalty amounting to Rs. 98,42,600/- and in respect of other international transaction amount to Rs. 81, 00,848/- 80. An identical issue has been considered and decided by us in Revenue's appeal vide ITA No. 4565/AHD/2007 in ground no. 3 vide para no 16 of this order which has been decided by us for statistical purposes. Please refer the relevant Para for our detailed discussion therein, we direct accordingly. Hence Ground no. 5 of the assessee is allowed for statistical purposes. The sixth issue raised by the Assessee in ground no 6 is that the Ld.CIT (A) erred in confirming the action of the AO to allocate certain expenses between EOU and DTA in ratio of turnover. 81. An identical issue has been considered and decided by us in Revenue's appeal vide ITA No. 4565/Ahd/2007 in ground no. 4 to 6 vide Para No. 21 of this order which has been decided by us in favour of the assessee in part. Please refer the relevant Para ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessment order. Therefore, opening cenvat credit balance of Rs. 1,55,96,554/- already allowed to the assessee in the A.Y. 2004-05 was correctly added and allowing the said amount of Rs. 1,55,86,554/- again during the year will lead to double deduction. 3. On the facts and in the circumstances of the case and in law, the Ld.CIT(A) erred in deleting the disallowance u/s.40A(9) on account of training cost of employees, without appreciating that section 40A(9) prohibits deduction in respect of contribution to any fund or trust etc. for any purpose other than that provided in section 36(1)(iv) and (v) and the impugned contribution was not covered by section 36(1)(iv) and (v). 4. On the facts and in the circumstances of the case and in law, the Ld.CIT(A) erred in allowing the4 entire depreciation of Rs. 5,68,979/- on data processing machines in the computation of income of the DTA Unit, without appreciating that the assessee was using these machines along with ASP R3 software for controlling the functions of its entire organization comprising DTA Unit and tax free EOU unit and hence depreciation on all the assets used for office work and establishment work including these data ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s order in favour of the assessee. For detailed discussion please refer the relevant Para, we direct accordingly. Hence, Ground no. 2 of the Revenue is dismissed. The issue raised by the Revenue in ground no 3 is that the Ld.CIT (A) erred in deleting the addition made by the AO for Rs. 5,78,912/- u/s 40A(9) of the Act, on account of training cost of employees. 86. An identical issue has been considered and decided by us in Revenue's appeal vide ITA No 4565/Ahd/2007 in ground no. 1 Para no. 6 of this order against the assessee. For detailed discussion please refer the relevant Para therein, we direct accordingly. Hence Ground no. 3 of the Revenue is dismissed. The issue raised by the Revenue in ground No. 4 and 5 is that the Ld.CIT (A) erred in deletion the addition made by the assessee on account of the allocation of depreciation on data processing machine and advertisement expenses Rs. 5,68,979.00 and Rs. 21,18,782.00 to the EOU unit. 87. An identical issue has been considered and decided by us in Revenue's appeal vide ITA no. 4565/Ahd/2007 in ground no. 4, 5 6 Para no 21 of this order in favour of the assessee. For the detailed discussion please refer the re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ade. Particulars Total Amount (Rs.) Allocated to DTA (Rs.) Allocated to EOU (Rs.) Depreciation on Motor Car 14,75,904 13,08,046 1,67,853 Depreciation on Software Upgradation/Development of Addl.Programme of SAP R/3 treated as capital expenditure 1,70,86,096 1,51,42,859 19,43,237 Total . 1,85,62,000 1,64,50,905 21,11,090 4. The learned CIT(A) erred in fact and in law in confirming the action of the AO in disallowing expenses incurred towards repairs and maintenance amounting to Rs. 3,00,745/- on the ground that it is related to purchase of computer and software development charges and therefore capital in nature. 5. The learned CIT(A) erred in fact and in law in confirming the action of the AO in making adjustment u/s.92C r.w.s.92(1) in respect of royalty and lump sum know how fees paid amounting to Rs. 485.41 lacs on the ground that the payment of royalty was justified to the extent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r consideration has incurred certain expenses on the purchase of the computer and the software amounting to Rs. 2,30,557.00 and Rs. 70,188.00 respectively. The assessee treated these expenses as revenue in nature. However, the AO was of the view that the impugned expenditures were incurred on the acquisition of the new assets. Therefore the same were treated as capital in nature. Accordingly the AO disallowed the claim of the assessee and added the sum of Rs. 3,00,745./- to the total income of the assessee. 94. Aggrieved assessee preferred an appeal to the Ld.CIT-A who confirmed the order of the AO by observing as under: 9.2. I have considered the submissions of the ld.AR and the facts of the case. The details of the impugned expenses have been tabulated by the AO at page 14 of the assessment order. On examination of the same it is seen that the expenses involved replacement of parts like filter, driver, pressure regulator, air meter, etc. These are clearly items of replacement of worn out parts. However it is seen that the expenditure also included purchase of computer (Rs.2,30,557/-) and software development charges (Rs.26,448/- and Rs. 43,740/-). These are capital in natu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iction were not satisfied. 2. The learned CIT erred in fact and in law in directing the AO to allow depreciation @25% instead of 60% on computer software as done by the Assessing Officer in assessment u/s.143(3) of the Act. The only issue raised by the assessee is that Ld. CIT erred in holding that the order passes by the AO u/s 143(3) of the Act, is erroneous and prejudicial to the interest of Revenue. 100. The Ld.CIT observed from para 4 of the assessment order that the Ld.AO treated the expenditure of license user fee and maintenance fees amounting to Rs. 2,84,76,826/- as capital expenditure for acquiring intangible assets covered u/s 32(1)(iii) of the act and allowed depreciation at the rate of 60%. Thus allowed depreciation of Rs. 1,70,86,096/- and remaining balance of Rs. 1,13,90,730/- disallowed and added to the income of the assessee. 100.1 The Ld.CIT (A) by following the earlier judgment for AY 2002-03 confirmed the addition to the extent of Rs, 2,08,32,699/- vide order dated 2703-2009, treating it as a capital expenditure for the purpose of acquiring the intangible assets i.e right to use and exploit a particular software program. As such the addition confirme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of incurring of expenditure for SAP on account of user licencee fee and on account of reimbursement is not in dispute. We find that Hon'ble Delhi High Court in case of CIT vs. Asahi India Safety Glass Ltd. (2011) 64 DTR (Del) 63 has concluded that the expenditure incurred by assessee on software is allowable as Revenue expenditure more so as the expenditure acquired by the assessee was an application software which enable it execute tasks in the field of accounting, purchases and inventory maintenance. In case of IBM India Ltd. vs. ACIT (2007) 108 TTJ (Bang) 531 the Co-ordinate Bench of Tribunal has held that expenditure on purchase of application software is allowable as revenue expenditure as it is an aid in manufacturing process rather than the tool and though there is an enduring benefit there is no acquisition of capital asset. In case of GE Capital Services India Ltd. 106 TTJ 65 (Del), the Co-ordinate Bench has held that software being the filed of vast change technology which needs update and upgradation regularly, expenditure on software is allowable as Revenue expenditure. Before us, Revenue has not brought on record any contrary binding decision in its support. We, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 81,22,220 6,805 5. Rolamentos FAG Ltd. 85,32,907 6 FAG Megyarooszag Kft.Hungary Purchase of Raw material 1,27,92,493 7 FAG Bearing Corpn.USA i) Export of Bearing/Tools 6,06,86,727 8 FAG China company Ltd. China Export of components 9,78,159 9 The Barden Corpn.UK Export of components Reimbursement of expenses 5,25,32,054 11,75,260 10 Schaeffler Group USA INC d/b/a USA i) Export of Bearing 48,201 11 FAG Bearings Ltd., Canada i) Purchase of Raw material 24,45,445 12 Schaeffler Portugal S.A. i) Purchase of Raw material 77,68,082 13 FAG Kugelfisher AG Co. HG), Germany i) Fees for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d by the ssessee objected the multiple year data used by the assessee 104.6 Further, TPO observed that the assessee during the year under consideration has paid Royalty of Rs. 990.34 lacs to FAG Kugle Fischer, Germany 104.7 The royalty has been paid on the basis of agreement as detailed under: Sr.No. Reference of Agreement Effective date Rate of Royalty 1. Agreement dated 12st December 2000 1st June 2000 upto 31st may-2005 3% on scheduled products and 5% on Non-scheduled products. Agreement dated 2t5h September 2005 1-06-2005 Agreement dated 16th February 2006 1-1-2006 This agreement was executed in view of merger of collaborator. The rates of royalty have remained same. 2. Agreement dated 24th June 2002 5th February 2002 5% on domestic sale and 8% on export sales. 3. Agreement dated 30th March-2000 9th May 2001 5 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee also submitted that it has paid Royalty on net sales after and therefore the comparables should also be compared on the basis of net sales. 104.15 Further assessee also objected the rejection of three agreements from the 11 agreements submitted by the assessee in Scheffer Group study. However the TPO rejected the contention of assessee, use of multiple year data by observing as under: As per Rule 10B of the Income Tax Rule for the benchmarking of an International transaction data of comparables should be used the data for the year in which transactions have took place. As per the OECD guidelines the multiple year data is considered to be used under special circumstance. 104.16 In view of above, the data for the year 2003-04 and 2004-5 used by the assessee for determining the ALP of the international transaction is rejected. 104.17 The TPO reject the TNMM method used by the assessee for determining the ALP by observing as under: The assessee not submitted any evidence to prove that the transactions which are aggregated by it are inter-linked and not possible to segregate it. The assessee has paid royalty on the basis of agreement but no clause in all ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the above draft order. 105. The assessee before the Ld. DRP submitted as under: Regarding segregation/aggregation of International transaction: 105.1 TPO admitted the TNMM method used by the assessee to all transaction other than the Royalty. The TPO segregated only Royalty transaction. The aggregation of all other transactions under the manufacturing segment was accepted by the TPO. Thus the action of the TPO is contradictory. Regarding the selection of most appropriate method: 105.2 The TPO has not recorded the reason for applying the CUP method as most appropriate method. Therefore there was no reason for rejecting the TNMM method as the most appropriate method. Regarding the alteration of comparable set: 105.3 No valid reason given by the TPO to reject the three agreements out of eleven agreements. If the criteria s selected by the TPO for rejection of the agreement is considered, then the other agreements bearing nos. 3998, 4082, and 4102 should also be rejected. However the TPO did not reject the same by reason of Royalty rate in these agreement are very low. In case the above agreements are rejected, then the average rate of royalty of re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Please refer the relevant Para for our detailed discussion therein, we direct accordingly. Hence Ground no. 1 of the assessee is allowed for statistical purposes. The second issue raised by the assessee is that the Ld. DRP erred in treating the running cost of SAP R/3 charges and up-gradation cost for Rs. 61,87,000.00 and 1,71,05,000.00 as capital expenditure and accordingly disallowed the same: 109. An identical issue has been considered and decided by us in Assessee's appeal vide ITA no. 80/Ahd/2008 in ground no. 3 Para no 73 of this order in favour of the assessee. For the detailed discussion please refer the relevant Para therein, we direct accordingly. Hence Ground no. 2 of the Assessee is allowed. The third issue raised by the assessee is that the Ld. DRP erred in treating the royalty expenses of Rs. 790.52 lacs as capital expenditure as well as not allowing depreciation on such expenses. 110. An identical issue has been considered and decided by us in Revenue's appeal vide ITA No. 4565/Ahd/2007 in ground No. 2 Para no. 11 of this order in favour of the assessee. For the detailed discussion please refer the relevant Para therein, we direct accordingly. H ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er in not allowing the variation of +/- 5% of international transactions as required by proviso to section 92C(2) of the Act. 1.5. The learned CIT(A) erred in fact and in law in confirming the action of the TPO and the Assessing Officer in determining the4 ALP of the transaction of Reimbursement of Insurance charges without applying any of the method prescribed under section 92C(1) of the Act. 2. The learned CIT(A) erred in fact and in law in confirming the action of the AO in making a disallowance of Rs. 50.53 lacs [gross value of expenditure] being SAP R/3 cost on the ground that the said expenses are upgradation charges and are capital in nature. 3. The learned CIT(A) erred in fact and in law in confirming the action of the Assessing Officer in treating expenses of Rs. 48,23,252 being repair to building as capital expenditure instead of revenue expenditure. 4. The learned CIT(A) erred in fact and in law in confirming the action of the Assessing Officer in charging interest u/s.234B and of the Income Tax Act, 1961. 5. The learned CIT(A) erred in fact and in law in confirming the action of the AO in charging interest u/s.234C and of the Income Tax Act, 1961. 6. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... issue are taken up now. There is no dispute that under the Indian Regulations (IRDA/RBI), Indian companies can neither make nor remit insurance premium to foreign insurance company. In fact, as admitted by the appellant, RBI has not allowed remittance of insurance premium in question by the appellant to its AEs. In a third party situation, no company could have been such insurance from the foreign insurer and there is no question of payment of similar insurance premium payment between independent parties, i.e. an Indian company to an insurer abroad. The ALP of the transaction was therefore, rightly determined at Rs. NIL by the TPO through CUP method though not expressly mentioned in TPO s order. Without prejudice, claim of expense of such insurance premium is not allowable in view of Explanation below section 37(1) of the Act as well. Grounds of appeal in respect of transfer pricing adjustment for insurance premium of Rs. 74,09,925/- are dismissed. Being aggrieved by the order of the Ld.CIT (A) the assessee is in appeal before us. 117. The Ld. AR before us submitted that impugned cost has been incurred in the course of the business at the ALP. Therefore the same should be al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nditure without appreciating the fact that the expenditure were for the purchase of new assets or replacement or for major renovation which gives enduring benefit to the assessee, and hence the expenditure is capital in nature in view of the parameters laid down in the case of Saravana Spinning Mills Pvt.Ltd. (2007) 293 ITR 2301 (SC). 3. The appellant craves leave to add to, amend or alter the above grounds as may be deemed necessary. Relief claimed in appeal It is prayed that the order of the CIT(Appeals) be set aside and that of the Assessing Officer be restored. The first issue raised by the Revenue is that the Ld. CIT-A erred in reducing the addition to Rs. 1,14,66,000.00 from 4,26,64,000.00 Rs. on account of upward adjustment made by the TPO for the royalty expenses. 123. At the outset, we note that the identical issue regarding the upward adjustment of the Royalty expenses of Rs. 1,14,66,000.00 has been decided by us in ITA 3400/Ahd/2010 vide Para no.108 and in the appeal of the assessee in ITA 1197/Ahd/2012 vide Para No. 115 of this order wherein we have restored the issue to the file of the ld. CIT-A for fresh adjudication. Respectfully following the same ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee towards the wear and tear expenses of the machineries. Accordingly we do not find any reason to disturb the finding of the Ld. CITA. Hence the ground of appeal of the Revenue is dismissed. In the result, the appeal of the Revenue is dismissed. Coming to Revenue s appeal in ITA No. 1941/AHD/2012 The Revenue has raised the following grounds of appeal: 1. On the facts and in the circumstances of the case and in law, the ld.CIT(Appeals) erred in changing the base for computing the percentage Royalty, which has resulted in reduction of the adjustment from ₹502.33 lacs as suggested by the Transfer Pricing Officer to ₹394.24 lacs. The ld.CIT(A) erred in reworking the adjustment by modifying the rate of Royalty directing it to be computed on Gross Sales basis and not on the Net Sales basis as computed by the assessee itself. The only issue raised by the Revenue is that the Ld. CIT-A erred in reducing the addition to Rs. 1,08,09,000.00 from 5,02,33,000.00 Rs. on account of adjustment made by the TPO for the royalty expenses. 128. At the outset, we note that the identical issue regarding the upward adjustment of the Royalty expenses of Rs. 1,08,0 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der section 92C(1) of the Act. 2. The learned CIT(A) erred in fact and in law in confirming the action of the AO in making a disallowance of Rs. 6.22 lacs [gross value of expenditure] being SAP R/3 cost on the ground that the said expenses are upgradation charges and are capital in nature. 3. The learned CIT(A) erred in fact and in law in confirming the action of the AO in treating expenses of Rs. 8,34,893/- being repair to building as capital expenditure instead of revenue expenditure. 4. The learned CIT(A) erred in fact and in law in confirming the action of the AO in charging interest u/s.234D and of the Income Tax Act, 1961. 5. The learned CIT(A) erred in fact and in law in confirming the action of the Assessing Officer in initiating penalty proceedings u/s.271(1(c) of the Income Tax Act, 1961. The first issue raised by the assessee is that the ld. CIT-A erred in making the following adjustments: 1. Making upward adjustment of Rs. 3,94,42,000.00 on account of royalty payment. 2. Reimbursement of Insurance Expenses of Rs. 92,63,039.00 Making upward adjustment of Rs. 3,94,42,000.00 on account of royalty payment. 129. At the outset, we note that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd circumstances of the case and law, the Ld.CIT(A) has erred in by deleting the entire adjustment of Rs. 375.03 Lakhs made by the TPO in determination of Arm s Length Price of International transaction on account of royalty payment and reimbursement of insurance charges without appreciating the findings of TPO on record and merit of the case. 2. On the facts and circumstances of the case and in law, the Ld.CIT(A) has erred in by rejecting TPO working on Arm s Length Principal on segregated transaction without going to the merit of the case. 3. On the facts and circumstances of the case and in law, the Ld.CIT(A) has erred in by accepting assessee contention on TNMM method for determining the ALP on payment of royalty and rejected unanimously CUP method applied by TPO which is the most appropriate method. 4. The appellant craves leave to add to, amend or alter the above grounds as may be deemed necessary Relief claimed in appeal It is prayed that the order of the CIT(Appeals) be set aside and that of the Assessing Officer be restored. The only effective issue raised by the Revenue is that the ld. CIT-A erred in deleting the addition of Rs. 2,60,77,400.00 on acc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n holding that section 145A is applicable and directing the AO to make a fresh assessment. 6. Your Appellant craves the right to add to or alter, amend, substitute, delete or modify all or any of the above grounds of appeal. 133. At the outset, we note that there was a delay in filing the appeal by the assessee for 673 days. At the time of hearing the ld. AR for the assessee has not furnished any plausible reason for the delay in filing the appeal. 133.1 Therefore, we are not inclined to condone the delay in the absence of any reason which prevented the assessee in filing the appeal. Hence we dismiss the appeal of the assessee. Coming to Assessee s appeal in ITA No. 799/AHD/2016 The assessee has raised the following grounds of appeal: All the grounds of appeal in this appeal are mutually exclusive and without prejudice to each other. 1. The learned Commissioner of Income Tax (Appeals)-I, Baroda [ the CIT(A) ] erred in fact and in law in conforming the action of the Assistant Commissioner of Income Tax, Circle-l(2), Baroda [ the AO ] in making an addition of difference between the opening balance and closing balance of CENVAT amounting to Rs. 5,92,16,449 to ..... 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