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2014 (2) TMI 652 - AT - Income TaxAllowability of benefit of brought forward loss - Computation of book profits u/s 115JB of the Act Held that - The assessee to be entitled to deduction of such loss - there were no accumulated losses at the end of the year because the reduction in paid up capital took place during the said year - thus, the benefit of brought forward loss cannot be denied for the purposes of computation of books profit u/s 115JB - the Assessing Officer is directed to verify the correctness of the figure so claimed thus, the order set aside and the matter remitted back to the AO for fresh adjudication Decided in favour of Assessee. Nature of Profit - Is it cash profit or net operating profit under TNMM - whether the adoption of Cash profits as the numerator under the TNMM is in accordance with law Held that - The assessee's calculation of the so called 'Cash profit' by simply reducing the amount of depreciation from the amount of net profit does not stand anywhere - The assessee is a limited company - it is required to maintain its account on mercantile basis - Under such method of accounting, the expenses incurred' are considered for deduction irrespective of the actual payment - Income is recognized when right to receive income is acquired notwithstanding the actual receipt of the amount - Such items of incurring of expenses or accrual of income have not been taken out of the amount of net profit to characterize the numerator as Cash profit' - the profit so deduced by the assessee and claimed as cash profit' is strictly speaking neither cash profit nor profit under mercantile system, but hybrid of both. Whether any adjustment towards higher depreciation is called for Held that - Sub-clause (iii) to rule 10B(1)(e) clearly provides that the normal gross profit mark-up of comparables is adjusted to take into account the functional and other differences, if any, between the international transaction and the comparable uncontrolled transactions etc - To ask for adjustment, it is sine qua non that there should be some independent and substantial reason for claiming adjustment in profit rate of comparables - The singular effect of higher quantum of an item of expenditure de hors the other relevant factors, is not permissible - In the context of depreciation, one can rightly appreciate the need to make adjustment, if rate of depreciation charged by the assessee vis- -vis its comparables is different - But the simplicitor difference in the amount of depreciation is inconsequential - there is nothing to show that the assessee did charge depreciation at higher rates in comparison with its comparables. Rule of consistency Held that - The major ingredient of the operating cost is remuneration to employee and the assets play minimal role in the process of rendering of such services - The depreciation component in such cases becomes quite insignificant - the application of such PLI was accepted because in that case there was an isolated year in which such change in the numerator was objected to - For the subsequent years, the same was accepted - no material in that case was placed on record to show that the acceptance of cash profit to sales as the correct PLI worked to the prejudice of the Revenue in terms of the sacrifice of transfer pricing adjustment, unlike it is the case of the Revenue. The assets play significant role in manufacturing - In such a situation, the depreciation cost plays a major role in the overall operating cost and as such cannot be excluded - If the amount of depreciation, which is otherwise an important item of the operating nature, is expelled from computation, then no meaningful analysis is possible under TNMM. Transfer pricing adjustment - Determination of the ALP Held that - It can also be seen from the assessee's submissions as recorded by the CIT(A) that the correctness of such OP/sales of comparables was not disputed - The rightness of this calculation by the TPO has also not been controverted - the determination of ALP by the TPO by considering OP/Sales at 6.17% of the comparables with the operating loss shown by the assessee, thereby determining TP adjustment amounting to ₹ 1.95 crores (as rectified), does not require any interference - The order on this issue is set aside and the addition made by the AO is restored Decided in favour of Revenue. Confirmation of disallowance of consultancy charges Held that - The expenditure was incurred for conducting feasibility study for undertaking the same activity of manufacturing in Mauritius - The plans did not fructify and the project was abandoned Revenue could not draw our attention towards any part of sections 35D or 37(1), which prohibits the allowability of expenses simply for the reason that it was incurred outside India thus, the reasoning adopted by the CIT(A) cannot be upheld for sustaining this addition. Whether the expenditure should be allowed u/s 37(1) in entirety or should be allowed as preliminary expenditure u/s 35D Held that - The decision in CIT Vs Priya Village Roadshows Ltd. 2009 (8) TMI 765 - Delhi High Court followed - Where expenditure was incurred on feasibility study on new project development connected with the existing business with a common administration and common fund, and the new project was shelved with no new asset being created, the impugned expenditure was allowable as revenue expenditure - the assessee incurred such expenditure for the extension of the existing business on conducting market feasibility study for the same products in Mauritius thus, the decision taken by the ld. CIT(A) cannot be upheld Decided in favour of Assessee.
Issues Involved:
1. Allowing the benefit of brought forward loss for the purpose of computation of book profits under Section 115JB of the Income-tax Act. 2. Deletion of disallowance made on account of deduction under Section 80HHC for computing book profits under Section 115JB. 3. Deletion of disallowance of depreciation on vehicles pending registration. 4. Deletion of disallowance of claim for loose tools. 5. Deletion of disallowance of training expenses. 6. Deletion of disallowance of royalty expenses. 7. Deletion of disallowance on account of reduction of depreciation rate on molds used in plastic business. 8. Deletion of transfer pricing addition made by the AO. 9. Confirmation of disallowance of consultancy charges. Issue-wise Detailed Analysis: 1. Benefit of Brought Forward Loss for Computation of Book Profits under Section 115JB: The Revenue's appeal contested the CIT(A)'s decision to allow the assessee the benefit of brought forward loss for computing book profits under Section 115JB. The Tribunal noted that a similar issue had been previously decided in favor of the assessee for the preceding assessment year 2002-03. Despite the Departmental Representative's contention that there were no accumulated losses at the end of the year, the Tribunal found the facts for the current year to be similar to the preceding year. Respectfully following the precedent, the Tribunal held that the benefit of brought forward loss could not be denied and remitted the matter back to the AO for verification of the claimed figure. 2. Deletion of Disallowance for Deduction under Section 80HHC for Book Profits: The Tribunal noted that the facts and circumstances of this issue were similar to the preceding year where such disallowances were deleted. Following the same view, the Tribunal upheld the CIT(A)'s order, resulting in the failure of this ground. 3. Deletion of Disallowance of Depreciation on Vehicles Pending Registration: The Tribunal upheld the CIT(A)'s decision to delete this disallowance, noting that the facts and circumstances were similar to the preceding year where such disallowances were deleted. 4. Deletion of Disallowance of Claim for Loose Tools: The Tribunal upheld the CIT(A)'s decision to delete this disallowance, noting that the facts and circumstances were similar to the preceding year where such disallowances were deleted. 5. Deletion of Disallowance of Training Expenses: The Tribunal upheld the CIT(A)'s decision to delete this disallowance, noting that the facts and circumstances were similar to the preceding year where such disallowances were deleted. 6. Deletion of Disallowance of Royalty Expenses: The Tribunal upheld the CIT(A)'s decision to delete this disallowance, noting that the facts and circumstances were similar to the preceding year where such disallowances were deleted. 7. Deletion of Disallowance on Account of Reduction of Depreciation Rate on Molds: The Tribunal upheld the CIT(A)'s decision to delete this disallowance, noting that the facts and circumstances were similar to the preceding year where such disallowances were deleted. 8. Deletion of Transfer Pricing Addition: The Tribunal evaluated whether the adoption of 'Cash profits to Sales' as the Profit Level Indicator (PLI) under the Tooling Division was appropriate. The Tribunal held that the correct numerator under the Transactional Net Margin Method (TNMM) should be 'Net operating profit' and not 'Cash profit'. The Tribunal also rejected the assessee's alternative plea for adjustment due to higher depreciation rates, noting that the change in depreciation rates was not substantial and did not significantly impact the overall amount of depreciation. The Tribunal found no merit in the assessee's contention that the PLI of 'Cash profit to sales' should be accepted and restored the addition made by the AO. 9. Confirmation of Disallowance of Consultancy Charges: The Tribunal addressed the assessee's cross-objection regarding the disallowance of consultancy charges for a feasibility study in Mauritius. The Tribunal disagreed with the CIT(A)'s reasoning that expenses incurred outside India were not deductible. Citing precedents, the Tribunal held that expenses for feasibility studies related to the existing business should be allowed as revenue expenditure under Section 37(1) and not treated as preliminary expenses under Section 35D. The Tribunal overturned the CIT(A)'s decision and directed the deletion of the addition. Conclusion: The Tribunal allowed the assessee's cross-objection and partly allowed the Revenue's appeal, remitting certain issues for verification while upholding others based on precedents and detailed analysis. The judgment emphasized the importance of consistency and adherence to prescribed methods in transfer pricing cases.
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