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2017 (9) TMI 1776 - AT - Income TaxProvision made for Excise duty and interest due on Excise duty - addition u/s 43B - Held that - The claim of assessee is in respect of Excise duty paid and the interest on Excise duty paid in July, 2005 i.e. before the due date for filing the return of income under section 139(1) for which a provision was made as on the close of the year. The said payment is in respect of Excise duty due for the current year and also for the previous years and the interest is due on the late payment of Excise duty dues for the earlier years. We find no merit in the stand of Revenue that the said Excise duty being not recorded in the books of account in the respective years, cannot be allowed as business expenditure during the previous year in which they were paid. Reversing the order of CIT (A), we direct the Assessing Officer to allow the claim of assessee on account of provision made for Excise duty and interest due on Excise duty Non deduction of tax at source on payment towards technical fees and also rent - Held that - Sum was allocated to different companies by TACO; the said amount was paid by TACO and the assessee reimbursed the same. In respect of Jamshedpur office also, it was pointed out that the recovery of rent was made from the assessee and in view thereof, there was no requirement to deduct tax at source. In view of the evidence produced, we find merit in the plea of assessee and direct the Assessing Officer to allow the claim of assessee. TPA - MAM selection - CUP method v/s TNMM - Held that - We find no merit in the plea of assessee in the absence of any third party evidence and we reject the plea of assessee in this regard. Similarly, in respect of import of machinery where the assessee had purchased the machinery from its associated enterprises on its specification, CUP method cannot be applied to benchmark its transactions. In respect of export of goods, wherein the assessee had made a comparison between the margins of associated enterprises segment with non-associated enterprises but because of import of raw material being utilized by both the segments and the same being tainted, then there is no merit in applying CPM method. In respect of payment of royalty and technical consultancy fees and interest on delayed payments, the assessee has not raised any issues either before the CIT (A) or before us and in view thereof, we reject the application of CUP method by the assessee and uphold the approach of the TPO in applying TNMM method on aggregate basis. Comparable selection - bench-marking - selection of new comparables - Held that - In the case before us, the year of taxation is assessment year 2005-06 which were the initial years of transfer pricing and because of availability of data of concerns which were functionally comparable to the assessee, there is no merit in the rejection of said additional evidence by the CIT (A) at the initial stage itself. Accordingly, we reverse the findings of CIT (A) and hold that in case two concerns Minda S A I Ltd. and Ellora Trading Ltd. are functionally comparable to the assessee, then the margins of said concerns be applied to benchmark the international transactions undertaken by the assessee. In respect of Ellora Trading Ltd., the assessee had taken the said concern to be functionally comparable in its TP study report during assessment year 2007-08 and the TPO has not passed any adverse comments on the acceptability of the same. In respect of Minda S A I Ltd., the TPO himself in the transfer pricing order for assessment year 2009-10 had taken the said company as functionally comparable. Once the said concerns are accepted to be functionally comparable in subsequent years and unless it is brought on record that the functions performed by the said concerns in the year under consideration were different than the functions performed in later years, then the said concerns cannot be rejected to be comparable. The data which was available could be considered as reliable data. We find merit in the plea of assessee. Accordingly, we direct the Assessing Officer to benchmark the international transactions of assessee by applying TNMM method and comparing the margins of assessee with margins of two concerns i.e. Minda S A I Ltd. and Ellora Trading Ltd. as against the comparables originally adopted by the TPO and upheld by the CIT (A). The Assessing Officer shall determine the addition, if any, with respect to assessee s international transactions with its associated enterprises on an aggregate basis under TNMM method. Adjustment on account of such difference in the depreciation between assessee and comparable companies under TNMM method. not to be allowed - See VISHAY COMPONENTS PVT. LTD. VERSUS ASST. COMMISSIONER OF INCOME-TAX, CIRCLE-7, PUNE 2017 (2) TMI 636 - ITAT PUNE . Proportionate adjustment to be made while applying TNMM method only to the international transactions undertaken and not at the entity level - Held that - We find that the issue is covered by the ratio laid down in CIT v. Thyssen Krupp Industries India (P.) Ltd. 2015 (12) TMI 1076 - BOMBAY HIGH COURT and CIT v. Keihin Panalfa Ltd. 2016 (5) TMI 203 - DELHI HIGH COURT . Hence, we direct the TPO to compute transfer pricing adjustment, if any, only with respect to international transactions. Computation of operating margins of assessee by considering the interest expenditure, loan processing charges and loss on disposal of assets as operating expenditure - Held that - Issue of working of operating margins on account of loss on disposal of assets, loan processing charges and interest expenditure, whether is non-operating or operating in nature, has not been looked into either by the TPO or by the CIT (A). The assessee had raised this issue and hence, additional ground of appeal No.9 is admitted. The learned Authorized Representative for the assessee points out that the interest expenses and loss on disposal of assets has been held to be non-operating in the hands of assessee in later years. Accordingly, we direct the Assessing Officer / TPO to verify this plea of assessee. In case, similar expenditure has not been taken as non-operating in nature and the expenditure booked in the year under consideration is falling in same category, then the same is not to be included as part of operating cost. AO/ TPO is also directed to look into the plea of assessee with regard to loan processing charges and the nature of such charges. In respect of scrap sales, in case, it arises on account of business activity of the assessee, then the same is to be included in the hands of assessee as operating revenue. Economic adjustment for higher import content of assessee vis-a-vis comparable companies - Held that - Additional ground of appeal is that no such plea was ever raised before any authorities below. The assessee in order to plead its case of economic adjustment for higher import content of the assessee vis-a-vis its comparables has moved an application under Rule 29 of the Income Tax (Appellate Tribunal) Rules, 1963 seeking permission to file additional evidence. In support of the said claim, the assessee has attached computation of excess non-CENVAT duty paid by the assessee during the year and detailed computation of import of raw materials, spares and components along with Schedules forming part of the account for the year ending 31.03.2005, wherein in the notes to the accounts, consumption of raw materials, CIF value of imports, etc. are provided. In appendix-2, the assessee provided other details. Disallowance on account of payment of earlier assessment years Excise duty in current year be added to the profit of assessee for calculating Profit Level Indicator - Held that - We have already decided the issue of allowability of Excise duty both in respect of earlier years and current year along with interest on delayed payment of Excise duty as allowable in the hands of assessee. Hence, the Assessing Officer is not to re-compute assessee s PLI after including the amount of disallowance made on account of Excise duty. The grounds of appeal raised by the Revenue are allowed though on different grounds.
Issues Involved:
1. Disallowance of payment of excise duty including interest thereon. 2. Applicability of section 40(a)(i) of the Income-tax Act on payment towards technical fees. 3. Applicability of section 40(a) of the Income-tax Act on payment towards rent. 4. Transfer pricing adjustments including general grounds, transactional level analysis, application of TNMM, selection of comparables, and proportionate adjustments. 5. Error in computation of the appellant’s operating margin. 6. Economic adjustment for higher import content. Detailed Analysis: 1. Disallowance of Payment of Excise Duty Including Interest Thereon: The assessee claimed a deduction for excise duty and interest amounting to ?11,60,72,000, which was disallowed by the Assessing Officer (AO) on the grounds that the liability arose due to regulatory lapses detected by the Excise Department. The AO held that the expenses incurred due to infringement of law were not allowable as business expenses. The CIT (A) upheld the AO’s decision, noting that the liability had crystallized due to regulatory action, and thus section 43B of the Act did not apply. However, the Tribunal reversed this decision, stating that section 43B allows for deduction of such statutory dues in the year of payment, irrespective of the year in which the liability was incurred. The Tribunal directed the AO to allow the claim of the assessee. 2. Applicability of Section 40(a)(i) on Payment Towards Technical Fees: The AO disallowed expenses towards technical fees amounting to ?2,45,515 due to non-deduction of TDS. The CIT (A) confirmed this disallowance. The Tribunal, however, found merit in the assessee’s plea that these were reimbursements and directed the AO to allow the claim, provided the evidence supported this. 3. Applicability of Section 40(a) on Payment Towards Rent: The AO disallowed expenses towards rent amounting to ?1,37,595 due to non-deduction of TDS. The CIT (A) upheld this disallowance. The Tribunal directed the AO to allow the claim, provided the evidence supported that these were reimbursements. 4. Transfer Pricing Adjustments: - General Ground: The Tribunal noted that the TPO had applied TNMM to benchmark the international transactions, which was upheld by the CIT (A). The Tribunal rejected the assessee’s plea to apply the CUP method due to lack of third-party evidence. - Transactional Level Analysis: The Tribunal upheld the TPO’s decision to reject the transactional level analysis and apply TNMM. - Selection of Comparables: The Tribunal directed the AO to reconsider comparables submitted by the assessee, specifically Minda S A I Ltd. and Ellora Trading Ltd., which were functionally comparable. - Proportionate Adjustments: The Tribunal directed the TPO to compute transfer pricing adjustments only with respect to international transactions and not at the entity level. 5. Error in Computation of Appellant’s Operating Margin: The Tribunal addressed the computation errors by directing the AO to exclude non-operating items such as loan processing charges, loss on disposal of assets, and interest on loans from the operating margin calculation. Scrap sales were to be included as operating income if linked to regular manufacturing activities. 6. Economic Adjustment for Higher Import Content: The Tribunal rejected the additional ground for economic adjustment on higher import content, noting that it was a new plea not raised before lower authorities and lacked merit. Conclusion: The Tribunal allowed the appeal of the assessee in part, directing the AO to allow deductions for excise duty and interest under section 43B, and to reconsider certain disallowances and transfer pricing adjustments. The appeal of the Revenue was allowed on different grounds, primarily concerning the re-computation of the Profit Level Indicator (PLI) after including the disallowed excise duty.
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