2017 (6) TMI 1290 - AT - Income Tax

Disallowance u/s.l4A - interest expenditure - application of Rule 8D in assessment year prior to its introduction - HELD THAT - The CIT (A) himself though in the paras thereafter have admitted that the provisions of Rule 8D of the Rules are not applicable and in view of the provisions of section 14A of the Act, disallowance of ₹ 1 lakh was made. We uphold the said disallowance of ₹ 1 lakh under section 14A Disallowance of Excise duty on obsolete stock - HELD THAT - We find that similar issue of provision of Excise duty on obsolete stock arose before the Tribunal in SANDVIK ASIA PVT. LTD. VERSUS THE JT. COMMISSIONER OF INCOME TAX, RANGE 10, PUNE 2015 (12) TMI 1742 - ITAT PUNE . Tribunal held the assessee to be entitled to claim the deduction.Following the same parity of reasoning, we allow the claim of assessee and ground of appeal Adhoc addition of valuing the stock of scrap - HELD THAT - The assessee is consistently following the method of accounting, wherein whenever scrap was sold by the assessee, the receipts from the sale of such scrap were accounted for in the books of account. However, scrap which was available at the end of year had not been shown as part of the closing stock. The estimated value of the stock which has been upheld by the CIT (A) is also ₹ 75,000/- as against the same, the assessee during the year under consideration had sold scrap for about ₹ 18 crores, which has been included as receipts of the business for the year under consideration by the assessee. In view thereof, where a consistent approach has been followed by the assessee, we find no merit in the inclusion of value of scrap as on the close of the year at ₹ 75,000/- as part of income of assessee. The ground of appeal No.4 raised by the assessee is thus, allowed. Transfer Pricing adjustment of manufacturing wire segment - assessee applied TNMM method with net profit margin as the Profit Level Indicator (PLI) in order to benchmark the arm s length price of its aforesaid four divisions - TPO proposed to adopt Cost Plus Method - CPM method could not be applied to compare the results shown in the domestic market with the results shown of export to associated enterprises - export activity of assessee was only to the extent of 2% of the overall wire manufacturing activity - HELD THAT - We find merit in the plea of assessee that where transactions under the same segment are inter-linked, then they are to be aggregated in the hands of assessee. This plea of aggregation has been accepted and adopted in the hands of assessee in the earlier years and even in the later years. Accordingly, the same merits to be applied in the year under consideration also. Applying the ratio of decision in JOHN DEERE INDIA PVT. LTD., (JOHN DEERE EQUIPMENT PVT. LTD.) , (FORMERLY KNOWN AS L&T JOHN DEERE PVT. LTD VERSUS DY. CIT, ITO, 2015 (3) TMI 318 - ITAT PUNE to the present facts, we hold that TNNM method is the most appropriate method to be applied to benchmark the international transactions of exports to associated enterprises. The assessee aggregated all the international transactions under this division and applied TNNM method and found the transaction of exports to associated enterprises at arm s length. However, the Assessing Officer is directed to verify the said claim of assessee by applying single year s data and compute the adjustment, if any, in the hands of assessee after affording reasonable opportunity of hearing to the assessee. Addition regarding Export of Seamless tubes - engaged in the manufacture of sophisticated pipes of different categories numbering about 30 - aggregated all the international transactions - application of CUP method - HELD THAT - Where the transactions are inter- linked, then aggregation approach is to be applied as held by us in the paras hereinabove in respect of division of manufacturing of wires. The said aggregation approach has been applied by the TPO himself in assessee s own case in both the preceding and succeeding years except the year under consideration. Since there is no difference in the factual aspects, we find no merit in the approach adopted by the TPO. Once the aggregation approach is to be applied, then thereafter, CUP method cannot be applied because both the activities having controlled transactions of import of service charges, management fees, etc. and hence, are tainted. In this regard, we find support from the ratio laid down by the Pune Bench of Tribunal in John Deere India (P.) Ltd. s case (supra) and RACOLD THERMO LIMITED VERSUS THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE 10, PUNE 2015 (10) TMI 1747 - ITAT PUNE which has been referred in paras above. Accordingly, we allow the claim of assessee in this regard. The TPO is directed to apply the TNNM method on single year s data and compute the adjustment, if any, in the hands of assessee. Adjustment of management service fees payment - expenses were on arm s length - Revenue authorities could not question the business needs of assessee and their commercial decisions so long as the assessee s claim is prudent and acceptable - TPO in reject the claim was that the assessee had not derived any tangible benefits from the services received - HELD THAT - assessee has established the factum of receipt of management services from Sandvik group entities, in accordance with the terms of agreement entered into by the assessee with Sandvik AB, Sweden and where the additional evidence in this regard was filed before the CIT (A), who in turn, has considered the same and has held that services provided by Sandvik group entities were in accordance with the agreement and were actually rendered by the associated enterprises. He also referred to the order of TPO in remand report, who had not doubted that the management services were not rendered at all but had stated that the same were rendered by group entities and not by Sandvik AB, Sweden and no adverse inference could be drawn for the same. In the totality of the above said facts and circumstances, we find merit in the claim of assessee and in view of gamut of evidences filed by the assessee establishing its claim of receipt of management support services from Sandvik entities, which in turn, was as per terms of agreement, then there is no merit in making any adjustment on account of payment of management fees. Upholding the order of CIT (A), we reverse the findings of the TPO in this regard as the same are without any basis. The second point which has been considered by the CIT (A) is that the said management service fees have been taxed in the hands of recipient Sandvik AB, Sweden. Where the Assessing Officer Incharge of assessment of Sandvik AB, Sweden has accepted income arising on rendering of management services and the same being taxed in the hands of provider of services, then the claim of assessee that it had paid management services fees to Sandvik AB, Sweden, is to be allowed in the hands of assessee. Another aspect to be seen is that where the management services have actually been rendered, may be, by Sandvik entities, then the arm s length price of such a transaction cannot be taken at Nil. The assessee has applied TNNM method to determine the arm s length price of payment of management fees by aggregating the transactions at Nil. Accordingly, we hold that no addition is merited in the hands of assessee on account of transfer pricing adjustment on the transaction of payment of management services to Sandvik AB, Sweden. Taxability of anagement service fees in the hands of recipient Sandvik AB, Sweden as dividend - HELD THAT - Another aspect on which the Assessing Officer had disallowed the claim was that the payment was in the nature of dividend. Once the amount has been taxed in the hands of recipient i.e. Sandvik AB, Sweden, as income on account of rendering of management services, there is no merit in the said stand of Assessing Officer in treating the said payment to be dividend and accordingly, the same is dismissed. Allowability of software application as revenue expenditure - HELD THAT - n view of the ratio laid down in assessee s own case in earlier years in SANDVIK ASIA PVT. LTD. VERSUS THE JT. COMMISSIONER OF INCOME TAX, RANGE 10, PUNE 2015 (12) TMI 1742 - ITAT PUNE and the facts being similar, we uphold the order of CIT (A) in allowing the expenditure incurred on software application. Addition on account of closing stock of obsolete inventory - HELD THAT - The issue arising before us is identical to the issue before the Tribunal in assessment year 2004-05 in SANDVIK ASIA PVT. LTD. VERSUS THE JT. COMMISSIONER OF INCOME TAX, RANGE 10, PUNE 2015 (12) TMI 1742 - ITAT PUNE and the said issue raised by the Revenue has been dismissed. Following the same parity of reasoning, we uphold the order of CIT (A) in deleting addition of ₹ 19,52,000/- made on account of value of obsolete inventory as part of closing stock. The grounds of appeal No.4a and 4b raised by the Revenue are thus, dismissed. Set off of losses of newly set up EOU unit against its other business income - HELD THAT - The issue arising in the present appeal is squarely covered by the order of Tribunal in assessee s own case (supra) in assessment year 2004-05 and following the same parity of reasoning, we dismiss the ground of appeal No.6 raised by the Revenue

Summary

Issues Involved:
1. Disallowance under Section 14A of the Income Tax Act.
2. Disallowance of Excise Duty on Obsolete Stock.
3. Adhoc Addition by Valuing Stock of Scrap.
4. Transfer Pricing Adjustments.
5. Admission of Additional Evidence.
6. Deletion of Adjustment to International Transactions of Management Service Fees.
7. Treatment of Software Application Expenditure.
8. Deletion of Addition on Account of Closing Stock of Obsolete Inventory.
9. Estimation of Value of Closing Stock of Scrap.
10. Set-off of Losses of EOU Unit Against Other Business Income.

Detailed Analysis:

1. Disallowance under Section 14A of the Income Tax Act:
The assessee contested the disallowance of ?1 lakh under Section 14A. The Assessing Officer had initially calculated a disallowance of ?4,52,000 using Rule 8D, which was not applicable for the assessment year 2005-06 as per the Bombay High Court ruling in Godrej & Boyce Mfg. Co. Ltd. The Tribunal upheld the disallowance of ?1 lakh by the CIT (A), reversing the findings that relied on Rule 8D.

2. Disallowance of Excise Duty on Obsolete Stock:
The assessee argued that the provision of ?60,000 for Excise duty on obsolete stock, included in the closing stock and paid before the due date of filing the return, should be allowed as a deduction. The Tribunal followed its earlier decision in the assessee's case for assessment year 2004-05, allowing the deduction under Section 43B of the Act.

3. Adhoc Addition by Valuing Stock of Scrap:
The assessee challenged the addition of ?75,000 for valuing the stock of scrap at the year-end. The Tribunal noted the consistent accounting policy of not valuing scrap at the year-end and the significant income from scrap sales during the year, thus finding no merit in the addition. The ground was allowed in favor of the assessee.

4. Transfer Pricing Adjustments:
The assessee contested adjustments in the Manufacturing Wires segment and Exports of Seamless Tubes and Pipes. The Tribunal held that the aggregation approach should be applied and the TNMM method was the most appropriate for benchmarking international transactions. The Tribunal directed the Assessing Officer to verify the claim using single-year data and compute any necessary adjustments.

5. Admission of Additional Evidence:
The Revenue's appeal on the CIT (A)'s admission of additional evidence was dismissed. The Tribunal found no merit in the Revenue's contention as the CIT (A) had followed Rule 46A of the Income Tax Rules, 1962, and obtained a remand report from the Assessing Officer.

6. Deletion of Adjustment to International Transactions of Management Service Fees:
The Tribunal upheld the CIT (A)'s deletion of the adjustment of ?4,41,44,973 for management service fees. It was established that the services were rendered by Sandvik group entities as per the agreement, and the fees were taxed in the hands of Sandvik AB, Sweden. The Tribunal found no basis for the TPO's determination of the arm's length price as nil.

7. Treatment of Software Application Expenditure:
The Tribunal upheld the CIT (A)'s treatment of software application expenditure of ?60,98,995 as revenue expenditure. This decision was consistent with the Tribunal's ruling in the assessee's case for assessment year 2004-05, where similar expenditures were allowed as revenue expenses.

8. Deletion of Addition on Account of Closing Stock of Obsolete Inventory:
The Tribunal upheld the CIT (A)'s deletion of the addition of ?19,52,000 for obsolete inventory. The Tribunal noted the consistent accounting method followed by the assessee and the principle of consistency, referencing the Supreme Court's decision in Rotork Controls India (P.) Ltd.

9. Estimation of Value of Closing Stock of Scrap:
The Tribunal dismissed the Revenue's appeal on the estimation of the value of closing stock of scrap at ?5 per kg. The issue was linked to the assessee's ground on the valuation of scrap, which had been decided in favor of the assessee.

10. Set-off of Losses of EOU Unit Against Other Business Income:
The Tribunal upheld the CIT (A)'s decision allowing the set-off of losses of the newly set-up EOU unit against other business income. This was in line with the Tribunal's ruling in the assessee's case for assessment year 2004-05, following the Bombay High Court's decision in Hindustan Unilever Ltd. v. DCIT.

Conclusion:
The assessee's appeal was partly allowed, and the Revenue's appeal was dismissed. The Tribunal's decision was based on consistent application of legal principles and precedents, ensuring that the assessee's claims were evaluated fairly and in accordance with the law.