2017 (6) TMI 1346 - AT - Income Tax

Disallowance u/s 14A r.w.r. 8D - HELD THAT - Admittedly, the year under appeal is assessment year 2005-06 i.e. the year when the provisions of Rule 8D of the Rules were not on Statute. The Hon ble Bombay High Court in Godrej Boyce Mfg. Co. Ltd. 2010 (8) TMI 77 - BOMBAY HIGH COURT had held the said provisions to be prospective in nature, hence the same were not applicable to the year under appeal. Accordingly, the findings of CIT(A) in para 2.8.11 needs to be reversed. 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 of the Act. Accordingly, the ground of appeal No.2 is decided as indicated above. Disallowance of Excise duty on obsolete stock - HELD THAT - The assessee had made provision of Excise duty which as per the assessee, was included in the closing stock and was also paid before the due date of filing the return of income. We find that similar issue of provision of Excise duty on obsolete stock arose before the Tribunal in assessment year 2004-05 2015 (12) TMI 1742 - ITAT PUNE wherein as held that the assessee is entitled to the claim of deduction under section 43B of the Act as the aforesaid amount admittedly, was paid before the due date of filing the return of income for the instant assessment year, as certified by the Auditor in the audit report in Annexure 7 attached to the Form No.3CD, wherein it has been certified that the amount of Excise duty paid up to date of filing the return of income. Adhoc addition by valuing the stock of scrap as on 31.03.2005 - assessee explained that it was its policy not to value any scrap at the close of the year and the said policy was consistently followed from year to year - CIT(A) restricted the addition by revaluing the stock @ ₹ 5 per Kg., estimated on adhoc basis - 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. - Decided in favour of assessee. TP Adjustment - MAM Selection - benchmarking the transaction of manufacturing of wires - adjustment made on account of arm's length price of the manufacturing division i.e. export of wire - assessee had applied TNMM method with net profit margin as the Profit Level Indicator (PLI) in order to benchmark the arm's length price - TPO had applied the CPM method and had considered the rate of GP as comparison in order to benchmark the arm's length price of international transactions - 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. 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. Export of Seamless tubes and pipes - Since the facts of the present case are identical to the facts in earlier and subsequent years, we find no merit in the said stand of the TPO. 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. See RACOLD THERMO LIMITED 2015 (10) TMI 1747 - ITAT PUNE and JOHN DEERE INDIA PVT. LTD., (JOHN DEERE EQUIPMENT PVT. LTD.) 2015 (3) TMI 318 - ITAT PUNE 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. Reasonable opportunity of hearing shall be given to the assessee in this regard. Adjustment made to international transactions of management service fees - Receipt of management services from Sandvik group entities - HELD THAT - 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, in view of specific covenants of the agreement entered into by the assessee with Sandvik AB, Sweden. 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. 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. The grounds of appeal No.2a and 2b raised by the Revenue are thus, dismissed. Nature of expenditure - software application as revenue expenditure - HELD THAT - In view of the ratio laid down in assessee s own case in earlier years 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. The ground of appeal No.3 raised by the Revenue is thus, dismissed. Addition on account of closing stock of obsolete inventory - HELD THAT - As relying on own case 2015 (12) TMI 1742 - ITAT PUNE we uphold the order of CIT(A) in deleting addition made on account of value of obsolete inventory as part of closing stock. Allowing set off of losses suffered by the newly set up EOU unit against its other business income - HELD THAT - As relying on own case 2015 (12) TMI 1742 - ITAT PUNE we hold that the assessee is entitled to set off of losses of EOU unit against the other business income, if any, assessed in the hands of assessee for the captioned assessment year. Balance loss, if any, would be carried forward to the succeeding years to be adjusted as per the provisions of the Act. Ground of appeal raised by the Revenue is also dismissed.

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. Allowance of depreciation on software expenses.
5. Allowance of warranty payments.
6. Transfer pricing adjustments for the Manufacturing - Wires segment.
7. Transfer pricing adjustments for the Exports of Seamless tubes and pipes.
8. Admission of additional evidence under Rule 46A.
9. Deletion of adjustment to international transactions of management service fees.
10. Treatment of software application expenditure as revenue expenditure.
11. Deletion of addition to closing stock for obsolete inventory.
12. Estimation of value of closing stock of scrap.
13. Set off of losses suffered by newly set up EOU against other business income.

Detailed Analysis:

1. Disallowance under section 14A of the Income Tax Act:
The CIT(A) restricted the disallowance to ?1 lakh, which was upheld by the Tribunal. The Tribunal noted that Rule 8D of the Income Tax Rules was not applicable for the assessment year 2005-06, as held by the Hon’ble Bombay High Court in Godrej Boyce Mfg. Co. Ltd. Vs. DCIT & Anr. (2010) 328 ITR 81 (Bom).

2. Disallowance of Excise duty on obsolete stock:
The Tribunal allowed the claim of the assessee, following its own decision in the assessee's case for the assessment year 2004-05, where it was held that the provision for Excise duty on obsolete stock, paid before the due date of filing the return, was allowable under section 43B of the Act.

3. Adhoc addition by valuing stock of scrap:
The Tribunal found merit in the assessee’s consistent policy of not valuing scrap at the end of each year and allowed the ground, reversing the CIT(A)’s addition of ?75,000.

4. Allowance of depreciation on software expenses:
This issue was dismissed as infructuous since relief had already been granted in earlier years.

5. Allowance of warranty payments:
This issue was also dismissed as infructuous since relief had already been granted in earlier years.

6. Transfer pricing adjustments for the Manufacturing - Wires segment:
The Tribunal held that the aggregation approach and TNMM method should be applied, as accepted in earlier and later years. The adjustment of ?6,25,621/- made by the TPO using CPM was rejected.

7. Transfer pricing adjustments for the Exports of Seamless tubes and pipes:
The Tribunal upheld the aggregation approach and TNMM method, rejecting the CUP method applied by the TPO. The adjustment of ?12,05,814/- was deleted.

8. Admission of additional evidence under Rule 46A:
The Tribunal found no merit in the Revenue's contention against the admission of additional evidence, noting that the CIT(A) had followed due process under Rule 46A.

9. 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/-, finding that the management services were indeed rendered and the payment was in accordance with the agreement. The Tribunal also noted that the amount was taxed in the hands of Sandvik AB, Sweden.

10. Treatment of software application expenditure as revenue expenditure:
The Tribunal upheld the CIT(A)’s order, following its own decision in the assessee's case for assessment year 2004-05, where software application expenditure was treated as revenue expenditure.

11. Deletion of addition to closing stock for obsolete inventory:
The Tribunal upheld the CIT(A)’s deletion of ?19,52,000/-, following its own decision in the assessee's case for assessment year 2004-05, recognizing the consistent method of accounting for obsolete stock.

12. Estimation of value of closing stock of scrap:
The Tribunal dismissed the Revenue’s ground, aligning with its decision on the assessee’s ground regarding the valuation of scrap.

13. Set off of losses suffered by newly set up EOU against other business income:
The Tribunal upheld the CIT(A)’s order, following its own decision in the assessee's case for assessment year 2004-05, allowing the set off of EOU losses against other business income.

Conclusion:
The appeal of the assessee was partly allowed, and the appeal of the Revenue was dismissed. The Tribunal provided detailed reasons for each issue, ensuring consistency with previous rulings and applicable legal provisions.