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2015 (8) TMI 755 - AT - Income TaxTransfer pricing adjustment - selection of comparable - Held that - M/s Eicher Motors - CIT(A) has held a tractor manufacturer as comparable with a harvester combine manufacturer. Whereas a harvester combine is a machine that harvests green crops by combining three separate operations, namely, reaping, threshing and winnowing, a tractor is a vehicle used for drawing or pulling. Further, a combine is several times dearer than a tractor. It can be observed that the functions of both, along with their respective price tags, are entirely different from each other. It is beyond our comprehension as to how a manufacturer of a tractor can be considered as comparable with the manufacturer of harvester combine. Simply because both the machines fall in the overall category of Agricultural equipments , it does not mean that they become comparable to each other. If one accepts such a logic as applied by the ld. CIT(A), then the manufacturer of other agricultural equipments, such as tillers, would also become comparable with a manufacturer of tractor or harvester combine and vice versa, which proposition is absolutely absurd. In view of the inherent differences in the characteristics, usage and price of harvester combine and tractors, we are unable to countenance the view taken by the ld. CIT(A) in treating M/s Eicher Motors as a good comparable. The impugned order on this score is overturned and the view of the TPO is restored. M/s Force Motors - facts and circumstances of M/s Force Motors are mutatis mutandis similar to those of M/s Eicher Motors. This company, initially considered as comparable by the assessee, was also excluded by the TPO on the same reasoning as given for M/s Eicher Motors and the ld. CIT(A) also upheld the inclusion of this company in the list of comparables by following the same reasoning as given by him for M/s Eicher Motors. In view of our above discussion made in the context of M/s Eicher Motors, we hold that M/s Force Motors cannot be considered as a good comparable. The impugned order on this score is reversed. Capacity adjustment in respect of certain items of expenses - CIT(A) allowing the claim which was denied by the TPO - Held that - The authorities below have adjusted the operating costs of the assessee in allowing the capacity adjustment. As against that, the correct course of action provided under the law is to adjust the operating costs of the comparable and their resultant operating profit. There is hardly need to accentuate that there can be no estoppel against the law. Once the law enjoins for doing a particular thing in a particular manner alone, it is not open to anyone to adopt a contrary or different approach. As the authorities below have adopted a course of action in allowing adjustment, which is not in consonance with law, we cannot approve the same. The impugned order is set aside and the matter is restored to the file of the TPO/AO for giving effect to the amount of idle capacity adjustment in the operating profit of the comparables and not the assessee. How to compute capacity utilization adjustment under TNMM - Held that - both the TPO as well as the ld. CIT(A) have proceeded on a wrong premise not only by allowing capacity utilization adjustment in the assessee s profit, which is contrary to the legal position as discussed above, but also by considering all the comparables as one unit with the average percentage of their respective capacity utilizations. It is further observed that in the calculation of such capacity utilization adjustment, the ld. CIT(A) has considered four companies as comparable, which view has been modified by us supra inasmuch as we have held that M/s Eicher Motors and M/s. Force Motors are incomparable. Naturally, they would also go out of reckoning in the computation of idle capacity utilization adjustment. In the absence of the availability of financials of all the comparable companies, it is not possible at our end to work out the amount of capacity adjustment in the manner discussed above. Ergo, we set aside the impugned order and direct the TPO/AO to work out the amount of capacity utilization adjustment afresh in terms of our above observations. Needless to say, the assessee will be allowed a reasonable opportunity of hearing in such fresh proceedings. Addition on account of capitalization of Software expenses - CIT(A) deleted the addition - Held that - First item is anti-virus software subscription for which a sum of ₹ 1,49,611/- was paid by the assessee. On being called upon to produce the bill for this software subscription, the ld. AR expressed his inability as the same was not readily available. The extent of deductibility of this amount depends upon the period for which this subscription and from the date on which it was paid. If it is given for a period of more than one year, then naturally, the amount relatable to the period beyond the first year, would not be admissible for deduction during the year in question. If the amount is paid for one year, then the subscription period covered during the year will be deductible and the remaining amount will qualify for deduction in the succeeding year. In the absence of the availability of the date and the period of subscription period, we set aside the impugned order on this issue and send the matter to the AO for deciding it in conformity with our above observations. Website charges - we find that the creation of website is an advantage which facilities carrying on business more efficiently and profitably leaving fixed capital untouched. The Hon ble Supreme Court in Empire Jute Company Limited VS. CIT (1980 (5) TMI 1 - SUPREME Court) has held that such expenses should be considered as revenue in nature. Also see Addl. CIT Vs. Avendus Advisors Pvt. Ltd. (2011 (2) TMI 1368 - ITAT MUMBAI). Price of modem - The same is a capital expenditure eligible for depreciation @ 60% as applicable to computer. Our view is fortified by the judgment of the Hon ble Delhi High Court in CIT vs. BSES Yamuna Powers Ltd. 2010 (8) TMI 58 - DELHI HIGH COURT and that of DCIT VS. Datacraft India Ltd. (2010 (7) TMI 642 - ITAT, MUMBAI) . Addition on account of deferred revenue expenditure - CIT(A) deleted the addition - Held that - The factual matrix of this ground is that the assessee capitalized certain sum for development of a new product called TAF60. Till 30.9.2003, a sum of ₹ 156 lac was capitalized and treated as capital work-in-progress. A further sum of ₹ 28.32 lac was incurred on its development between 1.10.2003 to 31.3.2004. The assessee capitalized the entire sum and claimed deduction @ 25% of the same in the earlier years and in the year in question. The AO treated this amount as capital expenditure and did not allow any deduction. The ld. CIT(A) accepted the assessee s claim. Similar issue came up for consideration before the Tribunal in the assessee s own case for the AY 2007-08 decided in the assessee s favour. Thus we uphold the impugned order in allowing deduction for a sum of ₹ 37.03 lac, which has been admittedly claimed on the same percentage of 25% as for the year dealt with by the tribunal. Addition of ₹ 2 lac on account of disallowance of Miscellaneous expenses - non-availability of certain details - CIT(A) delted addition - Held that - We are satisfied with the decision of the ld. CIT(A) in deleting this ad hoc addition made by the AO. If the AO was not satisfied with the justification of some expenses, he ought to have specifically pointed out such expenses rather than making an ad hoc disallowance of ₹ 2 lac. We, therefore, approve the view taken by the ld. CIT(A) on this score.
Issues Involved:
1. Inclusion of Eicher Motors and Force Motors in the list of comparables. 2. Capacity utilization adjustment. 3. Capitalization of software expenses. 4. Deduction of deferred revenue expenditure. 5. Disallowance of miscellaneous expenses. Issue-wise Detailed Analysis: 1. Inclusion of Eicher Motors and Force Motors in the List of Comparables: The Revenue challenged the inclusion of Eicher Motors and Force Motors as comparables for the assessee, who is engaged in the manufacture and sale of harvester combines. The Tribunal observed that the functional similarity is a sine qua non for comparability analysis. Since Eicher Motors and Force Motors are primarily engaged in the manufacture and sale of tractors, which are functionally different from harvester combines, they cannot be considered good comparables. The Tribunal overturned the CIT(A)'s decision and restored the TPO's view that excluded these companies from the list of comparables. 2. Capacity Utilization Adjustment: The second issue involved the allowance of capacity utilization adjustment. The assessee claimed a capacity utilization adjustment due to operating at 29% capacity compared to the comparables' average of 44%. The TPO and CIT(A) allowed partial adjustments. The Tribunal clarified that adjustments should be made to the comparables' operating costs, not the assessee's. The Tribunal set aside the CIT(A)'s order and directed the TPO/AO to recompute the capacity utilization adjustment by adjusting the comparables' operating costs, considering only the fixed and semi-variable costs. 3. Capitalization of Software Expenses: The AO capitalized certain software expenses and allowed depreciation, leading to an addition of Rs. 61,762/-. The Tribunal upheld the CIT(A)'s deletion of the addition for website charges and anti-virus software subscription but reversed the decision regarding the modem's cost, holding it as capital expenditure eligible for depreciation at 60%. 4. Deduction of Deferred Revenue Expenditure: The assessee claimed a deduction for deferred revenue expenditure related to the development of a new product, TAF60, capitalizing the costs and claiming 25% deduction. The AO disallowed the deduction, treating it as capital expenditure. The Tribunal upheld the CIT(A)'s decision to allow the deduction, following the precedent set in the assessee's case for AY 2007-08. 5. Disallowance of Miscellaneous Expenses: The AO made an ad hoc disallowance of Rs. 2 lakh out of Rs. 20.14 lakh debited under miscellaneous expenses due to non-availability of certain details. The Tribunal approved the CIT(A)'s deletion of the ad hoc addition, stating that specific expenses should have been pointed out by the AO rather than making a blanket disallowance. Conclusion: The Tribunal partly allowed the Revenue's appeal for statistical purposes and dismissed the assessee's cross-objection. The order was pronounced in the open court on 12.08.2015.
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